UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**Form
      10-Q**





(Mark
      One)


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


For
      the
      quarterly period ended: **June 30, 2007**





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


For
      the
      transition period from _____________________ to __________________





Commission
      File Number:  **000-51152**





**PetroHunter
      Energy Corporation**


(Exact
      name of registrant as specified in its charter)





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





**1875
      Lawrence Street, Suite 1400, Denver, Colorado 80202**


(Address
      of principal executive
      offices)                (Zip
      Code)





Registrant’s
      telephone number:  **(303) 572-8900**





**Not
      applicable**


(Former
      name, former address and former fiscal year, if changed since last
      report)





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  (Check one):


Large
      accelerated filer
      [  ]                                                                Accelerated
      filer
      [  ]                                                      Non-accelerated
      filer [X]





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





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


**274,948,841****shares
      of Common Stock, $.001 par value, as of**


**August
      17, 2007**





PETROHUNTER
      ENERGY CORPORATION


(A
      Development Company)


CONSOLIDATED
      BALANCE SHEETS


**ASSETS**-**June
                30,**
            
            
            **September
                30****2007**
            
            
            **2006****(unaudited)**
            
            
            **(unaudited)****Current
                Assets**Cash
                and cash equivalents
            
            $
            18,101
            
            
            $
            10,631,776Oil
                and gas receivables , net
            
            
            895,426
            
            
            
            -Oil
                and gas receivables - related party
            
            
            73,616
            
            
            
            35,656Other
                receivables
            
            
            105,697
            
            
            
            22,290Due
                from related parties
            
            
            -
            
            
            
            921,344Prepaid
                expenses and other assets
            
            
            250,423
            
            
            
            30,960**Total
                current assets**
            
            
            1,343,263
            
            
            
            11,642,026**Property
                and Equipment, at cost**Oil
                and gas properties under full cost, net
            
            
            169,109,711
            
            
            
            45,972,784Deposit
                on pending oil and gas property acquistion, related party
            
            
            2,243,777
            
            
            
            -Furniture
                and equipment, net
            
            
            788,527
            
            
            
            550,213172,142,015
            
            
            
            46,522,997**Other
                Assets**Due
                from joint interest owners
            
            
            16,273,715
            
            
            
            -Restricted
                cash
            
            
            601,793
            
            
            
            1,076,793Deferred
                financing costs
            
            
            340,256
            
            
            
            -**Total
                Assets**
            
            $
            190,701,042
            
            
            $
            59,241,816**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities**Checks
                written in anticipation of deposit
            
            $
            14,910
            
            
            $
            -Accounts
                payable and accrued expenses
            
            
            19,051,344
            
            
            
            9,644,236Note
                payable - related party - current portion
            
            
            3,080,000
            
            
            
            0Accrued
                interest payable
            
            
            1,081,356
            
            
            
            124,474Accrued
                interest payable - related party
            
            
            344,972
            
            
            
            -Due
                to shareholder and related parties
            
            
            1,488,607
            
            
            
            197,785Contracts
                payable - oil and gas properties - in default
            
            
            1,850,000
            
            
            
            -Convertible
                notes payable - in default
            
            
            400,000
            
            
            
            -Convertible
                notes payable
            
            
            -
            
            
            
            400,000**Total
                current liabilities**
            
            
            27,311,189
            
            
            
            10,366,495Non
                Current ObligationsNotes
                payable - related party
            
            
            9,450,000
            
            
            
            -Notes
                payable - net
            
            
            21,709,061
            
            
            
            -Asset
                retirement obligation
            
            
            338,301
            
            
            
            522,05431,497,362
            
            
            
            522,054**Total
                Liabilities**
            
            
            58,808,551
            
            
            
            10,888,549**Common
                stock subscribed**
            
            
            2,767,500
            
            
            
            -**Commitments
                and Contingencies (Notes 3, 4, 5 ,7, 8, 9, 12)****Stockholders'
                Equity**Preferred
                stock, $.001 par valueAuthorized
                - 1,000,000 shares, issued, noneCommon
                stock, $.001 par valueAuthorized
                - 500,000,000 sharesIssued
                and outstanding - 274,948,841 and 219,928,734 shares
            
            
            274,949
            
            
            
            219,929Capital
                in excess of par value
            
            
            169,937,269
            
            
            
            70,944,172Deficit
                accumulated during the development stage
            
            
            (41,087,227
            )
            
            
            (22,810,834
            )**Total
                Stockholders' Equity**
            
            
            129,124,991
            
            
            
            48,353,267**Total
                Liabilities and Stockholders' Equity**
            
            $
            190,701,042
            
            
            $
            59,241,816The
                accompanying notes are an integral part of the consolidated financial
                statements.




2
 
 
 **PETROHUNTER
                  ENERGY CORPORATION****(A
                  Development Company)****CONSOLIDATED
                  STATEMENTS OF OPERATIONS****Three**
              
              
              **Three****Months
                  Ended**
              
              
              **Months
                  Ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              **2006****(unaudited)**
              
              
              **(unaudited)****Revenues**Oil
                  and gas revenues (Note 4)
              
              $
              846,920
              
              
              $
              -**Costs
                  and Expenses**Lease
                  operating expenses (Note 4)
              
              
              211,260
              
              
              
              -General
                  and administrative
              
              
              5,395,364
              
              
              
              1,934,930Property
                  development - related
              
              
              -
              
              
              
              1,245,000Consulting
                  fees  - related party
              
              
              75,000
              
              
              
              -Depreciation,
                  depletion, amortization,impairment
                  and accretion (Note 4)
              
              
              304,579
              
              
              
              -**Total
                  operating expenses**
              
              
              5,986,203
              
              
              
              3,179,930**Other
                  Income (Expense)**Interest
                  income
              
              
              6,310
              
              
              
              -Interest
                  expense
              
              
              (1,545,801
              )
              
              
              (1,295,118
              )**Total
                  other income (expense)**
              
              
              (1,539,491
              )
              
              
              (1,295,118
              )**Net
                  Loss**
              
              $
              (6,678,774
              )
              
              $
              (4,475,048
              )**Net
                  loss per common share -****basic
                  and diluted**
              
              $
              (0.03
              )
              
              $
              (0.03
              )**Weighted
                  average number of common shares****outstanding
                  - basic and diluted**
              
              
              256,905,707
              
              
              
              165,526,118**Cumulative
                  from****Inception****Nine**
              
              
              **Nine**
              
              
              **(June
                  20, 2005)****Months
                  Ended**
              
              **Months
                  Ended**
              
              **to****June
                  30,**
              
              **June
                  30,**
              
              **June
                  30,****2007**
              
              
              **2006**
              
              
              **2007****(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)****Revenues**Oil
                  and gas revenues (Note 4)
              
              $
              2,185,294
              
              
              $
              -
              
              
              $
              2,220,950**Costs
                  and Expenses**Lease
                  operating expenses (Note 4)
              
              
              600,530
              
              
              
              -
              
              
              
              604,202General
                  and administrative
              
              
              13,393,935
              
              
              
              3,810,783
              
              
              
              28,267,527Property
                  development - related
              
              
              1,815,000
              
              
              
              2,765,000
              
              
              
              7,205,000Consulting
                  fees  - related party
              
              
              150,000
              
              
              
              -
              
              
              
              150,000Depreciation,
                  depletion, amortization,impairment
                  and accretion Note 4)
              
              
              1,068,109
              
              
              
              -
              
              
              
              1,141,246**Total
                  operating expenses**
              
              
              17,027,574
              
              
              
              6,575,783
              
              
              
              40,275,402**Other
                  Income (Expense)**Interest
                  income
              
              
              20,699
              
              
              
              -
              
              
              
              23,333Interest
                  expense
              
              
              (3,454,813
              )
              
              
              (1,981,777
              )
              
              
              (5,963,535
              )**Total
                  other income (expense)**
              
              
              (3,434,114
              )
              
              
              (1,981,777
              )
              
              
              (5,940,202
              )**Net
                  Loss**
              
              $
              (18,276,394
              )
              
              $
              (8,557,560
              )
              
              $
              (41,087,227
              )`**Net
                  loss per common share -****basic
                  and diluted**
              
              $
              (0.08
              )
              
              $
              (0.07
              )**Weighted
                  average number of common shares****outstanding
                  - basic and diluted**
              
              
              221,802,340
              
              
              
              122,774,060


The
        accompanying notes are an integral part of the consolidated financial
        statements.
  3


PETROHUNTER
        ENERGY CORPORATION
 (A
        Development Company)
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**




**Nine**
                **Months
                  Ended**
                **June
                  30,**
                **2007**
                **(unaudited)**
              
              
              **Nine**
                **Months
                  Ended**
                **June
                  30,**
                **2006
                  (unaudited)**
              
              
              **Cumulative**
                **from
                  Inception**
                **(June
                  20, 2005)**
                **to**
                **June
                  30, 2007 (unaudited)****Cash
                  flows used in operating activities**Net
                  loss
              
              $
              (18,276,394
              )
              
              $
              (8,557,560
              )
              
              $
              (41,087,227
              )Adjustments
                  to reconcile net loss tonet
                  cash (used) in operating activitiesStock
                  for expenditures advanced
              
              
              -
              
              
              
              -
              
              
              
              100,000Stock
                  based compensation
              
              
              7,304,762
              
              
              
              1,353,090
              
              
              
              17,316,806Depreciation,
                  depletion, amotization, impairment and accretion
              
              
              1,068,108
              
              
              
              -
              
              
              
              1,141,245Stock
                  for financing costs
              
              
              1,337,749
              
              
              
              942,562
              
              
              
              2,760,450Amortization
                  of discount and deferred financing costs
              
              
              457,771
              
              
              
              
              
              
              
              457,771on
                  notes payable
              
              
              
              
              
              
              -
              
              
              
              -Changes
                  in assets and liabilities
              
              
              
              
              
              
              
              
              
              
              -Accounts
                  receivable
              
              
              (943,177
              )
              
              
              -
              
              
              
              (1,001,123
              )Due  from
                  related party
              
              
              847,728
              
              
              
              -
              
              
              
              (73,617
              )Prepaids
                  and other
              
              
              (53,986
              )
              
              
              (1,414,952
              )
              
              
              (62,937
              )Accounts
                  payable and accrued expenses
              
              
              (179,861
              )
              
              
              1,142,374
              
              
              
              1,199,926Due
                  to shareholder and related parties
              
              
              1,290,822
              
              
              
              (648,421
              )
              
              
              1,488,607**Net
                  cash used in operating activities**
              
              
              (7,146,477
              )
              
              
              (7,182,907
              )
              
              
              (17,760,098
              )**Cash
                  flows used in investing activities**Additions
                  to oil and gas properties
              
              
              (13,212,093
              )
              
              
              (20,731,982
              )
              
              
              (45,993,434
              )Due
                  from joint interest owner
              
              
              (16,273,715
              )
              
              
              -
              
              
              
              (16,273,715
              )Deposit
                  on oil and gas property acquisition, related party
              
              
              (2,243,777
              )
              
              
              (371,066
              )
              
              
              (2,243,777
              )Property
                  and equipment
              
              
              (260,113
              )
              
              
              -
              
              
              
              (813,324
              )Restricted
                  cash
              
              
              475,000
              
              
              
              (30,000
              )
              
              
              (601,793
              )**Net
                  cash used in investing activities**
              
              
              (31,514,698
              )
              
              
              (21,133,048
              )
              
              
              (65,926,043
              )**Cash
                  flows from financing activities**Proceeds
                  from the sale of common stock
              
              
              300,000
              
              
              
              35,442,500
              
              
              
              35,742,500Proceeds
                  from common stock subscribed
              
              
              2,767,500
              
              
              
              -
              
              
              
              2,767,500Proceeds
                  from the issuance of notes payable
              
              
              25,000,000
              
              
              
              -
              
              
              
              25,000,000Payment
                  of notes payable - related party
              
              
              -
              
              
              
              -
              
              
              
              -Proceeds
                  from the exercise of warrants
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Cash
                  received upon recapitalization and merger
              
              
              -
              
              
              
              20,949
              
              
              
              20,949Proceeds
                  from issuance of convertible notes
              
              
              -
              
              
              
              16,080,167
              
              
              
              20,831,667Offering
                  and financing costs
              
              
              (20,000
              )
              
              
              (1,815,623
              )
              
              
              (1,658,374
              )-**Net
                  cash provided by financing activities**
              
              
              28,047,500
              
              
              
              49,727,993
              
              
              
              83,704,242**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (10,613,675
              )
              
              
              21,412,038
              
              
              
              18,101**Cash
                  and cash equivalents, beginning of period**
              
              
              10,631,776
              
              
              
              1,250,242
              
              
              
              -**Cash
                  and cash equivalents, end of period**
              
              $
              18,101
              
              
              $
              22,662,280
              
              
              $
              18,101**Supplemental
                  schedule of cash flow information**Cash
                  paid for interest
              
              $
              1,302
              
              
              $
              -
              
              
              $
              1,029,655Cash
                  paid for income taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -**Supplemental
                  disclosures of non-cash investing and financing
                  activities**Stock
                  issued for expenditures advanced
              
              $
              -
              
              
              $
              100,000
              
              
              $
              100,000Contracts
                  for oil and gas properties
              
              
              
              
              
              $
              6,261,460
              
              
              $
              11,773,960Common
                  stock issued for debt conversion
              
              $
              -
              
              
              $
              21,194,167
              
              
              $
              22,031,667Common
                  stock issued for commissions on offerings
              
              $
              200,000
              
              
              $
              2,424,500
              
              
              $
              3,100,201Common
                  stock issued for property and finders fee on property
              
              $
              4,510,150
              
              
              $
              -
              
              
              $
              6,710,150Convertible
                  debt issued for property
              
              $
              -
              
              
              $
              -
              
              
              $
              1,200,000


The
            accompanying notes are an integral part of the consolidated financial
            statements.
 4
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**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”) and changed its domicile to Maryland.




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




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 Petronian Oil Corporation, now known as PetroHunter Heavy
      Oil
      Ltd. (“Heavy Oil”), as a wholly owned subsidiary for the purpose of holding and
      developing the Company’s heavy oil assets.  Effective September 30,
      2006, PetroHunter acquired 50% of the outstanding common shares of Sweetpea
      Corporation Pty Ltd (“Sweetpea”), an Australian corporation; and effective
      January 1, 2007 acquired the remaining 50%.  Sweetpea is the record
      owner of four exploration permits issued by the Northern Territory of
      Australia.  On October 20, 2006, PetroHunter formed PetroHunter Energy
      NT Ltd., now known as PetroHunter Australia Ltd. (“PetroHunter Australia”), as a
      wholly owned subsidiary, for the purpose of holding and developing its assets
      in
      Australia.  In May 2007, PetroHunter determined to dissolve
      PetroHunter Australia and formed a British Columbia corporation, Australia
      PetroHunter Ltd.  Collectively, PetroHunter and its subsidiaries are
      referred to herein as the “Company”.




**NOTE
      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




The
      unaudited financial statements included herein were prepared from the records
      of
      the Company in accordance with generally accepted accounting principles in
      the
      United States applicable to interim financial statements and reflect all
      adjustments which are, in the opinion of management, necessary to provide a
      fair
      statement of the results of operations and financial position for the interim
      periods.  Such financial statements conform to the presentation
      reflected in the Company’s Form 10-KSB filed with the Securities and Exchange
      Commission for the year ended September 30, 2006.  The current interim
      period reported herein should be read in conjunction with the Company’s Form
      10-KSB for the year ended September 30, 2006.  The results of
      operations for the three and nine months ended June 30, 2007 are not necessarily
      indicative of the results that may be expected for the full fiscal year ending
      September 30, 2007.




5
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**






**NOTE
      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**




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 incurred a cumulative net loss of $41,087,227 for
                the
                period from inception (June 20, 2005) to June 30, 2007, has a working
                capital deficit of $25,967,927 at June 30, 2007 and has significant
                capital expenditure commitments.  As of June 30, 2007, 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 continue 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 $83.7 million of
                notes, convertible notes and common stock through June 30,
                2007.  Subsequent to June 30, 2007 the Company has received an
                additional $5,500,000 under a mezzanine financing arrangement and
                $250,000
                from a related party pursuant to a subordinated unsecured promissory
                note.
                (See Notes 9 and 13.)  Management believes that the Company will
                be successful in raising additional funding to have sufficient capital
                to
                meet its obligations for its planned
                operations.





DEVELOPMENT
                STAGE





The
      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.  The Company has commenced initial test
      production from its first wells in the Piceance Basin of Colorado; however,
      management does not consider that the Company has commenced principal operations
      as of June 30, 2007.




BASIS
      OF
      PRESENTATION




The
      accompanying unaudited consolidated financial statements include PetroHunter
      for
      the three and nine months ended June 30, 2007.  For the three and nine
      months ended June 30, 2006, the consolidated financial statements are those
      of
      GSL.  All significant intercompany transactions have been eliminated
      upon consolidation.




6
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**




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.




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 June 30, 2007, the Company has no proved reserves,
      has received 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 estimated 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.




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 may
      have an interest with other producers in certain properties, in which case
      the
      Company uses the sales method to account for gas imbalances. Under this method,
      revenue is recorded on the basis of gas actually sold by the
      Company.  In addition, the Company records revenue for its share of
      gas sold by other owners that cannot be volumetrically balanced in the future
      due to insufficient remaining reserves.  The Company also reduces
      revenue for other owners’ gas sold by the Company that cannot be volumetrically
      balanced in the future due to insufficient remaining reserves.  The
      Company’s remaining over- and under-produced gas balancing positions will be
      considered in the Company’s proved reserves.  The Company has no gas
      balancing arrangements in place at June 30, 2007.  Oil and gas sold is
      not significantly different from the Company’s product entitlement.




7
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**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.  During the three months ended December 31, 2006,
      management of the Company determined not to proceed with further evaluation
      or
      exploration of its South Bronco project in the Piceance Basin of Colorado,
      charged to operations an impairment expense of $550,790.  No
      additional impairment expense was recognized during the three months ended
      June
      30, 2007.




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).




8
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**




**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 61,552,500 for the period ended June 30, 2007.




SHARE
      BASED COMPENSATION




Effective
      October 1, 2005, 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.  Prior to the three months ended June 30, 2007 no such
      forfeitures have occurred.  During the three months ended June 30,
      2007, 100,000 options were forfeited by a former employee, and 10,000,000 were
      cancelled by the Company’s majority shareholder.  Based upon the
      relatively insignificant number of forfeitures to date, the Company is assuming
      no forfeitures going forward based on the Company’s historical forfeiture
      experience.  The Company will continue to monitor forfeitures in the
      future, and as appropriate, adjust the recognition of future stock based
      compensation expense to reflect such forfeitures.  The fair value of
      stock options is calculated using the Black-Scholes option-pricing
      model.




As
      of
      June 30, 2007, under the provisions of the Company’s 2005 Stock Option Plan (the
“Plan”), options to purchase an aggregate of 24,365,000 shares of the Company’s
      common stock were outstanding, of which 8,773,000 are
      exercisable.  These options were granted to the Company’s officers,
      directors and consultants in August of 2005 and 2006, and in May 2007 vesting
      20% at grant date and 20% per year on the anniversary of the grant date for
      the
      next four years.  In February 2007 options were granted to directors
      of the Company that vest 50% at grant and 50% one year from
      grant.  Each option granted under the Plan 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.  In addition the Company has granted
      non-qualified options outside of the Plan to purchase an aggregate of 10,145,000
      shares of the Company’s common stock of which 6,087,000 are
      exercisable.  These options vest 60% at grant date and 20% per year on
      the anniversary of the grant date for the next two years.  Stock-based
      compensation expense of $3,688,038 and $7,304,762 before tax, was charged to
      operations as compensation expense for the three and nine months ended June
      30,
      2007.


9
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**





**NOTE
      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**




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 June 30, 2007 consists of certificates
      of deposit underlying letters of credit for exploration permits, state and
      local
      plugging and abandonment bonds and guarantees to vendors.




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.




**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 “MAB Consulting Agreement”), as
      amended, 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 and 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:




·
            The
                Company’s working interest in all its oil and gas properties doubled (from
                50% undivided interest in the properties to
                100%);


·
            The
                Company’s prior obligation to carry MAB for its 50% portion of the first
                $700 million in capital costs was
                eliminated;


·
            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;


10
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      3 — AGREEMENT WITH MAB RESOURCES LLC (Continued)**




·
            MAB’s
                3% overriding royalty was increased to 5% (the “Override”), but the
                Override does not apply to the Company’s Piceance II properties, and does
                not apply to the extent that the Override would cause the Company’s net
                revenue interest under an oil and gas lease to be less than
                75%;


·
            MAB
                will receive 7% of the issued and outstanding shares of
                Australia  PetroHunter, as of the date that the Company receives
                Australia PetroHunter shares in consideration for the Company’s assignment
                of its rights and obligations in the Northern Territory (Australia)
                permits to Australia PetroHunter.


·
            MAB
                will receive 7% of the issued and outstanding shares of Heavy Oil
                in
                consideration for MAB’s assignment of its interests in the Utah and
                Montana leases.




Under
      the
      MAB Consulting Agreement the Company issued 50,000,000 shares of the Company’s
      common stock to MAB.  MAB has the right and opportunity to receive up
      to an additional 50,000,000 shares, to be issued over a five-year period in
      specified numbers of shares that are tied to the Company’s performance in
      booking reserves.  The MAB Consulting Agreement, including the monthly
      payments to MAB, terminates after five years, except MAB’s overriding royalty
      continues for the life of the properties.




The
      Company has accounted for the acquisition component of the MAB Consulting
      Agreement in accordance with the purchase accounting provisions of SFAS 141
      “Business Combinations.”  Accordingly, the Company has capitalized as
      oil and gas properties the $13,500,000 promissory note and the $81,000,000
      fair
      market value of the 50,000,000 shares issued to MAB, based on the trading price
      of the Company’s common stock on the trading date immediately preceding the
      effective date of the transaction.  The $25,000 per month consulting
      fees are charged to operations as incurred.




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.




**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.




11
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      4 — OIL AND GAS PROPERTIES (Continued)**




The
      following description of the Company’s oil and gas property acquisitions for the
      period from October 1, 2006 to December 31, 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.




On
      November 28, 2006, MAB entered into an agreement with Maralex Resources, Inc.
      and Adelante Oil & Gas, LLC (collectively, “Maralex”) for the acquisition
      and development of the Sugarloaf Prospect in Garfield County, Colorado (the
      “Maralex Agreement”).  Under the terms of the Maralex Agreement, an
      initial payment of $100,000 was made upon execution and the balance of $2.9
      million cash and issuance of 2,428,100 shares of the Company’s common stock was
      due on January 15, 2007.  The Company has recorded the $2.9 million
      obligation as a contract payable and the fair market value of the shares to
      be
      issued of $4,127,770, based on the closing price of the Company’s common stock
      as of the date of the Maralex Agreement.  The Company and Maralex have
      amended the terms of the Maralex Agreement on three occasions since the original
      Maralex Agreement was executed, amending the payment dates, issuing 1,571,900
      additional shares the Company’s common stock and agreeing to increase the amount
      of cash due under the agreement by a total of $287,812.  As of June
      30, 2007 the Company owes Maralex a balance of $1,850,000 under the Maralex
      Agreement.  On June 29, 2007 Maralex notified the Company it was in
      default under the terms of the Maralex Agreement, as amended.  If the
      Company fails to make payment of the remaining balance by August 28, 2007,
      Maralex may, at its option, return up to 80% of the shares of Company stock
      previously issued to it and the Company will reassign to Maralex all leases
      acquired under the Maralex Agreement.




On
      November 14, 2006, the Company and Lakes Oil N.L. entered into an agreement
      (the
“Lakes Agreement”) under which they would jointly develop Lakes Oil’s onshore
      petroleum prospects (focusing on unconventional gas resources) in the Gippsland
      and Otway basins in Victoria, Australia.  The arrangement was subject
      to various conditions precedent, including completion of satisfactory due
      diligence, and the satisfactory processing of certain retention lease
      applications.  Under the Lakes Agreement, the Company or its
      subsidiary company Sweetpea would initially farm into 33-1/3% of Lakes Oil’s
      permits by spending $7 million in Lakes Oil’s permits.  In addition,
      the Company would subscribe for $3 million in new shares in Lakes Oil at 1.5
      cents (Australian).  The Company also had 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, from
      the
      date of the first closing under the Agreement (the “Closing”).  Under
      the Lakes Agreement, the Company had the right to participate in the same
      proportion in any permits which are non-contiguous to existing permits acquired
      by Lakes within two years from the Closing, and any contiguous permits acquired
      by Lakes moving forward, and the Company had a first right of refusal in other
      permits acquired by Lakes within five years from the Closing.  The
      Company was to assume Lakes Oil’s position as operator of the
      permits.  The Lakes Agreement expired pursuant to the terms of the
      Agreement, and the Company and Lakes are in ongoing discussions and negotiations
      to renew or extend the Agreement under revised terms.





12
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      4 — OIL AND GAS PROPERTIES (Continued)**





On
      December 29, 2006, the Company entered into an agreement (“PSA”) with Galaxy
      Energy Corporation (“Galaxy”) and its wholly owned subsidiary, Dolphin Energy
      Corporation (“Dolphin”), a related party, 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.  The controlling owner of PetroHunter’s largest single
      shareholder (MAB Resources LLC) is Marc A. Bruner.  Mr. Bruner is a
      14.3% beneficial shareholder of Galaxy and the father of the President and
      Chief
      Executive Officer of Galaxy.  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.  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.  Closing of the transaction, which was originally
      scheduled to occur by February 28, 2007, has been extended until August 31,
      2007.  Either party may terminate the agreement if the closing has not
      occurred by August 31, 2007.  The Company has paid to Galaxy a $2
      million earnest money payment due under the terms of the agreement and has
      advanced an additional $243,777 towards operating costs of the assets to be
      acquired.  In the event the sale is not consummated, the amounts
      advanced to Galaxy will be converted to unsecured notes payable by Galaxy to
      the
      Company.





On
      March
      21, 2007, the Company entered into a Partial Assignment of Contract and
      Guarantee (the “Assignment”) with MAB.  Pursuant to this Assignment,
      the Company assigned MAB its right to purchase an undivided 45% interest in
      oil
      and gas interests in the Powder River Basin of Wyoming and Montana, which right
      PetroHunter obtained in the PSA with Galaxy.  As consideration for the
      Assignment, MAB assumed the Company’s obligation under the PSA to pay Galaxy $25
      million in PetroHunter common stock.  MAB also agreed to indemnify the
      Company against costs relating to or arising out of the termination or breach
      of
      the PSA by Galaxy or Dolphin, and MAB agreed to guarantee the payment of
      principal and interest due to the Company in the event the PSA does not
      close.




In
      February and March 2007, the Company received notice it was in default for
      failure to make timely payments of amounts due for drilling and completion
      operations, under the terms of a Joint Operating Agreement with an oil and
      gas
      operator (the “Operator”) and certain Well Participation and Farmout Agreements
      (the “Farmouts”) with a different third party oil and gas operator (the
“Farmor”).  On March 29, 2007, the Farmor notified the Company it was
      exercising its rights under the Farmouts to terminate the Farmouts and resume
      ownership of the working interests in six wells drilled on the farmout
      acreage.  The Farmor refunded all amounts paid by the Company to drill
      the wells, and credited the Company for the remaining balance due to the
      Operator.  The Company had recorded, through March 31, 2007,
      $2,470,100 of oil and gas sales revenue, $417,358 of lease operating and
      production tax expense and $426,566 of depreciation, depletion and amortization
      from the six wells in which it had held a contractual interest.


13
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      4 — OIL AND GAS PROPERTIES (Continued)**





Accordingly,
      the accompanying financial statements as of June 30, 2007, and for the nine
      months then ended, have been adjusted from those previously presented at March
      31, 2007, to retroactively eliminate the oil and gas sales, and related costs
      and expenses, from the terminated six wells.  The Company will restate
      the financial statements included in its Form 10-Q filed for the period ended
      March 31, 2007 to give effect to this transaction.





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 charged 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 June 30, 2007, the Company had received revenues
      from
      initial testing and production on certain of its projects.





NOTE 5 -- DUE FROM JOINT INTEREST OWNERS


The
      Company has been in negotiations with unrelated third party oil and gas
      operators (the “Third Parties”) to exchange leasehold interests in certain oil
      and gas leases in the Piceance Basin of Colorado held by the Company for
      interests in certain oil and gas leases held by the Third Parties in the
      Piceance Basin.  During the nine months ended June 30, 2007, the
      Company had drilled, as operator, 14 wells on oil and gas leases which are
      subject to the above-described negotiations.  As of June 30, 2007 the
      Company has recorded only its share of costs in the 14 wells, based upon its
      record title interest, as Oil and Gas Properties, and has recorded the costs
      incurred on behalf of the Third Parties, as Due From Joint Interest
      Owners.  At June 30, 2007, this amount totaled
      $16,273,715.  In the event the negotiations are successfully
      consummated, the Company’s interest in those leases will increase to 100% and
      the balance Due From Joint Interest Owners will be reclassified to Oil and
      Gas
      Properties.  In the event the negotiations are not successfully
      consummated, the Third Parties will be obligated to reimburse the Company for
      all costs incurred for the Third Parties’ working
      interest.  Management believes the transaction will be successfully
      consummated in the fourth quarter of fiscal 2007, and that the amounts
      classified as Due from Joint Interest Owners at June 30, 2007 will subsequently
      be reclassified to Oil and Gas Properties.








**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.





14
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE  6
      - ASSET RETIREMENT OBLIGATION (Continued)**





The
      following table summarizes activity related to the accounting for asset
      retirement obligations for the nine months ended June 30, 2007 and
      2006:


2007
            
            
            2006Asset
                retirement obligations, beginning of period
            
            $
            522,054
            
            
            $
            -Liabilities
                incurred
            
            
            27,424
            
            
            
            -Revisions
                to estimates
            
            
            (213,825
            )Liabilities
                settled
            
            
            -
            
            
            
            -Accretion
                expense
            
            
            2,648
            
            
            
            -Asset
                retirement obligations, end of period
            
            $
            338,301
            
            
            $
            -




**NOTE
      7— CONVERTIBLE NOTES**




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 June
      30, 2007, the Company was in default on payment of the note and is in
      discussions with the holders to convert the notes and accrued interest into
      stock of the Company




In
      December 2006, PetroHunter Australia, commenced the sale, pursuant to a private
      placement, of up to $50,000,000 of convertible notes.  As of January
      8, 2007, the Company had received proceeds of $1,530,000 from the
      offering.  In February 2007, the Company terminated the offering, and
      refunded $30,000 to four investors, and converted $1,500,000 from one investor
      as the initial funding under a Credit and Security Agreement entered into
      January 9, 2007.  (See Note 9.)




NOTE
      8 -- NOTE PAYABLE -- RELATED PARTY




Effective
                January 1, 2007, in conjunction with the MAB Consulting Agreement,
                the
                Company issued a $13.5 million promissory note (the “requires monthly MAB
                Note”) as partial consideration for MAB’s assignment of its undivided 50%
                working interest in the oil and gas properties (Note 3).  The
                MAB Note bears interest at a rate equal to LIBOR and principal payments
                of
                $225,000 plus interest commencing January 31, 2007.  As of June
                30, 2007, the outstanding balance of the MAB Note was $12,050,000
                of which
                $3,080,000 was currently due, including $724,972 of principal and
                interest
                that was past due.  The Company was not in compliance with
                various covenants under the MAB note as of June 30, 2007.  MAB has
                waived and released PetroHunter from any and all defaults, failures
                to
                perform, and any other failures to meet its
                obligations.




15
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**




NOTE 9 -- NOTE PAYABLE




On
      January 9, 2007, the Company entered into a Credit and Security Agreement (the
      “January 2007 Credit Facility”) with Global Project Finance AG, a Swiss company
      (“Global”), for mezzanine financing in the amount of $15 million.  The
      January 2007 Credit Facility provides for an interest rate of 6.75% over prime,
      and is collateralized 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 has applied most of the proceeds of this
      loan to its drilling and development operations in the Piceance Basin,
      Colorado.  The terms of the January 2007 Credit Facility also provide
      for the issuance of 1,000,000 warrants of the Company’s shares upon execution of
      the Credit Facility, and an additional 200,000 warrants, for each $1 million
      draw down of the credit facility up to $15 million.  The warrants will
      be exercisable until January 9, 2012.  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.  The fair value of the warrants was estimated as of each
      respective issue date under the Black-Scholes pricing model, with the following
      assumptions: common stock based on market price of at issue date, zero
      dividends, expected volatility of 69.2% to 71.4%, risk free interest rate of
      4.5% to 4.75% and expected life of 2.5 years.  The fair value of the
      debenture warrants of $2,196,421 was recorded as a discount to the note and
      is
      being amortized over the life of the note.  During the nine months
      ended June 30, 2007, amortization of discount in the amount of $364,716 was
      included in interest expense.





Global
      and its controlling shareholder were shareholders of the Company prior to the
      Financing.  The initial draw down of $1,500,000 was converted from the
      PetroHunter Australia convertible note offering (see Note 7).  As of
      June 30, 2007, the Company has drawn down all $15,000,000 on the January 2007
      Credit Facility.





On
      May
      21, 2007, the Company entered into a second Credit and Security Agreement with
      Global (the “May 2007 Credit Facility”).  Under that Agreement, Global
      agreed to use its best efforts to advance up to $60,000,000 over the next 18
      months.  Interest accrues at 6.75% over the prime rate and is payable
      quarterly beginning June 30, 2007.  The Company is 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 collateralized
      by a first perfected security interest on the Piceance II, Buckskin Mesa and
      Sugar Loaf projects in the Piceance Basin, Colorado (the “Security
      Interest”).





Global
      received warrants to purchase 2,000,000 of the Company’s shares upon execution
      of the May 2007 Credit Facility and 400,000 warrants for each $1,000,000
      advanced under the credit facility.  The warrants are exercisable
      until May 21, 2012 prices equal to 120% of the volume-weighted average price
      of
      the stock for the 30 days immediately preceding each warrant issuance
      date.  The fair value of the warrants was estimated as of each
      respective issue date under the Black-Scholes pricing model, with the following
      assumptions: common stock based on market price of at issue date, zero
      dividends, expected volatility of 69.2% to 71.8%, risk free interest rate of
      4.5% to 4.875% and expected life of 2.5 years.  The fair value of the
      debenture warrants of $1,522,547 was recorded as a discount to the note and
      is
      being amortized over the life of the note.  During the three months
      ended June 30, 2007, amortization of discount in the amount of $63,313 was
      included in interest expense.  In addition, upon each advance, Global
      receives a fee equal to 2% of the amount of the advance.


16
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


NOTE 9 -- NOTE PAYABLE (Continued)




With
      respect to the January 2007 Credit Facility, the Company agreed to extend to
      Global the same terms as those contained in this May 2007 Credit Facility on
      a
“most favored nation” basis.  The Security Interest collateralizes the
      Company’s obligations under both credit facilities on a pro rata
      basis.





As
      of
      June 30, 2007, the Company was in default of payment of $1,329,926, which was
      interest and Global’s fee under the Credit Facilities.  The Company
      was also not in compliance with various covenants under the Global Credit
      Facilities as of June 30, 2007.  Global has waived and released
      PetroHunter from any and all defaults, failures to perform, and any other
      failures to meet its obligations.





**NOTE
      10 — STOCKHOLDERS’ EQUITY**




COMMON
      STOCK




During
      the nine months ended June 30, 2007 the Company issued common stock as
      follows:


·
            3,000,000
                shares for oil and gas properties,


·
            50,000,000
                for oil and gas properties to Related
                Party,


·
            256,000
                shares for oil and gas properties and transaction finance
                costs,


·
            121,250
                shares for commission on convertible debt
                issue,


·
            475,000
                for transaction finance costs,


·
            642,857
                for cash and transaction finance
                costs,


·
            525,000
                for transaction finance costs.





COMMON
      STOCK SUBSCRIBED





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
      consisted of one share of the Company’s common stock and one-half common stock
      purchase warrant.  A whole common stock purchase warrant entitled 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.  In February 2007,
      the Board of Directors determined that the composition of the units being
      offered would be restructured, and those investors who had subscribed in the
      offering would be offered the opportunity to rescind their subscriptions or
      to
      participate on the same terms as ultimately defined for the restructured
      offering.  As of June 30, 2007, the Company has received subscriptions
      for $2,767,500 for the sale of units pursuant to the private placement, of
      which
      $2,250,000 was from a related party, and has recorded the proceeds and
      outstanding subscriptions from the offering as “Common Stock
      Subscribed”.





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 June 30,
      2007, options to purchase 15,635,000 shares were available to be granted
      pursuant to the stock option plan.





17
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      10 — STOCKHOLDERS’ EQUITY (Continued)**




STOCK
      OPTION PLAN (Continued)




A
      summary
      of option activity under the Plan for the nine months ended June 30, 2007 is
      presented below:


Weighted
            WeightedAverage
            Average
            AggregateNumber
                of
            Exercise
            Contractual
            IntrinsicShares
            Price
            Term
                (Years)
            ValueOptions
                outstanding - October 1, 2006
            32,295,000
            $1.16Granted  during
                the period
            2,170,000
            $1.11Exercised
                during the period
            -Forfeited
                during the period
            (100,000)
            $2.10Cancelled
                during the period
            (10,000,000)
            $0.50Expired
                during the period
            -Options
                outstanding - June 30, 2007
            24,365,000
            $1.42
            3.80
            $90,000Exercisable
                at June 30, 2007
            8,773,000
            $0.96
            3.55
            $54,000





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (i.e., the difference between our closing stock price on June
      30, 2007 and the exercise price, multiplied by the number of shares) that would
      have been received by the option holders had all option holders exercised their
      options on June 30, 2007.  There have not been any options exercised
      during the nine months ended June 30, 2007.





NON-QUALIFIED
      STOCK OPTIONS





The
      Company also authorized and issued 10,145,000 of non-qualified stock options
      to
      employees and non-employee consultants.  The options were granted at
      an exercise price of $0.50 per share vest 60% at grant date and 20% per year
      at
      the one and two-year anniversary of the grant date and expire on May 21,
      2012.  As of June 30, 2007, 6,087,000 non-qualified options were
      exercisable.





WARRANTS




The
      following stock purchase warrants were outstanding at June 30,
      2007:




**Number
                of Shares**
            **Exercise
                Price**
            **Expiry
                Date**34,442,500
                (1)
            $1.00
            20114,000,000
                (2)
              6,000,000
                (3)
            $1.30-$2.10
              $0.67-$1.39
            2012
              2012




(1)
      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.


18
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      10 — STOCKHOLDERS’ EQUITY (Continued)**




WARRANTS
      (Continued)




(2)
      Pursuant to the January 2007 Credit Facility (Note 9), the Company issued
      1,000,000 stock purchase warrants upon execution of the Credit Agreement,
      and  an additional  3,000,000 warrants  for draws
      on the facility.  The warrants are exercisable for five years from the
      date of draw.  The exercise price of the warrants is 120% of the
      weighted average price of the Company’s stock for the 30 days immediately prior
      to each warrant issuance date.




(3)
      Pursuant to the May 2007 Credit Facility (Note 9), the Company issued 2,000,000
      stock purchase warrants upon execution of the Credit Agreement and an additional
      4,000,000 warrants for draws on the facility.  The warrants are
      exercisable for five years from the date of draw.  The exercise price
      of the warrants is 120% of the weighted average price of the Company’s stock for
      the 30 days immediately prior to each warrant issuance date.




**NOTE
      11 — RELATED PARTY TRANSACTIONS**




During
      the nine months ended June 30, 2007, pursuant to the MAB Agreement and the
      $13.5
      million promissory note issued thereunder (see Note 3), the Company incurred
      interest expense of $344,972 and made principal payments of
      $970,000.  As of June 30, 2007, the Company owed MAB principal and
      accrued interest of $12,907,972 under the terms of the promissory
      note.




During
      the nine months ended June 30, 2007, the Company incurred $150,000 of consulting
      fees pursuant to the MAB Agreement and $1,815,000 in property development costs
      to MAB under the Development Agreement between MAB and the
      Company.  At June 30, 2007, in addition to the amount due under the
      promissory note as discussed above, MAB was owed $697,402 by the Company for
      consulting fees and other expenditures incurred on behalf of the
      Company.




On
      March
      21, 2007, the Company entered into a Partial Assignment of Contract and
      Guarantee (the “Assignment”) with MAB.  Pursuant to this Assignment,
      the Company assigned MAB its right to purchase an undivided 45% interest in
      oil
      and gas interests in the Powder River Basin of Wyoming and Montana, which right
      the Company obtained in the PSA with Galaxy (see Note 4).  As
      consideration for the Assignment, MAB assumed the Company’s obligation under the
      PSA to pay Galaxy $25 million in PetroHunter common stock.  MAB also
      agreed to indemnify the Company against costs relating to or arising out of
      the
      termination or breach of the PSA by Galaxy or Dolphin, and MAB agreed to
      guarantee the payment of principal and interest due to the Company in the event
      the PSA does not close.




At
      June
      30, 2007, the Company is owed $73,619 from MAB for oil and gas revenues for
      its
      share of initial production earned through December 31, 2006 pursuant to the
      Development and EDA agreements with MAB, and the Company owes MAB $422,881
      for
      oil and gas revenues received by the Company on behalf of MAB.




19
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      11 — RELATED PARTY TRANSACTIONS (Continued)**




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 an equivalent employee 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 75% owner of the largest single shareholder of the
      Company is also the Chief Executive Officer and a Director of
      Falcon.  At June 30, 2007, the Company owed Falcon $368,324 for its
      share of costs incurred pursuant to the agreement.




During
      the nine months ended June 30, 2006, the Company incurred consulting fees
      related to services provided by its officers in the aggregate amount of
      $484,150; and incurred $2,765,000 in property development costs to MAB under
      the
      Development Agreement between MAB and the Company.




**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, and
      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.




DEFAULTS




At
      June
      30, 2007, the Company was in default of payment of debt
      obligations.  See Notes 8 and 9.




**NOTE
      - 13 - SUBSEQUENT EVENTS**




In
      July
      and August 2007, the Company received additional advances of $5.5 million under
      the terms of the May 2007 Credit and Security Agreement (see Note
      9).




In
      July
      2007, the Company borrowed $250,000 from Bruner Family Trust UTD March 28,
      2005
      and executed a subordinated unsecured promissory note.  Interest
      accrues at the rate of 8% per annum and the note matures on the later of October
      29, 2007 or the time at which the Company’s senior indebtedness has been paid in
      full.  One of the trustees of Bruner Family Trust UTD March 28, 2005
      is Marc E. Bruner, the son of Marc A. Bruner, who is the largest beneficial
      holder of the Company’s outstanding shares.  Proceeds of the loan were
      used to help fund the Company’s obligations as contract operator on the Powder
      River Basin assets it proposes to purchase from Galaxy Energy
      Corporation.  See Note 4.





20
 **PETROHUNTER
            ENERGY CORPORATION**
 **(A
            Development Stage Company)**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **June
            30, 2007**


**NOTE
      - 13 - SUBSEQUENT EVENTS (Continued)**





In
      July
      2007, Australia PetroHunter Ltd. commenced a private placement of warrants
      to
      raise up to Cdn.$25,000,000.  As of August 15, 2007, no subscriptions
      had been received.





On
      August
      15, 2007, the Company received a notice of default for failure to make payment
      in accordance with the terms of an acquisition agreement for acreage in the
      Buckskin Mesa prospect in the Piceance Basin of Colorado.  The Company
      has ten days to cure the default without penalty, and fifteen additional days
      to
      cure subject to a cash penalty, reassignment or other remedy.





On
      July
      3, 2007, the Company’s Board of Directors appointed a new Chief Executive
      Officer and granted him options to purchase 1,000,000 shares of the Company’s
      common stock under the terms of the Company’s 2005 Stock Option
      Plan.  The options have an exercise price equal to the closing market
      price of the Company’s common stock at the date of grant and expire five years
      from the date of grant.






















21


**ITEM
                2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





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-Q.





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
“Stock Exchange”).  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 Petronian Oil
      Corporation, now known as PetroHunter Heavy Oil Ltd., as a wholly-owned
      subsidiary for the purpose of holding and developing its heavy oil
      assets.  Effective September 30, 2006, PetroHunter acquired 50% of the
      outstanding common shares of Sweetpea Corporation Pty Ltd (“Sweetpea”), an
      Australian corporation; and effective January 1, 2007 acquired the remaining
      50%.  Sweetpea is the record owner of four exploration permits issued
      by the Northern Territory of Australia.  On October 20, 2006,
      PetroHunter formed PetroHunter Energy NT Ltd., now known as PetroHunter
      Australia Ltd. (“PetroHunter Australia”) for the purpose of holding and
      developing its assets in Australia.  In May 2007, PetroHunter approved
      the dissolution of PetroHunter Australia and formed a British Columbia
      corporation, Australia PetroHunter Ltd.  Collectively, PetroHunter and
      its subsidiaries are referred to herein as the “Company,” “we,” “us” or
“our”.




As
      a
      result of the Stock Exchange, 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




22







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




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.




**MAB
      Resources LLC**





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




·
            Our
                working interest in all our oil and gas properties doubled (from
                50%
                undivided interest in the properties to
                100%);


·
            Our
                prior obligation to carry MAB for its 50% portion of the first $700
                million in capital costs was
                eliminated;


·
            Our
                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;


·
            MAB’s
                3% overriding royalty was increased to 5% (the “Override”), but the
                Override does not apply to our Piceance II properties, and does not
                apply
                to the extent that the Override would cause our net revenue interest
                under
                an oil and gas lease to be less than
                75%;


·
            MAB
                will receive 7% of the issued and outstanding shares of PetroHunter
                Australia, as of the date that we receive PetroHunter Australia shares
                in
                consideration for our assignment of our rights and obligations in
                the
                Northern Territory (Australia) permits to PetroHunter
                Australia.


·
            MAB
                will receive 7% of the issued and outstanding shares of PetroHunter
                Heavy
                Oil Ltd. in consideration for MAB’s assignment of its interests in the
                Utah and Montana properties.




Under
      the
      agreement we issued 50 million shares of our common stock to MAB.  MAB
      has the right and opportunity to receive up to an additional 50 million shares,
      to be issued over a five-year period in specified numbers of shares that are
      tied to our 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.




The
      transfer of MAB’s working interest for our shares (including the carried
      interest), the revised override and MAB foregoing monthly capital cost advances,
      were analyzed by an independent economic evaluator, who, in a report dated
      April
      10, 2007, concluded the transaction was fair to our existing
      shareholders.




23


Commencing
      July 1, 2005 and continuing through December 31, 2006, we and MAB operated
      pursuant to the Development Agreement, and a series of individual property
      agreements (collectively, the “EDAs”).  The Development Agreement set
      forth: (a) MAB’s obligation to assign to us a minimum 50% undivided
      interest in any and all oil and gas assets which MAB acquired 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 was covered by a property-specific EDA that was consistent
      with the terms of the Development Agreement.




**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 the controlling owner of 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.





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 August 31,
      2007.





In
      January 2007, we paid to Galaxy a $2 million earnest money payment due under
      the
      terms of the agreement.  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.  There is no
      assurance that Galaxy will have the funds to repay such a note.





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.





On
      March
      21, 2007, we entered into a Partial Assignment of Contract and Guarantee (the
      “Assignment”) with MAB.  Pursuant to this Assignment, we assigned MAB
      our right to purchase an undivided 45% interest in oil and gas interests in
      the
      Powder River Basin Assets, which right we obtained in the PSA with
      Galaxy.  As consideration for the Assignment, MAB assumed our
      obligation under the PSA to pay Galaxy $25 million in PetroHunter common
      stock.  MAB also agreed to indemnify us against costs relating to or
      arising out of the termination or breach of the PSA by Galaxy or Dolphin, and
      MAB agreed to guarantee the payment of principal and interest due to us in
      the
      event the PSA does not close.




24


**Production
      and Prices**





The
      following table sets forth information regarding net production of oil and
      natural gas, and certain price and cost information for quarters ended June
      30,
      2007, March 31, 2007, December 31, 2006 and the fiscal year ended September
      30,
      2006.  The figures reported below give effect to the retroactive
      adjustment relating to the six relinquished wells as more fully discussed in
      Note 4 of the accompanying financial statements.  We did not have any
      production during the comparable periods of the prior year.





**For
                the quarter ended June 30, 2007**
            **For
                the quarter ended March 31, 2007**
            **For
                the quarter ended December 31, 2006**
            **For
                the fiscal year ended**
              **September
                30, 2006****Production
                Data:**Natural
                gas (Mcf)
            123,519
            226,795
            142,229
            5,822Oil
                (Bbls)
            32
            55
            584
            -0-**Average
                Prices:**Natural
                gas (per Mcf)
            $7.04
            $5.59
            $5.17
            $6.12Oil
                (per Bbl)
            $58.57
            $54.13
            $58.29
            --





**Productive
      Wells**





The
      following table summarizes information at June 30, 2007, 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.





**Gross**
            **Net****Location**
            **Oil**
            **Gas**
            **Total**
            **Oil**
            **Gas**
            **Total**Colorado
            --
            16
            16
            --
            4.2
            4.2Utah
            --
            --
            --
            --
            --
            --Montana
            2
            --
            2
            2.0
            --
            2.0Australia
            --
            --
            --
            --
            --
            --TOTAL
            2
            16
            18
            2.0
            4.2
            6.2





**Acreage
      Positions**





As
      of
      June 30, 2007, we owned interests in the following developed and undeveloped
      acreage positions.  Undeveloped acreage refers to acreage that has not
      been placed in producing units.





**Developed**
            **Undeveloped****Location**
            **Gross
                Acres**
            **Net
                Acres**
            **Gross
                Acres**
            **Net
                Acres**Colorado
            480.0
            102.2
            28,605.0
            21,662.9Utah
            0
            0
            173,738.0
            173,738.0Montana
            80.0
            80.0
            93,515.0
            72,734.0Australia
            0
            0
            7,000,000.0
            7,000,000.0TOTAL
            560.0
            182.2
            7,295,858.0
            7,268,134.9


25


**Summary
      of Development and Exploration Projects and Plan of
      Operations**





The
      following is an update of our
      production and exploration areas and significant projects.  While
      actively pursuing specific production and exploration activities in each of
      the
      following areas, we continually review additional acquisition opportunities
      in
      our core areas that meet our exploration criteria.





***Heavy
      Oil Properties***





***Great
      Salt Lake,
      Utah.***  We have 173,738 net mineral acres under lease
      (covered by approximately 78 leases) on two principal properties, the West
      Rozel
      Field and the Gunnison Wedge prospect in the Great Salt Lake of
      Utah.  Our drilling plan now includes six vertical wells in the West
      Rozel Field.  The six wells have been sited according to geology and
      the State of Utah drilling regulations.  Permits are being prepared
      for the six wells.  Site visit was conducted to meet with the land
      owner for access to the lake from Little Valley Harbor.





PetroHunter
      has negotiated an extension
      to the dates of the work commitments under the current acquisition
      agreement.  The amendment between the Company and American Oil &
Gas, Inc. was executed on July 31, 2007.





***Fiddler
      Creek,
      Montana.***  We have completed major geologic studies on
      the 23,795 net acres of leasehold owned by the Company across four anticlines
      on
      the northern portion of the Big Horn Basin, which extends from north central
      Wyoming into southern Montana.  Our interests encompass significant
      portions of Roscoe Dome, Dean Dome, Fiddler Creek and MacKay Domes, which we
      believe have significant estimated in place oil reserves.  These
      structures 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.  The geologic studies have
      identified locations that appear to have the most potential.  The
      current program for Fiddler Creek includes one re-completion, one vertical
      well
      and one horizontal well; two re-completions and one horizontal well in Roscoe
      Dome; and one re-completion and two vertical wells in Dean Dome.  As
      the program proceeds, refinements will be made based on results.





***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 10o to 22o
      API with
      viscosities of 1500 centipoise to greater than 50,000 centipoise at 125oF.  Additional
      conventional petroleum potential is possible in Devonian Duperow and Nisku
      formations, and in the Mississippian Madison Formation, and will require
      acquiring seismic data to define prospects.  We are now evaluating a
      seismic program to better define locations for an initial drilling
      program.





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





***Plan
      of
      Operations.***  We anticipate that, over the next twelve to
      twenty-four months, we will incur the following costs related to our heavy
      oil
      prospects in Montana and Utah, subject to financing:





·
            Approximately
                $1,300,000 to add land and drill a well in Montana on existing oil
                and gas
                leases in areas where we have already completed
                acquisitions;




26







·
            $7,000,000
                to $14,000,000 in connection with the Fiddler Creek project, to include
                drilling, completion and production facilities;
                and




·
            $15,000,000
                to $21,000,000 in connection with the Great Salt Lake project, to
                include
                project design, project equipment procurement, site infrastructure
                development and initial drilling.





***Piceance
      Basin, Colorado Properties***





***Buckskin
      Mesa
      Project.***  A 26-square mile 3D seismic survey has been
      licensed, re-processed, and interpreted to focus initial drilling in areas
      of
      thickest pay and enhanced fracturing.  We have acquired approximately
      20,000 net acres of leasehold in Rio Blanco County, Colorado, subject to certain
      payment and work commitments.  We have applied for and received six
      approved drilling permits to test targets in the Cretaceous Mesa Verde
      Group.  We have drilled and cased our first well at Buckskin Mesa, the
      Anderson 6-16, with a total depth of 10,785 feet.  Log analysis
      indicates a gross pay interval in excess of 3,500 feet, with a net pay of 600
      feet with 215 feet in the primary Williams Fork Target.  Gas shows
      during drilling averaged 3,000 units with peaks as high as 20,000
      units.  We have drilled and cased the Anderson 13-10 to a total depth
      of 10,835 feet.  This well also had gas shows during
      drilling.  Log analysis of the second well indicates net pay of 572
      feet.  The third well, Lake 16-21, was cased on April 9, 2007 and has
      net sandstone pay of 590 feet.  The fourth well, the Harold Anderson
      4-21, was cased on June 5, 2007 and has net sandstone pay of greater than 500
      feet.  We are on site for the fifth well, Lake 6-22, which will
      complete our initial drilling operations and obligation under the acquisition
      agreement.  PetroHunter has received a notice of default from Daniels
      Petroleum Company for failure to tender payment of $500,000 due by August 15,
      2007 under the Fourth Amendment to the original Acquisition
      Agreement.  The Amendment provides that PetroHunter has ten (10) days
      to cure the default without penalty, and fifteen (15) additional days to cure
      subject to a cash penalty, reassignment or other remedy.


***Piceance
      II
      Project.***  As of June 30, 2007, we had interests in 18
      producing non-operated wells with 15 additional operated wells waiting on
      completion, and 1 well currently being drilling by PetroHunter to complete
      a
      lease obligation.  A portion of production and revenues from the
      non-operated wells are being held in suspense pending completion of certain
      property exchanges designed to maximize operating efficiencies between operators
      in the project area.





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





On
      November 28, 2006, we executed a
      purchase and sale agreement with Maralex Resources, Inc. and Adelante Oil &
Gas, LLC (collectively “Maralex”) for the acquisition and development of 2,000
      net acres in the Jack’s Pocket Prospect in Garfield County,
      Colorado.  Under the terms of the agreement, an initial payment of
      $100,000 was made upon execution and the balance of $2.9 million cash and
      issuance of 2,428,100 shares of our common stock due on January 15,
      2007.  Effective January 12, 2007, the agreement was amended to extend
      the payment date for the cash due until March 15, 2007, with an increase in
      the
      number of shares to be issued to 3 million.  These shares were issued
      as of January 31, 2007.  Effective March 26, 2007, the agreement was
      further amended to extend the payment date until June 29, 2007 with an
      additional 1 million shares to be distributable to Maralex and
      Adelante.  We are obligated to drill four wells on these leases during
      2008.  By letter received June 29, 2007, Maralex has advised of the
      default under the latest amendment to the original acquisition agreement, and
      PetroHunter has until August 28, 2007 to cure the default by payment of the
      balance due plus penalties.  If we do not


27


cure
      the
      default, Maralex and Adelante have the option to rescind the agreement by
      reassignment of eighty percent of the shares conveyed by
      PetroHunter.





The
      Company has been in negotiations with multiple unrelated third party oil and
      gas
      operators (the “Third Parties”) to exchange leasehold interests in certain oil
      and gas leases in the Piceance II Project Area within the Piceance Basin of
      Colorado held by the Company for interests in certain oil and gas leases held
      by
      the Third Parties in the vicinity of the PetroHunter
      leasehold.  During the nine months ended June 30, 2007, the Company
      had drilled, as operator, 14 wells on oil and gas leases which are subject
      to
      the above described negotiations.  As of June 30, 2007 the Company has
      recorded only its share of costs in the 14 of the 16 wells drilled by that
      date,
      based upon its record title interest in each individual well, as Oil and Gas
      Properties, and has recorded costs incurred on behalf of the Third Parties,
      as
      Due From Joint Interest Owners.  At June 30, 2007 this amount totaled
      $16,273,715.  In the event the negotiations are successfully
      consummated the Company’s interest in those leases will increase to 100% and the
      balance Due From Joint Interest Owners will be reclassified to Oil and Gas
      Properties.  In the event the negotiations are not successfully
      consummated, the Third Parties will be obligated to reimburse the Company for
      all costs incurred for the Third Party’s working interest.  Management
      believes the transaction will be successfully consummated in the fourth quarter
      of fiscal 2007, and that the amounts classified as Due from Joint Interest
      Owner
      at June 30, 2007 will subsequently be reclassified to Oil and Gas
      Properties.





In
      February and March 2007, the Company received notice it was in default for
      failure to make timely payments of amounts due for drilling and completion
      operations, under the terms of a Joint Operating Agreement with an oil and
      gas
      operator (the “Operator”) and certain Well Participation and Farmout Agreements
      (the “Farmouts”) with a different third party oil and gas operator (the
“Farmor”). On March 29, 2007, the Farmor notified the Company it was exercising
      its rights under the Farmouts to terminate the Farmouts and resume ownership
      of
      the working interests in six wells drilled on the farmout
      acreage.  The Farmor refunded all amounts paid by the Company to drill
      the wells, and credited the Company for the remaining balance due to the
      Operator.  The Company had recorded, through March 31, 2007,
      $2,470,100 of oil and gas sales revenue, $417,358 of lease operating and
      production tax expense and $426,566 of depreciation, depletion and amortization
      from the six wells in which it had held a contractual interest.





Accordingly,
      the accompanying financial statements as of June 30, 2007, and for the nine
      months then ended, have been adjusted from those previously presented at March
      31, 2007, to retroactively eliminate the oil and gas sales, and related costs
      and expenses, from the terminated six wells.  The Company will restate
      the financial statements included in its Form 10-Q filed for the period ended
      March 31, 2007 to give effect to this transaction.





***Plan
      of
      Operations.***  We expect that the development of our
      Colorado properties will include continued drilling of wells in the southern
      portion of the Piceance Basin, where we expect to complete at least 12 wells
      for
      additional gas production, and design and construction of a two-mile low
      pressure gathering system to connect these wells to market.





Associated
      with the development of our
      Colorado properties, we anticipate that, over the next twelve to twenty-four
      months, we will incur costs of approximately $40,000,000 to continue drilling,
      completion and connection of wells drilled to date to gathering and sales gas
      systems.





***Australian
      Properties***





***Beetaloo
      Basin*****.**We spudded the Sweetpea
      Shenandoah #1 well on July 31, 2007.  To date, seven drilling
      locations have been identified based on extensive geological and geophysical
      analysis.  These


28


locations
      have been cleared through the Northern Land Council, responsible for protecting
      Native Lands, and permits have been submitted to the Department of Primary
      Industries, Fisheries and Mines located in Darwin, Northern
      Territory.  Final drilling approval was received in May and these
      locations have been staked and will be formally surveyed.  The
      preparation of drilling pads and access lines commenced the last week of May
      and
      continued into June.





Sweetpea
      mobilized Century Resources to provide the drilling rig for the Shenandoah
      #1.  In preparation for the drilling program, a drilling yard has been
      constructed in the permit area.  Casing and other necessary materials
      were ordered and arrived prior to spudding this well.





From
      July
      through November of 2006, 686 kilometers of new 2D seismic data were acquired
      throughout the Beetaloo Basin.  Additionally, 1000 kilometers of
      previously acquired 2D seismic data were reprocessed.  Along, with the
      other existing 1500 kilometers of 2D seismic data that have not been
      reprocessed, geologic structure maps have been generated for the
      basin.  Ongoing work is proceeding to delineate drilling locations
      beyond the initial seven locations.





The
      exploration drilling program for 2007 will test several play concepts within
      the
      basin.  Hydrocarbon potential exists in shallow, conventional
      structures (in the form of oil), and in deeper unconventional reservoirs,
      including fractured shales and basin centered gas accumulations.  The
      unconventional plays may be gas and/or oil.  All of the exploration
      wells are planned to reach a total depth in the Bessie Creek Sandstone
      formation.  The deepest penetration is expected to be 3000
      meters.





Sweetpea
      currently controls 7 million contiguous acres in the Beetaloo
      Basin.  Applications for another 1.5 million acres have been submitted
      to the Territory’s Ministry.  Sweetpea owns the existing four
      permits.





***Gippsland
      and Otway Basins***.  On November 14, 2006, we entered into
      an agreement with Lakes Oil N.L. (“Lakes Oil”), under which we would jointly
      develop Lakes Oil’s onshore petroleum prospects (focusing on unconventional gas
      resources) in the Gippsland and Otway basins in Victoria,
      Australia.  Under an amendment to the original agreement, completion
      of the agreement was scheduled for June 30, 2007 with PetroHunter, or our
      subsidiary company, Sweetpea, farming into 33-1/3 of Lakes Oil’s permits by
      spending $7 million on exploration efforts.  In addition, we would
      subscribe for $3 million in new shares in Lakes Oil at 1.5 cents
      (Australian).  We also had 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, Sweetpea would be the operator of the permits, but had signed a
      sub
      operator agreement with Lakes Oil to take advantage of their infrastructure
      in
      Victoria.  The
      Lakes
      Agreement expired pursuant to the terms of the Agreement, and the Company and
      Lakes are in ongoing discussions and negotiations to renew or extend the
      Agreement under revised terms.





***Northwest
      Shelf Area***.  Effective February 19, 2007, the
      Commonwealth of Australia granted to Sweetpea an exploration permit in the
      shallow, offshore waters of Western Australia.  The permit, WA-393-P,
      has a six-year term and encompasses almost 20,000 acres.





***Plan
      of Operations.***In Australia we plan to explore and
      develop portions of the 7,000,000 acres of the project area in the Northern
      Territory of Australia (Beetaloo Basin).  We anticipate that, over the
      next twelve months, we will incur approximately $20,000,000 in costs related
      to
      drilling, well completion and a potential delineation seismic
      program.  Over the next eight months, we plan to have a drilling
      program which shall consist of up to seven wells.  This number will
      vary depending on depth and success of the exploration
      drilling.


29


**Current
      Financing Activities**





To
      fund
      the planned operations described above and our fixed commitments for operating
      leases, delay rentals, property development fees and consulting fees and note
      payments to MAB totaling approximately $2,700,000 for the fiscal year ended
      September 30, 2007, 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 consisted of
      one share of our common stock and one-half common stock purchase
      warrant.  A whole common stock purchase warrant entitled the purchaser
      to acquire one share of our common stock at an exercise price of $1.88 per
      share
      through December 31, 2007.  As of March 31, 2007, we had received
      $2,767,500 from the sale of units pursuant to the private
      placement.  In February 2007, our board of directors determined that
      the composition of the units being offered would be restructured, and those
      investors who had subscribed in the offering would be offered the opportunity
      to
      rescind their subscriptions or to participate on the same terms as ultimately
      defined for the restructured offering.  During the three months ended
      June 30, 2007, one investor chose to convert his $300,000 investment into
      642,857 shares of the Company’s common stock.





In
      December 2006, PetroHunter Australia
      commenced the sale, pursuant to a private placement, of up to $50,000,000 of
      convertible notes.  As of January 8, 2007, proceeds of $1,530,000 had
      been received from the offering.  In February 2007, PetroHunter
      Australia terminated the offering, refunded $30,000 to four investors, and
      converted $1,500,000 from one investor as the initial funding under a Credit
      and
      Security Agreement entered into January 9, 2007, as described
      below.





On
      January 9, 2007, we entered into a Credit and Security Agreement (the “January
      2007 Credit Facility”) with Global Project Finance AG, a Swiss company
      (“Global”), for mezzanine financing in the amount of $15 million.  The
      January 2007 Credit Facility provided for an interest rate of 6.75% over prime,
      and is 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.  We have applied most of the proceeds of this loan to the
      Company’s drilling and development operations in the Piceance Basin,
      Colorado.  The terms of the January 2007 Credit Facility also provide
      for the issuance of warrants to purchase 1,000,000 of our common shares upon
      execution of the January 2007 Credit Facility, and an additional 200,000
      warrants, for each $1 million draw down of the credit facility up to $15
      million.  The warrants are exercisable for until January 9,
      2012.  The exercise prices of the warrants are equal to 120% of the
      volume weighted average price of our stock for the 30 days immediately prior
      to
      each warrant issuance date.  Global and its controlling shareholder
      were shareholders of the Company prior to the January 2007 Credit
      Facility.  As April 30, 2007, we had drawn down all $15,000,000 on the
      credit facility.





On
      May
      21, 2007, we entered into a second Credit and Security Agreement with Global
      (the “May 2007 Credit Facility”).  Under that Agreement, Global has
      agreed to use its best efforts to advance up to $60,000,000 over the next 18
      months.  Interest accrues at 6.75% over the prime rate and is payable
      quarterly beginning June 30, 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 Piceance II, Buckskin Mesa and Sugar Loaf
      projects in the Piceance Basin, Colorado (the “Security
      Interest”).  We plan to use the loan proceeds for our drilling and
      development operations in the Piceance Basin and other mineral interests we
      own
      and will acquired, as well as for ongoing working capital
      needs.


30


Global
      received warrants to purchase 2,000,000 shares of our common stock upon
      execution of the May 2007 Credit Facility and 400,000 warrants for each
      $1,000,000 advanced under the credit facility.  The warrants are
      exercisable until May 21, 2012, and the exercise prices are equal to 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 2% of the amount of the advance.





With
      respect to the January 2007 Credit Facility, we agreed to extend to Global
      the
      same terms as those contained in the May 2007 Credit Facility on a “most favored
      nation” basis.  The Security Interest secures our obligations under
      both credit facilities on a pro rata basis.





We
      dissolved PetroHunter Australia and
      formed Australia PetroHunter Ltd. in British Columbia in May 2007, as we believe
      that conditions for raising capital are more favorable in Canada than in the
      United States.  In July 2007, Australia PetroHunter commenced a
      private placement of warrants to raise up to Cdn.$25,000,000.  As of
      August 15, 2007, no subscriptions had been received.





**Liquidity
      and Capital Resources**




We
      had
      not commenced principal operations or earned significant revenue as of June
      30,
      2007, and are considered a development stage company.  During the
      period from inception to June 30, 2007, we incurred a cumulative net loss of
      $41,087,227 and at that date have a working capital deficit of
      $25,967,927.  In order to fund our operations, current drilling
      commitments and planned exploration and development of oil and gas properties,
      we will require significant additional funding.  We have sold
      approximately $83.7 million of notes, convertible notes and common stock from
      inception through June 30, 2007, 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.




The
      Company at June 30, 2007 is vastly different from its existence at June 30,
      2006.  At June 30, 2006, we had been operating for approximately one
      year, had no employees, no drilling operations and had acquired interests in
      five properties including its Heavy Oil projects in Utah and Montana, Buckskin
      Mesa, Piceance II and Northern Territory comprising approximately 7.1 million
      acres.  Each area was in the acquisition stage or very early stages of
      exploration.  During the 2006 fiscal year and the first nine months of
      the current fiscal year, we added 17 employees, moved to offices in Denver,
      Colorado, and commenced a drilling program of 20 operated wells with
      participation in 18 additional wells, and have added approximately 200,000
      gross
      acres of leasehold with operations commenced on each project area.




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 8,800,000 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 an oil and gas prospect.  At June 30, 2007, we had a
      working capital deficit of $25,967,927 and cash of $18,101.  In
      addition, 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 June 30, 2007, we were in default on payment of these
      notes and are in discussion with the holders about converting the notes and
      accrued interest into shares of the Company’s stock.


31


***Cash
      Used in Operating Activities.***  We incurred a net loss of
      $18,276,394 and we used cash of $7,146,476 for operating activities for nine
      months ended June 30, 2007.  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 $7,304,762, as a result of stock options issued to employees
      and
      consultants; depreciation, depletion, amortization, impairment and accretion
      of
      $1,068,108; common stock issued for financing costs of $1,337,749; and
      amortization of discount on notes payable of $457,771.  In comparison,
      we used $7,182,907 of cash in operations for the nine months ended June 30,
      2006
      and the principal adjustment to reconcile from the net loss of $8,557,560 was
      $1,353,090 of stock based compensation expense and $942,562 of common stock
      issued for financing costs.





***Cash
      Used in Investing Activities.***  We used cash of
      $31,514,698 in investing activities during the nine months ended June 30, 2007,
      primarily for our additions to our oil and gas properties of $13,212,093, costs
      incurred on behalf of joint interest owners of $16,273,715, and deposits on
      oil
      and gas property acquisitions of $2,243,777.  Depending on the outcome
      of current negotiations with third party joint interest owners, the amount
      expended on behalf of the joint interest owners will either be reclassified
      to
      additions to oil and gas properties, or will be collected in the form of cash
      payments from the joint interest owners.  We also recovered $475,000
      of restricted cash, which are certificates of deposit underlying letters of
      credit for exploration permits, state and local bonds and guarantees to
      vendors.  During the nine months ended June 30, 2006, we used
      $20,731,982 for additions to oil and gas properties.





We
      currently anticipate our capital budget will be approximately $40 million for
      the calendar year 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 the
      balance of our 2007 calendar year capital budget.





***Cash
      Provided by Financing Activities.***Cash provided by
      financing activities in the nine months ended June 30, 2007 consisted of
      proceeds from promissory notes sold under a Credit and Security Agreement of
      $25,000,000 and proceeds from the sale of units in our private placement shares
      for gross proceeds of $2,767,500.  Total cash provided by financing
      activities was $28,047,500 and we had a cash balance of $18,101 at June 30,
      2007.





It
      is
      anticipated that the continuation and future development of our business will
      require significant additional capital expenditures.  We believe cash
      flow from our existing producing wells and wells soon to be connected will
      provide sufficient funds to meet our ongoing administration and operating
      expenditures; however, our capital expenditure budget for the calendar year
      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 $40 million on
      exploration and development activities during the calendar year 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 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.





32


**Results
      of Operations**





**Three
      months ended June 30, 2007 compared to three months ended June 30,
      2006**





***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 decreased significantly for the quarter ended June
      30, 2007 from the previous quarter as we agreed to relinquish our six best
      producing wells, following our default on the timely payment of drilling and
      completion obligations on the wells.  As discussed in Note 4 to the
      accompanying financial statements, we adjusted
      the current financial statements to retroactively eliminate the oil and gas
      sales, and related costs and expenses, from the terminated six
      wells.  We will restate the financial statements included in our Form
      10-Q filed for the period ended March 31, 2007 to give effect to this
      transaction.





The
      loss
      of revenue from the six relinquished wells was partially offset by production
      from five additional wells that recorded initial production during the
      period.  We sold 123,519 mcf of natural gas and 32 barrels of oil,
      generating $846,950 ($7.04/mcf and $58.57/bbl) of production revenues for the
      three months ended June 30, 2007, as compared to none for the three months
      ended
      June 30, 2006.  We recorded lease operating expenses of
      $211,260($1.74/mcfe) and depreciation, depletion and amortization (DD&A)
      expense of $251,460 ($2.03mcfe) for the 2007 period.





***General
      and Administrative.***Due to the substantially increased
      level of activity during the three months ended June 30, 2007 as compared to
      the
      three months ended June 30, 2006, general and administrative expenses increased
      by $3,460,434 or 179%





For
      the
      quarters ended June 30, 2007 and 2006, we recorded general and administrative
      costs of $5,395,364 and $1,934,930, respectively, as summarized
      below:





**Three
                months ended June 30,****2007**
            **2006**Consulting
                fees
            $              418,420
            $            554,707Insurance
            74,309
            32,947Investor
                relations
            63,187
            165,281Legal
            114,496
            56,123Salaries
            544,092
            -Stock
                based compensation
            3,688,038
            846,734Travel
                and entertainment
            266,641
            217,447Director
                fees
            13,500
            -Office
                lease and expenses
            118,695
            43,768Audit
                and accounting
            40,803
            10,824Other
                expenses
            53,183
            7,099$        5,395,364
            $        1,934,930





·
            Consulting
                fees decrease slightly in 2007 due to the addition of full time staff
                to
                replace certain consultants in the prior
                periods.


·
            Insurance
                increased due to medical insurance benefits provided for employees,
                cost
                of insurance to cover office furnishings and equipment, and directors
                and
                officers insurance.


33


·
            Investor
                relations decreased in 2007 compared to 2006 when we were in the
                process
                of becoming a public company through the Stock Exchange in May
                2006.


·
            Legal
                expenses increased in 2007 due to growth of the business, particularly
                with regard to new financings, the renegotiation of the MAB Acquisition
                and Consulting Agreement, and the costs of public company reporting
                and
                compliance.


·
            Increased
                salary expense in 2007 reflects the fact we had no employees at June
                30,
                2006 compared to 17 employees as of June 30,
                2007.


·
            Increased
                stock based compensation expense in 2007 reflects significantly more
                options granted and vested as of June 30, 2007 as compared to June
                30,
                2006.


·
            Increased
                travel and entertainment expenses reflect the growth of the business,
                the
                level of operational activity both domestically and in
                Australia.


·
            Increased
                director fees reflect compensation paid to three outside directors
                in 2007
                versus none in 2006.


·
            Increased
                office expenses reflects costs of our existing offices in Denver
                and Salt
                Lake City in 2007.  In 2006, the Company had no office
                facilities.


·
            Increased
                accounting and audit fees reflect the growth of the business, complexity
                of the transactions entered into and the resultant audit and review
                requirements subsequent to becoming a public reporting entity effective
                May 2006.





***Property
      Development – Related.***During the three months ended
      June 30, 2006, we incurred $1,245,000 in property development costs with MAB,
      as
      compared to nil in 2007.  This reduction follows the execution of the
      new Acquisition and Consulting Agreement with MAB, which was effective January
      1, 2007, under which we no longer incur property development costs with
      MAB.




***Depreciation,
      Depletion,
      Amortization, Impairment and Accretion Expense.***We
      recorded depreciation on furniture and fixtures of $52,448, depletion of oil
      and
      gas properties of $251,460, and accretion of asset retirement obligation (ARO)
      of $671 during the three months ended June 30, 2007.  For the
      corresponding period of 2006 we incurred no such expenses, due to the early
      stage of our business and having no revenue from oil and gas
      operations.




***Operating
      Expenses.***Total operating expenses for 2007 were
      $5,986,203, as compared to $3,179,930 in 2006.




***Interest
      Expense.***We incurred interest and financing expenses of
      $1,545,801 for 2007, as compared to $1,295,118 for 2006.  The increase
      in 2007 relates primarily**to financing costs paid in common stock
      to extend the payment terms for pending acquisitions of oil and gas properties
      of $204,081 in 2007 compared to none in 2006.




***Net
      Loss.***As
      a result of the expenses described above and the retroactive adjustment related
      to the relinquishment of six producing wells, we incurred a loss of $6,678,774
      for 2007 as compared to $4,475,048 for 2006, increasing the loss accumulated
      since inception to $41,087,227.




**Nine
      months ended June 30, 2007 compared to nine months ended June 30,
      2006**




***Oil
      and
      Gas Revenues.***As
      discussed in
      Note 4 to the accompanying financial statements, weadjusted the current
      financial statements to retroactively eliminate the oil and gas sales, and
      related costs and expenses, from the terminated six wells.  We will
      restate the financial statements included in our Form 10-Q filed for the period
      ended March 31, 2007 to give effect to this transaction.  The
      discussion below addresses the results of operations for the nine months ended
      June 30, 2007, including the effect of the aforementioned retroactive
      adjustment.


34


During
      the nine months ended June 30, 2007, we sold 350,314 mcf of natural gas and
      87
      barrels of oil, generating $2,185,294 ($6.22/mcf and $54.36/bbl) of production
      revenue, as compared to none for the nine months ended June 30,
      2006.  We recorded lease operating expenses of $600,350 $1.71/mcfe)
      and DD&A of $383,615($1.09/mcfe) for the 2007 period.




***General
      and Administrative.***Due to the substantially increased
      level of activity during the nine months ended June 30, 2007 as compared to
      the
      nine months ended June 30, 2006, general and administrative expenses increased
      by $9,583,152 or 251%.




For
      the
      nine months ended June 30, 2007 and 2006, we recorded general and administrative
      costs of $13,393,935 and $3,810,783 respectively, as summarized
      below:





**Nine
                months ended June 30,****2007**
            **2006**Consulting
                fees
            $                 1,021,733
            $                    1,054,708Insurance
            220,046
            44,314Investor
                relations
            495,098
            472,701Legal
            735,308
            405,950Salaries
            1,696,189
            -Stock
                based compensation
            7,304,762
            1,353,090Travel
                and entertainment
            1,045,893
            350,137Director
                fees
            46,500
            -Office
                lease and expenses
            446,427
            71,964Audit
                and accounting
            218,025
            46,736Other
                expenses
            163,954
            11,183$13,393,935
            $3,810,783





·
            Insurance
                increased due to medical insurance benefits provided for employees
                and
                cost of insurance to cover office furnishings and equipment, and
                directors
                and officers insurance coverage.


·
            Legal
                expenses increased in 2007 due to growth of the business, particularly
                with regard to new financings, the renegotiation of the MAB Acquisition
                and Consulting Agreement, and the incremental costs of public company
                reporting and compliance.


·
            Increased
                salary expense in 2007 reflects the fact we had no employees at June
                30,
                2006 compared to 17 employees as of June 30,
                2007.


·
            Increased
                stock based compensation expense in 2007 reflects significantly more
                options granted and vested as of June 30, 2007 as compared to June
                30,
                2006.


·
            Increased
                travel and entertainment expenses reflect the growth of the business,
                the
                level of operational activity both domestically and in Australia,
                and the
                increases in professional staff.  Additional travel of staff was
                required during the fundraising activities discussed above and for
                the
                Australian operational activities in
                2007.


·
            Increase
                in director fees reflects compensation paid to three outside directors
                in
                2007 versus none in 2006.


·
            Increased
                office expenses reflect costs of our existing offices in Denver and
                Salt
                Lake City in 2007.  In 2006, the Company had no office
                facilities.


·
            Increased
                accounting and audit fees reflect the growth of the business, complexity
                of the transactions entered into and the resultant audit review
                requirements.


35


***Property
      Development – Related.***During the nine months ended
      June 30, 2007, we incurred $1,815,000 in property development costs with MAB,
      as
      compared to $2,765,000 in 2006.  All 2007 costs were incurred in the
      first three months of fiscal 2007.  The Company and MAB executed a new
      Acquisition and Consulting Agreement effective January 1, 2007, under which
      we
      no longer incur property development costs with MAB.




***Depreciation,
      Depletion, Amortization, Impairment and Accretion
      Expense.***We recorded depreciation on furniture and
      fixtures of $132,371, depletion of oil and gas properties of $383,615,
      impairment expenses of $550,790, and accretion of ARO of $1,333 during the
      nine
      months ended June 30, 2007.  For the corresponding period of 2006 we
      incurred no such expenses, due to the early stage of our business.




***Operating
      Expenses.***Total operating expenses for 2007 were
      $17,027,574, as compared to $6,575,783 in 2006.





***Interest
      Expense.***We incurred interest and financing expenses of
      $3,454,813 for 2007, as compared to $1,981,777 for 2006.  The increase
      relates primarily**to financing costs paid in common stock to
      extend the payment terms for pending acquisitions of oil and gas properties
      of
      $1,337,749 in 2007 compared to none in 2006 coupled with higher debt levels
      in
      2007 following the issuance of $25,000,000 of notes payable under two Security
      and Credit Agreements, and the issuance of the $13.5 million note payable to
      MAB
      as part of the Consulting Agreement executed in January 2007.





**Going
      Concern**





We
      have
      incurred a cumulative net loss $41,087,227 for the period from inception to
      June
      30, 2007 and at June 30, 2007 have a working capital deficit of
      $25,967,927.  We require significant additional funding to sustain our
      operations and satisfy our contractual obligations and current commitments
      for
      our planned oil and gas exploration and development operations.  Our
      ability to establish the Company as a going concern is dependent upon our
      ability to obtain additional financing in order to fund our planned operations
      and ultimately to achieve profitable operations.





**Off-Balance
      Sheet Arrangements**





From
      time to time, we enter into
      off-balance sheet arrangements and transactions that can give rise to
      off-balance sheet obligations.  As of June 30, 2007, the off-balance
      sheet arrangements and transactions that we have entered into include operating
      lease agreements.  We do not believe that these arrangements will
      materially affect our liquidity or the availability of, or requirements for,
      capital resources.





36


**Schedule
      of Contractual Obligations**





The
      following table summarizes our obligations and commitments to make future
      payments under our notes payable, operating leases, employment contracts and
      consulting agreements for the periods specified as of June 30,
      2007.


**Contractual
                obligations (1)**
            **Payments
                due by period****Total**
            **Less
                than 1 year**
            **1-3
                years**
            **3-5
                years**
            **More
                than 5 years**Convertible
                Notes Payable
              Principal
              Interest
              Notes
                Payable Principal & Interest
              Related
                Party (2)
              Other
            $    400,000
              60,000
              
              14,361,209
              34,126,986
            $400,000
              60,000
              
              4,012,815
              4,740,000
            $                -
              -
              
              6,127,981
              29,386,986
            $                 -
              -
              
              4,220,413
              -
            $   -
              -
              
              -
              -Office,
                Equipment Leases & Other
            905,513
            226,209
            474,492
            204,812
            -TOTAL
            $49,853,708
            $9,439,024
            $35,989,459
            $4,425,225
            $-


(1)
            We
                have excluded asset retirement obligations because we are not able
                to
                precisely predict the timing for these
                amounts.




(2)
            Interest
                payments were calculated using actual interest rates charged through
                June
                30, 2007 and 5.3% thereafter.





**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 are computed on the units of production method based on proved
      reserves.  Amortizable costs include estimates of future development
      costs of proved undeveloped reserves.




Capitalized
      costs of oil and gas properties may not exceed an amount equal to the present
      value, discounted at 10%, of the estimated future net cash flows from proved
      oil
      and gas reserves plus the cost, or estimated fair market value, if lower, of
      unproved properties.  Should capitalized costs exceed this ceiling, an
      impairment is recognized.  The present value of estimated future net
      cash flows is computed by applying year end prices of oil and natural gas to
      estimated future production of proved oil and gas reserves as of year end,
      less
      estimated future expenditures to be incurred in developing and producing the
      proved reserves and assuming continuation of existing economic
      conditions.  As of June 30, 2007, we have no proved reserves, have
      received revenue from testing and production on our initial wells, and all
      oil
      and gas property costs are considered to be unevaluated and are recorded at
      the
      lower of cost or estimated fair market value.




37


***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 June 30, 2007, we had recorded an ARO of $338,301 for
      our initial wells under progress.




***Share
      Based Compensation.***On October
      1, 2005, 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
      June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
      48”).  The interpretation clarifies the accounting for uncertainty in
      income taxes recognized in a company’s financial statements in accordance with
      SFAS 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 interpretation will be effective for the
      fiscal year beginning October 1, 2007 for the Company.  The adoption
      of FIN 48 is not expected to have a material impact on our consolidated
      financial position, results of operations and cash flows.




In
      September 2006, the FASB issued SFAS 157, “Fair Value
      Measurements.”  This Statement defines fair value as used in numerous
      accounting pronouncements, establishes a framework for measuring fair value
      in
      generally accepted accounting principles and expands disclosure related to
      the
      use of fair value measures in financial statements.  The Statement is
      to be effective for the Company’s financial statements issued in 2009; however,
      earlier application is encouraged.  We are currently evaluating the
      timing of adoption and the impact that adoption might have on our financial
      position or results of operations.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”).  Due to diversity in
      practice among registrants, SAB 108 expresses SEC staff views regarding the
      process by which misstatements in financial statements are evaluated for
      purposes of determining whether financial statement restatement is
      necessary.  SAB 108 was effective for the Company on October 1,
      2006.  The adoption of SAB 108 had no impact on our financial position
      or results from operations.


38


In
      December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2,
“Accounting for Registration Payment Arrangements.”  This FSP
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement should be
      separately recognized and measured in accordance with FASB Statement No. 5,
“Accounting for Contingencies.”  This FSP is effective immediately for
      registration payment arrangements and the financial instruments subject to
      those
      arrangements that are entered into or modified subsequent to December 21,
      2006.  For registration payment arrangements and financial instruments
      subject to those arrangements that were entered into prior to December 21,
      2006, the guidance in the FSP will be effective for the fiscal year beginning
      October 1, 2007 for the Company.  The adoption of this FSP is not
      expected to have a material impact on our financial position or results from
      operations.





On
      February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities.”  This
      Statement establishes presentation and disclosure requirements designed to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities.  SFAS
      No. 159 is effective for our financial statements issued in
      2009.  We are currently evaluating the impact that the adoption of
      SFAS No. 159 might have on our financial position or results of
      operations.








**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**





Our
      primary market risk relates to changes in the pricing applicable to the sales
      of
      gas production in the Piceance Basin in Colorado.  This risk will
      become more significant to us as our production increases in this
      area.  We also have market risk related to the interest rate on
      borrowings under our Credit Facilities, which accrues at variable interest
      rates.  Although we are not using derivatives at this time to mitigate
      the risk of adverse changes in commodity prices or interest rates, we may
      consider using them in the future.








**ITEM
      4.           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 were not
      effective.  The controls were not sufficient to ensure that the
      Company’s accounting department would receive or review material documents, or
      to ensure that the accounting department would receive or review information
      on
      a timely basis.  There was not an effective system in place to ensure
      that those responsible for financial reporting received copies of Board minutes
      which reflected the issuance of common shares of stock.  In addition,
      the Company’s accounting department does not have adequate staffing to provide
      timely financial information.  Subsequent to the end of the period
      covered bythis
      report, we approved and are implementing procedures and processes to remediate
      this control deficiency by completing the implementation of an improved
      information flow and disclosure system within the Company.  We also
      hired additional staff for the accounting department subsequent to June 30,
      2007.


39




**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.  As disclosed above, subsequent to the end of our last
      fiscal quarter, we began the implementation of certain changes, which we believe
      will improve our internal controls over financial reporting.




40


**PART
      II - OTHER INFORMATION**





**ITEM
      1.             LEGAL
      PROCEEDINGS**





The
      law
      firm of Minter Ellison, based in Melbourne, Australia, has filed an action
      against Sweetpea and the Company to recover approximately $215,000 in legal
      fees
      which are currently owed.  No further proceedings have taken
      place.





**ITEM
      1A.          RISK
      FACTORS**





There
      were no material changes from the risk factors disclosed in our Form 10-KSB
      for
      the fiscal year ended September 30, 2006.





**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**





During
      the three months ended March 31, 2007, a wholly-owned subsidiary of the
      registrant, PetroHunter Australia Ltd., sold convertible notes in the aggregate
      amount of $25,000 to three accredited investors pursuant to the exemption from
      registration contained in Rule 506 of Regulation D.  These funds were
      returned to the investors during the three months ended June 30,
      2007.





**ITEM
                3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**





Not
      Applicable.





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





Not
      Applicable.





**ITEM
                5.**
            **OTHER
                INFORMATION**





Not
      Applicable.





**ITEM
                6.**
            **EXHIBITS**





**Regulation
                S-K 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)






41







**Regulation
                S-K**
              **Number**
            **Exhibit**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)2.5
            Second
                Amendment to Purchase and Sale Agreement dated February 28, 2007
                (incorporated by reference to Exhibit 2.2 to the Company’s amended current
                report on Form 8-K dated December 29, 2006, filed March 2,
                2007)2.6
            Partial
                Assignment of Contract and Guarantee between PetroHunter Energy
                Corporation, PetroHunter Operating Company and MAB Resources LLC,
                dated
                March 21, 2007 (incorporated by reference to Exhibit 2.1 to the Company’s
                current report on Form 8-K dated March 21, 2007, filed March 22,
                2007)2.7
            Third
                Amendment to Purchase and Sale Agreement dated March 30, 2007
                (incorporated by reference to Exhibit 2.3 to the Company’s amended current
                report on Form 8-K dated December 29, 2006, filed April 2,
                2007)2.8
            Fourth
                Amendment to Purchase and Sale Agreement dated April 30, 2007
                (incorporated by reference to Exhibit 2.4 to the Company’s amended current
                report on Form 8-K dated December 29, 2006, filed May 1,
                2007)2.9
            Fifth
                Amendment to Purchase and Sale Agreement dated May 31, 2007 (incorporated
                by reference to Exhibit 2.5 to the Company’s amended current report on
                Form 8-K dated December 29, 2006, filed June 1, 2007)2.10
            Sixth
                Amendment to Purchase and Sale Agreement dated June 30, 2007 (incorporated
                by reference to Exhibit 2.6 to the Company’s amended current report on
                Form 8-K dated December 29, 2006, filed July 2, 2007)2.11
            Seventh
                Amendment to Purchase and Sale Agreement dated July 31, 2007 (incorporated
                by reference to Exhibit 2.7 to the Company’s amended current report on
                Form 8-K dated December 29, 2006, filed August 2, 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)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)





42


**Regulation
              S-K**
              **Number**
            **Exhibit**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 May 4, 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)10.10
            Credit
                and Security Agreement dated as of May 21, 2007 between PetroHunter
                Energy
                Corporation and PetroHunter Operating Company and Global Project
                Finance
                AG (incorporated by reference to Exhibit 10.1 to the Company’s current
                report on Form 8-K dated May 21, 2007, filed May 22,
                2007)10.11
            Subordinated
                Unsecured Promissory Note dated July 31, 2007 to Bruner Family Trust
                UTD
                March 28, 2005 (incorporated by reference to Exhibit 10.1 to the
                Company’s
                current report on Form 8-K dated July 31, 2007, filed August 1,
                2007)31.1
            Rule
                13a-14(a) Certification of Charles B. Crowell31.2
            Rule
                13a-14(a) Certification of Carmen J. Lotito32.1
            Certification
                of Charles B. Crowell Pursuant to 18 U.S.C. Section 1350, as Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act Of
                2002





43


**Regulation
                S-K**
              **Number**
            **Exhibit**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














44


**SIGNATURES**









Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized.









**PETROHUNTER
                ENERGY CORPORATION**
              **(Registrant)**Date:  August
                24, 2007
            By:  /s/
                Carmen J. LotitoCarmen
                J. Lotito
              Chief
                Financial Officer and Treasurer (Principal Financial Officer and
                Principal
                Accounting Officer)