UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10- Q/A


AMENDMENT
NO. 1


(Mark
One)





R
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THESECURITIES EXCHANGEACT OF
    1934





For
the quarterly period ended December 31, 2007





Or





£
            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.)1600
      Stout Street
            
            80202Suite
      2000, Denver, Colorado
            
            (Zip
    Code)(Address
      of principal executive offices)





Registrant’s
telephone number, including area code:


(303)
572-8900





Registrant’s
former address:


1875
Lawrence Street,


Suite
1400, Denver, Colorado 80202





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 R     No
£





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


Large
accelerated filer £                                                        Accelerated
filer £


Non-accelerated
filer £                                                           Smaller
reporting company R





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





As of
January 31, 2008, the registrant had 318,748,841 shares
of common stock outstanding.





FORWARD-LOOKING
STATEMENTS





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








EXPLANATORY
NOTE REGARDING RESTATEMENTS





This
Quarterly Report on Form 10-Q/A for the three month period ended December 31,
2007 includes restatements of the previously filed condensed consolidated
financial statements and data (and related disclosures) for the period ended
December 31, 2007.  A summary of these restatements and corrections
are discussed in Note 2, Restatement of Previously Issued
Financial Statements, included in the accompanying condensed consolidated
financial statements for the period ended December 31, 2007.  These
corrections are also discussed in Item 2, Management’s Discussion and Analysis
of Financial Condition and Results of Operations.  We previously
announced, in a Form 8-K filed with the SEC on November 20, 2008, that we would
restate our previously reported financial statements as originally filed with
the SEC on February 19, 2008, as a result of the discovery of several
significant errors by management during its year-end review, and in conjunction
with the annual audit.  The information contained in this Quarterly
Report on Form 10-Q/A amends only Items 1, 2 and 4 of Part I to the originally
filed Quarterly Report on Form 10-Q filed with the SEC on February 19, 2008 (the
“Original Report”).





This
Quarterly Report on Form 10-Q/A does not reflect all events occurring after the
original filing of the Original Report or modify or update all the disclosures
affected by subsequent events.  Information not modified or updated
herein reflects the disclosures made at the time of the filing of the Original
Report on February 19, 2008.  Accordingly, this Form 10-Q/A should be
read in conjunction with all of our periodic filings, including our amended
filings on Form 10-Q/A in relation to the three- and six-month period ended
March 31, 2008, and in relation to the three- and nine-month period ended June
30, 2008, filed with the SEC in conjunction with the filing of this
report.





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








CURRENCIES





All
amounts expressed herein are in U.S. dollars unless otherwise
indicated.








2





GLOSSARY





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





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





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





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





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





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





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





Developed Acreage.The number
of acres that are allocated or assignable to producing wells or wells capable of
production.





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





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





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





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





Farm-In or Farm-Out.An
agreement under which the owner of a working interest in a natural gas and oil
lease assigns the working interest or a portion of the working interest to
another party who desires to drill on the leased acreage. Generally, the
assignee is required to drill one or more wells in order to earn its interest in
the acreage. The assignor usually retains a royalty or reversionary interest in
the lease. The interest received by an assignee is a “farm-in” while the
interest transferred by the assignor is a “farm-out”.





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





Finding and Development Costs.The total capital expenditures, including acquisition costs, and
exploration and abandonment costs, for oil and gas activities divided by the
amount of proved reserves added in the specified period.





3


Force Pooling.The process by
which interests not voluntarily participating in the drilling of a well, may be
involuntarily committed to the operator of the well (by a regulatory agency) for
the purpose of allocating costs and revenues attributable to such
well.





Gross Acres or Gross Wells.The total acres or wells, as the case may be, in which we have a working
interest.





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





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





MCFE.One thousand cubic feet
of gas equivalent. Gas equivalents are determined using the ratio of six Mcf of
gas (including gas liquids) to one Bbl of oil.





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





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





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





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





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





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





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





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





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





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





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





4


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





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





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





5


PETROHUNTER
ENERGY CORPORATION





FORM
10-Q/A





FOR
THE THREE-MONTH PERIOD ENDED


DECEMBER
31, 2007


(restated)





INDEX





PagePART
      I — FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            7Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            39Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            48Item
      4.
            Controls
      and Procedures
            48PART
      II — OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            51Item
      1A.
            Risk
      Factors
            51Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            51Item
      3.
            Defaults
      Upon Senior Securities
            52Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            52Item
      5.
            Other
      Information
            52Item
      6.
            Exhibits
            52Signatures
            53


6


PART I.FINANCIAL INFORMATION


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED BALANCE
SHEETS‘


December
      31,2007
                              
                              
                              September
      30,2007(unaudited)
                                (restated)($
      in thousands)ASSETSCurrent
      AssetsCash
      and cash equivalents
                              
                              $
                              462
                              
                              
                              $
                              120ReceivablesOil
      and gas receivables, net
                              
                              
                              306
                              
                              
                              
                              487GST
      receivable
                              
                              
                              424
                              
                              
                              
                              —Due
      from related parties
                              
                              
                              —
                              
                              
                              
                              500Other
      receivables
                              
                              
                              31
                              
                              
                              
                              59Note
      receivable — related party
                              
                              
                              —
                              
                              
                              
                              2,494Prepaid
      expenses and other assets
                              
                              
                              249
                              
                              
                              
                              187Marketable
      securities, available for sale
                              
                              
                              3,896
                              
                              
                              
                              —Total
      Current Assets
                              
                              
                              5,368
                              
                              
                              
                              3,847Property
      and Equipment, at costOil
      and gas properties under full cost method, net
                              
                              
                              163,006
                              
                              
                              
                              162,843Furniture
      and equipment, net
                              
                              
                              737
                              
                              
                              
                              569163,743
                              
                              
                              
                              163,412Other
      AssetsJoint
      interest billings
                              
                              
                              1,029
                              
                              
                              
                              13,637Restricted
      cash
                              
                              
                              599
                              
                              
                              
                              599Deposits
      and other assets
                              
                              
                              90
                              
                              
                              
                              —Deferred
      financing costs, net
                              
                              
                              2,084
                              
                              
                              
                              529Intangible
      asset
                              
                              
                              1,997
                              
                              
                              
                              —Total
      Assets
                              
                              $
                              174,910
                              
                              
                              $
                              182,024LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                              
                              $
                              23,532
                              
                              
                              
                              26,631Notes
      payable — short-term
                              
                              
                              2,548
                              
                              
                              
                              4,667Convertible
      notes payable
                              
                              
                              400
                              
                              
                              
                              400Note
      payable — related party — current portion
                              
                              
                              2,385
                              
                              
                              
                              3,755Note
      payable — current portion of long term liabilities
                              
                              
                              120
                              
                              
                              
                              120Accrued
      interest payable
                              
                              
                              3,821
                              
                              
                              
                              2,399Accrued
      interest payable — related party
                              
                              
                              654
                              
                              
                              
                              516Due
      to shareholder and related parties
                              
                              
                              1,353
                              
                              
                              
                              1,474Contract
      payable — oil and gas properties
                              
                              
                              —
                              
                              
                              
                              1,750Contingent
      purchase obligation
                              
                              
                              1,997
                              
                              
                              
                              —Total
      Current Liabilities
                              
                              
                              36,810
                              
                              
                              
                              41,712Non-Current
      ObligationsNotes
      payable — net of discount and current portion
                              
                              
                              29,464
                              
                              
                              
                              27,944Subordinated
      notes payable — related parties
                              
                              
                              1,149
                              
                              
                              
                              9,050Convertible
      notes payable — net of discount
                              
                              
                              60
                              
                              
                              
                              —Asset
      retirement obligation
                              
                              
                              104
                              
                              
                              
                              136Net
      Non-Current Obligations
                              
                              
                              30,777
                              
                              
                              
                              37,130Total
      Liabilities
                              
                              
                              67,587
                              
                              
                              
                              78,842Common
      Stock Subscribed
                              
                              
                              —
                              
                              
                              
                              2,858Commitments
      and Contingencies (Note 13)Stockholders’
      EquityPreferred
      stock, $0.001 par value; authorized 100,000,000 shares; none
      issued
                              
                              
                              —
                              
                              
                              
                              —Common
      stock, $0.001 par value; authorized 1,000,000,000 shares; issued and
      outstanding — 318,748,841 and 278,948,841 shares
                              
                              
                              319
                              
                              
                              
                              279Additional
      paid-in-capital
                              
                              
                              197,993
                              
                              
                              
                              172,672Other
      comprehensive loss
                              
                              
                              (1,559
                              )
                              
                              
                              (5
                              )Deficit
      accumulated during the development stage
                              
                              
                              (89,430
                              )
                              
                              
                              (72,622
                              )Total
      Stockholders’ Equity
                              
                              
                              107,323
                              
                              
                              
                              100,324Total
      Liabilities and Stockholders’ Equity
                              
                              $
                              174,910
                              
                              
                              $
                              182,024


See
accompanying notes to consolidated financial statements.


7


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS





Three-Months
                Ended
                December
      31,2007
              
              
              Three-Months
                Ended
                December
      31,2006
              
              
              Cumulative
                From
      Inception
                (June
      20,
                2005)to
                December 31, 2007(unaudited,
      restated, $ in thousands, except per share amounts)RevenueOil
      and gas revenue
              
              $
              507
              
              
              $
              449
              
              
              $
              3,363Costs
      and ExpensesLease
      operating expenses
              
              
              100
              
              
              
              162
              
              
              
              897General
      and administrative
              
              
              2,318
              
              
              
              3,671
              
              
              
              35,266Project
      development costs — related party
              
              
              —
              
              
              
              1,815
              
              
              
              7,205Impairment
      of oil and gas properties
              
              
              —
              
              
              
              5,151
              
              
              
              24,053Depreciation,
      depletion, amortization and accretion
              
              
              262
              
              
              
              386
              
              
              
              1,580Total
      Operating Expenses
              
              
              2,680
              
              
              
              11,185
              
              
              
              69,001Loss
      from Operations
              
              
              (2,173
              )
              
              
              (10,736
              )
              
              
              (65,638
              )Other
      Income (Expense)Loss
      on conveyance of property
              
              
              (11,875
              )
              
              
              —
              
              
              
              (11,875
              )Foreign
      currency exchange
              
              
              —
              
              
              
              —
              
              
              
              23Interest
      income
              
              
              25
              
              
              
              8
              
              
              
              63Interest
      expense
              
              
              (2,785
              )
              
              
              173
              
              
              
              (12,003
              )Total
      Other Income (Expense)
              
              
              (14,635
              )
              
              
              181
              
              
              
              (23,792
              )Net
      Loss
              
              $
              (16,808
              )
              
              $
              (10,555
              )
              
              $
              (89,430
              )Net
      loss per common share — basic and diluted
              
              $
              (0.05
              )
              
              $
              (0.05
              )Weighted
      average number of common shares outstanding — basic and
      diluted
              
              
              306,471
              
              
              
              219,929





See
accompanying notes to consolidated financial statements





8


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS


(unaudited,
restated)




Common
      Stock
                
                
                Additional
                  Paid-in
                
                
                Deficit
                  Accumulated
                  During
      the
                  Development
                
                
                Accumulated
                  Other
                  Comprehensive
                
                
                Total
                  Stockholders’
                
                
                Total
                  ComprehensiveShares
                
                
                Amount
                
                
                Capital
                
                
                Stage
                
                
                Loss
                
                
                Equity
                
                
                Loss($
      in thousands)Balance,
      June 20, 2005 inception)
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Shares
      issued to founder at $0.001 per share
                100,000,000
                
                
                
                100
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                100
                
                
                
                —Stock
      based compensation costs for options granted to non-
    employees
                —
                
                
                
                —
                
                
                
                823
                
                
                
                —
                
                
                
                —
                
                
                
                823
                
                
                
                —Net
      loss
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,119
                )
                
                
                —
                
                
                
                (2,119
                )
                
                
                (2,119
                )Balance,
      September 30, 2005
                100,000,000
                
                
                
                100
                
                
                
                823
                
                
                
                (2,119
                )
                
                
                —
                
                
                
                (1,196
                )
                
                
                (2,119
                )Shares
      issued for property interests at $0.50 per share
                3,000,000
                
                
                
                3
                
                
                
                1,497
                
                
                
                —
                
                
                
                —
                
                
                
                1,500
                
                
                
                —Shares
      issued for finder’s fee on property at $0.50 per share
                3,400,000
                
                
                
                3
                
                
                
                1,697
                
                
                
                —
                
                
                
                —
                
                
                
                1,700
                
                
                
                —Shares
      issued upon conversion of debt, at $0.50 per share
                44,063,334
                
                
                
                44
                
                
                
                21,988
                
                
                
                —
                
                
                
                —
                
                
                
                22,032
                
                
                
                —Shares
      issued for commission on convertible debt at $0.50 per
    share
                2,845,400
                
                
                
                3
                
                
                
                1,420
                
                
                
                —
                
                
                
                —
                
                
                
                1,423
                
                
                
                —Sale
      of shares and warrants at $1.00 per unit
                35,442,500
                
                
                
                35
                
                
                
                35,407
                
                
                
                —
                
                
                
                —
                
                
                
                35,442
                
                
                
                —Shares
      issued for commission on sale of units
                1,477,500
                
                
                
                1
                
                
                
                1,476
                
                
                
                —
                
                
                
                —
                
                
                
                1,477
                
                
                
                —Costs
      of stock offering: Cash
                —
                
                
                
                —
                
                
                
                (1,638
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,638
                )
                
                
                —Shares
      issued for commission at $1.00 per share
                —
                
                
                
                —
                
                
                
                (1,478
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,478
                )
                
                
                —Exercise
      of warrants
                1,000,000
                
                
                
                1
                
                
                
                999
                
                
                
                —
                
                
                
                —
                
                
                
                1,000
                
                
                
                —Recapitalization
      of shares issued upon merger
                28,700,000
                
                
                
                30
                
                
                
                (436
                )
                
                
                —
                
                
                
                —
                
                
                
                (406
                )
                
                
                —Stock
      based compensation
                —
                
                
                
                —
                
                
                
                9,189
                
                
                
                —
                
                
                
                —
                
                
                
                9,189
                
                
                
                —Net
      loss
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (20,692
                )
                
                
                —
                
                
                
                (20,692
                )
                
                
                (20,692
                )Balance,
      September 30, 2006
                219,928,734
                
                
                
                220
                
                
                
                70,944
                
                
                
                (22,811
                )
                
                
                —
                
                
                
                48,353
                
                
                
                (20,692
                )Shares
      issued for property interests at $1.62 per share
                50,000,000
                
                
                
                50
                
                
                
                80,950
                
                
                
                —
                
                
                
                —
                
                
                
                81,000
                
                
                
                —Shares
      issued for property interests at $1.49 per share
                256,000
                
                
                
                —
                
                
                
                382
                
                
                
                —
                
                
                
                —
                
                
                
                382
                
                
                
                —Shares
      issued for commission costs on property at $1.65 per share
                121,250
                
                
                
                —
                
                
                
                200
                
                
                
                —
                
                
                
                —
                
                
                
                200
                
                
                
                —   9
  Shares
      issued for finance costs on property at $0.70 per share
                        642,857
                        
                        
                        
                        1
                        
                        
                        
                        449
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        450
                        
                        
                        
                        —Shares
      issued for property and finance interests at various costs per
      share
                        8,000,000
                        
                        
                        
                        8
                        
                        
                        
                        6,905
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,913
                        
                        
                        
                        —Foreign
      currency translation adjustment
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (5
                        )
                        
                        
                        (5
                        )
                        
                        
                        (5
                        )Discount
      on notes payable
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,670
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,670
                        
                        
                        
                        —Stock
      based compensation
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,172
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,172
                        
                        
                        
                        —Net
      loss
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (49,811
                        )
                        
                        
                        —
                        
                        
                        
                        (49,811
                        )
                        
                        
                        (49,811
                        )Balance,
      September 30, 2007
                        278,948,841
                        
                        
                        
                        279
                        
                        
                        
                        172,672
                        
                        
                        
                        (72,622
                        )
                        
                        
                        (5
                        )
                        
                        
                        100,324
                        
                        
                        
                        (49,816
                        )Shares
      issued for property interests at $0.31 per share – related
      party
                        25,000,000
                        
                        
                        
                        25
                        
                        
                        
                        7,725
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        7,750
                        
                        
                        
                        —Shares
      issued  in connection with  debt conversion at $0.23
      per share – related party
                        16,000,000
                        
                        
                        
                        16
                        
                        
                        
                        3,664
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        3,680
                        
                        
                        
                        —Shares
      issued for property
                          conveyance
      at $0.25 per share
                        5,000,000
                        
                        
                        
                        5
                        
                        
                        
                        1,245
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,250
                        
                        
                        
                        —Shares
      returned for property conveyance at $0.22 per share
      (restated)
                        (6,400,000
                        )
                        
                        
                        (6
                        )
                        
                        
                        (1,402
                        )
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,408
                        )
                        
                        
                        —Shares
      issued for finance costs at $0.28 per share
                        200,000
                        
                        
                        
                        —
                        
                        
                        
                        56
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        56
                        
                        
                        
                        —Discounts
      associated with beneficial conversion feature and detachable warrants on
      convertible debenture issuance
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,956
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        6,956
                        
                        
                        
                        —Warrant
      value associated with convertible debenture issuance
      (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        21
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        21
                        
                        
                        
                        —Warrants
      issued in connection with debt offering (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,895
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,895
                        
                        
                        
                        —Warrant
      value associated with  debt conversion  - related
      party (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,841
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,841
                        
                        
                        
                        —Debt
      conversion – related party (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,704
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,704
                        
                        
                        
                        —Discount
      on notes payable (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        143
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        143
                        
                        
                        
                        —Foreign
      currency translation adjustment (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        79
                        
                        
                        
                        79
                        
                        
                        
                        79Unrealized
      loss on marketable securities (restated)
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,633
                        )
                        
                        
                        (1,633
                        )
                        
                        
                        (1,633
                        )






10
 
  Stock
      based compensation (restated)
                —
                
                
                
                —
                
                
                
                473
                
                
                
                —
                
                
                
                —
                
                
                
                473
                
                
                
                —Net
      loss (restated)
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (16,808
                )
                
                
                —
                
                
                
                (16,808
                )
                
                
                (16,808
                )Balance,
      December 31, 2007
                318,748,841
                
                
                $
                319
                
                
                $
                197,993
                
                
                $
                (89,430
                )
                
                $
                (1,559
                )
                
                $
                107,323
                
                
                $
                (18,362
                )









See
accompanying notes to consolidated financial statements.





11


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Three-Months
                Ended
                December
      31,
                2007
              
              
              Three-Months
                Ended
                December
      31,
                2006
              
              
              Cumulative
      From
                Inception
                (June
      20,
                2005)to
      December 31,
                2007(unaudited,
      restated, $ in thousands)Cash
      flows from operating activitiesNet
      loss
              
              $
              (16,808
              )
              
              $
              (10,555
              )
              
              $
              (89,430
              )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:Stock
      based compensation
              
              
              473
              
              
              
              1,561
              
              
              
              18,657Detachable
      warrants recorded as interest expense
              
              
              163
              
              
              
              —
              
              
              
              163Depreciation,
      depletion, amortization and accretion
              
              
              262
              
              
              
              386
              
              
              
              1,580Impairment
      of oil and gas properties
              
              
              —
              
              
              
              5,151
              
              
              
              24,053Amortization
      of deferred financing costs
              
              
              709
              
              
              
              —
              
              
              
              2,332Amortization
      of debt discount and beneficial conversion feature costs on convertible
      debentures
              
              
              606
              
              
              
              —
              
              
              
              1,642Loss
      on conveyance of property
              
              
              11,875
              
              
              
              —
              
              
              
              11,875Other
      adjustments to reconcile to net loss
              
              
              56
              
              
              
              —
              
              
              
              133Changes in assets and liabilities:
                Receivables
              
              
              (215
              )
              
              
              (476
              )
              
              
              (761
              )Due
      from related party
              
              
              —
              
              
              
              786
              
              
              
              (500
              )Prepaids
      and other
              
              
              (152
              )
              
              
              (33
              )
              
              
              (197
              )Accounts
      payable, accrued expenses, and other liabilities
              
              
              (647
              )
              
              
              (451
              )
              
              
              4,207Due
      to shareholder and related parties
              
              
              —
              
              
              
              470
              
              
              
              1,474Net
      cash used in operating activities
              
              
              (3,678
              )
              
              
              (3,161
              )
              
              
              (24,772
              )Cash
      flows from investing activitiesAdditions
      to oil and gas properties
              
              
              (7,857
              )
              
              
              (1,241
              )
              
              
              (73,522
              )Proceeds
      from sale of oil and gas properties
              
              
              7,500
              
              
              
              —
              
              
              
              7,500Notes
      receivable-related party
              
              
              —
              
              
              
              (6,427
              )
              
              
              (2,494
              )Additions
      to furniture and equipment
              
              
              (129
              )
              
              
              (33
              )
              
              
              (816
              )Restricted
      cash
              
              
              —
              
              
              
              (525
              )
              
              
              (1,077
              )Net
      cash used in investing activities
              
              
              (486
              )
              
              
              (8,226
              )
              
              
              (70,409
              )Cash
      flows from financing activitiesProceeds
      from the sale of common stock
              
              
              —
              
              
              
              —
              
              
              
              35,742Proceeds
      from common stock subscribed
              
              
              —
              
              
              
              1,588
              
              
              
              2,858Proceeds
      from the issuance of notes payable
              
              
              1,250
              
              
              
              —
              
              
              
              32,800Borrowing
      on short-term notes payable
              
              
              750
              
              
              
              —
              
              
              
              1,250Payments
      on short-term notes
              
              
              (3,805
              )
              
              
              —
              
              
              
              (3,805
              )Proceeds
      from related party borrowings
              
              
              500
              
              
              
              —
              
              
              
              775Payments
      on related party borrowing
              
              
              (519
              )
              
              
              —
              
              
              
              (519
              )Proceeds
      from the exercise of warrants
              
              
              —
              
              
              
              —
              
              
              
              1,000Cash
      received upon recapitalization and merger
              
              
              —
              
              
              
              —
              
              
              
              21Proceeds
      from issuance of convertible notes
              
              
              6,330
              
              
              
              1,505
              
              
              
              27,162Offering
      and financing costs
              
              
              —
              
              
              
              (30
              )
              
              
              (1,638
              )Net
      cash provided by financing activities
              
              
              4,506
              
              
              
              3,063
              
              
              
              95,646Effect
      of exchange rate changes on cash
              
              
              —
              
              
              
              —
              
              
              
              (3
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              342
              
              
              
              (8,324
              )
              
              
              462Cash
      and cash equivalents, beginning of period
              
              
              120
              
              
              
              10,632
              
              
              
              —Cash
      and cash equivalents, end of period
              
              $
              462
              
              
              $
              2,308
              
              
              $
              462Supplemental
      schedule of cash flow informationCash
      paid for interest
              
              $
              11
              
              
              $
              —
              
              
              $
              1,512Cash
      paid for income taxes
              
              $
              —
              
              
              $
              —
              
              
              $
              —







See
accompanying notes to consolidated financial statements.


12


PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)




Note 1 — Organization and Basis of
Presentation





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





GSL was
incorporated under the laws of the State of Maryland on June 20, 2005 for the
purpose of acquiring, exploring, developing and operating oil and gas
properties. PetroHunter is considered a development stage company as defined by
Statement of Financial Accounting Standards (“SFAS”) 7, Accounting and Reporting by Development Stage
Enterprises.A development stage enterprise is one in which planned
principal operations have not commenced, or if its operations have commenced,
there have been no significant revenues therefrom. As of December 31, 2007, our
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 and we have not commenced
our planned principal operations. In October 2006, GSL changed its name to
PetroHunter Operating Company.





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





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





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





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





Net
      cash acquired
                
                $
                21Other
      current assets
                
                
                22Liabilities
      assumed
                
                
                (449
                )Value
      of 28,700,000 Digital Shares
                
                $
                (406
                )




Note
2 – Restatement of Previously Issued Financial Statements





On
August 11, 2008, we concluded our unaudited financial statements for the
quarterly periods ended December 31, 2007 and March 31, 2008, included in our
Quarterly Reports on Form 10-Q for the quarterly periods ended December 31, 2007
and March 31, 2008, should not be read without also considering the effect of
errors that were discovered in subsequent periods.  The Company had
identified the aggregate effects of correcting these errors in their proper
quarterly periods, which was announced in our Form 8-K filed with the SEC on
August 14, 2008.





On
November 14, 2008, we concluded our unaudited financial statements included in
the Company’s Quarterly Reports on Form 10-Q for the quarters ended December 31,
2007, March 31, 2008 and June 30, 2008 would be restated due to the discovery of
additional errors.




13


PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)




The
following errors affected our Original Report for the three month period ended
December 31, 2007:





1.
            Detachable Warrants with
      Convertible Debentures – We corrected an error in relation to our
      accounting for the value of detachable warrants that were issued in
      relation to the issuance of $7.0 million of Convertible Debentures, where
      we erroneously charged the $2.9 million of value assigned
      to the detachable warrants to interest expense, versus recording the
      warrant value as a discount against the face value of the Convertible
      Debentures and amortizing the discount to interest expense over the
      remaining term of the convertible debentures using the effective interest
      method.




2.
            Detachable Warrants with
      Global Debt Facility – We corrected errors in our accounting for
      detachable warrants issued in relation to our Global Credit
      Facility.  We inappropriately used a warrant term assumption in
      our Black-Scholes calculation of fair value that was less than the
      contractual life of the warrants, which understated the initial value of
      the warrants by $1.9 million in total.  Second, we failed to
      properly record $1.2 million of the total as deferred financing costs
      associated with the warrants that were issued in connection with securing
      the facility.




3.
            Heavy Oil Asset Sale –
      We corrected several errors in our accounting for the sale of our Heavy
      Oil Projects.  First, we corrected an error in our accounting
      for the proceeds from the sale of these assets to Pearl Exploration and
      Production Ltd., where we erroneously recorded $2.7 million of contingent
      consideration (in the form of the common stock of the acquirer) relating
      to the sale of assets that did not ultimately transfer, net of $0.9
      million in unrealized losses also recognized in error.  Second,
      we corrected a $2.4 million error in our accounting for unrealized losses
      from declines in the market value of the securities received in the
      transaction, where we erroneously treated the securities as trading
      securities and recorded an unrealized loss in our statement of operations,
      versus reflecting the $1.6 million in unrealized losses (net of the $0.9
      million excess discussed above) as a charge to other comprehensive
      income.  Finally, we determined we should have recorded a $11.9
      million loss on conveyance on the transaction, based on the relationship
      of the fair value of the Heavy Oil Projects, versus what was recorded in
      our full cost pool.




4.
            Related Party Consulting
      Agreement Termination –We corrected a $0.2 million error in our
      accounting for the termination of certain consulting services that had
      been provided by a significant shareholder, which understated accrued
      expenses and general and administrative
  expense.




5.
            Contingent Purchase Obligation– We corrected an error in our accounting for a financial guarantee
      in relation to capital costs incurred by a third party in conjunction with
      the construction of a gas gathering system and the provision of gas
      gathering services for our Buckskin Mesa Project, and recorded a $2.0
      million intangible asset and contingent purchase obligation to reflect
      the value of this
guarantee.




6.
            Unrecorded Property Costs –We corrected several errors that resulted from the discovery of
      unrecorded obligations relating to our property accounts.  The
      correction of these errors resulted in a $0.9 million increase in oil and
      gas properties and accrued
expenses.




7.
            Stock-Based Compensation
      Expense – During our first quarter ended December 31, 2007, we
      corrected a $0.2 million error in our accounting for stock-based
      compensation expense, resulting from various errors in valuing this
      expense using the Black-Scholes calculation of fair
    value.




8.
            Maralex Transaction –
      We corrected an error in our accounting for the value of 6.4 million
      shares of our common stock that we reacquired during the quarter ended
      December 31, 2007.  The shares were originally issued during our
      year ended September 30, 2007 in relation to the acquisition of certain
      properties (our “Sugarloaf Project”) and the incurrence of penalties on a
      series of payment defaults on our contract.  The correction of
      this error resulted in a $4.1 million increase in our oil and gas property
      accounts, with a corresponding increase in additional paid in
      capital.





9.
            Other Errors– We
      corrected several other errors that were individually insignificant and
      primarily related to the timing of the recognition of costs and expenses
      in our statement of operations between the
  first


14


PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  quarterly
      period ended December 31, 2007 and the second quarterly period ended March
      31, 2008, and the proper classification of Goods and Services Taxes on
      Australia, and the proper classification of certain of our debt
      obligations.


Balance
Sheet Effects of Restatements





The
following table sets forth the unaudited condensed consolidated balance sheet,
showing previously reported amounts, adjustments resulting from the correction
of errors and reclassifications, and restated balances as of December 31, 2007
(in thousands):




December
      31, 2007As
      previously reported
                          
                          
                          Net
      Adjustments
                          
                          
                          As
      restatedCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          462
                          
                          
                          $
                          -
                          
                          
                          $
                          462Receivables
                          
                          
                          93
                          
                          
                          
                          668
                          
                          
                          
                          761Marketable
      securities, available for sale
                          
                          
                          6,619
                          
                          
                          
                          (2,723
                          )
                          
                          
                          3,896Other
      current assets
                          
                          
                          326
                          
                          
                          
                          (77
                          )
                          
                          
                          249Total
      Current Assets
                          
                          
                          7,500
                          
                          
                          
                          (2,132
                          )
                          
                          
                          5,368Property
      and Equipment, at cost and Other AssetsOil
      and gas properties under full cost method, net
                          
                          
                          166,764
                          
                          
                          
                          (3,758
                          )
                          
                          
                          163,006Intangible
      asset
                          
                          
                          -
                          
                          
                          
                          1,997
                          
                          
                          
                          1,997Deferred
      financing costs, net
                          
                          
                          847
                          
                          
                          
                          1,237
                          
                          
                          
                          2,084Other
      assets
                          
                          
                          2,256
                          
                          
                          
                          199
                          
                          
                          
                          2,455Total
      Assets
                          
                          $
                          177,367
                          
                          
                          $
                          (2,457
                          )
                          
                          $
                          174,910Current
      LiabilitiesAccounts
      payable and accrued expenses
                          
                          $
                          22,995
                          
                          
                          $
                          537
                          
                          
                          $
                          23,532Due
      to shareholders and related parties
                          
                          
                          1,132
                          
                          
                          
                          221
                          
                          
                          
                          1,353Notes
      and interest payable
                          
                          
                          5,781
                          
                          
                          
                          1,108
                          
                          
                          
                          6,889Notes
      and interest payable, related parties
                          
                          
                          606
                          
                          
                          
                          2,433
                          
                          
                          
                          3,039Contingent
      purchase obligation
                          
                          
                          -
                          
                          
                          
                          1,997
                          
                          
                          
                          1,997Total
      Current Liabilities
                          
                          
                          30,514
                          
                          
                          
                          6,296
                          
                          
                          
                          36,810Non-Current
      ObligationsNotes
      payable, net
                          
                          
                          30,088
                          
                          
                          
                          (624
                          )
                          
                          
                          29,464Convertible
      notes payable, net
                          
                          
                          2,954
                          
                          
                          
                          (2,894
                          )
                          
                          
                          60Subordinated
      notes payable, related parties
                          
                          
                          3,392
                          
                          
                          
                          (2,243
                          )
                          
                          
                          1,149Asset
      retirement obligation
                          
                          
                          104
                          
                          
                          
                          -
                          
                          
                          
                          104Net
      Non-Current Obligations
                          
                          
                          36,538
                          
                          
                          
                          (5,761
                          )
                          
                          
                          30,777Total
      Liabilities
                          
                          
                          67,052
                          
                          
                          
                          535
                          
                          
                          
                          67,587Stockholders'
      EquityCommon
      stock
                          
                          
                          319
                          
                          
                          
                          -
                          
                          
                          
                          319Additional
      paid-in-capital
                          
                          
                          192,050
                          
                          
                          
                          5,943
                          
                          
                          
                          197,993Accumulated
      other comprehensive loss
                          
                          
                          (16
                          )
                          
                          
                          (1,543
                          )
                          
                          
                          (1,559
                          )Deficit
      accumulated during the development stage
                          
                          
                          (82,038
                          )
                          
                          
                          (7,392
                          )
                          
                          
                          (89,430
                          )Total
      Stockholders' Equity
                          
                          
                          110,315
                          
                          
                          
                          (2,992
                          )
                          
                          
                          107,323Total
      Liabilities and Stockholders' Equity
                          
                          $
                          177,367
                          
                          
                          $
                          (2,457
                          )
                          
                          $
                          174,910




15




PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)




Statement
of Operations Effects of Restatements





The
following table presents our unaudited condensed consolidated statement of
operations, showing previously reported amounts, adjustments resulting from the
correction of errors, and restated balances for the three month period ended
December 31, 2007 (in thousands, except share data):




For
      the three months ended December 31, 2007As
      previously reported
                          
                          
                          Net
      Adjustments
                          
                          
                          As
      restatedOil
      and Gas Revenue
                          
                          $
                          287
                          
                          
                          $
                          220
                          
                          
                          $
                          507Costs
      and Expenses:General
      and administrative
                          
                          
                          1,894
                          
                          
                          
                          424
                          
                          
                          
                          2,318Other
      operating expenses
                          
                          
                          359
                          
                          
                          
                          3
                          
                          
                          
                          362Total
      Operating Expenses
                          
                          
                          2,253
                          
                          
                          
                          427
                          
                          
                          
                          2,680Loss
      From Operations
                          
                          
                          (1,966
                          )
                          
                          
                          (207
                          )
                          
                          
                          (2,173
                          )Other
      Income (Expense):Loss
      on conveyance of property
                          
                          
                          -
                          
                          
                          
                          (11,875
                          )
                          
                          
                          (11,875
                          )Interest
      expense
                          
                          
                          (5,035
                          )
                          
                          
                          2,250
                          
                          
                          
                          (2,785
                          )Trading
      security losses
                          
                          
                          (2,393
                          )
                          
                          
                          2,393
                          
                          
                          
                          -Other,
      net
                          
                          
                          (22
                          )
                          
                          
                          47
                          
                          
                          
                          25Total
      Other Expense
                          
                          
                          (7,450
                          )
                          
                          
                          (7,185
                          )
                          
                          
                          (14,635
                          )NET
      LOSS
                          
                          $
                          (9,416
                          )
                          
                          $
                          (7,392
                          )
                          
                          $
                          (16,808
                          )Net
      loss per share - basic and diluted
                          
                          $
                          (0.03
                          )
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.05
                          )Weighted
      average number of shares outstanding-
      basic and diluted
                          
                          
                          306,471
                          
                          
                          
                          -
                          
                          
                          
                          306,471




Statement
of Cash Flows Effects of Restatements





The
following table presents selected unaudited condensed consolidated statement of
cash flows information, showing previously reported amounts, adjustments
resulting from the correction of errors and reclassifications, and restated
balances for the three months ended December 31, 2007 (in
thousands):




For
      the three months ended December 31, 2007As
      previously reported
                      
                      
                      Net
      Adjustments
                      
                      
                      As
      restatedNet
      cash used in operating activities
                      
                      $
                      (4,357
                      )
                      
                      $
                      679
                      
                      
                      $
                      (3,678
                      )Net
      cash provided by investing activities
                      
                      
                      1,764
                      
                      
                      
                      (2,250
                      )
                      
                      
                      (486
                      )Net
      cash provided by financing activities
                      
                      
                      2,929
                      
                      
                      
                      1,577
                      
                      
                      
                      4,506Effect
      of exchange rate changes on cash
                      
                      
                      6
                      
                      
                      
                      (6
                      )
                      
                      
                      -Increase in
      cash and cash equivalents
                      
                      
                      342
                      
                      
                      
                      -
                      
                      
                      
                      342Cash
      and cash equivalents beginning of year
                      
                      
                      120
                      
                      
                      
                      -
                      
                      
                      
                      120Cash
      and cash equivalents end of period
                      
                      $
                      462
                      
                      
                      $
                      -
                      
                      
                      $
                      462


16


PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


Note 3 — Summary of
Significant Accounting Policies





Basis of Accounting.The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which contemplates the realization of
assets and extinguishment of liabilities in the normal course of business. As
shown in the accompanying statements of operations, PetroHunter, together with
its wholly-owned subsidiaries (the “Company”, “we” or “us”) has incurred a
cumulative loss in the amount of $89.4 million for the period from
inception (June 20, 2005) to December 31, 2007, has a working capital deficit of
approximately $31.4 million as of December 31, 2007, was not in
compliance with the covenants of several loan agreements, has had multiple
property liens and foreclosure actions filed by vendors and has significant
capital expenditure commitments. As of December 31, 2007, the Company has earned
oil and gas revenue from its initial operating wells, but will require
significant additional funding to sustain operations and satisfy contractual
obligations for planned oil and gas exploration, development and operations in
the future. These factors, among others, may indicate that the Company may be
unable to continue in existence. The Company’s financial statements do not
include adjustments related to the realization of the carrying value of assets
or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence. The Company’s ability to
establish itself as a going concern is dependent upon its ability to obtain
additional financing to fund planned operations and to ultimately achieve
profitable operations. Management believes that we can be successful in
obtaining equity and/or debt financing and/or sell interests in some of
our properties, which will enable us to continue in existence and
establish ourselves as a going concern. The Company has raised
approximately $ 100.0 million through December 31, 2007
through issuances of common stock and convertible and other debt. We believe
we will be successful at raising necessary funds to meet
our  obligations for our planned operations. In November 2007,
we raised an additional $7.0 million in a private placement of convertible
debentures and we sold our Heavy Oil assets for total potential consideration
of up to $30.0 million, of which $7.5 million
was cash.





For the
three-months ended December 31, 2007 and 2006, the consolidated financial
statements include the accounts of PetroHunter and its wholly-owned
subsidiaries. For the period from June 20, 2005 through September 30, 2005, the
consolidated financial statements include only the accounts of GSL. All
significant intercompany transactions have been eliminated upon
consolidation.





The
accompanying financial statements should be read in conjunction with the
Company’s Annual Report on Form 10-K for the year-ended September 30, 2007.
Significant accounting policies disclosed therein have not changed. The
accompanying consolidated financial statements are unaudited; however, in the
opinion of management, they include all normal recurring adjustments necessary
for a fair presentation of the consolidated financial position of the Company at
December 31, 2007 and the consolidated results of its operations and cash flows
for the three-months ended December 31, 2007 and 2006. The results of operations
for the three-months ended December 31, 2007 are not necessarily indicative of
the results that may be expected for the full fiscal year ending September 30,
2008.





Use of Estimates.Preparation
of the Company’s financial statements in accordance with Generally Accepted
Accounting Principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses for the reporting period. Actual results could differ from those
estimates.





In the
course of preparing the consolidated financial statements, management makes
various assumptions, judgments and estimates to determine the reported amounts
of assets, liabilities, revenue and expenses, and to disclose commitments and
contingencies. Changes in these assumptions, judgments and estimates will occur
as a result of the passage of time and the occurrence of future events and,
accordingly, actual results could differ from amounts initially
established.





The more
significant areas requiring the use of assumptions, judgments and estimates
relate to volumes of natural gas and oil reserves used in calculating depletion,
the determination of whether losses should be recorded on property
conveyances, the amount of expected future cash flows used in determining
possible impairments of oil and gas properties and the amount of future capital
costs estimated for such calculations. Assumptions, judgments and




17
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


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





Marketable Securities, Available
for Sale.In November 2007, we sold our Heavy Oil assets (see Note
5). As partial consideration, we accepted 1.5 million shares of common
stock of the purchaser, Pearl Exploration and Production Ltd. These shares are
available for sale in the short term and as a result we account for them
by marking them to market with unrealized gains and losses reflected as a
component of Other
Comprehensive Income, until such gains or losses become realized when
they are then recognized in our statement of operations. During the first
quarter ended December 31, 2007, we did not recognize any gain or
loss relating to our marketable securities.





Joint Interest Billings. Joint
interest billingsrepresents our working interest partners’ share of
costs that we paid, on their behalf, to drill certain wells. During the first
quarter 2008, we entered into a transaction whereby we increased our interest in
14 of these wells to 100% (see Note 5) and we therefore reclassified $12.7
million of costs related to those wells from Joint interest billingsto
Oil and gas properties.We are currently in negotiations with our other partner regarding the
remaining two wells and the balance of $1.0 million at December 31,
2007.





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 sale or abandonment
significantly alters the relationship between capitalized costs and proved oil
and gas reserves of the cost center. 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.





Asset Retirement Obligation.Asset retirement obligations associated with tangible long-lived assets
are accounted for in accordance with SFAS 143, Accounting for Asset Retirement
Obligations. The estimated fair value of the future costs associated with
dismantlement, abandonment and restoration of oil and gas properties is recorded
generally upon acquisition or completion of a well. The net estimated costs are
discounted to present values using a risk adjusted rate over the estimated
economic life of the oil and gas properties. Such costs are capitalized as part
of the related asset. The asset is depleted on the units-of-production method on
a field-by-field basis. The liability is periodically adjusted to reflect (1)
new liabilities incurred, (2) liabilities settled during the period, (3)
accretion expense, and (4) revisions to estimated future cash flow requirements.
The accretion expense is recorded as a component of depletion, amortization and
accretion expense in the accompanying consolidated statements of
operations.





Guarantees. As part of a
Gas Gathering Agreement we have with CCES Piceance Partners1, LLC (“CCES”), we
have guaranteed that, should there be a mutual failure to execute a formal
agreement for long-term gas gathering services in the future, we will repay CCES
for certain costs they have incurred in relation to the development of a gas
gathering system. We have accounted for this guarantee using FASB
Interpretation No. 45 as amended, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,which requires us to recognize a liability for
the obligations undertaken upon issuing the guarantee in order to have a more
representationally faithful depiction of the guarantor’s assets and




18
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  2.0 million contingent purchase
obligation and related intangible asset on our consolidated balance sheet as of
December 31, 2007.


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





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





•       The
cost of properties not being amortized; plus





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





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





If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. During
the three-months ended December 31, 2007 there was no impairment charge to
expense. During the three-months ended December 31, 2006, we recorded an
impairment charge in the amount of $5.2 million.





Fair Value.The carrying
amount reported in the consolidated balance sheets 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 payable notes,
approximates their face value.





Revenue Recognition.We
recognize revenue from the sales of natural gas and crude oil related to
our interests in producing wells when delivery to the customer has occurred and
title has transferred. We currently have no gas balancing arrangements in
place.





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





Income Taxes.In June 2006,
the FASB issued Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty in income taxes
recognized in financial statements in accordance with FASB Statement 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 was effective for us on October 1,
2007. The cumulative effect of adopting FIN 48 did not have a significant impact
on the Company’s financial position or results of operations and accordingly no
adjustment was made.




19
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  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





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





Loss per Common Share.Basic
loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Convertible equity instruments
such as stock options and convertible debentures are excluded from the
computation of diluted loss per share, as the effect of the assumed exercises
would be anti-dilutive. The dilutive weighted-average number of common shares
outstanding excluded potential common shares from stock options and warrants of
approximately 139,863,026 and 44,701,500 for the three-months ended
December 31, 2007 and 2006, respectively.





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





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





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.





Recently Issued Accounting
Pronouncements. In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51. SFAS 160
establishes accounting and reporting standards that require noncontrolling
interests to be reported as a component of equity, changes in a parent’s
ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, and any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary be initially measured at
fair value. SFAS 160 is effective for fiscal years and interim periods within
those fiscal years, beginning on or after December 15, 2008 and is to be applied
prospectively as of the beginning of the fiscal year in which the statement is
applied. The Company is required to adopt SFAS 160 in the first quarter of 2009.
Management believes that the adoption of SFAS 160 will have no impact on our
consolidated results of operations, cash flows or financial
position.





In
December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS
141(R) replaces SFAS 141 and provides greater consistency in the accounting and
financial reporting of business combinations. SFAS 141(R) requires the acquiring
entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction and any non-controlling interest in the
acquiree at the acquisition date, measured at the fair value as of that date.
This includes the measurement of the acquirer’s shares issued in consideration
for a business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring




20
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  cost
accruals, the treatment of acquisition related transaction costs and the
recognition of changes in the acquirer’s income tax valuation allowance and
deferred taxes. SFAS 141(R) is effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008 and is to be
applied prospectively as of the beginning of the fiscal year in which the
statement is applied. Early adoption is not permitted. The Company is required
to adopt SFAS 141(R) in the first quarter of 2009. Management believes that the
adoption of SFAS 141(R) will have no impact on our consolidated results of
operations, cash flows or financial position.





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





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which provides guidance for using fair value to measure assets and liabilities.
The standard also responds to investors’ requests for more information about:
(1) the extent to which companies measure assets and liabilities at fair value;
(2) the information used to measure fair value; and (3) the effect that fair
value measurements have on earnings. SFAS 157 will apply whenever another
standard requires (or permits) assets or liabilities to be measured at fair
value. SFAS 157 does not expand the use of fair value to any new circumstances.
SFAS 157 is effective for us on October 1, 2008. We have not assessed the impact
of SFAS 157 on our consolidated results of operations, cash flows or financial
position.





Supplemental Cash Flow Information. Supplemental cash flow information for the three months ended
December 31, 2007 and 2006, respectively, and cumulative from inception (June
2005) is as follows:





Three-Months
                Ended
                December
      31,
                2007
              
              
              Three-Months
                Ended
                December
      31,
                2006
              
              
              Cumulative
                From
      Inception
                (June
      20, 2005)
                to
                December
      31,
                2007(unaudited, restated, $ in
      thousands)Supplemental
      disclosures of non-cash investing and financing
    activitiesShares
      issued for expenditures advanced
              
              $
              —
              
              
              $
              —
              
              
              $
              100Contracts
      for oil and gas properties
              
              $
              (1,500
              )
              
              $
              2,900
              
              
              $
              12,024Shares
      issued for debt conversion
              
              $
              6,384
              
              
              $
              —
              
              
              $
              28,416Shares
      issued for finance costs
              
              $
              56
              
              
              $
              —
              
              
              $
              56Shares
      issued for property
              
              $
              9,000
              
              
              $
              —
              
              
              $
              90,000Shares
      returned on property conveyance
              
              $
              (1,408
              )
              
              $
              —
              
              
              $
              (1,408
              )Shares
      issued for property and finder’s fee on property
              
              $
              —
              
              
              $
              —
              
              
              $
              9,644Warrants
      issued for debt
              
              $
              1,862
              
              
              $
              —
              
              
              $
              6,532Non-cash
      uses of notes payable, accounts payable and accrued
      liabilities
              
              $
              —
              
              
              $
              —
              
              
              $
              26,313Convertible
      debt issued for property
              
              $
              —
              
              
              $
              —
              
              
              $
              1,200Common
      stock issuable
              
              $
              —
              
              
              $
              4,128
              
              
              $
              —Shares
      issued for common stock offerings
              
              $
              —
              
              
              $
              —
              
              
              $
              2,900Debt
      issued for common stock previously subscribed – related
      party
              
              $
              2,858
              
              
              $
              —
              
              
              $
              2,858Receipt
      of trading securities related to sale of heavy oil
    assets
              
              $
              5,529
              
              
              $
              —
              
              
              $
              5,529Debt
      discount related to beneficial conversion feature and
      warrants
              
              $
              6,956
              
              
              $
              —
              
              
              $
              6,956Increase
      in oil and gas properties related to relief of joint interest
      billings
              
              $
              12,707
              
              
              $
              —
              
              
              $
              12,707


21


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





Note 4 — Agreements with MAB
Resources LLC





The
Company and MAB Resources LLC (“MAB”) have entered into various agreements
described below. MAB is a Delaware limited liability company controlled by the
largest shareholder of the Company, who had an approximate 53.8% beneficial
ownership interest in us at December 31, 2007. MAB is in the business of oil and
gas exploration and development.





The Development Agreement.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 set forth: (i) MAB’s obligation to assign to the Company a
minimum 50% undivided interest in any and all oil and gas assets that MAB was to
acquire from third parties in the future; and (ii) 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 was consistent with the terms of the Development
Agreement.





The
material terms of the Development Agreement and the EDAs were as
follows:





i. MAB
and the Company each owned an undivided 50% working interest in all oil and gas
leases, production facilities, and related assets (collectively, the
“Properties”).





ii. The
Company was named as Operator, and had appointed a related controlled entity,
MAB Operating Company LLC, as sub-operator. The Company and MAB agreed to sign a
joint operating agreement, governing all operations.





iii. Each
party was to pay its proportionate share of costs and receive its proportionate
share of revenues, subject to the Company bearing the following
burdens:





a. Each
assignment of Properties from MAB to the Company reserved an overriding royalty
equivalent to 3% of 8/8ths (proportionately reduced to 1.5% of the Company’s
undivided 50% working interest in the Properties) (the “MAB Override”), payable
to MAB out of production and sales.





b. Each
EDA provided that the Company would pay 100% of the cost of acquisitions and
operations (“Project Costs”) up to a specified amount, after which time each
party shall pay its proportionate 50% share of such costs. The maximum specified
amount of Project Costs of which the Company was to pay 100%, under the
Development Agreement for properties acquired in the future, was $100.0 million
per project. There was no “before payout” or “after payout” in the traditional
sense of a “carried interest” because the Company’s obligation to expend the
specified amount of Project Costs and MAB’s receipt of its 50% share of revenues
applied without regard to whether or not “payout” had occurred. Therefore, the
Company’s payment of all Project Costs up to such specified amount may have
occurred before actual payout, or may have occurred after actual payout,
depending on each project and set of Properties.





c. Under
the Development Agreement, the Company was to pay to MAB monthly project
development costs representing a specified portion of MAB’s “carried” Project
Costs. The total amount incurred to MAB by the Company was to be deducted from
MAB’s portion of the Project Costs carried by the Company. During 2007, 2006 and
2005, we paid MAB $1.8 million, $4.5 million and $0.9 million, respectively, for
Project Costs which are classified on the consolidated statements of operations
as Project development costs
— related
party.





The Consulting Agreement.Effective January 1, 2007, the Company and MAB entered into an
Acquisition and Consulting Agreement (the “Consulting Agreement”) which replaced
in its entirety the Development Agreement entered into July 1, 2005, and
materially revised the relationship between MAB and the Company. The material
terms of the Consulting Agreement provide as follows:




22
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


i. MAB
conveyed to the Company its entire remaining undivided 50% working interest in
all rights and benefits under each EDA, and the Company assumed its share of all
duties and obligations under each individual EDA (such as drilling and
development obligations), with respect to said remaining undivided 50% working
interest,





ii. A
consulting agreement was agreed upon, including the Company’s obligation to pay
fees in the amount of $.03 million per month for services rendered to us
for which we paid a total of $0.2 million, during the year ended September 30,
2007,





iii. As a
result of MAB’s above-referenced conveyance of its remaining undivided 50%
working interest to us, the Company’s working interest in certain oil and gas
properties increased from 50% to 100%,





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





v. The
Company became obligated for monthly payments in the amount of $0.2 million
under a $13.5 million promissory note,





vi. MAB’s
overriding royalty interest (the “Override”) was increased from 3% to 5%, half
of which accrues but is deferred for three years. The Override does not apply to
the Company’s Piceance II properties, and did not apply to certain other
properties to the extent that the Override would cause the Company’s net revenue
interest to be less than 75%,





vii. MAB
would receive 7% of the issued and outstanding shares of any new subsidiary with
assets comprised of the subject properties,





viii. MAB
received 50.0 million shares of PetroHunter Energy Corporation, and would
receive up to an additional 50.0 million shares (the “Performance Shares”) if
the Company met certain thresholds based on proven reserves.





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





On
October 29, 2007, November 15, 2007, and December 31, 2007, we entered into the
first, second, and third amendments, respectively, to the Consulting Agreement
(the “First Amendment”, the “Second Amendment”, and the “Third Amendment”,
respectively, and collectively, “the Amendments”). Portions of the First
Amendment were effective January 1, 2007, the Second Amendment was effective
November 1, 2007, and the Third Amendment was effective December 31, 2007. The
Amendments significantly changed several provisions of the Consulting
Agreement.





Pursuant
to the First Amendment: (a) MAB relinquished its overriding royalty interest in
all properties in Montana and Utah effective October 1, 2007 (the Override still
applies to the Company’s Australian properties and Buckskin Mesa property); (b)
MAB received 25.0 million additional shares of our common stock; (c) MAB
relinquished all rights to the Performance Shares; and (d) the parties’ rights
and obligations related to MAB’s consulting services were terminated effective
retroactively back to January 1, 2007.





Under the
terms of the Second Amendment, effective November 1, 2007, the note payable to
MAB was reduced in accordance with and in exchange for the following (see Note
9 ):




23


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





•
            By
      $8.0 million in exchange for 16.0 million shares of our common stock with
      a value of $3.7 million based on the closing price of $0.23 per share at
      November 15, 2007 and warrants to acquire 32.0 million shares of our
      common stock at $0.50 per share. The warrants expire on November 14, 2009
      and were valued at $1.8
million;





•
            By
      $2.5 million in exchange for our release of MAB’s obligation to pay the
      equivalent amount as guarantor of the performance of Galaxy Energy
      Corporation under the subordinated unsecured promissory note dated August
      31, 2007 (see Note 12 );





•
            A
      reduction to the note payable to MAB of $0.5 million for cash payments
      made during the first quarter of
2008.




Further,
in the Second Amendment, MAB waived all past due amounts and all claims against
PetroHunter.





The net
effect of the reduction of debt and issuance of our common shares in the Second
Amendment resulted in a net benefit to us of $2.7 million and has been
reflected as additional paid-in-capital during the first fiscal quarter ending
December 31, 2007. Monthly payments on the revised promissory note in the amount
of $2.0 million commence February 1, 2008 and will be paid in full in two
years.





Under the
terms of the Third Amendment, effective December 31, 2007, the note payable to
MAB was reduced: (a) by $0.4 million for our release of MAB’s obligation to pay
the equivalent amount as guarantor of the performance of Galaxy Energy
Corporation under the subordinated unsecured promissory note dated August 31,
2007 (see Note 12 ); and (b) by $0.2 million for MAB assuming certain
obligations of PaleoTechnology, Inc. (“Paleo”), which Paleo owed to the
Company.





Note 5 — Oil and Gas
Properties





Oil and
gas properties consisted of the following ($ in thousands):





December
      31,
                      2007
                    
                    
                    September
      30,
                      2007(unaudited,
                      restated)Oil
      and gas properties, at cost, full cost methodUnprovedUnited
      States
                    
                    $
                    102,967
                    
                    
                    $
                    107,239Australia
                    
                    
                    24,110
                    
                    
                    
                    23,569Proved,
      United States
                    
                    
                    37,219
                    
                    
                    
                    57,168Total
                    
                    
                    164,296
                    
                    
                    
                    187,976Less
      accumulated  depreciation, depletion, amortization
      and  impairment
                    
                    
                    (1,290
                    )
                    
                    
                    (25,133
                    )Total
                    
                    $
                    163,006
                    
                    
                    $
                    162,843





Included
in oil and gas properties above is capitalized interest of $0.2 million and $1.5
million for three-months ended December 31, 2007 and the year ended September
30, 2007, respectively. No interest was capitalized during the three-months
ended December 31, 2006.





The
following is a summary of depreciation, depletion, amortization and accretion,
as reflected in the consolidated statements of operations (including depletion
and amortization of oil and gas properties per thousand cubic feet of natural
gas equivalent) for the three-months ended December 31, ($ in thousands, except
per thousand cubic feet):


24


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)




2007
              
              
              2006
              
              
              Cumulative
                Total(restated)
              
              
              
              
              
              (restated)Depletion
      and amortization of oil and gas properties
              
              $
              210
              
              
              $
              300
              
              
              $
              1,250Depreciation
      of furniture and equipment
              
              
              50
              
              
              
              37
              
              
              
              242Accretion
      of asset retirement obligation
              
              
              2
              
              
              
              1
              
              
              
              15Total
              
              $
              262
              
              
              $
              338
              
              
              $
              1,507Depletion
      and amortization per thousand cubic feet of natural gas
      equivalent
              
              $
              2.43
              
              
              $
              3.27





Using
December 31, 2007 oil and gas prices of $95.96 per barrel and $6.07 per thousand
cubic feet, our full cost pools did not exceed their ceiling.





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





PICEANCE
BASIN





Buckskin Mesa Project.As of
December 31, 2007, the Company drilled, but did not complete, five wells at a
cost of $19.3 million. Plans include completion of these wells during the fiscal
year ending September 30, 2008.





By the
terms of the amended agreement with a third party assignor, Daniels Petroleum
Company (“DPC”), the Company is required to drill 16 wells during the calendar
year ending December 31, 2008. With respect to the 16 wells, the Company must
commence the drilling of a minimum of three wells on certain subject properties
by March 31, 2008, four additional wells during the second calendar quarter of
2008, four additional wells during the third calendar quarter of 2008, and five
additional wells during the fourth calendar quarter of 2008. The fifth amendment
to the DPC Agreement, dated October 16, 2007, also required a payment of $0.7
million on October 31, 2007, or to pay such amount plus interest up to November
30, 2007. That payment, including interest, was made on November 8, 2007. The
Company’s estimate to drill and complete each well is $3.7 million; costs to
drill and complete the 16 wells aggregate $59.2 million. If the Company fails to
commence the drilling of (or receive credit for) the number of additional wells
required by the fifth amendment to the DPC Agreement during each respective
quarter, the DPC Agreement, as amended, requires the payment of $0.5 million for
each undrilled well on the last day of the applicable quarter.





Piceance II Project.As of
December 31, 2007, the Company drilled, but did not complete, 16 wells at a 100%
working interest cost of $18.8 million. Plans include completion of these wells
during the fiscal year ending September 30, 2008.





On
December 10, 2007, we entered into two agreements with EnCana Oil & Gas
(USA) Inc. (“EnCana”) to exchange interests in certain Piceance Basin wells (14
of the 16 wells mentioned above) as follows:





Exchange
1 — We received an interest in 40 net acres, including two wells with a total
present value of net cash flows discounted at 10% as of September 30, 2007 of
$2.6 million, and conveyed interests in 19 wells with a total present value of
net cash flows discounted at 10% as of September 30, 2007 of $0.9 million. The
Company and EnCana relieved each other of existing obligations related to all
past costs and operations. Therefore, EnCana’s share of the costs to drill the
two wells of $3.2 million reflected as Joint interest billingsin the Company’s
consolidated balance sheet at September 30, 2007 was reclassified to Oil and gas propertiesduring
the first quarter ended December 31, 2007. In addition, the Company’s accounts
receivable from EnCana for oil and gas sales and accounts payable to EnCana for
lease operating expenses from the 19 wells, of $0.2 million and $0.1 million
respectively, as of December 31, 2007, was also reclassified to Oil and gas propertiesduring
the first quarter ended December 31, 2007.




25


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





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





By the
terms of a Lease Acquisition and Development Agreement between MAB, Apollo
Energy LLC and ATEC Energy Ventures and of a certain oil and gas lease, the
Company was to have commenced the drilling of two wells by August 31, 2007 and
an additional two wells by August 31, 2008. Subject to certain spacing orders
being issued by the Colorado Oil and Gas Conservation Commission, that
requirement has been deferred in its entirety by one year, thus requiring the
drilling of two wells by August 31, 2008 and two wells by August 31, 2009. The
Company has estimated costs to drill and complete each well at $2.1 million per
well ($0.8 million to the Company’s 37.5% interest in the dedicated spacing
unit), or $4.2 million ($1.6 million to the Company’s 37.5% interest in the
dedicated spacing unit), and $4.2 million ($1.6 million to the Company’s 37.5%
interest in the dedicated spacing unit) to be incurred by August 31, 2008 and
2009, respectively.





By the
terms of a Lease Acquisition and Development Agreement between MAB, Apollo
Energy LLC and ATEC Energy Ventures and of a second oil and gas lease,
pertaining to the Piceance II properties, the Company was to have commenced the
drilling of four wells by June 30, 2007, an additional two wells by June 30,
2008 and an additional two wells by June 30, 2009. Subject to certain spacing
orders being issued by the Colorado Oil and Gas Conservation Commission, that
requirement has been deferred indefinitely. The Company has estimated costs to
drill and complete each well at $2.1 million ($1.0 million to the Company’s 50%
interest) per well; total estimated costs to drill and complete is approximately
$16.8 million ($8.4 million to the Company’s 50% interest).





By the
terms of a Lease Acquisition and Development Agreement between MAB, Apollo
Energy LLC and ATEC Energy Ventures and a third oil and gas lease pertaining to
the Piceance II properties, the Company was required to drill 10 wells by
December 31, 2008. Of the 10 wells, the Company drilled two during the fiscal
year ended September 30, 2007 and we paid 100% of the costs to drill those two
wells (two of the 16 wells mentioned above). Our joint interest partner’s share
in the amount of $1.0 million is reflected as Joint interest billingson our consolidated
balance sheet at December 31, 2007. The Company has estimated costs to drill and
complete each well at $2.1 million ($1.3 million to the Company’s 62.5%
interest) per well; total estimated costs to drill and complete is approximately
$16.8 million ($10.5 million to the Company’s 62.5% interest). The Company is
currently conducting negotiations with the owner of the remaining 37.5% working
interest owner to trade their interest in this lease for other oil and gas
interests owned by the Company.





Sugarloaf Project.We failed
to make payments in accordance with the agreement related to this prospect and
as a result, on December 4, 2007, the agreement was terminated and we instructed
the escrow agent to return all assignments which were being held in escrow to
the seller (See Note 8 ).





AUSTRALIA





Australia Project.The
Company owns four exploration licenses comprising 7.0 million net acres in the
Beetaloo Basin (owned by the Company’s wholly-owned subsidiary, Sweetpea
Petroleum Pty Ltd., [“Sweetpea”]).





On July
31, 2007, Sweetpea commenced drilling the Sweetpea Shenandoah No. 1 well in the
central portion of the Beetaloo Basin. The well was drilled to a depth of 4,724
feet, intermediate casing was run on September 15, 2007 and the well was then
suspended with an intention to deepen the well to a depth of 9,580
feet.





Beetaloo Project.The Company
has a 100% working interest in this project with a royalty interest of 10% to
the government of the Northern Territory and an overriding royalty interest of
1% to 2%, 8% and 5% to the Northern Land Council, the assignor and to MAB,
respectively, leaving a net revenue interest of 75% to 76% to us.





26
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


Pursuant
to the terms of the exploration permits for the calendar year ended December 31,
2008, the Company is committed to drill two wells on Exploration Permit 76 at an
estimated cost of $5.0 million, and to shoot 100 kilometers
(approximately 62 miles) of seismic.





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





POWDER RIVER
BASIN





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





In
January 2007, we paid a $2.0 million earnest money deposit to Galaxy, which was
due under the terms of the Galaxy PSA. As contract operator of the Powder River
Basin Assets, we incurred $0.8 million in expenses. The Galaxy PSA expired by
its terms on August 31, 2007. Upon expiration and under the terms of the Galaxy
PSA, we obtained a note receivable in the amount of $2.5 million (the “Galaxy
Note”) which consisted of the $2.0 million earnest deposit plus a portion of
operating costs paid by us. As guarantor of the Galaxy Note, MAB paid the
balance off in November 2007 by offsetting it against amount owed by us to MAB
under the MAB Note (see Notes 4 and 9 ).





MONTANA COALBED
METHANE





Bear Creek Project.Of the
original 25,278 acres acquired, the Company has retained 15,991 of those
acres. The remaining 9,287 acres have been released. The acres retained
have been reflected in unproved oil and gas properties subject to further
evaluation by the Company. The acres released have been reflected in unproved
properties but included in evaluated costs subject to amortization; those costs
have also been included in the full cost ceiling test at the lower of cost or
market value.





HEAVY
OIL





Sale of Heavy Oil Projects.On November 6, 2007 and effective October 1, 2007, the Company sold a
majority of its interest in certain Heavy Oil Projects, including the West
Rozel, Fiddler Creek and Promised Land Projects to Pearl Exploration and
Production Ltd. (“Pearl”). We recognized a loss related to the transaction of
$11.9 million. Prior to this sale, we had engaged in a lengthy sales process and
turned down numerous offers from other parties for the property. We felt that
Pearl’s offer was within the range of valuation we considered to be reasonable
for this property. In evaluating the impact on our full cost pool, we applied
the guidance of Regulation S-X Rule 4-10, Financial Accounting and Reporting for Oil and Gas
Producing Activities Pursuant to the Federal Securities Laws and the Energy
Policy and Conservation Act of 1975(“Rule 4-10”). Pursuant to Rule 4-10,
the sale of these properties resulted in a significant alteration in the
reserves on our properties and therefore, we had to evaluate the properties for
a loss on the transaction. Accordingly, the net book value of our
properties was allocated on the same ratio of reserves between the sold
properties and those that we retained, resulting in a loss on the conveyance of
these properties of $11.9 million during the period ended December 31,
2007.  The purchase price was a maximum of $30.0 million, payable as
follows: (a) $7.5 million in cash at closing ; (b) the issuance of the
number of shares of Pearl equivalent up to $10.0 million in total
(based on a price of $4.00 Canadian dollars per share or such other higher price
as is dictated by the regulations of the TSX Venture Exchange), including
value attributable to leases on which title is being reviewed after closing, and
value attributable to 4,645 net acres of leasehold which were not assigned at
closing, pending Pearl’s attempt to renegotiate the terms of the Company’s
agreement with the third party that sold acreage to PetroHunter (within six
months after closing) ; and (c) a performance payment (the “Pearl Performance
Payment”) of $12.5 million in cash at such time as either: (i) production from
the assets reaches 5,000 barrels per day; or (ii) proven reserves from the
assets is greater than 50.0 million barrels of oil as certified by a third




27
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  party
reserve engineer. In the event that these targets have not been achieved by
September 30, 2010, the Pearl Performance Payment obligation will
expire.





The sale
of assets to Pearl also resulted in amendments to existing agreements with third
parties, including MAB’s relinquishment of its rights and obligations in all
PetroHunter present and future properties in Utah and Montana, as set
forth in the Second Amendment, and termination of PetroHunter’s obligation to
pay an overriding royalty and a per barrel production payment to American Oil
& Gas, Inc. (“American”) and Savannah Exploration (“Savannah”), in
consideration for: (a) five million common shares of PetroHunter common stock to
be issued to American and Savannah; and (b) a contingent obligation to pay a
total of $2.0 million to American and Savannah in the event PetroHunter receives
the Pearl Performance Payment.





Note 6 — Furniture and
Equipment





Furniture
and equipment is reported at cost, net of accumulated depreciation and consisted
of the following ($ in thousands):





December
      31,
                        2007
                      
                      
                      September
      30,
                        2007(restated)Furniture
      and equipment
                      
                      $
                      966
                      
                      
                      $
                      748Less
      accumulated depreciation
                      
                      
                      (229
                      )
                      
                      
                      (179
                      )Total
                      
                      $
                      737
                      
                      
                      $
                      569





Depreciation
expense associated with capitalized office furniture and equipment during the
three-months ended December 31, 2007 and 2006 was $50,000 and $37,000,
respectively. The estimated useful life of furniture and fixtures is seven
years.





Note 7 — Asset Retirement
Obligation





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





The
Company’s estimated asset retirement obligation liability is based on estimated
economic lives, estimates as to the cost to abandon the wells in the future, and
federal and state regulatory requirements. The liability is discounted using a
credit-adjusted risk-free rate estimated at the time the liability is incurred
or revised. The credit-adjusted risk-free rates used to discount the Company’s
abandonment liabilities range from 8% to 15%. Revisions to the liability are due
to increases in estimated abandonment costs and changes in well economic lives,
or in changes to federal or state regulations regarding the abandonment of
wells.





A
reconciliation of the Company’s asset retirement obligation liability is as
follows, ($ in thousands):





December
      31,
                        2007
                      
                      
                      September
      30,
                        2007Beginning
      asset retirement obligation
                      
                      $
                      136
                      
                      
                      $
                      522Liabilities
      incurred
                      
                      
                      1
                      
                      
                      
                      30Liabilities
      settled
                      
                      
                      (35
                      )
                      
                      
                      —Revisions
      to estimates
                      
                      
                      —
                      
                      
                      
                      (429
                      )Accretion
      expense
                      
                      
                      2
                      
                      
                      
                      13Ending
      asset retirement obligation
                      
                      $
                      104
                      
                      
                      $
                      136




28
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


Note 8 — Contract
Payable





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





The
terms of the Agreement were amended on several occasions resulting in the
issuance of an additional 5.6 million shares of our common stock as well as the
grant of several cash “uplifts” and penalties that were recorded as interest
expense during the year ended September 30, 2007.





We
continually failed to make payments in accordance with the Agreement and
subsequent amendments and as a result, on December 4, 2007, Maralex terminated
the Agreement. Pursuant to this termination Maralex returned to us 6.4 million
shares of common stock that had been issued to them, and all leases related to
the Agreement were returned to Maralex. To account for the termination and
conveyances, we reclassified the balance of the Contractpayable- oil and gas
properties in the amount of $1.5 million to oil and gasproperties, recorded the
return of our common stock at its current fair value of $1.4 million as a
reduction of oil and gas
properties and shareholders’ equity, and
reversed the value of our remaining unpaid cash obligations to oil and gas
properties.





Note 9 — Notes
Payable





Notes
payable are summarized below ($ in thousands):





December
      31,
                      2007
                    
                    
                    September
      30,
                      2007(restated)Short-term
      notes payable:Wes-Tex
                    
                    $
                    750
                    
                    
                    $
                    —Global
      Project Finance AG
                    
                    
                    500
                    
                    
                    
                    500Vendor
                    
                    
                    1,230
                    
                    
                    
                    4,050Flatiron
      Capital Corp.
                    
                    
                    68
                    
                    
                    
                    117Short-term notes payable
                    
                    $
                    2,548
                    
                    
                    $
                    4,667Convertible
      notes payable
                    
                    $
                    400
                    
                    
                    $
                    400Notes
      payable — related party — current portion:Bruner
      Family Trust
                    
                    $
                    2,385
                    
                    
                    $
                    —MAB
                    
                    
                    —
                    
                    
                    
                    3,755Notes
      payable — related party — current portion
                    
                    $
                    2,385
                    
                    
                    $
                    3,755Subordinated
      notes payable — related party:Bruner
      Family Trust
                    
                    $
                    106
                    
                    
                    $
                    275MAB
                    
                    
                    1,043
                    
                    
                    
                    12,530Less
      current portion
                    
                    
                    —
                    
                    
                    
                    (3,755
                    )Subordinated
      notes payable — related party
                    
                    $
                    1,149
                    
                    
                    $
                    9,050Long-term
      notes payable — net of discount:Global
      Project Finance AG
                    
                    $
                    32,800
                    
                    
                    $
                    31,550Vendor
                    
                    
                    211
                    
                    
                    
                    250Less
      current portion
                    
                    
                    (120
                    )
                    
                    
                    (120
                    )Discount
      on notes payable
                    
                    
                    (3,427
                    )
                    
                    
                    (3,736
                    )Long-term notes payable — net of
discount
                    
                    $
                    29,464
                    
                    
                    $
                    27,944Convertible
      debt:Convertible
      debt
                    
                    $
                    6,956
                    
                    
                    $
                    —Discount
      on convertible debt
                    
                    
                    (6,896
                    )
                    
                    
                    —Convertible
      debt — net of discount
                    
                    $
                    60
                    
                    
                    $
                    —






29
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


Short-
Term Notes
Payable





Wes-Tex. On December 18,
2007, we obtained a loan and signed a promissory note (the “Wes-Tex Note”) in
the amount of $0.8 million from a third party oil and gas company. The loan is
collateralized by 947,153  of the Pearl shares, accrues interest at
the rate of 15%. Principal and accrued interest was originally due on January
18, 2008. On January 18 , 2008, the Wes-Tex Note was extended to March 4,
2008.





Global Project Finance AG.On
September 25, 2007, the Company borrowed $0.5 million from Global Project
Finance, AG (“Global”) under a note dated September 1, 2007. The note was due on
the earlier of November 30, 2007 or five business days after the close of the
sale of the Heavy Oil assets. The note is unsecured and bears interest at a rate
of 7.75% per annum. This note was paid in full on November 9,
2007.   During the three months ended December 31, 2007, we entered
into an agreement with Global for short-term borrowings. Principal and
accrued interest at 15% per annum are due in full on July 31, 2008 and the
note is unsecured.





Vendor.The company has
entered into promissory notes for outstanding unpaid account payable balances as
follows: (i) On June 19, 2007, the Company entered into a promissory note with a
vendor for an outstanding unpaid balance due to the vendor, in the amount of
$6.5 million. The note was to be paid in full by July 31, 2007 and bears
interest at 14% if paid current. The interest rate increases to 21% if the note
is in default. At December 31, 2007, we were in default on this note due to
non-payment; the balance was $1.0 million and we had accrued interest on
the note in the amount of $0.3 million. The vendor filed a judgment lien against
us (see Note 13 ) related to non-payment of this note and the Company and
the vendor are continuing to negotiate a settlement on this matter; (ii) During
the first quarter ended December 31, 2007, we entered into one other promissory
note with a vendor for outstanding account payable balances. The note bears
interest at 8.25% per annum and is due to mature February 29, 2008. At December
31, 2007, we were in default on the payment terms. The payee on this note has
deferred any formal claim or legal action for the payment of interest and
principal for the time being, and the parties are discussing a deferred payment
schedule.





Flatiron Capital Corp.On
June 6, 2007, the Company entered into a promissory note with Flatiron Capital
for the financing of certain insurance policies in the amount of $0.2 million.
The note bears interest at a rate of 7.25% per annum. Payments are due in 10
equal installments of $17,000, commencing on July 1, 2007 and maturing on April
1, 2008. The note is unsecured and the balance at December 31, 2007 was $68,000.
As of December 31, 2007, we were not in default on this
note.





Convertible
Notes Payable





Prior to
the merger with GSL on May 12, 2006, Digital entered into five separate loan
agreements, aggregating $0.4 million, 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 Over the Counter Bulletin Board market on the day
preceding notice from the lender of its intent to convert the loan. As of
December 31, 2007, accrued interest amounted to $0.1 million. The Company is in
default on payment of the notes.





Notes
Payable – Related Party, short term





Bruner Family Trust.During
November 2007, we entered into a promissory note with the Bruner Family Trust in
the amount of $2.4 million. The note accrues at LIBOR plus 3% per annum and is
due 12 months from the issue date. As of December 31, accrued interest relating
to these notes is $0.0 million and all amounts are classified as current on our
consolidated balance sheets.





30


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





Subordinated
Notes Payable-Related Party





MAB Note. Effective January
1, 2007, in conjunction with the Consulting Agreement, we issued a $13.5 million
promissory note (the “MAB Note”) as partial consideration for MAB’s assignment
of its undivided 50% working interest in certain oil and gas properties (see
Note 4). The MAB Note bore interest at a rate equal to LIBOR. Monthly payments
of principal of $225,000 plus accrued interest were scheduled to begin on
January 31, 2007 and were scheduled to end in December 2011. On November 15,
2007, we entered into the Second Amendment under the terms of which the MAB Note
was replaced with a new promissory note in the amount of $2.0 million. The note
bears interest at LIBOR per annum and is due to mature on January 1, 2010. In
the event of default, the interest rate increases to 10%. At December 31, 2007,
we had accrued interest on these notes in the amount of $0.6 million and were in
default on the remaining note. MAB has waived and released PetroHunter from any
and all defaults, failures to perform, and any other failures to meet its
obligations through October 1, 2008.





Bruner Family Trust.  On July 11, 2007,
we executed a subordinated unsecured promissory note in the amount of $250,000
in favor of Bruner Family Trust UTD March 28, 2005 (the “Bruner Family Trust”).
Interest accrues at an annual rate of 8% and the note plus accrued interest is
due in full on the later of October 29, 2007 or the time when the Global Project
Finance AG Credit Facility and all other senior indebtedness has been paid in
full. In November 2007, Charles Crowell, Chairman and CEO of the Company, was
assigned the right to receive from the Company approximately $0.2 million of the
$0.3 million owed by the Company under this promissory note to the Bruner Family
Trust. Mr. Crowell received this right from the Bruner Family Trust in exchange
for a promissory note in the same amount which had been issued to Mr. Crowell by
Galaxy for services rendered to Galaxy prior to Mr. Crowell becoming an officer
of the Company.





Subsequently,
Mr. Crowell participated in the Company’s private placement in November 2007 to
the extent of $0.2 million and in exchange for cancellation of $0.2 million of
the total amount owed to him by the Company. The balance of the amount owed to
him under the note, $18,000, was then paid in cash. At December 31, 2007, the
balance due to the Bruner Family Trust under this arrangement was
$81,000.





On
September 21, 2007, we executed a subordinated unsecured promissory note in the
amount of $25,000 in favor of Bruner Family Trust. Interest accrues at the rate
of 8% per annum and the note plus accrued interest is due in full on the later
of December 20, 2007 or the time when the Global Project Finance AG Credit
Facility and all other senior indebtedness has been paid in full.





Long-Term
Notes Payable





Credit Facility — Global.On
January 9, 2007, we entered into a Credit and Security Agreement (the “January
2007 Credit Facility”) with Global for mezzanine financing in the amount of
$15.0 million. The January 2007 Credit Facility is collateralized by a first
perfected lien on certain oil and gas properties and other assets of the company
and interest accrues at an annual rate of 6.75% over the prime rate. Interest is
payable in arrears on the last day of each quarter beginning March 31, 2007.
Principal payments commence at the end of the first quarter, 18 months following
the date of the agreement or September 30, 2008. Principal payments shall be
made in such amounts as may be agreed upon by us and Global on the then
outstanding principal balance in order to repay the balance by the maturity
date, July 9, 2009. We may prepay the balance in whole or in part without
penalty or notice and we may terminate the facility with 30 days written notice.
In the event that we sell any interest in the oil and gas properties that
compromise the collateral, a mandatory prepayment is due in the amount equal to
such sales proceeds, not to exceed the balance due under the January 2007 Credit
Facility.





The terms
of the January 2007 Credit Facility provide for the issuance of 1.0 million
warrants to purchase 1.0 million shares of the Company’s common stock upon
execution of the January 2007 Credit Facility, and an additional 0.2 warrants,
for each $1.0 million draw of funds from the credit facility up to the total
amount available under the facility, $15.0 million. The warrants are exercisable
until January 9, 2012. The exercise price of the warrants is equal 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 1.0 million
warrants issued in conjunction with the advances was




31
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  $0.9
million using the Black-Scholes pricing method and is being amortized over the
life of the note.  The fair value of the warrants issued with the
debt of $2.2 million was recorded as a discount to the credit
facility and is also  being amortized over the life of the note. The
unamortized portion of the discount is offset against the long-term notes
payable on the consolidated balance sheet. We pay an advance fee (the “Advance
Fee”) of 1% of all amounts drawn against the facility. In 2007, the advance fee
related to the original January 2007 Credit Facility was recorded as deferred
financing fees, totaled $0.2 million and is being amortized to interest expense
over the life of the January 2007 Credit Facility. Global and its controlling
shareholder were shareholders of the Company prior to entering into the January
2007 Credit Facility. As of December 31, 2007, the Company has drawn the total
$15.0 million available under 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 the May 2007 Credit Facility,
Global agreed to use its best efforts to advance up to $60.0 million to us over
the following 18 months. Interest on advances under the May 2007 Credit Facility
accrues at 6.75% over the prime rate and is payable quarterly beginning June 30,
2007. We pay an advance fee of 2% on all amounts drawn under the May 2007 Credit
Facility. 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, December 31, 2008. Payments shall be made in such amounts as may
be agreed upon by us and Global on the then outstanding principal balance in
order to repay the principal balance by the maturity date, November 21, 2009.
The loan is collateralized by a first perfected security interest on the same
properties and assets that are collateral for the January 2007 Credit Facility.
We may prepay the balance in whole or in part without penalty or notice and we
may terminate the facility with 30 days written notice. In the event that we
sell any interest in the oil and gas properties that comprise the collateral, a
mandatory prepayment is due in the amount equal to such sales proceeds, not to
exceed the balance due under the May 2007 Credit Facility. As of December 31,
2007, $17.8 million has been advanced to us under this facility. The
advance fee in the amount of $0.5 million was recorded as deferred financing
costs, and is being amortized over the life of the May 2007 Credit
Facility.





Global
received warrants to purchase 2.0 million of the Company’s shares upon execution
of the May 2007 Credit Facility and 0.4 million warrants for each $1.0 million
advanced under the credit facility. The warrants are exercisable until May 21,
2012 at prices equal to 120% of the volume-weighted-average price of the
Company’s common stock for the 30 days immediately preceding each warrant
issuance date. Prices range from $0.31 to $2.10 per warrant. The fair
value of the warrants  issued in conjunction with the advances was $1.0
million,  estimated as of each respective issue date under the
Black-Scholes pricing model. The fair value of the warrants issuable as of
December 31, 2007, in the amount of $2.4 million for advances through
December 31, 2007, was recorded as a discount to the note and is being amortized
over the life of the note.





On May
12, 2007, the Company issued a “most favored nation” letter to Global which
indicated that it would extend all the economic terms from the May 2007 Credit
Facility retroactively to the January 2007 Credit Facility. On May 21, 2007,
when the May 2007 Credit Facility was signed, the Company issued an additional
1.0 million warrants for the execution of the January 2007 Credit Facility and
an additional 3.0 million warrants for the January 2007 Credit Facility based on
the $15.0 million advanced under the January 2007 Credit Facility. The fair
value of the warrants relating to this amendment totaled $0.6 million. The
Company also recorded an additional $0.2 million in deferred financing costs
which are being amortized over the life of the January 2007 Credit Facility. The
most favored nation agreement did not extend the dates identified in the January
2007 Credit Facility; as a result, the additional deferred financing costs and
loan discount are being amortized over the term of the January 2007 Credit
Facility.





As of
December 31, 2007, the Company was in default of payments to Global in the
amount of $3.9 million, which consists of unpaid interest and fees under the
Credit Facilities. The Company was also not in compliance with various financial
and debt covenants under the Global Credit Facilities as of December 31, 2007.
Global has waived and released PetroHunter from any and all defaults, failures
to perform, and any other failures to meet its obligations through January 15,
2009.





32


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





Vendor
Long-term Notes Payable





On
August 10, 2007, the Company entered into an unsecured promissory note with a
vendor for past due invoices aggregating $0.3 million. The note bears interest
at an annual rate of 8%. Payments are due in 24 equal
installments  commencing on October 1, 2007 and maturing on September
1, 2009. As of December 31, the balance of this note is $0.2
million.





Convertible Notes.On
November 13, 2007, we completed the sale of Series A 8.5% Convertible Debentures
in the aggregate principal amount of $7.0 million to several accredited
investors. The debentures are due November 2012 and are collateralized by shares
in our Australian subsidiary. Debenture holders also received five-year warrants
that allow them to purchase a total of 46.4 million shares of common stock at
prices ranging from $0.24 to $0.27 per share. The warrants are immediately
exercisable and as a result, the Company recorded $3.0 million of interest
expense during the first quarter of 2008. In connection with the placement of
the debentures, we paid a placement fee of $0.3 million and issued placement
agent warrants entitling the holders to purchase an aggregate of 0.2 million
shares at $0.35 per share for a period of five years. Interest payments were due
quarterly beginning January 1, 2008. As of January 2, 2008 we were in default on
interest payments on this note. All overdue, accrued, unpaid interest incurs a
late fee of 18% to be charged on the unpaid interest balance. Interest accrued
on these notes as of December 31, 2007 was $0.1 million.





We have
agreed to file a registration statement with the Securities and Exchange
Commission in order to register the resale of the shares issuable upon
conversion of the debentures and the shares issuable upon exercise of the
warrants.





According
to the Registration Rights Agreement, the registration statement must be filed
by March 4, 2008 and it must be declared effective by July 2, 2008. The
following penalties apply if filing deadlines and/or documentation requirements
are not met in compliance with the stated rules: (i) the Company shall pay to
each holder of Registrable Securities 1% of the purchase price paid in cash as
partial liquidated damages; (ii) the maximum aggregate liquidated damages
payable is 18% of the aggregate subscription amount paid by the holder; (iii) if
the Company fails to pay liquidated damages in full within seven days of the
date payable, the Company will pay interest of 18% per annum, accruing daily
from the original due date; (iv) partial liquidated damages apply on a daily
prorated basis for any portion of a month prior to the cure of an event; and (v)
all fees and expenses associated with compliance to the agreement shall be
incurred by the Company. We believe that these requirements will be met and
therefore have accrued no liabilities related to such penalties.





The
debentures have a maturity date of five years and are convertible at any time by
the holders into shares of our common stock at a price of $0.15 per share, which
was determined to be beneficial to the holders on the date of issuance. In
accordance with EITF 00-27, Application of
EITF to certain convertible instruments, Issue No. 98-5, "Accounting
Convertible Securities with Beneficial Conversion Features or Contingency
Adjustable Conversion Shares," to certain convertible
instruments, we recorded discounts to the debentures equal
to their full face value at issuance which will be accreted to interest
expense over the term of the notes using the effective interest method.
Interest accrues at an annual rate of 8.5% and is payable in cash or in shares
(at our option) quarterly, beginning upon the successful registration of
the warrant shares and the shares issuable upon conversion of the debentures, as
noted above.





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





The
debenture agreement contains anti-dilution protections for the investors to
allow a downward adjustment to the conversion price of the debentures in the
event that we sell or issue shares at a price less than the conversion price of
the debentures.





33


PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)




Note 10 — Stockholders’
Equity





Common Stock.During the
three-months ended December 31, 2007, the Company issued 46.2 million shares of
its common stock and had 6.4 million shares of its common stock returned as
follows:





•
              In
      October, 2007 we issued 25.0 million shares of our common
      stock  at $0.31 per share to a related party in exchange for the
      relinquishment of overriding royalty interests in certain of our
      properties. (see Note 4)•
              In
      November, 2007 we issued 16.0 million shares of our common stock at $0.23
      per share to a related party in exchange  for the reduction
      of  an outstanding note payable balance. (see Note
      4)•
              In
      November, 2007 we issued 5.0 million shares  of our common stock
      at $0.25 per share in conjunction with sale of heavy oil
      assets.•
              In
      November, 2007 we issued 0.2 million  of our common stock
      at  $0.28 per share for transaction finance
      costs.•
              In
      December, 2007 6.4 million shares of our common stock were returned to us
      at $0.22 per share in connection with a property
      conveyance.




Common Stock Subscribed.On
November 6, 2006, we commenced the sale of a maximum $125.0 million pursuant to
a private placement of units at $1.50 per unit (the “Private Placement”). 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 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 were
offered the opportunity to rescind their subscriptions or to participate on the
same terms as ultimately defined for the restructured offering. As of December
31, 2007, the Company reclassed $2.4 million of subscriptions which included
$0.1 million of accrued interest to Notes Payable- Related
Party.





In
November, 2007, the Board of Directors again agreed to restructure the offering
of the Private Placement and to pay interest at 8.5% from the date the original
funds were received to the date of the issuance (see Note 9). Investors who had
subscribed in the offering were again offered the opportunity to rescind their
subscriptions or to participate in the restructured offering. Three of the
original investors opted to participate in the above restructured offering. As a
result the balance of outstanding subscriptions plus accrued interest at
December 31, 2007 totaling $0.5 million was reclassed from Common Stock Subscribedto Convertible notes payable — net of
discounton the consolidated balance sheet.





Note
11 — Share-Based Compensation





Stock Option Plan.On August
10, 2005, the Company adopted the 2005 Stock Option Plan (the “Plan”), as
amended. Stock options under the Plan may be granted to key employees,
non-employee directors and other key individuals who are committed to the
interests of the Company. Options may be granted at an exercise price not less
than the fair market value of the Company’s common stock at the date of grant.
Most options have a five year life but may have a life up to 10 years as
designated by the compensation committee of the Board of Directors (the
“Compensation Committee”). Typically, options vest 20% on grant date and 20%
each year on the anniversary of the grant date but each vesting schedule is also
determined by the Compensation Committee. Most initial grants to Directors vest
50% on grant date and 50% on the one-year anniversary of the initial grant date.
Subsequent grants (subsequent to the initial grant) to Directors typically vest
100% at the grant date. In special circumstances, the Board may elect to modify
vesting schedules upon the termination of selected employees and contractors.
The Company has reserved 40.0 million shares of common stock for the plan. At
December 31, 2007 and September 30, 2007, 14.0 and 16.0 million shares,
respectively remained available for grant pursuant to the stock option plan.
During the three-months ended December 31, 2007, the Company granted 3.0 million
options under its 2005 stock option plan to directors, employees and consultants
performing employee-like services to the Company. There were no options granted,
forfeited or vested during the three-months ended December 31,
2006.





34
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


A summary
of the activity under that Plan for the 3 months ended December 31, 2007 is
presented below (shares in thousands):





Number
      of
                          Shares
                        
                        
                        Weighted-Average
                          Exercise PriceOptions
      Outstanding – September 30, 2007
                        
                        
                        24,965
                        
                        
                        $
                        1.31Granted
                        
                        
                        2,950
                        
                        
                        
                        0.20Forfeited
                        
                        
                        (1,920
                        )
                        
                        
                        0.22Options
      outstanding  — December 31, 2007
                        
                        
                        25,995
                        
                        
                        $
                        1.16Options
      exercisable – December 31, 2007
                        
                        
                        14,133
                        
                        
                        $
                        1.04





Effective
October 1, 2006, we adopted the provisions of SFAS 123(R). In accordance with
SFAS 123(R) the fair value of each share-based award under all plans is
estimated on the date of grant using a Black-Scholes pricing model that
incorporates the assumptions noted in the following table for the three-months
ended December 31, 2007.





Expected
      option term – years
                  1.75-3.5Risk-free
      interest rate
                  3.07%-4.88%Expected
      dividend yield
                  0Weighted
      average volatility
                  69.9%-84.4%





Deferred Stock Based
Compensation - We authorized and issued 10.1 million stock options to
employees and non-employee consultants outside the 2005 stock option plan in
May, 2007. The options were granted at an exercise price of $0.50 per share and
vest 60% at grant date and 20% per year at the first and second anniversaries of
the date of grant. These options expire on May 21, 2012.





Number
      of
                        Shares
                      
                      
                      Weighted-Average
                        Exercise PriceOptions
      outstanding — September 30, 2007 (shares in thousands)
                      
                      
                      9,895
                      
                      
                      $
                      0.50Granted
                      
                      
                      —
                      
                      
                      
                      —Forfeited
                      
                      
                      (2,050
                      )
                      
                      
                      0.50Options
      outstanding — December 31, 2007
                      
                      
                      7,845
                      
                      
                      
                      0.50Options
      exercisable – December 31, 2007
                      
                      
                      4,907
                      
                      
                      $
                      0.50





Compensation Expense -Stock-based employee and non-employee compensation expense of $0.5
million was charged to operations during the three months ended December 31,
2007. Stock-based compensation expense of $1.6 million was recognized during the
three months ended December 31, 2006. Stock-based compensation has been included
in general and administrative expenses in the consolidated statements of
operations.





Warrants





The
following stock purchase warrants were outstanding at, (warrants in
thousands):





December
      31,
                      2007
                    
                    September
      30,
                      2007Number
      of warrants
                    130,171
                    
                    51,063Exercise
      price
                    $0.22
      - $2.10
                    
                    $0.31
      - $2.10Expiration
      date
                    2009
      - 2012
                    
                    2011
      - 2012




35


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited,
restated)





During
the three months ended December 31, 2007, we completed the sale of Series A 8.5%
convertible debentures. Debenture holders received five-year warrants that allow
them to purchase a total of 46.4 million shares of common stock at prices
ranging from $0.24 to $0.27 per share (see Note 9). As of December 31, 2008,
none of these warrants had been exercised and the total value of these warrants,
based on valuation under the Black-Scholes method was $7.4 million. In
connection with the placement of the debentures, we paid a placement fee of $0.3
million and issued placement agent warrants entitling the holders to purchase an
aggregate of 0.2 million shares at $0.35 per share for a period of five years.
These warrants had a total valuation under the Black-Scholes method of $0.02
million.





During
the three months ended December 31, 2007, we entered into the Second Amendment
of our consulting agreement with MAB Resources, LLC and issued warrants to
acquire 32.0 million shares of our common stock at $0.50 per share (see Note
4)These warrants expire on November 14, 2009 and have a total value, based on
the Black-Scholes method of $1.8 million.





During
the three months ended December 31, 2007 we recorded $2.0 million, in deferred
financing costs related to the issuance of 16.6 million warrants in connection
with our Global Credit Facility. Amounts recorded as deferred financing costs
have been calculated using the Black-Scholes method, the associated warrants
will expire in January, 2012.





Note 12 — Related Party
Transactions





MAB.During the three-months
ended December 31, 2006, we incurred project development costs to MAB under the
Development Agreement between us and MAB (see Note 4) in the amount of $1.8
million. We did not incur project development costs to MAB during the
three-months ended December 31, 2007. During the three-months ended December 31,
2007 and 2006, we recorded expenditures paid by MAB on behalf of us in the
amount of $0.5 million and $0.5 million. Project development costs to MAB are
classified in our consolidated statements of operations as Project development costs — related
party. At December 31, 2007 and September 30, 2007, we owed MAB $0.7
million and $1.0 million, respectively, related to project development costs and
other expenditures that MAB made on our behalf.





During
the three-months ended December 31, 2007, pursuant to the agreements with MAB
and the $13.5 million promissory note issued thereunder (see Note 9 ), the
Company incurred interest expense of $0.1 million and made principal
payments of $0.5 million. As of December 31, 2007, the Company owed MAB
principal and accrued interest of $1.6 million under the terms of the promissory
note.





At
December 31, 2007, the Company had three separate promissory notes with the
Bruner Family Trust for an aggregate principal amount of $2.5
million.  During the three months ended December 31, 2007, we incurred
total interest expense of $0.05 million.  In November 2007, $0.2
million of this note was relieved by an assignment of a promissory note from
Charles Crowell, Chairman and CEO of the Company (see Note 9).





At
December 31, 2007, the Company also has two separate promissory notes with the
Bruner Family Trust (see Note 9) in the amounts of $0.1 million and $0.03
million, respectively. During the three-months ended December 31, 2007, we
incurred total interest expense of $0.0 million and paid nothing in principal
payments on these notes. As of December 31, 2007, the Company owed the Bruner
Family Trust principal and accrued interest of $0.2 million under the terms of
these promissory notes.





Galaxy. Note receivable- related
party on the consolidated balance sheet at September 30, 2007 represents
$2.5 million related to a $2.0 million earnest money deposit made by us under
the terms of the Galaxy PSA and additional operating costs of $0.5 million that
we paid toward the operating costs of the assets we were to acquire plus accrued
interest on amounts due to us which were all converted into the Galaxy Note on
August 31, 2007. During the first quarter ended December 31, 2007, the entire
$2.5 million has been paid to us by offset against amounts that we owed to MAB.
At September 30, 2007, Galaxy owed us $0.3 million and $0.0 million
related to additional expenses paid by us related to the Galaxy PSA and accrued
interest on the Galaxy Note, respectively.






36
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  During
the three-months ended December 31, 2007, these amounts have also been paid by
offset to amounts we owed to MAB under the MAB Note. Marc A. Bruner is the
largest single beneficial shareholder of the Company, is a 14.0% beneficial
shareholder of Galaxy and is the father of the President and Chief Executive
Officer of Galaxy.





Due
from related parties





Falcon Oil and Gas.In June
2006, the Company entered into an office sharing agreement with Falcon Oil &
Gas Ltd. (“Falcon”) for office space in Denver, Colorado (the “Office
Agreement”), of which Falcon is the lessee. Under the terms of the Office
Agreement, Falcon and the Company share 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 on a pro rata basis
based on percentage of office space used. This Office Agreement terminated on
January 31, 2008 when the Company moved to new office space. The largest single
beneficial shareholder of the Company is also the Chief Executive Officer and a
Director of Falcon. At December 31, 2007 and September 31, 2007, we owed Falcon
$0.7 million and $0.5 million, respectively, for costs incurred pursuant to the
Office Agreement.





Officers.During the
three-months ended December 31, 2007 and 2006, the Company incurred consulting
fees related to services provided by its officers in the aggregate amount of
$0.1 million and $0.2 million, respectively. These fees are reflected in our
statements of operations as General and administrative.





Note 13 — 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 non-capital
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. We are currently a party
to the following legal actions: (i) Approximately 20 vendors have filed multiple
liens applicable to our properties, with two primary foreclosure actions pending
at various stages of the pleadings, in connection with the liens. The Company
has entered into settlement agreements including payment plans, with five
vendors; (ii) a law suit was filed in August 2007 by a law firm in the Supreme
Court of Victoria, Australia for the balance of legal fees owed to the law firm
in the amount of 0.2 million Australian dollars. The total amount owed was
included in accounts payable at September 30, 2007, but has been reduced to less
than 0.1 million Australian dollars, as a result of payments made by us; (iii) a
law suit was filed in December 2007 by a vendor in the Supreme Court of
Queensland, Australia for the balance which the vendor claims is owed by us in
the amount of 2.4 million Australian dollars. Although we accrued the entire
amount of the judgment lien in Accounts payableas of
September 30, 2007, this amount is disputed by us on the basis that the vendor
breached the contract; and (iv) a judgment lien was filed in October 2007 by
another vendor in the U.S. for the Company’s default under a settlement
agreement related to the contract between the two companies. The parties are
currently negotiating an amendment to the settlement agreement, which would
defer any further action by the vendor as long as the Company makes further
payments in accordance with the amended settlement. The total amount of the
judgment lien was recorded as Notes payable — short termand Accrued interest payableat
September 30, 2007.





In the
event the Company does not remove the liens referenced in (i), above, by paying
the lienors or otherwise settling with them, the encumbrances could have a
material adverse effect on the Company’s ability to secure other vendors to
perform services and/or provide goods related to the Company’s operations. In
the event one or more vendors pursue the foreclosure actions referenced in (ii),
above, the Company could be in jeopardy of losing assets. In the event the
Company loses the lawsuit to either or both vendors referenced in (ii) or (iii),
above, and does not pay the amount owed, either of said vendors could obtain a
judgment lien and seek to execute on the lien against the






37
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  Company’s
assets. In the event the Company and the vendor referenced in (iv), above do not
reach agreement on the amendment to the settlement agreement, this vendor could
enforce its existing judgment lien against the Company’s assets in
Colorado.





Commitments





Guarantees. As part of a
Gas Gathering Agreement we have with CCES Piceance Partners1, LLC (“CCES”), we
have guaranteed that, should there be a mutual failure to execute a formal
agreement for long-term gas gathering services in the future, we will repay CCES
for certain costs they have incurred in relation to the development of a gas
gathering system. We have accounted for this guarantee using FASB
Interpretation No. 45 as amended, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,which requires us to recognize a liability for
the obligations undertaken upon issuing the guarantee in order to have a more
representationally faithful depiction of the guarantor’s assets and
liabilities. Accordingly, we have recognized a $2.0 million contingent
purchase obligation and related intangible asset on our consolidated balance
sheet as of December 31, 2007.





Operating Leases.In 2006,
the Company entered into lease agreements for office space in Denver, Colorado
and Salt Lake City, Utah. The Salt Lake City office space was for our
subsidiary, Paleo, which was sold to a related party effective August 31, 2007.
The rental payments related to the Salt Lake City office space are included
below since we have been unable to obtain consent from the landlord to allow the
purchaser to assume all rights and obligations under the lease. In any event,
the purchaser has agreed to indemnify us and has guaranteed performance for all
of our obligations under the lease. On November 26, 2007, we entered into a
lease agreement for new office space in Denver, Colorado. This lease expires in
2011.





Rent
expense for the three-months ended December 31, 2007 and 2006 was $0.1 million
and $0.1 million respectively.





Delay Rentals.In conjunction
with the Company’s working interests in undeveloped oil and gas prospects, the
Company must pay approximately $0.1 million in delay rentals during the fiscal
year ending September 30, 2008 to maintain the right to explore these prospects.
The Company continually evaluates its leasehold interests, therefore certain
leases may be abandoned by the Company in the normal course of
business.





Work Commitments.See Note
5 for commitments related to the drilling of specific wells.





Note 14 — Subsequent
Events





Director Note.On January 25,
2008, we obtained a loan and signed a promissory note (the “Director Note”) in
the amount of $0.1 million from member of the Board of Directors of the
Company. The loan is collateralized, in a second priority position, by the same
947,153 of the Pearl shares that secure the Wes-Tex Note. The note
accrues interest at the rate of 15% and matures on February 29,
2008.





Bruner Family Trust.On
February 12, 2008, we entered into a promissory note with the Bruner Family
Trust in the amount of $0.1 million. Interest accrues at three-month LIBOR plus
3%. Principal and interest are due five days after receipt of the holder’s
written demand but not before February 11, 2009.








38


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





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





Background





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





GSL was
incorporated under the laws of the State of Maryland on June 20, 2005, for the
purpose of acquiring, exploring, developing and operating oil and gas
properties. PetroHunter is considered a development stage company as defined by
Statement of Financial Accounting Standards (“SFAS”) 7, Accounting and Reporting by Development Stage
Enterprises.A development stage enterprise is one in which planned
principal operations have not commenced, or if its operations have commenced,
there have been no significant revenues therefrom. As of December 31,
2007, our 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 and we have not
commenced our planned principal operations. In October 2006, GSL changed its
name to PetroHunter Operating Company.





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





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





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





The
Company entered into a Securities Purchase Agreement in November 2007 for the
issuance of Series A 8.5% Convertible Debentures (“Convertible Debentures”) in
the aggregate principal amount of $7.0 million to several accredited investors.
Attached to the Convertible Debentures were warrants to purchase 46.4 million
shares of the Company’s common stock. The Convertible Debentures accrue interest
on the aggregate unconverted and outstanding principal amount at 8.5% per annum,
payable quarterly beginning on the first date after the Original Issue Date and
are due five years from the date of the note. The decision whether to pay
interest in cash, shares of common stock, or a combination thereof is at the
discretion of the Company upon meeting certain conditions. The note
holders have the option to convert any unpaid note principal and interest to the
Company’s common stock at a price of $0.15 per share until the Convertible
Debenture is no longer outstanding. The conversion price of the Convertible
Debentures may be adjusted in certain circumstances such as if the Company pays
a stock dividend, subdivides, or combines outstanding shares of common
stock into a smaller number of shares.





As of
December 31, 2007, no investor has opted to convert principal or interest. As of
December 31, 2007, the Company had accrued interest of $0.1 million and
recorded $0.1 million to interest expense. As of January 2, 2008, we were in
default in quarterly interest payments that were due beginning January 1,
2008.





39


Results
of Operations





Three-Months Ended December 31, 2007
vs. Three-Months Ended December 31, 2006





Oil and Gas Revenue.For the
three-months ended December 31, 2007, oil and gas revenue was $0.5 million as
compared to $0.4 million for the corresponding period in 2006. The 2006 revenue
was the result of production from 12 natural gas wells in the Piceance
Basin of Colorado. The increase in revenue relates to increases in
commodity prices, offset by (a) the natural production decline in the wells, and
(b) to ownership interests in fewer producing wells. In 2007, eight
producing wells produced and sold approximately 93,824 Mcf of natural gas and 20
Bbls of oil. In 2006, we had 12 operating wells that sold 85,922 Mcf of natural
gas. Average prices received for gas sold has increased to $5.36 per Mcf in 2007
from $5.17 per Mcf in 2006 as a result of market conditions.





Costs
and Expenses





Lease Operating Expenses.For
the three-months ended December 31, 2007, lease operating expenses decreased to
$0.1 million compared to $0.2 million for the corresponding period in 2006. This
is a result of lower maintenance costs for the non-operated wells in which the
Company owns an interest, and a reduction in the Company’s ownership interests
in producing wells.





General and
Administrative.During the three-months
ended December 31, 2007, general and administrative expenses decreased by $1.4
million or 37% as compared to the corresponding period in 2006. The following
table highlights the areas with the most significant changes ($ in
thousands):





Three-Months
      Ended
                                December 31,2007
                              
                              
                              2006
                              
                              
                              Change(restated)
                              
                              
                              (restated)Personnel
      and contract services
                              
                              $
                              884
                              
                              
                              $
                              684
                              
                              
                              $
                              200Legal
      fees
                              
                              
                              252
                              
                              
                              
                              189
                              
                              
                              
                              63Stock-based compensation expense
                              
                              
                              474
                              
                              
                              
                              1,561
                              
                              
                              
                              (1,087
                              )Travel
                              
                              
                              52
                              
                              
                              
                              466
                              
                              
                              
                              (414
                              )Other
                              
                              
                              656
                              
                              
                              
                              771
                              
                              
                              
                              (115
                              )Total
                              
                              $
                              2,318
                              
                              
                              $
                              3,671
                              
                              
                              $
                              (1,353
                              )





The
decrease in general and administrative expenses in 2007 is primarily a
result of decreased stock-based compensation expense and a
decrease in travel.





Project Developmental Costs —
Related Party.Property costs incurred to MAB were $1.8 million during
2006. We no longer pay project development costs to MAB as a result of the
restructuring of our agreements with MAB, which were effective January 1,
2007.





Impairment of Oil and Gas
Properties.Costs capitalized for properties accounted for under the full
cost method of accounting are subjected to a ceiling test limitation to the
amount of costs included in the cost pool by geographic cost center. Costs of
oil and gas properties may not exceed the ceiling which is an amount equal to
the present value, discounted at 10%, of the estimated future net cash flows
from proved oil and gas reserves plus the cost, or estimated fair market value,
if lower, of unproved properties. Should capitalized costs exceed this ceiling,
an impairment is recognized. During 2006, we recorded an impairment expense in
the amount of $5.2 million, representing the excess of capitalized costs over
the ceiling, as calculated in accordance with these full cost rules. There was
no impairment charge in 2007.





Depreciation, Depletion,
Amortization and Accretion.Depreciation, depletion, amortization and
accretion expense (“DD&A”) was $0.3 million in 2007 as compared
to $0.4 million in 2006.





Loss on Conveyance of
Property. On November 2, 2007,
we closed the sale of substantially all of our interest in Heavy Oil Assets in
Montana to Pearl Exploration and Production Ltd. (“Pearl”), an unrelated third
party, for total consideration of up to $30.0 million. Prior to this
sale, we had engaged in a lengthy sales process and turned down






40
 
  numerous
offers from other parties for the property. We felt that Pearl’s offer was
within the range of valuation we considered to be reasonable for this
property.  In evaluating the impact on our full cost pool, we applied the
guidance of Regulation S-X Rule 4-10, Financial Accounting and Reporting for Oil
and Gas Producing Activities Pursuant to the Federal Securities Laws and the
Energy Policy and Conversion Act of 1975 (“Rule 4-10”). Pursuant to Rule 4-10,
the sale of these properties resulted in a significant alteration in the
reserves on our properties and therefore, we had to evaluate the properties for
a loss on the transaction. Accordingly, the net book value of our
properties was allocated on the same ratio of reserves between the sold
properties and those that we retained, resulting in a loss on the conveyance of
these properties of $11.9 million during the period ended December 31,
2007.





Interest Expense, restated.During the quarter ended December 31, 2007, interest expense was $ 2.8 million, as compared to $(0.2) million during the same period
last year. Interest expense for the quarter ended December 31, 2007 consisted of
the following: ($ in thousands)





Three-Months
      Ended
                          December 31, 2007(restated)Interest
      expense related to credit facility, convertible notes and other
      notes
                        
                        $
                        1,416Amortization
      of debt discounts, deferred financing costs
                        
                        
                        1,315Interest
      on vendor obligations and other
                        
                        
                        54Total
                        
                        $
                        2,785





We expect
that interest expense will increase during the remainder of the fiscal year
ending September 30, 2008, due to the borrowings under the convertible
debentures and our credit facilities and other borrowings that may
occur.





Net Loss.During the quarter ended December 31, 2007,we incurred a net loss of
$16.8 million as compared to a net loss of $10.6 million during the quarter
ended December 31, 2006.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended September 30, 2007, includes an explanatory
paragraph relating to the uncertainty of our ability to continue as a going
concern. We have incurred a cumulative net loss of $ 89.4 million for the period from inception (June 20,
2005) to December 31, 2007, and have a working capital deficit of
approximately $31.4 million as of December 31, 2007. We are not in
compliance with the covenants of several loan agreements, have had multiple
property liens and foreclosure actions filed by vendors, and have significant
capital expenditure commitments. We require significant additional funding to
sustain our operations and satisfy our contractual obligations for our planned
oil and gas exploration and development operations. Liens have been filed
against some of the properties and foreclosure proceedings have begun. In
addition, we are in default on certain obligations. Our ability to establish the
Company as a going concern is dependent upon our ability to obtain additional
funding in order to finance our planned operations.





Plan
of Operation





Colorado.We expect that the
development of our Colorado properties will include the following activities:
(i) the completion and tie-in of 16 wells drilled and cased to date in the
Piceance II Prospect and five wells drilled and cased to date in the Buckskin
Mesa Prospect (four wells drilled and cased during fiscal year 2007 and one well
drilled and cased during the first quarter ended December 31, 2007); (ii) the
drilling, completion and tie-in of a minimum of 10 commitment wells within the
Williams Fork development area in which the Piceance II Prospect is located in
the southern Piceance Basin; (iii) the drilling, completion and tie-in of a
minimum of 12 commitment wells in our greater than 20,000 net acre Buckskin Mesa
Prospect leasehold block surrounding the discovery wells for the
Powell Park Field near Meeker, Colorado in the northern Piceance Basin; and (iv)
the recompletion and tie-in of the six shut-in gas wells in the Powell Park
Field acquired by the Company from a third party operator.




41


We
anticipate that the following costs associated with the development of the
Colorado assets will be incurred:





•       $40.0
million to $50.0 million in connection with the Piceance II Project, to include
expenditures for seismic data acquisition, lease and asset acquisition,
drilling, completion, lease operation, and installation of production
facilities





•       $41.0
million to $60.0 million in connection with the Buckskin Mesa Project, to
include expenditures for seismic data acquisition, lease and asset acquisition,
drilling, completion, lease operation, and installation of production
facilities





We are
currently attempting to rationalize the Colorado asset base to raise capital and
reduce our working interest and the associated development costs attributable to
such retained interest.





Australia.We plan to explore
and develop portions of our 7.0 million net acre position in the Beetaloo Basin
project area located in northwestern Australia. During calendar year 2008, we
plan to drill five wells in the exploration permit blocks. We anticipate that
costs related to seismic acquisition, development of operational infrastructure,
and the drilling and completion of wells over the next twelve months will range
from $22.0 million to $30.0 million. As a means of reducing this exposure,
selected portions of the project portfolio will be made available for farm-out
to industry for cash and payment of expenses related to drilling and completion
of one or more wells in each prospect.





Liquidity
and Capital Resources





The
Company has grown rapidly since its inception. At September 30, 2005, we had
been operating for only a few months, had no employees, and had acquired an
interest in two properties, West Rozel and Buckskin Mesa, aggregating
approximately 12,400 net mineral acres. During 2006 and 2007, we added employees
and acquired an interest in additional properties. At December 2007 we had 13
full time employees and 15 consultants, and at December 2006, we had 16 full
time employees. We had interests in properties aggregating approximately 21,757
net acres in Colorado, 20,827 net acres in Montana, and 7.0 million net acres in
Australia at December 31, 2007 and 19,839 acres in Colorado and 7.0 million net
acres in Australia at December 31, 2006.





Our
initial plan for 2007 was to raise capital to fund the exploration and
development of our acquired properties; and we were successful at raising $35.5
million through borrowings, common stock issuances and subscriptions. We drilled
(or participated in the drilling of) 39 gross wells, and completed (or
participated in the completion of) 21 gross wells. During the third and fourth
quarters of 2007, we revised our plan to (i) sell non-core assets to allow us to
focus our exploration and development efforts in two primary areas: the Piceance
Basin, Colorado and Australia; and (ii) to improve the economics of our projects
by restructuring the Development Agreement with MAB. Accordingly, during the
three-months ended December 31, 2007 we sold our heavy oil assets and
restructured the Development Agreement with MAB through amendments.





Working Capital.Working
capital is the amount by which current assets exceed current liabilities. Our
working capital is impacted by changes in prices of oil and gas along with other
business factors that affect our net income and cash flows. Our working capital
is also affected by the timing of operating cash receipts and disbursements,
borrowings of and payments of debt, additions to oil and gas properties and
increases and decreases in other non-current assets.





As of
December 31, 2007, we had a working capital deficit of $31.4 million and
cash of $0.5 million. As of September 30, 2007, we had a working capital deficit
of $37.9 million and cash of $0.1 million. The changes in working capital are
primarily attributable to the factors described above. We expect that our future
working capital will be affected by these same factors.





In
November 2007, we raised approximately $6.3 million in
cash  through the sale of convertible debentures and $0.8 million
through the pledge of our investment in Pearl shares. During the remainder of
fiscal year 2008, we may sell working
interests in some of our properties and we may complete additional private
placements of debt or equity to raise cash to meet our working capital needs. A
significant amount of capital is needed to fund our proposed drilling program
for 2008.




42





Cash Flow.Net cash used in
or provided by operating, investing and financing activities for the
three-months ended December 31, 2007 and 2006 were as follows ($ in
thousands):





Three-Months
      Ended
                        December 31,2007
                      
                      
                      2006(restated)
                      
                      
                      (restated)Net
      cash used in operating activities
                      
                      $
                      (3,678
                      )
                      
                      $
                      (3,161
                      )Net
      cash used in investing activities
                      
                      $
                      (486
                      )
                      
                      $
                      (8,226
                      )Net
      cash provided by financing activities
                      
                      $
                      4,506
                      
                      
                      $
                      3,063





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





Net Cash Used in Investing
Activities.Net cash used in investing activities for the three-months
ended December 31, 2007 was primarily related to cash used for additions to oil
and gas properties of $7.9 million offset by cash received from the sale of oil
and gas properties of $7.5 million.  Net cash used in investing activities
for the three-months ended December 31, 2006 was primarily used for joint
interest billings in the amount of $6.4 million and additions to oil and gas
properties in the amount of $1.2 million.





Net Cash Provided by Financing
Activities.Net cash provided by financing activities for the
three-months ended December 31, 2007 was primarily comprised of borrowings of
$8.8 million net of repayments of debt in the amount of $4.3 million. Net
cash provided by financing activities for the three-months ended December 31,
2006 was comprised of: (1) the subscription of common stock of $1.6 million and
(2) the issuance of convertible notes of $1.5 million.





Capital Requirements.We
currently anticipate our capital budget for the year ending September 30, 2008
to be approximately between $103.0 and $140.0 million. Uses of cash for 2008
will be primarily for our drilling program in the Piceance Basin and in
Australia. The following table summarizes our drilling commitments for fiscal
year 2008 ($ in thousands):





Activity
              
              Prospect
              
              Aggregate
                Total Cost
              
              
              Our
      Working
                Interest
              
              Our Share
              
              (a)Drill
      and complete 12 wells
              
              Buckskin
      Mesa
              
              $
              44,400
              
              
              
              100
              %
              
              $
              44,400Drill
      and complete two wells
              
              Piceance
      II
              
              
              4,200
              
              
              
              37.5
              %
              
              
              1,575Drill
      and complete eight wells
              
              Piceance
      II
              
              
              16,800
              
              
              
              62.5
              %
              
              
              10,500Complete
      16 wells (b)
              
              Piceance
      II
              
              
              17,600
              
              
              
              100
              %
      (c)
              
              
              17,600Drill
      five wells
              
              Beetaloo
              
              
              20,000
              
              
              
              100
              %
              
              
              20,000
              
              (d)Total
              
              
              
              $
              103,000
              
              
              
              
              
              
              $
              94,075





(a)
            We
      intend to sell portions of our working interest to third parties and
      farm-out additional portions for cash and the agreement of the farmor to
      pay a portion of our development
costs.





(b)
            These
      wells have all been drilled.





(c)
            During
      December 2007, our working interest in these wells increased to 100% with
      the payment by us of $1.0 million in
cash.





(d)
            Our
      commitment in Australia is to have five wells drilled on the various
      permits by December 31, 2008.





43


Financing.During the first
quarter ended December 31, 2007 and fiscal year 2007, we entered into different
short and long-term financing arrangements as follows:





(1) On
November 13, 2007, we completed the sale of Series A 8.5% Convertible Debentures
in the aggregate principal amount of $7.0 million. The debentures are due
November 2012, are convertible at any time by the holders into shares of our
common stock at a price of $0.15 per share and are collateralized by shares in
our Australian subsidiary. Interest accrues at an annual rate of 8.5% and is
payable in cash or in shares (at our option) quarterly, beginning January 1,
2008.





Debenture
holders also received five-year warrants that allow them to purchase a total of
46.4 million shares of common stock at prices ranging from $0.24 to $0.27 per
share. In connection with the placement of the debentures, we paid a placement
fee of $0.3 million and issued placement agent warrants entitling the holders to
purchase an aggregate of 0.2 million shares at $0.35 per share for a period of
five years.





We have
agreed to file a registration statement with the Securities and Exchange
Commission in order to register the resale of the shares issuable upon
conversion of the debentures and the shares issuable upon exercise of the
warrants. According to the Registration Rights Agreement, the registration
statement must be filed by March 4, 2008 and it must be declared effective by
July 2, 2008. The following penalties apply if filing deadlines and/or
documentation requirements are not met in compliance with the stated rules: (i)
the Company shall pay to each holder of Registrable Securities 1% of the
purchase price paid in cash as partial liquidated damages; (ii) the maximum
aggregate liquidated damages payable is 18% of the aggregate subscription amount
paid by the holder; (iii) if the Company fails to pay liquidated damages in full
within seven days of the date payable, the Company will pay interest of 18% per
annum, accruing daily from the original due date; (iv) partial liquated damages
apply on a daily prorated basis for any portion of a month prior to the cure of
an event; and (v) all fees and expenses associated with compliance to the
agreement shall be incurred by the Company. We believe that these requirements
will be met and therefore have accrued no liabilities related to such
penalties.





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





The
debenture agreement contains anti-dilution protections for the investors to
allow a downward adjustment to the conversion price of the debentures in the
event that we sell or issue shares at a price less than the conversion price of
the debentures.





Proceeds
were used to fund working capital needs.





(2) On
December 18, 2007, we obtained a loan from a third party in the amount of $0.8
million. The loan is secured by the shares that we received as partial
consideration for the sale of our heavy oil assets, bears interest at 15% per
annum and matures on January 18, 2008. Funds were used to fund working capital
needs.





(3)
During fiscal year 2007, we borrowed $0.5 million from Global. The note was
unsecured and bore interest at 7.75% per annum. The funds were used primarily to
fund working capital needs. We paid this note in full in November
2007.





(4) We
entered into a note with MAB in the amount of $13.5 million as a result of the
Consulting Agreement with MAB; however, no cash was actually received. During
the first quarter ended December 31, 2007, the note was reduced by further
amendments to the Consulting Agreement (the First, Second and Third Amendments)
and as a result, we paid $0.3 million in cash towards repayment of this note. At
December 31, 2007, the balance of this note was $1.1 million. The note is
unsecured and bears interest at LIBOR. Although at December 31, 2007, we were in
default on this note, MAB has waived and released us from defaults, failures to
perform and any other failures to meet our obligations through October 1,
2008.





44


(5) We
entered into two separate loans with the Bruner Family Trust, UTD March 28, 2005
for a total of $0.3 million. Each note bears interest at 8% and is due in full
at the time when the January and May Credit Facilities have been paid in full
(described below). A portion of one of these notes was assigned to a director of
the company who then invested in our convertible debenture offering in November
2007. At December 31, 2007, the balance of these notes is $0.1
million.





(6) We
entered into a $15.0 million credit facility in January 2007, with Global (the
“January Credit Facility”). The January Credit Facility is secured by certain
oil and gas properties and other assets of ours. It bears interest at prime plus
6.75% and is due to be paid in full in July 2009. We incurred advance
fees of 2% on all amounts borrowed under the facility. We may prepay the
balance without penalty. We are currently in default on interest payments and
not in compliance with the covenants. Global has waived all defaults that have
occurred or that might occur in the future until October 2008, at which time all
defaults must be cured. We have drawn the total $15.0 million available to us
under this facility. The funds were used to fund working capital
needs.





(7) We
entered into a $60.0 million credit facility with Global in May, 2007 (the “May
Credit Facility”). The May Credit Facility is secured by the same certain oil
and gas properties and other assets as the January Credit Facility. The May
Credit Facility bears interest at prime plus 6.75% and is due to be paid in full
in November, 2009. We pay an advance fee of 2% on all amounts borrowed under the
facility. We may prepay the balance without penalty. We are currently in default
on interest payments and not in compliance with the covenants. Global has waived
all defaults that have occurred or that might occur in the future until October,
2008. At December 31, 2007 we had $42.2 million remaining available to us
from the credit facility. The funds borrowed were used to fund working capital
needs of the Company.





Prior to
merger with GSL in May 2006, Digital entered into five separate loan agreements,
aggregating $0.4 million, due one year from issuance, commencing October 11,
2006. The loans bear interest at 12% per annum, are unsecured, and are
convertible, at the option of the lender at any time during the term of the loan
or upon maturity, at a price per share equal to the closing price of our common
stock on the OTC Bulletin Board on the day preceding notice from the lender of
its intent to convert the loan. As of January 10, 2007, we were in default on
payment of the notes and we are currently in discussions with the holders to
convert the notes and accrued interest into our common stock.





Other Cash Sources.On
November 6, 2007, we sold our Heavy Oil assets. The cash proceeds of $7.5
million were used to fund working capital needs.





The
continuation and future development of our business will require substantial
additional capital expenditures. Meeting capital expenditure, operational, and
administrative needs for the future period ending September 30, 2008 will
depend on our success in farming out or selling portions of working interests in
our properties for cash and/or funding of our share of development expenses, the
availability of debt or equity financing, and the results of our activities. To
limit capital expenditures, we may form industry alliances and exchange an
appropriate portion of our interest for cash and/or a carried interest in our
exploration projects using farm-out arrangements. We may need to raise
additional funds to cover capital expenditures. These funds may come from cash
flow, equity or debt financings, 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. If we are unable to raise
capital through the methods discussed above, our ability to execute our
development plans will be greatly impaired. See the Going Concern section
below.





Development Stage Company.We
had not commenced principal operations or earned significant revenue as of
December 31, 2007, and we are considered a development stage entity for
financial reporting purposes. During the period from inception to December 31,
2007, we incurred a cumulative net loss of $89.4 million. We have raised
approximately $100.0 million through borrowing and the sale of
convertible notes and common stock from inception through December 31, 2007. In
order to fund our planned exploration and development of oil and gas properties,
we will require significant additional funding.





Off-Balance
Sheet Arrangements





We do not
have off-balance sheet arrangements.





45


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.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 sale or
abandonment 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.





Asset Retirement Obligation.Asset retirement obligations associated with tangible long-lived assets
are accounted for in accordance with SFAS 143, Accounting for Asset Retirement
Obligations. The estimated fair value of the future costs associated with
dismantlement, abandonment and restoration of oil and gas properties is recorded
generally upon acquisition or completion of a well. The net estimated costs are
discounted to present values using a risk adjusted rate over the estimated
economic life of the oil and gas properties. Such costs are capitalized as part
of the related asset. The asset is depleted on the units-of-production method on
a field-by-field basis. The liability is periodically adjusted to reflect (1)
new liabilities incurred, (2) liabilities settled during the period, (3)
accretion expense, and (4) revisions to estimated future cash flow requirements.
The accretion expense is recorded as a component of depreciation, depletion,
amortization, and accretion expense in the accompanying consolidated statements
of operations.





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





Prior to
October 1, 2006 , we accounted for stock-based compensation using the
intrinsic value recognition and measurement principles detailed in Accounting
Principles Board Opinion 25, Accounting for Stock Issued
to Employeesand
related interpretations.





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





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.





46


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





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





•
            The
      cost of properties not being amortized;
plus





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





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





If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. There
was no impairment charge during the three-months ended December 31, 2007. During
the three-months ended December 31, 2006, we recorded an impairment charge in
the amount of $5.2 million.





Recently
Issued Accounting Pronouncements





Recently Issued Accounting
Pronouncements.In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB 51.
SFAS 160 establishes accounting and reporting standards that require
noncontrolling interests to be reported as a component of equity, changes in a
parent’s ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, and any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary be initially measured at
fair value. SFAS 160 is effective for fiscal years and interim periods within
those fiscal years, beginning on or after December 15, 2008 and is to be applied
prospectively as of the beginning of the fiscal year in which the statement is
applied. The Company is required to adopt SFAS 160 in the first quarter of 2009.
Management believes that the adoption of SFAS 160 will have no impact on our
consolidated results of operations, cash flows or financial
position.





In
December 2007, the FASB issued SFAS 141(R), Business Combinations. SFAS
141(R) replaces SFAS 141 and provides greater consistency in the accounting and
financial reporting of business combinations. SFAS 141(R) requires the acquiring
entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction and any non-controlling interest in the
acquiree at the acquisition date, measured at the fair value as of that date.
This includes the measurement of the acquirer shares issued in consideration for
a business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance and deferred taxes. SFAS 141(R) is effective for
fiscal years and interim periods within those fiscal years, beginning on or
after December 15, 2008 and is to be applied prospectively as of the beginning
of the fiscal year in which the statement is applied. SFAS 141(R) will have no
impact on our consolidated results of operations, cash flows or financial
position. Early adoption is not permitted. The Company is required to adopt SFAS
141(R) in the first quarter of 2009. Management believes that the adoption of
SFAS 141(R) will have no impact on our consolidated results of operations, cash
flows or financial position.





In
February 2007, the Financial Accounting Standards Board, or “FASB”, issued SFAS
159, The Fair Value Option for
Financial Assets and Financial Liabilities, which allows
entities to choose, at specified election dates, to






47
 
  measure
eligible financial assets and liabilities at fair value that are not otherwise
required to be measured at fair value. If a company elects the fair value option
for an eligible item, changes in that item’s fair value in subsequent reporting
periods must be recognized in current earnings. SFAS 159 also establishes
presentation and disclosure requirements designed to draw comparison between
entities that elect different measurement attributes for similar assets and
liabilities. SFAS 159 is effective for us on October 1, 2008. We have not
assessed the impact of SFAS 159 on our consolidated results of operations, cash
flows or financial position.





In
September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which provides guidance for using fair value to measure assets and liabilities.
The standard also responds to investors’ requests for more information about:
(1) the extent to which companies measure assets and liabilities at fair value;
(2) the information used to measure fair value; and (3) the effect that fair
value measurements have on earnings. SFAS 157 will apply whenever another
standard requires (or permits) assets or liabilities to be measured at fair
value. SFAS 157 does not expand the use of fair value to any new circumstances.
SFAS 157 is effective for us on October 1, 2008. We have not assessed the impact
of SFAS 157 on our consolidated results of operations, cash flows or financial
position.





In June
2006, the FASB issued Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes,
which clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with FASB Statement 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for us on October 1,
2007. The cumulative effect of adopting FIN 48 did not have a significant impact
on the Company’s financial position or results of operations and accordingly no
adjustment was made.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Commodity
Price Risk





Because
of our relatively low level of current oil and gas production, we are not
exposed to a great degree of market risk relating to the pricing applicable to
our oil and natural gas production. However, our ability to raise additional
capital at attractive pricing, our future revenues from oil and gas operations,
our future profitability and future rate of growth all depend substantially upon
the market prices of oil and natural gas, which fluctuate considerably. We
expect commodity price volatility to continue. We do not currently utilize
hedging contracts to protect against commodity price risk. As our oil and gas
production grows, we may manage our exposure to oil and natural gas price
declines by entering into oil and natural gas price hedging arrangements to
secure a price for a portion of our expected future oil and natural gas
production.





Foreign
Currency Exchange Rate Risk





We
conduct business in Australia and are subject to exchange rate risk on cash
flows related to sales, expenses, financing and investment transactions. We do
not currently utilize hedging contracts to protect against exchange rate risk.
As our foreign oil and gas production grows, we may utilize currency exchange
contracts, commodity forwards, swaps or futures contracts to manage our exposure
to foreign currency exchange rate risks.





Interest
Rate Risk





Interest
rates on future credit facility draws and debt offerings could be higher than
current levels, causing our financing costs to increase accordingly. This could
limit our ability to raise funds in debt capital markets.





ITEM 4. CONTROLS AND PROCEDURES




NOTE:  The following disclosure was contained
in our original report filed with the SEC on February 19, 2008.






48
 
 Evaluation
of Disclosure Controls and Procedures





As of
December 31, 2007, an evaluation was performed under the supervision and with
the participation of the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Partnership’s “disclosure controls and procedures” (as defined
in the Securities Exchange
Act of 1934 [the “Exchange Act”]). Based on that evaluation, the Company’s
management, including the Chief Executive Officer and Chief Financial Officer,
concluded the Company’s disclosure controls and procedures were not effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is (a) recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and (b) accumulated and communicated to the
Company’s management, including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions regarding required disclosure as
evidenced by the material weakness described below.





As
reported in Item 9A of the Company’s 2007 Form 10-K filed on January 15, 2008
management reported the existence of a continuing material weakness related to
our control environment which did not sufficiently promote effective internal
control over financial reporting through the management structure to prevent a
material misstatement. Specifically, management did not have an adequate process
for monitoring accounting and financial reporting and had not conducted a
comprehensive review of account balances and transactions that had occurred
throughout the year. Our disclosure controls and accounting processes lack
adequate staff and procedures in order to be effective. The Company did not have
adequate staffing to provide for an effective segregation of duties to
adequately resolve accounting issues and provide information to the auditors on
a timely basis. These material weaknesses continue to exist as of December 31,
2007.





We are
fully committed to remediating the material weakness described above, and we
believe that we are taking the steps that will properly address these issues.
Further, our Audit Committee has been and expects to remain actively involved in
the remediation planning and implementation. However, the remediation of the
design of the deficient controls and the associated testing efforts are not
complete, and further remediation may be required.





While we
are taking immediate steps and dedicating substantial resources to correct these
material weaknesses, they will not be considered remediated until the new and
improved internal controls operate for a period of time, are tested and are
found to be operating effectively. During the first quarter ended December 31,
2007, we hired a Chief Financial Officer and are utilizing several full-time
accounting contractors serving in senior and staff level accounting positions.
We are actively recruiting high-level, competent accounting
personnel.





Our
remediation efforts may not be sufficient to maintain effective internal
controls in the future. We may not be able to implement and maintain adequate
controls over our financial processes and reporting, which may require us to
restate our financial statements in the future. In addition, we may discover
additional past, ongoing or future material weaknesses or significant
deficiencies in our financial reporting system in the future. Any failure to
implement new controls, or difficulty encountered in their implementation, could
cause us to fail to meet our reporting obligations or result in material
misstatements in our financial statements. Inferior internal controls could also
cause investors to lose confidence in our reported financial information, which
could result in a lower trading price of our common shares.





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





Changes
in Internal Controls Over Financial Reporting





There
have been changes in our internal controls over financial reporting that
occurred during the first fiscal quarter of 2008 and additional controls will be
implemented during the second and third fiscal quarters that have materially
affected or are reasonably likely to materially affect our internal controls
over accounting and financial reporting.




NOTE:  The following discussion relates to
our filing of this Form 10-Q/A.


49


Subsequent Evaluation of Disclosure Controls and
Procedures




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





Our
management evaluated, with the participation of our Chief Executive Officer and
Interim Chief Financial Officer, the effectiveness of the design and operation
of our disclosure controls and procedures as of the date of filing this form
10-Q/A. Based on this evaluation, we have determined that material weaknesses in
internal control over financial reporting related to the operating effectiveness
of internal control over financial reporting, and specifically in relation to
our accounting for our oil and gas properties, existed during each quarter of
our year ended September 30, 2008. Based upon this evaluation, our Chief
Executive Officer and Interim Chief Financial Officer concluded that our
disclosure controls and procedures were not effective to reasonably ensure that
information required to be disclosed is included in the reports that we file
with the SEC.





A
material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. In our assessment, management identified the
following material weaknesses: (1) our controls over industry specific
accounting transactions did not operate effectively to appropriately calculate
losses on our oil and gas property conveyances in the consolidated statements of
operations and we lacked adequately defined procedures and controls to properly
value and present our oil and gas properties in our consolidated balance sheets
and statements of operations; and (2) our controls over other non-recurring
complex accounting transactions were not operating effectively to ensure that
all such transactions were properly accounted for and disclosed in accordance
with GAAP. These material weaknesses resulted in the restatement of the
Company’s consolidated financial statements filed with the SEC on Form 10-Q for
the quarterly periods ended December 31, 2007, March 31, 2008 and June 30,
2008.





Notwithstanding
the existence of these material weaknesses in internal control, we believe that
the consolidated financial statements fairly present, in all material respects,
our consolidated balance sheet as of December 31, 2007 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the quarterly period ended December 31, 2007 in conformity with
GAAP.












50





PART
II. OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





The
Company is a party to the following legal proceedings:









2.  Two
primary foreclosure actions are pending at various stages of the pleadings, in
connection with the liens (plus cross claims and counter claims within each of
these actions).





3.  A
law suit was filed in August 2007 by the law firm of Minter Ellison in the
Supreme Court of Victoria for the balance of legal fees owed (0.2 million
Australian dollars).





4.  A
law suit was filed in December 2007 by a vendor in the Supreme Court of
Queensland for the balance which the vendor claims is owed (2.4 million
Australian dollars). This amount is disputed by the Company on the basis that
the vendor breached the contract.





5.  A
judgment lien was filed in October 2007 by another vendor for PetroHunter’s
default under a settlement agreement related to the drilling contract between us
and the vendor. The parties are currently negotiating an amendment to the
settlement agreement, which would defer any further action by the vendor as long
as PetroHunter makes further payments in accordance with the amended
settlement.





In the
event the Company does not remove the liens referenced in (1) above, by paying
the lienors or otherwise settling with them, the encumbrances could have a
material adverse effect on the Company’s ability to secure other vendors to
perform services and/or provide goods related to the Company’s operations. In
the event one or more vendors pursue the foreclosure actions referenced in (1)
above, the Company could be in jeopardy of losing assets. In the event the
Company loses the lawsuits to the vendors referenced in 3 and/or 4 above, and
does not pay the amounts owed, the vendor could obtain a judgment lien and seek
to execute on the lien against the Company’s assets. In the event the Company
and the vendor referenced in (5) above do not reach agreement on the amendment
to the settlement agreement, the vendor could enforce its existing judgment lien
against the Company’s assets in Colorado.





ITEM
1A. RISK
FACTORS





There
were no material changes from the risk factors disclosed in our Form 10-K for
the fiscal year ended September 30, 2007.





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





On
November 6, 2007, the Company issued 5.0 million shares of common stock to
American Oil & Gas, Inc. and Savannah Exploration, Inc. in consideration for
the termination of the Company’s obligation to pay an overriding royalty and a
per barrel production payment on properties sold to Pearl Exploration and
Production Ltd. The Company relied upon the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.





These
issuances and sales are in addition to the following transactions involving
unregistered securities reported in current reports on Form 8-K:





—
            Issuance
      of 25,000,000 shares of common stock to MAB Resources LLC in an 8-K filed
      October 23, 2007





—
            Issuance
      of 16,000,000 shares of common stock and warrants to purchase 32,000,000
      shares of common stock in an 8-K filed November 16,
  2007





—
            Sales
      of convertible debentures and warrants in an 8-K filed November 15, 2007
      and amended on November 16, 2007 and the sales of convertible debentures
      and warrants in a current report on Form 8-K filed on November 16,
      2007.





51


ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM 5. OTHER INFORMATION





None.





ITEM 6. EXHIBITS





See
Exhibit Index





52


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
      CORPORATIONDate: 
      January 23, 2009
              By:
              /s/
      Charles B. CrowellCharles
      B. CrowellChief
      Executive Officer(Principal
      Executive Officer)
 Date: 
      January 23, 2009
              By:
              /s/
      Charles JosenhansCharles
      JosenhansInterim
      Chief Financial Officer(Principal
      Financial Officer)
 Date: 
      January 23, 2009
              By:
              /s/
      Robert PerlmanRobert
      PerlmanController(Principal
      Accounting Officer)
   53





EXHIBIT INDEX





Regulation
                      S-K Number
                    Exhibit31.1
                    Rule
      13a-14(a) Certification of Charles B. Crowell31.2
                    Rule
      13a-14(a) Certification of Charles Josenhans32.1
                    Certification
      of Charles B. Crowell Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act Of
  200232.2
                    Certification
      of Charles Josenhans Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act Of
  2002