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 March 31, 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. þYes  ̈ 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 o      Accelerated
filer o      Non-accelerated
filer o      Smaller
reporting company þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). oYes
   þNo





As of
April 30, 2008, the registrant had 318,748,841 shares of common stock
outstanding.





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 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
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 Securities and Exchange Commission
(the “SEC”).








EXPLANATORY
NOTE REGARDING RESTATEMENTS





This
Quarterly Report on Form 10-Q/A for the three- and six-month periods ended March
31, 2008 includes restatements of the previously filed condensed consolidated
financial statements and data (and related disclosures) for the period ended
March 31, 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 March 31, 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 May 15, 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 May 15, 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 May 15,
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 nine-month period ended June 30,
2008, filed with the SEC in conjunction with the filing of this
report.




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








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






2
 
 arbitrary
formula used to obtain this effect is: API gravity = (141.5/SG at 60°F) — 131.5,
where SG is the specific gravity of the fluid.





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





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





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





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





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





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





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





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.





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.





3


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





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





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





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





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





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





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





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





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





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





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





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





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





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





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.





4


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 SIX-MONTH PERIOD ENDED


MARCH
31, 2008


(restated)








INDEX








PART
      I — FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            7Consolidated
      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
            37Item
      4T.
            Controls
      and Procedures
            46PART
      II — OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            47Item
      1A.
            Risk
      Factors
            48Item
      6.
            Exhibits
            48Signatures
            49











6


PART
I. FINANCIAL INFORMATION


PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED BALANCE SHEETS


March
      31,2008
                          
                          
                          September
      30,
                            2007(unaudited)
                            (restated)($
      in thousands)ASSETSCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          1,592
                          
                          
                          $
                          120ReceivablesOil
      and gas receivables, net
                          
                          
                          404
                          
                          
                          
                          487Other
      receivables
                          
                          
                          15
                          
                          
                          
                          59GST
      receivable
                          
                          
                          442
                          
                          
                          
                          —Due
      from related parties
                          
                          
                          160
                          
                          
                          
                          500Note
      receivable — related party
                          
                          
                          —
                          
                          
                          
                          2,494Prepaid
      expenses and other assets
                          
                          
                          69
                          
                          
                          187Total
      Current Assets
                          
                          
                          2,682
                          
                          
                          
                          3,847Property
      and Equipment, at costOil
      and gas properties under full cost method, net
                          
                          
                          165,940
                          
                          
                          
                          162,843Furniture
      and equipment, net
                          
                          
                          840
                          
                          
                          
                          569166,780
                          
                          
                          
                          163,412Other
      AssetsJoint
      interest billings
                          
                          
                          1,029
                          
                          
                          
                          13,637Restricted
      cash
                          
                          
                          549
                          
                          
                          
                          599Deposits
      and other assets
                          
                          
                          48
                          
                          
                          
                          —Deferred
      financing costs
                          
                          
                          1,785
                          
                          
                          
                          529Intangible asset
                          
                          
                          2,431
                          
                          
                          
                          —Total
      Assets
                          
                          $
                          175,304
                          
                          
                          $
                          182,024LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                          
                          $
                          27,182
                          
                          
                          $
                          26,631Notes
      payable — short-term
                          
                          
                          2,109
                          
                          
                          
                          4,667Convertible
      notes payable
                          
                          
                          400
                          
                          
                          
                          400Note
      payable — related party — current portion
                          
                          
                          2,805
                          
                          
                          
                          3,755Note
      payable — current portion of long-term liabilities
                          
                          
                          120
                          
                          
                          
                          120Accrued
      interest payable
                          
                          
                          5,130
                          
                          
                          
                          2,399Accrued
      interest payable — related party
                          
                          
                          720
                          
                          
                          
                          516Due
      to shareholder and related parties
                          
                          
                          1,079
                          
                          
                          
                          1,474Contract
      payable — oil and gas properties
                          
                          
                          —
                          
                          
                          
                          1,750Contingent
      purchase obligation
                          
                          
                          2,431
                          
                          
                          
                          —Total
      Current Liabilities
                          
                          
                          41,976
                          
                          
                          
                          41,712Notes
      payable — net of discount
                          
                          
                          29,965
                          
                          
                          
                          27,944Subordinated
      notes payable — related parties
                          
                          
                          1,401
                          
                          
                          
                          9,050Convertible
      notes payable — net of discount
                          
                          
                          150
                          
                          
                          
                          —Asset
      retirement obligation
                          
                          
                          104
                          
                          
                          
                          136Total
      Liabilities
                          
                          
                          73,596
                          
                          
                          
                          78,842Common
      Stock Subscribed
                          
                          
                          —
                          
                          
                          
                          2,858Commitments
      and ContingenciesStockholders’
      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; 318,748,841 and
      278,948,841 shares issued and outstanding at March 31, 2008 and September
      30, 2007, respectively
                          
                          
                          319
                          
                          
                          
                          279Additional
      paid-in-capital
                          
                          
                          198,592
                          
                          
                          
                          172,672Accumulated
      other comprehensive loss
                          
                          
                          (41
                          )
                          
                          
                          (5
                          )Deficit
      accumulated during the development stage
                          
                          
                          (97,162
                          )
                          
                          
                          (72,622
                          )Total
      Stockholders’ Equity
                          
                          
                          101,708
                          
                          
                          
                          100,324Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          175,304
                          
                          
                          $
                          182,024


See
accompanying notes to consolidated financial statements.


7


PETROHUNTER ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS




Three
      months
                                    ended
                                    March
      31,
                                    2008
                                  
                                  
                                  Three
      months
                                    ended
                                    March 31,
                                    2007
                                  
                                  
                                  Six
      months
                                    ended
                                    March
      31,
                                    2008
                                  
                                  
                                  Six
      months
                                    ended
                                    March
      31,
                                    2007
                                  
                                  
                                  Cumulative
                                    From
      Inception
                                    (June
      20, 2005) to
                                    March
      31, 2008(unaudited,
      restated, $ in thousands except per share amounts)RevenueOil
      and gas revenue
                                  
                                  $
                                  496
                                  
                                  
                                  $
                                  989
                                  
                                  
                                  $
                                  1,003
                                  
                                  
                                  $
                                  1,438
                                  
                                  
                                  $
                                  3,859Other
      revenue
                                  
                                  
                                  150
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  150
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  150Total
      revenue
                                  
                                  
                                  646
                                  
                                  
                                  
                                  989
                                  
                                  
                                  
                                  1,153
                                  
                                  
                                  
                                  1,438
                                  
                                  
                                  
                                  4,009Costs
      and ExpensesLease
      operating expenses
                                  
                                  
                                  140
                                  
                                  
                                  
                                  224
                                  
                                  
                                  
                                  240
                                  
                                  
                                  
                                  386
                                  
                                  
                                  
                                  1,037General
      and administrative
                                  
                                  
                                  2,469
                                  
                                  
                                  
                                  4,405
                                  
                                  
                                  
                                  4,787
                                  
                                  
                                  
                                  8,076
                                  
                                  
                                  
                                  37,735Project
      development — related party
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,815
                                  
                                  
                                  
                                  7,205Impairment
      of oil and gas properties
                                  
                                  
                                  —
                                  
                                  
                                  
                                  3,800
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  8,951
                                  
                                  
                                  
                                  24,053Depreciation,
      depletion, amortization and accretion
                                  
                                  
                                  221
                                  
                                  
                                  
                                  827
                                  
                                  
                                  
                                  483
                                  
                                  
                                  
                                  1,213
                                  
                                  
                                  
                                  1,801Total
      operating expenses
                                  
                                  
                                  2,830
                                  
                                  
                                  
                                  9,256
                                  
                                  
                                  
                                  5,510
                                  
                                  
                                  
                                  20,441
                                  
                                  
                                  
                                  71,831Loss
      from operations
                                  
                                  
                                  (2,184
                                  )
                                  
                                  
                                  (8,267
                                  )
                                  
                                  
                                  (4,357
                                  )
                                  
                                  
                                  (19,003
                                  )
                                  
                                  
                                  (67,822
                                  )Other
      Income (Expense):Loss
      on conveyance of property
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (11,875
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (11,875
                                  )Gain
      on foreign exchange
                                  
                                  
                                  11
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  34Interest
      income
                                  
                                  
                                  2
                                  
                                  
                                  
                                  6
                                  
                                  
                                  
                                  27
                                  
                                  
                                  
                                  14
                                  
                                  
                                  
                                  65Interest
      expense
                                  
                                  
                                  (2,574
                                  )
                                  
                                  
                                  (2,004
                                  )
                                  
                                  
                                  (5,359
                                  )
                                  
                                  
                                  (1,831
                                  )
                                  
                                  
                                  (14,577
                                  )Loss
      on sale of securities
                                  
                                  
                                  (2,987
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2,987
                                  )
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (2,987
                                  )Total
      other expense
                                  
                                  
                                  (5,548
                                  )
                                  
                                  
                                  (1,998
                                  )
                                  
                                  
                                  (20,183
                                  )
                                  
                                  
                                  (1,817
                                  )
                                  
                                  
                                  (29,340
                                  )Net
      Loss
                                  
                                  $
                                  (7,732
                                  )
                                  
                                  $
                                  (10,265
                                  )
                                  
                                  $
                                  (24,540
                                  )
                                  
                                  $
                                  (20,820
                                  )
                                  
                                  $
                                  (97,162
                                  )Net
      loss per common share — basic and diluted
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  (0.05
                                  )
                                  
                                  $
                                  (0.08
                                  )
                                  
                                  $
                                  (0.09
                                  )Weighted
      average number of common shares outstanding — basic and
      diluted
                                  
                                  
                                  316,978
                                  
                                  
                                  
                                  222,562
                                  
                                  
                                  
                                  312,610
                                  
                                  
                                  
                                  221,245





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
                                                                      
                                                                      
                                                                      
                                                                      —Shares
      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
                                                                      )
   9
  Common
      Stock
                  
                  
                  Additional
      Paid-in
                  
                  
                  Accumulated
      Deficit During the Development
                  
                  
                  Accumulated
      Other Compre-hensive
                  
                  
                  Total
                    Stockholders’
                  
                  
                  Total
                    Compre-hensiveShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Stage
                  
                  
                  Loss
                  
                  
                  Equity
                  
                  
                  LossBalances,
      September 30, 2007
                  
                  
                  278,948,841
                  
                  
                  
                  279
                  
                  
                  
                  172,672
                  
                  
                  
                  (72,622
                  )
                  
                  
                  (5
                  )
                  
                  
                  100,324
                  
                  
                  
                  (49,816
                  )Shares
      issued for property interests at $0.31 per share – related
      party
                  
                  
                  25,000,000
                  
                  
                  
                  25
                  
                  
                  
                  7,725
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  7,750
                  
                  
                  
                  —Shares
      issued  in connection with  debt conversion at $0.23
      per share – related party
                  
                  
                  16,000,000
                  
                  
                  
                  16
                  
                  
                  
                  3,664
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,680
                  
                  
                  
                  —Shares
      issued for property interests at $0.25 per share
                  
                  
                  5,000,000
                  
                  
                  
                  5
                  
                  
                  
                  1,245
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,250
                  
                  
                  
                  —Shares
      returned for property conveyance at $0.22 per share
      (restated)
                  
                  
                  (6,400,000
                  )
                  
                  
                  (6
                  )
                  
                  
                  (1,402
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,408
                  )
                  
                  
                  —Shares
      issued for finance costs at $0.28 per share
                  
                  
                  200,000
                  
                  
                  
                  —
                  
                  
                  
                  56
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  56
                  
                  
                  
                  —Discounts
      associated with beneficial conversion feature and detachable warrants on
      convertible debenture issuance
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6,956
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  6,956
                  
                  
                  
                  —Warrant
      value associated with convertible debenture issuance
      (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  21
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  21
                  
                  
                  
                  —Warrants
      issued in connection with debt offering (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,895
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,895
                  
                  
                  
                  —Warrant
      value associated with  debt conversion  - related
      party (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,841
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,841
                  
                  
                  
                  —Debt
      conversion – related party (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,704
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,704
                  
                  
                  
                  —Discount
      on notes payable (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  143
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  143
                  
                  
                  
                  —Foreign
      currency translation adjustment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (36
                  )
                  
                  
                  (36
                  )
                  
                  
                  (36
                  )Stock-based
      compensation (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,072
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,072
                  
                  
                  
                  —Net
      loss (restated)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (24,540
                  )
                  
                  
                  —
                  
                  
                  
                  (24,540
                  )
                  
                  
                  (24,540
                  )Balances,
      March 31, 2008
                  
                  
                  318,748,841
                  
                  
                  $
                  319
                  
                  
                  $
                  198,592
                  
                  
                  $
                  (97,162
                  )
                  
                  $
                  (41
                  )
                  
                  $
                  101,708
                  
                  
                  $
                  (24,576
                  )


See
accompanying notes to consolidated financial statements.




10


PETROHUNTER ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Six
      months
                              ended
                              March
      31,
                              2008
                            
                            
                            Six
      months
                              ended
                              March 31,
                              2007
                            
                            
                            Cumulative
      From
                              Inception
                              (June
      20, 2005)
                              to
      March 31,
                              2008(unaudited,
      restated, $ in thousands)Cash
      flows from operating activitiesNet
      loss
                            
                            $
                            (24,540
                            )
                            
                            $
                            (20,820
                            )
                            
                            $
                            (97,162
                            )Adjustments used to reconcile
      net loss to net cash used in operating
    activities:Stock-based
      compensation
                            
                            
                            1,072
                            
                            
                            
                            3,617
                            
                            
                            
                            19,256Detachable
      warrants recorded as interest expense
                            
                            
                            163
                            
                            
                            
                            —
                            
                            
                            
                            163Depreciation,
      depletion, amortization and accretion
                            
                            
                            483
                            
                            
                            
                            1,763
                            
                            
                            
                            1,801Impairment
      of oil and gas properties
                            
                            
                            —
                            
                            
                            
                            8,400
                            
                            
                            
                            24,053Amortization
      of deferred financing costs
                            
                            
                            1,020
                            
                            
                            
                            1,441
                            
                            
                            
                            2,643Amortization
      of debt discount and beneficial conversion feature
                            
                            
                            1,180
                            
                            
                            
                            148
                            
                            
                            
                            2,216Loss
      on marketable securities
                            
                            
                            2,987
                            
                            
                            
                            —
                            
                            
                            
                            2,987Loss
      on conveyance of property
                            
                            
                            11,875
                            
                            
                            
                            —
                            
                            
                            
                            11,875Other
      adjustments to reconcile net loss
                            
                            
                            45
                            
                            
                            
                            —
                            
                            
                            
                            122Changes in assets and liabilities:
                              Receivables
                            
                            
                            (315
                            )
                            
                            
                            (1,569
                            )
                            
                            
                            (861
                            )Due
      from related party
                            
                            
                            —
                            
                            
                            
                            921
                            
                            
                            
                            (500
                            )Prepaids
      and other
                            
                            
                            70
                            
                            
                            
                            24
                            
                            
                            
                            25Accounts
      payable, accrued expenses, and other liabilities
                            
                            
                            1,898
                            
                            
                            
                            (1,255
                            )
                            
                            
                            6,752Due
      to shareholder and related parties
                            
                            
                            —
                            
                            
                            
                            618
                            
                            
                            
                            1,474Net
      cash used in operating activities
                            
                            
                            (4,062
                            )
                            
                            
                            (6,712
                            )
                            
                            
                            (25,156
                            )Cash
      flows from investing activitiesAdditions
      to oil and gas properties
                            
                            
                            (8,707
                            )
                            
                            
                            (3,808
                            )
                            
                            
                            (74,372
                            )Notes
      receivable, related party
                            
                            
                            —
                            
                            
                            
                            (12,863
                            )
                            
                            
                            (2,494
                            )Proceeds
      from sale of oil and gas properties
                            
                            
                            7,500
                            
                            
                            
                            —
                            
                            
                            
                            7,500Proceeds
      from sales of marketable securities
                            
                            
                            2,541
                            
                            
                            
                            —
                            
                            
                            
                            2,541Additions
      to furniture and equipment
                            
                            
                            (277
                            )
                            
                            
                            (95
                            )
                            
                            
                            (964
                            )Restricted
      cash
                            
                            
                            50
                            
                            
                            
                            (525
                            )
                            
                            
                            (1,027
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            1,107
                            
                            
                            
                            (17,291
                            )
                            
                            
                            (68,816
                            )Cash
      flows from financing activitiesProceeds
      from the sale of common stock
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            35,742Proceeds
      from common stock subscribed
                            
                            
                            —
                            
                            
                            
                            3,067
                            
                            
                            
                            2,858Proceeds
      from the issuance of notes payable
                            
                            
                            1,250
                            
                            
                            
                            12,500
                            
                            
                            
                            32,800Borrowing
      on short-term notes payable
                            
                            
                            850
                            
                            
                            
                            —
                            
                            
                            
                            1,350Payments
      on short-term notes payable
                            
                            
                            (4,654
                            )
                            
                            
                            —
                            
                            
                            
                            (4,654
                            )Payments
      on related party borrowing
                            
                            
                            (519
                            )
                            
                            
                            (450
                            )
                            
                            
                            (519
                            )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
                            
                            
                            —
                            
                            
                            
                            (44
                            )
                            
                            
                            (1,638
                            )Net
      cash provided by financing activities
                            
                            
                            4,427
                            
                            
                            
                            15,073
                            
                            
                            
                            95,567Effect
      of exchange rate changes on cash
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (3
                            )Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            1,472
                            
                            
                            
                            (8,930
                            )
                            
                            
                            1,592Cash
      and cash equivalents, beginning of period
                            
                            
                            120
                            
                            
                            
                            10,632
                            
                            
                            
                            —Cash
      and cash equivalents, end of period
                            
                            $
                            1,592
                            
                            
                            $
                            1,702
                            
                            
                            $
                            1,592Supplemental
      schedule of cash flow informationCash
      paid for interest
                            
                            $
                            16
                            
                            
                            $
                            —
                            
                            
                            $
                            1,517Cash
      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 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, 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 Note 5 )
and subsequent to March 31, 2008, we entered into a binding purchase
and sale agreement to sell up to 1,059 net acres and 16 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 has 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 six month
periods ended March 31, 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 of value assigned to the detachable warrants to
      interest expense, versus recording the warrant value as a discount against
      the face value of the Convertible Debentures and amortizing the discount
      to interest expense over the remaining term of the convertible debentures
      using the effective interest method.  We recorded further
      corrections during the second quarter ended March 31, 2008 to give proper
      effect to the additional discount against the face value of the
      Convertible Debentures, and to properly record the effects of the
      additional amortization to interest
expense.




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.  We
      recorded further corrections during the second quarter ended March 31,
      2008 to give proper effect to the additional amortization to interest
      expense.




3.
            Heavy Oil AssetSale – 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 trading securities and recorded an unrealized
      loss in our statement of operations, versus reflecting the $1.6 million in
      unrealized losses (net of the $0.9 million excess discussed above) as a
      charge to other comprehensive income.  Finally, we determined we
      should have recorded a $11.9 million loss on conveyance on the
      transaction, based on the relationship of the fair value of the Heavy Oil
      Projects, versus what was recorded in our full cost pool.  We
      recorded further corrections during the second quarter ended March 31,
      2008 to give proper effect to the recognition of the realized loss on the
      sale of marketable securities we acquired in relation to this transaction,
      and had been held for sale, by recording the proper realized loss in our
      statement of operations.  In addition, we recorded corrections
      during the second quarter ended March 31, 2008 to our oil and gas property
      accounts and our accumulated deficit in relation to the loss on
      conveyance.




4.
            Related Party Consulting
      Agreement Termination – We corrected a $0.2 million error in our
      accounting for the termination of certain consulting services that had
      been provided by a significant shareholder during the first quarter ended
      December 31, 2007, which understated accrued expenses and general and
      administrative expense.  We recorded further corrections during
      the second quarter ended March 31, 2008 to reverse the  13
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
 effects
      of corrections we reflected in our Original Report, affecting accrued
      expenses, additional paid in capital and general and administrative
      expense.




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 second quarter ended March 31, 2008 to properly reflect the value the
      guarantee as of that date.




6.
            Stock-Based Compensation
      Expense – During our second quarter ended March 31, 2008, we
      corrected a $0.4 million error in our accounting for stock-based
      compensation expense, resulting from various errors in valuing our expense
      using our Black-Scholes calculation of fair
  value.




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 second quarter ended March 31, 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
      (primarily between the first quarterly period ended December 31, 2007 and
      the second quarterly period ended March 31, 2008) and the proper
      classification of amounts receivable for Goods and Services Taxes in
      Australia.





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 March 31, 2008 (in
thousands):




March
      31, 2008As
      previously reported
                                              
                                              
                                              Net
      Adjustments
                                              
                                              
                                              As
      restatedCurrent
      AssetsCash
      and cash equivalents
                                              
                                              $
                                              1,592
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              1,592Receivables
                                              
                                              
                                              359
                                              
                                              
                                              
                                              662
                                              
                                              
                                              
                                              1,021Other
      current assets
                                              
                                              
                                              69
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              69Total
      Current Assets
                                              
                                              
                                              2,020
                                              
                                              
                                              
                                              662
                                              
                                              
                                              
                                              2,682Property
      and Equipment, at cost and Other AssetsOil
      and gas properties under full cost method, net
                                              
                                              
                                              173,975
                                              
                                              
                                              
                                              (8,035
                                              )
                                              
                                              
                                              165,940Intangible
      asset
                                              
                                              
                                              2,756
                                              
                                              
                                              
                                              (325
                                              )
                                              
                                              
                                              2,431Deferred
      financing costs
                                              
                                              
                                              713
                                              
                                              
                                              
                                              1,072
                                              
                                              
                                              
                                              1,785Other
      assets
                                              
                                              
                                              2,073
                                              
                                              
                                              
                                              393
                                              
                                              
                                              
                                              2,466Total
      Assets
                                              
                                              $
                                              181,537
                                              
                                              
                                              $
                                              (6,233
                                              )
                                              
                                              $
                                              175,304Current
      LiabilitiesAccounts
      payable and accrued expenses
                                              
                                              $
                                              26,695
                                              
                                              
                                              $
                                              487
                                              
                                              
                                              $
                                              27,182Due
      to shareholders and related parties
                                              
                                              
                                              1,058
                                              
                                              
                                              
                                              21
                                              
                                              
                                              
                                              1,079Notes
      and interest payable
                                              
                                              
                                              7,759
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7,759Notes
      and interest payable, related parties
                                              
                                              
                                              3,525
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3,525Contingent
      purchase obligation
                                              
                                              
                                              2,756
                                              
                                              
                                              
                                              (325
                                              )
                                              
                                              
                                              2,431Total
      Current Liabilities
                                              
                                              
                                              41,793
                                              
                                              
                                              
                                              183
                                              
                                              
                                              
                                              41,976Non-Current
      ObligationsNotes
      payable, net
                                              
                                              
                                              30,099
                                              
                                              
                                              
                                              (134
                                              )
                                              
                                              
                                              29,965Convertible
      notes payable, net
                                              
                                              
                                              2,997
                                              
                                              
                                              
                                              (2,847
                                              )
                                              
                                              
                                              150Subordinated
      notes payable, related parties
                                              
                                              
                                              1,401
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,401Asset
      retirement obligation
                                              
                                              
                                              104
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              104Net
      Non-Current Obligations
                                              
                                              
                                              34,601
                                              
                                              
                                              
                                              (2,981
                                              )
                                              
                                              
                                              31,620Total
      Liabilities
                                              
                                              
                                              76,394
                                              
                                              
                                              
                                              (2,798
                                              )
                                              
                                              
                                              73,596Stockholders'
      EquityCommon
      stock
                                              
                                              
                                              319
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              319Additional
      paid in capital
                                              
                                              
                                              193,240
                                              
                                              
                                              
                                              5,352
                                              
                                              
                                              
                                              198,592Accumulated
      other comprehensive loss
                                              
                                              
                                              (41
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (41
                                              )Deficit
      accumulated during development stage
                                              
                                              
                                              (88,375
                                              )
                                              
                                              
                                              (8,787
                                              )
                                              
                                              
                                              (97,162
                                              )Total
      Stockholders' Equity
                                              
                                              
                                              105,143
                                              
                                              
                                              
                                              (3,435
                                              )
                                              
                                              
                                              101,708Total
      Liabilities and Stockholders' Equity
                                              
                                              $
                                              181,537
                                              
                                              
                                              $
                                              (6,233
                                              )
                                              
                                              $
                                              175,304




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 six month periods
ended March 31, 2008 (in thousands, except share data):




For
      the three months ended March 31, 2008
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          For
      the six months ended March 31, 2008As
      previously reported
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          Net
      Adjustments
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          As
      restated
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          As
      previously reported
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          Net
      Adjustments
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          As
      restatedTotal
      Revenue
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          705
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (59
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          646
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          992
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          161
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          1,153Costs
      & Expenses:General
      and administrative
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          3,796
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (1,327
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          2,469
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          5,690
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (903
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          4,787Other
      operating expenses
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          322
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          39
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          361
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          681
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          42
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          723Total
      Operating Expenses
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          4,118
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (1,288
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          2,830
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          6,371
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (861
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          5,510Loss
      From Operations
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (3,413
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          1,229
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,184
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (5,379
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          1,022
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (4,357
                                                                                                                                                                                                          )Other
      Income (Expense):Loss
      on conveyance of property
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (11,875
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (11,875
                                                                                                                                                                                                          )Interest
      expense
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,390
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (184
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,574
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (7,425
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          2,066
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (5,359
                                                                                                                                                                                                          )Loss
      on marketable securities
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (594
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,393
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,987
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,987
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,987
                                                                                                                                                                                                          )Other,
      net
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          60
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (47
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          13
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          38
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          38Total
      Other Expense
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,924
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (2,624
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (5,548
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (10,374
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (9,809
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          (20,183
                                                                                                                                                                                                          )NET
      LOSS
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (6,337
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (1,395
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (7,732
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (15,753
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (8,787
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (24,540
                                                                                                                                                                                                          )Net
      Loss Per share
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.02
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.00
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.02
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.05
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.03
                                                                                                                                                                                                          )
                                                                                                                                                                                                          
                                                                                                                                                                                                          $
                                                                                                                                                                                                          (0.08
                                                                                                                                                                                                          )Weighted
      Average Number of Shares Outstanding-Basic and
      Diluted
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          316,978
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          316,978
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          312,610
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          -
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          
                                                                                                                                                                                                          312,610




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 six months ended March 31, 2008 (in
thousands):




For
      the six months ended March 31, 2008As
      previously reported
                        
                        
                        Net
      Adjustments
                        
                        
                        As
      restatedNet
      cash used in operating activities
                        
                        $
                        (6,420
                        )
                        
                        $
                        2,358
                        
                        
                        $
                        (4,062
                        )Net
      cash provided by investing activities
                        
                        
                        4,753
                        
                        
                        
                        (3,646
                        )
                        
                        
                        1,107Net
      cash provided by financing activities
                        
                        
                        3,152
                        
                        
                        
                        1,275
                        
                        
                        
                        4,427Effect
      of exchange rate changes on cash
                        
                        
                        (13
                        )
                        
                        
                        13
                        
                        
                        
                        —Increase in
      cash and cash equivalents
                        
                        
                        1,472
                        
                        
                        
                        —
                        
                        
                        
                        1,472Cash
      and cash equivalents beginning of year
                        
                        
                        120
                        
                        
                        
                        —
                        
                        
                        
                        120Cash
      and cash equivalents end of period
                        
                        $
                        1,592
                        
                        
                        $
                        —
                        
                        
                        $
                        1,592




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 $97.2 million for the period from
inception (June 20, 2005) to March 31, 2008, have a working capital deficit of
approximately $­­­­39.3
million as of March 31, 2008, were not in compliance with the covenants of
several loan agreements, have had multiple property liens and foreclosure
actions filed by vendors and have significant capital expenditure commitments.
As of March 31, 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 $ 100.7  million through March 31, 2008 through issuances of
common stock and convertible and other debt.





For the
three and six-month periods ending March 31, 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 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 March 31, 2008 and the
consolidated results of our operations and cash flows for the three and
six-month periods ending March 31, 2008 and 2007. The results of operations for
the three and six-month periods ending March 31, 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 determination of whether losses should be recorded on property
conveyances, the amount of expected future cash flows used in determining
possible impairments of oil and gas properties and the amount of future capital
costs estimated for such calculations. Assumptions, judgments and 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 1.5 million 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 available 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.





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 sale or
abandonment significantly alters the relationship between capitalized costs
and proved oil and gas reserves of the cost center. Depletion and amortization
of oil and gas properties is computed on the units-of-production method based on
proved reserves. Amortizable costs include estimates of future development costs
of proved undeveloped reserves.





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





Guarantees. As part of a
Gas Gathering Agreement we have with CCES Piceance Partners I , LLC
(“CCES”), we have guaranteed that, should there be a mutual failure to execute a
formal agreement for long-term gas gathering services in the future, we will
repay CCES for certain costs they have incurred in relation to the development
of a gas gathering system and repurchase certain gas gathering assets we sold to
CCES. We have accounted for this guarantee using FASB Interpretation No. 45
as amended, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,which requires us to recognize a
liability for the obligations undertaken upon issuing the guarantee in order to
have a more representationally faithful depiction of the guarantor’s assets and
liabilities. Accordingly, we have recognized a $2.4 million
contingent purchase obligation and related intangible asset on our
balance sheet as of March 31, 2008.





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 Conservation Act of 1975(“Rule 4-10”).
Rule 4-10 requires that each regional cost center’s (by country) capitalized
cost, less accumulated amortization and related deferred income taxes not exceed
a cost center “ceiling.” The ceiling is defined as the sum of:




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




18
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


•      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 six-month periods ended March 31, 2008, we did not record any
impairment charges. During the three and six-month periods ended March 31, 2007,
we recorded impairment charges of $3.8 million and $9.0 million.





Fair Value.The carrying
amount reported in the consolidated balance sheets for cash, receivables,
prepaids, accounts payable and accrued liabilities approximates fair value
because of the immediate or short-term maturity of these financial instruments.
Based upon the borrowing rates currently available to us for loans with similar
terms and average maturities, the fair value of  notes payable,
approximates their face value.





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




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 excluded potential common shares from stock options and warrants of
approximately 114,169,114 and 48,701,500 for the periods ended March 31, 2008
and 2007, respectively.





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


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









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




Supplemental Cash Flow Information.Supplement cash flow information for the six months ended March 31, 2008
and 2007, respectively, and cumulative from inception (June 2005) is as
follows:





Six
      Months
                  Ended
                  March
      31,
                  2008
                
                
                Six
      Months
                  Ended
                  March
      31,
                  2007
                
                
                Cumulative
                  From
      Inception
                  (June
      20, 2005) to
                  March
      31,
                  2008(unaudited,
      restated, $ in thousands)Supplemental
      disclosures of non-cash investing and financing
      activitiesShares
      issued for expenditures advanced
                
                $
                —
                
                
                $
                —
                
                
                $
                100Contracts
      for oil and gas properties
                
                $
                (1,500
                )
                
                $
                2,900
                
                
                $
                12,024Shares
      issued for debt conversion
                
                $
                6,384
                
                
                $
                —
                
                
                $
                28,416Shares
      issued for 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 property and finder’s fee on property
                
                $
                —
                
                
                $
                —
                
                
                $
                9,644Warrants
      issued for debt
                
                $
                3,757
                
                
                $
                —
                
                
                $
                8,427Non-cash
      uses of notes payable, accounts payable and accrued
      liabilities
                
                $
                —
                
                
                $
                —
                
                
                $
                26,313Convertible
      debt issued for property
                
                $
                —
                
                
                $
                —
                
                
                $
                1,200Common
      stock issuable
                
                $
                —
                
                
                $
                4,128
                
                
                $
                —Discount
      associated with beneficial conversion feature and detachable
      warrants
                
                $
                6,956
                
                
                $
                —
                
                
                $
                6,956Common
      stock subscriptions converted to notes and convertible
      debentures
                
                $
                2,858
                
                
                $
                —
                
                
                $
                2,858Marketable
      securities received from sale of oil and gas
properties
                
                $
                5,529
                
                
                $
                —
                
                
                $
                5,529Acquisition
      of oil and gas properties by exchange of joint interest billings, oil and
      gas receivables and accounts payable
                
                $
                12,707
                
                
                $
                —
                
                
                $
                12,707





Note
4 — Agreements with MAB Resources LLC





We have
entered into various agreements with MAB Resources LLC (“MAB”), a company that
is controlled by our largest shareholder, Marc A. Bruner. The following is
a summary of those agreements.




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




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




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




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


o
            by
      $0.2 million for MAB assuming certain costs that Paleo Technology owed to
      us.




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




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.


Note
5 — Oil and Gas Properties





Oil and
gas properties consisted of the following:


March
      31,
                  2008
                  (restated)
                
                
                September
      30,
                  2007Oil
      and gas properties, at cost, full cost method
                
                ($
      in thousands)UnprovedUnited
      States
                
                $
                108,300
                
                
                $
                107,239Australia
                
                
                23,648
                
                
                
                23,569Proved
      – United States
                
                
                35,423
                
                
                
                57,168Total
                
                
                167,371
                
                
                
                187,976Less
      accumulated  depreciation, depletion, amortization
      and  impairment
                
                
                (1,431
                )
                
                
                (25,133
                )Total
                
                $
                165,940
                
                
                $
                162,843





Included
in oil and gas properties above is capitalized interest of $0.0 million and $0.4
million for three months ended March 31, 2008 and 2007, respectively. In
the six months ended March 31, 2008 and 2007, oil and gas properties included
capitalized interest of $0.2 million and $0.4 million,
respectively.





Included
below is a summary of significant activity related to oil and gas properties
during the three and six-month periods ended March 31, 2008.





PICEANCEBASIN





Buckskin Mesa Project.As of
March 31, 2008, we had drilled five wells, with two wells having been
completed and shut-in, awaiting completion 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. We currently estimate our cost to drill and complete each well
at $3.0 million, aggregating $39.0 million for the remaining 13
wells.





Piceance II Project.As of
March 31, 2008, we had drilled, but did not complete, 16 wells.





On
December 10, 2007, we entered into two agreements with EnCana Oil & Gas
(USA) Inc. (“EnCana”) to exchange and augment interests in certain
Piceance Basin properties, which resulted in an increase in our working
interest in 12 of the 16 wells mentioned above as follows:





Exchange
1 — We received from EnCana an interest in 40 net acres, including two net and
gross wells, and conveyed to EnCana interests in 19 gross wells and 0.4 net
wells. We and EnCana relieved each other of existing obligations related to all
past costs and operations of the respective properties exchanged. EnCana’s share
of the costs to drill the two wells of $3.2 million reflected as Joint interest billingsin our consolidated
balance sheet at September 30, 2007 was reclassified to Oil and gas propertiesduring
the first quarter ended December 31, 2007. In


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


Exchange
2 — We received from EnCana an interest in 99 net acres, including 10 gross
wells (5 net). EnCana’s share of the costs to drill the 10 wells of $9.4 million
reflected as Joint interest
billingsin our consolidated balance sheet at September 30, 2007 was
reclassified to Oil and gas
properties during the first quarter ended December 31, 2007. In addition,
we paid EnCana $1.0 million at closing that is also reflected in Oil and gas propertiesduring
the first quarter ended December 31, 2007.





By the
terms of a Lease Acquisition and Development Agreement between MAB, Apollo
Energy LLC and ATEC Energy Ventures and a third oil and gas lease pertaining to
the Piceance II properties, we were required to drill 10 wells by December 31,
2008. Of the 10 wells, we drilled two during the fiscal year ended September 30,
2007 and we paid 100% of the costs to drill those two wells (two of the 16 wells
mentioned above). Our joint interest partner’s share in the amount of $1.0
million is reflected as Joint
interest billingson our consolidated balance sheet at March 31, 2008. We have estimated
total estimated costs to drill and complete the 8 additional wells at
approximately $16.8 million ($10.5 million to our 62.5% interest). We are
currently conducting negotiations with the owners of the remaining 37.5% working
interest owners to trade their interest in this lease for other oil and gas
interests owned by us.





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





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





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





Australia 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.





Beetaloo Project.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 committed to drill five wells at a total estimated cost of
$20.0 million related to this property.





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


23
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


POWDERRIVER
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 4 and 8).





MONTANACOALBED
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.





HEAVY
OIL





Sale of Heavy Oil Projects.On November 6, 2007 and effective October 1, 2007, the Company sold a
majority of its interest in certain Heavy Oil Projects, including the West
Rozel, Fiddler Creek and Promised Land Projects to Pearl Exploration and
Production Ltd. (“Pearl”). We recognized a loss related to the transaction of
$11.9 million during the quarter ended December 31, 2007. Prior to this sale, we
had engaged in a lengthy sales process and turned down numerous offers from
other parties for the property. We felt that Pearl’s offer was within the range
of valuation we considered to be reasonable for this property. In evaluating the
impact on our full cost pool, we applied the guidance of Regulation S-X Rule
4-10, Financial Accounting and
Reporting for Oil and Gas Producing Activities Pursuant to the Federal
Securities Laws and the Energy Policy and Conservation Act of 1975 (“Rule
4-10”). Pursuant to Rule 4-10, the sale of these properties resulted in a
significant alteration in the reserves on our properties and therefore, we had
to evaluate the properties for a loss on the transaction. Accordingly, the
net book value of our properties was allocated on the same ratio of reserves
between the sold properties and those that we retained, resulting in a loss on
the conveyance of these properties of $11.9 million during the period ended
December 31, 2007.




The
purchase price was a maximum of $30.0 million, payable as follows: (a) $7.5
million in cash; (b) the issuance of the number of shares of Pearl equivalent to
$10.0 million in total (based on a price of $4.00 Canadian dollars per share or
such other higher price as is dictated by the regulations of the TSX Venture
Exchange), including value attributable to leases on which title is being
reviewed after closing, and value attributable to 4,645 net acres of leasehold
which were not assigned at closing, pending Pearl’s attempt to renegotiate the
terms of the Company’s agreement with the third party that sold acreage to
PetroHunter (within six months after closing); and (c) a performance payment
(the “Pearl Performance Payment”) of $12.5 million in cash at such time as
either: (i) production from the assets reaches 5,000 barrels per day; or (ii)
proven reserves from the assets is greater than 50.0 million barrels of oil as
certified by a third party reserve engineer. In the event that these targets
have not been achieved by September 30, 2010, the Pearl Performance Payment
obligation will expire. Upon the expiration of the




24
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  The sale
of assets to Pearl also resulted in amendments to existing agreements with third
parties, including MAB’s relinquishment of its rights and obligations in all
PetroHunter present and future properties in Utah and Montana, as set
forth in the Second Amendment, and termination of PetroHunter’s obligation
to pay an overriding royalty
and a per barrel production payment to American Oil & Gas, Inc. (“American”)
and Savannah Exploration (“Savannah”), in consideration for: (a) five
million common shares of PetroHunter common stock to be issued to American and
Savannah; and (b) a contingent obligation to pay a total of $2.0 million to
American and Savannah in the event PetroHunter receives the Pearl Performance
Payment.





Note
6 — 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:





March
      31,
                  2008
                
                
                September
      30,
                  2007($
      in thousands)Beginning
      asset retirement obligation
                
                $
                136
                
                
                $
                522Liabilities
      incurred
                
                
                1
                
                
                
                30Liabilities
      settled
                
                
                (35
                )
                
                
                —Revisions
      to estimates
                
                
                —
                
                
                
                (429
                )Accretion
      expense
                
                
                2
                
                
                
                13Ending
      asset retirement obligation
                
                $
                104
                
                
                $
                136





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 acontract payable
- oil and gas properties, and $4.1 million as stockholders’ equity (equal
to 2.4 million shares at the $1.70 closing price of our common stock on the date
of the closing).





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






25
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  We
continually failed to make payments in accordance with the Agreement and
subsequent amendments and as a result, on December 4, 2007, Maralex terminated
the Agreement. Pursuant to this termination Maralex returned to us 6.4 million
shares of common stock that had been issued to them, and all leases related to
the Agreement were returned to Maralex. To account for the termination and
conveyances we reclassified the balance of the contractpayable - oil and gas
properties in the amount of $1.5 million to oil and gasproperties, recorded the
return of the oil and gas
properties  oil and gas
properties





Note
8 — Notes Payable





Notes
payable are summarized below:


March
      31,
                  2008
                  (restated)
                
                
                September
      30,
                  2007($
      in thousands)Notes
      payable – short-term:Global
      Project Finance AG
                
                $
                850
                
                
                $
                500Vendor
                
                
                1,224
                
                
                
                4,050Flatiron
      Capital Corp.
                
                
                35
                
                
                
                117Notes
      payable – short-term
                
                $
                2,109
                
                
                $
                4,667Convertible
      notes payable
                
                $
                400
                
                
                $
                400Notes
      payable – related party – current portion:Bruner
      Family Trust
                
                $
                2,705
                
                
                $
                —Wealth
      Preservation
                
                
                100
                
                
                
                —MAB-
      current portion
                
                
                —
                
                
                
                3,755Notes
      payable – related party – current portion
                
                $
                2,805
                
                
                $
                3,755Subordinated
      notes payable — related party:Bruner
      Family Trust
                
                $
                106
                
                
                $
                275MAB
                
                
                1,295
                
                
                
                8,775Subordinated
      notes payable — related party
                
                $
                1,401
                
                
                $
                9,050Long-term
      notes payable — net of discount:Global
      Project Finance AG
                
                $
                32,800
                
                
                $
                31,550Vendor
                
                
                200
                
                
                
                250Less
      current portion
                
                
                (120
                )
                
                
                (120
                )Discount
      on notes payable
                
                
                (2,915
                )
                
                
                (3,736
                )Long-term
      notes payable — net of discount
                
                $
                29,965
                
                
                $
                27,944Convertible
      debt:Convertible
      debt
                
                $
                6,956
                
                
                $
                —Discount
      on convertible debt
                
                
                (6,806
                )
                
                
                —Convertible
      debt — net of discount
                
                $
                150
                
                
                $
                —





Short-
Term Notes
Payable





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. On
October 10, 2007, the Company received various advances of funds from Global a
short term note agreement with borrowings of $0.5 million on October 10, 2007,
$0.1 million on January 31, 2008, $0.2 million on February 13, 2008 and $0.1
million on March 18, 2008.  The entire balance on the




26
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  Vendor. (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 bears interest at 14% per annum if paid
current. The interest rate increases to 21% per annum if the note is in default.
At March 31, 2008, we were in default on this note due to non-payment; the
balance was $1.0 million and we had accrued interest
on the note in the amount of $0.4 million. The vendor filed a judgment lien
against us and garnished $0.3 million in cash. This matter has subsequently
been settled. (See Note 13 ).





(ii)
During the six months ended March 31, 2008, we entered into another promissory
note with a vendor for outstanding account payable balances. The note bears
interest at 8.25% per annum, increases to 10.25% if the note is in default and
was due to mature February 29, 2008. At March 31, 2008, we were in default on
the payment terms; the balance was $0.2 million and we had accrued interest
related to this in the amount of $0.0 million . The payee on this note has
deferred any formal claim or legal action for the payment of interest and
principal for the time being, and the parties are discussing a deferred payment
schedule.





As more
fully described in Note 13, subsequent to March 31, 2008 and as part of a sale
of substantially all of our working interest in our Southern Piceance
properties, we have entered into numerous settlements and reached agreements
with many of our trade creditors, in relation to balances recorded as of March
31, 2008.





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
bears interest at a rate of 7.25% per annum. Payments are due in 10 equal
installments of $17,000, commencing on July 1, 2007 and maturing on April 1,
2008. The note is unsecured and the balance at March 31, 2008 was $35,000. This
note was paid in full in April 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 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 shares on the Over the Counter Bulletin Board market on the
day preceding notice from the lender of its intent to convert the loan. As of
March 31, 2008, accrued interest amounted to $0.1 million. We are in default on
payment of the notes.





Note
– Payable Related Party – Current Portion





Wealth Preservation.On
January 25, 2008, we borrowed $0.1 million under a promissory note. 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.





Bruner Family Trust. During
the six months ended March 31, 2008, we entered into four promissory notes with
the Bruner Family Trust with principal amounts aggregating $2.7
million.  Each note accrues interest at LIBOR plus 3% per annum and is
due 12 months from each note’s respective issue date.  The largest of
these notes, $2.4 million is due November 13, 2008, with the remaining three
notes due in February and March 2009.  As of March 31, accrued
interest relating to these notes is $0.1 million and all amounts are classified
as current on our consolidated balance sheet.





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 the 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


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


Bruner Family Trust.On July
11, 2007, we executed a subordinated unsecured promissory note with the Bruner
Family Trust in the amount of $250,000. Interest accrues at an annual rate of 8%
and the note plus accrued interest is due in full on the later of October 29,
2007 or the time when the Global Project Finance AG Credit Facility and all
other senior indebtedness has been paid in full. In November 2007, Charles
Crowell, 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.





Subsequently,
Mr. Crowell participated in our private placement in November 2007 to the extent
of $0.2 million and in exchange for cancellation of $0.2 million of the total
amount we owed to him. The balance of the amount owed to him under the note,
$18,000, was then paid in cash. At March 31, 2008, the balance due to the Bruner
Family Trust under this arrangement was $81,000.





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





Long-Term
Notes Payable





Credit Facility — Global.On
January 9, 2007, we entered into a Credit and Security Agreement (the “January
2007 Credit Facility”) with Global for mezzanine financing in the amount of
$15.0 million. The January 2007 Credit Facility is collateralized by a first
perfected lien on certain oil and gas properties and other 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 March 31, 2008, we have drawn the total
$15.0 million available under the January 2007 Credit Facility.





The terms
of the January 2007 Credit Facility provide for the issuance of 1.0 million
warrants to purchase 1.0 million shares of 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 4.8%; and (v) an expected life of 5 years. The fair value of the 1.0
million warrants issued in conjunction with the advances was $0.9
million.   The fair value of the warrants issued with the
debt of $2.2 million was recorded as a discount to the credit facility and
is 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






28
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  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 March 31, 2008, $17.8 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 71.8%; (iv)
risk free interest rate of 3.1% to 4.9%; and (v) expected life of 5 years.
The fair value of the 2.0 million warrants issued in conjunction with the
advances was $1.0 million.   The fair value of the warrants
issuable as of March 31, 2008, in the amount of $2.4 million for advances
through March 31, 2008 under this facility, 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.





As of
March 31, 2008, we were in default of payments to Global in the amount of
$5.0 million, which consists of unpaid interest and fees under the Credit
Facilities. We were also not in compliance with various financial and debt
covenants under the Global Credit Facilities as of March 31, 2008. Global has
waived and released PetroHunter from any and all defaults, failures to perform,
and any other failures to meet its obligations through April 1 ,
2009.





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 March 31,
2008, the balance of this note is $0.2 million; however on April 8, 2008 we
satisfied the note with full payment of principal and interest.





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 $0.27 per share. The
warrants are immediately exercisable and as a result, we recorded $0.1
million and $0.3 million of interest expense during the three and
six-months ended March 31, 2008. In connection with the placement of the
debentures, we paid a placement fee of $0.3 million and issued placement
agent warrants entitling the holders to purchase an aggregate of 0.2 million
shares at $0.35 per share for a period of five years. Interest payments related
to the Debentures accrues at an annual rate of 8.5% and is payable in cash or in
shares (at our





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


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.





The
debentures have a maturity date of five years and are convertible at any time by
the holders into shares of our common stock at a price of $0.15 per share, which
was determined to be beneficial to the holders on the date of issuance. In
accordance with EITF 00-27, Application of
EITF  to certain convertible instruments, Issue No. 98-5, "Accounting for Convertible Debentures with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios,"we recorded discounts to the debentures equal to
their full face value at issuance which will be accreted to interest
expense over the term of the notes using the effective interest
method.





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.





Note
9 — Stockholders’ Equity





Common Stock.During the six
months ended March 31, 2008, we issued 46.2 million shares of our common stock
and had 6.4 million shares of our common stock returned as follows:




30
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  •
                  In
      October 2007, we issued 25.0 million shares of our common
      stock  at $0.31 per share to a related party in exchange for the
      relinquishment of overriding royalty interests in certain of our
      properties. (see Note 4)•
                  In
      November 2007, we issued 16.0 million shares of our common stock at $0.23
      per share to a related party in exchange  for the reduction
      of  an outstanding note payable balance. (see Note
      4)
  •
                In
      November 2007, we issued 5.0 million shares of our common stock at
      $0.25 per share in conjunction with sale of heavy oil
      assets.
  •
                In
      November 2007, we issued 0.2 million shares of our common stock
      at  $0.28 per share for transaction finance
      costs.


•
            In
      December 2007, 6.4 million shares of our common stock were returned to us
      at $0.22 per share in connection with a property
      conveyance.





Common Stock Subscribed.On
November 6, 2006, we commenced the sale of a maximum $125.0 million pursuant to
a private placement of units at $1.50 per unit (the “Private Placement”). Each
unit consisted of one share of our common stock and one-half common stock
purchase warrant. A whole common stock purchase warrant entitled the purchaser
to acquire one share of 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 six months ended March 31,
2008, we reclassified $2.4 million of subscriptions which included $0.1 million
of accrued interest to Notes
Payable- Related Party.





In
November, 2007, the Board of Directors again agreed to restructure the offering
of the Private Placement and to pay interest at 8.5% from the date the original
funds were received to the date of the issuance (see Note 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:





March
      31,
                2008
              
              
              September
      30,
                2007(warrants
      in thousands)Number
      of warrants
              
              
              130,171
              
              
              
              51,063Exercise
      price
              
              $
              0.22
      - $2.10
              
              
              $
              0.31
      - $2.10Expiration
      date
              
              
              2009
      - 2012
              
              
              
              2011
      - 2012





During
the six months ended March 31, 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 December
31, 2008, none of these warrants had been exercised and the total value of these
warrants, based on valuation under the Black-Scholes method was $7.4
million. In connection with the placement of the debentures, we paid a placement
fee of $0.3 million and issued placement agent warrants entitling the holders to
purchase an aggregate of 0.2 million shares at $0.35 per share for a period of
five years. These warrants had a total valuation under the Black-Scholes method
of $0.0 .




During
the six months ended March 31, 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.





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




During
the six months ended March 31, 2008  we recorded $2.0 million, in
deferred financing costs related to the issuance of 16.6 million warrants in
connection with our Global Credit Facility. Amounts recorded as deferred
financing costs have been calculated using the Black-Scholes method, the
associated warrants will expire in January, 2012.
  During
the six months ended March 31, 2008 we issued warrants in connection with
amounts borrowed against our credit facility. We issued 0.5 million warrants
valued at $0.1 million using the Black-Scholes method.


Note
10 — Share-Based Compensation





Stock Option Plan.On August
10, 2005, the Company adopted the 2005 Stock Option Plan (the “Plan”), as
amended. Stock options under the Plan may be granted to key employees,
non-employee directors and other key individuals who are committed to the
interests of the Company. Options may be granted at an exercise price not less
than the fair market value of the Company’s common stock at the date of grant.
Most options have a five year life but may have a life up to 10 years as
designated by the compensation committee of the Board of Directors (the
“Compensation Committee”). Typically, options vest 20% on grant date and 20%
each year on the anniversary of the grant date but each vesting schedule is also
determined by the Compensation Committee. Most initial grants to Directors vest
50% on grant date and 50% on the one-year anniversary of the initial grant date.
Subsequent grants (subsequent to the initial grant) to Directors typically vest
100% at the grant date. In special circumstances, the Board may elect to modify
vesting schedules upon the termination of selected employees and contractors. We
have reserved 40.0 million shares of common stock for the plan. At March 31,
2008 and September 30, 2007, 10.0 million and 15.0 million shares, respectively
remained available for grant pursuant to the stock option plan. During the three
and six-months ended March 31, 2008, we granted 5.0 and 8.0 million options
under our 2005 stock option plan to directors, employees and consultants
performing employee-like services for us during the three and six months ended
March 31, 2007, we granted 1.0 million options under our 2005 stock option plan
to directors.





A summary
of the activity under the Plan for the six months ended March 31, 2008 is
presented below:


Number
      of
                    Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
      Price(shares
      in thousands)Options
      outstanding — September 30, 2007
                  
                  
                  24,965
                  
                  
                  $
                  1.31Granted
                  
                  
                  7,950
                  
                  
                  
                  0.21Forfeited
                  
                  
                  (2,450
                  )
                  
                  
                  0.22Options
      outstanding — March 31, 2008
                  
                  
                  30,465
                  
                  
                  
                  0.99Options
      exercisable — March 31, 2008
                  
                  
                  15,425
                  
                  
                  
                  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 six
months ended March 31, 2008.





Expected
      option term — years
                1.75
      – 3.5Weighted-average
      risk-free interest rate
                1.79%
      - 4.04%Expected
      dividend yield
                0Weighted-average
      volatility
                69.9%
      - 97.4%




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





32
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)


A summary
of the activity for the six months ended March 31, 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 — March 31, 2008
                                  
                                  
                                  7,595
                                  
                                  
                                  
                                  0.50Options
      exercisable — March 31, 2008
                                  
                                  
                                  4,757
                                  
                                  
                                  
                                  0.50





Compensation
expense–Stock-based employee and non-employee compensation expense of
$0.6 million and $1.1 million was charged to operations during the three and six
months ended March 31, 2008.  Stock-based compensation expense of $1.5
million and $3.6 million was recognized during the three months and six months
ended March 31, 2007 Stock based compensation has been included in general and
administrative expenses in the consolidated statements of
operations.





Note
11 — Related Party Transactions





MAB.During the three and six
months ended March 31, 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 six months ended March 31, 2008.
Project development costs to MAB are classified in our consolidated statements
of operations as Project
development costs — related party. During the three and six months ended
March 31, 2008 and 2007, we recorded expenditures paid by MAB on our behalf in
the amount of $0.2 million, $0.7 million, $(0.2) million and $0.3 million,
respectively. At March 31, 2008 and September 30, 2007, we owed MAB $0.7 million
and $1.0 million, respectively, related to project development costs and other
expenditures that MAB made on our behalf.




As of
March 31, 2008, pursuant to the agreements with MAB and the $13.5 million
promissory note issued thereunder (see Note 8 ), we owed MAB principal and
accrued interest of $1.9 million. As of September 30, 2007, we owed MAB
principal and accrued interest of $13.0 million under the terms of the
promissory note.





At March
31, 2008, we had six separate promissory notes with the Bruner Family Trust (see
Note 8 ) for an aggregate  amount of $2.8 million. During the
three and six-months ended March 31, 2008, we incurred total interest expense of
$0.1 million and $0.1 million, respectively, and paid nothing in principal on
these notes.





Wealth Preservation.On
January 25, 2008, we borrowed $0.1 million under a promissory note with 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 six months ended March 31, 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 six months ended March 31, 2008, these
amounts have also been paid by offset to amounts we owed to MAB under the


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


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 its business. We are currently a party to the
following legal actions:




•
            As
      of March 31, 2008, there were 21 parties that had filed liens against our
      properties. Likewise, we were a party to 10 lawsuits, 9 of which
      relate to lienholders and one which relates to a lease on the property we
      intend to sell in connection with the pending property sale to Laramie
      (see Note 13). In connection with the Laramie transaction described
      in Note 13, we are required to obtain releases of all of these
      liens  related to the subject property prior to the closing of
      the transaction. As a result, we have obtained all Release of Lien
      documents and settlement agreements required from our creditors to resolve
      these liens and the related disputes. All such documents and
      agreements will be recorded and become effective upon closing on the sale
      to Laramie and payment to such creditors. We currently estimate that
      we will incur costs of approximately $20 million, excluding related legal
      fees, to resolve these liens and related disputes. See Note 13 for
      further description of the pending Laramie
  transaction.




•
            In
      August 2007, a lawsuit was filed by a law firm in the Supreme Court of
      Victoria, Australia for the balance of legal fees owed to the law firm in
      the amount of 0.2 million Australian dollars. The total amount owed was
      included in accounts payable at September 30, 2007, but has been reduced
      to less than 0.1 million Australian dollars, as a result of payments made
      by us.




•
            In
      December 2007, a lawsuit was filed by a vendor in the Supreme Court of
      Queensland, Australia for the balance which the vendor claims is owed by
      us in the amount of 2.4 million Australian dollars. Although we accrued
      the entire amount of the judgment lien in Accounts payableas of
      March 31, 2008, this amount is disputed by us on the basis that the vendor
      breached the contract.





In the
event we lose the lawsuit to either or both vendors in the lawsuits filed in
Australia and do not pay the amount owed, either of said vendors could obtain a
judgment lien and seek to execute on the lien against our assets.





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 — Subsequent Events





Laramie
Transaction




On April
25, 2008 we signed a binding purchase and sale agreement with Laramie Energy II,
LLC (“Laramie”) an unrelated third party for the sale of substantially all of
our working interest in our Southern Piceance properties in Colorado, effective
as of April 1, 2008. The original closing date target of May 6, 2008 has
been extended by the parties to May 31, 2008. A total of up to 1,059 net
acres are expected to be transferred to Laramie at closing. We will retain
all of our interest in eight producing wells in Garfield County, which are
operated by EnCana Oil & Gas (USA), Inc. The total purchase price,
prior to adjustments for transaction fees and certain other adjustments as
required by the agreement with Laramie (the “Agreement”), is $21.0 million in
cash. In addition to customary terms


34
 
 PETROHUNTER
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited,
restated)
  and
conditions, the Agreement also requires us to resolve numerous liens and other
legal actions brought against us in relation to these properties, and to
distribute the majority of the proceeds from the transaction to our trade
creditors and others in satisfaction of outstanding claims. We expect to
complete the last remaining pre-closing conditions in the near
future.




Additionally,
we have entered into numerous settlement and release agreements with many of our
trade creditors who have placed liens on our Southern Piceance properties, and
we have agreed to pay cash for a portion and issue shares of our stock for a
portion of the amounts owed to them, and we have further agreed to use our best
efforts to file a registration statement with the Securities and Exchange
Commission by June 30, 2008 in order to register these shares for resale on the
public market. Such agreements are conditioned upon the closing with
Laramie.




Upon
closing, we will be required to distribute substantially all of the adjusted
proceeds in settlement of existing trade obligations and other claims, resulting
in expected net proceeds to us of approximately $2.0 million. A total of
$0.5 million of our net proceeds will be held in escrow for 90 days to secure
our performance under the agreement.





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 that were recorded in the second quarter. The
amount of the Guarantee is variable, based upon the underlying incurred costs by
CCES as defined in the CCES Agreements, and aggregated $2.4 million as of March
31, 2008.





We have
accounted for our Guarantee under the requirements of FASB Interpretation
(“FIN”) 45. As of March 31, 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. Our Contingent Purchase Obligation will be
adjusted during future periods to its fair value, so long as the contingent
Guarantee remains unresolved.





Waiver
and Amendment




In April
and May 2008, we entered into a Waiver and Amendment Agreement (the “Waiver”)
with all of the holders of our Series A 8.5% convertible debentures (see Note
9). The Waiver provides the following:




•
            We
      agree to pay the interest installments due January 1, 2008 and April 1,
      2008 (both currently unpaid) by September 30, 2008, together with late
      fees of 18% per annum.






35


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




•
              We
      agree to issue warrants to purchase common stock, having the same terms as
      the warrants (see Note 9 ), equal to 4% of the shares each debenture
      holder (collectively, the “investors”) is entitled to under the
      debentures.


•
              The
      investors agree to waive our obligation to file a registration statement
      by March 4, 2008 to be effective July 2, 2008, and extend these dates to
      June 30, 2008 and December 31, 2008, respectively.•
              The
      investors agree to waive certain events of default, including the
      non-payment of interest.









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 14 in Item 1) and subsequent to March 31, 2008, we entered
into a binding purchase and sale agreement to sell up to 1,059 net acres of land
and 16 wells in the Southern Piceance Basin in Colorado (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 six-month
periods ended March 31, 2008 and 2007:




Three
      months
                      ended
                      March
      31,
                      2008
                    
                    
                    Three
      months
                      ended
                      March 31,
                      2007
                    
                    
                    Six
      months
                      ended
                      March
      31,
                      2008
                    
                    
                    Six
      months
                      ended
                      March
      31,
                      2007(restated,
      $ in thousands)Total
      Revenue
                    
                    $
                    646
                    
                    
                    $
                    989
                    
                    
                    $
                    1,153
                    
                    
                    $
                    1,438Costs
      and ExpensesLease
      operating expenses
                    
                    
                    140
                    
                    
                    
                    224
                    
                    
                    
                    240
                    
                    
                    
                    386General
      and administrative
                    
                    
                    2,469
                    
                    
                    
                    4,405
                    
                    
                    
                    4,787
                    
                    
                    
                    8,076Project
      development — related party
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,815Impairment
      of oil and gas properties
                    
                    
                    —
                    
                    
                    
                    3,800
                    
                    
                    
                    —
                    
                    
                    
                    8,951Depreciation,
      depletion, amortization and accretion
                    
                    
                    221
                    
                    
                    
                    827
                    
                    
                    
                    483
                    
                    
                    
                    1,213Total
      operating expenses
                    
                    
                    2,830
                    
                    
                    
                    9,256
                    
                    
                    
                    5,510
                    
                    
                    
                    20,441Loss
      From Operations
                    
                    
                    (2,184
                    )
                    
                    
                    (8,267
                    )
                    
                    
                    (4,357
                    )
                    
                    
                    (19,003
                    )Other
      Income (Expense)Loss
      on conveyance of property
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (11,875
                    )
                    
                    
                    —Gain
      on foreign exchange
                    
                    
                    11
                    
                    
                    
                    —
                    
                    
                    
                    11
                    
                    
                    
                    —Interest
      income
                    
                    
                    2
                    
                    
                    
                    6
                    
                    
                    
                    27
                    
                    
                    
                    14Interest
      expense
                    
                    
                    (2,574
                    )
                    
                    
                    (2,004
                    )
                    
                    
                    (5,359
                    )
                    
                    
                    (1,831
                    )Loss
      on sale of securities
                    
                    
                    (2,987
                    )
                    
                    
                    —
                    
                    
                    
                    (2,987
                    )
                    
                    
                    —Total
      other expense
                    
                    
                    (5,548
                    )
                    
                    
                    (1,998
                    )
                    
                    
                    (20,183
                    )
                    
                    
                    (1,817
                    )Net
      Loss
                    
                    $
                    (7,732
                    )
                    
                    $
                    (10,265
                    )
                    
                    $
                    (24,540
                    )
                    
                    $
                    (20,820
                    )Net
      loss per common share — basic and diluted
                    
                    $
                    (0.02
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.09
                    )Weighted
      average number of common shares outstanding — basic and
      diluted
                    
                    
                    316,978
                    
                    
                    
                    222,562
                    
                    
                    
                    312,610
                    
                    
                    
                    221,245





Revenue.During the
quarter ended March 31, 2008, total revenue declined $0.3 million to
approximately $0.7 million, led by a decline in oil and gas revenue of $0.5
million as a result of natural production decline in the wells and to ownership
interests in fewer producing wells. This decline was offset by $0.2 million
in other revenue, which represent certain services we have provided to Pearl
Exploration and Production Ltd. during the quarter, as well as increases in
commodity prices.




For
the six months ended March 31, 2008, revenue declined $0.3 million to
approximately $1.1 million, led by a decline of $0.4 million in oil and gas
revenue, as a result of the same factors discussed above.




Lease Operating Expenses.
Lease operating expenses declined $0.1 million during the three and six-month
periods ended March 31, 2008 compared to the same periods in the prior
year. 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 Colorado properties and in
the 2008 periods, we were not.





38


General and Administrative.During the three months ended March 31, 2008, general and administrative
expenses were $1.9 million or 44% lower than in the same period of
2007. The following table highlights the changes:


Three
      months ended2008
                    
                    
                    2007
                    
                    
                    Change($
      in thousands)Personnel
      and contract services
                    
                    
                    909
                    
                    
                    
                    1,146
                    
                    
                    
                    (237
                    )Legal
                    
                    
                    140
                    
                    
                    
                    432
                    
                    
                    
                    (292
                    )Stock-based
      compensation
                    
                    
                    599
                    
                    
                    
                    2,056
                    
                    
                    
                    (1,457
                    )Travel
                    
                    
                    22
                    
                    
                    
                    313
                    
                    
                    
                    (291
                    )Other
                    
                    799
                    
                    
                    
                    458
                    
                    
                    
                    341Total
                    
                    $
                    2,469
                    
                    
                    $
                    4,405
                    
                    
                    $
                    (1,936
                    )




Overall,
the decrease of $1.9 million in general and administrative expense from the
three months ended March 31, 2007 to the three months ended March 31, 2008, is
primarily due to a $1.5 million decrease in stock-based compensation expense, a
decrease in legal expenses of $0.3 million, and a decrease in travel of $0.3
million, partially offset by an increase in other general and administrative
expenses of $0.3 million.




Six
      months ended2008
                    
                    
                    2007
                    
                    
                    Change($
      in thousands)Personnel
      and contract services
                    
                    
                    1,793
                    
                    
                    
                    1,830
                    
                    
                    
                    (37
                    )Legal
                    
                    
                    392
                    
                    
                    
                    621
                    
                    
                    
                    (229
                    )Stock-based
      compensation
                    
                    
                    1,073
                    
                    
                    
                    3,617
                    
                    
                    
                    (2,544
                    )Travel
                    
                    
                    73
                    
                    
                    
                    779
                    
                    
                    
                    (706
                    )Other
                    
                    
                    1,456
                    
                    
                    
                    1,229
                    
                    
                    
                    227Total
                    
                    $
                    4,787
                    
                    
                    $
                    8,076
                    
                    
                    $
                    (3,289
                    )




Overall,
the decrease of $3.3 million in general and administrative expense from the
six-months ended March 31, 2007 to the six months ended March 31, 2008, is
primarily due to a $2.5 million decrease in stock-based compensation expense, a
decrease in travel expense of $0.7 million, and a decrease in legal expense of
$0.2 million partially offset by an increase of $0.2 million in other general
and administrative expenses.





Project Development Costs —
Related Party.Project development costs of $1.8 million incurred during
the six months ended March 31, 2007 relate to development costs we paid to MAB
under the Development Agreement (described more fully in Note 4 to the financial
statements in Item 1). 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. Costs of
oil and gas properties may not exceed the ceiling, which is an amount equal to
the present value, discounted at 10%, of the estimated future net cash flows
from proved oil and gas reserves plus the cost, or estimated fair market value,
if lower, of unproved properties. Should capitalized costs exceed this
ceiling, an impairment is recognized. During the three and six-month
periods ended March 31, 2007, we recognized impairments of $3.8 million and $9.0
million, respectively, representing the excess of capitalized costs over the
ceiling, as calculated in accordance with these full cost rules. There were
no impairment charges in the quarter and six months ended March 31,
2008.





Depreciation, Depletion,
Amortization and Accretion. During the quarter and six months ended March
31, 2008, depreciation, depletion, amortization and accretion declined $0.6
million and $0.7 million, respectively. These decreases were due to
adjustments in the previous year to proved reserves. During the fourth
quarter of the prior year, 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 $0.7 million and $1.0 million during the three and six-month
periods ended March 31, 2007. The effect of this






39
 
  adjustment
did not impact on our net loss for the year as such adjustments were ultimate
reflected in impairment of oil and gas properties in the consolidated statements
of operations.





Loss on conveyance of
property.  During the three-month period ended March 31, 2008,
there were no losses from property conveyances.  On November 2,
2007, we closed the sale of substantially all of our interest in Heavy Oil
Assets in Montana to Pearl Exploration and Production Ltd. (“Pearl”), an
unrelated third party, for total consideration of up to $30.0
million.  Prior to this sale, we had engaged in a lengthy sales
process and turned down numerous offers from other parties for the
property.  We felt that Pearl’s offer was within the range of
valuation we considered to be reasonable for this property.  In
evaluating the impact on our full cost pool, we applied the guidance of
Regulation S-X Rule 4-10, Financial Accounting and Reporting for Oil and Gas
Producing Activities Pursuant to the Federal Securities Laws and the Energy
Policy and Conservation Act of 1975 (“Rule 4-10”).  Pursuant to Rule
4-10, the sale of these properties resulted in a significant alteration in the
reserves on our properties and therefore, we had to evaluate the properties for
a loss on the transaction.  Accordingly, the net book value of our
properties was allocated on the same ratio of reserves between the sold
properties and those that we retained, resulting in a loss on the conveyance of
these properties of $11.9 million during the period ended December 31,
2007.





Interest Expense. Interest
expense increased $0.6 million and $3.5 million during the second
fiscal quarter and six months ended March 31, 2008 compared to the same periods
in the previous fiscal year ($ in thousands) .





Three Months
      ended
                                      March
      31, 2008
                                    
                                    
                                    Six Months
       ended
                                      March
      31, 2008(restated)Interest
      expense related to credit facility, convertible notes and other
      notes
                                    
                                    $
                                    1,354
                                    
                                    
                                    $
                                    2,770Amortization
      of debt discounts, deferred financing costs and
      accretion
                                    
                                    
                                    885
                                    
                                    
                                    
                                    2,200Interest
      on vendor obligations and other
                                    
                                    
                                    335
                                    
                                    
                                    
                                    389Total
      interest expense
                                    
                                    $
                                    2,574
                                    
                                    
                                    $
                                    5,359





This
increase is attributable to two primary factors as follows:




(i)
            higher
      interest expense associated with increased borrowings under our Global
      Credit Facility, and our Convertible Debentures;
  and




(ii)
            higher
      rates due to our default on certain of our borrowing
      agreements.





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 three month period ended
March 31, 2008. We did not have trading securities during the comparable
period of the previous year.





Net Loss. Net loss for
the quarter ended March 31, 2008 was $7.7 million compared to a loss of
$10.3 million during the same period in the previous fiscal
year. This $2.6 million change was primarily the result of a $3.8
million impairment charge recorded in the previous year quarter versus no
impairment in the current year quarter. Excluding this impairment, net loss
changed $1.3 million, primarily as a result of the realized loss on
the sale of marketable securities of $3.0 million, and higher interest expense,
partially offset by lower general and administrative expenses and
depreciation, depletion, amortization and accretion costs in the three months
ended March 31, 2008 compared to the same period in the previous year, as
described above.





40


Net loss
for the six months ended March 31, 2008 was $24.5 million compared to a
loss of $20.8 million during the last fiscal year. This $3.7 million
increase was primarily due to the loss on conveyance of properties of $11.9
million, the realized loss on the sale of marketable securities of $3.0 million,
and higher interest expense, offset by lower impairment of $9.0 million, lower
property development expenses of $1.8 million, and lower general and
administrative and depreciation, depletion, amortization and accretion costs in
the current year when compared with the same six months of the previous fiscal
year, as described above.





Net loss per common
share. Net loss per common share was ($0.02) per share in the
quarter ended March 31, 2008 compared to ($0.05) per share in the same period in
the prior year. This change was driven by a lower 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
six months ended March 31, 2008, net loss per common share was ($0.08)
per share compared to a net loss of ($0.09 ) per share in the same period
of the previous year. This change was driven by 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 $97.2 million for the
period from inception (June 20, 2005) to March 31, 2008. Likewise, as of
March 31, 2008, we had a working capital deficit of approximately $ 39.3  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 have also had multiple property liens and foreclosure
actions filed by vendors, some of whom have begun foreclosure proceedings, and
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 current
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 following costs associated with the development of the
Colorado assets will be incurred:





•
            $40.0
      million to $50.0 million in connection with the Piceance II Project, to
      include expenditures for seismic data acquisition, lease and asset
      acquisition, drilling, completion, lease operation, and installation of
      production facilities subject to the Laramie transaction referenced in
      Note 13 of Item 1.





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





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





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






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 March 2007, we had 16 full-time employees and at
March 2008 we grew to 15 full-time employees and 11 consultants. We had
interests in properties aggregating approximately 21,700 acres in Colorado and
7.0 million net acres in Australia at March 31, 2007 and grew to an aggregate of
approximately 21,700 net acres in Colorado, 16,000 net acres in Montana, and 7.0
million net acres in Australia at March 31, 2008.





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 six months ended March 31, 2008 we sold our heavy oil
assets and restructured the Development Agreement with MAB through
amendments.





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
March 31, 2008, we had a working capital deficit of $39.3 million and
cash of $1.6 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 six months
ended March 31, 2008 and 2007 were as follows ($ in
thousands) :





Six
      months ended
                      March
      31,2008
                    
                    
                    2007(restated)Net
      cash used in operating activities
                    
                    $
                    (4,062
                    )
                    
                    $
                    (6,712
                    )Net
      cash provided by (used in) investing activities
                    
                    $
                    1,107
                    
                    
                    $
                    (17,291
                    )Net
      cash provided by financing activities
                    
                    $
                    4,427
                    
                    
                    $
                    15,073





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




Net Cash Provided by (Used in)
Investing Activities.


42
 
  interest
billings in the amount of $10.6 million, additions to oil and gas properties in
the amount of $4.0 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 for the six months
ended March 31, 2008 was primarily comprised of borrowings of $9.6
million, net of repayments of debt in the amount of $5.2 million. Net
cash provided by financing activities for the six months ended March 31, 2007
was comprised of proceeds from promissory notes from Global and proceeds
from the sale of units in our private placement shares for gross proceeds of
$5.1 million. This was partially offset by payments to related
parties of $0.5 million.





Capital Requirements.We
currently anticipate our capital budget for the year ending September 30, 2008
to be approximately $44 million. Uses of cash for 2008 will be primarily
for our drilling program in the Piceance Basin and in Australia. Properties
in the Piceance II area are expected to be sold in the third quarter 2008.
Pursuant to the terms and conditions of the Laramie deal, drilling commitments
for Piceance II will be terminated effective the closing date. Capital allocated
to the Piceance II area are to be redeployed to the Buckskin Mesa project. The
following table summarizes our drilling commitments for fiscal year 2008 ($ in
thousands):





Activity
              Prospect
              Aggregate
                Total
      Cost
              Our
      Working
                Interest
              Our
      Share(a)Drill
      and complete eight wells
              Buckskin
      Mesa
              $24,000
              100%
              $24,000Drill
      five wells
              Beetaloo
              20,000
              100%
              20,000
              (b)Total
              
              $44,000
              
              $44,000




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





Financing.During the six
months ended March 31, 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.





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.






43





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 six months ended March 31, 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 March
31, 2008, the balance of this note was $1.3 million. The note is unsecured and
bears interest at the London InterBank Offered Rate, (“LIBOR”). Although at
March 31, 2008, we were in default on this note, MAB has waived and released us
from defaults, failures to perform and any other failures to meet our
obligations through October 1, 2008.





(5) We
entered into six separate loans with the Bruner Family Trust, UTD March 28, 2005
for a total of $3.0 million. The long-term note bears interest at 8% and is due
in full at the time when the January and May Credit Facilities have been paid in
full (described below). A portion of one of these notes was assigned to a
director of the company who then invested in our convertible debenture offering
in November 2007. At March 31, 2008, the balance of these notes is $0.1 million.
The short-term notes bear interest at LIBOR + 3% and are due 12 months from
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.






44





(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.
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 March 31, 2008 we had $42.2 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. As of January 10, 2007, we were in default on
payment of the notes and we are currently in discussions with the holders to
convert the notes and accrued interest into our common stock.





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





The
continuation and future development of our business will require substantial
additional capital expenditures. Meeting capital expenditure, operational, and
administrative needs for the 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 March
31, 2008, and we are considered a development stage entity for financial
reporting purposes. During the period from inception to March 31, 2008, we
incurred a cumulative net loss of $97.2 million. We have raised
approximately $100.7
million through borrowing and the sale of convertible notes and common stock
from inception through March 31, 2008. In order to fund our planned exploration
and development of oil and gas properties, we will require significant
additional funding.





Critical
Accounting Policies and Estimates





We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Financial
Statements.





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 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.




Management’s Discussion and Analysis
of Financial




45
 
 Condition 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 May 15,
2008.




Evaluation
of Disclosure Controls and Procedures




During
the quarter ended March 31, 2008, we performed an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and our former 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
former 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 former
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. These material weaknesses continued to exist as of March
31, 2008, however, we have taken steps to retain additional senior financial
consultants to assist us in completing our remediation of these material
weaknesses on an accelerated basis.




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.





Likewise,
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 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 half 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. Given our remediation efforts
discussed above, we expect further






46
 
  significant
changes to our internal controls will occur during the second half 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 March 31, 2008 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the three and six month periods ended March 31, 2008 in conformity
with GAAP.






PART II. OTHER INFORMATION





ITEM 1.   LEGAL PROCEEDINGS





As of
March 31, 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. 21
vendors have filed multiple liens applicable to our properties.





2. 9
lawsuits have been filed related to these liens.





3. A
lawsuit was filed by the lessor of certain of our properties in the
Piceance Basin for breach of our lease contract. We are contesting
this claim.









47


4. 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).
 
 5. 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 (2.4 million
Australian dollars). We are disputing the claim on the basis that the vendor
breached the contract.


Pursuant
to the terms of a pending sale of property to Laramie Energy, II,
LLC,  items 1 and 3 above must be resolved in order to consummate the
sale. We currently estimate it will cost approximately $20 million,
excluding related legal fees, to resolve those items. The terms of the
pending property sale are more fully described in Part I – Item 1 – Note 13
Subsequent Events in
this Form 10- Q/A .





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 its business.








ITEM
1A.   RISK FACTORS





During
the quarter, there were no material changes from the risk factors disclosed in
Item 1A our Form 10-K for the fiscal year ended September 30, 2007.








ITEM 6. EXHIBITS





10.25
                                        Charles
      B. Crowell Employment Agreement (incorporated by reference to Form 8-K
      filed with the U.S. Securities and Exchange Commission on January 10,
      2008)10.26
                                        $120,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated February 12, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on February 19,
      2008)10.27
                                        $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 14, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 17,
      2008)10.28
                                        $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 18, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 24,
      2008)




16.1
                Letter
      from Hein and Associates, LLP regarding change in certifying accountant
      (incorporated by reference to Form 8-K filed with the U.S. Securities and
      Exchange Commission on February 4, 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







48


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)







EXHIBIT
INDEX





10.25
            Charles
      B. Crowell Employment Agreement (incorporated by reference to Form 8-K
      filed with the U.S. Securities and Exchange Commission on January 10,
      2008)10.26
            $120,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated February 12, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on February 19,
      2008)10.27
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 14, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 17,
      2008)10.28
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 18, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 24,
      2008)16.1
            Letter
      from Hein and Associates, LLP regarding change in certifying accountant
      (incorporated by reference to Form 8-K filed with the U.S. Securities and
      Exchange Commission on February 4, 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