UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-Q





(Mark
One)





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





For
the quarterly period ended December 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)





Registrant’s
telephone number, including area code:


(303)
572-8900








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





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


Large
accelerated filer £                                                                                     Accelerated
filer £


Non-accelerated
filer £                                                                                     Smaller
reporting company R





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





As of
January 31, 2009, the registrant had 375,468,544 shares
of common stock outstanding.











FORWARD-LOOKING
STATEMENTS





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





CURRENCIES





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








2


PETROHUNTER
ENERGY CORPORATION





FORM
10-Q





FOR
THE THREE-MONTH PERIOD ENDED


DECEMBER
31, 2008





INDEX





PagePART
      I — FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            4Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            24Item
      4.
            Controls
      and Procedures
            24PART
      II — OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            26Item
      1A.
            Risk
      Factors
            26Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            26Item
      3.
            Defaults
      Upon Senior Securities
            26Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            26Item
      5.
            Other
      Information
            26Item
      6.
            Exhibits
            26SIGNATURES
            27


3


PETROHUNTER
ENERGY CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(unaudited)





December
      31,2008
                        
                        
                        September
      30,2008(
      $ in thousands)ASSETSCurrent
      AssetsCash
      and cash equivalents
                        
                        $
                        1,778
                        
                        
                        $
                        967ReceivablesOil
      and gas receivables, net
                        
                        
                        33
                        
                        
                        
                        193GST
      receivable
                        
                        
                        229
                        
                        
                        
                        504Other
      receivables
                        
                        
                        —
                        
                        
                        
                        12Due
      from related parties
                        
                        
                        1,631
                        
                        
                        
                        1,840Marketable
      securities, available for sale
                        
                        
                        3,311
                        
                        
                        
                        6,638Restricted
      marketable securities
                        
                        
                        3,337
                        
                        
                        
                        7,495Joint
      interest billings
                        
                        
                        240
                        
                        
                        
                        —Prepaid
      expenses and other assets
                        
                        
                        173
                        
                        
                        
                        273Restricted
      cash
                        
                        
                        2,530
                        
                        
                        
                        —TOTAL
      CURRENT ASSETS
                        
                        
                        13,262
                        
                        
                        
                        17,922Oil
      and Gas Properties, at cost under full cost methodUnevaluated
      properties
                        
                        
                        73,833
                        
                        
                        
                        84,576Evaluated
      properties
                        
                        
                        77,882
                        
                        
                        
                        69,704Accumulated
      depreciation, depletion amortization, and impairment
                        
                        
                        (67,204
                        )
                        
                        
                        (56,928
                        )Net
      Oil and Gas Properties
                        
                        
                        84,511
                        
                        
                        
                        97,352Property
      and Equipment, at costFurniture
      and equipment, net
                        
                        
                        677
                        
                        
                        
                        737Other
      AssetsRestricted
      cash
                        
                        
                        524
                        
                        
                        
                        524Deposits
      and other assets
                        
                        
                        130
                        
                        
                        
                        130Deferred
      financing costs
                        
                        
                        1,079
                        
                        
                        
                        1,388Intangible
      asset
                        
                        
                        5,370
                        
                        
                        
                        4,832TOTAL
      ASSETS
                        
                        $
                        105,553
                        
                        
                        $
                        122,885LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                        
                        $
                        9,503
                        
                        
                        $
                        11,981Notes
      payable — short-term
                        
                        
                        257
                        
                        
                        
                        329Notes
      payable — related party — short term
                        
                        
                        8,032
                        
                        
                        
                        3,572Accrued
      interest payable
                        
                        
                        149
                        
                        
                        
                        166Accrued
      interest payable — related parties
                        
                        
                        112
                        
                        
                        
                        969Contingent
      purchase obligation
                        
                        
                        5,370
                        
                        
                        
                        4,832TOTAL
      CURRENT LIABILITIES
                        
                        
                        23,423
                        
                        
                        
                        21,849Long-Term
      LiabilitiesNotes
      payable – related parties — net of discount
                        
                        
                        39,288
                        
                        
                        
                        38,035Convertible
      notes payable — net of discounts
                        
                        
                        465
                        
                        
                        
                        325Asset
      retirement obligation
                        
                        
                        111
                        
                        
                        
                        114Accrued
      interest payable — related parties
                        
                        
                        2,028
                        
                        
                        
                        —Other
                        
                        
                        132
                        
                        
                        
                        —TOTAL
      LIABILITIES
                        
                        
                        65,447
                        
                        
                        
                        60,323Stockholders’
      EquityPreferred
      stock, $0.001 par value; authorized 100,000,000 shares; none
      issued
                        
                        
                        —
                        
                        
                        
                        —Common
      stock, $0.001 par value; authorized 1,000,000,000 shares; issued and
      outstanding  375,218,544 and 373,343,544 shares, issued and
      outstanding at December 31, and September 30, 2008,
      respectively
                        
                        
                        375
                        
                        
                        
                        374Additional
      paid-in-capital
                        
                        
                        212,979
                        
                        
                        
                        212,308Other
      comprehensive loss
                        
                        
                        (8,251
                        )
                        
                        
                        (632
                        )Accumulated
      deficit
                        
                        
                        (164,997
                        )
                        
                        
                        (149,488
                        )TOTAL
      STOCKHOLDERS’EQUITY
                        
                        
                        40,106
                        
                        
                        
                        62,562TOTAL
      LIABILITIES AND STOCKHOLDERS EQUITY
                        
                        $
                        105,553
                        
                        
                        $
                        122,885


See
accompanying notes to these unaudited condensed consolidated financial
statements.


4


PETROHUNTER
ENERGY CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)




Three
      MonthsEnded
                December
      31,2008
              
              
              Three
      Months
                Ended
                December
      31,
                2007 (restated)($
      in thousands)RevenueOil
      and gas revenue
              
              $
              122
              
              
              $
              507Other
      revenue
              
              
              1
              
              
              
              —Total
      Revenue
              
              
              123
              
              
              
              507Costs
      and ExpensesLease
      operating expenses
              
              
              399
              
              
              
              100General
      and administrative
              
              
              2,118
              
              
              
              2,318Impairment
      of oil and gas properties
              
              
              10,268
              
              
              
              —Depreciation,
      depletion, amortization and accretion
              
              
              68
              
              
              
              262Total
      operating expenses
              
              
              12,853
              
              
              
              2,680(Loss)
      From Operations
              
              
              (12,730
              )
              
              
              (2,173
              )Other
      Income (Expense)Loss
      on conveyance of property
              
              
              (181
              )
              
              
              (11,875
              )Interest
      income
              
              
              6
              
              
              
              25Interest
      expense
              
              
              (2,484
              )
              
              
              (2,785
              )Other
              
              
              (122
              )
              
              
              —Total
      Other Income (Expense)
              
              
              (2,781
              )
              
              
              (14,635
              )Net
      (Loss)
              
              $
              (15,511
              )
              
              $
              (16,808
              )Net
      (loss) per common share — basic and diluted
              
              $
              (0.04
              )
              
              $
              (0.05
              )Weighted
      average number of common shares outstanding — basic and
      diluted
              
              
              373,990
              
              
              
              306,471





See
accompanying notes to these unaudited condensed consolidated financial
statements.





5


PETROHUNTER
ENERGY CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)





Three
      Months
                  Ended
                  December
      31,
                  2008
                
                
                Three
      Months
                  Ended
                  December
      31,
                  2007(restated)($
      in thousands)Cash
      flows from operating activitiesNet
      loss
                
                $
                (15,511
                )
                
                $
                (16,808
                )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:Stock
      based compensation
                
                
                481
                
                
                
                473Depreciation,
      depletion, amortization and accretion
                
                
                68
                
                
                
                262Detachable
      warrants recorded as interest expense
                
                
                —
                
                
                
                163Impairment
      of oil and gas properties
                
                
                10,268
                
                
                
                —Amortization
      of deferred financing costs
                
                
                309
                
                
                
                709Amortization
      of debt discount and beneficial conversion feature
                
                
                681
                
                
                
                606Loss
      on conveyance of property
                
                
                181
                
                
                
                11,875Other
      adjustments to reconcile to net loss
                
                
                —
                
                
                
                56Changes
      in assets and liabilities:
                  Receivables
                
                
                419
                
                
                
                (215
                )Prepaid
      expenses and other assets
                
                
                100
                
                
                
                (152
                )Accounts
      payable and accrued expenses
                
                
                (3,818
                )
                
                
                (647
                )Due
      from related party
                
                
                237
                
                
                
                —Net
      cash used in operating activities
                
                
                (6,585
                )
                
                
                (3,678
                )Cash
      flows from investing activitiesAdditions
      to oil and gas properties
                
                
                (125
                )
                
                
                (7,857
                )Proceeds
      from sale of oil and gas properties
                
                
                2,320
                
                
                
                7,500Additions
      to furniture and equipment
                
                
                (6
                )
                
                
                (129
                )Net
      cash provided by (used in) investing activities
                
                
                2,189
                
                
                
                (486
                )Cash
      flows from financing activitiesProceeds
      from the issuance of notes payable
                
                
                100
                
                
                
                1,250Borrowing
      on short-term notes payable
                
                
                —
                
                
                
                750Payments
      on short-term notes
                
                
                —
                
                
                
                (3,805
                )Proceeds
      from related party borrowings
                
                
                5,200
                
                
                
                500Payments
      on related party borrowing
                
                
                (93
                )
                
                
                (519
                )Proceeds
      from issuance of convertible notes
                
                
                —
                
                
                
                6,330Net
      cash provided by financing activities
                
                
                5,207
                
                
                
                4,506Net
      increase in cash and cash equivalents
                
                
                811
                
                
                
                342Cash
      and cash equivalents, beginning of period
                
                
                967
                
                
                
                120Cash
      and cash equivalents, end of period
                
                $
                1,778
                
                
                $
                462Supplemental
      schedule of cash flow informationCash
      paid for interest
                
                $
                5
                
                
                $
                11








See
accompanying notes to these unaudited condensed consolidated financial
statements.


6


PETROHUNTER
ENERGY CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note 1 - Organization and Basis of
Presentation





The
interim condensed consolidated financial statements of PetroHunter Energy
Corporation (“we,” “us,” “our,” or the “Company”) are unaudited and contain all
adjustments necessary for a fair statement of the results for the interim period
presented. Results for interim period are not necessarily indicative of results
to be expected for a full year or for previously reported periods due in part,
but not limited to, the volatility in crude oil and natural gas commodity
prices, interest rates, estimates of reserves, drilling risks, geological risks,
transportation restrictions, the timing of acquisitions, product demand, market
competition,  and our ability to obtain additional capital. You should
read these consolidated interim financial statements in conjunction with the
audited consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended September 30,
2008.





We are a
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 reasonable probability of economic success.  As of December
31, 2008, we owned properties in Rio Blanco and Garfield County, Colorado, Bear
Creek County, Montana, and Northern Territory, Australia.  We have drilled
five wells on our 20,000 acre Buckskin Mesa property located in Rio Blanco
County, Colorado. All five wells are drilled and cased, and three of the five
are completed and shut in awaiting further evaluation and connection to a
gathering system. In the Southern Piceance Basin, we own 1,074 gross acres and
402 net acres located in Garfield County, Colorado.  During the period
ended December 31, 2008, we sold our working interests in eight wells which were
operated by EnCana Oil & Gas USA (“EnCana”) with an effective date of
December 1, 2008. Subsequent to the sale we continue to hold an interest in
proved undeveloped acreage in Garfield County.  In Montana, we currently
hold 15,991 net undeveloped acres in the Bear Creek area.   In
Australia, we have an undivided 50% working interest in four exploration permits
that comprise 7.0 million net acres. We have drilled one test well on our
property in the Northern Territory and plan to undertake a major work program in
the area during 2009 and future periods.





Note
2 - Summary of Significant Accounting Policies





Basis of Accounting – The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) and include the accounts of PetroHunter Operating Company and its
wholly-owned subsidiaries. Inter-company accounts and transactions have been
eliminated. In preparing the accompanying financial statements, management has
made certain estimates and assumptions that affect reported amounts in the
financial statements. Actual results may differ from those estimates.
Significant assumptions are required in the valuation of proved oil and natural
gas reserves, which may affect the amount at which oil and natural gas
properties are recorded. For the unevaluated properties, the Company evaluates
the possibility of potential impairment on a quarterly basis. During the three
months ended December 31, 2008, approximately $11.5 million of unevaluated
property costs related to our Buckskin Mesa properties were reclassified to
proved property and a ceiling test impairment was recorded in the United States
full cost pool. The computation of share based compensation expense requires
assumptions such as volatility, expected life and the risk-free interest rate.
Our estimates related to changes in the market value of securities held by the
us requires reliance on several input variables including fluctuations in value
of the US dollar versus foreign currencies,  and  it is at
least reasonably possible these estimates could be revised in the near term, and
these revisions could be material.





Contingencies – In accounting
for legal matters and other contingencies we follow the guidance in Statement of
Financial Accounting Standards (“SFAS”) No. 5,Accounting for Contingencies
, under which loss contingencies are accounted for based upon the likelihood of
an impairment of an asset or the occurrence of a liability. If a loss
contingency is “probable” and the amount of the loss can be reasonably
estimated, it is accrued.  If a loss contingency is “probable” but the
loss cannot be reasonably estimated, disclosure is made. If a loss contingency
is “reasonably possible” disclosure is made, including a potential range of
loss, if determinable. Loss contingencies that are “remote” are neither
accounted for nor disclosed. Gain contingencies are given no accounting
recognition until realized, but are disclosed if material.





7


Comprehensive Loss –Comprehensive loss consists of net loss and foreign currency translation
adjustments and unrealized gains or losses on restricted and unrestricted
marketable securities held by us. Comprehensive loss is presented net of income
taxes in the consolidated statements of stockholders’ equity and comprehensive
loss.





Development Stage –For all
periods prior to December 31, 2008, we considered ourselves a development stage
enterprise as defined by SFAS No. 7, Accounting and Reporting by
Development Stage Enterprises.  As of December 31, 2008 we have
invested approximately $151.0 million in oil and gas properties, we have
participated in the drilling and/or completion of approximately 55 wells and
have generated revenue from operations.  As a result, we have determined
that as of December 31, 2008 the Company is no longer in the development
stage.




Fair Value
Measurements -In
September 2006, the Financial Accounting  Standards Board
(“FASB”)  issued SFAS No. 157,Fair Value
Measurementsin order to
establish a single definition of fair value and a framework for measuring fair
value in GAAP that is intended to result in increased consistency and
comparability in fair value measurements. SFAS No. 157 also expands disclosures
about fair value measurements. SFAS No. 157 applies whenever other authoritative
literature requires (or permits) certain assets or liabilities to be measured at
fair value, but does not expand the use of fair value. SFAS No. 157 was
originally effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those years with early
adoption permitted.




In early
2008, the FASB issued Staff Position (FSP) FAS-157-2, “Effective Date of FASB
Statement No. 157,” which delays by one year, the effective date of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). The delay pertains to items including, but
not limited to, non-financial assets and non-financial liabilities initially
measured at fair value in a business combination, non-financial assets recorded
at fair value at the time of donation, and long-lived assets measured at fair
value for impairment assessment under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.




The
Company has adopted the portion of SFAS No. 157 that has not been delayed by FSP
FAS-157-2 as of the beginning of its 2009 fiscal year, and plans to adopt the
balance of its provisions as of the beginning of its 2010 fiscal year. Items
carried at fair value on a recurring basis (to which SFAS No. 157 applies in
fiscal 2009) consist of available for sale securities based on quoted prices in
active or brokered markets for identical as well as similar assets.




Fair
values of assets and liabilities measured on a recurring basis as of December
31, 2008 included available for sale securities unrestricted and restricted,
recorded at a fair value of  $6.6 million which had quoted prices in
active markets for  identical assets (level 1) of $6.6
million.




Going Concern -As reported in
the accompanying condensed consolidated financial statements, as of December 31,
2008 we have an accumulated deficit of $165.0 million and a working capital
deficit of $10.2 million. As of the end of the fiscal period we have sold all of
our revenue producing assets. As noted in the auditor's report on our September
30, 2008, financial statements, these factors raise substantial doubt about the
Company's ability to continue as a going concern.





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  (“FIN 45”),  which requires
us to recognize a liability for the obligations undertaken upon issuing the
guarantee in order to have a more representative and faithful depiction of the
guarantor’s assets and liabilities.  Accordingly, we have recognized a
$5.4 million contingent purchase obligation and related intangible asset on our
balance sheet, as of December 31, 2008.  (See Note 11.)





Impairment –SFAS No. 144,
Accounting for the Impairment
and Disposal of Long-Lived Assets,requires
long-lived assets to be held and used to be reviewed for impairment whenever
events or changes in circumstances






8




indicate
that the carrying amount of an asset may not be recoverable. We use the full
cost method of accounting for our oil and gas properties. Properties accounted
for using the full cost method of accounting are excluded from the impairment
testing requirements under SFAS No. 144. Properties accounted for under the full
cost method of accounting are instead subject to SEC Regulation S-X Rule 4-10,
Financial Accounting and
Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities
Laws and the Energy Policy and Conservation Act of 1975(“Rule 4-10”).
Rule 4-10 requires that each regional cost center’s (by country) capitalized
cost, less accumulated amortization and related deferred income taxes not exceed
a cost center “ceiling”. The ceiling is defined as the sum of:





•
              The
      present value of estimated future net revenues computed by applying
      current prices of oil and gas reserves to estimated future production of
      proved oil and gas reserves as of the balance sheet date less estimated
      future expenditures to be incurred in developing and producing those
      proved reserves to be computed using a discount factor of 10%;
      plus•
              The
      cost of properties not being amortized; plus•
              The
      lower of cost or estimated fair value of unproven properties included in
      the costs being amortized; less•
              Income
      tax effects related to differences between the book and tax basis of the
      properties.





If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. During
the three months ended December 31, 2008 $10.3 million in impairment was charged
to expense. During the three months ended December 31, 2007, we recorded no
impairment charge.





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 diluted weighted-average number of common shares
outstanding excluded potential common shares from stock options and warrants of
approximately 179 million shares and 140 million shares for the three months
ended December 31, 2008 and 2007, respectively.





Liquidity -We hold working
interests in undeveloped leases, and foreign exploration permits and we have
participated in seismic surveys and the drilling of test wells on undeveloped
properties. Further leasehold acquisitions and seismic operations are planned
for 2009 and future periods.  In addition, exploratory and developmental
drilling is scheduled in future periods on our undeveloped properties.  We
anticipate that these exploration activities together with others that may be
entered into may impose financial requirements which may exceed our existing
working capital. We may need to raise additional equity or enter into new
borrowing arrangements to finance our continued participation in planned
activities. Further, we have farmed-out certain of our projects.  However,
if additional financing is not available, we may be compelled to reduce the
scope of our business activities. If we are unable to fund planned expenditures,
it may be necessary to forfeit our interest in proposed wells, farm-out our
interest in proposed wells, sell a portion of our interests in prospects and use
the sale proceeds to fund participation for a lesser interest, reduce general
and administrative expenses, or a combination of all of these
factors.





Marketable Securities –
We have received marketable equity securities as consideration from the
sale of certain of interests in our oil and gas properties, and account for them
in accordance with SFAS No. 115,Accounting for Certain
Investments in Debt and Equity Securities.  As shares we have
received are available for sale in the short term, or may be used as collateral
for future borrowings.  We account for them by marking them to market with
unrealized gains and losses reflected as a component of Other Comprehensive
Income, until such gains or losses become realized, when they are then
recognized in our statement of operations. In addition, in circumstances where
significant price declines are experienced subsequent to the balance sheet date,
we consider whether such declines are other than temporary, after considering
our expected holding period, and may record a provision for impairment in the
event we do not expect the value of the securities  to recover from such a
decline in market value. We





9


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





Restricted Cash – Consists of
certificates of deposit underlying letters of credit for exploration permits,
state and local bonds and guarantees to vendors, as well as amounts received
from a related party restricted for use in completing drilling on our Buckskin
Mesa project.





Recently
Issued Accounting Pronouncements





The FASB
issued Statement No. 141 (revised 2007), Business Combinations, and
No. 160, Noncontrolling
Interests in Consolidated Financial Statements. SFAS No. 141(R) requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination.  SFAS No.141
R is effective for fiscal years beginning after December 15,
2008.  The Company does not believe that SFAS No. 141 R will have any
impact on its financial statements.





The FASB
issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.SFAS No.160 requires all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as equity in the consolidated financial statements. Moreover, SFAS No.
160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. SFAS No.160 is effective for fiscal years
beginning after December 15, 2008.  The Company does not believe that
SFAS No. 160 will have any impact on its financial statements.




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for the Company beginning January 1, 2009.
Management believes that, for the foreseeable future, this Statement will have
no impact on the financial statements of the Company once adopted.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. GAAP for non-governmental entities. We have
adopted SFAS No. 162 in December 2008 and there has been minimal to no
effect on our financial reporting.





Supplemental Cash Flow
Information.Supplemental cash flow information for the three
months ended December 31, 2008 and 2007, respectively is as
follows:






10




Three
      MonthsEndedDecember
      31,2008
              
              
              Three
      MonthsEndedDecember
      31,2007Supplemental
      disclosures of non-cash investing and financing activitiesContracts
      for oil and gas properties
              
              $
              —
              
              
              $
              (1,500
              )Shares
      issued for debt conversion
              
              $
              —
              
              
              $
              6,384Shares
      issued for finance costs
              
              $
              —
              
              
              $
              56Shares
      issued for property
              
              $
              150
              
              
              $
              9,000Shares
      returned on property conveyance
              
              $
              —
              
              
              $
              (1,408
              )Warrants
      value associated with waiver and amendments on debt
      instruments
              
              $
              42
              
              
              $
              1,862Debt
      issued for common stock previously subscribed – related
    party
              
              $
              —
              
              
              $
              2,858Receipt
      of trading securities related to sale of heavy oil
      assets
              
              $
              —
              
              
              $
              5,529Debt
      discount related to beneficial conversion feature and
      warrants
              
              $
              —
              
              
              $
              6,956Increase
      in oil and gas properties related to relief of joint interest
      billings
              
              $
              —
              
              
              $
              12,707




Note
3 – Restricted Cash and Marketable Securities





As of
December 31, 2008 we have recorded $2.5 million in restricted cash on our
condensed consolidated balance sheet as a current asset.  This amount
relates to cash received from a related party, Falcon Oil & Gas
Ltd. (“Falcon”), pursuant to the November 2008 sale of a 25% interest
in five drilled but uncompleted wells in our Buckskin Mesa Project. Under the
terms of the agreement Falcon is to pay up to $5.3 million for testing and
completion costs on these wells. The cash is to be used in connection with
expenses to be incurred related to testing and completion on these
wells.  Therefore these amounts are restricted for use by the Company
for purposes of completing the remaining wells. As of December 31, 2008, Falcon
has expended approximately $2.8 million of the original commitment.
 
 As of
December 31, 2008, long term restricted cash consists of $0.5 million in
certificates of deposit underlying letters of credit for exploration permits,
state and local bonds and guarantees to vendors.
 
 As of
December 31, 2008 we have recorded $3.3 million in available for sale marketable
securities, and $3.3 in restricted marketable securities on our condensed
consolidated balance sheet. Included in these amounts are 28.9 million shares of
Falcon common stock received in connection with the sale of a 50% interest in
our four exploration permits in Australia in September, 2008.
 
 The
Falcon shares have been classified as follows as of December 31,
2008:
 
 14.5
million shares are held in escrow at the direction of Falcon, and serve as
collateral against $5 million we have borrowed from Falcon.
    2.8
million shares have been deposited in a brokerage account  and may be
sold by us without restriction.




11


Note 4 — Oil and Gas
Properties





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





December
      31,2008
                    
                    
                    September
      30,2008Oil
      and gas properties, at cost, full cost methodUnproved
      United States
                    
                    $
                    71,111
                    
                    
                    $
                    82,040Unproved
      Australia
                    
                    
                    2,722
                    
                    
                    
                    2,536Proved,
      United States
                    
                    
                    77,882
                    
                    
                    
                    69,704Total
                    
                    
                    151,715
                    
                    
                    
                    154,280Less
      accumulated  depreciation, depletion, amortization
      and  impairment
                    
                    
                    (67,204
                    )
                    
                    
                    (56,928
                    )Total
                    
                    $
                    84,511
                    
                    
                    $
                    97,352








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





December
      31, 2008
                
                
                December
      31, 2007Depletion
      and amortization of oil and gas properties
                
                $
                8
                
                
                $
                210Depreciation
      of furniture and equipment
                
                
                58
                
                
                
                50Accretion
      of asset retirement obligation
                
                
                2
                
                
                
                2Total
                
                $
                68
                
                
                $
                262Depletion
      and amortization per thousand cubic feet of natural gas
      equivalent
                
                $
                2.59
                
                
                $
                2.43





Using
December 31, 2008 oil and gas prices of $26.19 per barrel and $4.80 per thousand
cubic feet, our full cost pool exceeded our ceiling by $10.3 million, which
necessitated an impairment loss recorded in the same amount for the three months
ended December 31, 2008. For the three months ended December 31, 2007 there was
no impairment loss recorded.





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





PICEANCE BASIN,
COLORADO





Buckskin Mesa
Project.  As of December 31, 2008, we have drilled five
wells within our 20,000-acre Buckskin Mesa Project area.  All five
wells are drilled and cased, and three of the five are completed and shut
in awaiting further
evaluation and connection to a gathering system. The first PetroHunter operated
well, the Anderson 6-16, was drilled to a total depth of 10,785 feet through the
Williams Fork, Cozzette, Corcoran, and Sego sands into the Cretaceous Mancos
Shale. The initial well was followed in close succession with the drilling of
the Anderson 13-10, the Lake 16-21, Anderson 4-21, and the Lake 6-22 wells.
Completion operations have begun on the Lake 16-21,  Lake 6-22, and the
Anderson 6-16 wells. It is anticipated that completion operations will
commence on the remaining wells as soon as possible after the gathering system
is in place.





Piceance Project. We own an
additional 1,074 gross acres and 402 net acres in the Piceance Basin. During the
quarter ended December 31, 2008,  we sold our 50% working interests in
our 8 producing wells  located in this area of Garfield, County,
Colorado for $2.3 million. Related to this sale, we recorded a loss on
conveyance in the three months ended December 31, 2008 of approximately
$0.2 million.





AUSTRALIA





Northwest Shelf Project. In
March 2007, Sweetpea Petroleum (“Sweetpea”) acquired Exploration Permit
#WA-393-P in the Barrow Sub-Basin of the Carnavon Basin on the Northwest Shelf
of Australia.  Subsequently,






12




Sweetpea acquired
the available seismic on and adjacent to the permit and mapped four
stratigraphic horizons. Initial seismic mapping of the permit area demonstrates
three structures: one structure entirely on the block and two partially on the
block in water depths of approximately 600 feet. These structures are within
about 80 kilometers of the major discovery in the Triassic Mungaroo Formation at
the Chevron Clio-1 well on the Northwest Shelf in this basin, which occur in
deeper water depths of about 3,000 feet. Additional geophysical analysis and
mapping are ongoing on the block.





Beetaloo Basin Project.
Sweetpea also has four exploration permits in the Northern Territory, comprising
the Beetaloo Basin Project. In September 2007, Sweetpea drilled and cased one
well the Shenandoah #1 to a total depth of 1,555 meters (4,740 feet) in the area
covered by Exploration Permit (“EP”) 98 in the Beetaloo Basin. The test was a
twin (50 meter distance) from the Balmain #1 well and was designed to test the
Bessie Creek Formation at a depth of approximately 3,000 meters. The well was
completed to the drilled depth of 1,555 meters and cased, in anticipation of
later completing the well to the targeted total depth.  It is expected
that this well will be deepened to evaluate the petroleum potential
there.  Additionally, we plan to drill four wells prior to December
31, 2009, subject to availability of capital, to fulfill our obligations
under EP 98 and EP 117, with additional activity planned for EP 76 and EP
99.  Evaluation of drilling results in the Shenandoah #1 and seven
other existing wells in the Beetaloo Basin indicate oil and gas prospectivity in
the Kyalla Shale and a drilling and stimulation program to test these horizons
is planned to commence in the 2009.





In
addition to the Beetaloo Basin and Northwest Shelf projects, we have also
applied for two additional exploration permits in the Northern Territory in
Australia covering an additional 1.5 million acres, which are adjacent to our
Beetaloo Basin Project acreage.





MONTANA COALBED
METHANE





Bear Creek Project.Of the
original 25,278 acres acquired, the Company has retained 15,991 of those acres.
The remaining 9,287 acres were released prior to the period ended December 31,
2008. The acreage retained has been reflected in unproved oil and gas properties
subject to further evaluation by the Company. The acreage released has been
reflected in unproved properties but included in evaluated costs subject to
amortization; those costs have also been included in the full cost ceiling test
at the lower of cost or market value.





Note 5 — Asset Retirement
Obligation





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




The
Company’s estimated asset retirement obligation liability is based on estimated
economic lives, estimates as to the cost to abandon the wells in the future, and
federal and state regulatory requirements. The liability is discounted using a
credit-adjusted risk-free rate estimated at the time the liability is incurred
or revised. The credit-adjusted risk-free rates used to discount the Company’s
abandonment liabilities range from 8% to 22%. Revisions to the liability are due
to increases in estimated abandonment costs and changes in well economic lives,
or in changes to federal or state regulations regarding the abandonment of
wells.





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





December
      31, 2008
                
                
                September
      30, 2008Beginning
      asset retirement obligation
                
                $
                114
                
                
                $
                136Liabilities
      settled
                
                
                (2
                )
                
                
                (16
                )Revisions
      to estimates
                
                
                (3
                )
                
                
                (14
                )Accretion
      expense
                
                
                2
                
                
                
                8Ending
      asset retirement obligation
                
                $
                111
                
                
                $
                114





13


Note 6 —
Notes Payable





Notes
payable as of December 31, 2008 and September 30, 2008 are summarized below ($
in thousands):


December
      31, 2008
                                      
                                      
                                      
                                      September
      30, 2008Short-term
      notes payable
                                      
                                      (unaudited)Installment
      loan
                                      
                                      $
                                      181
                                      
                                      
                                      
                                      $
                                      199Other
                                      
                                      
                                      76
                                      
                                      
                                      
                                      
                                      —Vendor
                                      
                                      
                                      —
                                      
                                      
                                      
                                      
                                      130Notes
      payable – short-term
                                      
                                      $
                                      257
                                      
                                      
                                      
                                      $
                                      329Note
      payable – related party – short termFalcon
      Energy
                                      
                                      $
                                      5,000
                                      
                                      
                                      
                                      $
                                      —Bruner
      Family Trust
                                      
                                      $
                                      2,722
                                      
                                      
                                      
                                      $
                                      2,722Global
      Project Finance
                                      
                                      
                                      100
                                      
                                      
                                      
                                      
                                      850Convertible
      debentures
                                      
                                      
                                      200
                                      
                                      
                                      
                                      
                                      —Other
                                      
                                      
                                      10
                                      
                                      
                                      
                                      
                                      —Notes
      payable – related party – short, term
                                      
                                      $
                                      8,032
                                      
                                      
                                      
                                      $
                                      3,572Long-term
      notes payable – related party — netGlobal
      Project Finance
      AG
                                      
                                      $
                                      40,650
                                      
                                      
                                      
                                      $
                                      39,800Bruner
      Family
      Trust
                                      
                                      
                                      106
                                      
                                      
                                      
                                      
                                      106Other
                                      
                                      
                                      —
                                      
                                      
                                      
                                      
                                      146Discount
      on notes
      payable
                                      
                                      
                                      (1,468
                                      )
                                      
                                      
                                      
                                      (2,017
                                      )Long-term
      notes payable – related party — net
                                      
                                      $
                                      39,288
                                      
                                      
                                      
                                      $
                                      38,035Convertible
      debt
                                      
                                      $
                                      6,956
                                      
                                      
                                      
                                      $
                                      6,956Discount
      on convertible debt
                                      
                                      
                                      (6,491
                                      )
                                      
                                      
                                      
                                      (6,631
                                      )Convertible
      debt — net
                                      
                                      $
                                      465
                                      
                                      
                                      
                                      $
                                      325Capital
      leases
                                      
                                      $
                                      132
                                      
                                      
                                      
                                      $
                                      —




During
the three months ended December 31, 2008, we issued three subordinated
convertible debentures totaling $0.2 million to related parties. These
debentures bore interest at 15% per annum and are due in May 2009. We issued 0.5
million warrants to purchase our common stock at $0.15  per share in
connection with these debentures. (See Note 9.)   These
debentures along with all related accrued interest were repaid in January 2009
(see Note 12).




During
the three months ended December 31, 2008, we issued a promissory note in the
amount of $0.1 million to a related party. This note bore interest at 15% per
annum. In January 2009, we repaid this note and all accrued
interest.





On
October 1, 2008, we entered into a secured loan agreement with Falcon (“Falcon
Loan”). Under the terms of the loan agreement, Falcon agreed to advance to us
$5.0 million.  The loan is secured by 14.5 million shares of Falcon
common stock we had received as consideration in relation to the sale of a 50%
working interest in our four exploration permits in Australia. The shares have
been pledged under a Pledge and Security Agreement and are classified as
restricted marketable securities on the accompanying condensed consolidated
balance sheet. The Falcon Loan is also secured by a first position security
interest in our five well bores in our Buckskin Mesa project.





Note
7 — Stockholders’ Equity





We have
authorized 1 billion shares of common stock and 100 million shares of preferred
stock. No preferred stock was issued or is outstanding as of December 31,
2008.





Common Stock.During the
three months ended December 31, 2008, we issued 1.9 million shares of our common
stock at $0.22 cents per share in connection with the receipt of an amendment to
a letter of understanding between Clear
Creek Energy Services “CCES” and us, related to our property interests. Under
the terms of the agreement CCES agreed to allow Falcon to exercise an additional
option for and additional working interest in our Buckskin Mesa project, should
Falcon choose to do so.




14




Note
8— Share-Based Compensation





In
November 2008, we granted an extension allowing for the continuation of the
vesting of options related to a consultant of the Company whose tenure with the
Company was to be terminated in December 2008.





In
December 2008, we granted the acceleration of the vesting of 0.1 million
unvested options granted to a consultant in August 2008.





The fair
value of each share-based award under all plans is estimated on the date of
grant or amendment using a Black-Scholes pricing model that incorporates the
assumptions noted in the following table for the three months ended December 31,
2008.





Expected
      option term – years
              1.75-3.5Risk-free
      interest rate
              1%-1.69%Expected
      dividend yield
              0Weighted
      average volatility
              98.84%





The
following table sets forth stock options outstanding under our 2005 stock option
plan as of December 31, 2008   (shares in
thousands):





Number
      of
                        Shares
                      
                      
                      Weighted-Average
                        Exercise PriceOptions
      Outstanding – September 30, 2008
                      
                      
                      34,170
                      
                      
                      $
                      0.90Granted
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      (170
                      )
                      
                      $
                      1.87Expired
                      
                      
                      -
                      
                      
                      
                      -Options
      outstanding  — December 31, 2008
                      
                      
                      34,000
                      
                      
                      $
                      .90Options
      exercisable — December 31, 2008
                      
                      
                      20,454
                      
                      
                      $
                      .99





Compensation Expense -Stock-based employee and non-employee compensation expense of $0.5
million was charged to operations during the three months ended December 31,
2008. Stock-based compensation expense of $0.5 million was recognized during the
three months ended December 31, 2007. Stock-based compensation has been included
in general and administrative expenses in the consolidated statements of
operations.





Note
9 — Common Stock Warrants





The
following stock purchase warrants were outstanding at December 31, 2008 and
September 30, 2008 (warrants in thousands):





December
      31,
                      2008
                    
                    
                    September
      30,
                      2008Number
      of warrants
                    
                    
                    137,215
                    
                    
                    
                    135,754Exercise
      price
                    
                    $
                    0.15
      - $2.10
                    
                    
                    $
                    0.21
      - $2.10Expiration
      date
                    
                    
                    2009
      - 2012
                    
                    
                    
                    2011
      - 2012





During
the three months ended December 31, 2008, we issued 0.5 million warrants to
purchase our common stock at $0.15 per share to three related parties, in
connection with sale of $0.2 million in convertible debentures (see Note 6). The
warrants issued have a one year term and the total value of $0.0
million as calculated under the Black-Scholes  method.




During
the three months ended December 31, 2008, we issued 0.9 million warrants to
purchase our common stock at prices ranging $0.24 to $0.28 per share to the
holders of our Series A 8.5% convertible debentures in connection
with  the receipt of waivers related to our violation of certain debt
covenants. The warrants expire in November 2012 and had a total value of $0.0
million as calculated under the Black-Scholes method.


15





Note 10— Related Party
Transactions





During
the three months ended December 31, 2008, we issued three subordinated
debentures in the total amount of $0.2 million to related parties. These
debentures bore interest at 15% per annum and were due in May, 2009. We issued
0.5 million warrants to purchase our common stock at $0.15  per share
in connection with these debentures. (see Notes  6 and
9)  We repaid these debentures and all related accrued interest in
January 2009 (see Note 12).





During
the three months ended December 31, 2008,  we issued a promissory note
in the amount of $0.1 million to a related party. This note bore interest at 15%
per annum. In January 2009, we repaid this note and all accrued
interest.





During
the three months ended December 31, 2008, we entered into the Falcon loan
agreement with Falcon for proceeds of $5.0 million.  The Falcon Loan
is secured by a mortgage on our Buckskin Mesa Wells as defined in the Buckskin
Mesa Purchase and Sale Agreement dated August 22, 2008, as well as a pledge of
14.5 million shares of Falcon common stock received in connection with our sale
of a 50% interest in our Beetaloo Basin property.





During
the three months ended December 31, 2008, we sold a 25% interest in five drilled
but uncompleted wells in our Buckskin Mesa Project. Under the terms of the
agreement, Falcon deposited $7.0 million into escrow, of which $5.3 million
is to be used for testing and completion costs on these wells.  (see Note
3).





As of
December 31, 2008 we have recorded both restricted and unrestricted marketable
securities totaling $6.6 million in aggregate on our consolidated condensed
balance sheet. These securities were received from a related party,
Falcon,  pursuant to the sale of a 50% interest in four exploration
permits in Australia during fiscal year ended September 30, 2008.





Note 11 — Commitments and
Contingencies





CCES - 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 relating to the initial phase of our gas gathering system
project.  These agreements formalize and expand upon a Letter of
Understanding (“LOU”) between the parties which contemplates a dedicated
relationship with CCES in the development of a gas gathering system and the
provision of Gas Gathering Services within our Buckskin Mesa Project area (the
“CCES Agreements”).





In
addition to customary terms and conditions, the CCES Agreements include a
guarantee (the “Guarantee”) from us to CCES regarding their increasing financial
commitments as they are incurred in relation to the development of the gas
gathering system, including our contingent repurchase of the gas gathering
assets we sold to CCES.  The triggering event for the Guarantee is
contingent upon our mutual failure to execute a formal agreement for long-term
gas gathering services in the future (the “Second Phase Midstream Services
Agreement”).  The resolution of this contingency is dependent upon,
among other things, gas production levels from the initial phase gas gathering
system for our Buckskin Mesa Project over the next 12 to 18 months, and other
factors as determined by both parties.  Should we fail to execute a
mutually agreeable long-term contract, CCES has the right to invoice us for
their incurred costs and demand repayment within 20 days of our receipt of the
Demand Invoice.  To secure our Guarantee, we have executed a
Promissory Note for an amount up to $11.5 million, secured by second deeds of
trust on our Colorado properties.  The amount of the Guarantee is
variable, based upon the underlying incurred costs by CCES as defined in the
CCES Agreements, and aggregated $5.4 million as of December 31, 2008. We have
accounted for our Guarantee under the requirements of FASB Interpretation
(“FIN”) 45.  As of December 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 as property.  Our
Contingent Purchase Obligation will be adjusted during future periods to its
fair value, so long as the contingent Guarantee remains unresolved.




16




Note 12 — Subsequent
Events





In January 2009, we appointed J. Chris Steinhauser as Chief Financial
officer of the Company. In connection with his employment with the Company Mr.
Steinhauser was granted 1.0 million options to purchase the Company’s common
stock at $0.11 per share, we entered into an employment agreement with Mr.
Steinhauser that runs through December 2013.




In
January 2009, we issued an 18% subordinated debenture in the amount of $0.03
million to the former interim Chief Financial Officer of the Company in exchange
for the relief of amounts due the former CFO. The subordinated debentures are
collateralized by an interest in .01 million shares of Falcon common stock held
by us as unrestricted marketable securities. In connection with the
issuance the debenture we issued 0.07  million warrants to purchase
our common stock at $0.15 per share, which expire in January 2010.




In
January 2009, we sold 1.6 million shares of Falcon stock received in connection
with the sale of our assets in the Beetaloo Basin on the open market in two
separate transactions, for net proceeds of approximately $0.5 million in
aggregate.




In
January 2009, we repaid a $0.1 million promissory note issued to a related party
in December 2008.




In
January 2009, we repaid $0.2 million in convertible debentures issued to related
parties in December 2008.




In
January 2009, we issued .03 million shares of our common stock to two investor
relation firms.












Subsequent
to the end of the reporting period, we continue to perform and update testing on
three of the five wells previously drilled by us in our Buckskin Mesa project in
Rio Blanco County, Colorado. This is in connection with the testing and
completion program which was announced in October 2008.






17


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





The
following discussion and analysis should be read in conjunction with the
accompanying financial statements and related notes included elsewhere in this
report. It contains forward looking statements that reflect our future plans,
estimates, beliefs and expected performance. The forward looking statements are
dependent upon events, risks and uncertainties that may be outside our control.
Our actual results could differ materially from those discussed in these forward
looking statements.




Factors
that could cause or contribute to such differences include, but are not limited
to, market prices for natural gas and oil, economic and competitive conditions,
regulatory changes, estimates of proved reserves, potential failure to achieve
production from development drilling projects, capital expenditures and other
uncertainties, as well as those factors discussed below, all of which are
difficult to predict and which expressly qualify all subsequent oral and written
forward-looking statements attributable to us or persons acting on our behalf.
In light of these risks, uncertainties and assumptions, the forward looking
events discussed may not occur. We do not have any intention or obligation to
update forward-looking statements included in this report after the date of this
report, except as required by law.





Executive
Summary





We are a
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 reasonable probability of economic success.  As of December
31, 2008, we owned properties in Rio Blanco and Garfield County, Colorado, Bear
Creek County, Montana, and Northern Territory, Australia.  We have drilled
five wells on our 20,000-acre Buckskin Mesa property located in Rio Blanco
County, Colorado. All five wells are drilled and cased and three of the five are
shut in and awaiting completion of a gathering system. In the Southern Piceance
Basin, we own 1,074 gross acres and 402 net acres located in Garfield County,
Colorado.  During the period ended December 31, 2008, we sold our working
interests in eight wells which were operated by EnCana Oil & Gas USA
(“EnCana”) with an effective date of December 1, 2008. Subsequent to the sale we
continue to hold an interest in proved undeveloped acreage in Garfield
County.  In Montana, we currently hold a 15,991 net undeveloped acres in
the Bear Creek area.   In Australia we have an undivided 50% working
interest in four exploration permits that comprise 7.0 million gross acres. We
have drilled one test well on our property in the Northern Territory and plan to
undertake a work program in the area during 2009 and future
periods.





Results
of Operations





The
financial information with respect to the three months ended December 31, 2008
and 2007 that is discussed below is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for such
periods.  The results of operations for interim periods are not necessarily
indicative of the results of operations for the full fiscal years.





Industry
Overview for the three months ended December 31, 2008




The three
months ended December 31, 2008 saw moderately weaker natural gas prices. The
index price prevailing in the locale of our Piceance Basin project in Colorado,
as quoted in Gas Daily as of  December 31, 2008, was $6.19 per Mcf
versus $7.82 per Mcf as of December 31, 2007 (assuming a BTU factor of
1.1).  Natural gas prices have been very volatile during 2008 year to
date due to supply concerns earlier in the year, and more recently due to
recession concerns arising from the current worldwide financial
crisis.





In the
future we may need to raise capital, and due to the global credit crisis and
downturn in the stock market, funds may not be available, or if available, may
be on unfavorable terms.  Exploratory and development drilling is scheduled
during 2009 and future periods on our undeveloped properties. It is anticipated
that these exploration activities together with others that may be entered into
will impose financial requirements which will exceed our existing working
capital. We may raise additional equity and/or debt capital, and we may farm-out
certain of our projects to finance our continued participation in planned
activities. However, if additional financing is not






18




available,
we may be compelled to reduce the scope of our business activities. If we are
unable to fund planned expenditures, it may be necessary to:




1.
              
              forfeit
      our interest in wells that are proposed to be drilled;2.
              
              farm-out
      our interest in proposed wells;3.
              
              sell
      a portion of our interest in prospects and use the sale proceeds to fund
      our participation for a lesser interest; and4.
              
              reduce
      general and administrative
expenses.





Company
Overview for the three months ended December 31, 2008




Our net
loss for the three months ended December 31, 2008 was $15.5 million. We received
only nominal revenues from our oil and natural gas activities while incurring
substantial acquisition and exploration costs and overhead expenses which have
resulted in an accumulated deficit through December 31, 2008 of $165.0 million.
Effective December 1, 2008 we sold our revenue producing
assets.





Comparison
of the results of operations for the three months ended December 31, 2008 and
December 31, 2007





Oil and Gas Revenue. For the
three months ended December 31, 2008, oil and gas revenue was $0.1 million as
compared to $0.5 million for the corresponding period in 2007. The decrease in
revenue relates to the sale of 8 producing wells effective December 1,
2008, as well as the natural production decline in the wells. In the period
ended December 31, 2008,  8 producing wells produced and sold 42,791
Mcf, and in the corresponding prior period 8 wells produced and sold 93,824 Mcf
of natural gas and 20bbls of oil.





Costs
and Expenses





Lease Operating Expenses. For
the three months ended December 31, 2008, lease operating expenses
increased to $0.4 million from $0.1 million for the corresponding period in
2007. This increase was primarily attributable to compressor rental charges in
the Buckskin Mesa.





General and
Administrative.During the three months ended December 31,
2008, general and administrative expenses decreased by $0.2 million as
compared to the corresponding period in 2007. The following table highlights the
areas with the most significant changes ($ in thousands):




December 31,2008
                  
                  
                  
                  2007
                  
                  
                  
                  ChangePayroll
                  
                  $
                  815
                  
                  
                  $
                  552
                  
                  
                  $
                  263Consulting
      fees
                  
                  
                  281
                  
                  
                  
                  174
                  
                  
                  
                  107Stock
      based compensation
                  
                  
                  481
                  
                  
                  
                  624
                  
                  
                  
                  (143
                  )Legal
                  
                  
                  94
                  
                  
                  
                  136
                  
                  
                  
                  (42
                  )Travel
                  
                  
                  22
                  
                  
                  
                  51
                  
                  
                  
                  (29
                  )Investor
      relations
                  
                  
                  12
                  
                  
                  
                  13
                  
                  
                  
                  (1
                  )IT Maintenance & support
                  
                  
                  27
                  
                  
                  
                  41
                  
                  
                  
                  (14
                  )Audit
      fees
                  
                  
                  167
                  
                  
                  
                  224
                  
                  
                  
                  (57
                  )Insurance
                  
                  
                  130
                  
                  
                  
                  60
                  
                  
                  
                  70Office
      operations
                  
                  
                  98
                  
                  
                  
                  104
                  
                  
                  
                  (6
                  )Other
      miscellaneous expenses
                  
                  
                  173
                  
                  
                  
                  339
                  
                  
                  
                  (166
                  )Overhead
      recovery
                  
                  
                  (182
                  )
                  
                  
                  -
                  
                  
                  
                  (182
                  )Total
                  
                  $
                  2,118
                  
                  
                  $
                  2,318
                  
                  
                  $
                  (200
                  )






19


The
decrease in general and administrative expenses in 2008 is primarily a result of
decreases in audit fees, legal expenses, stock based compensation, travel and
other miscellaneous expenses offset by increases in payroll and consulting
expense.





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,
impairment is recognized. During the three months ended December 31, 2008 we
recognized impairment expense of $10.3 million as compared to $0.0 million
during the corresponding period in 2007.





Depreciation, Depletion,
Amortization and Accretion. Depreciation, depletion, amortization and
accretion expense (“DD&A”) was $0.1 million in 2008 as compared
to $0.3 million in 2007.





Interest Expense. During the
quarter ended December 31, 2008, interest expense was $2.5
million, as compared to $2.8 million during the same period last year. Interest
expense for the quarters ended December 31, 2008 and 2007 consisted of the
following ($ in thousands):





Three
      Months Ended
                  December
      31,2008
                
                
                2007Interest
      expense related to credit facility, convertible notes and other
      notes
                
                $
                1,474
                
                
                $
                1,510Amortization
      of debt discounts, deferred financing costs
                
                
                999
                
                
                
                1,169Interest
      on vendor obligations and other
                
                
                11
                
                
                
                106Total
                
                $
                2,484
                
                
                $
                2,785





We expect
that interest expense will decrease during the remainder of the fiscal year
ending September 30, 2009, due to the fact that the interest rates on the
majority of our debt portfolio are linked to indices that continue to benefit
and enjoy lower interest rates as a result of the global credit crisis. In
addition, issuances of our stock purchase warrants in connection with penalties
and defaults will continue to yield lower interest expense as the value of our
stock has continued to drop.





Net Loss.During the quarter ended December 31, 2008, we incurred a net loss of
$15.5 million as compared to a net loss of $16.8 million during the quarter
ended December 31, 2007.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended September 30, 2008, includes an explanatory
paragraph relating to the uncertainty of our ability to continue as a going
concern. We have an accumulated deficit of $165.0 million and have a working
capital deficit of approximately $10.2 million as of December 31, 2008. We are
not in compliance with the covenants of several loan agreements, and have
significant capital expenditure commitments. We require significant additional
funding to sustain our operations and satisfy our contractual obligations for
our planned oil and gas exploration and development operations. We are in
default on certain obligations. Our ability to establish the Company as a going
concern is dependent upon our ability to obtain additional funding in order to
finance our planned operations.





Plan
of Operation





Colorado


In fiscal
year 2009 we will focus on completing our five wells, and connecting them to the
gathering system, followed by drilling nine additional obligation wells, which
must be commenced by December 31, 2009. Completion of the gathering system and
central facility for the Buckskin Mesa Project will also enable us to recomplete
and hook-up one or more of the six additional shut-in gas wells acquired with
the properties in 2006.





20


Extensive
regulatory compliance work has been initiated to facilitate our asset
development plan, and some title issues are being addressed in connection with
the drilling program for the fiscal year 2009. In summary, execution of the plan
for these assets will optimally yield the drilling of not less than nine new
exploratory wells in the Buckskin Mesa Prospect, and the completion or
recompletion of as many as six wells in the Buckskin Mesa Prospect during fiscal
year 2009.





Australia


We plan
to explore and develop portions of our undivided 50% working interest in our
7.0 million acre position in four exploration permits in the
Beetaloo Basin project area located in the northern territory of Australia.
During calendar year 2009, we plan to drill eight wells in the exploration
permit blocks and shoot 800 kilometers of seismic. We anticipate that costs
related to seismic acquisition, development of operational infrastructure, and
the drilling and completion of wells over the nine months, will aggregate
approximately $18.5 million relating to our 50% working
interest.





Liquidity
and Capital Resources





Our most
recent quarter ended December 31, 2008 continued to be a period of transition
for us. We disposed of our only revenue generating assets, and our cash flows
from operations were not sufficient for us to meet our operating
commitments.  Our cash flows from operations continue to be, and are
expected to continue to be, insufficient to meet our operating commitments
throughout the remainder of the fiscal year ending September 30,
2009.





On
November 10, 2008, we closed the sale of an undivided 25% interest in five wells
drilled in Buckskin Mesa, in exchange for a $5.3 million cash work commitment to
complete certain of these wells. In addition, in December 2008, we completed the
sale of our working interests in our eight producing wells operated by EnCana
Oil & Gas (USA), Inc., for net cash proceeds of $2.3 million. As of December
31, 2008, we had a working capital deficit of $10.2 million.





In
addition, as part of the Purchase and Sale Agreement with Falcon relating to our
Buckskin Mesa property, Falcon obtained an option to acquire up to a 50%
interest in our entire Buckskin Mesa Project, for total consideration of $28.5
million in cash or shares of Falcon common stock, and an $18.0 million work
commitment ($9.0 million of which would be a carried interest for us). Further,
Falcon may elect to become the operator of the Buckskin Mesa Project for an
additional payment of $3.5 million. Falcon will have 60 days to determine
whether it wishes to exercise the option after we have completed our testing
program.  As of December 31, 2008, we have not been able to ascertain the
likelihood as to whether or not Falcon will choose to exercise this
option.





In
October 2008, we and Global Project Finance AG (“Global”) agreed that under
certain circumstances, we may reduce the outstanding balance under the credit
facilities with Global by up to $20.0 million in exchange for securities in
Falcon and our common stock.  If Falcon exercises its option to acquire a
50% interest in the Buckskin Mesa project and pays up to $10.0 million of the
purchase price in Falcon convertible securities, we will assign to Global up to
$10.0 million of such Falcon convertible securities, and pay the balance,
if any, in cash, so that the total of the assigned Falcon securities and any
cash payment equals $10.0 million.  Global has agreed to treat this
assignment and payment as payment of $10.0 million against amounts owed under
the Credit Facilities.   In addition, upon exercise of the
option, we would issue to Global shares of our common stock valued at $10.0
million as payment of an additional $10.0 million against amounts owed under the
credit facilities.





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





As of
December 31, 2008, we had a working capital deficit of $10.2 million and
unrestricted cash of $1.8 million, while at September 30, 2008 we had a working
capital deficit of $3.9 million and cash of $1.0 million. The decreases in
working capital are primarily attributable to minimal revenues from operations,
continued expenses incurred related to drilling and exploration, as well as the
increasing difficulty we have experienced in raising capital. In addition during
the fiscal year ended September 30, 2008,  we had completed several
property






21




conveyances
that temporarily reduced our working capital deficit. We do not expect our
working capital deficit to decrease or cash balance to increase in the near
future.





Cash Flow.Net cash used in
or provided by operating, investing and financing activities for the three
months ended December 31, 2008 and 2007 were as follows ($ in
thousands):





Three
      Months Ended
                    December
      31,2008
                  
                  
                  2007Net
      cash used in operating activities
                  
                  $
                  (6,585
                  )
                  
                  $
                  (3,678
                  )Net
      cash provided by (used in) investing activities
                  
                  $
                  2,189
                  
                  
                  $
                  (486
                  )Net
      cash provided by financing activities
                  
                  $
                  5,207
                  
                  
                  $
                  4,506





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.Net cash provided by investing activities for the
three months ended December 31, 2008 was primarily related to net proceeds
of $2.3 million received from the sale of our 8 producing “Jolley”
wells.   Net cash used in investing activities for three months
ended December 31, 2007 related to cash received from the sale of oil and gas
properties of $7.5 million, offset by cash used for additions to oil and gas
properties of $7.9 million.





Net Cash Provided by Financing
Activities.Net cash provided by financing activities
for the three months ended December 31, 2008 was comprised primarily of proceeds
received related to the $5.0 million note payable associated with our Beetaloo
transaction and the receipt of $0.3 million in borrowings from related parties.
Net cash provided by financing activities for the three months ended December
31, 2007 was primarily comprised of borrowings of $8.8 million net of repayments
of debt in the amount of $4.3 million.





Capital
Requirements.


Uses of
Cash for 2009 will be primarily for our drilling programs in the Piceance Basin
and Australia. The following table summarizes our minimum drilling commitments
for fiscal 2009 ($ in thousands)





Activity
              
              Prospect
              
              Aggregate
                Total Cost
              
              
              Our
      Working
                Interest
              
              
              Our ShareDrill
      and complete  4 wells
              
              Buckskin
      Mesa
              
              $
              9,200
              
              
              
              100
              %
              
              $
              9,200Drill
      and complete 4 wells  (a)
              
              Piceance
      II
              
              
              6,400
              
              
              
              37.5
              %
              
              
              2,400Drill
      and complete 4 wells  (b)
              
              Beetaloo
              
              
              13,800
              
              
              
              50
              %
              
              
              6,900Total
              
              
              
              $
              29,400
              
              
              
              
              
              
              $
              18,500





(a)
            Our
      proportionate share of the total commitment assumes our working interest
      partners pay their proportionate share.  Should we not drill these
      wells we will incur a penalty of $.03
million.


(b)
            Represents
      our obligation related to our undivided 50%
  interest.





Financing.During the quarter
ended December 31, 2008, we entered into the following financing
arrangements:





In
October 2008, we entered into a secured loan agreement with Falcon, whereby
Falcon agreed to advance to us up to $5.0 million. During October and November
2008, we received advances aggregating $5.0 million. The loan is secured by 14.5
million shares of Falcon common stock we received in consideration for our sale
of a 50% working interest in four exploration permits in Australia. These shares
have been pledged to Falcon under a pledge and security agreement. The loan
carries interest at 10% payable in monthly installments and is due in full on
April 30, 2009. Funds were used to satisfy various vendor
obligations.





In
December 2008,  we issued $0.2 million in convertible debentures to
three related parties. The debentures bore interest at interest at 15%. The
debenture holders were issued 0.5 million warrants to purchase our common stock.
Funds borrowed were used to fund the operations.





22


In
December 2008, we borrowed $0.1 million from Global, a related party, under
short term promissory notes which were unsecured and bore interest at 15%. Funds
borrowed were used to fund the operations.





The
continuation and future development of our business will require substantial
additional capital expenditures. Meeting capital expenditure, operational, and
administrative needs for the fiscal year ending September 30, 2009 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. The global credit crisis may
impact our ability to raise additional funds. 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.





Off-Balance
Sheet Arrangements





We do not
have off-balance sheet arrangements.





Critical
Accounting Policies and Estimates





Our
consolidated financial statements have been prepared by management in accordance
with U.S. GAAP. We refer you to the corresponding section in Part II Item 7 and
the notes to the consolidated financial statements of our Annual Report on Form
10K for the year ended September 30, 2008 for the description of critical
accounting policies and estimates.





Recently
Issued Accounting Pronouncements





The FASB
issued Statement No. 141 (revised 2007), Business Combinations, and
No. 160, Noncontrolling
Interests in Consolidated Financial Statements. SFAS 141(R) requires the
acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination.  SFAS No.141
R is effective for fiscal years beginning after December 15,
2008.  The Company does not believe that SFAS No. 141 R will have any
impact on its financial statements.





The FASB
issued FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial StatementsStatement No.160 requires all entities
to report noncontrolling (minority) interests in subsidiaries in the same way—as
equity in the consolidated financial statements. Moreover, SFAS No. 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. SFAS No.160 is effective for fiscal years beginning after
December 15, 2008.  The Company does not believe that SFAS No. 160
will have any impact on its financial statements.




In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for the Company beginning January 1, 2009.
Management believes that, for the foreseeable future, this Statement will have
no impact on the financial statements of the Company once adopted.





In May
2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting
Principles. The new standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with





23


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Commodity
Price Risk





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





Foreign
Currency Exchange Rate Risk





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





Interest
Rate Risk





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





ITEM
4. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures




Based on
their evaluation as of the end of the first quarter ended December 31, 2008, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are effective to ensure that information
required to be disclosed in reports that we file or submit under the Exchange
Act are recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and in providing reasonable
assurance that information required to be disclosed by the Company in such
reports is accumulated and communicated to the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.





Remediation
of Material Weaknesses in Internal Control Over Financial Reporting





As
previously disclosed in our past filings with the SEC, management identified
material weaknesses in our internal control over financial reporting for the
years ended September 30, 2008, 2007 and 2006. The weaknesses that the Company
previously disclosed related to (a) our lack of adequate processes for
monitoring our financial reporting and accounting processes and our failure to
conduct a comprehensive review of our account balances and transactions; (b) our
lack of appropriate processes and procedures, including
inadequate segregation of duties; and (c) our lack of appropriate processes
and procedures in relation to the timely review of material documents and
transactions for accounting and disclosure purposes. In order to remediate these
material weaknesses management retained additional senior accounting staff and
financial consultants and, during the third and fourth quarters of fiscal 2008,
and into the first quarter of fiscal 2009, the Company designed and implemented
improved processes and controls to ensure that (a) all material transactions are
properly recorded, reviewed and approved; (b) all significant accounts are
reconciled on a timely basis; (c) duties are properly segregated; and, (d)
complex accounting issues are properly evaluated and accounted for in accordance
with GAAP.





24


Management
believes we now have sufficient individuals that collectively possess a strong
background, experience and expertise related to accounting, SEC reporting and
other finance functions. We now believe that the remediation steps taken in
previous periods and through the quarter ended December 31, 2008, permitted
observation over an appropriate period of time for us to conclude that our
disclosure controls and procedures were effective as of December 31, 2008 to
assure that the information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is appropriately recorded, processed,
summarized and reported within the periods specified in the SEC's
rules.





Notwithstanding
the existence of these past material weaknesses in internal control, we believe
that the consolidated financial statements fairly present, in all material
respects, our condensed consolidated balance sheets as of December 31 and
September 30, 2008 and the related condensed consolidated statements of
operations, and cash flows for the three months ended December 31, 2008 and 2007
are in conformity with GAAP.





Changes
in Internal Control over Financial Reporting





Other
than as described above, there have been no significant changes in our internal
control over financial reporting during the quarter ended December 31, 2008 that
have materially affected, or is reasonably likely to materially affect our
internal control over financial reporting.








25





PART
II. OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





As of
December 31, 2008, the Company is not a party to any legal or administrative
actions or proceedings.





ITEM
1A. RISK
FACTORS





Our
viability will depend upon our ability to negotiate satisfactory arrangements
with our creditors and vendors.
 
 As of
December 31, 2008, we have no revenue-producing assets and a working capital
deficit of approximately $10.2 million.  In February 2009, we received
extensions from several of our lenders allowing us to extend the due dates on
scheduled interest payments until January 2010.  We will need to negotiate
with other lenders for similar extensions and with vendors for extended and/or
reduced payment terms in order to survive our existing cash shortage.  We
cannot assure you that we will be able to do so.  If we are unsuccessful in
these negotiation efforts, we may be unable to continue in
existence.





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





During
the three months ended December 31, 2008, we issued 1.9 million shares of our
common stock at $0.22 cents per share in connection with the receipt of an
amendment to a letter of understanding between CCES and us, related to our
property interests.





During
the three months ended December 31, 2008, we issued 0.5 million warrants to
purchase our common stock at $0.15 per share to three related parties, in
connection with sale of $0.2 million in convertible debentures.





During
the three months ended December 31, 2008 we issued 0.9 million warrants to
purchase our common stock at prices ranging $.024 to $0.28 per share to the
holders of our Series A 8.5% convertible debentures in connection
with  the receipt of waivers related to our violation of certain debt
covenants.





No
underwriters were used in the above stock transactions.  The Company
relied upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933 as to these transactions, as the investors were either
deemed to be sophisticated with respect to the investment in the securities due
to their financial condition and involvement in the Company’s business or
accredited investors.  Restrictive legends were placed on the
certificates evidencing the securities issued in both of the above
transactions.





ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.





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





None.





ITEM 5. OTHER INFORMATION





None.





ITEM 6. EXHIBITS





See
Exhibit Index





26


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: 
      February 17, 2009
                    By:
                    /s/ Charles
      B. CrowellCharles
      B. CrowellChief
      Executive OfficerDate:
 Date: 
      February 17, 2009
                    By:
                    /s/ J.
      Chris SteinhauserJ.
      Chris SteinhauserChief
      Financial OfficerDate:


27





EXHIBIT INDEX





Regulation
                          S-K Number
                        
                        Exhibit31.1
                        
                        Rule
      13a-14(a) Certification of Charles B. Crowell31.2
                        
                        Rule
      13a-14(a) Certification of J. Chris Steinhauser32.1
                        
                        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 J. Chris Steinhauser to 18 U.S.C. Section 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act Of
2002