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 THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2008





or





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





For the transition period
from  _____  to _____





Commission
file number: 000-51152





PETROHUNTER
ENERGY CORPORATION


(Exact
name of registrant as specified in its charter)





Maryland
            
            98-0431245(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)1600
      Stout Street
            
            80202Suite
      2000, Denver, Colorado
            
            (Zip
    Code)(Address
      of principal executive offices)





(303) 572-8900


Registrant’s
telephone number, including area code








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





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





Large
accelerated filer £      Accelerated
filer £      Non-accelerated
filer 0     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
April 30, 2008, the registrant had 318,748,841 shares of common stock
outstanding.








Unless
otherwise noted in this report, any description of “us” or “we” refers to
PetroHunter Energy Corporation and our subsidiaries. All amounts expressed
herein are in U.S. dollars unless otherwise indicated.








FORWARD-LOOKING
STATEMENTS





Certain
statements contained in this Quarterly Report constitute “forward-looking
statements.” These statements, identified by words such as
“plan,”  “anticipate,”  “believe,”  “estimate,”  “should,”  “expect”
and similar expressions include our expectations and objectives regarding our
future financial position, operating results and business strategy. These
statements reflect the current views of management with respect to future events
and are subject to risks, uncertainties and other factors that may cause our
actual results, performance or achievements, or industry results, to be
materially different from those described in the forward-looking statements. All
forward-looking statements herein as well as all subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by cautionary statements set forth in
Item 1A “Risk Factors” appearing in our Annual Report on Form 10-K for the
fiscal year ended September 30, 2007. We assume no duty to update or revise our
forward-looking statements based on changes in internal estimates or
expectations or otherwise. We advise you to carefully review the reports and
documents we file from time to time with the Securities and Exchange Commission
(the “SEC”).








GLOSSARY





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





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





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





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





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





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





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





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





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





Drilled and Cased.Involves
drilling a well and installing casing to a specified depth in the wellbore for
future completion.





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





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





2


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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





3


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





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





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





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





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





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





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





4


PETROHUNTER
ENERGY CORPORATION





FORM
10-Q








INDEX





PART
      I — FINANCIAL INFORMATIONItem
      1.
            Financial
      StatementsCondensed Consolidated Balance
      Sheets at March 31, 2008 (unaudited) and September 30,
    2007.Condensed  Consolidated
      Statements of Operations for the three and six months ended March 31,
      2008and
      2007, and the cumulative period from inception to March 31, 2008
      (unaudited).Condensed Consolidated Statements
      of Stockholders’ Equity and Comprehensive Loss for the sixmonths
      ended March 31, 2008 and the cumulative period from inception to March 31,
      2008 (unaudited).Condensed Consolidated Statements
      of Cash Flows for the six months ended March 31, 2008 and 2007and
      the cumulative period from inception to March 31, 2008
      (unaudited).Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      OperationsItem
      4T.
            Controls
      and ProceduresPART
      II — OTHER INFORMATIONItem
      1.
            Legal
      ProceedingsItem
      1A.
            Risk
      FactorsItem
      6.
            ExhibitsSignatures





5


PART
I. FINANCIAL INFORMATION





PETROHUNTER
ENERGY CORPORATION


(A
Development Stage Company)


CONDENSED
CONSOLIDATED BALANCE SHEETS


(unaudited,
$ in thousands, except share and per share amounts)


March
      31,
              2008
            
            
            September
      30,
              2007ASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            1,592
            
            
            $
            120ReceivablesOil
      and gas receivables, net
            
            
            184
            
            
            
            487Other
      receivables
            
            
            15
            
            
            
            59Due
      from related parties
            
            
            160
            
            
            
            500Note
      receivable — related party
            
            
            —
            
            
            
            2,494Prepaid
      expenses and other assets
            
            
            69
            
            
            
            187Marketable
      securities, trading
            
            
            —
            
            
            
            —Total
      Current Assets
            
            
            2,020
            
            
            
            3,847Property
      and Equipment, at costOil
      and gas properties under full cost method, net
            
            
            173,975
            
            
            
            162,843Furniture
      and equipment, net
            
            
            447
            
            
            
            569174,422
            
            
            
            163,412Other
      AssetsJoint
      interest billings
            
            
            1,029
            
            
            
            13,637Restricted
      cash
            
            
            549
            
            
            
            599Deposits
      and other assets
            
            
            48
            
            
            
            —Deferred
      financing costs
            
            
            713
            
            
            
            529Intangible asset
            
            
            2,756
            
            
            
            —Total
      Assets
            
            $
            181,537
            
            
            $
            182,024LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesNotes
      payable — short-term
            
            $
            2,109
            
            
            $
            4,667Convertible
      notes payable
            
            
            400
            
            
            
            400Accounts
      payable and accrued expenses
            
            
            26,695
            
            
            
            26,631Note
      payable — related party — current portion
            
            
            2,805
            
            
            
            3,755Note
      payable — current portion of long-term liabilities
            
            
            120
            
            
            
            120Accrued
      interest payable
            
            
            5,130
            
            
            
            2,399Accrued
      interest payable — related party
            
            
            720
            
            
            
            516Due
      to shareholder and related parties
            
            
            1,058
            
            
            
            1,474Contract
      payable — oil and gas properties
            
            
            —
            
            
            
            1,750Contingent
      purchase obligation
            
            
            2,756
            
            
            
            —Total
      Current Liabilities
            
            
            41,793
            
            
            
            41,712Notes
      payable — net of discount
            
            
            30,099
            
            
            
            27,944Subordinated
      notes payable — related parties
            
            
            1,401
            
            
            
            9,050Convertible
      notes payable — net of discount
            
            
            2,997
            
            
            
            —Asset
      retirement obligation
            
            
            104
            
            
            
            136Total
      Liabilities
            
            
            76,394
            
            
            
            78,842Common
      Stock Subscribed
            
            
            —
            
            
            
            2,858Commitments
      and ContingenciesStockholders’
      EquityPreferred
      stock, $0.001 par value; authorized 100,000,000 shares; none
      issued
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value; authorized 1,000,000,000 shares; 318,748,841 and
      278,948,841 shares issued and outstanding at March 31, 2008 and September
      30, 2007, respectively
            
            
            319
            
            
            
            279Additional
      paid-in-capital
            
            
            193,240
            
            
            
            172,672Accumulated
      other comprehensive loss
            
            
            (41
            )
            
            
            (5
            )Deficit
      accumulated during the development stage
            
            
            (88,375
            )
            
            
            (72,622
            )Total
      Stockholders’ Equity
            
            
            105,143
            
            
            
            100,324Total
      Liabilities and Stockholders’ Equity
            
            $
            181,537
            
            
            $
            182,024


See
accompanying notes to condensed consolidated financial statements.


6





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited;
$ in thousands except per share amounts)





Three
      months
              ended
              March
      31,
              2008
            
            
            Three
      months
              ended
              March 31,
              2007
              (restated)
            
            
            Six
      months
              ended
              March
      31,
              2008
            
            
            Six
      months
              ended
              March
      31,
              2007
              (restated)
            
            
            Cumulative
              From
      Inception
              (June
      20, 2005) to
              March 31, 2008RevenuesOil
      and gas revenues
            
            $
            496
            
            
            $
            889
            
            
            $
            783
            
            
            $
            1,338
            
            
            $
            3,639Other
      revenues
            
            
            209
            
            
            
            —
            
            
            
            209
            
            
            
            —
            
            
            
            209Total
      revenues
            
            
            705
            
            
            
            889
            
            
            
            992
            
            
            
            1,338
            
            
            
            3,848Costs
      and expensesLease
      operating expenses
            
            
            140
            
            
            
            224
            
            
            
            240
            
            
            
            386
            
            
            
            1,037General
      and administrative
            
            
            3,796
            
            
            
            4,331
            
            
            
            5,690
            
            
            
            8,002
            
            
            
            38,639Property
      development — related party
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,815
            
            
            
            7,205Impairment
      of oil and gas properties
            
            
            —
            
            
            
            3,800
            
            
            
            —
            
            
            
            8,951
            
            
            
            24,053Consulting
      fees – related party
            
            
            —
            
            
            
            75
            
            
            
            —
            
            
            
            75
            
            
            
            —Depreciation,
      depletion, amortization and accretion
            
            
            182
            
            
            
            827
            
            
            
            441
            
            
            
            1,213
            
            
            
            1,759Total
      operating expenses
            
            
            4,118
            
            
            
            9,257
            
            
            
            6,371
            
            
            
            20,442
            
            
            
            72,693Loss
      from operations
            
            
            (3,413
            )
            
            
            (8,368
            )
            
            
            (5,379
            )
            
            
            (19,104
            )
            
            
            (68,845
            )Other
      income (expense):Gain
      on foreign exchange
            
            
            34
            
            
            
            —
            
            
            
            11
            
            
            
            —
            
            
            
            34Interest
      income
            
            
            26
            
            
            
            6
            
            
            
            27
            
            
            
            14
            
            
            
            66Interest
      expense
            
            
            (2,390
            )
            
            
            (2,004
            )
            
            
            (7,425
            )
            
            
            (2,231
            )
            
            
            (16,643
            )Trading
      security losses
            
            
            (594
            )
            
            
            —
            
            
            
            (2,987
            )
            
            
            —
            
            
            
            (2,987
            )Total
      other expense
            
            
            (2,924
            )
            
            
            (1,998
            )
            
            
            (10,374
            )
            
            
            (2,217
            )
            
            
            (19,530
            )Net
      loss
            
            $
            (6,337
            )
            
            $
            (10,366
            )
            
            $
            (15,753
            )
            
            $
            (21,321
            )
            
            $
            (88,375
            )Net
      loss per common share — basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.05
            )
            
            $
            (0.05
            )
            
            $
            (0.10
            )Weighted
      average number of common shares outstanding — basic and
      diluted
            
            
            316,978
            
            
            
            222,562
            
            
            
            312,610
            
            
            
            221,245





See
accompanying notes to condensed consolidated financial
statements


7




CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS


(unaudited,
$ in thousands except share and per share amounts)





Common Stock
            
            
            Additional
              Paid-in
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Accumulated
              Other
              Comprehensive
            
            
            Total
              Stockholders’
            
            
            Total
              ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            Loss
            
            
            Equity
            
            
            LossBalances,
      June 20, 2005 (inception)
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Shares
      issued to founder at $0.001 per share
            
            
            100,000,000
            
            
            
            100
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            100
            
            
            
            —Stock-based
      compensation costs for options granted to non- employees
            
            
            —
            
            
            
            —
            
            
            
            823
            
            
            
            —
            
            
            
            —
            
            
            
            823
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,119
            )
            
            
            —
            
            
            
            (2,119
            )
            
            
            (2,119
            )Balances,
      September 30, 2005
            
            
            100,000,000
            
            
            
            100
            
            
            
            823
            
            
            
            (2,119
            )
            
            
            —
            
            
            
            (1,196
            )
            
            
            (2,119
            )Shares
      issued for property interests at $0.50 per share
            
            
            3,000,000
            
            
            
            3
            
            
            
            1,497
            
            
            
            —
            
            
            
            —
            
            
            
            1,500
            
            
            
            —Shares
      issued for finder’s fee on property at $0.50 per share
            
            
            3,400,000
            
            
            
            3
            
            
            
            1,697
            
            
            
            —
            
            
            
            —
            
            
            
            1,700
            
            
            
            —Shares
      issued upon conversion of debt, at $0.50 per share
            
            
            44,063,334
            
            
            
            44
            
            
            
            21,988
            
            
            
            —
            
            
            
            —
            
            
            
            22,032
            
            
            
            —Shares
      issued for commission on convertible debt at $0.50 per
    share
            
            
            2,845,400
            
            
            
            3
            
            
            
            1,420
            
            
            
            —
            
            
            
            —
            
            
            
            1,423
            
            
            
            —Sale
      of shares and warrants at $1.00 per unit
            
            
            35,442,500
            
            
            
            35
            
            
            
            35,407
            
            
            
            —
            
            
            
            —
            
            
            
            35,442
            
            
            
            —Shares
      issued for commission on sale of units
            
            
            1,477,500
            
            
            
            1
            
            
            
            1,476
            
            
            
            —
            
            
            
            —
            
            
            
            1,477
            
            
            
            —Costs of stock
      offering:Cash
            
            
            —
            
            
            
            —
            
            
            
            (1,638
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,638
            )
            
            
            —Shares
      issued for commission at $1.00 per share
            
            
            —
            
            
            
            —
            
            
            
            (1,478
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,478
            )
            
            
            —Exercise
      of warrants
            
            
            1,000,000
            
            
            
            1
            
            
            
            999
            
            
            
            —
            
            
            
            —
            
            
            
            1,000
            
            
            
            —Recapitalization
      of shares issued upon merger
            
            
            28,700,000
            
            
            
            30
            
            
            
            (436
            )
            
            
            —
            
            
            
            —
            
            
            
            (406
            )
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            9,189
            
            
            
            —
            
            
            
            —
            
            
            
            9,189
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (20,692
            )
            
            
            —
            
            
            
            (20,692
            )
            
            
            (20,692
            )Balances,
      September 30, 2006
            
            
            219,928,734
            
            
            
            220
            
            
            
            70,944
            
            
            
            (22,811
            )
            
            
            —
            
            
            
            48,353
            
            
            
            (20,692
            )Shares
      issued for property interests at $1.62 per share
            
            
            50,000,000
            
            
            
            50
            
            
            
            80,950
            
            
            
            —
            
            
            
            —
            
            
            
            81,000
            
            
            
            —Shares
      issued for property interests at $1.49 per share
            
            
            256,000
            
            
            
            —
            
            
            
            382
            
            
            
            —
            
            
            
            —
            
            
            
            382
            
            
            
            —






8




Common Stock
            
            Additional
              Paid-in
            
            
            Deficit
              Accumulated
              During
      the
              Development
            
            
            Accumulated
              Other
              Comprehensive
            
            
            Total
              Stockholders’
            
            
            Total
              ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            Loss
            
            
            Equity
            
            
            LossShares
      issued for commission costs on property at $1.65 per share
            
            
            121,250
            
            
            
            —
            
            
            
            200
            
            
            
            —
            
            
            
            —
            
            
            
            200
            
            
            
            —Shares
      issued for finance costs on property at $0.70 per share
            
            
            642,857
            
            
            
            1
            
            
            
            449
            
            
            
            —
            
            
            
            —
            
            
            
            450
            
            
            
            —Shares
      issued for property and finance interests at various costs per
      share
            
            
            8,000,000
            
            
            
            8
            
            
            
            6,905
            
            
            
            —
            
            
            
            —
            
            
            
            6,913
            
            
            
            —Foreign
      currency translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5
            )
            
            
            (5
            )
            
            
            (5
            )Discount
      on notes payable
            
            
            —
            
            
            
            —
            
            
            
            4,670
            
            
            
            —
            
            
            
            —
            
            
            
            4,670
            
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            8,172
            
            
            
            —
            
            
            
            —
            
            
            
            8,172
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (49,811
            )
            
            
            —
            
            
            
            (49,811
            )
            
            
            (49,811
            )Balances,
      September 30, 2007
            
            
            278,948,841
            
            
            
            279
            
            
            
            172,672
            
            
            
            (72,622
            )
            
            
            (5
            )
            
            
            100,324
            
            
            
            (49,816
            )Shares
      issued for property interests at $0.31 per share
            
            
            25,000,000
            
            
            
            25
            
            
            
            7,725
            
            
            
            —
            
            
            
            —
            
            
            
            7,750
            
            
            
            —Shares
      issued for finance costs at $0.23 per share
            
            
            16,000,000
            
            
            
            16
            
            
            
            3,664
            
            
            
            —
            
            
            
            —
            
            
            
            3,680
            
            
            
            —Shares
      issued in conjunction with asset sale at $0.25 per share
            
            
            5,000,000
            
            
            
            5
            
            
            
            1,245
            
            
            
            —
            
            
            
            —
            
            
            
            1,250
            
            
            
            —Shares
      returned for property and retired at prices ranging from $0.23 per share
      to $1.72 per share
            
            
            (6,400,000
            )
            
            
            (6
            )
            
            
            (5,524
            )
            
            
            —
            
            
            
            —
            
            
            
            (5,530
            )
            
            
            —Shares
      issued for finance costs at $0.28 per share
            
            
            200,000
            
            
            
            —
            
            
            
            56
            
            
            
            —
            
            
            
            —
            
            
            
            56
            
            
            
            —Discounts
      associated with beneficial conversion feature and detachable warrants on
      convertible debenture issuance
            
            
            —
            
            
            
            —
            
            
            
            6,956
            
            
            
            —
            
            
            
            —
            
            
            
            6,956
            
            
            
            —Warrant
      value associated with convertible debenture issuance
            
            
            —
            
            
            
            —
            
            
            
            21
            
            
            
            —
            
            
            
            —
            
            
            
            21
            
            
            
            —Warrant
      value associated with related party amendment
            
            
            —
            
            
            
            —
            
            
            
            705
            
            
            
            —
            
            
            
            —
            
            
            
            705
            
            
            
            —Forgiveness
      of amounts due to shareholder and related party debt
            
            
            —
            
            
            
            —
            
            
            
            4,067
            
            
            
            —
            
            
            
            —
            
            
            
            4,067
            
            
            
            —Discount
      on notes payable
            
            
            —
            
            
            
            —
            
            
            
            52
            
            
            
            —
            
            
            
            —
            
            
            
            52
            
            
            
            —Foreign
      currency translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (36
            )
            
            
            (36
            )
            
            
            (36
            )Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            1,601
            
            
            
            —
            
            
            
            —
            
            
            
            1,601
            
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (15,753
            )
            
            
            —
            
            
            
            (15,753
            )
            
            
            (15,753
            )Balances,
      March 31, 2008
            
            
            318,748,841
            
            
            $
            319
            
            
            $
            193,240
            
            
            $
            (88,375
            )
            
            $
            (41
            )
            
            $
            105,143
            
            
            $
            (15,789
            )





See
accompanying notes to condensed consolidated financial
statements.


9


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited,
$ in thousands)


Six
      months
              ended
              March
      31,
              2008
            
            
            Six
      months
              ended
              March 31,
              2007
              (restated)
            
            
            Cumulative
      From
              Inception
              (June
      20, 2005)
              to
      December 31,
              2007Cash
      flows used in operating activitiesNet
      loss
            
            $
            (15,753
            )
            
            $
            ( 21,321
            )
            
            $
            (88,375
            )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:
              Stock
      for expenditures advanced
            
            
            —
            
            
            
            —
            
            
            
            100Stock-based
      compensation
            
            
            1,601
            
            
            
            3,617
            
            
            
            19,785Detachable
      warrants recorded as interest expense
            
            
            4,097
            
            
            
            —
            
            
            
            4,097Depreciation,
      depletion, amortization and accretion
            
            
            442
            
            
            
            1,763
            
            
            
            1,760Impairment
      of oil and gas properties
            
            
            —
            
            
            
            8,400
            
            
            
            24,053Stock
      for financing costs
            
            
            —
            
            
            
            1,441
            
            
            
            1,623Amortization
      of discount and deferred financing costs on notes payable
            
            
            1,205
            
            
            
            148
            
            
            
            2,241Loss
      on trading securities
            
            
            2,987
            
            
            
            —
            
            
            
            2,987Gain
      on foreign exchange
            
            
            (11
            )
            
            
            —
            
            
            
            (34
            )Changes
      in assets and liabilities
              Receivables
            
            
            102
            
            
            
            (1,469
            )
            
            
            (444
            )Due
      from related party
            
            
            (160
            )
            
            
            921
            
            
            
            (660
            )Prepaids
      and other
            
            
            74
            
            
            
            24
            
            
            
            29Deferred
      financing costs
            
            
            (344
            )
            
            
            —
            
            
            
            (344
            )Accounts
      payable, accrued expenses, and other liabilities
            
            
            (667
            )
            
            
            (854
            )
            
            
            4,187Due
      to shareholder and related parties
            
            
            7
            
            
            
            618
            
            
            
            1,481Net
      cash used in operating activities
            
            
            (6,420
            )
            
            
            (6,712
            )
            
            
            (27,514
            )Cash
      flows provided by (used in) investing activitiesProceeds
      from CD redemption
            
            
            50
            
            
            
            —
            
            
            
            50Additions
      to oil and gas properties
            
            
            (5,322
            )
            
            
            (3,808
            )
            
            
            (70,987
            )Proceeds
      from sale of oil and gas properties
            
            
            7,500
            
            
            
            —
            
            
            
            7,500Sale of trading securities
            
            
            2,541
            
            
            
            —
            
            
            
            2,541Deposit
      on oil and gas property acquisition
            
            
            —
            
            
            
            (12,863
            )
            
            
            (2,494
            )Additions
      to property and equipment
            
            
            (16
            )
            
            
            (95
            )
            
            
            (703
            )Restricted
      cash
            
            
            —
            
            
            
            (525
            )
            
            
            (1,077
            )Net
      cash provided by (used in) investing activities
            
            
            4,753
            
            
            
            (17,291
            )
            
            
            (65,170
            )Cash
      flows from financing activitiesProceeds
      from the sale of common stock
            
            
            —
            
            
            
            —
            
            
            
            35,742Proceeds
      from common stock subscribed
            
            
            —
            
            
            
            3,067
            
            
            
            2,858Proceeds
      from the issuance of notes payable
            
            
            1,150
            
            
            
            12,500
            
            
            
            32,700Payments
      on long-term debt
            
            
            (40
            )
            
            
            —
            
            
            
            (40
            )Borrowing
      on short-term notes payable
            
            
            1,755
            
            
            
            —
            
            
            
            2,255Payments
      on short-term notes
            
            
            (5,648
            )
            
            
            —
            
            
            
            (5,648
            )Payments
      on contracts payable
            
            
            (250
            )
            
            
            —
            
            
            
            (250
            )Payments
      on related party borrowing
            
            
            (219
            )
            
            
            (450
            )
            
            
            (219
            )Proceeds
      from related party borrowing
            
            
            420
            
            
            
            —
            
            
            
            695Proceeds
      from the exercise of warrants
            
            
            —
            
            
            
            —
            
            
            
            1,000Cash
      received upon recapitalization and merger
            
            
            —
            
            
            
            —
            
            
            
            21Proceeds
      from issuance of convertible notes
            
            
            6,334
            
            
            
            —
            
            
            
            27,166Offering
      and financing costs
            
            
            (350
            )
            
            
            (44
            )
            
            
            (1,988
            )Net
      cash provided by financing activities
            
            
            3,152
            
            
            
            15,073
            
            
            
            94,292Effect
      of exchange rate changes on cash
            
            
            (13
            )
            
            
            —
            
            
            
            (16
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            1,472
            
            
            
            (8,930
            )
            
            
            1,592Cash
      and cash equivalents, beginning of period
            
            
            120
            
            
            
            10,632
            
            
            
            —Cash
      and cash equivalents, end of period
            
            $
            1,592
            
            
            $
            1,702
            
            
            $
            1,592Supplemental
      schedule of cash flow informationCash
      paid for interest
            
            $
            21
            
            
            $
            —
            
            
            $
            1,522Cash
      paid for income taxes
            
            $
            —
            
            
            $
            —
            
            
            $





See
accompanying notes to condensed consolidated financial
statements.


10


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note 1 — Organization and Basis of
Presentation





We are a
development stage global oil and gas exploration and production company
committed to acquiring and developing primarily unconventional natural gas and
oil prospects that we believe have a very high probability of economic success.
Since our inception in 2005, our principal business activities have been raising
capital through the sale of common stock and convertible notes and acquiring oil
and gas properties in the western United States and
Australia.  Currently, we own property in Colorado, where we have
drilled five wells on our Buckskin Mesa property, and Australia, where we have
drilled one well on our property in the Northern Territory, and in Montana,
where we hold a land position in the Bear Creek area.  The wells on
these properties have not yet commenced oil and gas production. We own working
interests in eight additional wells in Colorado which are operated by EnCana Oil
& Gas USA (“EnCana”) and are currently producing gas.  In November
2007, we sold 66,000 net acres of land and two wells in Montana and 177,445
acres of land in Utah (see Note 4) and subsequent to March 31, 2008, we entered
into a binding purchase and sale agreement to sell up to 1,059 net acres
and 16 wells in the Southern Piceance Basin in Colorado (see Note
13).





Our
predecessor, Digital Ecosystems Corp. (“Digital”), was incorporated on February
21, 2002 under the laws of the state of Nevada.  On February 10, 2006,
Digital entered into a Share Exchange Agreement (the “Exchange Agreement”) with
GSL Energy Corporation (“GSL”) and certain shareholders of GSL pursuant to which
Digital acquired more than 85% of the issued and outstanding shares of common
stock of GSL in exchange for shares of Digital’s common stock.  The
Exchange Agreement was completed on May 12, 2006.  At that time, GSL’s
business, which was formed in 2005 for the purpose of acquiring, exploring,
developing and operating oil and gas properties, became Digital’s business and
GSL became a subsidiary of Digital. Since this transaction resulted in the
former shareholders of GSL acquiring control of Digital, for financial reporting
purposes, the business combination was accounted for as an additional
capitalization of Digital (a reverse acquisition with GSL as the accounting
acquirer).  In accounting for this transaction:





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


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





Subsequent
to the closing of the Exchange Agreement, Digital acquired all the remaining
outstanding stock of GSL, and effective August 14, 2006, Digital changed its
name to PetroHunter Energy Corporation (“PetroHunter”).  Likewise, in
October 2006, GSL changed its name to PetroHunter Operating
Company.





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





Unless
otherwise noted in this report, any description of “us” or “we” refers to
PetroHunter Energy Corporation and our subsidiaries. Financial information in
this report is presented in U.S. dollars.





Note 2 — Summary of Significant
Accounting Policies





Basis of Accounting.The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which contemplates the realization of
assets and extinguishment of liabilities in the normal course of business. As
shown in the accompanying statements of operations, we have incurred a
cumulative loss in the amount of $88.4 million for the period from inception
(June 20, 2005) to March 31, 2008, have a working capital deficit of
approximately $39.8 million as of March 31, 2008, were not in compliance with
the covenants of several loan agreements, have had multiple property liens and
foreclosure actions filed by vendors and have significant capital expenditure
commitments. As of March 31, 2008, we have earned oil and gas revenue from our
initial operating wells, but will require significant additional funding to
sustain operations and satisfy contractual obligations for planned oil and gas
exploration, development and operations in the future. These factors, among
others, may indicate that we may be unable to continue in existence. Our
financial statements do not include adjustments related to the realization of
the carrying value of assets or the amounts and classification of liabilities
that might be necessary should we be unable to continue in existence. Our
ability to establish ourselves as a going concern is dependent upon our ability
to obtain additional financing to fund planned operations




11


and to
ultimately achieve profitable operations. Management believes that we can be
successful in obtaining equity and/or debt financing and/or sell interests in
some of our properties, which will enable us to continue in existence and
establish ourselves as a going concern. We have raised approximately $102.4
million through March 31, 2008 through issuances of common stock and convertible
and other debt.





For the
three and six-month periods ending March 31, 2008 and 2007, the condensed
consolidated financial statements include the accounts of PetroHunter and our
wholly-owned subsidiaries. For the period from June 20, 2005 through September
30, 2005, the consolidated financial statements include only the accounts of
GSL. All significant intercompany transactions have been eliminated upon
consolidation.





The
accompanying financial statements should be read in conjunction with our Annual
Report on Form 10-K for the year ended September 30, 2007. The accompanying
condensed consolidated financial statements are unaudited; however, in the
opinion of management, they include all normal recurring adjustments necessary
for a fair presentation of our consolidated financial position at March 31, 2008
and the consolidated results of our operations and cash flows for the three and
six-month periods ending March 31, 2008 and 2007. The results of operations for
the three and six-month periods ending March 31, 2008 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
September 30, 2008 or for any other interim period in the September 2008 fiscal
year.  Further, the accompanying balance sheet as of September 30,
2007 was derived from audited financial statements.





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





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





The more
significant areas requiring the use of assumptions, judgments and estimates
relate to volumes of natural gas and oil reserves used in calculating depletion,
the amount of expected future cash flows used in determining possible
impairments of oil and gas properties and the amount of future capital costs
estimated for such calculations. Assumptions, judgments and estimates are also
required to determine future abandonment obligations, the value of undeveloped
properties for impairment analysis and the value of deferred tax
assets.





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





Marketable Securities, Trading.In November 2007, we sold our Heavy Oil assets (see Note 4, Oil and Gas Properties). As
partial consideration, we accepted a total of 1,539,975 shares of common stock
of the purchaser, Pearl Exploration and Production Ltd. These shares were sold
subsequent to a holding period, and were classified as held for sale in the
short term at December 31, 2007. During the intervening period from closing
through the date of sale in March 2008, we accounted for them by marking them to
market with unrealized losses recognized in our operating results in the period
incurred. During the second quarter ended March 31, 2008, and as more fully
described in Notes 4 and 12, we recorded certain adjustments in relation to
these marketable securities due to the correction of an error. In addition to
the reversal of $0.9 million of unrealized losses on these securities that was
initially recorded during the first quarter, we recognized a loss on the
disposition of our trading securities in the amount of $1.5 million recorded as
Trading Security Lossesin our consolidated statement of operations during the second
quarter.





Joint Interest Billings.Joint interest billingsrepresents our working
interest partners’ share of costs that we paid, on their behalf, to drill
certain wells. During the first quarter of 2008, we entered into a transaction
whereby we increased our interest in 14 wells to 100% (see Note 4, Oil and Gas Properties) and
we therefore reclassified $12.6 million of costs related to those wells from
Joint interest billingsto Oil and gas
properties.





12


Oil and Gas Properties.We
utilize the full cost method of accounting for our oil and gas activities. Under
this method, subject to a limitation based on estimated value, all costs
associated with property acquisition, exploration and development, including
costs of unsuccessful exploration, are capitalized within a cost center on a
by-country basis. No gain or loss is recognized upon the sale or abandonment of
undeveloped or producing oil and gas properties unless the sale represents a
significant portion of oil and gas properties and the gain significantly alters
the relationship between capitalized costs and proved oil and gas reserves of
the cost center. Depletion and amortization of oil and gas properties is
computed on the units-of-production method based on proved reserves. Amortizable
costs include estimates of future development costs of proved undeveloped
reserves.





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





Guarantees.  As
part of a Gas Gathering Agreement we have with CCES Piceance Partners1, LLC
(“CCES”), we have guaranteed that, should there be a mutual failure to execute a
formal agreement for long-term gas gathering services in the future, we will
repay CCES for certain costs they have incurred in relation to the development
of a gas gathering system and repurchase certain gas gathering assets we sold to
CCES.  We have accounted for this guarantee using FASB Interpretation
No. 45 as amended, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,which requires us to recognize a
liability for the obligations undertaken upon issuing the guarantee in order to
have a more representationally faithful depiction of the guarantor’s assets and
liabilities.  Accordingly, we have recognized a $2.7 million
contingent purchase obligation on our balance sheet.  See further
explanation at Note 13.





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





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





•      The
cost of properties not being amortized; plus





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





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





If
unamortized costs capitalized within a cost center, less related deferred income
taxes, exceed the cost center ceiling, the excess is charged to expense. During
the three and six-month periods ended March 31, 2008, we did not record any
impairment charges. During the three and six-month periods ended March 31, 2007,
we recorded impairment charges of $3.8 million and $9.0 million.





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





Environmental Contingencies.Oil and gas producing activities are subject to extensive environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require us to remove or
mitigate the environmental effects of the disposal or release of petroleum or
chemical substances at various sites. Environmental




13


expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefit are expensed. Liabilities for expenditures
of a non-capital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.





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





Loss per Common Share.Basic
loss per share is based on the weighted average number of common shares
outstanding during the period. Diluted loss per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Convertible equity instruments
such as stock options and convertible debentures are excluded from the
computation of diluted loss per share, as the effect of the assumed exercises
would be anti-dilutive. The dilutive weighted-average number of common shares
outstanding excluded potential common shares from stock options and warrants of
approximately 114,169,114 and 48,701,500 for the periods ended March 31, 2008
and 2007, respectively.





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





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





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





Six
      Months
              Ended
              March
      31,
              2008
            
            
            Six
      Months
              Ended
              March
      31,
              2007(restated)
            
            
            Cumulative
              From
      Inception
              (June
      20, 2005) to
              March 31,
              2008($
      in thousands)Supplemental
      disclosures of non-cash investing and financing activitiesShares
      issued for expenditures advanced
            
            $
            —
            
            
            $
            —
            
            
            $
            100Contracts
      for oil and gas properties
            
            $
            (7,030
            )
            
            $
            2,900
            
            
            $
            6,494Shares
      issued for debt conversion
            
            $
            —
            
            
            $
            —
            
            
            $
            22,032Shares
      issued for commissions on offerings
            
            $
            50
            
            
            $
            200
            
            
            $
            250Shares
      issued for property
            
            $
            1,250
            
            
            $
            81,275
            
            
            $
            82,525Shares
      issued for property and finder’s fee on property
            
            $
            —
            
            
            $
            —
            
            
            $
            9,644Warrants
      issued for debt
            
            $
            2,954
            
            
            $
            —
            
            
            $
            7,624Non-cash
      uses of notes payable, accounts payable and accrued
      liabilities
            
            $
            —
            
            
            $
            —
            
            
            $
            26,313Convertible
      debt issued for property
            
            $
            —
            
            
            $
            —
            
            
            $
            1,200Common
      stock issuable
            
            $
            —
            
            
            $
            4,128
            
            
            $
            —Shares
      issued for common stock offerings
            
            $
            —
            
            
            $
            —
            
            
            $
            2,900Debt
      issued for common stock previously subscribed
            
            $
            2,858
            
            
            $
            —
            
            
            $
            2,858Assignment
      of rights in properties in exchange for stock and forgiveness of related
      party notes payable
            
            $
            15,959
            
            
            $
            —
            
            
            $
            15,959Satisfaction
      of receivable by reduction of related party note payable
            
            $
            2,992
            
            
            $
            —
            
            
            $
            2,992




14


Debt
      discount related to beneficial conversion feature
            
            $
            3,959
            
            
            $
            —
            
            
            $
            3,959Increase
      in oil and gas properties related to relief of joint interest
      billings
            
            $
            12,608
            
            
            $
            —
            
            
            $
            12,608





Note 3 — Agreements with MAB
Resources LLC





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




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




MAB
assign to us a 50% undivided interest in any and all oil and gas leases,
production facilities and related assets (collectively, the “Properties”) that
MAB was to acquire from third parties in the future, we would be operator of the
jointly owned properties, with MAB Operating Company LLC as sub-operator, and
each party would pay its proportionate share of costs and receive its
proportionate share of revenues, subject to certain adjustments, including our
burden to carry MAB for specified costs, pay advances, and to make an overriding
royalty payment of 3% (gross, or 1.5% net) to MAB out of production and
sales.





A more
thorough description of the Development Agreement is included in Item 8 of our
Annual Report on Form 10-K, Financial Statements and
Supplementary Data - Note 3.





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





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


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


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





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





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





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





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


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


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


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


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


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




15


o
            by
      $8.0 million in exchange for 16.0 million shares of our common stock with
      a value of $3.7 million based on the closing price of $0.23 per share at
      November 15, 2007 and warrants to acquire 32.0 million shares of our
      common stock at $0.50 per share. The warrants expire on November 14, 2009
      and were valued at $0.7 million;


o
            by
      $2.9 million in exchange for our release of MAB’s obligation to pay the
      equivalent amount as guarantor of the performance of Galaxy Energy
      Corporation under the subordinated unsecured promissory note dated August
      31, 2007 (see Note 10);


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


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





The net
effect of the reduction of debt and issuance of our common shares resulted in a
net benefit to us of $3.8 million and has been reflected as additional
paid-in-capital during the six months ended March 31, 2008. Monthly payments on
the revised promissory note in the amount of $2.0 million commenced February 1,
2008 and are due in full in two years.





As more
fully described in Note 12, during the preparation of our second quarter
financial statements, we discovered certain errors that relate to our first
quarter financial statements.  One of those errors resulted from the
retroactive termination of MAB’s consulting services, where we (a) overstated
the reversal of our obligation to pay for the consulting services by $0.2
million, and (b) had erroneously recorded the relief of the actual $0.2 million
liability we had recorded at September 30, 2007 as a credit to our first quarter
net loss.  We have subsequently determined that the relief of this
obligation by MAB should correctly be reflected as a credit to our paid in
capital account, as the transaction relates to the relief of an obligation to a
significant shareholder.  These errors were corrected in the second
quarter.





Note 4 — Oil and Gas
Properties





Oil and
gas properties consisted of the following:





March
      31,
              2008
            
            
            September
      30,
              2007Oil
      and gas properties, at cost, full cost method
            
            ($
      in thousands)UnprovedUnited
      States
            
            $
            107,135
            
            
            $
            107,239Australia
            
            
            24,099
            
            
            
            23,569Proved
      – United States
            
            
            44,172
            
            
            
            57,168Total
            
            
            175,406
            
            
            
            187,976Less
      accumulated  depreciation, depletion, amortization
      and  impairment
            
            
            (1,431
            )
            
            
            (25,133
            )Total
            
            $
            173,975
            
            
            $
            162,843





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





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





PICEANCE
BASIN





Buckskin Mesa Project.As of
March 31, 2008, we had drilled five wells, with two wells having been
completed and shut-in, awaiting completion of the gathering system, and the
remaining 3 wells awaiting completion. We are required to drill 16 wells during
the calendar year ending December 31, 2008, three during the first quarter and
four during each of the second and third calendar quarters of 2008 and five
during the fourth calendar quarter of 2008, under the terms of an agreement
between us and a third party assignor, Daniels Petroleum Company (“DPC”). If we
do not satisfy these quarterly drilling requirements, our agreement with DPC
requires that we pay DPC $0.5 million for each undrilled well on the last day of
the applicable quarter.  At the end of the first calendar quarter of
2008, we extended and subsequently exercised our right to pay $0.5 million in
penalties for three wells that were required to be drilled that quarter by
agreeing to pay the $1.5 million fee, plus a $1.0 million additional penalty.
These amounts were paid on April 28, 2008, thereby reducing the total
number of wells we are committed to drill for the remainder of calendar year
2008 to 13.  We currently estimate our cost to drill and complete each
well at $3.0 million, aggregating $39.0 million for the remaining 13
wells.





16


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





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





Exchange
1 — We received from EnCana an interest in 40 net acres, including two net and
gross wells, and conveyed to EnCana interests in 19 gross wells and 0.4 net
wells. We and EnCana relieved each other of existing obligations related to all
past costs and operations of the respective properties exchanged. EnCana’s share
of the costs to drill the two wells of $3.2 million reflected as Joint interest billingsin our consolidated
balance sheet at September 30, 2007 was reclassified to Oil and gas propertiesduring
the first quarter ended December 31, 2007. In addition, our accounts receivable
from EnCana for oil and gas sales and accounts payable to EnCana for lease
operating expenses from the 19 wells, of $0.2 million and $0.1 million
respectively, as of December 31, 2007, was also reclassified to Oil and gas propertiesduring
the first quarter ended December 31, 2007.





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





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





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





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





Sugarloaf Project.We failed
to make payments in accordance with the agreement related to this prospect and
as a result, on December 4, 2007, the agreement was terminated and we instructed
the escrow agent to return all assignments which were being held in escrow to
the seller (See Note 6).





AUSTRALIA





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





Beetaloo Project.We have a
100% working interest in this project with a royalty interest of 10% to the
government of the Northern Territory and an overriding royalty interest of 1% to
2%, 8% and 5% to the Northern Land Council, the original assignor of the




17


licenses,
and to MAB, respectively, leaving a net revenue interest of 75% to 76% to
us.  We have committed to drill five wells at a total estimated cost
of $20.0 million related to this property.





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





POWDER RIVER
BASIN





On
December 29, 2006, we entered into a purchase and sale agreement (the “Galaxy
PSA”) with Galaxy Energy Corporation (“Galaxy”) and its wholly-owned subsidiary,
Dolphin Energy Corporation (“Dolphin”), both of which are related parties to us.
Pursuant to the Galaxy PSA, we agreed to purchase all of Galaxy’s and Dolphin’s
oil and gas interests in the Powder River Basin of Wyoming and Montana (the
“Powder River Basin Assets”), and to assume operations as contract operator,
pending the purchase.





In
January 2007, we paid a $2.0 million earnest money deposit to Galaxy, which was
due under the terms of the Galaxy PSA. As contract operator of the Powder River
Basin Assets, we incurred $0.8 million in expenses. The Galaxy PSA expired by
its terms on August 31, 2007. Upon expiration and under the terms of the Galaxy
PSA, we obtained a note receivable in the amount of $2.5 million (the “Galaxy
Note”) which consisted of the $2.0 million earnest deposit plus a portion of
operating costs paid by us. As guarantor of the Galaxy Note, MAB repaid the
balance in November 2007 by offsetting it against amounts owed by us to MAB
under the MAB Note (see Notes 3 and 7).





MONTANA COALBED
METHANE





Bear Creek Project.We have
retained 13,905 acres of the original 25,278 acres of leasehold acquired through
an assignment from MAB. The remaining 11,373 acres of leasehold have expired.
The acres retained have been reflected in unproved oil and gas properties and
are subject to further evaluation. The acres released have been reflected in
unproved properties but included in evaluated costs subject to amortization and
in the full cost ceiling test at the lower of cost or market value.





HEAVY
OIL





Sale of Heavy Oil Projects.On November 6, 2007 and effective October 1, 2007, we sold a majority of
our interest in certain of our Heavy Oil Projects, including the West Rozel,
Fiddler Creek and Promised Land Projects, to Pearl Exploration and Production
Ltd. (“Pearl”). The purchase price was a maximum of $30.0 million, payable as
follows: (a) $7.5 million in cash at closing; (b) the issuance of up to 2.5
million shares of Pearl equivalent to $10 million (based on a price of $4.00
Canadian dollars per share, as stipulated in the purchase and sale contract),
and (c) a performance payment (the “Pearl Performance Payment”) of $12.5 million
in cash at such time as either: (i) production from the assets reaches 5,000
barrels per day or (ii) proven reserves from the assets is greater than 50.0
million barrels of oil as certified by a third party reserve engineer. In the
event that these targets have not been achieved by September 30, 2010, the Pearl
Performance Payment obligation will expire.  As of March 31, 2008, no
amounts have been accrued in relation to the Pearl Performance Payment as
the triggering events have not yet occurred.  In addition, the number
of shares included in (b) above may be reduced by 960,025 shares (valued in the
contract at $3.8 million based on a price of $4.00 per share, as above) if a
satisfactory agreement is not made between Pearl and the lessor (“ECA”) of
certain of the properties within 6 months of the date of closing (that being May
6, 2008).  No such satisfactory agreement was reached between Pearl
and ECA and therefore, the total amount conveyed in (b) above was 1,539,975
shares.





We
originally accounted for the sale of the Heavy Oil Project assets to Pearl to
include the sale of the ECA properties, as we believed at that time it was
probable Pearl and ECA would reach agreement and the ECA assets would be
conveyed to Pearl within the six month period contemplated in our agreement with
Pearl.  During the second quarter, we were informed that agreement
between Pearl and ECA would not be reached, and that the ECA assets would not
transfer to Pearl.  As a result, we reviewed the original accounting
for the transaction and determined that we had inappropriately included the
960,025 shares of Pearl stock relating to the ECA assets in our marketable
securities as of December 31, 2007, and further, we had recorded unrealized
losses on those shares during the first quarter in error.  During the
second quarter, we recorded correcting entries in our financial statements which
resulted in (a) the reversal of $0.9 million of unrealized losses on the shares
of Pearl stock we did not ultimately receive, and (b) the reversal into our full
cost pool of $3.5 million of marketable securities we originally recorded in
anticipation of closing the sale of the ECA assets.  During March
2008, we sold all of the 1,539,975 shares of Pearl stock we did receive, which
resulted in net proceeds of $2.5 million.  The




18


difference
between the value of these shares at closing of $5.5 million and the net
proceeds received upon sale, was recorded as Trading Security Losses in our consolidated
results of operations for the six months ended March 31, 2008.  See
Note 12 for further discussion.





The sale
of assets to Pearl also resulted in amendments to existing agreements with third
parties, including MAB’s relinquishment of its rights and obligations in all
PetroHunter properties in Utah and Montana, and termination of PetroHunter’s
obligation to pay an overriding royalty and a per barrel production payment to
American Oil & Gas, Inc. (“American”) and Savannah Exploration,
Inc. (“Savannah”), in consideration for: (a) 5 million common shares of
PetroHunter common stock to be issued to American and Savannah; and (b) a
contingent obligation to pay a total of $2.0 million to American and Savannah in
the event PetroHunter receives the Pearl Performance Payment.





Note 5 — Asset Retirement
Obligation





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





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





A
reconciliation of our asset retirement obligation liability is as
follows:





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








Note 6 — Contract
Payable





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





The terms
of the Maralex Agreement and Assignment were amended on several occasions since
the original Agreement was executed, amending the payment dates, issuing 5.6
million additional shares of our common stock and agreeing to increase the
amount of cash due under the agreement by a total of $0.3 million. By the terms
of the Maralex Agreement, we were required to pay to Maralex an amount equal to
5% of the outstanding payable for each 20 days past due (the “Maralex
Penalty”).





We failed
to make payments in accordance with the Maralex Agreement and as a result, on
December 4, 2007, Maralex terminated the Maralex Agreement and notified us that,
in accordance with the terms of the Maralex Agreement, they returned 6.4 million
shares of




19


common
stock and we instructed the escrow agent to reassign to Maralex all leases which
were being held in escrow pursuant to the Maralex Agreement.





During
the six months ended March 31, 2008, in accordance with the termination of this
agreement, we (i) reclassified the balance of Contract payable — Oil and gas propertiesin the amount of $1.5 million to Oil and gas properties; (ii) recorded the
return of 80% of the additional equity consideration as a reduction of Oil and gas propertiesand
equity and (iii) reversed the remaining accrued liabilities to Oil and gas
properties.





Note 7 — Notes
Payable





Notes
payable are summarized below:





March
      31,
              2008
            
            
            September
      30,
              2007($
      in thousands)Notes
      payable – short-term:Wes-Tex
            
            $
            —
            
            
            $
            —Global
      Project Finance AG
            
            
            —
            
            
            
            500Shareholder
      note
            
            
            850
            
            
            
            —Vendor
            
            
            1,224
            
            
            
            4,050Flatiron
      Capital Corp.
            
            
            35
            
            
            
            117Notes
      payable – short-term
            
            $
            2,109
            
            
            $
            4,667Convertible
      notes payable
            
            $
            400
            
            
            $
            400Notes
      payable – related party – current portion:Bruner
      Family Trust
            
            $
            2,705
            
            
            $
            —Wealth
      Preservation
            
            
            100
            
            
            
            —MAB-
      current portion
            
            
            —
            
            
            
            3,755Notes
      payable – related party – current portion
            
            $
            2,805
            
            
            $
            3,755Subordinated
      notes payable — related party:Bruner
      Family Trust
            
            $
            106
            
            
            $
            275MAB
            
            
            1,295
            
            
            
            8,775Subordinated
      notes payable — related party
            
            $
            1,401
            
            
            $
            9,050Long-term
      notes payable — net of discount:Global
      Project Finance AG
            
            $
            32,800
            
            
            $
            31,550Vendor
            
            
            200
            
            
            
            250Less
      current portion
            
            
            (120
            )
            
            
            (120
            )Discount
      on notes payable
            
            
            (2,781
            )
            
            
            (3,736
            )Long-term
      notes payable — net of discount
            
            $
            30,099
            
            
            $
            27,944Convertible
      debt
            
            $
            6,956
            
            
            $
            —Discount
      on convertible debt
            
            
            (3,959
            )
            
            
            —Convertible
      debt — net of discount
            
            $
            2,997
            
            
            $
            —





Short-
Term Notes
Payable





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





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





Shareholder Note. During the
three months ended March 31, 2008, we entered into an agreement with a
shareholder for short-term borrowings.  Principal and accrued interest
at 15% per annum are due in full in July 2008.





Vendor. (i) On June 19, 2007,
we entered into a promissory note with a vendor for an outstanding unpaid
balance due to the vendor, in the amount of $6.5 million. The note was to be
paid in full by July 31, 2007 and bears interest at 14% per annum if paid
current. The




20


interest
rate increases to 21% per annum if the note is in default. At March 31, 2008, we
were in default on this note due to non-payment; the balance was $1.0 million
and we had accrued interest on the note in the amount of $0.4 million. The
vendor filed a judgment lien against us and garnished $0.3 million in
cash.  This matter has subsequently been settled. (See Note
11).





(ii)
During the six months ended March 31, 2008, we entered into another promissory
note with a vendor for outstanding account payable balances. The note bears
interest at 8.25% per annum, increases to 10.25% if the note is in default and
was due to mature February 29, 2008. At March 31, 2008, we were in default on
the payment terms; the balance was $0.2 million and we had accrued interest
related to this in the amount of $6,000. The payee on this note has deferred any
formal claim or legal action for the payment of interest and principal for the
time being, and the parties are discussing a deferred payment
schedule;





(iii) On
January 29, 2008 an unsecured promissory note with a vendor was entered into for
past due invoices aggregating $0.1 million. The note bears interest at an annual
rate of 8%. Principal plus interest was due on March 15, 2008.  At
March 31, 2008 we were in default on this note; however on April 8, 2008, we
satisfied this note with full payment of principal and interest.





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





Flatiron Capital Corp.On
June 6, 2007, we entered into a promissory note with Flatiron Capital for the
financing of certain insurance policies in the amount of $0.2 million. The note
bears interest at a rate of 7.25% per annum. Payments are due in 10 equal
installments of $17,000, commencing on July 1, 2007 and maturing on April 1,
2008. The note is unsecured and the balance at March 31, 2008 was $35,000. This
note was paid in full in April 2008.





Convertible Notes Payable.Prior to the merger with GSL on May 12, 2006, Digital entered into five
separate loan agreements, aggregating $0.4 million, due one year from issuance,
commencing October 11, 2006. The loans bear interest at 12% per annum, are
unsecured, and are convertible, at the option of the lender, at any time during
the term of the loan or upon maturity, at a price per share equal to the closing
price of our common shares on the Over the Counter Bulletin Board market on the
day preceding notice from the lender of its intent to convert the loan. As of
March 31, 2008, accrued interest amounted to $0.1 million. We are in default on
payment of the notes.





Note
– Payable Related Party – Current Portion





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





Bruner Family Trust. During
the three months ended March 31, 2008 three additional promissory notes
aggregating $0.3 million were entered into with the Bruner Family Trust UTD (the
“Bruner Family Trust”). Each note accrues interest at LIBOR plus 3% per annum
and principal and interest are due in full 12 months from issue
date.





During
November 2007, we entered into a promissory note with the Bruner Family Trust in
the amount of $2.4 million for amounts related to a prior stock subscription
that did not occur. Interest accrues at LIBOR plus 3% and principal and interest
are due in November 2008.





Subordinated
Notes Payable-Related Party





MAB Note. Effective January
1, 2007, in conjunction with the Consulting Agreement, we issued a $13.5 million
promissory note (the “MAB Note”) as partial consideration for MAB’s assignment
of its undivided 50% working interest in certain oil and gas properties (see
Note 3). The MAB Note bore interest at a rate equal to the London InterBank
Offered Rate, (“LIBOR”). Monthly payments of principal of $225,000 plus accrued
interest were scheduled to begin on January 31, 2007 and were scheduled to end
in December 2011. On November 15, 2007, we entered into the Second Amendment
under the terms of which the MAB Note was replaced with a new promissory note in
the amount of $2.0 million. The note bears interest at LIBOR per annum and is
due to mature on January 1, 2010. In the event of default, the interest rate
increases to 10%. At March 31, 2008, we had accrued interest on these notes in
the




21


amount of
$0.6 million and were in default on the remaining note. MAB has waived and
released PetroHunter from any and all defaults, failures to perform, and any
other failures to meet its obligations through October 1, 2008.





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





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





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





Long-Term
Notes Payable





Credit Facility — Global.On
January 9, 2007, we entered into a Credit and Security Agreement (the “January
2007 Credit Facility”) with Global for mezzanine financing in the amount of
$15.0 million. The January 2007 Credit Facility is collateralized by a first
perfected lien on certain oil and gas properties and other of our assets and
interest accrues at an annual rate of 6.75% over the prime rate. Global and its
controlling shareholder were shareholders of ours prior to entering into the
January 2007 Credit Facility. As of March 31, 2008, we have drawn the total
$15.0 million available under the January 2007 Credit Facility.





The terms
of the January 2007 Credit Facility provide for the issuance of 1.0 million
warrants to purchase 1.0 million shares of our common stock upon execution of
the January 2007 Credit Facility, and an additional 0.2 warrants, for each $1.0
million draw of funds from the credit facility up to the total amount available
under the facility, $15.0 million. The warrants are exercisable until January 9,
2012. The exercise price of the warrants is equal to 120% of the
weighted-average price of our stock for the 30 days immediately prior to each
warrant issuance date. Prices range from $1.30 to $2.10 per warrant. The fair
value of the warrants was estimated as of each respective issue date under the
Black-Scholes pricing model with the following assumptions: (i) the common stock
price at market price on the date of issue; (ii) zero dividends; (iii) expected
volatility of 69.2% to 71.4%; (iv) a risk-free interest rate ranging from 4.5%
to 4.8%; and (v) an expected life of 2.5 years. The fair value of the warrants
of $2.2 million was recorded as a discount to the credit facility and is being
amortized over the life of the note. The unamortized portion of the discount is
offset against the long-term notes payable on the consolidated balance sheet. We
pay an advance fee (the “Advance Fee”) of 1% of all amounts drawn against the
facility. In 2007, the advance fee related to the original January 2007 Credit
Facility was recorded as deferred financing fees, totaled $0.2 million and is
being amortized to interest expense over the life of the January 2007 Credit
Facility.





On May
21, 2007, we entered into a second Credit and Security Agreement with Global
(the “May 2007 Credit Facility”). Under the May 2007 Credit Facility, Global
agreed to use its best efforts to advance up to $60.0 million to us over the
following 18 months. Interest on advances under the May 2007 Credit Facility
accrues at an annual rate of 6.75% over the prime rate and is payable in arrears
quarterly beginning June 30, 2007. We pay an advance fee of 2% on all amounts
drawn under the May 2007 Credit Facility. We are to begin making principal
payments on the loan beginning at the end of the first quarter following the end
of the 18 month funding period: December 31, 2008. Payments shall be made in
such amounts as may be agreed upon by us and Global on the then outstanding
principal balance in order to repay the principal balance by the maturity date,
November 21, 2009. The loan is collateralized by a first perfected security
interest on the same properties and assets that are collateral for the January
2007 Credit Facility. We may prepay the balance in whole or in part without
penalty or notice and we may terminate the facility with 30 days written notice.
In the event that we sell any interest in the oil and gas properties that
comprise the collateral, a mandatory prepayment is due in the amount equal to
such sales proceeds, not to exceed the balance due under the May 2007 Credit
Facility. As of March 31, 2008, $17.8 million has been advanced to us under this
facility. The advance fee in the amount of $0.5 million was recorded as deferred
financing costs, and is being amortized over the life of the May 2007 Credit
Facility.




22


Global
received warrants to purchase 2.0 million of our shares upon execution of the
May 2007 Credit Facility and 0.4 million warrants for each $1.0 million advanced
under the credit facility. The warrants are exercisable until May 21, 2012 at
prices equal to 120% of the volume-weighted-average price of our common stock
for the 30 days immediately preceding each warrant issuance date. Prices range
from $0.22 to $1.01 per warrant. The fair value of the warrants were estimated
as of each respective issue date under the Black-Scholes pricing model, with the
following assumptions: (i) common stock based on the market price on the issue
date; (ii) zero dividends; (iii) expected volatility of 69.8% to 71.8%; (iv)
risk free interest rate of 3.1% to 4.9%; and (v) expected life of 2.3 to 2.5
years. The fair value of the warrants issuable as of March 31, 2008, in the
amount of $2.5 million for advances through March 31, 2008 under this facility,
was recorded as a discount to the note and is being amortized over the life of
the note.





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





As of
March 31, 2008, we were in default of payments to Global in the amount of $3.9
million, which consists of unpaid interest and fees under the Credit Facilities.
We were also not in compliance with various financial and debt covenants under
the Global Credit Facilities as of March 31, 2008. Global has waived and
released PetroHunter from any and all defaults, failures to perform, and any
other failures to meet its obligations through January 15, 2009.





Vendor Long-term Notes Payable.On August 10, 2007, we entered into an unsecured promissory note with a
vendor for past due invoices aggregating $0.3 million. The note bears interest
at an annual rate of 8%. Payments are due in 24 equal installments of $11,000,
commencing on October 1, 2007 and maturing on September 1, 2009. As of March 31,
2008, the balance of this note is $0.2 million; however on April 8, 2008 we
satisfied the note with full payment of principal and interest.





Convertible Notes.On
November 13, 2007, we completed the sale of Series A 8.5% Convertible Debentures
(the “Debentures”) in the aggregate principal amount of $7.0 million to several
accredited investors. The debentures are due November 2012 and are
collateralized by shares in our Australian subsidiary. Debenture holders also
received five-year warrants that allow them to purchase a total of 46.4 million
shares of common stock at prices ranging from $0.24 to $0.27 per share. The
warrants are immediately exercisable and as a result, we recorded $0.2
million  and $3.2 million of interest expense during the three and
six-months ended March 31, 2008. In connection with the placement of the
debentures, we paid a placement fee of $0.3 million and issued placement agent
warrants entitling the holders to purchase an aggregate of 0.2 million shares at
$0.35 per share for a period of five years. Interest payments related to the
Debentures accrues at an annual rate of 8.5% and is payable in cash or in shares
(at our option) quarterly, beginning January 1, 2008. All overdue unpaid
interest incurs a late fee of 18% per annum, calculated based on the entire
unpaid interest balance. At March 31, 2008 we were in default on the January
interest payment of $0.1 million.  Accrued late fees of $4,000 were
accrued related to this unpaid interest balance. The Company is also currently
in default on the April 1, 2008 interest payment of $0.1 million.





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





According
to the Registration Rights Agreement, the registration statement was to be filed
by March 4, 2008 and declared effective by July 2, 2008. The following penalties
apply if filing deadlines and/or documentation requirements are not met in
compliance with the stated rules: (i) the Company shall pay to each holder of
Registrable Securities 1% of the purchase price paid in cash as partial
liquidated damages; (ii) the maximum aggregate liquidated damages payable is 18%
of the aggregate subscription amount paid by the holder; (iii) if the Company
fails to pay liquidated damages in full within seven days of the date payable,
the Company will pay interest of 18% per annum, accruing daily from the original
due date; (iv) partial liquidated damages apply on a daily prorated basis for
any portion of a month prior to the cure of an event; and (v) all fees and
expenses associated with compliance to the agreement shall be incurred by the
Company.





23


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





The
debentures have a maturity date of five years and are convertible at any time by
the holders into shares of our common stock at a price of $0.15 per share, which
was determined to be beneficial to the holders on the date of issuance. In
accordance with EITF 00-27, we recorded a discount to the debt in the amount of
$4.0 million which will be accreted to interest expense over the term of the
notes.





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





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





Note 8 — Stockholders’
Equity





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




•       25.0
million shares issued at $0.31 per share for consideration given to an amendment
to a related party contract relinquishing overriding royalty interests (see Note
3)
  •       16.0
million shares issued at $0.23 per share for an amendment to a related party
contract reducing an outstanding note payable (see Note 3)


•       5.0
million shares issued at $0.25 per share in conjunction with sale of heavy oil
assets





•       0.2
million shares issued at $0.28 per share for transaction finance
costs





•       1.9
million shares returned at $1.70 per share for property interests





•       0.5
million shares returned at $1.72 per share for property interests





•       0.4
million shares returned at $1.29 per share for property interests





•       0.4
million shares returned at $0.51 per share for property interests





•       3.2
million shares returned at $0.23 per share for property interests





Common Stock Subscribed.On
November 6, 2006, we commenced the sale of a maximum $125.0 million pursuant to
a private placement of units at $1.50 per unit (the “Private Placement”). Each
unit consisted of one share of our common stock and one-half common stock
purchase warrant. A whole common stock purchase warrant entitled the purchaser
to acquire one share of our common stock at an exercise price of $1.88 per share
through December 31, 2007. In February 2007, the Board of Directors determined
that the composition of the units being offered would be restructured, and those
investors who had subscribed in the offering were offered the opportunity to
rescind their subscriptions or to participate on the same terms as ultimately
defined for the restructured offering. During the six months ended March 31,
2008, we reclassified $2.4 million of subscriptions which included $0.1 million
of accrued interest to Notes
Payable- Related Party.





24


In
November, 2007, the Board of Directors again agreed to restructure the offering
of the Private Placement and to pay interest at 8.5% from the date the original
funds were received to the date of the issuance (see Note 7). Investors who had
subscribed in the offering were again offered the opportunity to rescind their
subscriptions or to participate in the restructured offering. Three of the
original investors opted to participate in the above restructured offering. As a
result the balance of outstanding subscriptions plus accrued interest totaling
$0.5 million was reclassified from Common Stock Subscribedto Convertible notes payable — net of
discounton the consolidated balance sheet.





Warrants





The
following stock purchase warrants were outstanding at:





March
      31,
              2008
            
            
            September
      30,
              2007(warrants
      in thousands)Number
      of warrants
            
            
            130,172
            
            
            
            51,063Exercise
      price
            
            $
            0.22
      - $2.10
            
            
            $
            0.31
      - $2.10Expiration
      date
            
            
            2009
      - 2012
            
            
            
            2011
      - 2012





In
November 2007, we completed the sale of Series A 8.5% convertible debentures.
Debenture holders received five-year warrants that allow them to purchase a
total of 46.4 million shares of common stock at prices ranging from $0.24 to
$0.27 per share (see Note 7). As of March 31, 2008, none of these warrants had
been exercised and the total value of these warrants, based on valuation under
the Black-Scholes method was $5.1 million. In connection with the placement of
the debentures, we paid a placement fee of $0.3 million and issued placement
agent warrants entitling the holders to purchase an aggregate of 0.2 million
shares at $0.35 per share for a period of five years. These warrants had a total
valuation under the Black-Scholes method of $20,000.





In
November 2007, the Second Amendment was entered into and warrants to acquire
32.0 million shares of our common stock at $0.50 per share were issued (see Note
3). These warrants expire on November 14, 2009 and have a total value, based on
valuation under the Black-Scholes method of $0.6 million.





During
the six months ended March 31, 2008 we issued warrants in connection with
amounts borrowed against our credit facility. We issued 0.5 million warrants
valued at $0.1 million using the Black-Scholes method.





Note 9 — Stock
Options





Stock Option Plan.On August
10, 2005, we adopted the 2005 Stock Option Plan (the “Plan”), as amended. Stock
options under the Plan may be granted to key employees, non-employee directors
and other key individuals who are committed to our interests. Options may be
granted at an exercise price not less than the fair market value of our common
stock at the date of grant. Most options have a five year life but may have a
life up to 10 years as designated by the compensation committee of the Board of
Directors (the “Compensation Committee”). Typically, options vest 20% on grant
date and 20% each year on the anniversary of the grant date but each vesting
schedule is also determined by the Compensation Committee. Most initial grants
to Directors vest 50% on grant date and 50% on the one-year anniversary of the
initial grant date. Subsequent grants (subsequent to the initial grant) to
Directors typically vest 100% at the grant date. In special circumstances, the
Board may elect to modify vesting schedules upon the termination of selected
employees and contractors. We have reserved 40.0 million shares of common stock
for the plan. At March 31, 2008 and September 30, 2007, 9.5 and 15.0 million
shares, respectively remained available for grant pursuant to the stock option
plan. During the three and six months ended March 31, 2008, we granted 5.0 and
8.0 million options under our 2005 stock option plan to directors, employees and
consultants performing employee-like services for us. During the three and six
months ended March 31, 2007, we granted 1.0 million options under our 2005 stock
option plan to directors.





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





25


Number
      of
              Shares
            
            
            Weighted-
              Average
              Exercise Price(shares
      in thousands)Options
      outstanding — September 30, 2007
            
            
            24,965
            
            
            $
            1.31Granted
            
            
            7,950
            
            
            
            0.21Forfeited
            
            
            (2,450
            )
            
            
            1.76Options
      outstanding — March 31, 2008
            
            
            30,465
            
            
            
            0.99




Effective
October 1, 2006, we adopted the provisions of SFAS 123(R). In accordance with
SFAS 123(R) the fair value of each share-based award under all plans is
estimated on the date of grant using a Black-Scholes pricing model that
incorporates the assumptions noted in the following table for the three and six
months ended March 31, 2008.





2008Expected
      option term — years
            3.75Weighted-average
      risk-free interest rate
            3.62%Expected
      dividend yield
            0Weighted-average
      volatility
            71%




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





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





Number
      of
              Shares
            
            
            Weighted-Average
              Exercise Price(shares
      in thousands)Options
      outstanding — September 30, 2007
            
            
            9,895
            
            
            $
            0.50Granted
            
            
            —
            
            
            
            —Forfeited
            
            
            (1,260
            )
            
            
            0.50Options
      outstanding — March 31, 2008
            
            
            8,635
            
            
            
            0.50Options
      exercisable — March 31, 2008
            
            
            5,181
            
            
            
            0.50





Compensation
Expense





Under
SFAS 123(R), pre-tax stock-based employee compensation expense of $1.0 million
and $1.5 million was charged to operations for the three and six months ended
March 31, 2008, respectively, and $1.0 million and $1.5 million was charged to
operations for the three and six months ended March 31, 2007, respectively.
Under EITF 96-18, pre-tax stock-based non-employee compensation expense of $0.0
million and $0.1 million was charged to operations as compensation expense for
the three and six months ended March 31, 2008, respectively, and $1.0 and $2.1
million for the three and six months ended March 31, 2008,
respectively.





Note 10 — Related Party
Transactions





MAB.During the three and six
months ended March 31, 2007, we incurred project development costs to MAB under
the Development Agreement between us and MAB (see Note 3) in the amount of $0.0
million and $1.8 million, respectively. We did not incur project development
costs to MAB during the three and six months ended March 31, 2008. Project
development costs to MAB are classified in our consolidated statements of
operations as Project
development costs — related party. During the three and six months ended
March 31, 2008 and 2007, we recorded expenditures paid by MAB on our behalf in
the amount of $0.2 million, $0.7 million, $(0.2) million and $0.3 million,
respectively. At March 31, 2008 and September 30, 2007, we owed MAB $0.7 million
and $1.0 million, respectively, related to project development costs and other
expenditures that MAB made on our behalf.




26


As of
March 31, 2008, pursuant to the agreements with MAB and the $13.5 million
promissory note issued thereunder (see Note 7), we owed MAB principal and
accrued interest of $1.7 million. As of September 30, 2007, we owed MAB
principal and accrued interest of $13.0 million under the terms of the
promissory note.





At March
31, 2008, we had six separate promissory notes with the Bruner Family Trust (see
Note 7) for an aggregate  amount of $2.8 million. During the three and
six-months ended March 31, 2008, we incurred total interest expense of $0.1
million and $0.1 million, respectively, and paid nothing in principal on these
notes.





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





Galaxy. Note receivable- related
party on the consolidated balance sheet at September 30, 2007 represents
$2.5 million related to a $2.0 million earnest money deposit made by us under
the terms of the Galaxy PSA and additional operating costs of $0.5 million that
we paid toward the operating costs of the assets we were to acquire plus accrued
interest on amounts due to us which were all converted into the Galaxy Note on
August 31, 2007. During the six months ended March 31, 2008, the entire $2.5
million has been paid to us by offset against amounts that we owed to MAB. At
September 30, 2007, Galaxy owed us $0.3 million and $17,000 related to
additional expenses paid by us related to the Galaxy PSA and accrued interest on
the Galaxy Note, respectively. During the six months ended March 31, 2008, these
amounts have also been paid by offset to amounts we owed to MAB under the MAB
Note. Marc A. Bruner is our largest single beneficial shareholder, is a 14.0%
beneficial shareholder of Galaxy and is the father of the President and Chief
Executive Officer of Galaxy.





Note 11 — Commitments and
Contingencies





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


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


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


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





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





Work Commitments.See Note 4
for commitments related to the drilling of specific wells.





Environmental.While we are
not currently subject to environmental-related litigation, the nature of our
business is such that we are subject to constantly changing environmental laws
and regulations adopted by federal, state and local governmental authorities in
both the U.S. and Australia.  We would face significant liabilities to
the government of other third parties for discharges of oil, natural gas,
produced water or other pollutants into the air, oil, or water, and the cost to
investigate, litigate and remediate such a discharge could




27




materially
adversely affect our business, results of operations and financial
condition.  We encourage readers of this filing to review our risk
factors disclosed in our Item 1A of our Annual Report on Form 10-K for the year
ended September 30, 2007 for further discussion of our environmental
risks.





Note
12 —  Correction of Errors





During
the quarter ended March 31, 2008 and in relation to the filing of this quarterly
report, we discovered various errors in our financial statements, and the
correction of these errors has been reflected in our second quarter operating
results.  The characterization of these errors primarily falls into
the following categories (a) classification errors in relation to our balance
sheet captions; (b) errors relating to the timing of recording various expenses
between our first and second quarters; (c) errors in relation to the timing of
the recognition of certain liabilities; and (d) an error in relation to the
recording of the proceeds received from the sale of our Heavy Oil Projects
during the first quarter.





The
discovery of these errors has resulted from our ongoing efforts to strengthen
our internal controls and to reconcile our accounts, and is reflective of our
significant progress to this end.  We have evaluated these errors for
qualitative and quantitative materiality, and have concluded that these errors
do not materially affect our previously reported
results.  Consequently, we have corrected these errors in the current
period.





The
aggregate effect of these errors, if corrected in their proper periods, would be
to decrease our reported net loss in the first quarter by $0.0 million, and
increase our reported net loss in the second quarter by the same
amount.  Overall, an error in our accounting for unrealized losses on
marketable securities was fully offset by a series of errors affecting other
costs, primarily general and administrative expenses.  Additionally,
one of the more significant errors involved a related party transaction, and is
discussed in further detail in Note 3.





Finally,
the error in relation to the sale of our Heavy Oil Projects, which affected our
accounting for marketable equity securities, is discussed in more detail in Note
4.  We have provided additional visibility to these two errors in this
report, as although we believe these errors are not individually material, we
believe the absence of such disclosures in this second quarter report may render
our current financial statements confusing or potentially
misleading.





Note
13 — Subsequent Events





Laramie
Transaction




On April
25, 2008 we signed a binding purchase and sale agreement with Laramie Energy II,
LLC (“Laramie”) an unrelated third party for the sale of substantially all of
our working interest in our Southern Piceance properties in Colorado, effective
as of April 1, 2008.  The original closing date target of May 6, 2008 has
been extended by the parties to May 31, 2008.  A total of up to 1,059 net
acres are expected to be transferred to Laramie at closing.  We will retain
all of our interest in eight producing wells in Garfield County, which are
operated by EnCana Oil & Gas (USA), Inc.  The total purchase price,
prior to adjustments for transaction fees and certain other adjustments as
required by the agreement with Laramie (the “Agreement”), is $21.0 million in
cash.  In addition to customary terms and conditions, the Agreement also
requires us to resolve numerous liens and other legal actions brought against us
in relation to these properties, and to distribute the majority of the proceeds
from the transaction to our trade creditors and others in satisfaction of
outstanding claims.  We expect to complete the last remaining pre-closing
conditions in the near future.
  Additionally,
we have entered into numerous settlement and release agreements with many of our
trade creditors who have placed liens on our Southern Piceance properties, and
we have agreed to pay cash for a portion and issue shares of our stock for a
portion of the amounts owed to them, and we have further agreed to use our best
efforts to file a registration statement with the Securities and Exchange
Commission by June 30, 2008 in order to register these shares for resale on the
public market.  Such agreements are conditioned upon the closing with
Laramie.
  Upon
closing, we will be required to distribute substantially all of the adjusted
proceeds in settlement of existing trade obligations and other claims, resulting
in expected net proceeds to us of approximately $2.0 million.  A total of
$0.5 million of our net proceeds will be held in escrow for 90 days to secure
our performance under the agreement.


28


CCES
Transactions





On April
11, 2008 we closed the sale of certain natural gas gathering assets for $0.7
million in cash consideration, and simultaneously entered into a Gas Gathering
Agreement with CCES Piceance Partners I, LLC (“CCES”) relating to the initial
phase of our gas gathering system project.  These agreements formalize
and expand upon a Letter of Understanding (“LOU”) between the parties which
contemplates a dedicated relationship with CCES in the development of a gas
gathering system and the provision of Gas Gathering Services within our Buckskin
Mesa Project area (the “CCES Agreements”).





In
addition to customary terms and conditions, the CCES Agreements include a
guarantee (the “Guarantee”) from us to CCES regarding their increasing financial
commitments as they are incurred in relation to the development of the gas
gathering system, including our contingent repurchase of the gas gathering
assets we sold to CCES.  The triggering event for the Guarantee is
contingent upon our mutual failure to execute a formal agreement for long-term
gas gathering services in the future (the “Second Phase Midstream Services
Agreement”).  The resolution of this contingency is dependent upon,
among other things, gas production levels from the initial phase gas gathering
system for our Buckskin Mesa Project over the next 12 to 18 months, and other
factors as determined by both parties.  Should we fail to execute a
mutually agreeable long-term contract, CCES has the right to invoice us for
their incurred costs and demand repayment within 20 days of our receipt of the
Demand Invoice.  To secure our Guarantee, we have executed a
Promissory Note for an amount up to $11.5 million, secured by second deeds of
trust on our Colorado properties that were recorded in the second
quarter.  The amount of the Guarantee is variable, based upon the
underlying incurred costs by CCES as defined in the CCES Agreements, and
aggregated $2.8 million as of March 31, 2008.





We have
accounted for our Guarantee under the requirements of FASB Interpretation
(“FIN”) 45.  As of March 31, 2008, we have recorded a current
liability and intangible asset in our financial statements, to reflect our
Contingent Purchase Obligation relating to the Guarantee.  In the
event the triggering event does not occur and our obligation lapses, these
obligations will be offset against each other.  In the event the
Guarantee is triggered, we expect to acquire and obtain title to the
gas gathering assets, which will then be included in our full cost
pool.  Our Contingent Purchase Obligation will be adjusted during
future periods to its fair value, so long as the contingent Guarantee remains
unresolved.





Waiver and Amendment




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


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


·
            We
      agree to issue warrants to purchase common stock, having the same terms as
      the warrants (see Note 8), equal to 4% of the shares each debenture holder
      (collectively, the “investors”) is entitled to under the
      debentures.


·
            The
      investors agree to waive our obligation to file a registration statement
      by March 4, 2008 to be effective July 2, 2008, and extend these dates to
      June 30, 2008 and December 31, 2008,
  respectively.


·
            The
      investors agree to waive certain events of default, including the
      non-payment of interest.





29





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





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





Executive
Summary





We are a
development stage global oil and gas exploration and production company
committed to acquiring and developing primarily unconventional natural gas and
oil prospects that we believe have a very high probability of economic success.
Since our inception in 2005, our principal business activities have been raising
capital through the sale of common stock and convertible notes and acquiring oil
and gas properties in the western United States and
Australia.  Currently, we own property in Colorado, where we have
drilled five wells on our Buckskin Mesa property, Australia, where we have
drilled one well on our property in the Northern Territory, and in Montana,
where we hold a land position in the Bear Creek area. The wells on these
properties have not yet commenced oil production. We also have working interests
in eight additional wells in Colorado which are operated by EnCana Oil & Gas
USA (“EnCana”).  In November 2007, we sold 66,000 net acres of land
and two wells in Montana and 177,445 net acres of land in Utah (See Note 14 in
Item 1) and subsequent to March 31, 2008, we entered into a binding purchase and
sale agreement to sell up to 1,059 net acres of land and 16 wells in the
Southern Piceance Basin in Colorado (see Note 13 of the Notes to the
Consolidated Financial Statements in Item 1).





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





During
the three month period ended March 31, 2008, we found certain adjustments
relating to the previous quarter.  We assessed the materiality of
these adjustments both quantitatively and qualitatively and determined that the
effect of these adjustments did not have a material effect on our results
of operations or financial condition such that it would render the financial
statements or accompanying notes as previously reported
misleading.  Consequently, these adjustments were made in our fiscal
second quarter.  Please see Note 12 of the Notes to the Consolidated
Financial Statements in Item 1 for a more thorough discussion of these
adjustments.





30


Results
of Operations





The
following summarizes our results of operations for the three and six-month
periods ended March 31, 2008 and 2007:





Three
      months
              ended
              March
      31,
              2008
            
            
            Three
      months
              ended
              March 31,
              2007
              (restated)
            
            
            Six
      months
              ended
              March
      31,
              2008
            
            
            Six
      months
              ended
              March
      31,
              2007
              (restated)Revenues
            
            $
            705
            
            
            $
            889
            
            
            $
            992
            
            
            $
            1,338Costs
      and ExpensesLease
      operating expenses
            
            
            140
            
            
            
            224
            
            
            
            240
            
            
            
            386General
      and administrative
            
            
            3,795
            
            
            
            4,331
            
            
            
            5,689
            
            
            
            8,002Property
      development — related party
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,815Impairment
      of oil and gas properties
            
            
            —
            
            
            
            3,800
            
            
            
            —
            
            
            
            8,951Consulting
      fees – related party
            
            
            —
            
            
            
            75
            
            
            
            —
            
            
            
            75Depreciation,
      depletion, amortization and accretion
            
            
            183
            
            
            
            827
            
            
            
            442
            
            
            
            1,213Total
      Operating Expenses
            
            
            4,118
            
            
            
            9,257
            
            
            
            6,371
            
            
            
            20,442Operating
      (loss) income
            
            
            (3,413
            )
            
            
            (8,368
            )
            
            
            (5,379
            )
            
            
            (19,104
            )Other
      Income (Expense)Gain
      on foreign exchange
            
            
            34
            
            
            
            —
            
            
            
            11
            
            
            
            —Interest
      income
            
            
            26
            
            
            
            6
            
            
            
            27
            
            
            
            14Interest
      expense
            
            
            (2,390
            )
            
            
            (2,004
            )
            
            
            (7,425
            )
            
            
            (2,231
            )Trading
      Security Losses
            
            
            (594
            )
            
            
            —
            
            
            
            (2,987
            )
            
            
            —Total
      other income (expense)
            
            
            (2,924
            )
            
            
            (1,998
            )
            
            
            (10,374
            )
            
            
            (2,217
            )Net
      Loss
            
            $
            (6,337
            )
            
            $
            (10,366
            )
            
            $
            (15,753
            )
            
            $
            (21,321
            )Net
      loss per common share — basic and diluted
            
            $
            (0.02
            )
            
            $
            (0.05
            )
            
            $
            (0.05
            )
            
            $
            (0.10
            )Weighted
      average number of common shares outstanding — basic and
      diluted
            
            
            316,978
            
            
            
            222,562
            
            
            
            312,610
            
            
            
            221,245





Revenues.During the
quarter ended March 31, 2008, revenues declined $0.2 million to $0.7 million,
led by a decline in oil and gas revenues of $0.4 million as a result of natural
production decline in the wells and to ownership interests in fewer producing
wells.  This decline was offset by $0.2 million in other revenues, which
represent certain services we have provided to Pearl Exploration and Production
Ltd. during the quarter, as well as increases in commodity prices.


For the
six months ended March 31, 2008, revenues declined $0.3 million to $1.0 million,
led by a decline of $0.6 million in oil and gas revenues, as a result of the
same factors discussed above.


Lease Operating Expenses.
Lease operating expenses declined $0.1 million during the three and six-month
periods ended March 31, 2008 compared to the same periods in the prior
year.  This decline is due to a decrease in activity year over year
with respect to drilling and completions, where in the 2007 periods, we were
actively working on drilling and completions on certain of our Colorado
properties and in the 2008 periods, we were not.





31


General and Administrative.During the three months ended March 31, 2008, general and administrative
expenses were $0.5 million or 12% lower than in the same period of
2007.  The following table highlights the changes:





Three
      months ended2008
            
            
            2007
            
            
            Change($
      in thousands)Personnel
      and contract services
            
            $
            1,563
            
            
            $
            1,071
            
            
            $
            492Legal
            
            
            256
            
            
            
            432
            
            
            
            (176
            )Stock-based
      compensation
            
            
            977
            
            
            
            2,056
            
            
            
            (1,079
            )Travel
            
            
            22
            
            
            
            313
            
            
            
            (291
            )Other
            
            
            978
            
            
            
            459
            
            
            
            519Total
            
            $
            3,796
            
            
            $
            4,331
            
            
            $
            (535
            )




Overall,
      the decrease in general and administrative expense from the three-months
      ended March 31, 2007 to the three months ended March 31, 2008, is
      primarily due to a $1.1 million decrease in stock-based compensation
      expense, and a decrease in travel expense of $0.3 million, offset by an
      increase of $1.0 million in personnel and contract services and other
      expenses.





During
      the six months ended March 31, 2008, general and administrative expenses
      were $2.3 million or 29% lower than in the same period of
      2007.  The following table highlights the
    changes:




Six
      months ended2008
            
            
            2007
            
            
            Change($
      in thousands)Personnel
      and contract services
            
            $
            2,138
            
            
            $
            1,755
            
            
            $
            383Legal
            
            
            392
            
            
            
            621
            
            
            
            (229
            )Stock-based
      compensation
            
            
            1,602
            
            
            
            3,617
            
            
            
            (2,015
            )Travel
            
            
            73
            
            
            
            779
            
            
            
            (706
            )Other
            
            
            1,485
            
            
            
            1,230
            
            
            
            255Total
            
            $
            5,690
            
            
            $
            8,002
            
            
            $
            (2,312
            )




Overall,
the decrease in general and administrative expense from the six-months ended
March 31, 2007 to the six months ended March 31, 2008, is primarily due to a
$2.0 million decrease in stock-based compensation expense, a decrease in travel
expense of $0.7 million, offset by an increase of $0.4 million in personnel and
contract services expense.





Property Development Costs — Related
Party.Project development costs of $1.8 million incurred during the six
months ended March 31, 2007 relate to development costs we paid to MAB under the
Development Agreement (described more fully in Note 3 to the financial
statements in Item 1).  We no longer pay project development costs to
MAB as a result of the restructuring of our agreements with MAB effective
January 1, 2007.





Impairment of Oil and Gas
Properties.Costs capitalized for properties accounted for under the full
cost method of accounting are subjected to a ceiling test limitation to the
amount of costs included in the cost pool by geographic cost center. Costs of
oil and gas properties may not exceed the ceiling, which is an amount equal to
the present value, discounted at 10%, of the estimated future net cash flows
from proved oil and gas reserves plus the cost, or estimated fair market value,
if lower, of unproved properties.  Should capitalized costs exceed
this ceiling, an impairment is recognized.  During the three and
six-month periods ended March 31, 2007, we recognized impairments of $3.8
million and $9.0 million, respectively, representing the excess of capitalized
costs over the ceiling, as calculated in accordance with these full cost
rules.  There were no impairment charges in the quarter and six months
ended March 31, 2008.





Depreciation, Depletion,
Amortization and Accretion. During the quarter and six months ended March
31, 2008, depreciation, depletion, amortization and accretion declined $0.6
million and $0.8 million, respectively.  These decreases were due to
adjustments in the previous year to proved reserves.  During the
fourth quarter of the prior year, our proved reserves were estimated by an
independent reservoir engineer.  We estimated that, had those reserves
been obtained during previous quarters, depreciation, depletion and amortization
would have increased by $0.7 million and $1.0 million during the three and
six-month periods ended March 31, 2007. The effect of this adjustment did not
impact on our net loss for the year as such adjustments were ultimate reflected
in impairment of oil and gas properties in the consolidated statements of
operations.





32


Interest Expense. Interest
expense increased $0.4 million and $5.2 million during the second fiscal quarter
and six-months ended March 31, 2008 compared to the same periods in the previous
fiscal year.  This increase is attributable to two primary factors as
follows:





(i)
            higher
      interest expense associated with warrants on the Series A 8.5% Convertible
      Debentures we issued in November.  Because these warrants are
      immediately exercisable, we recorded interest expense associated with the
      warrants of $0.2 million and $3.2 million in the three and six-month
      periods ended March 31, 2008; and


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





Trading Security
Losses.  In connection with the sale of certain of our
properties to Pearl Exploration and Production Ltd (“Pearl”), we received a
portion of the total purchase price in Pearl common stock.  The value
of these shares declined significantly from the date of the transaction
until we sold the shares in March 2008.  As a result, we recognized
losses associated with these securities of $3.0 million during the six
month period ended March 31, 2008.  The loss of $0.6 million for the
quarter ended March 31, 2008 is net of an adjustment of $0.9 million relating to
the correction of an error, as described more fully in Notes 4 and 12 to the
Condensed Consolidated Financial Statements in Item 1.  We did not have
trading securities during the comparable period of the previous
year.





Net Loss.  Net loss
for the quarter ended March 31, 2008 was $6.3 million compared to a loss of
$10.4 million during the same period in the previous fiscal
year.  This $4.1 million change was primarily the result of a $3.8
million impairment charge recorded in the previous year quarter versus no
impairment in the current year quarter.  Excluding this impairment,
net loss changed $0.3 million, primarily as a result of lower general and
administrative expenses and depreciation, depletion, amortization and accretion
costs in the three months ended March 31, 2008 compared to the same period in
the previous year, as described above, partially offset by higher interest
expense.





Net loss
for the six months ended March 31, 2008 was $15.8 million compared to a loss of
$21.3 million during the last fiscal year.  This $5.5 million change
was primarily due to lower impairment, general and administrative and
depreciation, depletion, amortization and accretion costs in the current year
when compared with the same six months of the previous fiscal year, as described
above.  These factors were partially offset by higher interest
expense.





Net loss per common
share.  Net loss per common share was ($0.02) per share in the
quarter ended March 31, 2008 compared to ($0.05) per share in the same period in
the prior year.  This change was driven by a lower net loss and a
higher share base primarily due to the issuance of common stock associated with
certain of our debt agreements, amendments of certain agreements with MAB, and
the issuance of Series A 8.5% convertible debentures.





For the
six months ended March 31, 2008, net loss per common share was ($0.05) per share
compared to a net loss of ($0.10) per share in the same period of the previous
year.  This change was driven by a lower net loss and a higher share
base, as described above.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended September 30, 2007, includes an explanatory
paragraph relating to the uncertainty of our ability to continue as a going
concern. We have incurred a cumulative net loss of $88.4 million for the period
from inception (June 20, 2005) to March 31, 2008.  Likewise, as of
March 31, 2008, we had a working capital deficit of approximately $39.8 million,
are in default on certain obligations, are not in compliance with the covenants
of several loan agreements, and require significant additional funding to
sustain our operations and satisfy our contractual obligations for our planned
oil and gas exploration and development operations.  We have also had
multiple property liens and foreclosure actions filed by vendors, some of whom
have begun foreclosure proceedings, and have significant capital expenditure
commitments. Our ability to establish ourselves as a going concern is dependent
upon our ability to obtain additional funding in order to finance our planned
operations.





Plan
of Operation





Colorado.We expect that the
development of our Colorado properties will include the following activities:
(i) the tie-in of two wells drilled, cased and completed to date,
and the completion and tie-in of three wells drilled and cased to date in the
Buckskin Mesa Prospect (four wells drilled and cased during fiscal year
2007; one well drilled and cased during the first quarter ended December
31, 2007; and two of the five drilled wells completed during the current
quarter); (ii) the drilling, of a minimum of 13 commitment wells in our greater
than 20,000 net acre Buckskin Mesa Prospect leasehold block surrounding the
discovery wells for the Powell Park Field




33


near
Meeker, Colorado in the northern Piceance Basin; and (iii) the recompletion and
tie-in of the six shut-in gas wells in the Powell Park Field acquired by us from
a third party operator.





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





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





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





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





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





Liquidity
and Capital Resources





We have
grown rapidly since our inception. At September 30, 2005, we had been operating
for only a few months, had no employees, and had acquired an interest in two
properties, West Rozel and Buckskin Mesa, aggregating approximately 12,400 net
mineral acres. From 2006 to 2008, we added employees and acquired interests
in additional properties. At March 2007, we had 16 full-time employees and at
March 2008 we grew to 15 full-time employees and 11 consultants. We had
interests in properties aggregating approximately 21,700 acres in Colorado and
7.0 million net acres in Australia at March 31, 2007 and grew to an aggregate of
approximately 21,700 net acres in Colorado, 16,000 net acres in Montana, and 7.0
million net acres in Australia at March 31, 2008.





Our
initial plan for 2007 was to raise capital to fund the exploration and
development of our acquired properties; and we were successful at raising $35.5
million through borrowings, common stock issuances and subscriptions. We drilled
(or participated in the drilling of) 39 gross wells, and completed (or
participated in the completion of) 21 gross wells. During the third and fourth
quarters of 2007, we revised our plan to (i) sell non-core assets to allow us to
focus our exploration and development efforts in two primary areas: the Piceance
Basin in Colorado and Australia; and (ii) to improve the economics of our
projects by restructuring the Development Agreement with MAB. Accordingly,
during the six months ended March 31, 2008 we sold our heavy oil assets and
restructured the Development Agreement with MAB through amendments.





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





As of
March 31, 2008, we had a working capital deficit of $39.8 million and cash of
$1.6 million. As of September 30, 2007, we had a working capital deficit of
$37.9 million and cash of $0.1 million. The changes in working capital are
primarily attributable to the factors described above. We expect that our future
working capital will be affected by these same factors.





In
November 2007, we raised approximately $7.0 million through the sale of
convertible debentures and $0.8 million through the pledge of our investment in
Pearl shares. During the remainder of fiscal year 2008, we have sold working
interests in some of our properties and we may complete additional private
placements of debt or equity to raise cash to meet our working capital needs. A
significant amount of additional capital is needed to fund our proposed drilling
program for 2008.  See "Plan of Operation" above.





34


Cash Flow.Net cash used in
or provided by operating, investing and financing activities for the six months
ended March 31, 2008 and 2007 were as follows:





Six
      months ended
              March 31,2008
            
            
            2007($
      in thousands)Net
      cash used in operating activities
            
            $
            (6,420
            )
            
            $
            (6,712
            )Net
      cash provided by (used in) investing activities
            
            $
            4,753
            
            
            $
            (17,291
            )Net
      cash provided by financing activities
            
            $
            3,152
            
            
            $
            15,073





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





Net Cash Provided by (Used in)
Investing Activities.Net cash provided by investing activities for the
six months ended March 31, 2008 was primarily from cash received for the sale of
oil and gas properties of $7.5 million and the sale of trading securities of
$2.5 million offset by cash used for additions to oil and gas properties of $5.3
million.  Net cash used in investing activities for the six months
ended March 31, 2007 was primarily used for joint interest billings in the
amount of $10.6 million, additions to oil and gas properties in the amount of
$4.0 million and deposits on oil and gas property acquisitions of $2.2
million.





Net Cash Provided by Financing
Activities.Net cash provided by financing activities for the six months
ended March 31, 2008 was primarily comprised of borrowings of $9.7 million, net
of repayments of debt in the amount of $6.1 million, and payment of financing
costs in the amount of $0.4 million. Net cash provided by financing activities
for the six months ended March 31, 2007 was comprised of proceeds from
promissory notes sold under a Credit and Security Agreement of $12.5 million and
proceeds from the sale of units in our private placement shares for gross
proceeds of $3.1 million.  This was partially offset by payments on
contracts payable of $0.5 million.





Capital Requirements.We
currently anticipate our capital budget for the year ending September 30, 2008
to be approximately $42 million. Uses of cash for 2008 will be primarily for our
drilling program in the Piceance Basin and in Australia. Properties in the
Piceance II area are expected to be sold in the third quarter 2008.
Pursuant to the terms and conditions of the Laramie deal, drilling commitments
for Piceance II will be terminated effective the closing date. Capital allocated
to the Piceance II area are to be redeployed to the Buckskin Mesa project. The
following table summarizes our drilling commitments for fiscal year 2008 ($ in
thousands):





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




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





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





Financing.During the six
months ended March 31, 2008 and the fiscal year 2007, we entered into different
short and long-term financing arrangements as follows:





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





Debenture
holders also received five-year warrants that allow them to purchase a total of
46.4 million shares of common stock at prices ranging from $0.24 to $0.27 per
share. In connection with the placement of the debentures, we paid a placement
fee of $0.3




35




million
and issued placement agent warrants entitling the holders to purchase an
aggregate of 0.2 million shares at $0.35 per share for a period of five
years.





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





According
to the Registration Rights Agreement, the registration statement was to be filed
by March 4, 2008 and declared effective by July 2, 2008. The following penalties
apply if filing deadlines and/or documentation requirements are not met in
compliance with the stated rules: (i) the Company shall pay to each holder of
Registrable Securities 1% of the purchase price paid in cash as partial
liquidated damages; (ii) the maximum aggregate liquidated damages payable is 18%
of the aggregate subscription amount paid by the holder; (iii) if the Company
fails to pay liquidated damages in full within seven days of the date payable,
the Company will pay interest of 18% per annum, accruing daily from the original
due date; (iv) partial liquidated damages apply on a daily prorated basis for
any portion of a month prior to the cure of an event; and (v) all fees and
expenses associated with compliance to the agreement shall be incurred by the
Company.





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





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





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





Proceeds
were used to fund working capital needs.





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





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





(4) We
entered into a note with MAB in the amount of $13.5 million as a result of the
Consulting Agreement with MAB; however, no cash was actually received. During
the six months ended March 31, 2008, the note was reduced by further amendments
to the Consulting Agreement (the First, Second and Third Amendments) and as a
result, we paid $0.3 million in cash towards repayment of this note. At March
31, 2008, the balance of this note was $1.3 million. The note is unsecured and
bears interest at the London InterBank Offered Rate, (“LIBOR”). Although at
March 31, 2008, we were in default on this note, MAB has waived and released us
from defaults, failures to perform and any other failures to meet our
obligations through October 1, 2008.





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





36


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





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





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





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





The
continuation and future development of our business will require substantial
additional capital expenditures. Meeting capital expenditure, operational, and
administrative needs for the period ending September 30, 2008 will depend on our
success in farming out or selling portions of working interests in our
properties for cash and/or funding of our share of development expenses, the
availability of debt or equity financing, and the results of our activities. To
limit capital expenditures, we may form industry alliances and exchange an
appropriate portion of our interest for cash and/or a carried interest in our
exploration projects using farm-out arrangements. We may need to raise
additional funds to cover capital expenditures. These funds may come from cash
flow, equity or debt financings, a credit facility, or sales of interests in our
properties, although there is no assurance additional funding will be available
or that it will be available on satisfactory terms. If we are unable to raise
capital through the methods discussed above, our ability to execute our
development plans will be greatly impaired. See the Going Concern section
above.





Development Stage Company.We
had not commenced principal operations or earned significant revenue as of March
31, 2008, and we are considered a development stage entity for financial
reporting purposes. During the period from inception to March 31, 2008, we
incurred a cumulative net loss of $88.4 million. We have raised approximately
$102.4 million through borrowing and the sale of convertible notes and common
stock from inception through March 31, 2008. In order to fund our planned
exploration and development of oil and gas properties, we will require
significant additional funding.





Critical
Accounting Policies and Estimates





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





Critical Accounting
Estimates





In
preparing our condensed consolidated financial statements in conformity with
U.S. generally accepted accounting principles, management must undertake
decisions that impact the reported amounts and related disclosures. Such
decisions include the selection of the appropriate accounting principles to be
applied and assumptions upon which accounting estimates are based. Management
applies its best judgment based on its understanding and analysis of the
relevant circumstances to reach these decisions. By their




37




nature,
these judgments are subject to an inherent degree of uncertainty. Accordingly,
actual results may vary significantly from the estimates we have
applied.





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





ITEM
4T. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




During
the quarter ended March 31, 2008, we performed an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and our former Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 [the “Exchange Act”]). Based on
that evaluation, our management, including our Chief Executive Officer and our
former Chief Financial Officer, concluded that our disclosure controls and
procedures were not effective to ensure that information required to be
disclosed by us in reports we file or submit under the Exchange Act is (a)
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and (b) accumulated and
communicated to management, including our Chief Executive Officer and former
Chief Financial Officer, to allow timely decisions regarding required disclosure
as evidenced by the material weaknesses described below.




As
reported in Item 9A of our 2007 Form 10-K filed on January 15, 2008, management
reported the existence of a continuing material weakness related to our control
environment which did not sufficiently promote effective internal control over
financial reporting through our management structure to prevent a material
misstatement from occurring. Specifically, management did not have an adequate
process for monitoring accounting and financial reporting and had not conducted
a comprehensive review of account balances and transactions that had occurred
throughout the year. Our disclosure controls and accounting processes lack
adequate staff and procedures in order to be effective. We have not had adequate
staffing to provide for an effective segregation of duties, or to adequately
identify and resolve accounting issues and provide information to our auditors
on a timely basis.  These material weaknesses continued to exist as of
March 31, 2008, however, we have taken steps to retain additional senior
financial consultants to assist us in completing our remediation of these
material weaknesses on an accelerated basis.




We are
fully committed to remediating the material weaknesses described above and
believe that the steps we are taking, including the active involvement of our
Audit Committee in the remediation planning and implementation, will properly
address these issues.  However, while we are taking immediate steps and
dedicating substantial resources to correct these material weaknesses, any new
controls we implement must operate for a period of time and be tested before a
determination can be made as to their effectiveness.  Also, our remediation
procedures have identified several errors in our previously issued financial
statements, which have resulted in an aggregate overstatement of our first
quarter net loss by $0.0 million, and an offsetting understatement of our second
quarter net loss by the same amount, as more fully described in Note 12 to our
Consolidated Financial Statements.  As we continue to proceed through
our remediation process, we may discover additional past, ongoing or future
material weaknesses or significant deficiencies in our financial reporting
processes, or additional errors in our financial statements, some of which could
be material.





Likewise,
our failure to remediate any material weaknesses or significant deficiencies, or
a difficulty encountered in their implementation, could result in, among other
things: an inability to provide timely and reliable financial information, an
inability to meet our reporting obligations with governing bodies such as the
Securities and Exchange Commission, loss of investor confidence in our reported
financial information leading to a lower trading price for our common shares,
additional costs to remediate and implement effective internal controls, or
restatements of previously-issued financial statements, any of which could have
a material adverse effect on our business, results of operations, or financial
condition.




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




38


Changes
in Internal Controls Over Financial Reporting




There
have been changes in our internal controls over financial reporting that
occurred during the first half of the 2008 fiscal year that have materially
affected or are reasonably likely to materially affect our internal controls
over accounting and financial reporting in the future.  Given our
remediation efforts discussed above, we expect further significant changes to
our internal controls will occur during the second half of the 2008 fiscal year
as we continue to strengthen our internal control over financial
reporting.








PART
II. OTHER INFORMATION





ITEM
1.   LEGAL PROCEEDINGS





As of
March 31, 2008, we were a party to the following legal proceedings, which are
described more fully in Part I - Item 1 - Note 11 Commitments and Contingenciesin this Form 10-Q:





1.  21
vendors have filed multiple liens applicable to our properties.





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





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





4. A
lawsuit was filed in August 2007 by a law firm in Australia in the Supreme Court
of Victoria for the balance of legal fees owed (0.2 million Australian
dollars).





5. A
lawsuit was filed in December 2007 by a vendor in the Supreme Court of
Queensland for the balance which the vendor claims is owed (2.4 million
Australian dollars). We are disputing the claim on the basis that the vendor
breached the contract.





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





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





ITEM 1A.   RISK
FACTORS





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





39


ITEM
6. EXHIBITS





10.25
            Charles
      B. Crowell Employment Agreement (incorporated by reference to Form 8-K
      filed with the U.S. Securities and Exchange Commission on January 10,
      2008)10.26
            $120,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated February 12, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on February 19,
      2008)10.27
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 14, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 17,
      2008)10.28
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 18, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 24,
      2008)16.1
            Letter
      from Hein and Associates, LLP regarding change in certifying accountant
      (incorporated by reference to Form 8-K filed with the U.S. Securities and
      Exchange Commission on February 4, 2008)31.1
            Rule
      13a-14(a) Certification of Charles B. Crowell31.2
            Rule
      13a-14(a) Certification of Carmen J. Lotito32.1
            Certification
      of Charles B. Crowell Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
            Certification
      of Carmen J. Lotito Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002





40




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: 
      May 15, 2008
              By:
              /s/ Charles
      B. CrowellCharles
      B. CrowellChief
      Executive Officer(Principal
      Executive Officer)


Date: 
      May 15, 2008
              By:
              /s/ Carmen
      J. LotitoCarmen
      J. LotitoExecutive
      Vice President - Business Development and Director(Principal
      Financial and Accounting Officer)
   41





EXHIBIT
INDEX





10.25
            Charles
      B. Crowell Employment Agreement (incorporated by reference to Form 8-K
      filed with the U.S. Securities and Exchange Commission on January 10,
      2008)10.26
            $120,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated February 12, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on February 19,
      2008)10.27
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 14, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 17,
      2008)10.28
            $100,000
      unsecured promissory note in favor of Bruner Family Trust UTD March 28,
      2005 dated March 18, 2008 (incorporated by reference to Form 8-K filed
      with the U.S. Securities and Exchange Commission on March 24,
      2008)16.1
            Letter
      from Hein and Associates, LLP regarding change in certifying accountant
      (incorporated by reference to Form 8-K filed with the U.S. Securities and
      Exchange Commission on February 4, 2008)31.1
            Rule
      13a-14(a) Certification of Charles B. Crowell31.2
            Rule
      13a-14(a) Certification of Carmen J. Lotito32.1
            Certification
      of Charles B. Crowell Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
            Certification
      of Carmen J. Lotito Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002