UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10- Q/A
 Amendment
No. 1
 
 (Mark
One)
 
 [X]
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended June 30, 2008
 
 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)
 
 (303) 572-8900
 Registrant’s
telephone number, including area code
 
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes[X]     No
[
]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer [  ]      Accelerated filer
[  ]      Non-accelerated filer [ 
]     Smaller reporting company [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [  ]   No [X]
 
 As of
July 31, 2008, the registrant had 340,743,469 shares of common stock
outstanding.
  
  EXPLANATORY
NOTE
 
 Unless
otherwise noted in this report, any description of “us” or “we” refers to
PetroHunter Energy Corporation and our subsidiaries. All amounts expressed
herein are in U.S. dollars unless otherwise indicated.
 
 
 FORWARD-LOOKING
STATEMENTS
 
 Certain
statements contained in this Quarterly Report on Form 10-Q/A 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. All
forward-looking statements herein as well as all subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by cautionary statements set forth in
the “Risk Factors” section of our Prospectus on Form S-1 filed with the
Securities and Exchange Commission (“SEC”) on June 30, 2008 and in Item 1A “Risk
Factors” appearing in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2007. We assume no duty to update or revise our forward-looking
statements based on changes in internal estimates or expectations or otherwise.
We advise you to carefully review the reports and documents we file from time to
time with the SEC.
 
 
 EXPLANATORY
NOTE REGARDING RESTATEMENTS
 
 This
Quarterly Report on Form 10-Q/A for the three and nine month periods ended June
30, 2008 includes restatements of the previously filed consolidated financial
statements and data (and related disclosures) for the period ended June 30,
2008.  A summary of these restatements and corrections are discussed
in Note 2, Restatement of Previously Issued Financial Statements, included in
the accompanying consolidated financial statements for the period ended June 30,
2008.  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 August 13, 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 August 13, 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 August 13, 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 month period ended December 31,
2007, and in relation to the three and six month period ended March 31, 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.
 
  
  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
that is known to be productive.
 
 Drilled and Cased.Involves
drilling a well and installing casing to a specified depth in the wellbore for
future completion.
 
 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. Productive wells consist of producing wells and wells capable of
production, but specifically exclude wells drilled and cased during the fiscal
year that have yet to be tested for completion.
 
 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.
 
 4
 Spud.To start the well
drilling process by removing rock, dirt and other sedimentary
material.
 
 Stratigraphic.Relating to vertical
position in a rock column. More generally, relating to relative geological age,
since typically, in any given sequence of sedimentary rock, older rock is lower
than newer.
 
 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 NINE-MONTH PERIOD ENDED
 JUNE 30, 2008
 (RESTATED)
 
 INDEX
 
 PART
      I — FINANCIAL INFORMATIONItem
      1.
              Financial
      StatementsConsolidated
      Balance Sheets
              7Consolidated
      Statements of Operations
              8Consolidated
      Statements of Stockholders’ Equity and Comprehensive
    Loss
              9Consolidated
      Statements of Cash Flows
              11Notes
      to Consolidated Financial Statements
              12Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              36Item
      4T.
              Controls
      and Procedures
              45PART
      II — OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              46Item
      1A.
              Risk
      Factors
              47Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              47Item
      6.
              Exhibits
              48Signatures
              49
 
 
   6
 PART I.FINANCIAL INFORMATION
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 CONSOLIDATED
BALANCE SHEETS
  June
      30, 2008
                            
                            
                            September
      30, 2007(restated)
                              (unaudited)($
      in thousands)ASSETSCurrent
      AssetsCash
      and cash equivalents
                            
                            $
                            695
                            
                            
                            $
                            120Restricted
      cash
                            
                            
                            531
                            
                            
                            
                            —ReceivablesOil
      and gas receivables, net
                            
                            
                            380
                            
                            
                            
                            487Other
      receivables
                            
                            
                            62
                            
                            
                            
                            59GST
      receivables
                            
                            
                            485
                            
                            
                            
                            —Due
      from related parties
                            
                            
                            —
                            
                            
                            
                            500Note
      receivable — related party
                            
                            
                            —
                            
                            
                            
                            2,494Prepaid
      expenses and other assets
                            
                            
                            406
                            
                            
                            
                            187Total
      Current Assets
                            
                            
                            2,559
                            
                            
                            
                            3,847Property
      and Equipment, at costOil
      and gas properties under full cost method, net
                            
                            
                            145,082
                            
                            
                            
                            162,843Furniture
      and equipment, net
                            
                            
                            792
                            
                            
                            
                            569Total
      Property and Equipment
                            
                            
                            145,874
                            
                            
                            
                            163,412Other
      AssetsJoint
      interest billings
                            
                            
                            —
                            
                            
                            
                            13,637Restricted
      cash
                            
                            
                            524
                            
                            
                            
                            599Deposits
      and other assets
                            
                            
                            130
                            
                            
                            
                            —Deferred
      financing costs
                            
                            
                            1,678
                            
                            
                            
                            529Intangible asset
                            
                            
                            3,532
                            
                            
                            
                            —Total
      Assets
                            
                            $
                            154,297
                            
                            
                            $
                            182,024LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                            
                            $
                            10,172
                            
                            
                            $
                            26,631Notes
      payable — short-term
                            
                            
                            1,055
                            
                            
                            
                            4,667Convertible
      notes payable
                            
                            
                            400
                            
                            
                            
                            400Note
      payable — related party — current portion
                            
                            
                            2,622
                            
                            
                            
                            3,755Note
      payable — current portion of long-term liabilities
                            
                            
                            120
                            
                            
                            
                            120Accrued
      interest payable
                            
                            
                            5,960
                            
                            
                            
                            2,399Accrued
      interest payable — related party
                            
                            
                            18
                            
                            
                            
                            516Due
      to shareholder and related parties
                            
                            
                            440
                            
                            
                            
                            1,474Contract
      payable — oil and gas properties
                            
                            
                            —
                            
                            
                            
                            1,750Contingent
      purchase obligation
                            
                            
                            3,532
                            
                            
                            
                            —Total
      Current Liabilities
                            
                            
                            24,319
                            
                            
                            
                            41,712Non-current
      obligationsNotes
      payable — net of discount
                            
                            
                            37,207
                            
                            
                            
                            27,944Subordinated
      notes payable — related parties
                            
                            
                            106
                            
                            
                            
                            9,050Convertible
      notes payable — net of discount
                            
                            
                            240
                            
                            
                            
                            —Asset
      retirement obligation
                            
                            
                            73
                            
                            
                            
                            136Net
      Non-current Obligations
                            
                            
                            37,626
                            
                            
                            
                            37,130Total
      Liabilities
                            
                            
                            61,945
                            
                            
                            
                            78,842Common
      Stock Subscribed
                            
                            
                            —
                            
                            
                            
                            2,858Commitments
      and Contingencies (Note 12)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; 338,065,950 and
      278,948,841 shares issued and outstanding at June 30, 2008 and September
      30, 2007, respectively
                            
                            
                            338
                            
                            
                            
                            279Additional
      paid-in-capital
                            
                            
                            203,362
                            
                            
                            
                            172,672Accumulated
      other comprehensive gain (loss)
                            
                            
                            33
                            
                            
                            
                            (5
                            )Deficit
      accumulated during the development stage
                            
                            
                            (111,381
                            )
                            
                            
                            (72,622
                            )Total
      Stockholders’ Equity
                            
                            
                            92,352
                            
                            
                            
                            100,324Total
      Liabilities and Stockholders’ Equity
                            
                            $
                            154,297
                            
                            
                            $
                            182,024
 See
accompanying notes to consolidated financial statements.
  7
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Three
      months
                                      ended
                                      June
      30,
                                      2008
                                    
                                    
                                    Three
      months
                                      ended
                                      June
      30,
                                      2007
                                    
                                    
                                    Nine
      months
                                      ended
                                      June
      30,
                                      2008
                                    
                                    
                                    Nine
      months
                                      ended
                                      June
      30,
                                      2007
                                    
                                    
                                    Cumulative
                                      From
      Inception
                                      (June
      20, 2005) to
                                      June
      30, 2008(unaudited, restated, $
      in thousands except per share amounts)RevenuesOil
      and gas revenues
                                    
                                    $
                                    567
                                    
                                    
                                    $
                                    847
                                    
                                    
                                    $
                                    1,570
                                    
                                    
                                    $
                                    2,285
                                    
                                    
                                    $
                                    4,426Other
      revenues
                                    
                                    
                                    6
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    156
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    156Total
      revenues
                                    
                                    
                                    573
                                    
                                    
                                    
                                    847
                                    
                                    
                                    
                                    1,726
                                    
                                    
                                    
                                    2,285
                                    
                                    
                                    
                                    4,582Costs
      and ExpensesLease
      operating expenses
                                    
                                    
                                    164
                                    
                                    
                                    
                                    211
                                    
                                    
                                    
                                    404
                                    
                                    
                                    
                                    597
                                    
                                    
                                    
                                    1,201General
      and administrative
                                    
                                    
                                    2,511
                                    
                                    
                                    
                                    5,470
                                    
                                    
                                    
                                    7,298
                                    
                                    
                                    
                                    13,546
                                    
                                    
                                    
                                    40,246Project
      development — related party
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,815
                                    
                                    
                                    
                                    7,205Impairment
      of oil and gas properties
                                    
                                    
                                    —
                                    
                                    
                                    
                                    600
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    9,551
                                    
                                    
                                    
                                    24,053Depreciation,
      depletion, amortization and accretion
                                    
                                    
                                    337
                                    
                                    
                                    
                                    805
                                    
                                    
                                    
                                    820
                                    
                                    
                                    
                                    2,018
                                    
                                    
                                    
                                    2,138Total
      operating expenses
                                    
                                    
                                    3,012
                                    
                                    
                                    
                                    7,086
                                    
                                    
                                    
                                    8,522
                                    
                                    
                                    
                                    27,527
                                    
                                    
                                    
                                    74,843Loss
      from operations
                                    
                                    
                                    (2,439
                                    )
                                    
                                    
                                    (6,239
                                    )
                                    
                                    
                                    (6,796
                                    )
                                    
                                    
                                    (25,242
                                    )
                                    
                                    
                                    (70,261
                                    )Other
      Income (Expense):Loss
      from conveyance of property
                                    
                                    
                                    (8,593
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (20,468
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (20,468
                                    )Gain
      on foreign exchange
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    11
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    34Interest
      income
                                    
                                    
                                    6
                                    
                                    
                                    
                                    6
                                    
                                    
                                    
                                    33
                                    
                                    
                                    
                                    20
                                    
                                    
                                    
                                    71Interest
      expense
                                    
                                    
                                    (3,193
                                    )
                                    
                                    
                                    (846
                                    )
                                    
                                    
                                    (8,552
                                    )
                                    
                                    
                                    (2,677
                                    )
                                    
                                    
                                    (17,770
                                    )Loss
      on sale of securities
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (2,987
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (2,987
                                    )Total
      other expense
                                    
                                    
                                    (11,780
                                    )
                                    
                                    
                                    (840
                                    )
                                    
                                    
                                    (31,963
                                    )
                                    
                                    
                                    (2,657
                                    )
                                    
                                    
                                    (41,120
                                    )Net
      Loss
                                    
                                    $
                                    (14,219
                                    )
                                    
                                    $
                                    (7,079
                                    )
                                    
                                    $
                                    (38,759
                                    )
                                    
                                    $
                                    (27,899
                                    )
                                    
                                    $
                                    (111,381
                                    )Net
      loss per common share — basic and diluted
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (0.12
                                    )
                                    
                                    $
                                    (0.13
                                    )Weighted
      average number of common shares outstanding — basic and
      diluted
                                    
                                    
                                    324,147
                                    
                                    
                                    
                                    256,906
                                    
                                    
                                    
                                    317,811
                                    
                                    
                                    
                                    221,802
 
 See
accompanying notes to consolidated financial statements
 
  8
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF
 STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
 (unaudited,
$ in thousands except share and per share amounts)
 
 Common
      Stock
                              
                              
                              Additional
                                Paid-in
                              
                              
                              Deficit
                                Accumulated
                                During
      the
                                Development
                              
                              
                              Accumulated
                                Other
                                Compre-
                                hensive
                              
                              
                              Total
                                Stockholders’
                              
                              
                              Total
                                Compre-
                                hensiveShares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Stage
                              
                              
                              Loss
                              
                              
                              Equity
                              
                              
                              LossBalances,
      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
                              )Balances,
      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
                              )Balances,
      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
                              
                              
                              
                              —
    9
   Common
      Stock
                              
                              
                              Additional
                                Paid-in
                              
                              
                              Deficit
                                Accumulated
                                During
      the
                                Development
                              
                              
                              Accumulated
                                Other
                                Compre-
                                hensive
                              
                              
                              Total
                                Stockholders’
                              
                              
                              Total
                                Compre-
                                hensiveShares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Stage
                              
                              
                              Loss
                              
                              
                              Equity
                              
                              
                              LossShares
      issued for commission costs on property at $1.65 per share
                              
                              
                              121,250
                              
                              
                              
                              —
                              
                              
                              
                              200
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              200
                              
                              
                              
                              —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
                              )Balances,
      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 conversionat
      $0.23 per share – related party
                              
                              
                              16,000,000
                              
                              
                              
                              16
                              
                              
                              
                              3,664
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,680
                              
                              
                              
                              —Shares
      issued for property interest at $0.25 per share
                              
                              
                              5,000,000
                              
                              
                              
                              5
                              
                              
                              
                              1,245
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,250
                              
                              
                              
                              —Shares
      returned for property conveyance at prices ranging from $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
                              
                              
                              
                              —Shares
      issued for vendor settlements at $0.20 per share
      (restated)
                              
                              
                              16,879,219
                              
                              
                              
                              17
                              
                              
                              
                              3,359
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              3,376
                              
                              
                              
                              —Shares
      issued for finance costs at $0.20 per share (restated)
                              
                              
                              2,037,890
                              
                              
                              
                              2
                              
                              
                              
                              365
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              367
                              
                              
                              
                              —Shares
      issued for option to purchase CCES
                              
                              
                              400,000
                              
                              
                              
                              —
                              
                              
                              
                              80
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              80
                              
                              
                              
                              —Discounts
      associated with beneficial conversion feature and detachable warrants on
      convertible debenture issuance
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              6,956
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              6,956
                              
                              
                              
                              —Warrant
      value associated with amendment and waiver on convertible debt
      (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              332
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              332
                              
                              
                              
                              —Warrants
      in connection with debt offering (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              21
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              21
                              
                              
                              
                              —Warrant
      value associated with debt conversion – related party
      (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,841
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,841
                              
                              
                              
                              —Debt
      conversion – related party (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,704
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,704
                              
                              
                              
                              —Warrants
      issued as origination fees for debt offering
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,895
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,895
                              
                              
                              
                              —Discount
      on notes payable
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              336
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              336
                              
                              
                              
                              —Foreign
      currency translation adjustment
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              38
                              
                              
                              
                              38
                              
                              
                              
                              38Stock-based
      compensation, (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,513
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,513
                              
                              
                              
                              —Net
      loss (restated)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (38,759
                              )
                              
                              
                              —
                              
                              
                              
                              (38,759
                              )
                              
                              
                              (38,759
                              )Balances,
      June 30, 2008, restated
                              
                              
                              338,065,950
                              
                              
                              $
                              338
                              
                              
                              $
                              203,362
                              
                              
                              $
                              (111,381
                              )
                              
                              $
                              33
                              
                              
                              $
                              92,352
                              
                              
                              $
                              (38,721
                              )
 
 See
accompanying notes to consolidated financial statements.
 
  10
  PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Nine
      months
                                ended
                                June
      30,
                                2008
                              
                              
                              Nine
      months
                                ended
                                June
      30,
                                2007
                              
                              
                              Cumulative
      From
                                Inception
                                (June
      20, 2005)
                                to
      June 30,
                                2008(unaudited,
      restated, $ in thousands)Cash
      flows from operating activitiesNet
      loss
                              
                              $
                              (38,759
                              )
                              
                              $
                              (27,899
                              )
                              
                              $
                              (111,381
                              )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:Stock-based
      compensation
                              
                              
                              1,512
                              
                              
                              
                              7,305
                              
                              
                              
                              19,696Detachable
      warrants recorded as interest expense
                              
                              
                              495
                              
                              
                              
                              —
                              
                              
                              
                              495Depreciation,
      depletion, amortization and accretion
                              
                              
                              820
                              
                              
                              
                              2,268
                              
                              
                              
                              2,138Impairment
      of oil and gas properties
                              
                              
                              —
                              
                              
                              
                              4,400
                              
                              
                              
                              24,053Amortization
      of deferred financing costs
                              
                              
                              1,340
                              
                              
                              
                              1,338
                              
                              
                              
                              2,963Amortization
      of debt discount and beneficial conversion feature
                              
                              
                              1,783
                              
                              
                              
                              458
                              
                              
                              
                              2,819Loss
      on marketable securities
                              
                              
                              2,987
                              
                              
                              
                              —
                              
                              
                              
                              2,987Loss
      on conveyance of properties
                              
                              
                              20,468
                              
                              
                              
                              —
                              
                              
                              
                              20,468Other
      adjustments to reconcile net loss
                              
                              
                              45
                              
                              
                              
                              —
                              
                              
                              
                              122Changes
      in assets and liabilities:
                                Receivables
                              
                              
                              (381
                              )
                              
                              
                              (894
                              )
                              
                              
                              (927
                              )Due
      from related party
                              
                              
                              —
                              
                              
                              
                              848
                              
                              
                              
                              (500
                              )Prepaids
      and other
                              
                              
                              (349
                              )
                              
                              
                              (54
                              )
                              
                              
                              (394
                              )Accounts
      payable, accrued expenses, and other liabilities
                              
                              
                              (11,210
                              )
                              
                              
                              (2,508
                              )
                              
                              
                              (6,356
                              )Due
      to shareholder and related parties
                              
                              
                              (967
                              )
                              
                              
                              1,291
                              
                              
                              
                              507Net
      cash used in operating activities
                              
                              
                              (22,216
                              )
                              
                              
                              (13,447
                              )
                              
                              
                              (43,310
                              )Cash
      flows from investing activitiesAdditions
      to oil and gas properties
                              
                              
                              (14,838
                              )
                              
                              
                              (13,212
                              )
                              
                              
                              (80,503
                              )Proceeds
      from sale of oil and gas properties
                              
                              
                              26,922
                              
                              
                              
                              —
                              
                              
                              
                              26,922Sale
      of marketable securities, available for sale
                              
                              
                              2,541
                              
                              
                              
                              —
                              
                              
                              
                              2,541Due
      from joint interest owner
                              
                              
                              —
                              
                              
                              
                              (16,274
                              )
                              
                              
                              —Notes
      receivable – related party
                              
                              
                              —
                              
                              
                              
                              (2,244
                              )
                              
                              
                              (2,494
                              )Additions
      to furniture and equipment
                              
                              
                              (324
                              )
                              
                              
                              (260
                              )
                              
                              
                              (1,011
                              )Restricted
      cash
                              
                              
                              75
                              
                              
                              
                              475
                              
                              
                              
                              (1,002
                              )Net
      cash provided by (used in) investing activities
                              
                              
                              14,376
                              
                              
                              
                              (31,515
                              )
                              
                              
                              (55,547
                              )Cash
      flows from financing activitiesProceeds
      from the sale of common stock
                              
                              
                              —
                              
                              
                              
                              300
                              
                              
                              
                              35,742Proceeds
      from common stock subscribed
                              
                              
                              —
                              
                              
                              
                              2,768
                              
                              
                              
                              2,858Proceeds
      from the issuance of notes payable
                              
                              
                              8,250
                              
                              
                              
                              31,700
                              
                              
                              
                              39,800Borrowing
      on short-term notes payable
                              
                              
                              850
                              
                              
                              
                              —
                              
                              
                              
                              1,350Payments
      on short-term notes payable
                              
                              
                              (6,088
                              )
                              
                              
                              —
                              
                              
                              
                              (6,088
                              )Payments
      on related party borrowing
                              
                              
                              (2,097
                              )
                              
                              
                              (600
                              )
                              
                              
                              (2,097
                              )Proceeds
      from related party borrowing
                              
                              
                              1,170
                              
                              
                              
                              —
                              
                              
                              
                              1,445Proceeds
      from the exercise of warrants
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,000Cash
      received upon recapitalization and merger
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              21Proceeds
      from issuance of convertible notes
                              
                              
                              6,330
                              
                              
                              
                              —
                              
                              
                              
                              27,162Offering
      and financing costs
                              
                              
                              —
                              
                              
                              
                              180
                              
                              
                              
                              (1,638
                              )Net
      cash provided by financing activities
                              
                              
                              8,415
                              
                              
                              
                              34,348
                              
                              
                              
                              99,555Effect
      of exchange rate changes on cash
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (3
                              )Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              575
                              
                              
                              
                              (10,614
                              )
                              
                              
                              695Cash
      and cash equivalents, beginning of period
                              
                              
                              120
                              
                              
                              
                              10,632
                              
                              
                              
                              —Cash
      and cash equivalents, end of period
                              
                              $
                              695
                              
                              
                              $
                              18
                              
                              
                              $
                              695Supplemental
      schedule of cash flow informationCash
      paid for interest
                              
                              $
                              2,227
                              
                              
                              $
                              1
                              
                              
                              $
                              3,744Cash
      paid for income taxes
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              —
 See
accompanying notes to consolidated financial statements.
  11
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
  Note
1 — Organization and Basis of Presentation
 
 We are a
development stage global oil and gas exploration and production company
committed to acquiring and developing primarily unconventional natural gas and
oil prospects that we believe have a high probability of economic success.
Since our inception in 2005, our principal business activities have been raising
capital through the sale of common stock and convertible notes and acquiring oil
and gas properties in the western United States and
Australia.  Currently, we own property in Colorado, where we have
drilled five wells on our Buckskin Mesa property, and Australia, where we have
drilled one well on our property in the Northern Territory, and in Montana,
where we hold a land position in the Bear Creek area.  The wells on
these properties have not yet commenced oil and gas production. We own working
interests in eight additional wells in Colorado which are operated by EnCana Oil
& Gas USA (“EnCana”) and are currently producing gas.  In November
2007, we sold 66,000 net acres of land and two wells in Montana and 177,445
acres of land in Utah (see “Heavy Oil” in Note 5 ) and on May 30, 2008, we
sold 605 net acres, 16 wells which had been drilled but not completed or
connected to a pipeline and rights to participate in an additional 8 wells in
the Southern Piceance Basin in Colorado (see Note 13 ).
 
 Our
predecessor, Digital Ecosystems Corp. (“Digital”), was incorporated on February
21, 2002 under the laws of the state of Nevada.  On February 10, 2006,
Digital entered into a Share Exchange Agreement (the “Exchange Agreement”) with
GSL Energy Corporation (“GSL”) and certain shareholders of GSL pursuant to which
Digital acquired more than 85% of the issued and outstanding shares of common
stock of GSL in exchange for shares of Digital’s common stock.  The
Exchange Agreement was completed on May 12, 2006.  At that time, GSL’s
business, which was formed in 2005 for the purpose of acquiring, exploring,
developing and operating oil and gas properties, became Digital’s business and
GSL became a subsidiary of Digital. Since this transaction resulted in the
former shareholders of GSL acquiring control of Digital, for financial reporting
purposes, the business combination was accounted for as an additional
capitalization of Digital (a reverse acquisition with GSL as the accounting
acquirer).  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;
    andii.
                control
      of the net assets and business of Digital was effective May 12, 2006 for
      no consideration.
  Subsequent
to the closing of the Exchange Agreement, Digital acquired all the remaining
outstanding stock of GSL, and effective August 14, 2006, Digital changed its
name to PetroHunter Energy Corporation (“PetroHunter”).  Likewise, in
October 2006, GSL changed its name to PetroHunter Operating
Company.
 
 PetroHunter
is considered a development stage company as defined by Statement of Financial
Accounting Standards (“SFAS”) 7, Accounting and Reporting by
Development Stage Enterprises,as we have not yet commenced our planned
principal operations. A
development stage enterprise is one in which planned principal operations have
not commenced, or if its operations have commenced, there have been no
significant revenue therefrom.
 
 Unless
otherwise noted in this report, any description of “us” or “we” refers to
PetroHunter Energy Corporation and our subsidiaries. Financial information in
this report is presented in U.S. dollars.
 
  12
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
  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.
  The
following errors affected our Original Report for the three and nine month
periods ended June 30, 2008:
  1.
              Detachable Warrants with
      Convertible Debentures – We corrected an error during our first
      quarter ended December 31, 2007 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 value of 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.  In our Original Report for the quarter ended
      June 30, 2008, we disclosed in Notes 7 and 14 that we had corrected the
      cumulative effect of the error.  In our restatement, we recorded
      further adjustments during the third quarter ended June 30, 2008 to give
      proper effect to the correction of the original error in its proper period
      during the quarter ended December 31, 2007, thereby reversing the
      correction recorded in our Original Report for the period ended June 30,
      2008.
  2.
              Detachable Warrants with
      Global Debt Facility – We corrected errors in our accounting for
      detachable warrants issued in relation to our Global Credit Facility
      during our first quarter ended December 31, 2007.  First, 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.  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.  In our
      Original Report for the quarter ended June 30, 2008, we disclosed in Notes
      7 and 14 that we had corrected the cumulative effect of the
      error.  In our restatement, we recorded further adjustments
      during the third quarter ended June 30, 2008 to give proper effect to the
      correction of the original error in its proper period during the quarter
      ended December 31, 2007.
  3.
              Heavy Oil Asset Sale –
      We corrected several errors in our accounting for the sale of our Heavy
      Oil Projects during our first quarter ended December 31,
      2007.  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 marketable
      securities, available for sale and recorded an unrealized loss in our
      statement of operations, versus reflecting the $1.5 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.  We recorded further
      corrections during the third quarter ended June 30, 2008 to give proper
      effect to our oil and gas property accounts and our accumulated deficit in
      relation to the loss on
  conveyance.  4.
                Loss on Conveyance – As
      a result of adjustments to our oil and gas property accounts we recorded
      in our first quarter ended December 31, 2007 and in our second quarter
      ended March 31, 2008, we recalculated
 13
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
 
 our
      loss on conveyance during the third quarter ended June 30, 2008 in
      relation to the sale of our Piceance II Prospect Assets to Laramie Energy
      II, LLC.  In our Original Report, we recorded a loss on
      conveyance of $15.2 million in relation to this transaction.  We
      reduced this loss to $8.6 million as a result of the cumulative effect of
      our restatement adjustments, that we recorded in the first two quarters,
      including the loss on conveyance we recorded in relation to our Heavy Oil
      Asset sale noted above.
  5.
              Contingent Purchase Obligation
      – During our first quarter ended December 31, 2007, 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 fair value of this
      guarantee.  We recorded further corrections during the third
      quarter ended June 30, 2008 to properly reflect the value the guarantee as
      of that date.
  6.
              Interest Expense –
      During our third quarter ended June 30, 2008, we corrected two $0.3
      million, offsetting errors in our accounting for interest expense,
      resulting from errors in overstating our accrued interest and deferred
      financing cost accounts.
  7.
              Maralex Transaction –During the first quarter ended December 31, 2007, 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.  We
      recorded further corrections to our oil and gas property accounts and
      additional paid in capital during the third quarter ended June 30, 2008 to
      give proper effect to the correction of this error on our balance
      sheet.
 
 8.
              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 during our year ending September 30, 2008
      and the proper classification of certain of our debt
      obligations.
 
  14
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
 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 June 30, 2008 (in
thousands):
 June
      30, 2008As
      previously reported
                                      
                                      
                                      Net
      Adjustments
                                      
                                      
                                      As
      restatedCurrent
      AssetsCash
      and cash equivalents
                                      
                                      $
                                      695
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      695Receivables
                                      
                                      
                                      827
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      927Other
      current assets
                                      
                                      
                                      937
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      937Total
      Current Assets
                                      
                                      
                                      2,459
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      2,559Property
      and Equipment, at cost and Other AssetsOil
      and gas properties under full cost method, net
                                      
                                      
                                      146,184
                                      
                                      
                                      
                                      (1,102
                                      )
                                      
                                      
                                      145,082Intangible
      asset
                                      
                                      
                                      4,142
                                      
                                      
                                      
                                      (610
                                      )
                                      
                                      
                                      3,532Deferred
      financing costs
                                      
                                      
                                      1,657
                                      
                                      
                                      
                                      21
                                      
                                      
                                      
                                      1,678Other
      assets
                                      
                                      
                                      1,076
                                      
                                      
                                      
                                      370
                                      
                                      
                                      
                                      1,446Total
      Assets
                                      
                                      $
                                      155,518
                                      
                                      
                                      $
                                      (1,221
                                      )
                                      
                                      $
                                      154,297Current
      LiabilitiesAccounts
      payable and accrued expenses
                                      
                                      $
                                      9,873
                                      
                                      
                                      $
                                      299
                                      
                                      
                                      $
                                      10,172Due
      to shareholders and related parties
                                      
                                      
                                      440
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      440Notes
      and interest payable
                                      
                                      
                                      7,877
                                      
                                      
                                      
                                      (342
                                      )
                                      
                                      
                                      7,535Notes
      and interest payable, related parties
                                      
                                      
                                      2,640
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,640Contingent
      purchase obligation
                                      
                                      
                                      4,142
                                      
                                      
                                      
                                      (610
                                      )
                                      
                                      
                                      3,532Total
      Current Liabilities
                                      
                                      
                                      24,972
                                      
                                      
                                      
                                      (653
                                      )
                                      
                                      
                                      24,319Non-Current
      ObligationsNotes
      payable, net
                                      
                                      
                                      37,207
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      37,207Convertible
      notes payable, net
                                      
                                      
                                      684
                                      
                                      
                                      
                                      (444
                                      )
                                      
                                      
                                      240Subordinated
      notes payable, related parties
                                      
                                      
                                      106
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      106Asset
      retirement obligation
                                      
                                      
                                      73
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      73Net
      Non-Current Obligations
                                      
                                      
                                      38,070
                                      
                                      
                                      
                                      (444
                                      )
                                      
                                      
                                      37,626Total
      Liabilities
                                      
                                      
                                      63,042
                                      
                                      
                                      
                                      (1,097
                                      )
                                      
                                      
                                      61,945Stockholders'
      EquityCommon
      stock
                                      
                                      
                                      338
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      338Additional
      paid-in-capital
                                      
                                      
                                      199,968
                                      
                                      
                                      
                                      3,394
                                      
                                      
                                      
                                      203,362Accumulated
      other comprehensive gain
                                      
                                      
                                      33
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      33Deficit
      accumulated during the development stage
                                      
                                      
                                      (107,863
                                      )
                                      
                                      
                                      (3,518
                                      )
                                      
                                      
                                      (111,381
                                      )Total
      Stockholders' Equity
                                      
                                      
                                      92,476
                                      
                                      
                                      
                                      (124
                                      )
                                      
                                      
                                      92,352Total
      Liabilities and Stockholders' Equity
                                      
                                      $
                                      155,518
                                      
                                      
                                      $
                                      (1,221
                                      )
                                      
                                      $
                                      154,297




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 and nine month periods
ended June 30, 2008 (in thousands, except share data):





For
      the three months ended June 30, 2008
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            For
      the nine months ended June 30, 2008As
      previously reported
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            Net
      Adjustments
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            As
      restated
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            As
      previously reported
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            Net
      Adjustments
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            As
      restatedTotal Revenue
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            580
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (7
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            573
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,571
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            155
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,726Costs
      and Expenses:General
      and administrative
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,554
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (43
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2,511
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            8,245
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (947
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            7,298Other
      operating expenses
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            498
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            3
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            501
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,178
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            46
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,224Total
      Operating Expenses
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            3,052
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (40
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            3,012
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            9,423
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (901
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            8,522Loss
      From Operations
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (2,472
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            33
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (2,439
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (7,852
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,056
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (6,796
                                                                                                                                                            )Other
      Income (Expense):Loss
      on conveyance of properties
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (15,220
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            6,627
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (8,593
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (15,220
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (5,248
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (20,468
                                                                                                                                                            )Interest
      expense
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (1,801
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (1,392
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (3,193
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (9,226
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            674
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (8,552
                                                                                                                                                            )Loss
      on marketable securities
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (2,987
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (2,987
                                                                                                                                                            )Other,
      net
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            6
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            6
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            44
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            44Total
      Other Expense
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (17,015
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            5,235
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (11,780
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (27,389
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (4,574
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (31,963
                                                                                                                                                            )NET
      LOSS
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (19,487
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            5,268
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (14,219
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (35,241
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (3,518
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (38,759
                                                                                                                                                            )Net
      Loss Per share
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.06
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            0.02
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.04
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.11
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.01
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            (0.12
                                                                                                                                                            )Weighted
      Average Number of Shares Outstanding - Basic and
    Diluted
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            324,147
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            324,147
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            317,811
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            317,811




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 nine months ended June 30, 2008 (in
thousands):




For
      the nine months ended June 30, 2008As
      previously reported
                                                                    
                                                                    
                                                                    Net
      Adjustsments
                                                                    
                                                                    
                                                                    As
      restatedNet
      cash used in operating activities
                                                                    
                                                                    $
                                                                    (16,887
                                                                    )
                                                                    
                                                                    $
                                                                    (5,329
                                                                    )
                                                                    
                                                                    $
                                                                    (22,216
                                                                    )Net
      cash provided by investing activities
                                                                    
                                                                    
                                                                    9,430
                                                                    
                                                                    
                                                                    
                                                                    4,946
                                                                    
                                                                    
                                                                    
                                                                    14,376Net
      cash provided by financing activities
                                                                    
                                                                    
                                                                    8,067
                                                                    
                                                                    
                                                                    
                                                                    348
                                                                    
                                                                    
                                                                    
                                                                    8,415Effect
      of exchange rate changes on cash
                                                                    
                                                                    
                                                                    (35
                                                                    )
                                                                    
                                                                    
                                                                    35
                                                                    
                                                                    
                                                                    
                                                                    -Increase
      in cash and cash equivalents
                                                                    
                                                                    
                                                                    575
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    575Cash
      and cash equivalents beginning of year
                                                                    
                                                                    
                                                                    120
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    120Cash
      and cash equivalents end of period
                                                                    
                                                                    $
                                                                    695
                                                                    
                                                                    
                                                                    $
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    695





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, we have incurred a
cumulative loss in the amount of $111.4 million for the period from
inception (June 20, 2005) to June 30, 2008, have a working capital deficit of
approximately $21.8 million as of June 30, 2008, and were not in
compliance with the covenants of several loan agreements. As of June 30, 2008,
we have earned oil and gas revenue from our initial operating wells, but will
require significant additional funding to sustain operations and satisfy
contractual obligations for planned oil and gas exploration, development and
operations in the future. These factors, among others, may indicate that we may
be unable to continue in existence. Our financial statements do not include
adjustments related to the realization of the carrying value of assets or the
amounts and classification of liabilities that might be necessary should we be
unable to continue in existence. Our ability to establish ourselves as a going
concern is dependent upon our ability to obtain additional financing to fund
planned operations and to ultimately achieve profitable operations. Management
believes that we can be successful in 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. We have raised
approximately $107.7 million through June 30, 2008 through issuances of
common stock and convertible and other debt.





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





The
accompanying financial statements should be read in conjunction with our
Registration Statement on Form S-1 filed June 30, 2008 and our Annual Report on
Form 10-K for the year ended September 30, 2007. 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
our consolidated financial position at June 30, 2008 and the consolidated
results of our operations and cash flows for the three and nine month periods
ending June 30, 2008 and 2007. The results of operations for the three and
nine-month periods ending June 30, 2008 are not necessarily indicative of the
results that may be expected for the full fiscal year ending September 30, 2008
or for any other interim period in the September 2008 fiscal
year.  Further, the accompanying balance sheet as of September 30,
2007 was derived from audited financial statements.





Use of Estimates.Preparation
of our 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 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 estimates are also
required to determine future abandonment obligations, the value of undeveloped
properties for impairment analysis and the value of deferred tax
assets.





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.




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




Marketable Securities, Available for
Sale.In November 2007, we sold our Heavy Oil assets (see Note 5, Oil and Gas Properties). As
partial consideration, we accepted a total of 1,539,975 shares of common stock
of the purchaser, Pearl Exploration and Production Ltd. These shares were sold
subsequent to a holding period, and were classified as held for sale in the
short term at December 31, 2007. During the intervening period from closing
through the date of sale in March 2008, we accounted for them by marking them to
market with unrealized losses reflected as a component of other comprehensive
income, until realized.  During the second quarter ended March 31,
2008, we recognized a $3.0 million loss on sales of these 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 of 2008, we entered into a transaction
whereby we increased our interest in 14 wells to 100% (see Note 5 , Oil and Gas Properties) and
we therefore reclassified $12.6 million of costs related to those wells from
Joint interest billingsto Oil and Gas
Properties.In May 2008, we sold the remaining wells for which we had
joint billing arrangements as part of the Laramie transaction, as described
further in Note 13 .





Oil and Gas Properties.We
utilize the full cost method of accounting for our 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
by-country basis. No gain or loss is recognized upon the sale or abandonment of
undeveloped or producing oil and gas properties unless the sale represents a
significant portion of oil and gas properties and the gain or loss 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.




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 (“SFAS 143”). 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 and repurchase certain gas gathering assets we sold to
CCES.  We have accounted for this guarantee using Financial Accounting
Standards Board (“FASB”) Interpretation No. 45 as amended, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others(“FIN 45”),which requires us to
recognize a liability for the obligations undertaken upon issuing the guarantee
in order to have a more representationally faithful depiction of the guarantor’s
assets and liabilities.  Accordingly, we have recognized a $3.5
million contingent purchase obligation on our balance sheet.  See
further explanation at Note 14 .





Impairment.We use the full
cost method of accounting for our oil and gas properties and as such, these
properties are subject to SEC Regulation S-X Rule 4-10, Financial Accounting and Reporting
for Oil and Gas Producing Activities Pursuant to the Federal Securities
Laws and the Energy Policy and Conversion Act of 1975(“Rule 4-10”).
Rule 4-10 requires that each regional cost center’s (by country) capitalized
cost, less accumulated amortization and related deferred income taxes not exceed
a cost center “ceiling.” The ceiling is defined as the sum of:




•
              the
      present value of estimated future net revenues computed by applying
      current prices of oil and gas reserves to estimated future production of
      proved oil and gas reserves as of the balance sheet date less  18
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
  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 and nine month periods ended June 30, 2007, we recorded impairment
charges of $0.6 million and $9.6 million. We did not impair any of our
properties in the three and nine months ended June 30, 2008.





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 us for loans with similar
terms and average maturities, the fair value of payable notes approximates their
carrying value.





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




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.
 
 The
Company has adopted the provisions of SFAS 109, Accounting for Income Taxes.
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
 
 Temporary
differences between the time of reporting certain items for financial and tax
reporting purposes consist primarily of exploration and development costs on oil
and gas properties, and stock based compensation of options
granted.




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 excluding potential common shares from; stock options, warrants and
convertible debt of 175,456 and 61,553 respectively for the periods ended
June 30, 2008 and 2007.





Recently Issued Accounting
Pronouncements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS 159”),
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






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


similar
assets and liabilities. SFAS 159 will be effective for us on October 1, 2008. We
have not yet assessed the impact of SFAS 159 on our consolidated results of
operations, cash flows or financial position.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(“SFAS 157”), 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 will be effective for us on October 1, 2008. We have
not yet assessed the impact of SFAS 157 on our consolidated results of
operations, cash flows or financial position.


Supplemental Cash Flow Information.Supplement cash flow information for the nine months ended June 30, 2008
and 2007, respectively, and cumulative from inception (June 2005) is as
follows:




Nine
      Months Ended
                          June
      30, 2008
                        
                        
                        Nine
      Months Ended
                          June,
      30 2007
                        
                        
                        Cumulative From
      Inception
                          (June
      20, 2005) to
                          June
      30, 2008(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 commissions on offerings
                        
                        $
                        56
                        
                        
                        $
                        200
                        
                        
                        $
                        2,956Shares
      issued for property
                        
                        $
                        9,000
                        
                        
                        $
                        81,275
                        
                        
                        $
                        90,000Shares
      returned on property conveyance
                        
                        $
                        (1,408
                        )
                        
                        $
                        —
                        
                        
                        $
                        (1,408
                        )Shares
      issued for vendor settlements
                        
                        $
                        3,376
                        
                        
                        $
                        —
                        
                        
                        $
                        3,376Shares
      issued for property and finder’s fee on property
                        
                        $
                        367
                        
                        
                        $
                        —
                        
                        
                        $
                        10,011Non-cash
      uses of notes payable, accounts payable and accrued
      liabilities
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        26,313Convertible
      debt issued for property
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        1,200Common
      stock issuable
                        
                        $
                        —
                        
                        
                        $
                        4,510
                        
                        
                        $
                        —Discount
      associated with beneficial conversion feature and detachable
      warrants
                        
                        $
                        6,956
                        
                        
                        $
                        —
                        
                        
                        $
                        6,956Common
      stock subscription converted to notes and convertible
      debentures
                        
                        $
                        2,858
                        
                        
                        $
                        —
                        
                        
                        $
                        2,858Marketable
      securities received from sale of oil and gas
properties
                        
                        $
                        5,529
                        
                        
                        $
                        —
                        
                        
                        $
                        5,529Acquisition
      of oil and gas properties by exchange of joint interest billing, oil and
      gas receivables and accounts payable
                        
                        $
                        12,707
                        
                        
                        $
                        —
                        
                        
                        $
                        12,707Warrants
      issued for debt
                        
                        $
                        4,093
                        
                        
                        $
                        3,952
                        
                        
                        $
                        8,763





Note
4 — Agreements with MAB Resources LLC





We were a
party to various agreements (the “MAB Agreements”) with MAB Resources LLC
(“MAB”), a company that is controlled by our largest beneficial shareholder,
Marc A. Bruner.  All the MAB Agreements described below were terminated as
of June 30, 2008.  The following is a summary of those prior MAB
Agreements.




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




20
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )


·
              MAB
      assign to us a 50% undivided interest in any and all oil and gas leases,
      production facilities and related assets (collectively, the “Properties”)
      that MAB was to acquire from third parties in the
  future,
 ·
              we
      would be operator of the jointly owned properties, with MAB Operating
      Company LLC as sub-operator, and each party would pay its proportionate
      share of costs and receive its proportionate share of revenues, subject to
      certain adjustments, including our burden to carry MAB for specified
      costs, pay advances, and
 ·
              to
      make an overriding royalty payment of 3% (gross, or 1.5% net) to MAB out
      of production and sales.
 
 A more
thorough description of the Development Agreement is included in Item 8 of our
Annual Report on Form 10-K, Financial Statements and
Supplementary Data - Note 4.





The Consulting Agreement.Effective January 1, 2007, we and MAB began operating under an
Acquisition and Consulting Agreement (the “Consulting Agreement”) which replaced
in its entirety the Development Agreement described above.  Upon
execution of the Consulting Agreement, MAB conveyed its entire remaining working
interest in the Properties to us in consideration for a $13.5 million promissory
note, 50 million shares of PetroHunter Energy Corporation and an additional 50
million shares (the “Performance Shares”) provided we met certain thresholds
based on proven reserves.  Furthermore, MAB would
receive:





·
            7%
      of the issued and outstanding shares of any new subsidiary with assets
      comprised of the subject properties


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


·
            $25,000
      per month for consulting services (which was later rescinded by Amendment
      1 to the Consulting Agreement, effective retroactively to January 1,
      2007).





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





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).





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





·
            MAB
      relinquished portions of its overriding royalty interest effective October
      1, 2007 such that the override currently only applies to our Australian
      properties and Buckskin Mesa
property;


·
            MAB
      received 25.0 million additional shares of our common
    stock;


·
            MAB
      relinquished all rights to the Performance Shares described
      above;


·
            MAB’s
      consulting services were terminated effective retroactively back to
      January 1, 2007;


·
            MAB
      waived all past due amounts and all claims against PetroHunter;
      and


·
            the
      note payable to MAB was reduced in accordance with and in exchange for the
      following:


o
            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 $0.7 million;


o
            by
      $2.9 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 11 );


o
            a
      reduction to the note payable to MAB of $0.5 million for cash payments
      made during the first quarter of 2008;
and




21
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )




o
              by
      $0.2 million for MAB assuming certain costs that Paleo Technology owed to
      us.
 
 The net
effect of the reduction of debt and issuance of our common shares resulted in a
net benefit to us of $2.7 million and has been reflected as additional
paid-in-capital during the six months ended March 31, 2008. Monthly payments on
the revised promissory note in the amount of $2.0 million commenced February 1,
2008 and are due in full in two years.
 
 Effective
June 30, 2008, MAB sold all its interest in the above-mentioned overriding
royalty (in our Buckskin Mesa and Australian properties) to a third
party.


Note
5 — Oil and Gas Properties





Oil
      and gas prope rties consisted of the following:
                      
                      June
      30,
                        2008
                        (restated)
                      
                      
                      September
      30,
                        2007Oil
      and gas properties, at cost, full cost method
                      
                      ($
      in thousands)UnprovedUnited
      States
                      
                      $
                      80,221
                      
                      
                      $
                      107,239Australia
                      
                      
                      24,787
                      
                      
                      
                      23,569Proved
      – United States
                      
                      
                      41,772
                      
                      
                      
                      57,168Total
                      
                      
                      146,780
                      
                      
                      
                      187,976Less
      accumulated  depreciation, depletion, amortization
      and impairment
                      
                      
                      (1,698
                      )
                      
                      
                      (25,133
                      )Total
                      
                      $
                      145,082
                      
                      
                      $
                      162,843





Included
in oil and gas properties above is capitalized interest of $0.0 million and $0.8
million for three months ended June 30, 2008 and 2007,
respectively.  In the nine months ended June 30, 2008 and 2007, oil
and gas properties included capitalized interest of $0.2 million and $1.1
million, respectively.





Included
below is a summary of significant activity related to oil and gas properties
during the three and nine month periods ended June 30, 2008.





PICEANCE
BASIN





Buckskin Mesa Project. As of
June 30, 2008, we had drilled five wells, with two wells having been
completed and shut-in, awaiting installation of the gathering system, and the
remaining 3 wells awaiting completion. We are required to drill 16 wells during
the calendar year ending December 31, 2008, three during the first quarter and
four during each of the second and third calendar quarters of 2008 and five
during the fourth calendar quarter of 2008, under the terms of an agreement
between us and a third party assignor, Daniels Petroleum Company (“DPC”). If we
do not satisfy these quarterly drilling requirements, our agreement with DPC
requires that we pay DPC $0.5 million for each undrilled well on the last day of
the applicable quarter.  At the end of the first calendar quarter of
2008, we extended and subsequently exercised our right to pay $0.5 million in
penalties for three wells that were required to be drilled that quarter by
agreeing to pay the $1.5 million fee, plus a $1.0 million additional penalty.
These amounts were paid on April 28, 2008, thereby reducing the total
number of wells we are committed to drill for the remainder of calendar year
2008 to 13. Prior to June 30, 2008 (the due date for commencing the next
four wells), we determined that we could not obtain the materials necessary to
commence such operations by June 30, and we provided written notice of such
force majeure condition to DPC.  We were otherwise prepared to comply with
all obligations regarding the referenced commitment.  DPC objected to the
notice. On June 30, 2008, we filed an action in Denver District Court requesting
the court to issue a declaratory judgment concerning this dispute. See Note 12
for further discussion of this case. As of June 30, 2008, we had not recorded a
loss with respect to this case as we believe we are in full compliance with our
contractual obligations.









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


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 7 ).


AUSTRALIA





Beetaloo Project.We own four
exploration licenses comprising 7.0 million net acres in the Beetaloo Basin
(owned by our wholly-owned subsidiary, Sweetpea Petroleum Pty Ltd.,
[“Sweetpea”]).  In July 2007, we drilled and cased one well to a depth
of 4,724 feet, with the intention to deepen the well at a later
date.





We have 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 original assignor of the
licenses, and to MAB, respectively, leaving a net revenue interest of 75% to 76%
to us.  We have received an extension on our drilling commitments
related to this property and are currently committed to drill 8 wells in 2009 at
a total estimated cost of $36 million. We are not currently committed to
drilling any wells on this property in 2008.





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 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, we entered into a purchase and sale agreement (the “Galaxy
PSA”) with Galaxy Energy Corporation (“Galaxy”) and its wholly-owned subsidiary,
Dolphin Energy Corporation (“Dolphin”), both of which are related parties to us.
Pursuant to the Galaxy PSA, we agreed to purchase all of Galaxy’s and Dolphin’s
oil and gas interests in the Powder River Basin of Wyoming and Montana (the
“Powder River Basin Assets”), and to assume operations as contract operator,
pending the purchase.





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 repaid the
balance in November 2007 by offsetting it against amounts owed by us to MAB
under the MAB Note (see Notes 3 and 7).





MONTANA COALBED
METHANE





Bear Creek Project.We have
retained 15,991 acres of the original 25,278 acres of leasehold acquired
through an assignment from MAB. The remaining 11,373 acres of leasehold have
expired. The acres retained have been reflected in unproved oil and gas
properties and are subject to further evaluation. The acres released have been
reflected in unproved properties but included in evaluated costs subject to
amortization and in the full cost ceiling test at the lower of cost or market
value.




23
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
 
 HEAVY
OIL
 
 Sale of Heavy Oil Projects.On November 6, 2007 and effective October 1, 2007, we sold a
majority of our interest in our Heavy Oil Projects, including the West
Rozel, Fiddler Creek and Promised Land Projects in Utah and Montana, to Pearl
Exploration and Production Ltd. (“Pearl”). We recognized a loss related to
this transaction of $11.9 million during the quarter 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 up to 2.5
million shares of Pearl equivalent to $10 million (based on a price of $4.00
Canadian dollars per share, as stipulated in the purchase and sale contract),
and (c) a performance payment (the “Pearl Performance Payment”) of $12.5 million
in cash at such time as either: (i) production from the assets reaches 5,000
barrels per day or (ii) proven reserves from the assets is greater than 50.0
million barrels of oil as certified by a third party reserve engineer. In the
event that these targets have not been achieved by September 30, 2010, the Pearl
Performance Payment obligation will expire.  As of June 30, 2008, no amounts
have been accrued in relation to the Pearl Performance Payment as the
triggering events have not yet occurred.  In addition, the number of
shares included in (b) above may be reduced by 960,025 shares (valued in the
contract at $3.8 million based on a price of $4.00 per share, as above) if a
satisfactory agreement is not made between Pearl and the lessor (“ECA”) of
certain of the properties within 6 months of the date of closing (that being May
6, 2008).  No such satisfactory agreement was reached between Pearl
and ECA and therefore, the total amount conveyed in (b) above was 1,539,975
shares.





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 properties in Utah and Montana, 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,
Inc. (“Savannah”), in consideration for: (a) 5 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 — Asset Retirement Obligation





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





Our
estimated asset retirement obligation liability is based on estimated economic
lives, estimates as to the cost to abandon the wells in the future, and federal
and state regulatory requirements. The liability is discounted using a
credit-adjusted risk-free rate estimated at the time the liability is incurred
or revised. The credit-adjusted risk-free rates used to discount our 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 our asset retirement obligation liability is as
follows:





June
      30,
                      2008
                    
                    
                    September
      30,
                      2007($
      in thousands)Beginning
      asset retirement obligation
                    
                    $
                    136
                    
                    
                    $
                    522Liabilities
      incurred
                    
                    
                    1
                    
                    
                    
                    30Liabilities
      settled
                    
                    
                    (35
                    )
                    
                    
                    —Revisions
      to estimates
                    
                    
                    (27
                    )
                    
                    
                    (429
                    )Accretion
      expense
                    
                    
                    (2
                    )
                    
                    
                    13Ending
      asset retirement obligation
                    
                    $
                    73
                    
                    
                    $
                    136




24
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )


Note
7 — 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. We initially recorded the $2.9
million obligation as a contract payable - oil and gasproperties, and $4.1
million as stockholders’ equity (equal to 2.4 million shares at the $1.70
closing price of our common stock on the date of the
closing).




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




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





Note
8 — Notes Payable




Notes
payable are summarized below:


June 30, 2008
                      (restated)
                    
                    
                    September 30, 2007($
      in thousands)Notes
      payable – short-term:Global
      Project Finance AG
                    
                    $
                    850
                    
                    
                    $
                    500Vendor
                    
                    
                    —
                    
                    
                    
                    4,050Flatiron
      Capital Corp.
                    
                    
                    205
                    
                    
                    
                    117Notes
      payable – short-term
                    
                    $
                    1,055
                    
                    
                    $
                    4,667Convertible
      notes payable
                    
                    $
                    400
                    
                    
                    $
                    400Notes
      payable – related party – current portion:Bruner
      Family Trust
                    
                    $
                    2,622
                    
                    
                    $
                    —MAB-
      current portion
                    
                    
                    —
                    
                    
                    
                    3,755Notes
      payable – related party – current portion
                    
                    $
                    2,622
                    
                    
                    $
                    3,755Subordinated
      notes payable — related party:Bruner
      Family Trust
                    
                    $
                    106
                    
                    
                    $
                    275MAB
                    
                    
                    —
                    
                    
                    
                    8,775Subordinated
      notes payable — related party
                    
                    $
                    106
                    
                    
                    $
                    9,050Long-term
      notes payable — net of discount:Global
      Project Finance AG
                    
                    $
                    39,800
                    
                    
                    $
                    31,550Vendor
                    
                    
                    149
                    
                    
                    
                    250Less
      current portion
                    
                    
                    (120
                    )
                    
                    
                    (120
                    )Discount
      on notes payable
                    
                    
                    (2,622
                    )
                    
                    
                    (3,736
                    )Long-term
      notes payable — net of discount
                    
                    $
                    37,207
                    
                    
                    $
                    27,944Convertible
      debt:Convertible
      debt
                    
                    $
                    6,956
                    
                    
                    $
                    —Discount
      on convertible debt
                    
                    
                    (6,716
                    )
                    
                    
                    —Convertible
      debt — net of discount
                    
                    $
                    240
                    
                    
                    $
                    —




25
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )




RECENT DEBT
ACTIVITY




LaramieTransaction.  On
May 30, 2008, we sold substantially all of our working interest in our Southern
Piceance properties in Colorado (see Notes 4, 11 and 12).  In
conjunction with this sale, we entered into numerous settlement and release
agreements with many of our trade creditors, some of whom had previously entered
into promissory notes with us.  Specifically, with respect to
settlements on notes previously outstanding:





(i) On
June 19, 2007, we 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 bore interest at 14% per annum
if paid current. Upon our default on the note, the interest rate increased to
21% per annum.  In conjunction with the Laramie transaction, we paid
$6.3 million in cash and issued 10 million shares of our common stock to this
vendor in full satisfaction of all amounts owed by us to this vendor
including the note as well as other amounts owed.





(ii)In October 2007, we
entered into another promissory note with a vendor for outstanding account
payable balances. The note bore interest at 8.25% per annum, which increased to
10.25% upon default and was due to mature February 29, 2008.  In
conjunction with the Laramie transaction, we paid $0.2 million to this vendor in
full satisfaction of all amounts owed by us to this vendor.





Both of
the notes described above were classified as Vendor notes in the table
above.





Vendor.On January
29, 2008 an unsecured promissory note with a vendor was entered into for past
due invoices aggregating $0.1 million. The note bore interest at an annual rate
of 8%. On April 8, 2008, we satisfied this note with full payment of principal
and interest.





Global Project Finance AG.On
September 25, 2007, we borrowed $0.5 million from Global Project Finance, AG
(“Global”) under an unsecured note bearing interest at a rate of 7.75% per
annum. We repaid this note in full on November 9, 2007 before it became
due.





Flatiron Capital Corp.On
June 6, 2007, we entered into a promissory note with Flatiron Capital for the
financing of certain insurance policies in the amount of $0.2 million. The note
bore interest at a rate of 7.25% per annum. Payments were due in 10 equal
installments of $17,000, commencing on July 1, 2007 and maturing on April 1,
2008. The note was unsecured and the note was paid in full in April
2008.





On June
6, 2008, we entered into another a promissory note with Flatiron Capital for the
financing of certain insurance policies in the amount of $0.2 million. The note
bears interest at a rate of 4.15% per annum.  We made a down payment of
$0.1 million at the inception of the loan.  Monthly payments are due in 11
equal installments commencing in July 2008. The note is unsecured and we are
current in our payments





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 London InterBank Offered Rate, (“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 bore interest at an
annual rate equal to LIBOR and was due to mature on January 1,
2010.  At June 30, 2008, we had repaid the note in full and applied a
$0.1 million overpayment towards the balance of notes outstanding with the
Bruner Family Trust, discussed below.





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 was
collateralized by 947,153 of the Pearl shares, and accrued interest at the rate
of 15%. The note and accrued interest was paid in full in March
2008.




Wealth Preservation.


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




annum,
and was due on February 29, 2008. This principal balance and accrued interest of
$4,000 was paid in full in April 2008.





OTHER OUTSTANDING
DEBT





Short-
Term Notes
Payable




Shareholder Note. During the
second fiscal quarter of 2008, we entered into an agreement to borrow $0.9
million from a shareholder with interest to accrue at a rate of 15% per
annum.  All principal and accrued interest amounts are due in full on
August 31, 2008.





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 bore interest at 12% per annum, were unsecured, and
were 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 shares on the Over the Counter Bulletin Board market on the day
preceding notice from the lender of its intent to convert the loan. Subsequent
to June 30, 2008 we received notice from the lender of its intent to convert the
loans into common stock, as described in Note 15.





Notes
Payable – Related Party





Bruner Family Trust. As of
September 30, 2007, we had entered into two promissory notes with the Bruner
Family Trust in the amount of $0.3 million which each accrue interest at 8% per
annum and are 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, our Chairman
and CEO, was assigned the right to receive from us approximately $0.2 million of
the $0.3 million owed by us 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 PetroHunter.  At June 30, 2008, total principal and accrued
interest related to these notes was $0.1 million and was classified as long term
on our consolidated balance sheets.





During
the 2008 fiscal year, we entered into four more promissory notes with the Bruner
Family Trust with principal amounts aggregating $2.7 million.  Each of
these notes accrues interest at the LIBOR plus 3% per annum and are due 12
months from each note’s respective issue date.  The largest of these
notes, aggregating $2.3 million in principal and interest as of June 30, 2008,
is due November 13, 2008, with the remaining three notes, aggregating $0.3
million in principal and accrued interest as of June 30, 2008, due in February
and March 2009.  As of June 30, 2008, all principal and accrued
interest related to these notes were classified as current on our consolidated
balance sheets.





Long-Term
Notes Payable





Vendor Long-term Notes Payable.On August 10, 2007, we entered into an unsecured promissory note with a
vendor for past due invoices aggregating $0.3 million. The note bears interest
at an annual rate of 8%. Payments are due in 24 equal installments of $11,000,
commencing on October 1, 2007 and maturing on September 1, 2009. As of June 30,
2008, the balance of this note was $0.2 million.





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 of our assets and
interest accrues at an annual rate of 6.75% over the prime rate. Global and its
controlling shareholder were shareholders of ours
prior to entering into the January 2007 Credit Facility. As of June 30, 2008, we
have drawn the total $15.0 million available under the January 2007 Credit
Facility.




27
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )




The terms
of the January 2007 Credit Facility provide for the issuance of 1.0 million
warrants to purchase 1.0 million shares of our 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 to 120% of the
weighted-average price of our stock for the 30 days immediately prior to each
warrant issuance date. Prices range from $1.30 to $2.10 per warrant. The fair
value of the warrants was estimated as of each respective issue date under the
Black-Scholes pricing model with the following assumptions: (i) the common stock
price at market price on the date of issue; (ii) zero dividends; (iii) expected
volatility of 69.2% to 71.4%; (iv) a risk-free interest rate ranging from 4.5%
to 4.7%; and (v) an expected life of 5 years. The fair value of the warrants was
recorded as a discount to the credit facility and is 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.





On May
21, 2007, we 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 an annual rate of 6.75% over the prime rate and is payable in arrears
quarterly beginning June 30, 2007. We pay an advance fee of 2% on all amounts
drawn under the May 2007 Credit Facility. We are to begin making principal
payments on the loan beginning at the end of the first quarter following the end
of the 18 month funding period: 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 June 30, 2008, $24.8 million has been advanced to us under this
facility. The advance fee in the amount of $0.6 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 our 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 our common stock
for the 30 days immediately preceding each warrant issuance date. Prices range
from $0.22 to $1.01 per warrant. The fair value of the warrants were estimated
as of each respective issue date under the Black-Scholes pricing model, with the
following assumptions: (i) common stock based on the market price on the issue
date; (ii) zero dividends; (iii) expected volatility of 69.8% to 76.0%; (iv)
risk free interest rate of 2.2% to 4.9%; and (v) expected life of 2.0 to 2.5
years. The fair value of the warrants issuable as of June 30, 2008 was recorded
as a discount to the note and is being amortized over the life of the
note.





On May
12, 2007, we issued a “most favored nation” letter to Global which indicated
that we 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, we 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. We 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 and as a result,
the additional deferred financing costs and loan discount are being amortized
over the term of the January 2007 Credit Facility.






28
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
  compliance
event or condition occurring, Global waived and released PetroHunter from any
and all defaults, failures to perform, and any other failures to meet its
obligations through July 1, 2009 .





Convertible Notes.On
November 13, 2007, we completed the sale of Series A 8.5% Convertible Debentures
(the “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 $0.28 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.
Interest payments related to the Debentures 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, as further discussed
below. All overdue unpaid interest incurs a late fee of 18% per annum,
calculated based on the entire unpaid interest balance. We defaulted on interest
payments due January 1, 2008 and April 1, 2008 and as a result, we obtained a
waiver and amendment from Debenture holders under which the defaults were waived
in consideration for the issuance of warrants and an agreement to pay the
interest and related late fees in September 2008.  This waiver and
amendment is described more fully below. As of the date of filing, we were in
default on our July 1, 2008 scheduled interest payment.





Under the
original Debenture agreement, we 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 that Registration Rights
Agreement, the registration statement was to be filed by March 4, 2008 and
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) we 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 we fail to pay liquidated damages in full within
seven days of the date payable, we 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 us.





A waiver
and amendment agreement relating to the above Registration Rights Agreement was
signed by all investors in April and May 2008. The agreement is an extension of
filing date and effectiveness date to June 30, 2008 and December 31, 2008,
respectively. Each purchaser waived (i) our obligation to file a registration
statement covering the Registrable Securities by March 4, 2008; (ii) our
obligation to have such registration statement declared effective by July 2,
2008, and (iii) any penalties associated with the failure to satisfy such
obligations as described above. In addition, each purchaser waived as events of
default, our failure to pay the January 1, 2008 and April 1, 2008 interest
payments. As consideration for this waiver, we agreed to pay the interest
installments due January 1, 2008 and April 1, 2008 by September 30, 2008,
together with late fees of 18% per annum.  In addition, warrants to
purchase our common stock will be issued in an amount equal to 4% of the
warrants each purchaser received with the original agreement. The terms of these
warrants mirror the terms given in the original agreement.  Pursuant
to this waiver and amendment, we filed a registration statement on June 30,
2008, which is expected to become effective in August 2008.  Further,
we recorded $0.3 million in costs related to the warrants issued under
the waiver and amendment, which was recorded as a component of interest
expense.





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
Issue No. 98-5, "Accounting for Convertible Debentures with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," to certain
convertible instruments, we recorded an additional discounts to the
debentures equal to their full face value at issuance, which are being
accreted to interest expense over the term of the notes using the effective
interest method.





During
the preparation of our financial statements for the third quarter ended June 30,
2008, we noted that as of July 1, 2008, we were still in default of various
provisions as set forth in the November 2007 Debenture agreement. In April,
May and August 2008 the investors granted waivers for certain provisions
for which we were in default.




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




Although
the waiver granted to us does not cure all of the defaults as of July 1, 2008 we
do not believe that the investors will enforce the terms of the
Debentures, as the enforcement of the terms is of no economic benefit to
either the investors or to us. Accordingly, no adjustments or reclassifications
have been recorded by us in our consolidated financial statements as of June
30, 2008 to reflect the defaults, as we feel that the investors will
continue to work with us.





Provided
that there is an effective registration statement covering the shares underlying
the Debentures, or the shares are otherwise eligible for resale without
restriction under Rule 144, 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.





Note
9 — Stockholders’ Equity





Common Stock.During the nine
months ended June 30, 2008, we issued 65.5 million shares of our common stock
and had 6.4 million shares of our common stock returned as follows:


•
                In October, 2007we
      issued25.0
      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
      issued16.0
      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, 2007we
      issued5.0
      million shares  of our common stock at $0.25 per share in
      conjunction with sale of heavy oil
assets.
  •
              In November, 2007we
      issued0.2
      million shares of our common stock at $0.28 per share for transaction
      finance costs.
  •
                In April, 2008 we issued 2 million shares
      of our common stock at $.20 per share for finance
    costs.  •
                  In May, 2008 we issued 16.9 million
      shares of our common stock at $.20 per share for vendor
      settlements.  •
                    In May, 2008 we issued .04 million shares
      of our common stock at $.20 per share in connection with the "Clear Creek"
      purchase option.  •
                      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 our 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. During the nine months ended June 30,
2008, we reclassified $2.4 million of subscriptions which included $0.1 million
of accrued interest to Notes
Payable- Related Party.




30
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )


In
November 2007, the Board of Directors again agreed to restructure the offering
of the Private Placement and to offer those investors the opportunity to rescind
their subscriptions or to participate on the same terms as the Debenture
offering, with interest to be paid at 8.5% from the date the original funds were
received to the date of the subscription of Debentures (see Note 8 ).
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 totaling $0.5 million was reclassified from Common Stock Subscribedto Convertible notes payable — net of
discounton the consolidated balance sheet.


Warrants
 
 The
following stock purchase warrants were outstanding at:
 
 June
      30,
                          2008
                          (restated)
                        
                        
                        September
      30,
                          2007(warrants
      in thousands)Number
      of warrants
                        
                        
                        134,826
                        
                        
                        
                        51,063Exercise
      price
                        
                        $
                        0.22
      - $2.10
                        
                        
                        $
                        0.31
      - $2.10Expiration
      date
                        
                        
                        2009
      - 2012
                        
                        
                        
                        2011
      - 2012
 
 During the nine months ended
June 30, 2008, we completed the sale of Series A 8.5% convertible
debentures. Debenture holders received five-year warrants that allow them to
purchase a total of 46.4 million shares of common stock at
prices ranging from $0.24 to $0.27 per share (see Note 8) . As of June 30,
2008, none of these warrants had been exercised and the total value of these
warrants, based on valuation under the Black-Scholes method was $7.4 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
$0.0





During
the nine months ended June 30, 2008, we entered into the Second Amendment of our
consulting agreement with MAB Resources, LLC and issued warrants to acquire 32.0
million shares of our common stock at $0.50 per share (see Note 4). These
warrants expire on November 14, 2009 and have a total value, based on the
Black-Scholes method of $1.9 million.





During
the nine months ended June 30, 2008, we issued 3.3 million warrants in
connection with amounts borrowed against our credit facility. These warrants
were valued at $.05 million using the Black-Scholes method and expire in May of
2012.





During
the nine months ended June 30, 2008, we issued 2.5 million five year warrants in
connection with penalties incurred related to defaults on scheduled interest
payments on our convertible debt. These warrants were valued at $0.3
million  using the Black-Scholes method and corresponding amounts have
been reflected as interest expense for the period.





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





Note
10 — Share-Based Compensation





Stock Option Plan.On August
10, 2005, we 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 our interests. Options may be
granted at an exercise price not less than the fair market value of our common
stock at the date of grant. Most options have a five year life but may have a
life up to 10 years as






31
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )




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 and each vesting schedule is also approved 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. We have reserved
40.0 million shares of common stock for the
plan. At June 30, 2008 and September 30, 2007, 9.25 and 15.0 million shares,
respectively, remained available for grant pursuant to the stock option plan.
During the three and nine months ended June 30, 2008, we granted 0.3 and
8.2 million options under our 2005 stock option plan to directors, employees
and consultants performing employee-like services for us. During the three and
nine months ended June 30, 2007, we granted 1.2 and 2.2 million options,
respectively, under our 2005 stock option plan to directors, employees and
consultants.
 A summary
of the activity under the Plan for the nine months ended June 30, 2008 is
presented below:
 
 Number
      of
                      Shares
                    
                    
                    Weighted-
                      Average
                      Exercise
      Price(shares
      in thousands)Options
      outstanding — September 30, 2007
                    
                    
                    24,965
                    
                    
                    $
                    1.31Granted
                    
                    
                    8,235
                    
                    
                    
                    0.21Forfeited
                    
                    
                    (2,465
                    )
                    
                    
                    0.22Options
      outstanding — June 30, 2008, restated
                    
                    
                    30,735
                    
                    
                    
                    0.99Options
      exercisable – June 30, 2008
                    
                    
                    15,599
                    
                    
                    
                    0.99


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 and nine
months ended June 30, 2008.





Expected
      option term — years
                1.75
      – 3.5Risk-free
      interest rate
                1.79%
      - 4.88%Expected
      dividend yield
                0Weighted-average
      volatility
                69.9%
      - 98.56%




Deferred Stock-Based Compensation.We authorized and issued 10.1 million of non-qualified stock options not
under the Plan, to employees and non-employee consultants on May 21, 2007. The
options were granted at an exercise price of $0.50 per share and vest 60% at
grant date and 20% per year at the one and two-year anniversaries of the grant
date. These options expire on May 21, 2012.





A summary
of the activity for the nine months ended June 30, 2008 for these options is
presented below:


Number
      of
                  Shares
                
                
                Weighted-
                  Average
                  Exercise
      Price(shares
      in thousands)Options
      outstanding — September 30, 2007
                
                
                9,895
                
                
                $
                0.50Granted
                
                
                —
                
                
                
                —Forfeited
                
                
                (2,300
                )
                
                
                0.50Options
      outstanding — June 30, 2008, restated
                
                
                7,595
                
                
                
                0.50Options
      exercisable — June 30, 2008, restated
                
                
                6,076
                
                
                
                0.50





Compensation Expense.Non-cash
stock-based compensation expense of $0.4 million and $1.5 million
was recognized during the three and nine months ended June 30, 2008. Stock-based
compensation expense of $3.4








32
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )
 million
and $7.3 million was recognized during the three and nine months ended June 30,
2007. Stock-based compensation expense is included in general and administrative
expenses in the consolidated statements of operations.
 Note
11 — Related Party Transactions
 MAB.During the three and
nine months ended June 30, 2007, we incurred project development costs to MAB
under the Development Agreement between us and MAB (see Note 4 ) in the
amount of $0.0 million and $1.8 million, respectively. We did not incur project
development costs to MAB during the three and nine months ended June 30, 2008.
Project development costs to MAB are classified in our consolidated statements
of operations as Project
development costs — related party. During the three and nine months ended
June 30, 2007, we recorded expenditures paid by MAB on our behalf in the amount
of $0.4 million and $0.6 million, respectively. At June 30, 2008 and September
30, 2007, we owed MAB $0.0 million and $1.0 million, respectively, related to
project development costs and other expenditures that MAB made on our
behalf.
  As of
June 30, 2008, we had paid off the $13.5 million promissory note issued pursuant
to the agreements with MAB (see Note 8 ). As of September 30, 2007, we
owed MAB principal and accrued interest of $13.0 million under the terms of the
promissory note.
 
 At June
30, 2008, we had six separate promissory notes with the Bruner Family Trust (see
Note 8 ) for an aggregate principal amount of $2.7 million. During
the three and nine months ended June 30, 2008, we incurred total interest
expense of $0.0 million and $0.1 million, respectively. In June 2008 we offset
$0.2 million in





Wealth Preservation.On
January 25, 2008, we borrowed $0.1 million under a promissory note with an
entity controlled by a member of the board of directors. The note bears interest
at 15% and was due on February 29, 2008. At March 31, 2008 we were in default of
this note and the interest increased to 24%.  This principal balance
and accrued interest of $4,000 was paid in full in April 2008.





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 nine months ended June 30, 2008, 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 $17,000 related to
additional expenses paid by us related to the Galaxy PSA and accrued interest on
the Galaxy Note, respectively. During the nine months ended June 30, 2008, these
amounts have also been paid by offset to amounts we owed to MAB under the MAB
Note. Marc A. Bruner, our largest single beneficial shareholder, is a 14.0%
beneficial shareholder of Galaxy and is the father of the President and Chief
Executive Officer of Galaxy.




Note
12 — Commitments and Contingencies





Contingencies.We may from
time to time be involved in various claims, lawsuits, disputes with third
parties, actions involving allegations of discrimination, or breach of contract
incidental to the operations of our business. We are currently a party to the
following legal actions:





·
            one
      vendor has filed a lien applicable to our properties in Rio Blanco County,
      Colorado, for $0.2 million.


·
            a
      lawsuit was filed in August 2007 by a law firm in Australia in the Supreme
      Court of Victoria for the balance of legal fees owed (0.2 million
      Australian dollars). As of June 30, 2008, we had made payments such that
      we have no liability left pursuant to the claims in this lawsuit and the
      lawsuit was pending dismissal.


·
            a
      lawsuit was filed in December 2007 by a vendor in the Supreme Court of
      Queensland for the balance which the vendor claims is owed (3.8 million
      Australian dollars). We disputed the claim on the basis that








33
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated )


the
      vendor breached the contract.  As of June 30, 2008, we were in
      the final stages of negotiating a written settlement agreement which
      provides that we will pay 3.5 million Australian dollars as part of the
      settlement.  This amount was accrued and reflected in Accounts
      payable and accrued expense as of June 30, 2008.·
                on
      June 30, 2008, we filed an action requesting the court to issue a
      declaratory judgment regarding the interpretation of certain provisions of
      a contract between us and DPC. The primary issue in this matter relates to
      our claim of force majeure relating to certain work commitments under the
      contract; specifically, that we were unable to meet the drilling
      commitments required by the contract (described in Note 5 ) due to
      the current shortage of casing available to domestic drilling operations
      such as ours. On July 29, 2008, DPC filed a response to our complaint and
      the case is proceeding in the normal course of litigation. We are
      vigorously defending our position in this
  action.
 
 During
the third fiscal quarter of 2008 we resolved numerous legal matters in
conjunction with the Laramie transaction, as more fully described in Note
13 .  Pursuant to that transaction, we agreed to settle and
release, and did settle and release, all liens and legal matters related to the
property that was sold in the Piceance Basin using proceeds from the
transaction.  As a result, we resolved all of the liens on the
applicable property that had been filed by multiple vendors, as reported in
previous filings, as well as all lawsuits related to those liens, and a lawsuit
filed by the lessor of certain of these properties for breach of our lease
contract.  As of June 30, 2008, approximately $0.8 million related to
this transaction was being held in escrow pending the resolution of a dispute
between us and the lessor of certain of the properties that were included in the
transaction, wherein said lessor claims that the lease will be terminated due to
the transaction.  On August 1, 2008, we transferred the money in
escrow back to the purchaser and retained the 435 acres of land relating to the
escrowed amount.


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





Environmental.While we are
not currently subject to environmental-related litigation, the nature of our
business is such that we are subject to constantly changing environmental laws
and regulations adopted by federal, state and local governmental authorities in
both the U.S. and Australia.  We would face significant liabilities to
the government of other third parties for discharges of oil, natural gas,
produced water or other pollutants into the air, oil, or water, and the cost to
investigate, litigate and remediate such a discharge could materially adversely
affect our business, results of operations and financial
condition.  We encourage readers of this filing to review our risk
factors disclosed in our Item 1A of our Annual Report on Form 10-K for the year
ended September 30, 2007 for further discussion of our environmental
risks.





Note
13 — Laramie Transaction





On May
30, 2008, we closed the sale of substantially all of our working interest in our
Southern Piceance properties in Colorado to Laramie Energy II, LLC (“Laramie”),
an unrelated third party.  We have received total net consideration of
$17.9 million, and expect to receive an additional $0.8 million which is being
held in escrow until August 31, 2008 to secure our performance under the
agreement with Laramie. We recognized a loss related to the transaction of $8.6
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
Laramie’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 $8.6 million during the three and nine month periods ended
June 30, 2008.  Upon closing, we conveyed 605 net acres of land, 16
wells which had been drilled but not completed or connected to a pipeline to
Laramie. In addition, $0.8 million was held in escrow pending the resolution of
a dispute between us and the lessor of certain of the properties that were
included in the transaction, wherein said lessor claims that the lease would be
terminated upon transfer to Laramie.  On August 1, 2008, we
transferred the $0.8 million in escrow






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


back
to Laramie and retained the 435 acres of land relating to the escrow amount,
which had no effect on the total net consideration noted above.
 
 Pursuant
to the Laramie agreement, we also entered into numerous settlement and release
agreements with many of our trade creditors which had placed liens on our
Southern Piceance properties or which had commenced litigation related to the
properties.  Accordingly, in June 2008, we paid cash for a portion and
issued shares of our stock for a portion of the amounts owed to each of these
creditors and filed a registration statement with the Securities and
 Note
14 — CCES Transactions
 
 On April
11, 2008, we closed the sale of certain natural gas gathering assets for $0.7
million in cash consideration, and simultaneously entered into a Gas Gathering
Agreement with CCES Piceance Partners I, LLC (“CCES”) relating to the initial
phase of our gas gathering system project.  These agreements formalize
and expand upon a Letter of Understanding (“LOU”) between the parties which
contemplates a dedicated relationship with CCES in the development of a gas
gathering system and the provision of Gas Gathering Services within our Buckskin
Mesa Project area (the “CCES Agreements”).
 
 In
addition to customary terms and conditions, the CCES Agreements include a
guarantee (the “Guarantee”) from us to CCES regarding their increasing financial
commitments as they are incurred in relation to the development of the gas
gathering system, including our contingent repurchase of the gas gathering
assets we sold to CCES.  The triggering event for the Guarantee is
contingent upon our mutual failure to execute a formal agreement for long-term
gas gathering services in the future (the “Second Phase Midstream Services
Agreement”).  The resolution of this contingency is dependent upon,
among other things, gas production levels from the initial phase gas gathering
system for our Buckskin Mesa Project over the next 12 to 18 months, and other
factors as determined by both parties.  Should we fail to execute a
mutually agreeable long-term contract, CCES has the right to invoice us for
their incurred costs and demand repayment within 20 days of our receipt of the
Demand Invoice.  To secure our Guarantee, we have executed a
Promissory Note for an amount up to $11.5 million, secured by second deeds of
trust on our Colorado properties.  The amount of the Guarantee is
variable, based upon the underlying incurred costs by CCES as defined in the
CCES Agreements, and aggregated $3.5 million as of June 30,
2008.





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





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





Note
15 — Subsequent Events





Note Conversion.On July 10,
2008, we received notice from one of our lenders of its intent to convert the
five loans we had with this lender into common stock.  Accordingly,
the $0.4 million of principal and the $0.1 million of accrued interest as of
July 10, 2008 was converted to 2,677,519 shares of our common stock at the
closing price of our common stock on July 9, 2008 of $0.20 per
share.





35


Waiver Agreement.  On
July 1, 2008, we were still in default of various provisions as set forth in the
November 2007 Debenture agreement.  In April, May and August 2008, the
investors granted waivers for certain provisions for which we were in
default.  Although the waiver granted to us does not cure all of the
defaults as of July 1, 2008, we do not
believe that the investors will enforce the terms of the Debentures, as the
enforcement of the terms is of no economic benefit to either the investors or to
us.  Accordingly, no adjustments or reclassifications have been recorded by
us in our consolidated financial statements as of June 30,
2008.







36


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 is
provided as a supplement to, and should be read in conjunction with, our audited
consolidated financial statements, accompanying notes and Item 7 of our
Annual Report on Form 10-K for the fiscal year ended September 30, 2007, as well
as our unaudited consolidated financial statements and accompanying notes
appearing elsewhere in this Form 10- Q/A .





Executive
Summary





We are a
development stage global oil and gas exploration and production company
committed to acquiring and developing primarily unconventional natural gas and
oil prospects that we believe have a very high probability of economic success.
Since our inception in 2005, our principal business activities have been raising
capital through the sale of common stock and convertible notes and acquiring oil
and gas properties in the western United States and
Australia.  Currently, we own property in Colorado, where we have
drilled five wells on our Buckskin Mesa property, Australia, where we have
drilled one well on our property in the Northern Territory, and in Montana,
where we hold a land position in the Bear Creek area. The wells on these
properties have not yet commenced oil production. We also have working interests
in eight additional wells in Colorado which are operated by EnCana Oil & Gas
USA (“EnCana”).  In November 2007, we sold 66,000 net acres of land
and two wells in Montana and 177,445 net acres of land in Utah (See Note
5 in Item 1) and on May 30, 2008, we sold 625 net acres of land, 16
wells and interests in an additional 8 wells in the Southern Piceance Basin in
Colorado to a third party (see Note  13 of the Notes to the
Consolidated Financial Statements in Item 1).





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








37





Results
of Operations





The
following summarizes our results of operations for the three and nine month
periods ended June 30, 2008 and 2007:




Three
      months
                                    ended
                                    June
      30,
                                    2008
                                  
                                  
                                  Three
      months
                                    ended
                                    June
      30,
                                    2007
                                  
                                  
                                  Nine
      months
                                    ended
                                    June
      30,
                                    2008
                                  
                                  
                                  Nine
      months
                                    ended
                                    June
      30,
                                    2007(restated,
      $ in thousands)Total
      Revenue
                                  
                                  $
                                  573
                                  
                                  
                                  $
                                  847
                                  
                                  
                                  $
                                  1,726
                                  
                                  
                                  $
                                  2,285Costs
      and ExpensesLease
      operating expenses
                                  
                                  
                                  164
                                  
                                  
                                  
                                  211
                                  
                                  
                                  
                                  404
                                  
                                  
                                  
                                  597General
      and administrative
                                  
                                  
                                  2,511
                                  
                                  
                                  
                                  5,470
                                  
                                  
                                  
                                  7,298
                                  
                                  
                                  
                                  13,546Project
      development — related party
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,815Impairment
      of oil and gas properties
                                  
                                  
                                  —
                                  
                                  
                                  
                                  600
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  9,551Depreciation,
      depletion, amortization and accretion
                                  
                                  
                                  337
                                  
                                  
                                  
                                  805
                                  
                                  
                                  
                                  820
                                  
                                  
                                  
                                  2,018Total
      Operating Expenses
                                  
                                  
                                  3,012
                                  
                                  
                                  
                                  7,086
                                  
                                  
                                  
                                  8,522
                                  
                                  
                                  
                                  27,527Loss
      from Operations
                                  
                                  
                                  (2,439
                                  )
                                  
                                  
                                  (6,239
                                  )
                                  
                                  
                                  (6,796
                                  )
                                  
                                  
                                  (25,242
                                  )Other
      Income (Expense)Loss
      on conveyance of property
                                  
                                  
                                  (8,593
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (20,468
                                  )
                                  
                                  
                                  —Gain
      on foreign exchange
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  —Interest
      income
                                  
                                  
                                  6
                                  
                                  
                                  
                                  6
                                  
                                  
                                  
                                  33
                                  
                                  
                                  
                                  20Interest
      expense
                                  
                                  
                                  (3,193
                                  )
                                  
                                  
                                  (846
                                  )
                                  
                                  
                                  (8,552
                                  )
                                  
                                  
                                  (2,677
                                  )Loss
      on sale of securities
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2,987
                                  )
                                  
                                  
                                  —Total
      Other Expense
                                  
                                  
                                  (11,780
                                  )
                                  
                                  
                                  (840
                                  )
                                  
                                  
                                  (31,963
                                  )
                                  
                                  
                                  (2,657
                                  )Net
      Loss
                                  
                                  $
                                  (14,219
                                  )
                                  
                                  $
                                  (7,079
                                  )
                                  
                                  $
                                  (38,759
                                  )
                                  
                                  $
                                  (27,899
                                  )Net
      loss per common share — basic and diluted
                                  
                                  $
                                  (0.04
                                  )
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.12
                                  )
                                  
                                  $
                                  (0.13
                                  )Weighted
      average number of common shares outstanding — basic and
      diluted
                                  
                                  
                                  324,147
                                  
                                  
                                  
                                  256,906
                                  
                                  
                                  
                                  317,811
                                  
                                  
                                  
                                  221,802





Revenue.During the
quarter ended June 30, 2008, total revenue declined 32.3% from the corresponding
quarter in the previous year. This decline was due to a decrease in oil and gas
revenues of $0.3 million as a result of natural production declines in the wells
we own an interest in that are operated by EnCana.  This decline was
offset by a small amount of other revenue representing certain services we have
provided to Pearl Exploration and Production Ltd. during the
quarter.





For
the nine months ended June 30, 2008, revenue declined 24.5% to $1.7 million, led
by a decline of $0.7 million in oil and gas revenue as a result of the same
factors discussed above as well as having ownership interests in fewer producing
wells during the first half of 2008 versus the first half of
2007.





Lease Operating Expenses.
Lease operating expensesdeclined
22.3% during the three months ended June 30, 2008 compared to the same period in
2007. During the nine months ended June 30, 2008, lease operating expenses
declined 32.3% , or $0.2 million, compared to the same period in
2007.  This decline is due to a decrease in activity year over year
with respect to drilling and completions, where in the 2007 periods, we were
actively working on drilling and completions on certain of our properties and in
the 2008 periods, we were not.








38





General and Administrative.During the three months ended June 30, 2008, general and administrative
expenses were $3.0 million, or 54.1% lower than the same three
months in 2007.  The following table highlights the
changes:





Three
      months ended June 30,2008
                        
                        
                        2007
                        
                        
                        Change($
      in thousands)Personnel
      and contract services
                        
                        $
                        1,118
                        
                        
                        $
                        1,248
                        
                        
                        $
                        (130
                        )Legal
      costs
                        
                        
                        265
                        
                        
                        
                        —
                        
                        
                        
                        265Stock-based
      compensation
                        
                        
                        440
                        
                        
                        
                        3,688
                        
                        
                        
                        (3,248
                        )Travel
                        
                        
                        91
                        
                        
                        
                        267
                        
                        
                        
                        (176
                        )Other
                        
                        
                        597
                        
                        
                        
                        267
                        
                        
                        
                        330Total
                        
                        $
                        2,511
                        
                        
                        $
                        5,470
                        
                        
                        $
                        (2,959
                        )




During
the nine months ended June 30, 2008, general and administrative expenses were
$6.2 million, or 46.1% lower than the same nine months in
2007.  The following table highlights the changes:




Nine
      months ended June 30,2008
                        
                        
                        2007
                        
                        
                        Change($
      in thousands)Personnel
      and contract services
                        
                        $
                        2,911
                        
                        
                        $
                        3,078
                        
                        
                        $
                        (167
                        )Legal
      costs
                        
                        
                        657
                        
                        
                        
                        621
                        
                        
                        
                        36Stock-based
      compensation
                        
                        
                        1,513
                        
                        
                        
                        7,305
                        
                        
                        
                        (5,792
                        )Travel
                        
                        
                        164
                        
                        
                        
                        1,046
                        
                        
                        
                        (882
                        )Other
                        
                        
                        2,053
                        
                        
                        
                        1,496
                        
                        
                        
                        557Total
                        
                        $
                        7,298
                        
                        
                        $
                        13,546
                        
                        
                        $
                        (6,248
                        )





For both
the three and nine month periods ended June 30, 2008, the declines in general
and administrative expenses over the comparable 2007 periods were led by
declines in stock-based compensation expense.  During the 2008 periods
we issued significantly fewer stock options to employees and consultants. 
In addition, we had lower overall cash costs due to expense control measures
to conserve cash.





Project development Costs — Related
Party.Project development costs of $1.8 million incurred during the nine
months ended June 30, 2007 relate to development costs we paid to MAB under the
Development Agreement (described more fully in Note 4 to the Consolidated
Financial Statements in Item 1 of this Form 10-Q/A).  We no longer pay
project development costs to MAB as a result of the restructuring of our
agreements with MAB 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, as
described in Note 1 to the Consolidated Financial Statements in Item 1 of this
Form 10- Q/A .  Should capitalized costs exceed this ceiling, an
impairment is recognized. During the three and nine months ended June 30, 2007,
we recognized impairments of $0.6 million and $9.6 million, respectively,
representing the excess of capitalized costs over the ceiling, as calculated in
accordance with these full cost rules. We did not recognize any impairment
charges during the three and nine months ended June 30, 2008.





Depreciation, Depletion,
Amortization and Accretion. During the quarter and nine months ended June
30, 2008, depreciation, depletion, amortization and accretion declined $0.5
million and $1.2 million, respectively, from the prior
year.   These decreases were due to adjustments in the previous
year to proved reserves.  During the fourth fiscal quarter of 2007,
our proved reserves were estimated by an independent reservoir
engineer.  We estimated that, had those reserves been obtained during
previous quarters, depreciation, depletion and amortization would have increased
by $0.5 million and $1.5 million during the quarter and nine months ended June
30, 2008.  The effect of this adjustment did not impact our net loss
for the year as such adjustments were ultimately reflected in impairment of oil
and gas properties in the consolidated statement of operations for the full
fiscal year in 2007.





39


Loss on conveyance of
property.On
May 30, 2008, we closed the sale of substantially all of our working interest in
our Southern Piceance properties in Colorado to Laramie Energy II, LLC
(“Laramie”), an unrelated third party, for total net consideration of $17.9
million, prior to amounts we anticipate receiving from Laramie that remain in
escrow.  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 Laramie’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 $8.6 million during the three month period
ended June 30, 2008.  The remaining $11.9 million occurred in the
first quarter resulting from the Pearl transaction for a combined total loss of
$20.5 million during the nine month period ended June 30, 2008.





Interest Expense. Interest
expense increased $2.3 million and $5.9 million during the three
and nine month periods ended June 30, 2008, respectively, compared with the
comparable periods in the prior year ($ in thousands) .




Three-Months
      ended
                              June
      30, 2008
                            
                            
                            Nine-Months
       ended
                              June
      30, 2008(restated)Interest
      expense related to Credit Facility, convertible notes and other
      notes
                            
                            $
                            1,623
                            
                            
                            $
                            4,393Amortization
      of debt discounts, deferred financing costs and
      accretion
                            
                            
                            923
                            
                            
                            
                            3,123Interest
      on vendor obligations and other
                            
                            
                            647
                            
                            
                            
                            1,036Total
      interest expense
                            
                            $
                            3,193
                            
                            
                            $
                            8,552





This
increase is attributable to three primary factors:




(i)
            higher
      interest expense related to the issuance of 8.5% convertible debentures in
      November, 2007.


(ii)
            additional
      interest expense related to second credit and security agreement with
      Global Finance. In May, 2007 we entered into a second credit and security
      agreement with Global Finance (as described in Note
      8 ).  Associated with this second facility, we have
      recorded deferred financing costs.  These deferred financing
      costs are being amortized over the life of the facility and the expense
      has been included as a component of interest expense.  Stock
      purchase warrants were also issued in connection with this second credit
      and security agreement. The value associated with these warrants has been
      recorded as a discount to the debt and is being amortized over the life of
      the associated debt instrument. The related amortization has been
      recorded as a component of interest expense. Additional borrowings under
      this second credit and security agreement since June 30, 2007 when
      we had drawn approximately $25 million under the facility,
      versus approximately $38 million as of June 30,
  2008.


(iii)
            higher
      interest rates on certain loans, primarily those with vendors, due to our
      default on certain of our borrowing arrangements.  Most of the
      arrangements where we were paying higher interest rates due to our default
      were paid in full in conjunction with the Laramie transaction as described
      in Note 13 to the Consolidated Financial Statements in Item 1 of
      this Form 10- Q/A .





Loss on Sale of Marketable
Securities.  In connection with the sale of certain of our
properties to Pearl Exploration and Production Ltd (“Pearl”), we received a
portion of the total purchase price in Pearl common stock.  The value
of these shares declined significantly from the date of the transaction
until we sold the shares in March 2008.  As a result, we recognized
losses associated with these securities of $3.0 million during
the nine month period ended June 30, 2008.  We did not have
marketable securities, available for sale during the comparable period of the
previous year.




Net Loss.  Net loss
for the quarter ended June 30, 2008 was $14.2 million compared to a loss
of $7.1 million during the same period in the previous fiscal
year.  This $7.1 million change was primarily the result of
losses incurred due






40




to the
sale of certain properties to Laramie and increased interest expense, partially
offset by a decline in general and administrative expenses.





Net loss
for the nine months ended June 30, 2008 was $38.8 million compared to a
loss of $27.9 million during the comparable period in the last fiscal
year.  This $10.9 million change was driven by losses incurred
due to the sale of certain properties, increased interest expense and
the  recognition of $3.0 million in losses on sales of marketable
securities,  all of which had the effect of increasing our Net
loss.  Partially offsetting these changes were declines in project
development costs and general and administrative expenses, both of which had the
effect of decreasing Net loss.





Net loss per common
share.  Net loss per common share was ($0.04) per share
in the quarter ended June 30, 2008 compared to ($0.03) per share in the same
quarter last year.  This was driven by a higher Net loss and a higher
share base primarily due to the issuance of common stock associated with certain
of our debt agreements, amendments of certain agreements with MAB and the
issuance of Series A 8.5% Convertible Debentures.





For the
nine months ended June 30, 2008, net loss per common share was ($0.12)
per share compared to a net loss of ($0.13) per share in the same period
of the previous year.   The loss in 2008 was driven by a larger
Net loss and a higher share base, as described above.





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 $111.4 million for the
period from inception (June 20, 2005) to June 30, 2008.  Likewise, as
of June 30, 2008, we had a working capital deficit of approximately $21.8
million, are in default on certain obligations, are not in compliance with the
covenants of several loan agreements, and require significant additional funding
to sustain our operations and satisfy our contractual obligations for our
planned oil and gas exploration and development operations.  We also
have significant capital expenditure commitments. Our ability to establish
ourselves as a going concern is dependent upon our ability to obtain additional
funding in order to finance our planned operations.





Plan
of Operation





Colorado.We expect that the
development of our Colorado properties will include the following activities:
(i) the tie-in of two wells drilled, cased and completed to date,
and the completion and tie-in of three wells drilled and cased to date in the
Buckskin Mesa Prospect (four wells drilled and cased during fiscal year
2007; one well drilled and cased during the first quarter ended December
31, 2007; and two of the five drilled wells completed during the second
quarter); (ii) the drilling of a minimum of 13 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 (iii) the recompletion and tie-in of the six shut-in gas
wells in the Powell Park Field acquired by us from a third party
operator.





We
anticipate that the development of the Colorado assets will require $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 the Northern Territory, Australia. Because we have
obtained extensions on our drilling requirements related to these properties, we
do not currently have drilling commitments in Australia in 2008. During calendar
year 2009, we plan to drill eight 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 sixteen months
will approximate $45 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.







41


Liquidity
and Capital Resources





We have
grown rapidly since our 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. From 2006 to 2008, we added employees and acquired interests
in additional properties. At June 2007, we had 16 full-time employees and at
June 2008 we grew to 15 full-time employees and 13 consultants. At June 30,
2008, we have an aggregate of approximately 21,000 net acres in Colorado, 14,000
net acres in Montana, and 7.0 million net acres in Australia.





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 in Colorado and Australia; and (ii) to improve the economics of our
projects by restructuring the Development Agreement with MAB. Accordingly,
during the nine months ended June 30, 2008 we sold our heavy oil assets and
restructured the Development Agreement with MAB through amendments. On June 30,
2008, the Development Agreement, as amended, had been terminated in its
entirety.





Working Capital.Our working
capital is impacted by various business and financial factors, including, but
not limited to: changes in prices of oil and gas, the timing of operating cash
receipts and disbursements, borrowings and repayments of debt, additions to oil
and gas properties and increases and decreases in other non-current assets,
along with other business factors that affect our net income and cash
flows.





As of
June 30, 2008, we had a working capital deficit of $21.8 million and
unrestricted cash of $0.7 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 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 have sold 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 additional capital is needed to fund our proposed drilling
program for 2008.  See "Plan of Operation" above.





Cash Flow.Net cash used in
or provided by operating, investing and financing activities for the nine months
ended June 30, 2008, restated and 2007 were as follows ($ in
thousands):




Nine
      months ended
                  June
      30,2008
                
                
                2007(restated)Net
      cash used in operating activities
                
                $
                (22,216
                )
                
                $
                (13,447
                )Net
      cash provided by (used in) investing activities
                
                $
                14,376
                
                
                $
                (31,515
                )Net
      cash provided by financing activities
                
                $
                8,415
                
                
                $
                34,348





Net Cash Used in Operating
Activities.The increase in net cash used in operating activities of $8.8
million is primarily attributable to increases in our Net loss during the
nine months ended June 30, 2008 and declines in our accounts payable balance due
primarily to the settlement of numerous past due vendor accounts using proceeds
from the Laramie Transaction (see Item 1, Note 13).





Net Cash Provided by (Used in)
Investing Activities.Net cash provided by investing activities for the
nine months ended June 30, 2008 was primarily from cash received for the sale of
oil and gas properties of $26.9 million and proceed from the




42




primarily
used for joint interest billings in the amount of $16.3 million, additions to
oil and gas properties in the amount of $13.2 million and deposits on oil and
gas property acquisitions of $2.2 million.





Net Cash Provided by Financing
Activities.Net cash provided by financing activities of $8.4
million for the nine months ended June 30, 2008 declined from the $34.3 million
in the same period of the previous year, due primarily to a decline of $23.5
million in proceeds from the issuance of notes payable and increased payments on
short-term debt resulting from the Laramie Transaction (see Item 1, Note 13).
Included in payments or short-term notes for the nine months ended June 30,
2008 is $5.5 million in amounts we paid on a vendor note pursuant to the Laramie
transaction.





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





Activity
            Prospect
            Aggregate
              Total
      Cost
            Our
      Working
              Interest
            Our
      Share (a)Drill
      and complete eight wells
            Buckskin
      Mesa
            $24,000
            100%
            $24,000
            (b)Total
            
            $24,000
            
            $24,000




(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 assignee to
      pay a portion of our development
costs.





(b)
            We
      have drilling commitments on our Buckskin Mesa properties as
      follows:




(i) three
wells during the first calendar quarter of 2008 (our fiscal second quarter),
which were satisfied through the payment of $1.5 million to DPC in lieu of
drilling.  These costs are not included in the table above.




(ii) four
wells during the second calendar quarter (our fiscal third quarter), which are
currently in dispute as we have claimed force majeure due to the current
shortage of casing available to domestic drilling operations such as ours. 
These commitments are still valid, however, on a delayed schedule, and therefore
the costs are included in the table above.




(iii)
four wells during the third calendar quarter (our fiscal fourth quarter). 
These costs are included in the table above.




We also
have drilling commitments for the fourth calendar quarter of 2008; however,
because these relate to the 2009 fiscal year, these costs have not been included
in the table above.




We
received extensions on our drilling commitments in Australia and therefore we no
longer have any drilling commitments in 2008 with respect to these
properties.




Financing.During the nine
months ended June 30, 2008 and the 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.







43


We
originally agreed to file a registration statement with the Securities and
Exchange Commission in order to register the resale of the shares issuable upon
conversion of the Debentures and the shares issuable upon exercise of the
warrants.  According to the Registration Rights Agreement, the
registration statement was to be filed by March 4, 2008 and declared effective
by July 2, 2008. The following penalties 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.





A waiver
and amendment agreement relating to the above Registration Rights Agreement was
signed by all investors in April and May 2008. The agreement is an extension of
filing date and effectiveness date to June 30, 2008 and December 31, 2008,
respectively. Each purchaser waived (i) our obligation to file a registration
statement covering the Registrable Securities by March 4, 2008: (ii) our
obligation to have such registration statement declared effective by July 2,
2008, and (iii) any penalties associated with the failure to satisfy such
obligations as described above. In addition, each purchaser waived as events of
default, our failure to pay the January 1, 2008 and April 1, 2008 interest
payments. As consideration for this waiver, we agreed to pay the interest
installments due January 1, 2008 and April 1, 2008 by September 30, 2008,
together with late fees of 18% per annum.  In addition warrants to
purchase our common stock will be issued in an amount equal to 4% of the shares
each purchaser received with the original agreement. The terms of these warrants
mirror the terms given in the original agreement.





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. This loan was paid in full in March, 2008.





(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 nine months ended June 30, 2008, 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 June 30,
2008, the balance of this note had been repaid in full. The note is unsecured
and bears interest at the London InterBank Offered Rate, (“LIBOR”).




(5) We
entered into six separate loans with the Bruner Family Trust, UTD March 28, 2005
for a total principal amount of $3.0 million. The two long-term notes,
aggregating $0.1 million in principal at June 30, 2008, bear interest at 8% and
are 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. The short-term notes, which aggregate $2.7 million in






44
 
  principal
at June 30, 2008, bear interest at LIBOR + 3% and are due 12 months from each
respective notes’ issue date.





(6) We
entered into a $15.0 million credit facility in January 2007, with Global (the
“January 2007 Credit Facility”). The January 2007 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 paid 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 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
2007 Credit Facility”). The May 2007 Credit Facility is secured by the same
certain oil and gas properties and other assets as the January 2007 Credit
Facility. The May 2007 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.
As of June 30, 2008, we would have been in default on interest payments and out
of compliance with the covenants. However, prior to any such default or
non-compliance event or condition occurring, Global waived all defaults that
might occur in the future until October 2008. At June 30, 2008 we had $20.2
million remaining available to us from the credit facility. The funds borrowed
were used to fund our working capital needs.





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. On July 10, 2008, we received
notice from this lender of its intent to convert the five loans we had with this
lender into common stock.  Accordingly, the $0.4 million of principal
and the $0.1 million of accrued interest as of July 10, 2008 was converted to
2,677,519 shares of our common stock at the closing price of our common stock on
July 9, 2008 of $0.20 per share.





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 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
above.





Development Stage Company.We
had not commenced principal operations or earned significant revenue as of June
30, 2008, and we are considered a development stage entity for financial
reporting purposes. During the period from inception to June 30, 2008, we
incurred a cumulative net loss of $111.4 million. We have raised
approximately $107.7 million through borrowing and the sale of
convertible notes and common stock from inception through June 30, 2008. In
order to fund our planned exploration and development of oil and gas properties,
we will require significant additional funding.




Critical
Accounting Estimates





In
preparing our consolidated financial statements in conformity with U.S.
generally accepted accounting principles, management must undertake decisions
that impact the reported amounts and related disclosures. Such decisions include
the selection of the appropriate accounting principles to be applied and
assumptions upon which accounting






45




estimates
are based. Management applies its best judgment based on its understanding and
analysis of the relevant circumstances to reach these decisions. By their
nature, these judgments are subject to an inherent degree of uncertainty.
Accordingly, actual results may vary significantly from the estimates we have
applied.





Our
critical accounting estimates are consistent with those disclosed in our
Prospectus on Form S-1 filed June 30, 2008 as well as our Annual Report on Form
10-K for the year ended September 30, 2007. Please refer to Item 7,
Management’s Discussion and
Analysis of FinancialCondition and Results of
Operations, in our Annual Report on Form 10-K for the year ended
September 30, 2007, for a complete description of our Critical Accounting
Estimates.








ITEM
4T. CONTROLS AND PROCEDURES




NOTE:  The
following disclosure was contained in our Form 10-Q originally filed on August
13, 2008.





Evaluation
of Disclosure Controls and Procedures




During
the quarter ended June 30, 2008, we performed an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Interim Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 [the “Exchange Act”]). Based on
that evaluation, our management, including our Chief Executive Officer and our
Interim Chief Financial Officer, concluded that our disclosure controls and
procedures were not effective to ensure that information required to be
disclosed by us in reports we file or submit 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 management, including our Chief Executive Officer and Interim
Chief Financial Officer, to allow timely decisions regarding required disclosure
as evidenced by the material weaknesses described below.




As
reported in Item 9A of our 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 our management structure to prevent a material
misstatement from occurring. 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. We have not had adequate
staffing to provide for an effective segregation of duties, or to adequately
identify and resolve accounting issues and provide information to our auditors
on a timely basis.  We have subsequently determined that we also have
material weaknesses in the application of various technical accounting guidance
to our business circumstances. These material weaknesses continued to exist as
of June 30, 2008, however, we continue to take steps to retain additional senior
financial personnel to assist us in completing our remediation of these material
weaknesses on an accelerated basis and we have made significant progress in
reviewing our account balances and transactions.




We are
fully committed to remediating the material weaknesses described above and
believe that the steps we are taking, including the active involvement of our
Audit Committee in the remediation planning and implementation, will properly
address these issues.  However, while we are taking immediate steps and
dedicating substantial resources to correct these material weaknesses, any new
controls we implement must operate for a period of time and be tested before a
determination can be made as to their effectiveness.  As we continue
to proceed through our remediation process, we may discover additional past,
ongoing or future material weaknesses or significant deficiencies in our
financial reporting processes, or additional errors in our financial statements,
some of which could be
material. Our evaluation and remediation issues are ongoing and are not yet
complete. We will endeavor to complete our internal reviews prior to filing our
2008 Form 10-K.





Our
failure to remediate any material weaknesses or significant deficiencies, or a
difficulty encountered in their implementation, could result in, among other
things: an inability to provide timely and reliable financial information, an
inability to meet our reporting obligations with governing bodies such as the
Securities and Exchange Commission, loss of investor confidence in our reported
financial information leading to a lower trading price for our common shares,
additional costs to remediate and implement effective internal controls, or
restatements






46




of
previously issued financial statements, any of which could have a material
adverse effect on our business, results of operations or financial
condition.




Pending
the successful implementation and testing of new controls, we are performing
mitigating procedures which we believe are sufficient until such new controls
have been implemented.




Changes
in Internal Controls Over Financial Reporting




There
have been changes in our internal controls over financial reporting that
occurred during the first nine months of the 2008 fiscal year that have
materially affected or are reasonably likely to materially affect our internal
controls over accounting and financial reporting in the future.  For
example, we have conducted extensive reviews of our accounts and reconciled our
vendor obligations. Given our remediation efforts discussed above, we expect
further significant changes to our internal controls will occur during the last
quarter of the 2008 fiscal year as we continue to strengthen our internal
control over financial reporting.




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




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 June 30, 2008 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the three and nine month periods ended June 30, 2008 in
conformity with GAAP.














47


PART
II. OTHER INFORMATION
 
 ITEM
1.   LEGAL PROCEEDINGS
 
 As of
June 30, 2008, we were a party to the following legal proceedings, which are
described more fully in Part I - Item 1 - Note 12 Commitments and Contingenciesin this Form 10- Q/A :
 
 1.  One
vendor has filed a lien applicable to our properties in Rio Blanco County,
Colorado for $0.2 million.


2. A
lawsuit was filed in August 2007 by a law firm in Australia in the Supreme Court
of Victoria for the balance of legal fees owed (0.2 million Australian
dollars).  As of June 30, 2008, we had made payments such that we have
no liability left pursuant to the claims in this lawsuit and the lawsuit was
pending dismissal.





3. A
lawsuit was filed in December 2007 by a vendor in the Supreme Court of
Queensland for the balance which the vendor claims is owed (3.8 million
Australian dollars). We disputed the claim on the basis that the vendor breached
the contract.  As of June 30, 2008, we were in the final stages of
negotiating a written settlement agreement which provides that we will pay 3.5
million Australian dollars as part of the settlement.





4.  On
June 30, 2008, we filed an action requesting the court to issue a declaratory
judgment regarding the interpretation of certain provisions of a contract
between us and DPC.  The primary issue in this matter relates to our
claim of force majeure relating to certain work commitments under the
contract.  On July 29, 2008 DPC filed a response to our complaint and
the case is proceeding in the normal course of litigation.





During
the third fiscal quarter of 2008 we resolved numerous legal matters in
conjunction with the Laramie transaction, as more fully described in Part I –
Item 1 – Note 13 .  Pursuant to that
transaction, we agreed to settle and release, and did settle and release, all
liens and legal matters related to the property that was sold in the Piceance
Basin using proceeds from the transaction.  As a result, we resolved
all of the liens on the property that had been filed by multiple vendors, as
reported in previous filings, as well as all lawsuits related to those liens,
and a lawsuit filed by the lessor of certain of these properties for breach of
our lease contract.  As of June 30, 2008, approximately $0.8 million
related to this transaction was being held in escrow pending the resolution of a
dispute between us and the lessor of certain of the properties that were
included in the transaction, wherein said lessor claims that the lease will be
terminated upon transfer to the purchaser.  On August 1, 2008, we
transferred the money in escrow back to the purchaser and retained the 435 acres
of land relating to the escrowed amount.





We may
from time to time be involved in various claims, lawsuits, disputes with third
parties, actions involving allegations of discrimination, or breach of contract
incidental to the operations of our business.





ITEM
1A.   RISK FACTORS





During
the quarter, there were no material changes from the risk factors disclosed in
our prospectus on Form S-1 filed June 30, 2008.





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





Our
annual meeting was held on April 7, 2008.  Stockholders were invited
to vote, by proxy or in person, in the election of five directors to our Board
of Directors.  The results of the vote were as follows:





FOR
                    WITHHOLDCHARLES
      B. CROWELL
                    190,900,168
                    1,210,200CARMEN
      J. LOTITO
                    190,901,528
                    1,208,840MARTIN
      B. ORING
                    190,901,528
                    1,208,840MATTHEW
      R. SILVERMAN
                    190,900,868
                    1,209,500DR.
      ANTHONY K. YEATS
                    190,892,728
                    1,217,640






48


ITEM
6. EXHIBITS





10.1
            Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company as Seller and Laramie Energy II, LLC as Buyer Dated
      Effective April 1, 2008 (incorporated by reference to Form 8-K as filed
      with the Securities and Exchange Commission on June 5,
    2008)10.2
            Amendment
      to Purchase and Sale Agreement between PetroHunter Energy Corporation and
      PetroHunter Operating Company as Seller and Laramie Energy II, LLC as
      Buyer Dated May 23, 2008 (incorporated by reference to Form 8-K as filed
      with the Securities and Exchange Commission on June 5,
    2008)31.1
            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











49







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)





50





EXHIBIT
INDEX




10.1
              Purchase
      and Sale Agreement between PetroHunter Energy Corporation and PetroHunter
      Operating Company as Seller and Laramie Energy II, LLC as Buyer Dated
      Effective April 1, 2008 (incorporated by reference to Form 8-K as filed
      with the Securities and Exchange Commission on June 5,
    2008)10.2
              Amendment
      to Purchase and Sale Agreement between PetroHunter Energy Corporation and
      PetroHunter Operating Company as Seller and Laramie Energy II, LLC as
      Buyer Dated May 23, 2008 (incorporated by reference to Form 8-K as filed
      with the Securities and Exchange Commission on June 5,
    2008)31.1
              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