UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended November 30, 2005

     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: 0-32237

                            GALAXY ENERGY CORPORATION
                (Name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                           <C>
                              COLORADO                                                      98-0347827
(State or other jurisdiction of incorporation or organization)                (I.R.S. Employer Identification No.)
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              1331 - 17TH STREET, SUITE 730, DENVER, COLORADO 80202
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (303) 293-2300

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:

                         COMMON STOCK, $0.001 PAR VALUE
                                (Title of class)

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes  [X] No

NOTE - Checking the box above will not relieve any  registrant  required to file
reports  pursuant  to  Section  13 or  15(d)  of the  Exchange  Act  from  their
obligations under those Sections.

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. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained,  to the best of registrant's knowledge, in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]



<PAGE>


Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ]  Accelerated filer [ ]  Non-accelerated filer [X]

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

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked price of such common  equity,  as of the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter: $46,943,334 AS OF MAY 31, 2005

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 68,668,029 AS OF MARCH 6, 2006

Documents incorporated by reference:  NONE





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                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         This report includes "forward-looking statements." All statements other
than statements of historical facts included or incorporated by reference in
this report, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"project," "estimate," "anticipate," "believe," or "continue" or the negative
thereof or variations thereon or similar terminology. Although we believe that
the expectations reflected in such forward-looking statements are reasonable, we
cannot give any assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ materially
from our expectations ("Cautionary Statements") include, but are not limited to,
our assumptions about energy markets, production levels, reserve levels,
operating results, competitive conditions, technology, the availability of
capital resources, capital expenditure obligations, the supply and demand for
oil and natural gas, the price of oil and natural gas, currency exchange rates,
the weather, inflation, the availability of goods and services, drilling risks,
future processing volumes and pipeline throughput, general economic conditions
(either internationally or nationally or in the jurisdictions in which we are
doing business), legislative or regulatory changes (including changes in
environmental regulation, environmental risks and liability under federal, state
and foreign environmental laws and regulations), the securities or capital
markets and other factors disclosed under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation," "Item 2. Properties"
and elsewhere in this report. All subsequent written and oral forward-looking
statements attributable to us, or persons acting on our behalf, are expressly
qualified in their entirety by the Cautionary Statements. We assume no duty to
update or revise our forward-looking statements based on changes in internal
estimates or expectations or otherwise.


                                    GLOSSARY

         The following is a description of the meanings of some of the natural
gas and oil industry terms used in this report.

         AFE (AUTHORIZATION FOR EXPENDITURE). An estimate of the costs of
drilling and completing a proposed well, which the operator provides to each
working interest owner before the well is commenced.

         BASIN-CENTERED GAS. A regional abnormally-pressured, gas-saturated
accumulation in low-permeability reservoirs lacking a down-dip water contact.

         CASING. Steel pipe that screws together and is lowered into the hole
after drilling is complete. It is used to seal off fluids and keeps the hole
from caving in.

         COMPLETION. The installation of permanent equipment for the production
of natural gas or oil, or in the case of a dry hole, the reporting of
abandonment to the appropriate agency.

         DEVELOPMENT WELL. A well drilled in to a proved natural gas or oil
reservoir to the depth of a stratigraphic horizon known to be productive.

         DOWNHOLE. Refers to equipment or operations that take place down inside
a borehole.

         DRY HOLE. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.

         EXPLORATORY WELL. A well drilled to find and produce natural gas or oil
reserves not classified as proved, to find a new reservoir in a field previously
found to be productive of natural gas or oil 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


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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."

         GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may
be, in which a working interest is owned.

         MCF. Thousand cubic feet.

         NET ACRES OR NET WELLS. The sum of the fractional working interest
owned in gross acres or wells, as the case may be.

         OPERATOR. The individual or company responsible for the exploration,
development, and production of an oil or 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.

         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.

         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.

         SURFACE CASING. Pipe that is set with cement through the shallow water
sands to avoid polluting the water and keep the same from caving in while
drilling a well.

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

         WORKING INTEREST. The operating interest that gives the owner the right
to drill, produce and conduct operating activities on the property and receive a
share of production 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.


                                     PART I

ITEM 1.  BUSINESS.

         We are an independent oil and gas company engaged in lease acquisition,
exploration, development and production of natural gas. We conduct exploration
activities to locate natural gas and crude petroleum through two wholly-owned
subsidiaries, Dolphin Energy Corporation and Pannonian International, Ltd. As we
commence production of these products, they will be sold to purchasers in the
immediate area where the products are produced. Our operations are focused in
the following core operating areas in the United States:

    o    THE PICEANCE BASIN OF WESTERN COLORADO. We are in the process of
         drilling our first wells in the basin. Our leasehold locations are
         located in close proximity to natural gas pipelines and the roads
         needed for efficient development.


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<PAGE>

    o    THE POWDER RIVER BASIN LOCATED IN WYOMING AND MONTANA. Over the last
         couple of years we have acquired leasehold interests in and are
         developing five different coal bed methane ("CBM") project areas in the
         basin. As of March 9, 2006 we had interests in 160 completed wells,
         65 wells in various stages of completion and eight water disposal
         wells. Of the completed wells, 37 are currently producing natural gas,
         30 are still dewatering, a precursor to the production of natural gas,
         and the remainder are shut-in pending future infrastructure development
         work.

We also have interests in early stage natural gas projects in Europe, where we
are being carried by our partners in the initial wells being drilled in
following projects:

    o    NEUES BERGLAND EXPLORATION PERMIT IN GERMANY. This is a 149,000 acre
         leaseholding near Kusel, in southwest Germany. Drilling on the first
         test well on the property reached total depth in late January 2006.
         Based upon the initial review of open hole logs, several zones of
         interest exist in the well. Based on initial well results our partner
         and we will undertake a detailed analysis to identify priority zones
         for further development. Our interest in this leasehold is 30% and
         could be reduced to 24%, depending upon the outcome of the future
         drilling program.

    o    JIU VALLEY OF ROMANIA. This is a 21,500 acre coalbed methane project.
         The initial test well in this project finished drilling in September
         2005. Based on the gas shows during the drilling of the well and core
         analyses and preliminary desorption measurements in the field our
         partner, a related party, and we have determined to enlarge the cored
         section to run casing to total depth of the well and to commence
         completion and testing operations. Our interest in this project is 25%.

We also hold leases on 1,955 undeveloped net acres in Texas. These cover six
identified prospects in Rusk and Nacogdoches counties. We do not currently have
the financial resources to drill these properties. These leases have terms
ranging from 18 to 24 months.

CORPORATE BACKGROUND

         We were incorporated in the State of Colorado on December 17, 1999
under the name "Galaxy Investments, Inc." On November 13, 2002 we acquired all
of the issued and outstanding stock of Dolphin Energy Corporation, a Nevada
Corporation ("Dolphin"). Since this transaction resulted in the existing
stockholders of Dolphin acquiring control of Galaxy Investments, Inc., for
financial reporting purposes the business combination was accounted for as a
reverse acquisition with Dolphin as the acquirer. Accordingly, all financial
information presented in this report for periods prior to November 13, 2002
represents the historical information of Dolphin. We changed our name to "Galaxy
Energy Corporation" on May 15, 2003.

          On May 7, 2003, we entered into a share exchange agreement with
Pannonian International, Ltd., a Colorado corporation, which at that point was a
related party, whereby we agreed acquire that company solely for shares of our
common stock. We completed the acquisition as of June 2, 2003 and issued
1,951,241 shares of our common stock, making Pannonian International a
wholly-owned subsidiary.

PICEANCE BASIN

         The Piceance Basin is located in northwestern Colorado. This
6,000-square mile, basin straddles Interstate 70 in Garfield and Mesa counties
and extends northward into Rio Blanco County and South into Gunnison and Delta
counties. The Piceance is a basin-centered gas play that may contain as much as
200 to 300-plus trillion cubic feet of gas resource in place according to
published reports. The primary focus of the companies drilling in the basin is a
1,700 to 2,400-foot thick, gas bearing section in the Williams Fork section of
the Mesaverde formation. This section usually occurs at depths ranging from
4,500 to 8,500 feet in the basin. There are also other Mesaverde sandstone
layers below the Williams Fork which range down to about 9,000 feet that are
productive in the basin.

         We entered the Piceance Basin in March of 2005. In conjunction with
Exxel Energy Corporation, a related party, which is our partner in the project,
as of March 15, 2006 we control approximately 5,900 undeveloped acres (1,475 net
to Galaxy) in the Piceance Basin. Under our agreement with Exxel, we will hold a
25% working interest in the wells that we drill in the basin and Exxel will hold
the remaining 75% working interest. We currently have gas production and sales
from the Clough


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RWF 14-13, a well drilled and operated by an unrelated oil and gas company, in
which we acquired a 5.66% working interest after the well was drilled and
completed. We also own an 8.33% interest in a well operated by another unrelated
oil and gas company which is now in the completion process following six stages
of fracture treatment stimulations. When fully completed and tested, a potential
test will be announced for this well. In addition, we have commenced, along with
our partner Exxel, drilling the first two wells of a planned continuous drilling
program in the basin. We own a 25% working interest in each of these two new
wells.

POWDER RIVER BASIN AND COAL BED METHANE

         The Powder River Basin is an area of 14 million acres in northeastern
Wyoming and southeastern Montana that is roughly bounded by the Bighorn
Mountains in the West, the Black Hills in the east, Montana's Cedar Ridge in the
north, and Wyoming's Laramie Mountains, Casper arch, and Hartville Uplift in the
South. The area is marked by grass-covered plains, rolling hills, wide, flat
streambeds, and broad floodplains. The Powder River Basin is the single largest
source of coal mined in the United States. It is also home to oil and
conventional natural gas production. Since 1997, it has also been the site of
intensive coal bed methane production and has recently become the most active
area in the country for such gas development. The United States Geological
Survey estimates there may be as much as 100 trillion cubic feet of gas waiting
to be found in the Powder River Basin.

         Methane is the clean-burning primary component of natural gas. While
conventional natural gas is often comprised of a mixture of methane and other
gases, coal bed methane (CBM) is attractive because it usually has very high
percentage of methane - up to 96%. Coal bed methane in the Powder River Basin
was generated not by heat and pressure, but by bacterial activity within the
coal itself. These anaerobic bacteria are classified as methanogens for their
ability to generate large quantities of methane. As methane is generated it is
trapped (adsorbed) onto microscopic surfaces within the coal by water pressure.

         In recent years, coal bed methane has attracted attention from the
energy sector. Methane is generally considered a cleaner form of energy than
traditional coal and oil. Since CBM in this area is found at relatively shallow
predictable depths, exploration and development costs are generally much lower
than for deeper, more geologically complex oil and gas exploration projects. The
wells drilled and completed to extract CBM from these shallower coal seams are
therefore much more cost effective to construct. Operating costs, however, for
these wells are usually higher than for conventional free flowing gas wells due
to the need for pumping and disposing of water during the producing life.

            The extraction of coal bed methane involves pumping water from the
coal seam aquifer in order to release the water pressure that is trapping the
gas in the coal. Methane travels with the ground water being pumped from the
coal by a well drilled and equipped with a water pump that is completed in a
coal seam that contains methane. Since methane has very low solubility in water,
it separates from the water in the well before the water enters the pump.
Instead of dewatering the coal seam, the goal is to decrease the hydrostatic
pressure above the coal seam. Water moving from the coal seam to the well bore
encourages gas migration toward the producing well. As this water pressure is
released, the gas will rise and is separated from the water and can be piped
away. New coalbed methane wells often produce water for several months and then,
as the water production decreases, natural gas production increases as the coal
seams de-water.

            Our Wyoming properties in the Powder River Basin consist of about
53,000 net acres in four project areas in Sheridan, Johnson and Campbell
counties, plus working interests in a total of 207 coalbed methane wells in
various stages of completion and production and 8 water disposal wells. All
leases were acquired and all wells were either acquired or drilled by us in the
period from December 2003 through November 2005.

            Our Montana properties in the Powder River Basin consist of about
32,000 net acres in two project areas in Big Horn county, plus working interests
in 18 non-operated wells in various stages of completion and production.

GERMANY

         We, through our wholly-owned subsidiary, Pannonian International, hold
a 30% working interest in the 149,000 acre Neues Bergland Exploration Permit
near Kusel, Germany. Pannonian is the operator of a four-company joint venture
group and will act as the operator for the first three wells in Phase One and
Two. Drilling on


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<PAGE>

the first test well on the property reached total depth in late January 2006.
Based upon the initial review of open hole logs from the well, several zones of
interest exist. Based on this, the joint venture group has decided to undertake
a detailed analysis to identify priority zones for further development. Our
interest in this project could drop to 24%, depending upon the outcome of the
future drilling program

ROMANIA

         We, through our wholly-owned subsidiary, Pannonian International, hold
a 25% working interest in a concession in the Jiu Valley Coal Basin in Romania
which was obtained by Pannonian prior to our acquisition of that company in
2003. Of the total concession area, 13,715 acres are underlain by total coalbed
thicknesses greater than 5 meters and are currently considered to be prospective
for coalbed methane. The prospective acreage contains up to 18 coal seams with a
cumulative thickness up to 50 meters at depths of 300 to 1,000 meters and the
main target seam averages 22 meters in thickness. The first test well on the
property has been completed. The core analyses and preliminary desorption
measurements in the field indicate the potential presence of coalbed methane in
multiple horizons but give no indication at this time of the potential gas
production rates or recoverable reserves to be expected. Based on gas shows
during the drilling of the well and the core information, the partners in the
project have determined to enlarge the cored section to run casing to total
depth and to commence completion and testing operations.

TEXAS

         We hold leases on 1,955 undeveloped net acres in Rusk and Nacogdoches
counties in Texas which were acquired from a related party. These leases cover
six identified prospects. We do not currently have the financial resources to
drill these properties.

EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES

         During the fiscal years ended November 30, 2005, 2004 and 2003, we
incurred $18,164,329, $34,029,772, and $2,306,409, respectively, in identifying
and acquiring petroleum and natural gas leases and prospect rights, and for
exploration costs.

PRINCIPAL PRODUCTs

         We conduct exploration activities to locate natural gas and crude
petroleum. As we commence production of these products, we anticipate that
generally they will be sold to purchasers in the immediate area where the
products are produced. We expect that the principal markets for oil and gas will
be refineries and transmission companies that have facilities near our producing
properties.

COMPETITION

         Oil and gas exploration and acquisition of undeveloped properties is a
highly competitive and speculative business. We compete with a number of other
companies, including major oil companies and other independent operators which
are more experienced and which have greater financial resources. We do not hold
a significant competitive position in the oil and gas industry.

COMPLIANCE WITH GOVERNMENTAL REGULATIONS

         Our operations are subject to various levels of government controls and
regulations in the United States and internationally.

         UNITED STATES REGULATION. In the United States, legislation affecting
the oil and gas industry has been pervasive and is under constant review for
amendment or expansion. Pursuant to such legislation, numerous federal, state
and local departments and agencies have issued extensive rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for failure to comply. Such laws and regulations
have a significant impact on oil and gas drilling, gas processing plants and
production activities, increase


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<PAGE>

the cost of doing business and, consequently, affect profitability. Inasmuch as
new legislation affecting the oil and gas industry is commonplace and existing
laws and regulations are frequently amended or reinterpreted, we are unable to
predict the future cost or impact of complying with such laws and regulations.

         We consider the cost of environmental protection a necessary and
manageable part of our business. We believe we will be able to plan for and
comply with new environmental initiatives without materially altering our
operating strategies.

         EXPLORATION AND PRODUCTION. Our United States operations are or will be
subject to various types of regulation at the federal, state and local levels.
Such regulation includes requiring permits for the drilling of wells;
maintaining bonding requirements in order to drill or operate wells;
implementing spill prevention plans; submitting notification and receiving
permits relating to the presence, use and release of certain materials
incidental to oil and gas operations; and regulating the location of wells, the
method of drilling and casing wells, the use, transportation, storage and
disposal of fluids and materials used in connection with drilling and production
activities, surface usage and the restoration of properties upon which wells
have been drilled, the plugging and abandoning of wells and the transporting of
production. Our operations are or will be also subject to various conservation
matters, including the regulation of the size of drilling and spacing units or
proration units, the number of wells which may be drilled in a unit, and the
unitization or pooling of oil and gas properties. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally limit the venting or flaring of gas, and impose certain requirements
regarding the ratable purchase of production. The effect of these regulations is
to limit the amounts of oil and gas we may be able to produce from our wells and
to limit the number of wells or the locations at which we may be able to drill.

         ENVIRONMENTAL AND OCCUPATIONAL REGULATIONS. Various federal, state and
local laws and regulations concerning the discharge of incidental materials into
the environment, the generation, storage, transportation and disposal of
contaminants or otherwise relating to the protection of public health, natural
resources, wildlife and the environment, affect our existing and proposed
exploration, development, processing, and production operations and the costs
attendant thereto. These laws and regulations increase our overall operating
expenses. We plan to maintain levels of insurance customary in the industry to
limit our financial exposure in the event of a substantial environmental claim
resulting from sudden, unanticipated and accidental discharges of oil, salt
water or other substances. However, we do not intend to maintain 100% coverage
concerning any environmental claim, and we do not intend to maintain any
coverage with respect to any penalty or fine required to be paid by us because
of our violation of any federal, state or local law. We are committed to meeting
our responsibilities to protect the environment wherever we operate and
anticipate making increased expenditures of both a capital and expense nature as
a result of the increasingly stringent laws relating to the protection of the
environment. We cannot predict with any reasonable degree of certainty our
future exposure concerning such matters. We consider the cost of environmental
protection a necessary and manageable part of our business. We believe we will
be able to plan for and comply with new environmental initiatives without
materially altering our operating strategies.

         We are also subject to laws and regulations concerning occupational
safety and health. Due to the continued changes in these laws and regulations,
and the judicial construction of same, we are unable to predict with any
reasonable degree of certainty our future costs of complying with these laws and
regulations. We consider the cost of occupational safety and health a necessary
and manageable part of our business. We believe we will be able to plan for and
comply with new occupational safety and health initiatives without materially
altering our operating strategies.

         INTERNATIONAL REGULATION. The oil and gas industry is subject to
various types of regulation throughout the world. Legislation affecting the oil
and gas industry has been pervasive and is under constant review for amendment
or expansion. Pursuant to such legislation, government agencies have issued
extensive rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for failure to
comply. Such laws and regulations have a significant impact on oil and gas
drilling and production activities, increase the cost of doing business and,
consequently, affect profitability. Inasmuch as new legislation affecting the
oil and gas industry is commonplace and existing laws and regulations are
frequently amended or reinterpreted, we are unable to predict the future cost or
impact of complying with such laws and regulations. The following are
significant areas of regulation.



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<PAGE>


         EXPLORATION AND PRODUCTION. Pannonian's oil and gas concessions and
permits are granted by host governments and administered by various foreign
government agencies. Such foreign governments require compliance with detailed
regulations and orders which regulate, among other matters, drilling and
operations on areas covered by concessions and permits and calculation and
disbursement of royalty payments, taxes and minimum investments to the
government.

         Regulation includes requiring permits for the drilling of wells;
maintaining bonding requirements in order to drill or operate wells;
implementing spill prevention plans; submitting notification and receiving
permits relating to the presence, use and release of certain materials
incidental to oil and gas operations; and regulating the location of wells, the
method of drilling and casing wells, the use, transportation, storage and
disposal of fluids and materials used in connection with drilling and production
activities, surface usage and the restoration of properties upon which wells
have been drilled, the plugging and abandoning of wells and the transporting of
production. Pannonian's operations are also subject to regulations, which may
limit the number of wells or the locations at which Pannonian can drill.

         ENVIRONMENTAL REGULATIONS. Various government laws and regulations
concerning the discharge of incidental materials into the environment, the
generation, storage, transportation and disposal of contaminants or otherwise
relating to the protection of public health, natural resources, wildlife and the
environment, affect Pannonian's exploration, development, processing and
production operations and the costs attendant thereto. In general, this consists
of preparing Environmental Impact Assessments in order to receive required
environmental permits to conduct drilling or construction activities. Such
regulations also typically include requirements to develop emergency response
plans, waste management plans, and spill contingency plans. In some countries,
the application of worldwide standards, such as ISO 14000 governing
Environmental Management Systems, are required to be implemented for
international oil and gas operations.

EMPLOYEES

         As of November 30, 2005, we had a total of six full time employees and
two part-time employees. None of our employees is covered by a collective
bargaining agreement.

ITEM 1A.     RISK FACTORS.

WE HAVE A LIMITED OPERATING HISTORY AND HAVE GENERATED ONLY VERY LIMITED
REVENUES. WE HAVE INCURRED SIGNIFICANT LOSSES AND WILL CONTINUE TO INCUR LOSSES
FOR THE FORESEEABLE FUTURE.

         We are a development stage oil and gas company and have earned very
limited production revenue. We have generated proved resources on only a few of
our properties. Our principal activities have been raising capital through the
sale of our securities and identifying and evaluating potential oil and gas
properties.

         From inception to November 30, 2005, we have an accumulated deficit of
$35,373,813. For the 2006 fiscal year, we do not expect our operations to
generate sufficient cash flows to provide working capital for our ongoing
overhead, the funding of our lease acquisitions, and the exploration and
development of our properties. Without adequate financing, we may not be able to
successfully develop any prospects that we have or acquire and we may not
achieve profitability from operations in the near future or at all.

OUR SHORT-TERM CASH COMMITMENTS REQUIRES US TO SELL MORE DEBT AND/OR EQUITY
SECURITIES AND/OR SELL OUR ASSETS, WHICH MAY BE DETRIMENTAL TO OUR SHAREHOLDERS.

         As of December 1, 2005, we had contractual obligations due by November
30, 2006 totaling $14,665,505. To meet these obligations, we will need to raise
additional funds by selling debt and/or equity securities, and selling assets or
farm-outs or similar types of arrangements. Any financing obtained through the
sale of our equity will likely result in substantial dilution to our
shareholders. We have granted a security interest in our assets to the holders
of our notes. This limits our ability to sell debt securities, as we would have
to offer subordinated debt. Also, the existence of a security interest in our
assets restricts our ability to sell assets. If we are forced to sell assets



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<PAGE>

to meet our operating and capital requirements, we may not realize the full
market value of the assets and the sales price could be less than our carrying
value of the assets.

THE COMPANY HAS SUFFERED RECURRING LOSSES FROM OPERATIONS AND ITS TOTAL
LIABILITIES EXCEEDS ITS TOTAL ASSETS AND AS A RESULT, THE COMPANY'S AUDITORS
HAVE INCLUDED A GOING CONCERN REFERENCE IN THEIR OPINION RELATING TO THE
NOVEMBER 30, 2005 FINANCIAL STATEMENTS OF THE COMPANY.

         As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses from operations and its total liabilities exceeds its
total assets. This raises substantial doubt about the Company's ability to
continue as a going concern. As a result, the Company's auditors have included a
going concern reference in their opinion relating to the November 30, 2005
financial statements of the Company.

THE LACK OF PRODUCTION AND ESTABLISHED RESERVES FOR OUR PROPERTIES IMPAIRS OUR
ABILITY TO RAISE CAPITAL.

         As of November 30, 2005, we have established very limited production of
natural gas from a limited number of wells, and have no properties for which
reserves have been established, making it more difficult to raise the amount of
capital needed to fully exploit the production potential of our properties.
Therefore, we may have to raise capital on terms less favorable than we would
desire. This may result in increased dilution to existing stockholders.

THE VOLATILITY OF NATURAL GAS AND OIL PRICES COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.

         We are producing and selling oil and gas only on a limited basis at
this time. However, the prices of natural gas and oil affect our business to the
extent that such prices influence a decision to invest in our company. If the
prices of natural gas and oil are low, investors may decide to invest in other
industries.

TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT.

         We may have to engage in common equity, debt, or preferred stock
financing in the future. Your rights and the value of your investment in the
common stock could be reduced by any type of financing we do. Interest on debt
securities could increase costs and negatively impacts operating results, and
investors in debt securities may negotiate for other consideration or terms
which could have a negative impact on your investment. Preferred stock could be
issued in series from time to time with such designations, rights, preferences,
and limitations as needed to raise capital, and the terms of preferred stock
could be more advantageous to those investors than to the holders of common
stock. If we need to raise more equity capital from sale of common stock,
institutional or other investors may negotiate terms at least as, and possibly
more, favorable than the terms of your investment. In addition, any shares of
common stock that we sell could be sold into the market and subsequent sales
could adversely affect the market price of our stock.

         As an example of the foregoing, the purchasers of convertible notes
issued in May 2005 negotiated a perpetual overriding royalty interest with
respect to our existing domestic acreage averaging from 1% to 3%, depending upon
the nature and location of the property, a right of first refusal with respect
to future debt and/or equity financings, and a right to participate in any
farm-out financing transactions that do not have operating obligations by the
financing party as a material component. The grant of the overriding royalty
interest reduces somewhat the value of the properties to us, thereby negatively
impacting your investment. The existence of a right of first refusal to
participate in future financings may place some limitation on our ability to
negotiate the best possible terms for such financings or may deter others from
offering financing to us.

THE DEVELOPMENT OF OIL AND GAS PROPERTIES INVOLVES SUBSTANTIAL RISKS THAT MAY
RESULT IN A TOTAL LOSS OF INVESTMENT.

         The business of exploring for and producing oil and gas involves a
substantial risk of investment loss that even a combination of experience,
knowledge, and careful evaluation may not be able to overcome. Drilling oil and
gas wells involves the risk that the wells will be unproductive or that,
although productive, the wells do not produce oil and/or gas in economic
quantities. There is no way to predict in advance of drilling and testing
whether any prospect encountering oil or gas will yield oil or gas in sufficient
quantities to cover drilling or completion costs or to be economically viable.
The seismic data, other technologies, and the study of producing fields in the
area do not enable us to know conclusively prior to drilling that oil and gas
will be present, or if present, if it is in commercial quantities. We cannot
assure anyone that the analogies that we draw from available data from other
wells, more fully explored prospects, or producing fields will be applicable to
our drilling prospects.

         Other hazards, such as unusual or unexpected geological formations,
pressures, fires, blowouts, loss of circulation of drilling fluids or other
conditions may substantially delay or prevent completion of any well. Adverse
weather conditions can also hinder drilling operations.


                                       10
<PAGE>

DELAYS IN OBTAINING PERMITS FOR METHANE WELLS COULD IMPAIR OUR BUSINESS.

         Drilling coal bed methane wells requires obtaining permits from various
governmental agencies. The ease of obtaining the necessary permits depends on
the type of mineral ownership and the state in which the property is located.
Intermittent delays in the permitting process can reasonably be expected
throughout the development of any play. We may shift our exploration and
development strategy as needed to accommodate the permitting process. As with
all governmental permit processes, permits may not be issued in a timely fashion
or in a form consistent with our plan of operations.

IF WE ARE NOT THE OPERATOR OF OUR WELLS, WE WILL HAVE LITTLE OR NO CONTROL OVER
THE PROJECT.

         If we are not the operator of the wells in which we have an interest,
we will have limited or no control over the project. More specifically, we will
have limited or no control over the following:

         o   the timing of the drilling and recompleting of wells;
         o   the timing and amounts of production; and
         o   the development and operating costs.

In addition, if we should produce natural gas, we may experience possible
negative gas balance conditions because the operator may sell to a purchaser
other than ours, which may cause a delay in the sale of gas to our interests.

WE MAY INCUR LOSSES AS A RESULT OF TITLE DEFICIENCIES IN THE PROPERTIES IN WHICH
WE INVEST.

         It is our practice in acquiring oil and gas leases or undivided
interests in oil and gas leases not to undergo the expense of retaining lawyers
to examine the title to the mineral interest to be placed under lease or already
placed under lease. Rather, we will rely upon the judgment of oil and gas lease
brokers or landsmen who perform the field work in examining records in the
appropriate governmental office before attempting to place under lease a
specific mineral interest. This practice is widely followed in the oil and gas
industry. Prior to the drilling of an oil and gas well, however, it is the
normal practice in the oil and gas industry for the person or company acting as
the operator of the well to obtain a preliminary title review of the spacing
unit within which the proposed oil and gas well is to be drilled to ensure there
are no obvious deficiencies in title to the well; however, neither we nor the
person or company acting as operator of the well will obtain counsel to examine
title to such spacing unit until the well is about to go into production. It
frequently happens, as a result of such examinations, that certain curative work
must be done to correct deficiencies in the marketability of the title, and such
curative work entails expense. The work might include obtaining affidavits of
heirship or causing an estate to be administered. It does happen, from time to
time, that the examination made by the title lawyers reveals that the oil and
gas lease or leases are worthless, having been purchased in error from a person
who is not the owner of the mineral interest desired. In such instances, the
amount paid for such oil and gas lease or leases is generally lost.

WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS THAT CAN ADVERSELY AFFECT THE TIMING
AND COST OF OUR OPERATIONS.

         In general, our exploration activities are subject to certain federal,
state and local laws and regulations relating to environmental quality and
pollution control. Such laws and regulations increase the costs of these
activities and may prevent or delay the commencement or continuance of a given
operation. Since we have not yet commenced any drilling activities, compliance
with these laws and regulations has not had a material effect on our operations
or financial condition to date. Specifically, we are subject to legislation
regarding emissions into the environment, water discharges, and storage and
disposition of hazardous wastes. In addition, legislation has been enacted which
requires well and facility sites to be abandoned and reclaimed to the
satisfaction of state authorities. As of this date, we are unable to predict the
ultimate cost of compliance.

WE ARE SUBJECT TO GOVERNMENTAL REGULATIONS THAT MAY ADVERSELY AFFECT THE COST OF
OUR OPERATIONS.

         Oil and gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. Legislation
affecting the oil and gas industry is under constant review for amendment and
expansion. Also, numerous departments and agencies, both federal and state, are
authorized by statute to issue and have issued rules and regulations binding on
the oil and gas industry and its individual members, some of which


                                       11
<PAGE>

carry substantial penalties for failure to comply. The regulatory burden on the
oil and gas industry increases our cost of doing business and, consequently,
affects our profitability. The possibility exists that laws and regulations
enacted in the future will adversely affect the oil and gas industry. Such new
legislation or regulations could drive up the cost of doing business to the
point where our projects would not be economically feasible.

         Most states in which we own and operate properties have statutes, rules
and regulations governing conservation matters including the unitization or
pooling of oil and gas properties, establishment of maximum rates of production
from oil and gas wells and the spacing of such wells.

OUR COMPETITORS MAY HAVE GREATER RESOURCES THAT COULD ENABLE THEM TO PAY A
HIGHER PRICE FOR PROPERTIES.

         The oil and gas industry is intensely competitive and we compete with
other companies which have greater resources. Many of such companies not only
explore for and produce crude oil and natural gas but also carry on refining
operations and market petroleum and other products on a worldwide basis. Such
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects, and to define, evaluate, bid for and purchase a
greater number of properties and prospects than our financial or human resources
permit. Our ability to acquire additional properties and to discover reserves in
the future will be dependent upon our ability to evaluate and select suitable
properties, to obtain funding and to consummate transactions in a highly
competitive environment. There is also competition between the oil and gas
industry and other industries with respect to the supply of energy and fuel to
industrial, commercial and individual customers. At this stage of our
development, we cannot predict if we will be able to effectively compete against
such companies.

MARC A. BRUNER AND HIS AFFILIATES CONTROL A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING COMMON STOCK, WHICH WILL ENABLE THEM TO CONTROL MANY SIGNIFICANT
CORPORATE ACTIONS AND MAY PREVENT A CHANGE IN CONTROL THAT WOULD OTHERWISE BE
BENEFICIAL TO OUR STOCKHOLDERS.

         Marc A. Bruner beneficially owned approximately 17% of our stock as of
March 6, 2006. In addition, he is the father of our president, Marc E. Bruner.
This control by Mr. Bruner could have a substantial impact on matters requiring
the vote of the stockholders, including the election of our directors and most
of our corporate actions. This control could delay, defer or prevent others from
initiating a potential merger, takeover or other change in our control, even if
these actions would benefit our stockholders and us. This control could
adversely affect the voting and other rights of our other stockholders and could
depress the market price of our common stock.

OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS.

         Our limited operating history and the lack of production or reserve
reports on our properties make it difficult to predict accurately our future
operations. We expect that our operating results will fluctuate significantly
from quarter to quarter, due to a variety of factors, many of which are beyond
our control. If our operating results fall below the expectations of investors
or securities analysts, the price of our common stock could decline
significantly. The factors that could cause our operating results to fluctuate
include, but are not limited to:

            o    worldwide or regional demand for energy;
            o    domestic and foreign supply of natural gas and oil;
            o    weather conditions;
            o    domestic and foreign governmental regulations;
            o    political conditions in natural gas or oil producing regions;
            o    price and availability of alternative fuels;
            o    availability and cost of drilling equipment;
            o    our ability to establish and maintain key relationships with
                 lessors, drilling partners and drilling funds;
            o    the amount and timing of operating costs and capital
                 expenditures relating to maintaining our business, operations,
                 and infrastructure; and
            o    general economic conditions and economic conditions specific to
                 the energy sector.

                                       12
<PAGE>

         These and other external factors have caused and may continue to cause
the market price and demand for our common stock to fluctuate substantially,
which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock.

         In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us it could
result in substantial costs and a diversion of our management's attention and
resources, which could hurt our business.

OUR ISSUANCE OF THE CONVERTIBLE NOTES AND WARRANTS COULD SUBSTANTIALLY DILUTE
THE INTERESTS OF SHAREHOLDERS.

         We issued convertible notes in 2004 that have an outstanding principal
balance of $12.5 million at November 30, 2005. We also issued $7.695 million in
notes in March 2005 and $10.0 million in notes in May 2005 These notes are
convertible into shares of our common stock at any time prior to their
respective maturity dates at a current conversion price of $1.25, subject to
adjustments for stock splits, stock dividends, stock combinations, and other
similar transactions. The initial conversion prices of these notes were $1.87
and $1.88. The conversion prices of the convertible notes could be further
lowered, perhaps substantially, in a variety of circumstances, including:

         o    our issuance of common stock below the convertible notes'
              conversion prices, either directly or in connection with the
              issuance of securities that are convertible into, or exercisable
              for, shares of our common stock;
         o    our failure to comply with specific registration and listing
              obligations applicable to the common stock into which the
              convertible notes are convertible; and
         o    our breaching other obligations to the holders of the convertible
              notes.

         In addition, we issued to the holders of convertible notes in August
2004 three-year warrants that currently entitle the warrant holders to purchase
an aggregate of 6,400,001 shares of our common stock at an exercise price of
$1.25 per share. As originally issued, these warrants were exercisable at $1.54
per share to purchase a total of 5,194,806 shares. We also issued three-year
warrants to the holders of convertible notes in March 2005 to purchase an
aggregate of 1,637,235 shares of our common stock at an exercise price of $1.88
per share. The exercise price of this warrant has been lowered to $1.25 per
share. Both the number of warrants and the exercise price are subject to
adjustments that could make them further dilutive to our shareholders. In
addition, the warrants issued in August 2004 and the notes issued in May 2005
provide for the issuance of additional warrants under certain circumstances.

         Neither the convertible notes nor the warrants establish a "floor" that
would limit reductions in the conversion price of the convertible notes or the
exercise price of the warrants that may occur under certain circumstances.
Correspondingly, there is no "ceiling" on the number of shares that may be
issuable under certain circumstances under the anti-dilution adjustment in the
convertible notes and warrants. We also issued to the "finders" of the August
2004 and May 2005 financing transactions five-year warrants to purchase 400,000
shares of our common stock at an exercise price of $1.25 per share and 200,000
shares at an exercise price of $1.25 per share. Accordingly, our issuance of the
convertible notes and warrants could substantially dilute the interests of our
shareholders.

OUR FAILURE TO SATISFY OUR REGISTRATION, LISTING, AND OTHER OBLIGATIONS WITH
RESPECT TO THE COMMON STOCK UNDERLYING THE CONVERTIBLE NOTES AND THE WARRANTS
COULD RESULT IN ADVERSE CONSEQUENCES, INCLUDING ACCELERATION OF THE CONVERTIBLE
NOTES.

         We are required to maintain the effectiveness of the registration
statement, of which this document forms a part, covering the resale of the
common stock underlying the convertible notes and warrants, until the earlier of
the date the underlying common stock may be resold pursuant to Rule 144(k) under
the Securities Act of 1933 or the date on which the sale of all the underlying
common stock is completed, subject to certain exceptions. We will be subject to
various penalties for failing to meet our registration obligations and the
related listing obligations for the underlying common stock, which include cash
penalties and the forced redemption of the convertible notes at the greater of:



                                       13
<PAGE>

            o   125% of the principal amount, plus accrued interest; or
            o   the number of shares of our common stock issuable upon
                conversion, multiplied by the weighted average price of our
                common stock on the trading day immediately preceding our
                registration or listing default.

WE ARE OBLIGATED TO MAKE SIGNIFICANT PERIODIC PAYMENTS OF PRINCIPAL AND INTEREST
UNDER OUR CONVERTIBLE NOTES.

         We have a material amount of indebtedness outstanding under the
convertible notes. We are required to make monthly principal payments of
$833,333 and accrued interest under the terms of the August 2004 and October
2004 financings, as well as quarterly payments of accrued interest under the
terms of the May 2005 financing. The holders of the 2004 notes have given us a
deferral of the monthly payments to April 1, 2006. We may make the payments in
stock, subject to meeting certain conditions. If we at any time default on our
payment obligations the creditors will have all rights available under the
instrument, including acceleration, termination, and enforcement of security
interests. Such security interests cover all of our assets and those of our
subsidiaries.

FUTURE EQUITY TRANSACTIONS, INCLUDING EXERCISE OF OPTIONS OR WARRANTS, COULD
RESULT IN DILUTION.

         From time to time, we sell restricted stock, warrants, and convertible
debt to investors in private placements. Because the stock is restricted, the
stock is sold at a greater discount to market prices compared to a public stock
offering, and the exercise price of the warrants sometimes is at or even lower
than market prices. These transactions cause dilution to existing stockholders.
Also, from time to time, options are issued to officers, directors, or
employees, with exercise prices equal to market. Exercise of in-the-money
options and warrants will result in dilution to existing stockholders. The
amount of dilution will depend on the spread between the market and exercise
price, and the number of shares involved.

THE ISSUANCE OF SHARES UPON EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE
AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.

         The issuance of shares upon exercise of warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may sell the full amount issuable on exercise. In addition, such
shares would increase the number of shares in the "public float" and could
depress the market price for our common stock.

OUR OFFICERS, DIRECTORS, AND ADVISORS ARE ENGAGED IN OTHER BUSINESSES, WHICH MAY
RESULT IN CONFLICTS OF INTEREST.

         Certain of our officers, directors, and advisors also serve as
directors of other companies or have significant shareholdings in other
companies. For example, Marc A. Bruner, our largest shareholder, serves as the
chairman of the board of Gasco Energy, Inc. and chairman of the board and
president of Falcon Oil & Gas Ltd. ("Falcon"), and is involved with other
natural resource companies. Marc A. Bruner is the father of our President, Marc
E. Bruner. Carmen Lotito is the Executive Vice President, Chief Financial
Officer and Treasurer of GSL Energy Corporation, and is the stepfather of our
President, Marc E. Bruner. To the extent that such other companies participate
in ventures in which we may participate, or compete for prospects or financial
resources with us, these officers and directors will have a conflict of interest
in negotiating and concluding terms relating to the extent of such
participation. In the event that such a conflict of interest arises at a meeting
of the board of directors, a director who has such a conflict must disclose the
nature and extent of his interest to the board of directors and abstain from
voting for or against the approval of such participation or such terms.

         In March 2005, we entered into an agreement to acquire an initial
58-1/3% working interest in 4,000 net undeveloped mineral acres in the Piceance
Basin in Colorado. The sellers were not willing to enter into the agreement
without having some agreement regarding the remaining 41-2/3% working interest
in the subject properties. Since we had previously decided that our maximum
commitment should not exceed that provided in the agreement, it was necessary to
find a third party to take the remaining working interest. Marc A. Bruner was
willing to provide a guaranteed payment to the sellers and enter into an
agreement with the sellers to acquire a 16-1/3% working interest for such
payment, with the option to acquire up to all of the then remaining 25% working
interest in the subject properties by investing an additional sum. The members
of our board of directors who did not have a conflict of interest unanimously
approved this arrangement. We entered into a participation agreement with Mr.
Bruner in March 2005.


                                       14
<PAGE>

         In March 2005, Mr. Bruner assigned all of his rights and obligations
under our participation agreement to Exxel Energy Corp., a British Columbia
corporation whose stock is trading on the TSX Venture Exchange. As of December
14, 2005, Mr. Bruner owned approximately 21.7% of the outstanding common stock
of Exxel Energy. Our participation agreement with Exxel Energy, as amended,
establishes our working interest at 25%, with Exxel having a 75% interest.

         In June 2005, we entered into a farm-out agreement with Falcon to
evaluate the 21,538 gross acre concession held by our subsidiary in the Jiu
Valley Coal Basin in Romania, which was issued to Pannonian by the Romanian
government in October 2002. The terms of the farmout agreement were essentially
the same as those that had been negotiated with a U.K. company, which is
unaffiliated with and unrelated to either us, Falcon or any of the officers or
principal shareholders thereof. After the U.K. company declined to proceed with
the farmout, Falcon offered to accept the farmout on essentially the same terms.
The members of our board of directors who did not have a conflict of interest
unanimously approved the farmout agreement with Falcon.


ITEM 2.     PROPERTIES.

OIL AND GAS ASSETS

         Our oil and gas activities have focused on the acquisition of
unevaluated oil and gas properties and the drilling of exploratory wells in the
Piceance Basin of Colorado and the Powder River Basin of Wyoming and Montana. In
addition, exploration projects are underway in Germany, Romania and Texas.

         PICEANCE BASIN - COLORADO. On March 2, 2005, we entered into a Lease
Acquisition and Development Agreement (the "Agreement") with Apollo Energy LLC
and ATEC Energy Ventures, LLC (the "Sellers") to acquire an initial 58-1/3%
working interest in unevaluated oil and gas properties in the Piceance Basin in
Colorado, by depositing $7,000,000 in escrow. Subsequently, including interest
earned on the escrow account and a small additional deposit we made into the
account, we paid from escrow a total $7,022,088 to acquire undeveloped leases in
the area. Because the Sellers were not willing to enter into the Agreement with
us without having some agreement regarding the remaining 41-2/3% working
interest in the subject properties, we entered into a Participation Agreement
with Marc A. Bruner, a related party (see Item 13), to acquire all or a portion
of the remaining 41-2/3% working interest in the subject properties. Mr. Bruner
subsequently assigned his rights under the Agreement to an unrelated third
party, Exxel Energy Corp. Mr. Bruner is now a significant shareholder of Exxel
Energy Corp. In October 2005, the Company and Exxel amended the Participation
Agreement so that Exxel was responsible for funding 100% of the next $14 million
of lease acquisition, drilling, completion and facilities costs to be incurred,
at which time, we will begin to participate for our 25% working interest. We
anticipate that level of expenditure will cover the drilling costs for at least
six wells.

         We commenced drilling operations on our first operated well on December
5, 2005 and drilling of a second well is also underway. We own a 25% working
interest in each of these wells. In addition we and Exxel are 33% working
interest owners (8.25% net to Galaxy) in a well operated by another oil and gas
operator in the basin. The well has been drilled and completed and production
testing is under way.

         Jointly, we and Exxel had an obligation under the agreement with the
Sellers to commence drilling one well by December 31, 2005, which obligation was
met, and we have to drill nine additional wells by August 22, 2006. If we should
fail to drill any of the nine wells, we are obligated to pay Sellers $500,000
for each undrilled well as liquidated damages or we are to reassign to Sellers
any of the acreage covered by the leases that remains undrilled.

         Sellers will reserve in the assignment of the leases either a reserved
production payment or a reserved overriding royalty interest, each equal to the
difference between 20% and existing burdens, but never less than 2%. At project
payout, Sellers are vested with an undivided 12 1/2% of our interest in the
leases.

         POWDER RIVER BASIN - WYOMING (GLASGOW AND WEST RECLUSE). This project
consists of approximately 4,400 net acres of oil and gas leases in Campbell and
Converse Counties on the eastern side of the Powder River Basin. As of March 9,
2006, a total of 40 wells have been drilled on the acreage, 39 of which have
been completed. Of these


                                       15
<PAGE>

wells, 37 were producing gas at various levels of production as they continue to
dewater. As of March 9, 2006, gas production from these two areas was
approximately one million cubic feet per day.

         POWDER RIVER BASIN - WYOMING (BUFFALO RUN, PIPELINE RIDGE, HORSE HILL
AND DUTCH CREEK). This property is located approximately 12 miles southeast of
Sheridan, Wyoming, and is divided into four CBM exploration projects: Buffalo
Run, Pipeline Ridge, Horse Hill, and Dutch Creek. The project area contains up
to eight separate coals, ranging in depth from 150 feet to 1,800 feet. Coal
thickness ranges from 20 feet to 70 feet, generally thinning with depth. We
estimate that full development of this project area would include the drilling
of up to 280 wells, with up to four coal zone completions per well.

         The four projects are in the early implementation stages with 101 wells
drilled to various depths as of March 9, 2006. Of these 67 have been completed
and approximately three-fourths of those have gas pressures at the wellhead
while the remaining wells all had significant gas shows during drilling and
completion operations. While these outcomes indicate that these wells may become
productive, only a portion of these wells has been stimulated and placed on
production. Contracts for electrical power supply have been executed and
construction is complete in the Pipeline Ridge area. As of March 9, 2006, 32
production wells and 5 water disposal wells have been drilled and completed in
the Pipeline Ridge area. Five additional wells have been started with only
surface casing in place. Installation of a compressor station to handle gas
sales into the adjacent Bighorn pipeline has been completed. The production
wells are continuing to dewater. At the current stage of dewatering, minor
amounts of gas are being produced by every well; but the gas production is
insufficient for sales into the pipeline. Additional water handling facilities
are being developed to handle the water that is currently being produced in this
field. We estimate that the cost to add these new water handling facilities will
be approximately $350,000. In addition, the cost of dewatering the production
wells is approximately $60,000 per month. An unrelated oil and gas company has
drilled and completed over 200 wells in the vicinity of Pipeline Ridge and is
finalizing a water management program to enable full-scale production. Once it
begins pumping from its wells, our effective dewatering program will be greatly
enhanced, which we believe will accelerate the time to gas sales.

         POWDER RIVER BASIN - WYOMING (LEITER AND UCROSS FIELDS). Effective
September 30, 2002, we entered into a lease acquisition and drilling agreement
with Pioneer Oil, a Montana limited liability company ("Pioneer"), which
entitled us to earn a 100% working interest and an 80% net revenue interest in
leases covering 15,657 acres in the Powder River Basin, near Leiter, Wyoming.
Under these agreements, as amended, we acquired 5 existing natural gas wells. In
addition, we were obligated to drill, or acquire, a total of 125 wells on the
leased acreage by December 31, 2005. We did not meet this drilling commitment as
of December 31, 2005. Thus we have retained our interest in only the 3,920 acres
surrounding the 49 wells drilled, or acquired, as of December 31, 2005. The
remaining acreage has been forfeited. The project area is approximately 20 to 30
miles west of the main north-south CBM fairway in Campbell County, Wyoming, and
is approximately nine miles west of the nearest established CBM production. Most
of our acreage is positioned along roads and pipelines. There is 20-inch gas
transmission line crossing the Leiter property, and U.S. Highway 14 runs through
both project areas and provides year-round access.

         Ten coal seams have been identified throughout the lease area, which
range from 10 feet to 35 feet in thickness and with depths of 600 to 2,500 feet
below the surface. The primary targets are coal beds in the Fort Union
Formation. Drilling depths range from 1,200 to 2,600 feet. The Fort Union
Formation is expected to have about 130 feet of aggregate coal separated into 8
to 10 widely spaced beds. The coals are widespread and have a nearly continuous
distribution. The successful implementation of multi-seam well completion
technology and cost effective produced water management in accordance with
existing established practices and requirements will greatly enhance results.

         As of March 9, 2006, these two areas contained 34 completed wells, 13
wells that are partly completed and 2 water disposal wells. Construction of
gathering systems and field facilities for both areas were completed during 2005
and dewatering of a number of the wells was begun. However, the amount of water
produced from the wells was sufficient to overwhelm the installed water handling
capabilities of the areas and the wells have been taken off production until
later in 2006 when additional water handling facilities that are being developed
in these areas will allow dewatering to recommence. We estimate that the cost to
add the new water handling facilities at the Leiter Field will be approximately
$400,000 and that the cost for the Ucross Field will be approximately the same.



                                       16
<PAGE>


                                  Leiter Field
         Mud logs from the five original Pioneer wells on this property indicate
the presence of gas in these coal seams. The mud log gas shows are consistent
with other Fort Union coals in the western portion of the Powder River Basin.
Based on historical production from other similar areas within this basin, which
are producing gas from the same Fort Union Formation coals in approximately
11,000 active wells, we are optimistic that economically recoverable amounts of
gas will be present here. However, we recognize that analogies drawn from
available data from other wells or producing fields may not be applicable to our
drilling prospects.

         Based on the Pioneer mudlogs, we have determined that the initial
target seams will be the Cook, Wall, and Pawnee seams at depths of 1,700 to
1,800 feet. These zones have exhibited the highest consistent gas shows in the
area and comprise 35 to 40 feet of total coal across an interval of
approximately 100 feet. Depending on pricing and water disposal capacity, an
additional 70 to 80 feet of shallower prospective coal could be accessed through
future perforations or by drilling additional wells to accelerate gas
production. We have drilled an additional 15 wells and converted two of the
Pioneer wells into water disposal wells. The 18 resulting production wells were
completed in the Pawnee coal. One sample of Pawnee coal was analyzed for
adsorption isotherm potential. Results indicate the coal has the potential to
hold 78 scf/t if fully with gas. Initial production testing showed higher than
expected permeability in the Pawnee seam, with one well flowing 10-20 mcfd
immediately upon coming online. The presence of immediately producible gas
confirms that these coals are fully gas saturated, and have approximately 400
mmcfg in place per 35-40 feet of coal. Because of the higher permeability, the
Leiter wells produce much more water than our original model suggested,
necessitating expansion of water disposal facilities.

                                  Ucross Field
         No existing wells were present on this property. As such, we ran
mudlogs on several initial wells in this field, and confirmed that the Cook,
Wall, and Pawnee coals had the highest gas contents. Based on these initial
wells, we drilled a total of 29 wells through the Pawnee coal at Ucross and
completed eight wells as perforated completions in the Cook coal and 8 wells as
co-mingled completions in the Cook and Wall coals. Thirteen wells remain to be
perforated.

         Twenty four offsetting wells operated by an unrelated oil and gas
company have begun producing small amounts of gas and will aid the dewatering
effort on our leases.

         Water management at Ucross has delayed the start of production. The
Wyoming Department of Environmental Quality put a hold on issuing any discharge
permits pending completion of a hydrologic basin watershed study. The study has
been completed and we have drafted a comprehensive water management plan that
includes surface and subsurface storage, evaporation, and treatment/discharge.

         POWDER RIVER BASIN - WYOMING (BEAVER CREEK). This project consists of
various working interests in approximately 27,000 net acres adjacent to, and in
the vicinity of, the Leiter Buffalo Run, Pipeline Ridge, Horse Hill, and Dutch
Creek acreage. This project is also in the early implementation stage with 22
wells drilled to various depths as of March 9, 2006. Of these, seven have been
completed, but are not yet connected to a gathering system. We are developing
plans to include these 22 wells in expanded production pilot projects, which are
then expected to be followed by full development of the related areas. We do not
currently have the financial resources to develop this property.

         POWDER RIVER BASIN - MONTANA. This project consists of a 12.5% working
interest in certain oil and gas leases covering approximately 214,000 gross
acres in the Powder River Basin area of Montana

         The primary geologic target associated in the acreage is natural gas
from shallow coal beds located at depths of 200 feet to 2,500 feet. Multiple
coal seams are present in this prospect area, with a total coal thickness of
approximately 100 feet. There are several surface structures and faults in the
prospect area that were mapped by the U.S. Geological Survey and the Montana
Bureau of Mines. We expect these structural features to enhance the CBM gas
production. Data used in defining the prospect area was taken from these
agencies, as well as information from abandoned deeper oil and gas wells drilled
in the area. CBM gas production has been established approximately six miles
south of the area where cumulative production to date is about 20 billion cubic
feet of natural gas.


                                       17
<PAGE>

         This acreage is divided into two projects: the Kirby prospect and the
Castle Rock prospect. We are currently participating in the first phase of a
planned exploration for the Kirby Area. Operations are underway for an initial
18 well pilot and field facilities construction has begun. The Company also has
interests in two test wells in the Castle Rock area. A decision concerning the
further development of this area is being analyzed by the partners involved in
the project. However, based upon the somewhat discouraging results of the
initial test wells, a recent decision by two of the other non-operators to not
pay delay rentals, and our lack of commitment to further development of this
area without an improvement in its outlook, we have decided to impair the entire
$2,070,547 carrying value of the Castle Rock prospect in the attached financial
statements.

         EAST TEXAS. We have paid-up leases covering approximately 1,955
undeveloped net in the vicinity of the Trawick Field, located in Rusk and
Nacogdoches Counties, Texas. Leases covering this acreage expire from June 2207
to December 2007.

         JIU VALLEY - ROMANIA. Our wholly-owned subsidiary, Pannonian
International, has a concession agreement covering 21,538 gross acres for a term
of 30 years in the Jiu Valley Coal Basin, Romania. Of this area, only 13,715
acres that are underlain by total coalbed thicknesses greater than 5 meters are
considered to be prospective for coalbed methane production at this time. This
acreage contains up to 18 coal seams with a cumulative thickness up to 170 feet
at depths of 985 to 3,280 feet. The main target seam averages 22 meters in
thickness in the concession area. The concession from the Romanian government
was issued October 22, 2002.

         On June 1, 2005 Pannonian, entered into a farmout agreement with Falcon
Oil & Gas Ltd., a related party because its President, Marc A. Bruner is a
related party (see Item 13), to evaluate the concession held by Pannonian in the
Jiu Valley Coal Basin. The farmout agreement calls for the assignment of the
concession and a 75% working interest in the concession area to Falcon; and for
the drilling of one test well and an additional, optional, test well, the cost
of which will be paid 100% by Falcon. In addition the Falcon will pay Pannonian
$100,000 upon approval by the Romanian government of the assignment of the
concession to Falcon, and will pay the first $250,000 of Pannonian's
proportionate share of drilling and operating costs subsequent to the drilling
of the first two wells. The assignment of the Concession from Pannonian to
Falcon is subject to Romanian government approval, as well as other regulatory
approvals. Pannonian is acting as Falcon's contract operator on the Jiu Valley
wells.

         The first test well on the property was completed in September 2005.
The core analyses and preliminary desorption measurements in the field indicate
the potential presence of coalbed methane in multiple horizons but give no
indication at this time of the potential gas production rates or recoverable
reserves to be expected. Based on gas shows during the drilling of the well and
the core information, the partners in the project have determined to enlarge the
cored section to run casing to total depth and to commence completion and
testing operations.

         Pannonian has applied for a concession on an additional 120,000 acres
in Romania known as the Anina Block. Such application is still pending at this
date. All of the costs related to the concession application are being born by
Falcon.

         NEUES BERGLAND - GERMANY. In December 2003, the 149,435-acre Neues
Bergland Exploration Permit was granted for a three-year term to Pannonian
International (50%) and two co-permittees (each with 25%). Both of the
co-permittees are privately-held oil and gas companies that are not affiliated
with us.

         On March 15, 2005, Pannonian, together with its partners in the Glantal
project in Germany executed a farmout agreement covering the Neues Bergland
Exploration Permit area with Empyrean Energy PLC, a publicly-traded,
unaffiliated oil and gas company. Terms of the agreement call for Empyrean to
initially earn a 40% working interest in the permit, which could rise to 52%
depending upon results of the project. Empyrean earned the 40% interest after
paying $750,000 to Pannonian and the two co-permittees and providing evidence of
deposits totaling 1.3 million euros which were set aside for drilling
obligations on the project. As a result, our interest in the project has been
reduced to 30%. Our interest in the project may drop to 24%, depending upon the
outcome of the future drilling program.

         Drilling on the first test well on the property reached total depth in
late January 2006. Based upon the initial review of open hole logs from the
well, several zones of interest exist. As a result, the joint venture group has
decided to undertake a detailed analysis to identify priority zones for further
development.



                                       18
<PAGE>

PRODUCTIVE GAS WELLS

         The following summarizes our productive and shut-in gas wells as of
November 30, 2005. Producing wells are wells producing natural gas or water, a
pre-cursor to natural gas production. Shut-in wells are completed wells that are
capable of production but are currently not producing. Gross wells are the total
number of wells in which we have a working interest. Net wells are the sum of
our fractional working interests owned in the gross wells.

                                                    PRODUCING GAS WELLS
                                                 GROSS                NET
  Producing gas wells                               87                 84
  Shut-in gas wells                                 77                 60
  Wells in various stages of completion
  and water disposal wells                          71                 61
                                                  ----               ----
       Total                                       235                205
                                                  ====               ====

         For comparison, as of March 9, 2006 we had 164 completed wells and 8
water disposal wells, as follows:

<TABLE>
<CAPTION>
        -----------------------------------------------------------------------------------------------
                                                                             WATER           PRODUCING
                                                          SHUT IN           DISPOSAL        GAS OR WATER
        -----------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>
        Glasgow/West Recluse                                 2                -0-               37
        -----------------------------------------------------------------------------------------------
        Pipeline Ridge                                       1                 6                30
        -----------------------------------------------------------------------------------------------
        Leiter/Ucross                                       34                 2                -0-
        -----------------------------------------------------------------------------------------------
        Buffalo Run, Beaver Creek, Horse Hill,
        Dutch Creek                                         43                -0-               -0-
        -----------------------------------------------------------------------------------------------
        Montana                                             13                -0-               -0-
        -----------------------------------------------------------------------------------------------
        Colorado Piceance Basin                              1                -0-                1
        -----------------------------------------------------------------------------------------------
        Germany                                              1                -0-               -0-
        -----------------------------------------------------------------------------------------------
        Romania                                              1                -0-               -0-
        -----------------------------------------------------------------------------------------------
        TOTAL                                               96                 8                68
        -----------------------------------------------------------------------------------------------
</TABLE>

ESTIMATED PROVED OIL AND GAS RESERVES

         The Company recognized its first proved reserves during the year ended
November 30, 2005. The proved reserves are located in two prospects on the
eastern side of the Powder River Basin and in one well in the Piceance Basin in
northwestern Colorado. Gustavson Associates, an independent petroleum
engineering firm estimated proved reserves as summarized in the table below, in
accordance with definitions and pricing requirements as prescribed by the
Securities Exchange Commission. Estimated values of proved reserves were
computed using prices in effect at November 30, 2005 of $6.86/Mcf and
$59.36/bbl. Due to the Company's current liquidity issues, proved undeveloped
reserves identified in the Gustavson Associates report have been excluded from
the disclosures below

<TABLE>
         Estimated proved reserves as on November 30, 2005
<CAPTION>
     ------------------------------------------------------------------------------------------------------
                                                 Estimated Future Net           Estimated Future Net
         Oil (bbls)           Gas (Mcf)                Revenues               Revenues Discounted at 10%
     ------------------------------------------------------------------------------------------------------
<S>                             <C>                        <C>                             <C>
              353               959,944                    $3,947,594                      $2,942,274
     ------------------------------------------------------------------------------------------------------
</TABLE>

OIL AND GAS ACREAGE

         The following table sets forth the undeveloped and developed leasehold
acreage, by area, held by us as of November 30, 2005. Undeveloped acres are
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. Developed acres are acres,
which are spaced or assignable to productive wells. Gross acres are the total
number of acres in which we have a working interest. Net acreage is obtained by
multiplying



                                       19
<PAGE>

gross acreage by our working interest percentage in the properties. The table
does not include acreage in which we have a contractual right to acquire or to
earn through drilling projects, or any other acreage for which we have not yet
received leasehold assignments.

<TABLE>
<CAPTION>
                                    UNDEVELOPED ACRES                             DEVELOPED ACRES
                                 GROSS              NET                       GROSS              NET
<S>                            <C>                <C>                         <C>               <C>
        Wyoming                 71,745             53,251                     6,080             5,864
        Montana                222,622             32,577                       0                 0
        East Texas               2,217              2,217                       0                 0
        Colorado                12,274              1,349                       0                 0
        Romania                 21,538              5,385                       0                 0
        Germany                149,000             44,700                       0                 0
                               -------            -------                     -----             -----
             Total             479,396            139,479                     6,080             5,864
                               =======            =======                                       =====
</TABLE>

DRILLING ACTIVITY

         The following table sets forth our drilling activity during the years
ended November 30, 2005 and 2004. We had no drilling activity during the years
ended November 30, 2002 and 2003.

     -----------------------------------------------------------------------

                                      2005                     2004

     -----------------------------------------------------------------------
                               GROSS        NET        GROSS         NET
     ---------------------------------------------------------------------
     Exploratory wells:
     ---------------------------------------------------------------------
       Productive                23         6.2         135         119.4
     ---------------------------------------------------------------------
       Dry                      -0-         -0-         -0-          -0-
     ---------------------------------------------------------------------

     ---------------------------------------------------------------------
     Development wells:
     ---------------------------------------------------------------------
       Productive               -0-         -0-         -0-          -0-
     ---------------------------------------------------------------------
       Dry                      -0-         -0-         -0-          -0-
     ---------------------------------------------------------------------

     ---------------------------------------------------------------------
         Total wells            23         6.2         135         119.4
     ---------------------------------------------------------------------

OFFICE SPACE

         Our principal executive offices are located at 1331 - 17th Street,
Suite 1050, Denver, Colorado, where we lease approximately 5,270 square feet of
office space under a lease expiring April 30, 2010.


ITEM 3.     LEGAL PROCEEDINGS.

         None.


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

         At a special meeting held February 22, 2006, shareholders of Galaxy
Energy Corporation approved the following:


                                       20
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                      FOR            AGAINST          ABSTAINED
------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>               <C>
Proposal to approve the issuance of shares of     33,366,126        1,172,412         1,170,623
common stock upon conversion of the
convertible notes issued in 2004 and May
2005, in lieu of cash payments on the
convertible notes, and upon exercise of the
warrants that have been issued or are
issuable under the terms of the notes, to the
extent such issuance would require
shareholder approval under the rules of the
American Stock Exchange.
------------------------------------------------------------------------------------------------
</TABLE>





















                                       21


<PAGE>
                                     PART II

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
             AND ISSUER PURCHASES OF EQUITY SECURITIES.

         Our common stock traded on the over-the-counter bulletin board
("OTCBB") under the symbol "GAXI" from December 10, 2001 until November 22,
2005. Since November 23, 2005 our common stock has traded on the American Stock
Exchange ("AMEX") under the symbol GAX. The following tables set forth the range
of high and low bid quotations for each fiscal quarter for the last two fiscal
years. These quotations reflect inter-dealer prices without retail mark-up,
mark-down, or commissions and may not necessarily represent actual transactions.

                                      AMEX

         FISCAL QUARTER ENDING                          HIGH BID       LOW BID

         November 30, 2005.........................     $   1.30       $   1.22
         February 28, 2006.........................     $   1.07       $   1.01

                                      OTCBB

         FISCAL QUARTER ENDING                          HIGH BID      LOW BID

         February 29, 2004.........................     $   3.78      $   1.95
         May 31, 2004..............................     $   3.60      $   1.00
         August 31, 2004...........................     $   1.66      $   1.19
         November 30, 2004.........................     $   1.86      $   1.10
         February 28, 2005.........................     $   1.79      $   1.22
         May 31, 2005..............................     $   1.16      $   1.13
         August 31, 2005                                $   1.06      $   0.98

         On March 9, 2006, the closing price for the common stock was $1.05.

         As of March 6, 2006, there were 119 record holders of our common stock.

         Since our inception, no cash dividends have been declared on our common
stock. We do not anticipate paying dividends on our common stock at any time in
the foreseeable future. Our board of directors plans to retain earnings for the
development and expansion of our business. Our directors also plan to regularly
review our dividend policy. Any future determination as to the payment of
dividends will be at the discretion of our directors and will depend on a number
of factors, including future earnings, capital requirements, financial condition
and other factors as the board may deem relevant. We are restricted by our
contractual agreements with our senior secured debt lenders and our senior
subordinated convertible debt lenders from paying dividends while the debt
remains outstanding.


ITEM 6.     SELECTED FINANCIAL DATA.

         The table sets forth selected financial data, derived from the
consolidated financial statements, regarding our financial position and results
of operations as of the dates indicated. All information for periods prior to
November 13, 2004 represents the historical information of Dolphin Energy
Corporation because Dolphin was considered the acquiring entity for accounting
purposes.







                                       22
<PAGE>


<TABLE>
<CAPTION>
                                                                      AS OF AND FOR THE YEAR ENDED NOVEMBER 30,
                                                                       2005              2004              2003
                                                                       ----              ----              ----
<S>                                                                <C>               <C>               <C>
Summary of Operations:
   Revenue                                                         $  1,297,194      $    122,455      $      --
   Lease operating costs                                                965,069            59,247             --
   General & administrative expense                                   5,316,588         3,517,218         2,095,495
   Depreciation, depletion and amortization
and impairment                                                        7,160,896            76,390            66,454
   Net (loss)                                                       (23,985,645)       (9,831,104)       (2,579,595)
   Net (loss) per share                                                   (0.38)            (0.18)            (0.08)

</TABLE>


<TABLE>
<CAPTION>
                                                                      AS OF AND FOR THE YEAR ENDED NOVEMBER 30,
                                                                       2005             2004              2003
                                                                       ----             ----              ----
<S>                                                                <C>               <C>              <C>
Balance Sheet:
   Working capital (deficiency)                                    $ (6,690,444)     $    (626,108)   $   1,756,776
   Cash and cash equivalents                                          1,328,469         10,513,847        2,239,520
   Oil and gas properties, net                                       44,358,725         37,491,529        2,799,720
   Total assets                                                      48,459,378         49,648,165        5,655,433
   Long-term debt                                                    12,380,234         10,915,928               --
   Stockholders' equity                                              26,605,640         26,681,207        2,634,559
</TABLE>


ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATION.

OVERVIEW

         We spent fiscal years 2003, 2004 and 2005 obtaining oil and gas
properties in the Piceance Basin of Colorado and the Powder River Basin of
Wyoming and Montana and obtaining the funding to pay for those properties,
commence drilling operations and complete the infrastructure necessary to
deliver natural gas to nearby pipelines. During this period, we also built our
corporate infrastructure and made the investing public aware of our presence.

         Our tasks now are to establish reserves on our properties and to place
our properties into production. As of March 9, 2006, we had interests in 164
completed wells (37 of which were delivering natural gas into sales pipelines),
65 wells in various stages of completion and 8 water disposal wells. We recorded
our first revenues from natural gas sales during the fiscal year ended November
30, 2004 and we currently are producing about 1 million cubic feet per day. As
our first wells come online in the Piceance Basin over the next few months and
as our coalbed methane wells continue to dewater and increase their production
of natural gas, we expect to generate significantly more revenues during the
current fiscal year. We anticipate that these revenues, while significantly
larger than in fiscal 2004 and 2005, will not be sufficient to fund completely
our planned operations and commitments. Accordingly, we will continue to raise
funds from external sources, such as the sale of equity and/or debt securities.
We believe, however, that the results from our drilling operations in the
Piceance Basin and the Powder River Basin, will enhance our ability to obtain
such financing on suitable terms.

RESULTS OF OPERATIONS

         YEAR ENDED NOVEMBER 30, 2005 COMPARED TO YEAR ENDED NOVEMBER 30, 2004.
During the year ended November 30, 2005, revenues from natural gas sales
increased to $1,297,194 from $122,455 the year before. A total of 38 wells
produced and sold 211,481 Mcf of natural gas in 2005 compared to 15 wells which
sold 26,247 Mcf in 2004. Average prices received for gas sold increased to $6.13
in 2005 from $4.67 in 2004. Lease operating and production tax expenses also
increased in 2005 to $965,069 or $4.56/Mcf, compared to $59, 247 or $2.26/Mcf
the year before. This increase reflects both an overall escalation of operating
costs throughout the oilfield and the costs


                                       23
<PAGE>

associated with remedial work undertaken in our producing fields to maintain and
boost production. Depreciation, depletion and amortization expense ("DD&A") of
$1,887,074 in 2005 reflects a significant increase from the 2004 amount,
$76,390. The increase is attributable primarily to DD&A on oil and gas
properties increasing to $1,753,798 or$8.29/Mcf in 2005 compared to $47,944
or$1.83/Mcf in 2004. Our increased DD&A reflects a much higher amortization base
in 2005 including over $5 million of costs associated with impaired properties
transferred into the amortization base in 2005. We also recognized impairment of
oil and gas properties of $5,273,795 representing the excess of capitalized
costs over the ceiling as calculated in accordance with the full cost rules.

         For the year ended, 2005 and 2004, we incurred general and
administrative expenses of $5,316,588 and $3,517,218, respectively, as
summarized below

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                   2005                             2004
----------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                             <C>
Salaries and benefits                                              $ 1,035,289                        $583,141
----------------------------------------------------------------------------------------------------------------
Professional and consulting fees                                     1,338,066                         602,940
----------------------------------------------------------------------------------------------------------------
Investor relations                                                     746,804                         537,090
----------------------------------------------------------------------------------------------------------------
Legal                                                                  631,921                         581,393
----------------------------------------------------------------------------------------------------------------
Travel and entertainment                                               473,238                         447,202
----------------------------------------------------------------------------------------------------------------
Office lease and expenses                                              337,458                          228703
----------------------------------------------------------------------------------------------------------------
Audit and accounting                                                   269,165                         147,769
----------------------------------------------------------------------------------------------------------------
Directors fees                                                         196,000                         180,395
----------------------------------------------------------------------------------------------------------------
Prospect generation, maintenance and presentation                      160,890                         111,836
----------------------------------------------------------------------------------------------------------------
Insurance and other                                                    127,757                          96,749
----------------------------------------------------------------------------------------------------------------
                                              Total                $ 5,316,588                     $ 3,517,218
----------------------------------------------------------------------------------------------------------------
</TABLE>

     Significant year to year variances include:
     o   Salaries and wages - Increase reflects the full year effect of staff
         and salary increases effective in mid-2004. Full time equivalent
         employee months increased from 67 in 2004 to 115 in 2005,
     o   Professional and consulting fees - 2005 expense includes $732,687
         recorded as consulting fees representing the fair value of the
         overriding royalty interest assigned to a consultant in 2005. We had no
         such costs in 2004.
     o   Investor relations - Increase in 2005 compared to 2004 reflects the
         Company's increasing efforts to attract and retain investor interest in
         the Company's equity. The efforts included numerous presentations to
         the investment community and consulting contracts with investor
         relations specialists.
     o   Office lease and expenses - 2005 increase reflects higher office rent
         expense for a portion of the year following the relocation to a larger
         space in mid 2005 and increased supply, communications and IT costs
         associated with the expansion of the operation during the year,
     o   Audit and accounting expense - Increase in 2005 reflects increased
         audit requirements associated with higher level of operational
         activity, consulting costs associated with our Sarbanes Oxley
         compliance readiness program and other technical accounting issues, and
         costs associated with accountants review of registration statements
         related to convertible notes offerings during the year
     o   Director fee increase in 2005 reflects higher rates of compensation for
         the entire year in 2005 compared to only eight months  of  2004.
     o   Prospect generation, maintenance and presentation - Increase in 2005
         compared to 2004 primarily reflects additional efforts spend on
         preparing and marketing the Germany and Romania projects to industry
         partners.
     o   Insurance and other - 2005 increase reflects higher director and
         officer insurance compared to 2004.

         During the year ended November 30, 2005, we recorded a gain on the sale
of oil and gas properties of $197,676, reflecting the excess of proceeds to be
received on the farm-out of the Neues Bergland Exploration Permit in Germany. No
such sales occurred in the corresponding period in 2004. Late in the year ended
November 30, 2005, the Company began to record operating revenues associated
with fees charged to joint venture partners for operating drilling programs. The
Company recorded a total of $43,472 of such fees in the fourth quarter of the
year, compared to -0- in the prior year.


                                       24
<PAGE>

         Interest income for the year ended November 30, 2005 includes interest
income earned on cash deposits in commercial banks of $163,291 compared to
$51,396 of interest income during the same period in 2004. The increase in
interest income reflects additional cash on deposit as a result from our
financing and fund raising activities in the year ending November 30, 2004 and
in March and May 2005.

         Interest and financing costs increased in 2005 to $12,244,752 from
$6,352,100 in 2004 reflecting the full year effect of the 2004 Notes and the
incremental effect of the March 2005 and May 2005 Notes including the
amortization of related discount and deferred financing costs and the writeoff
of unamortized discount and deferred financing costs upon issuance of new debt.
The table below summarizes interest and financing costs for the years ended
November 30,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                   2005                      2004
-------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>
Interest on outstanding debt                                     $ 3,811,005               $ 848,107
-------------------------------------------------------------------------------------------------------
Amortization of discount                                           3,811,970               4,180,240
-------------------------------------------------------------------------------------------------------
Amortization of deferred finance costs                             1,058,072                 884,703
-------------------------------------------------------------------------------------------------------
Discount on shares issued upon conversion of
principal and interest at below market rates                       1,074,428                       -
-------------------------------------------------------------------------------------------------------
Liquidated damages on failure to timely register
shares and fees paid to extend note                                  326,680                 439,050
-------------------------------------------------------------------------------------------------------
Writeoff of unamortized discount and deferred
financing costs upon issuance of new debt                          2,162,597                       -
-------------------------------------------------------------------------------------------------------
                                              Total             $ 12,244,752             $ 6,352,100
-------------------------------------------------------------------------------------------------------
</TABLE>

         YEAR ENDED NOVEMBER 30, 2004 COMPARED TO YEAR ENDED NOVEMBER 30, 2003.
During the year ended November 30 2004 we recorded our first revenues from
natural gas sales from initial production from 5 wells acquired in June 2004 and
from 10 additional wells drilled and completed during the year. We recorded
$122,455 of natural gas sales and $59,247 of lease operating and production tax
expense on net sales volumes of 26,247 mcf. Depreciation, depletion and
amortization ("DD&A") expenses associated with the gas sales were $47,944 or
$1.83 per mcf. Because the production history of the producing wells is not
sufficient to enable us to recognize proved reserves, we calculated DD&A on the
basis of costs incurred on producing wells and the estimated productive life of
the wells.

         We recorded interest income earned on cash deposits in commercial banks
of $51,396 in 2004 compared to $-0- in 2003. The cash deposits resulted from our
financing and fund raising activities during the year.

         For the year ended November 30, 2004 and 2003, we recorded general and
administrative costs of $3,517,218 and $$2,095,495, respectively. Significant
expenses in 2004 included: salaries and benefits of $583,141; professional and
consulting fees of $602,940; travel and entertainment, primarily related to
financing activities, of $447,202; legal expenses of $581,393; investor
relations of $537,090; office lease and expenses of $228,703 and directors fees
of $180,395. Comparative amounts for 2003 were: salaries and benefits of
$258,686; professional and consulting fees of $446,724; travel and entertainment
primarily related to financing activities of $321,463; legal expenses of
$381,166; investor relations of $380,243; office lease and expenses of $116,070
and directors fees of $27,500. The 2004 increases reflect our significantly
higher level of operational activity, including the oil and gas property
acquisitions and the drilling of 120 wells during the year. During fiscal 2004,
we relocated our headquarters to Denver from Miami, entered into an office lease
to accommodate the larger number of staff, and completed five registration
statements for the resale of our equity securities. These activities required
significant increases in legal, accounting and consulting fees to accomplish
successfully.

         We recorded $76,390 of DD&A expenses in 2004 compared to $685 in 2003.
The increase reflects depreciation of furniture and equipment of $20,683 in 2004
versus $685 in 2003, DD&A and abandonment of oil and gas properties of $52,944
in 2004 compared to $-0- in 2003, and depreciation and accretion of the asset
retirement obligation of $2,763 in 2004 compared to $-0- in 2003.

         We recorded interest and financing costs of $6,352,100 in 2004 compared
to $417,646 in 2003. The 2004 expense is comprised of interest on 7% convertible
debentures, the convertible notes and other notes payable of $848,157,
liquidated damages related to the Securities Purchase Agreements for the
convertible debentures and the December 2003 private placement of common stock
in the amounts of $404,000 and $35,050, respectively, the



                                       25

<PAGE>

amortization of the discount on the convertible debentures and convertible notes
of $1,645,431, amortization of deferred financing costs of $442,817, and the
write-off of the balance of unamortized discount and deferred financing costs
relating to the convertible debentures in the amounts of $2,537,518 and
$441,886, respectively. The liquidated damages were assessed in accordance with
the terms of the respective Securities Purchase Agreements and reflect the fact
we were unable meet the deadline for registration of the common stock to become
effective as required by such agreements. See Note 5 and Note 6 to the financial
statements for a complete discussion of the discount and the beneficial
conversion feature on the convertible debentures and convertible notes payable.
The 2003 expense is comprised of interest on 7% convertible debentures and other
notes payable of $75,967, the amortization of the discount on the convertible
debentures of $292,682, and $48,997 of amortization of deferred financing costs.

         Our loss for the year ended November 30, 2005 of $21,823,048 increased
the accumulated deficit as of that date to $35,373,713.

LIQUIDITY AND CAPITAL RESOURCES

         FINANCING ACTIVITIES. Since inception, we have funded our operating and
investing activities through the sale of our debt and equity securities, raising
net proceeds of $850,500 through the period ended November 30, 2002, net
proceeds of $6,151,278 for the year ended November 30, 2003, net proceeds of
$33,059,822 for the fiscal year ended November 30, 2004 and net proceeds of
$17,745,137 for the fiscal year ended November 30, 2005.

         From December 2002 through May 2003, we sold 1,602,000 shares of common
stock for gross proceeds of $1,602,000. In October 2003, we completed a
$5,640,000 private placement of 7% secured convertible debentures and warrants,
due two years from date of issue and secured by substantially all of our assets.
Debentures purchasers received five-year warrants to purchase 2,867,797 shares
of common stock at an exercise price of $0.71 per share and 2,867,797 shares of
common stock at an exercise price of $0.83 per share. We filed a registration
statement covering the shares underlying the debentures and warrants, but did
not meet the deadline associated with this filing obligation. We paid a penalty
of $404,000 to the holders of the debentures. During the year ended November 30,
2004, all of the debentures were converted at $0.59 per share into 9,559,322
shares of common stock.

         In December 2003, we completed a private placement of 2,503,571 shares
of our common stock and warrants to purchase 500,715 common shares, resulting in
gross proceeds of $3,505,000. The warrants were exercisable for a four-year
period at an original price of $2.71 per share. In accordance with the
antidilutive rights provisions, the exercise prices of those warrants with
original exercise prices in excess of $1.54 were reset to $1.54 per share, in
connection with the issuance of the 2004 notes. We granted registration rights
to the purchasers in this private placement.

         We completed a second private placement of 6,637,671 shares of our
common stock and warrants to purchase 1,327,535 common shares in January 2004,
resulting in gross proceeds of $11,947,800. The warrants were exercisable for a
five-year period at an original price of $4.05 per share. In accordance with the
antidilutive rights provisions, the exercise prices of those warrants with
original exercise prices in excess of $1.54 were reset to $1.54 per share, in
connection with the issuance of the 2004 notes. We granted registration rights
to the purchasers in this private placement as well.

         In August and October 2004, we completed two tranches of a private
placement of senior secured convertible notes (the "2004 Notes") and warrants
(the "2004 Warrants"). Gross proceeds from the initial tranche were $15,000,000,
while gross proceeds from the second tranche were $5,000,000. The 2004 Notes pay
interest at the prime rate plus 7.25% per annum, originally matured two years
from the date of issue, are collateralized by substantially all of our assets,
and were originally convertible into 10,695,187 shares of our common stock based
on a conversion price of $1.87 per share. In January 2005, under the terms of
the 2004 Notes, we were required to pay accumulated interest to that date.
Commencing on March 1, 2005 we were required to make monthly payments of
principal in the amount of $833,333 plus accrued interest. For the year ended
November 30, 2005, the Company has made total payments on the 2004 Notes of
$10,152,666 consisting of $7,500,000 in principal repayments and $2,652,666 of
interest. Of that amount the Company has paid $8,337,748, or 82% of the total
payment, using shares of common stock. Note purchasers received the three-year,
2004 Warrants, which originally allowed the holders to purchase 5,194,806 shares
of common stock at $1.54 per share.


                                       26
<PAGE>

         On March 1, 2005, we completed a private placement of $7,695,000 in
senior subordinated convertible notes (the "March 2005 Notes") to a group of
accredited investors to fund our entry into our Piceance Basin project. The
March 2005 Notes are payable on April 30, 2007 (but are subordinated in payment
to the 2004 Notes), accrue interest at the prime rate plus 6.75% per annum,
adjusted quarterly and payable at maturity, and were originally convertible into
4,093,086 shares of our common stock based on a conversion price of $1.88 per
share. March 2005 Note purchasers received three-year warrants (the "2005
Warrants"), which originally allowed the holders to purchase 1,637,234 shares of
common stock at $1.88 per share.

         On May 31, 2005, we completed a private offering of senior secured
convertible notes to essentially the same group of accredited investors that
purchased our 2004 Notes and Warrants (the "May 2005 Notes"). Gross proceeds
from the offering were $10,000,000. The May 2005 Notes are secured by a security
interest in all of our assets and the domestic properties of our subsidiaries.
Such security interest ranks equally with that of the 2004 Notes, and senior to
the March 2005 Notes. The May 2005 Notes mature and are payable on May 31, 2010
(but can be redeemed by the holders after May 31, 2008) and bear interest at the
prime rate plus 7.25%, adjusted and payable quarterly. The May 2005 Notes were
originally convertible into 5,319,149 shares of our common stock based on a
conversion price of $1.88 per share. In addition, the Investors received a
perpetual overriding royalty interest ("ORRI") in our domestic acreage averaging
from 1% to 3%, depending upon the nature and location of the property, a right
of first refusal with respect to future debt and/or equity financings, and a
right to participate in any farm-out financing transactions that do not have
operating obligations by the financing party as a material component.

         On December 1, 2005, we entered into a Waiver and Amendment Agreement
with the holders of the 2004 Notes and the holders of the 2005 Notes . Under the
agreement, we and the holders waived all claims in connection with Dolphin
Energy Corporation, our wholly-owned subsidiary, having entered into a Third
Amendment to Participation Agreement with our partner in our Piceance Basin
project, Exxel Energy Corporation as of October 4, 2005. The Third Amendment set
the working interest between us and Exxel at 25%/75%, consistent with the
original intent of the parties. As such, the Third Amendment clarified that
Exxel was obligated to pay the next $14 million in project costs to bring its
payments to 75% of the total costs, thereby adjusting for Galaxy having paid
about 50% of the land cost to get the project started.

         In addition, the Waiver and Amendment, among other things, effected the
following changes:
    o    Lowered the conversion price to $1.25 for conversions by the holders of
         the 2004 Notes, the May 2005 Notes, and the March 2005 Notes;
    o    Lowered the exercise price of the 2004 Warrants and the 2005 Warrants
         to $1.25 per share and increased the aggregate number of shares
         purchasable under the 2004 Warrants from 5,194,806 to 6,400,002.
    o    Caused the exercise price of warrants issued in December 2003 and
         January 2004 being lowered to $1.25 under the anti-dilution provisions
         of such warrants;
    o    Deferred monthly installment payments on the 2004 Notes until April 1,
         2006;
    o    Extended the maturity date of the 2004 Notes to July 1, 2007; and
    o    Extended any redemption or conversion of the 2004 Notes by Galaxy until
         June 22, 2006

         OPERATING AND INVESTING ACTIVITIES. For the 2005 fiscal year, we used
$24,927,850 for operating and investing activities, as compared to $24,671,863
in fiscal 2004 and $3,953,078 for fiscal 2003. We expended $18,873,239 on oil
and gas property acquisition, drilling, completion and construction of
facilities in 2005, and had $1,328,469 of cash at November 30, 2005. In
comparison, we expended $20,266,368 and $1,787,926 on property acquisition costs
during the fiscal years ended November 30, 2004 and 2003, and had $10,513847 and
$2,239,520 of cash at November 30, 2004 and 2003, respectively.

         WORKING CAPITAL DEFICIENCY. As of November 30, 2005, the Company had a
working capital deficiency of $6,690,440 compared to a working capital
deficiency of $626,108 at November 30, 2004, and a working capital position of
$1,756,776 at November 30, 2003. Included in current liabilities at November 30,
2005 is the current portion of convertible notes payable of $5,041,524 and
related accrued interest of $373,681. The Company may, subject to certain
conditions, make payment of these amounts in shares of common stock rather than
cash. For the year ended November 30, 2005, the Company has made total payments
on the 2004 Notes of $10,152,666 consisting of



                                       27

<PAGE>

$7,500,000 in principal repayments and $2,652,666 of interest. Of that amount
the Company has paid $8,337,748, using shares of common stock, with the balance
$1,925,346 paid in cash. During the same period the Company paid interest on the
May 2005 Notes in the aggregate amount of $457,689. Of that amount $347,260 was
paid by issuing common stock and $110,429 was paid in cash

         We may, subject to certain conditions, continue to make payment of
these amounts due on the convertible notes in shares of common stock rather than
cash. We intend to closely monitor the trading volume and price of our common
stock throughout the life of the convertible debentures to determine the optimum
repayment mix of cash and common stock. At November 30, 2005, we had recorded
natural gas sales from 37 wells in the Powder River Basin and one well in the
Piceance basin. We have also commenced water production, a pre-cursor to natural
gas production in CBM projects from an additional 49 wells in the Powder River
Basin. We are operator of an ongoing drilling program in the Piceance Basin, for
which we have an initial carried 25% interest. If successful, we anticipate gas
sales from this program by the middle of fiscal 2006. Management believes that
natural gas production from these wells will generate revenues sufficient to
allow more of our debt payments to be made in cash.

         Management believes these transactions are an indication of our ability
to generate additional capital to meet our obligations during the next year.
However, our drilling program for the coming year will require additional
capital and will require us to raise additional funds by selling equity
securities, issuing debt, selling assets, or engaging in farm-outs or similar
types of arrangements. Any financing obtained through the sale of our equity
will likely result in additional dilution to our stockholders. If we are forced
to sell assets to meet our operating and capital requirements, we may not
realize the full market value of the assets and the sales price could be less
than our carrying value of the assets.

SCHEDULE OF CONTRACTUAL OBLIGATIONS

         The following table summarizes our obligations and commitments to make
future payments under our notes payable, operating leases, employment contracts
and consulting agreement for the periods specified as of November 30, 2005.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                        PAYMENTS DUE BY PERIOD
                                                -------------------------------------------------------------------
                                                                                                            MORE
                                                                                                            THAN 5
    CONTRACTUAL OBLIGATIONS (1)<F1>                   TOTAL          YEAR         1-3 YEARS     3-5 YEARS   YEARS
-------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>            <C>           <C>             <C>
Convertible Notes Payable (2)<F2>
   Principal                                      $30,195,000     $10,000,000    $10,195,000   10,000,000      --
   Interest                                         9,845,106       2,451,256      6,674,809      719,041      --
Notes payable and accrued interest                  2,116,392       2,116,392             --           --      --
-------------------------------------------------------------------------------------------------------------------
Office and equipment leases                           494,534          97,857        209,482      187,195      --
-------------------------------------------------------------------------------------------------------------------
TOTAL                                             $42,651,032     $14,665,505    $17,079,291   10,906,236
-------------------------------------------------------------------------------------------------------------------
------------------
<FN>
(1)<F1>  This table excludes the costs of drilling obligations in our European
         permits. Together with our partners we have met certain of the
         preliminary obligations; however we have not determined that we will
         conduct those operations. In the event we do not fulfill those drilling
         obligations, we will forfeit a portion of the permit. We have excluded
         asset retirement obligations because we are not able to precisely
         predict the timing for these amounts.

(2)<F2>  Under certain conditions, as described elsewhere in this report, we
         have the option to pay the principal and interest with shares of common
         stock instead of cash. Interest payments were calculated using interest
         rates ranging from 13.5% to 14.5% from December 1 2005 through April 4,
         2006; and from 14% to 14.5%. thereafter.
</FN>
</TABLE>

PLAN OF OPERATION

         As described in Item 2. Properties, we entered into an agreement to
acquire a working interest in the Piceance Basin in Colorado. Funding for our
share of acquisition and project costs was financed through a private placement
of $7,695,000 in senior subordinated convertible notes and warrants. The notes
mature on April 30, 2007



                                       28

<PAGE>

(but are subordinated in payment to the 2004 Notes), accrue interest at the
prime rate plus 6.75% per annum, adjusted quarterly and payable at maturity, and
were originally convertible into 4,093,086 shares of our common stock based on a
conversion price of $1.88 per share. Note purchasers received three-year
warrants (the "2005 Warrants"), which originally allowed the holders to purchase
1,637,234 shares of common stock at $1.88 per share. The Waiver and Amendment
agreement entered into on December 1, 2005 reduced the conversion price on the
notes to $1.25 per share thereby increasing the number of shares of our common
stock into which the notes can be converted to 6,156,000. Additionally, the
December 1, 2006 agreement reduced the exercise price of the 2005 Warrants to
$1.25 per share thereby allowing the holders to purchase up to 2,462,400 shares
of common stock at $1.25 per share.

         We commenced drilling operations on our first operated well in the
Piceance Basin commenced on December 5, 2005. In addition we and our partner in
the basin, Exxel Energy Corp, are 33% working interest owners in a well operated
by Antero Resources in the basin. The well has been drilled and completed and
production testing is under way. Currently Exxel is currently paying 100% of the
costs of the project and we believe that, at the current level of expenditure,
at least six wells will be drilled before we begin paying 25% of the costs of
the project under our agreement with Exxel.

         We will also continue to operate and dewater our wells in the Powder
River Basin. As our financial resources allow, we will continue to add the
necessary infrastructure and water handling facilities to bring more of our
completed wells into production. If it proves economic to do so, we will
continue to drill wells on our Powder River Basin acreage so as to add to our
natural gas production capability.

         Our ability to complete all the drilling activities described above and
to meet our commitments and obligations is dependent upon the success of the
drilling program and the amount of cash flow generated from the sale of oil and
gas from the wells drilled. We continue to pursue funding and industry
participation alternatives to ensure our ability to continue to acquire
additional acreage and complete additional drilling activity. In addition, we
believe our ability to fund our activities and meet our commitments is dependent
upon the trading volume and price of our common stock. If our stock trades at
prices above the exercise prices of outstanding warrants and conversion prices
of outstanding debt securities, we may be able to obtain cash through the
exercise of warrants and pay our debt obligations with the issuance of our
stock.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to impairment of long-lived assets. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.

OIL AND GAS PROPERTIES

         We follow the full cost method of accounting for oil and gas
operations. Under this method, all costs related to the exploration for and
development of oil and gas reserves are capitalized on a country-by-country
basis. Costs include lease acquisition costs, geological and geophysical
expenses, overhead directly related to exploration and development activities
and costs of drilling both productive and non-productive wells. Proceeds from
the sale of properties are applied against capitalized costs, without any gain
or loss being recognized, unless such a sale would significantly alter the rate
of depletion and depreciation.

         Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method based upon
estimated proven oil and gas reserves. The costs of significant unevaluated
properties are excluded from costs subject to depletion. For depletion and
depreciation purposes,



                                       29

<PAGE>

relative volumes of oil and gas production and reserves are converted at the
equivalent conversion based upon relative energy content.

         In applying the full cost method, we perform a ceiling test whereby the
carrying value of oil and gas properties and production equipment, net of
recorded future income taxes and the accumulated provision for site restoration
and abandonment costs, is compared annually to an estimate of future net cash
flow from the production of proven reserves. Costs related to undeveloped oil
and gas properties are excluded from the ceiling tests. Discounted net cash
flow, utilizing a 10% discount rate, is estimated using year end prices, less
estimated future general and administrative expenses, financing costs and income
taxes. Should this comparison indicate an excess carrying value, the excess is
charged against earnings. For the year ended November 30, 2005, we recognized
impairment expense of $5,273,795 representing the excess of capitalized costs
over the ceiling amount.

ASSET RETIREMENT OBLIGATION

         In 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement requires companies to record
the present value of obligations associated with the retirement of tangible
long-lived assets in the period in which it is incurred. The liability is
capitalized as part of the related long-lived asset's carrying amount. Over
time, accretion of the liability is recognized as an operating expense and the
capitalized cost is depreciated over the expected useful life of the related
asset. Our asset retirement obligations ("ARO") relate primarily to the
plugging, dismantlement, removal, site reclamation and similar activities of our
oil and gas properties. Prior to adoption of this statement, such obligations
were accrued ratably over the productive lives of the assets through its
depreciation, depletion and amortization for oil and gas properties without
recording a separate liability for such amounts.

         As of November 30, 2005, we have, through acquisition and drilling,
acquired working interests in 235 natural gas wells. A limited number of these
wells had initial gas production during the period, and the others are in
various stages of completion and hook up at November 30, 2005. We adopted the
provisions of SFAS 143 to record the ARO associated with all wells in which we
own an interest on the date such obligation arose. Depreciation of the related
asset, and accretion of the ARO on wells from which production has commenced,
has been calculated using our estimate of the life of the wells, based upon the
lives of comparable wells in the area. The amounts recognized upon adoption are
based upon numerous estimates and assumptions, including future retirement
costs, future recoverable quantities of oil and gas, future inflation rates and
the credit-adjusted risk-free interest rate.

IMPAIRMENT OF LONG-LIVED ASSETS

         Our long-lived assets include property and equipment. We assess
impairment of long-lived assets whenever changes or events indicate that the
carrying value may not be recoverable. In performing our assessment we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates change in the future
we may be required to record impairment charges against these respective assets.

STOCK BASED COMPENSATION

         Options that we may grant to employees under our stock option plan are
accounted for by using the intrinsic method under APB Opinion 25, Accounting for
Stock Issued to Employees (APB 25). In October 1995, the Financial Accounting
Standards Board (FASB) issued Statement No.123, Accounting for Stock-Based
Compensation (SFAS123), which defines a fair value based method of accounting
for stock options. The accounting standards prescribed by SFAS 123 are optional
and we have continued to account for stock options under the intrinsic value
method specified in APB 25.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) is effective for public companies for the first
fiscal year beginning after June 15, 2005, supersedes APB Opinion No. 25,
Accounting for Stock Issued to



                                       30

<PAGE>

Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro-forma disclosure is no longer an alternative. The new standard will
be effective for the Company, beginning December 1, 2005. SFAS No. 123R permits
companies to adopt its requirements using either a "modified prospective"
method, or a "modified retrospective" method. Under the "modified prospective"
method, compensation cost is recognized in the financial statements beginning
with the effective date, based on the requirements of SFAS No. 123R for all
share-based payments granted after that date, and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS
No. 123R. Under the "modified retrospective" method, the requirements are the
same as under the "modified prospective" method, but also permits entities to
restate financial statements of previous periods, either for all prior periods
presented or to the beginning of the fiscal year in which the statement is
adopted, based on previous pro forma disclosures made in accordance with SFAS
No. 123. The Company is currently evaluating the impact of this new standard and
estimates that the adoption SFAS No. 123(R) will have an effect on the financial
statements similar to the pro-forma effects reported in the Stock Based
Compensation disclosure elsewhere in this report.

         The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 106 in September 2004 regarding the application of SFAS No. 143,
"Accounting for Asset Retirement Obligations," for oil and gas producing
entities that follow the full cost accounting method. SAB No. 106, states that
after adoption of SFAS No. 143, the future cash outflows associated with
settling asset retirement obligations that have been accrued on the balance
sheet should be excluded from the present value of estimated future net cash
flows used for the full cost ceiling test calculation. The Company has
calculated its ceiling test computation in this manner, and therefore SAB No.
106 had no effect on the Company's financial statements.

         In March 2005, the FASB issued Interpretation (FIN) No. 47, "Accounting
for Conditional Asset Retirement Obligations -- An Interpretation of SFAS No.
143", which clarifies the term "conditional asset retirement obligation" used in
SFAS No. 143, "Accounting for Asset Retirement Obligations", and specifically
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The adoption did not have an impact on
the company's financial statements.

         In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, which changes the guidance in APB 29, Accounting for Nonmonetary
Transactions. This Statement amends APB 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective during fiscal years beginning after June
15, 2005. We do not believe the adoption of SFAS 153 will have a material impact
on our financial statements.

         In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections", which replaces Accounting Principles Board Opinion No. 20,
Accounting Changes and SFAS No. 3. SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes
retrospective application, or the latest practicable date, as the required
method for reporting a change in accounting principle and the reporting of a
correction of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect that the adoption of SFAS No. 154 will have an
impact on the Company's financial statements.

         In June 2005, the Financial Accounting Standards Board ("FASB")
ratified the consensus reached by the Emerging Issues Task Force ("EITF") on
EITF Issue No. 05-02 The Meaning of "Conventional Convertible Debt Instrument"
in Issue No. 00-19 ("EITF 05-02"). The abstract clarified the meaning of
"conventional convertible debt instruments" and confirmed that instruments which
meet its definition should continue to receive an exception to certain
provisions of EITF Issue No. 00-19 Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock ("EITF
00-19"). The guidance should be applied to new instruments entered into and
instruments modified in periods beginning after June 29, 2005. The adoption of
EITF 05-02 has not had a material impact on our consolidated financial
statements.

         In September 2005, the FASB ratified the consensus reached by the EITF
on EITF Issue No. 05-08, INCOME TAX CONSEQUENCES OF ISSUING CONVERTIBLE DEBT
WITH A BENEFICIAL CONVERSION FEATURE ("EITF 05-08"). The EITF



                                       31

<PAGE>

consensus noted that for the purpose of applying SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, (1) the issuance of convertible debt with a beneficial conversion
feature results in a basis difference, (2) the basis difference is a temporary
difference and (3) the recognition of deferred taxes for the temporary
difference of the convertible debt with a beneficial conversion feature should
be recorded as an adjustment to additional paid-in capital. The EITF also
reached a consensus that the guidance in EITF 05-08 should be applied to
financial statements beginning in the first interim or annual reporting period
beginning after December 15, 2005. The guidance should be applied by
retrospective application pursuant to SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, to all instruments with a beneficial conversion feature accounted
for under EITF Issue No. 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE INSTRUMENTS. We will adopt the guidance in EITF 05-08 for our
quarter ending April 30, 2006. We are currently assessing the impact that
adoption of EITF 05-08 will have on our consolidated financial statements.

         In September 2005, the FASB staff reported that the EITF postponed
further deliberations on Issue No. 05-04 THE EFFECT OF A LIQUIDATED DAMAGES
CLAUSE ON A FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO ISSUE NO. 00-19 ("EITF
05-04") pending the FASB reaching a conclusion as to whether a registration
rights agreement meets the definition of a derivative instrument. The legal
agreements related to our 8% Convertible Debentures include a freestanding
registration rights agreement. Once the FASB ratifies the then-completed
consensus of the EITF on EITF 05-04, we will assess the impact on our
consolidated financial statements of adopting the standard and, if an impact
exists, follow the transition guidance for implementation.

OFF BALANCE SHEET ARRANGEMENTS

         The Company has no off balance sheet arrangements.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Our primary market risk relates to changes in the pricing applicable to
the sales of gas production in the Powder River Basin in Wyoming and Montana.
This risk will become more significant to us as our production increases in
these areas. Although we are not using derivatives at this time to mitigate the
risk of adverse changes in commodity prices, we may consider using them in the
future.


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See pages beginning with page F-1.


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

         On October 22, 2004, we dismissed Wheeler Wasoff, P.C. ("WW-PC") as our
independent public accountants. WW-PC had audited our financial statements for
the fiscal years ended November 30, 2002 and 2003. On October 23, 2004, we
engaged Hein + Associates LLP ("Hein") to serve as our independent public
accountants for the fiscal year ending November 30, 2004. The audit committee of
our board of directors approved both actions. We plan to continue to use WW-PC
for our tax work and ongoing consulting needs.

         During the two most recent fiscal years and the subsequent interim
period through October 22, 2004, there were no disagreements with WW-PC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of WW-PC,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.

         There were no other "reportable events" as that term is described in
Item 304(a)(1)(iv) of Regulation S-B occurring within our two most recent fiscal
years and the subsequent interim period ending October 22, 2004.



                                       32

<PAGE>

         During our two most recent fiscal years and through October 22, 2004,
the date prior to the engagement of Hein, neither we nor anyone on our behalf
consulted Hein regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements.


ITEM 9A.    CONTROLS AND PROCEDURES.

         As required by SEC rules, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures at the end of the
period covered by this report. This evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and operation of our
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

         Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.


ITEM 9B.    OTHER INFORMATION

         None.
















                                       33
<PAGE>
                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Our executive officers and directors are:

<TABLE>
<CAPTION>
        NAME                               AGE     POSITION
        ----                               ---     --------
<S>                                         <C>    <C>
        Marc E. Bruner                      32     President and Director
        Christopher Hardesty                61     Senior Vice President, Chief Financial Officer,
                                                   Secretary and Treasurer
        Cecil D. Gritz                      62     Chief Operating Officer and Director
        Richard E. Kurtenbach               50     Vice President - Administration and Controller
        Nathan C. Collins                   71     Director
        Dr. James M. Edwards                59     Director
        Robert Thomas Fetters, Jr.          65     Director
        Thomas W. Rollins                   73     Director
        Carmen Lotito                       61     Director
</TABLE>


         Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.

MARC E. BRUNER, PRESIDENT AND DIRECTOR

         Marc E. Bruner became our President and director upon the acquisition
of Dolphin in November 2002. He had served as president of Dolphin since June
2002. From September 1999 to June 2002, he worked as an investment banker and
analyst for Resource Venture Management AG, a Swiss-based energy sector
consulting firm. Mr. Bruner holds a B.S. degree in accounting from the
University of Notre Dame. Mr. Bruner devotes all of his working time to the
business of the company. Mr. Bruner is the son of Marc A. Bruner, the company's
founder and largest shareholder.

CHRISTOPHER HARDESTY, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER

         Effective July 27, 2005, Christopher S. Hardesty, who served as
Secretary of the Company since June 21, 2005, was appointed to the additional
positions of Senior Vice President, Chief Financial Officer and Treasurer of
Galaxy Energy Corporation. He had served as the Company's Director of Corporate
Finance since October 2004. He received an MBA from the Wharton School of the
University of Pennsylvania in May 1972. During his career, Mr. Hardesty has
served as Supply and Food Service Officer aboard two U.S. Navy nuclear
submarines, Treasurer of Esso Caribbean, Vice President and Treasurer of Newmont
Mining Corporation, Chief Financial Officer of Newmont Gold Company, Chief
Financial Officer of DEKALB Energy Company, and Chief Financial Officer of
Presidio Oil Company. Mr. Hardesty served as Treasurer of Pameco Corporation, a
private, venture capital-owned, turnaround company in the heating, ventilation
and air conditioning (HIVAC) industry from October 2000 to July 15, 2003. Mr.
Hardesty was one of the founders, in May 1996, of Sys.Test Labs, LLC, a private,
Denver-based company providing software testing services to private companies
and government entities at the federal, state and local level. He has served as
Chief Financial Officer of Sys.Test Labs since the time of its founding, working
full time in that role during the period from July 2003 until October 2004 and
at various times prior to October 2000. None of these organizations is related
to the Company.  Mr. Hardesty devotes all of his working time to the business of
Galaxy.

CECIL D. GRITZ, CHIEF OPERATING OFFICER AND DIRECTOR

         Cecil D. Gritz became a director upon the acquisition of Dolphin in
November 2002 and became our chief operating officer in October 2003. He has
worked in the oil and gas industry for more than three decades and holds an
advanced degree in petroleum engineering and is a graduate of the Colorado
School of Mines. Mr. Gritz worked as an engineer in various capacities for Shell
Oil Company from June 1966 to August 1973. After leaving Shell Oil Company, he
worked as a drilling and production manager, president of a drilling company,
and petroleum engineer



                                       34

<PAGE>

for companies in Denver, Colorado. He was the vice president of engineering and
operations for Vista Resources, Inc., Denver, Colorado, from July 1977 to
September 1982, and the drilling and production manager for Trend Exploration
Limited, Denver, Colorado, from September 1982 to September 1986. As an in-house
full-time consultant, he provided services as a petroleum engineer and project
manager for David Schlachter Oil & Gas, an independent oil and gas company based
in Dallas, Texas, from September 1986 to March 1988. He was vice president of
operations for Dantex Oil & Gas, Inc., Dallas, Texas, from March 1988 to August
1993. Mr. Gritz has been a manager and consulting petroleum engineer for Harbor
Petroleum, LLC in Granbury, Texas, since August 1993. He is a 50% owner of that
company. Mr. Gritz devotes all of his working time to the business of Galaxy.

RICHARD E. KURTENBACH, VICE PRESIDENT - ADMINISTRATION AND CONTROLLER

         Richard E. Kurtenbach became our Vice President - Administration and
Controller in April 2004, after having worked for us on a part-time basis since
January 2004. He has over 25 years of experience in domestic and international
oil and gas operations and auditing. From May 2003 to January 2004, he was an
accounting supervisor with respect to the Powder River business unit for
Marathon Oil Company, with responsibility for the preparation and analytical
review of monthly and quarterly financial statements for local management and
corporate consolidation purposes. He was the finance and administration manager
for Hilton Petroleum, Inc./STB Energy, Inc. from March 1998 to January 2001. He
provided management of all financial, administrative and accounting functions
for these companies that were U.S. subsidiaries of a Canadian publicly traded
company. Between his employment with Marathon Oil and Hilton/STB, he was
self-employed as a financial, accounting, auditing, tax, and administrative
consultant. Mr. Kurtenbach received a bachelor of science degree in accounting
from Illinois State University and is licensed as a certified public accountant
in Illinois and Colorado (inactive status).

NATHAN C. COLLINS, DIRECTOR

         Nathan C. Collins became a director in April 2004. He has served as a
director of First State Bank of Flagstaff, Arizona, since September 1998. Mr.
Collins retired in 2003 after a long career in banking. Most recently, he served
as president and CEO of Bank of the Southwest from February 2002 to September
2003, a community bank in Tempe, Arizona. From September 1999 to February 2002,
he was the president of Nordstrom fsb in Scottsdale, Arizona. Nordstrom fsb, a
wholly-owned subsidiary of Nordstrom, Inc., issues Nordstrom branded credit and
debit cards, offers checking account and other financial services to Nordstrom
customers, and provides related services and support for a number of other
Nordstrom activities. His banking career spans 39 years, including serving as
executive vice president, chief lending officer, and chief audit officer of
Valley National Bank of Arizona, where he served from August 1964 to September
1987.

DR. JAMES M. EDWARDS, DIRECTOR

         Dr. James M. Edwards became a director upon the acquisition of Dolphin
in November 2002. He has been actively involved in international oil and gas
exploration and exploitation for more than 27 years. He has participated in oil
and gas discoveries in Australia, Columbia, Equatorial Guinea, France, Norway,
Trinidad, Thailand, the United Kingdom, and the United States. Dr. Edwards
previously worked as chief geologist for Triton Energy Corporation. While with
Triton, he participated in the discovery efforts of the Cusiana/Cupiagua Field
Complex, Columbia. Since June 1991, he has been the president of Equinox Energy
Corp., an oil and gas consulting company located in Dallas, Texas. Dr. Edwards
holds advanced degrees in geology, including a Master of Science from the
University of Georgia and a Ph.D. from Rice University.

ROBERT THOMAS FETTERS, JR., DIRECTOR

         Robert Thomas Fetters, Jr. became a director in March 2004. He began
his career in the oil and gas industry in 1966 when he joined Exxon, USA (then
known as Humble Oil and Refining). He served in various capacities including
exploration, production, and research management and as exploration planning
manager. Internationally, he held positions as chief geologist for Esso
Production Malaysia and exploration manager for Esso Australia. In 1983, Mr.
Fetters joined Consolidated Natural Gas, serving as the president and CEO of its
subsidiary, CNG Producing Company, from 1984 to 1989. From 1990 to 1995, he was
the president of exploration and



                                       35

<PAGE>

production for the Exploration Company of Louisiana, and from 1995 to 1997, he
was the senior vice president of operations for National Energy Group in Dallas,
Texas. In 1997, Mr. Fetters co-founded Beta Oil and Gas, Inc., based in Houston,
Texas, and served as its managing director of exploration to September 2002. He
continued to act as a consultant to Beta Oil and Gas after leaving his position
to December 2002. In January 2003, he co-found Delta Resources, LLC, Houston,
Texas, which was formed specifically to utilize leading edge technology in oil
and gas exploration. He continues to serve as Delta's CEO and a director. In
January 2003, he also co-founded Alliance Oil & Gas Company, LLC, Houston,
Texas, which is principally involved in oil and gas acquisitions. He continues
to serve as Alliance's chairman and a director. Since January 2004, Mr. Fetters
has served as the president of Waveland Energy Partners, LLC, of Irvine,
California. He holds both a bachelor's and master's degree in geology from the
University of Tennessee.

THOMAS W. ROLLINS, DIRECTOR

         Thomas W. Rollins became a director in March 2004. He has been the
chief executive officer of Rollins Resources, his natural gas and oil consulting
firm in Houston, Texas, since 1985. He has also been a director of Remington Oil
and Gas Corporation, a publicly-traded company headquartered in Dallas, Texas,
since July 1996 and a member of the executive committee of its board of
directors. Mr. Rollins previously held executive positions and/or directorships
with Shell Oil Company, Pennzoil Company, Florida Gas Transmission Company, Pogo
Producing Company, Magma Copper Company, and Felmont Oil Corporation. In 1953,
he received his degree in geological engineering and is a distinguished graduate
medallist from the Colorado School of Mines. He is a member of the American
Association of Petroleum Geologists and the American Petroleum Institute.

CARMEN LOTITO, DIRECTOR

         Carmen Lotito is the Executive Vice President, Chief Financial Officer
and Treasurer of GSL Energy Corporation. Prior to joining GSL, Mr. Lotito was
Chief Financial Officer, Treasurer and a director of Galaxy Energy Corporation
since the acquisition of Dolphin in November 2002. He was also our Executive
Vice President since August 2004. He resigned his positions with us on July 26,
2005 in order to join GSL. He has been a director and the chairman of the audit
and compensation committees of Gasco Energy, Inc., a publicly-traded natural gas
and petroleum exploitation and development company based in Englewood, Colorado,
since April 2001. He served as vice president, chief financial officer and
director of Coriko Corporation, a private business development company, from
November 2000 to August 2002. From July 1998 to October 1999, Mr. Lotito served
as director of marketing and business development for Impact Web Development,
Salt Lake City, Utah. Prior to joining Coriko, Mr. Lotito was self-employed as a
financial consultant. In 1988, Mr. Lotito joined ConAgra, Inc., in San Antonio,
Texas as a brand manager. In 1966, Mr. Lotito joined the firm of Pannell, Kerr
Forester & Co. as a senior accountant in management and audit services for the
company's Los Angeles and San Diego, California offices. Mr. Lotito holds a BS
degree in Accounting from the University of Southern California. Mr. Lotito is
the stepfather of Marc E. Bruner. Mr. Lotito devotes all of his working time to
the business of the company.

ADVISORY COMMITTEE

         In previous years we made use of an Advisory Committee to obtain advice
and recommendations from persons with significant experience in unconventional
natural gas exploration and development companies concerning the identification
of properties for acquisition, negotiation of deal terms, assistance in making
presentations about our progress, and assistance in structuring financing
arrangements. At the beginning of 2005, we and the members of the Advisory
Committee agreed that, since the company had shifted into more of an operating
mode on its existing properties, there was no further need for the services of
the Advisory Committee and it was disbanded. The two members of the Advisory
Committee at the time of its termination - Marc A. Bruner and Brian Hughes -
continued to provide services to us, when requested during 2005, under the terms
of individually-negotiated consulting agreements.

CONFLICTS OF INTEREST

         Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our



                                       36

<PAGE>

company. While the officers and directors are engaged in other business
activities, we anticipate that such activities will not interfere in any
significant fashion with the affairs of our business.

         Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.

         Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.

COMMITTEES OF THE BOARD OF DIRECTORS

         Our board of directors has formed an Audit Committee, a Compensation
Committee, and an Executive Committee.

         The Audit Committee currently consists of Messrs. Collins, Edwards and
Fetters, all of whom are independent under the definition of independence used
in the NASD listing standards. Mr. Collins serves as the chairman of the Audit
Committee. The board of directors has determined that Mr. Collins is an audit
committee financial expert with the meaning set forth in the rules and
regulations under the Securities Exchange Act of 1934.

         The Compensation Committee currently consists of Messrs., Edwards,
Rollins, and Collins. The Compensation Committee is responsible for
administering and granting awards under all equity incentive plans; reviewing
the compensation of the our chief executive officer and recommendations of the
chief executive officer as to appropriate compensation for the other executive
officers and key personnel; and examining periodically the company's general
compensation structure.

         The Nominating Committee currently consists of Messrs. Edwards,
Rollins, and Fetters. The Nominating Committee assists the board in identifying
qualified individuals to become directors, recommends to the board qualified
director nominees for election at the stockholders' annual meeting, determines
membership on the board committees, recommends a set of Corporate Governance
Guidelines, oversees annual self-evaluations by the board and self-evaluates
itself annually, and reports annually to the board on the chief executive
officer succession plan.

         The Executive Committee currently consists of Messrs. Bruner, Edwards,
and Fetters. The principal responsibility of the Executive Committee is to aid
and assist our management in the day-to-day operations of the company. The
purpose of the Executive Committee in particular, is to act on behalf of the
board of directors, subject to certain limitations, when it is not feasible to
call and convene a full board meeting.

DIRECTOR NOMINATION PROCESS

         Security holders may recommend nominees to our board of directors by
submitting such recommendations no later than 120 days before the one-year
anniversary of the date on which the proxy statement related to the most recent
annual meeting was first mailed to security holders, to the attention of our
chief executive officer at our corporate headquarters. The Nominating Committee
charter specifies that it shall treat recommendations for director that are
received from the company's security holders equally with recommendations
received from any other source, so long as such recommendations are submitted as
described in this paragraph.



                                       37

<PAGE>

CODE OF ETHICS

         We have adopted a Code of Business Conduct and Ethics that applies to
our principal executive officer, principal financial officer, principal
accounting officer, and persons performing similar functions. The text of this
code is posted on our Internet website at WWW.GALAXYENERGY.COM. In the event
that an amendment to, or a waiver from, a provision of this code is necessary,
we intend to post such information on its website.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

         Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who beneficially own more than 10% of our
common stock to file reports of securities ownership and changes in such
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10% beneficial owners are also required by rules
promulgated by the SEC to furnish us with copies of all Section 16(a) forms they
file.

         Based solely upon a review of the copies of such forms furnished to us,
or written representations that no Form 5 filings were required, we believe that
during the fiscal year ended November 30, 2005, there was compliance with all
Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners.


ITEM 11.    EXECUTIVE COMPENSATION.

         The following table sets forth information about the remuneration of
our chief executive officers and each of our next highly compensated executive
officers whose total annual salary and bonus exceeded $100,000, for services
rendered during the years ended November 30, 2005, 2004, and 2003.

<TABLE>
                           SUMMARY COMPENSATION TABLE
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                          LONG TERM COMPENSATION
                                                                 ---------------------------------------
                            ANNUAL COMPENSATION                             AWARDS             PAYOUTS
-------------------------------------------------------------------------------------------------------------------
                                                         OTHER     RESTRICTED   SECURITIES
    NAME AND                                            ANNUAL        STOCK     UNDERLYING      LTIP       ALL OTHER
    PRINCIPAL                                          COMPENSA-    AWARD(S)     OPTIONS/      PAYOUTS     COMPENSA-
    POSITION        YEAR    SALARY ($)    BONUS ($)     TION($)        ($)       SARS (#)        ($)        TION($)
-------------------------------------------------------------------------------------------------------------------
<S>                 <C>      <C>             <C>          <C>          <C>      <C>              <C>          <C>
 Marc E. Bruner     2005     $120,000        -0-          -0-          -0-      100,000 (2)<F2>  -0-          -0-
  President (1)<F1> 2004     $108,000        -0-          -0-          -0-      750,000 (2)<F2>  -0-          -0-
                    2003      $72,000        -0-          -0-          -0-          -0-          -0-          -0
                    2002      $47,000        -0-          -0-          -0-          -0-          -0-          -0-
-------------------------------------------------------------------------------------------------------------------
  Cecil Gritz,      2005     $110,000        -0-          -0-          -0-      100,000 (2)<F2>  -0-          -0-
 Chief Operating    2004     $104,450        -0-          -0-          -0-      625,000 (2)<F2>  -0-          -0-
     Officer
-------------------------------------------------------------------------------------------------------------------
   Christopher      2005     $100,000        -0-          -0-          -0-      300,000 (2)<F2>  -0-          -0-
    Hardesty
 Chief Financial
     Officer
-------------------------------------------------------------------------------------------------------------------
     Richard        2005     $108,000        -0-          -0-          -0-      75,000 (2)<F2>   -0-          -0-
   Kurtenbach
 Vice President,
Chief Accounting
     Officer
-------------------------------------------------------------------------------------------------------------------
<FN>
(1)<F1>  Mr. Bruner has been the President since November 13, 2002. The salary
         shown above includes consulting fees paid to Mr. Bruner.
(2)<F2>  These stock options vest in equal amounts quarterly over a five-year
         period.
</FN>
</TABLE>

         The following table sets forth information with respect to all stock
options granted during the year ended November 30, 2005 to the named executive
officers.


                                       38

<PAGE>

<TABLE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                       POTENTIAL REALIZABLE VALUE AT
                                                                                       ASSUMED ANNUAL RATES OF STOCK
                                                                                       PRICE APPRECIATION FOR OPTION
                                                                                                 TERM (1)<F1>
---------------------------------------------------------------------------------------------------------------------
                                    PERCENTAGE OF
                      NUMBER OF         TOTAL
                     SECURITIES      OPTIONS/SARS
                     UNDERLYING       GRANTED TO      EXERCISE OR
                    OPTIONS/SARS     EMPLOYEES IN     BASE PRICE       EXPIRATION
      NAME           GRANTED (#)     FISCAL YEAR        ($/SH)            DATE            5% ($)          10% ($)
---------------------------------------------------------------------------------------------------------------------
<S>                    <C>              <C>              <C>            <C>              <C>              <C>
 Marc E. Bruner        100,000          10.3%            $1.34          12/2/2014         $6,700          $13,400
---------------------------------------------------------------------------------------------------------------------
   Cecil Gritz         100,000          10.3%            $1.34          12/2/2014         $6,700          $13,400
---------------------------------------------------------------------------------------------------------------------
   Christopher
    Hardesty           300,000          30.8%            $1.34          12/2/2014        $20,100          $40,200
---------------------------------------------------------------------------------------------------------------------
     Richard
   Kurtenbach          75,000            7.7%            $1.34          12/2/2014         $5,025          $10,050
---------------------------------------------------------------------------------------------------------------------
<FN>
(1)<F1>  Securities and Exchange Commission Rules require calculation of
         potential realizable value assuming that the market price of the common
         stock appreciates in value at 5% and 10% annualized rates from the date
         of grant to the expiration date of the option. No gain to an executive
         officer is possible without an appreciation in common stock value,
         which will benefit all holders of common stock. The actual value an
         executive officer may receive depends on market prices for the common
         stock, and there can be no assurance that the amounts reflected will
         actually be realized.
</FN>
</TABLE>

         No options have been exercised by any of our executive officers.

<TABLE>
                       AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                       NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                                                                      UNDERLYING UNEXERCISED           IN-THE-MONEY
                                                                      OPTIONS/SARS AT FY-END          OPTIONS/SARS AT
                          SHARES ACQUIRED ON                                    (#)                       FY-END ($)
         NAME                EXERCISE ($)        VALUE REALIZED ($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>               <C>                              <C>
    Marc E. Bruner                -0-                   -0-               277,500/572,500                  -0-/-0-
----------------------------------------------------------------------------------------------------------------------------
      Cecil Gritz                 -0-                   -0-               233,750/491,250                  -0-/-0-
----------------------------------------------------------------------------------------------------------------------------
 Christopher Hardesty             -0-                   -0-               45,000/255,000                   -0-/-0-
----------------------------------------------------------------------------------------------------------------------------
  Richard Kurtenbach              -0-                   -0-               142,500/307,500                  -0-/-0-
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

         We reimburse our officers and directors for reasonable expenses
incurred during the performance of their duties for Galaxy Energy.

         From April 1, 2003 through February 29, 2004, we paid our two outside
directors a stipend of $1,500 per month. On May 15, 2003, we also granted each
of them options to purchase 60,000 shares at $1.00 per share, exercisable
through May 15, 2013. One-third of these options vests each year beginning May
15, 2004.

         Beginning March 1, 2004, we pay our outside directors $2,500 per month,
plus an additional $500 per month for each committee on which they serve.
Outside directors were also granted 60,000 stock options, which vested
immediately and are exercisable through March 2, 2014 at $3.51 per share. Each
January 1, beginning January 1, 2005, we will grant our outside directors
options to purchase 60,000 shares of common stock, which shall vest immediately
and be exercisable for ten years at the market price as of date of grant. The
options granted in January 2005 vested immediately and are exercisable through
January 15, 2015 at $1.26 per share. The options granted in January 2006 vested
immediately and are exercisable through January 4, 2016 at $1.19 per share.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During the last fiscal year, the Compensation Committee of the board
was comprised of three directors, Messrs. Edwards, Rollins and Collins. None of
these directors is or was an officer of the company or any of its subsidiaries
at any time now or in the past.

REPORT OF THE COMPENSATION COMMITTEE OF THE COMPANY

         The Compensation Committee of the board of directors is responsible for
setting and administering the policies that govern the annual compensation and
the long-term compensation for our executive officers. The


                                       39

<PAGE>

Compensation Committee for the year ended November 30, 2005 was composed of
Messrs. Edwards, Rollins, and Collins none of whom is employed by the company or
any of its subsidiaries. The Compensation Committee makes all decisions
concerning the compensation of executive officers who receive annual
compensation in excess of $100,000, determines the total amount of bonuses, if
any, to be paid and grants all awards of stock options. The Compensation
Committee's compensation practices are designed to attract, motivate and retain
key personnel by recognizing individual contributions, as well as the overall
performance of the company. The current executive compensation consists of base
salary, potential cash bonus awards and long-term incentive opportunities in the
form of stock options. Although the Compensation Committee has not adopted a
formal compensation plan, executive compensation is reviewed by the Compensation
Committee and is set for individual executive officers based on subjective
evaluations of each individual's performance, the company's performance, and a
comparison to salary ranges for similar positions in other companies within the
oil and gas industry. The goal of the Compensation Committee is to ensure that
the company retains qualified executives and whose financial interests are
aligned with those of the shareholders.

         BASE SALARIES. The base salary for each executive officer is determined
based on the individual's performance, industry experience and the compensation
levels of industry competitors. The Compensation Committee reviews various
surveys and publicly filed documents to determine comparable salary levels
within the industry.

         POTENTIAL CASH BONUS AWARDS. The Compensation Committee does not
currently have a formal cash bonus plan. Cash bonuses may be awarded from time
to time for exceptional effort and performance. The Compensation Committee
considers the achievements of the company to determine the level of the cash
bonus, if any, to be awarded. The Compensation Committee focuses the earnings of
the company, the return on stockholders' equity, the growth in proved oil and
gas reserves and the successful completion of specific projects of the company
to determine the level of bonus awards, if any.

         STOCK OPTIONS. The Compensation Committee utilizes stock option awards
as a method of aligning the executives' interests with those of the stockholders
by giving the key employees a direct stake in the performance of the company.
The Compensation Committee uses the same criteria described above to determine
the level of stock option awards. During fiscal 2005, 2004, and 2003, the
Company granted common stock options to the Company's employees, consultants and
directors in the amounts of 975,000, 3,500,000 and 120,000, respectively In
April 2004, 60,000 of the 2004 and 60,000 of the 2003 options were relinquished.
There were no common stock options granted to the executive officers during the
year ended November 30, 2002.

         COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. During the year ended
November 30, 2005, Marc E. Bruner, President and Chief Executive Officer
received total compensation of $108,000 in salary and no cash bonus. The
Compensation Committee considered the factors described above to determine that
the compensation paid to Mr. Bruner during 2005 was appropriate. The foregoing
report is made by the Compensation Committee of the company's board of
directors.

PERFORMANCE CHART

         The following chart shows the changes in the value of $100, over the
period of November 2002, when the company began trading, until November 30,
2005, invested in: (1) Galaxy Energy Corporation; (2) the NASDAQ Market Index;
and (3) a peer group consisting of the 28 publicly-held companies in the S&P
Small Cap Energy Index. The year-end value of each investment is based on share
price appreciation and assumes that $100 was invested on November 30, 2002 and
that all dividends were reinvested. Calculations exclude trading commissions and
taxes. The comparison of past performance in the graph is required by the SEC
and is not intended to forecast or be indicative of possible future performance
of our common stock.


                                       40

<PAGE>


                                [GRAPHIC OMITTED]

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
TOTAL RETURN ANALYSIS
                                                 11/13/2002   11/30/2002    11/30/2003   11/30/2004   11/30/2005
----------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>           <C>          <C>          <C>
GALAXY ENERGY CORPORATION                          $ 100.00      $ 85.82      $ 170.90     $ 105.22      $ 92.00
----------------------------------------------------------------------------------------------------------------
S&P SC ENERGY INDEX                                $ 100.00     $ 115.39      $ 152.21     $ 270.66     $ 389.64
----------------------------------------------------------------------------------------------------------------
AMEX COMPOSITE                                     $ 100.00      $ 99.71      $ 134.73     $ 172.51     $ 248.34
----------------------------------------------------------------------------------------------------------------
Source:  CTA Public Relations www.ctapr.com (303) 665-4200.  Data from BRIDGE Information Systems, Inc.
</TABLE>

STOCK OPTION PLAN

         Our stockholders adopted a 2003 Stock Option Plan in May 2003, under
which options to purchase up to 3,500,000 shares of common stock may be granted.
In October 2004, our stockholders approved an amendment to the plan that
increased the aggregate number of shares of common stock authorized for issuance
under the plan to 6,500,000. The plan provides for the granting of incentive
stock options to our employees and non-statutory options to our employees,
advisors and consultants. The compensation committee of our board of directors
administers the plan. The maximum aggregate number of common shares underlying
all options to be granted to any one person may not exceed 60% of authorized
options.

         The committee determines the exercise price for each option at the time
the option is granted. The exercise price for shares under an incentive stock
option may not be less than 100% of the fair market value of the common stock on
the date such option is granted. The fair market value price is the closing
price per share on the date the option is granted. The committee also determines
when options become exercisable. The plan permits payment to be made by cash,
check, broker assisted same day sales, and by delivery of other shares of our
stock which optionees have owned for six (6) months or more as of the exercise
date. The term of an option may be no more than ten (10) years from the date of
grant. No option may be exercised after the expiration of its term.

         Unless otherwise expressly provided in any option agreement, the
unexercised portion of any option granted to an optionee shall automatically
terminate one year after the date on which the optionee's employment or service
is terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's death.
Options shall terminate immediately upon the termination of an optionee's



                                       41

<PAGE>

employment for cause or 30 days after the voluntary termination of employment or
service by the optionee. If an optionee's employment or consulting relationship
terminates as a result of his or her death, then all options he or she could
have exercised at the date of death, or would have been able to exercise within
the following year if the employment or consulting relationship had continued,
may be exercised within the one year period following the optionee's death by
his or her estate or by the person who acquired the exercise right by bequest or
inheritance.

         Options granted under the plan are not transferable other than by will
or the laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee, except that a non-statutory stock
option may be transferred to a family member or trust for the benefit of a
family member if the committee's prior written consent is obtained.

         We have the right to redeem any shares issued to any optionee upon
exercise of the option granted under the plan immediately upon the termination
of optionee's employment or service arising from disability, the death of the
optionee, the voluntary termination of employment or services of the optionee,
or the termination of employment or services of the optionee for cause. The
redemption price is the fair market value of the shares on the date of the event
of redemption.

         In the event that our stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the number and class of shares of stock subject to the plan,
the number and class of shares of stock subject to any option outstanding under
the plan, and the exercise price for shares subject to any such outstanding
option.

         In the event of a merger in which our shareholders immediately before
the merger own 50% or more of the issued and outstanding shares of stock of the
resulting entity after the merger, then existing options shall automatically
convert into options to receive stock of the resulting entity. Unless otherwise
expressly provided in any option, the committee in its sole discretion may
cancel, effective upon the date of the consummation of any change of control,
any option that remains unexercised on such date.

         The board may amend, alter, suspend, or terminate the plan, or any part
thereof, at any time and for any reason. However, we must obtain shareholder
approval for any amendment to the plan to the extent necessary and desirable to
comply with applicable laws. No such action by the board or shareholders may
alter or impair any option previously granted under the plan without the written
consent of the optionee. The plan shall remain in effect until terminated by
action of the board or operation of law.

         As of November 30, 2005, options to purchase 4,475,000 shares were
outstanding at an average exercise price of $2.15 per share and 2,025,000 shares
were available for future grant.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT.

         The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of our
common stock, as of March 6, 2006:

<TABLE>
<CAPTION>
                                                               AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1>                   BENEFICIAL OWNERSHIP          PERCENT OF CLASS (2)<F2>
----------------------------------------                       ---------------------         -------------------------
<S>                                                                <C>                               <C>

Marc A. Bruner                                                     11,701,799 (3)<F3>                17.0%
29 Blauenweg
Metzerlen, Switzerland 4116

Resource Venture Management                                         4,899,525                         7.1%
29 Blauenweg
Metzerlen, Switzerland 4116



                                       42

<PAGE>
<CAPTION>
                                                               AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1>                   BENEFICIAL OWNERSHIP          PERCENT OF CLASS (2)<F2>
----------------------------------------                       ---------------------         -------------------------
<S>                                                                <C>                               <C>

Bruner Group, LLP                                                   4,500,000                         6.6%
1775 Sherman Street #1375
Denver, Colorado 80203

Marc E. Bruner                                                      1,862,500 (4)<F4>                 2.7%

Carmen Lotito                                                       1,250.000 (5)<F5>                 1.8%

Cecil D. Gritz                                                        306,250 (6)<F6>                   *

Dr. James Edwards                                                     220,000 (7)<F7>                   *

Robert Thomas Fetters, Jr.                                            180,000 (8)<F8>                   *

Thomas W. Rollins                                                     180,000 (8)<F8>                   *

Nathan C. Collins                                                     180,000 (8)<F8>                   *

Christopher S. Hardesty                                                91,000 (9)<F9>

Richard E. Kurtenbach                                                 101,250 (10)<F10>                 *

All officers and directors as a group  (9 persons)                  4,457,250 (11)<F11>               6.3%

*less than one percent (1%)
-------------------
<FN>
(1)<F1>  To our knowledge, except as set forth in the footnotes to this table
         and subject to applicable community property laws, each person named in
         the table has sole voting and investment power with respect to the
         shares set forth opposite such person's name.

(2)<F2>  This table is based on 68,668,029 shares of Common Stock outstanding as
         of March 6, 2006. If a person listed on this table has the right to
         obtain additional shares of Common Stock within sixty (60) days from
         March 6, 2006, the additional shares are deemed to be outstanding for
         the purpose of computing the percentage of class owned by such person,
         but are not deemed to be outstanding for the purpose of computing the
         percentage of any other person.

(3)<F3>  Included in Mr. Bruner's share ownership are shares owned of record by
         Resource Venture Management and Bruner Group, LLP. Mr. Bruner is a
         control person of both these entities. Also included in Mr. Bruner's
         share ownership are 203,390 shares issuable upon exercise of warrants.

(4)<F4>  Includes 362,500 shares issuable upon exercise of stock options.

(5)<F5>  Includes 250,000 shares issuable upon exercise of stock options.

(6)<F6>  Includes 306,250 shares issuable upon exercise of stock options.

(7)<F7>  Includes 220,000 shares issuable upon exercise of stock options.

(8)<F8>  Includes 180,000 shares issuable upon exercise of stock options.

(9)<F9>  Includes 75,000 shares issuable upon exercise of stock options.

(10)<F10>Includes 187,500 shares issuable upon exercise of stock options.

(11)<F11>Includes 1,941,250 shares issuable upon exercise of stock options.
</FN>
</TABLE>

CHANGES IN CONTROL

         There are no agreements known to management that may result in a change
of control of our company.


                                       43
<PAGE>

EQUITY COMPENSATION PLANS

         At November 30, 2005, our equity compensation plans were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                NUMBER OF SECURITIES TO BE    WEIGHTED AVERAGE EXERCISE
                                  ISSUED UPON EXERCISE OF       PRICE OF OUTSTANDING         NUMBER OF SECURITIES
                                   OUTSTANDING OPTIONS,         OPTIONS, WARRANTS AND       REMAINING AVAILABLE FOR
        PLAN CATEGORY               WARRANTS AND RIGHTS                RIGHTS                   FUTURE ISSUANCE
-------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                            <C>                        <C>
  Equity compensation plans              4,475,000                      $2.15                      2,025,000
 approved by security holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not               -0-                          --                           -0-
 approved by security holders
-------------------------------------------------------------------------------------------------------------------
            Total                        4,475,000                      $2.15                      2,025,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.

         MARC A. BRUNER/RESOURCE VENTURE MANAGEMENT. Marc A. Bruner is one of
our principal shareholders, one of the founders of Dolphin, and the father of
Marc E. Bruner, who serves as our president and a director. We utilize the
services of Marc A. Bruner as a consultant and pay for his services through his
company, Resource Venture Management. During the fiscal year ended November 30,
2002, we agreed to pay Resource Venture Management a total of $692,500 for
monthly management fees of $162,000 through November 30, 2002, for finding oil
and gas projects ($300,000), and for reimbursement of costs and expenses
($230,500). We paid $259,296 in cash and issued 4,000,000 shares of our common
stock valued at $200,000, leaving $233,204 due at November 30, 2002. At February
28, 2003, Resource Venture Management agreed to convert its outstanding debt of
$233,204, into 233,204 shares of our common stock, valued at $1.00 per share.

         From June 2002 through September 2003, we paid Resource Venture
Management $30,000 per month to provide consulting services. Beginning October
1, 2003, we and Resource Venture Management agreed to a reduced fee of $10,000
per month. During the year ended November 30, 2003, consulting fees of $320,000
were incurred and $90,000 of such fees were paid through the issuance of 90,000
shares of common stock valued at $1.00 per share. We subsequently agreed to pay
Resource Venture Management additional expenses of $77,500 during the year ended
November 30, 2003, of which $42,500 was included in accounts payable at November
30, 2003. Resource Venture Management currently has only one employee, Marc A.
Bruner During each of the years ended November 30, 2005 and 2004, we paid
management fees of $120,000 to Resource Venture Management,. We also incurred
other costs and expenses of $30,000 and $79,929 with Resource Venture Management
for those same periods, of which $12,079 and $37,826 remained outstanding as of
the respective period ends.

         At November 30, 2004 we also owed Marc A. Bruner $19,500 for amounts
advanced to Pannonian International prior to its acquisition by us. Upon our
acquisition of Pannonian, we assumed this obligation. That amount was repaid
during the year ended November 30, 2005.

         On March 2, 2005, we entered into a Lease Acquisition and Development
Agreement (the "Agreement") with Apollo Energy LLC and ATEC Energy Ventures, LLC
(the "Sellers") to acquire an initial 58-1/3% working


                                       44
<PAGE>

interest in unevaluated oil and gas properties in the Piceance Basin in
Colorado, by depositing $7,000,000 in escrow. During the six months ended August
31, 2005 we paid from escrow a total $7,022,088 to acquire undeveloped leases in
the area. Because the Sellers were not willing to enter into the Agreement with
us without having some agreement regarding the remaining 41-2/3% working
interest in the subject properties, we entered into a Participation Agreement
with Marc A. Bruner to acquire all or a portion of the remaining 41-2/3% working
interest in the subject properties. Mr. Bruner subsequently assigned his rights
under the Agreement to an unrelated third party, Exxel Energy Corp. However,
because of his assignment to Exxel and because he subsequently became a
significant shareholder of Exxel, Exxel is now a related party to Galaxy.

         PANNONIAN INTERNATIONAL, LTD./THOMAS G. FAILS. On November 15, 2002, we
executed a letter of intent to acquire Pannonian International, Ltd., a Colorado
corporation, solely for shares of our common stock. Mr. Marc A. Bruner was also
a shareholder of this entity. Thomas G. Fails became one of our directors on
November 13, 2002 and resigned March 2, 2004. Mr. Fails is the president and a
director of Pannonian International, Ltd. At November 30, 2002, Pannonian
International owed us $25,000 for advances made in contemplation of the
acquisition transaction. We completed the acquisition of Pannonian International
on June 2, 2003, by issuing 1,951,241 shares.

         At November 30, 2005 and 2004, we, through Pannonian International,
owed Thomas G. Fails and his company $50,998 and $76,839, respectively, for
amounts paid by him for the benefit of Pannonian International and/or advanced
to Pannonian. Pannonian International shares office space with Mr. Fails and is
charged a proportionate share of the office rent and other expenses.

         HARBOR PETROLEUM, LLC AND FLORIDA ENERGY, INC. During the period from
May 2002 through November 30, 2003, Dolphin has advanced funds to Harbor
Petroleum, LLC for the purposes of acquiring oil, gas and mineral interest
leases in Rusk and Nacogdoches Counties, Texas. Harbor Petroleum is 50%-owned
and managed by Cecil Gritz, our chief operating officer and one of our
directors. During the years ended November 30, 2004 and 2003, we incurred total
costs with Harbor Petroleum of $266,403, and $344,294, respectively. Of those
amounts, $130,886 in 2004, and $254,084 in 2003, were for reimbursement of costs
incurred by Harbor to acquire oil and gas leases and other costs, and $135,517
in 2004, and $90,210 in 2003, represented consulting fees and expenses from
Harbor.

         As of January 31, 2006, we held leases covering approximately 1,955 net
acres. As of November 30, 2004, we had acquired leases covering approximately
2,780 net acres. On November 30, 2005, leases covering 613 net acres expired;
and an additional 213 net acres expired in December 2005 and January 2006. While
the leases are in the names of Harbor Petroleum or Florida Energy, Inc., such
leases have been assigned to Dolphin. Florida Energy is owned and controlled by
Stephen E. Bruner, the brother of Marc A. Bruner, our controlling shareholder,
and the uncle of Marc E. Bruner, our president.

         By an agreement dated March 6, 2003, Dolphin acknowledged that it was
responsible for payment of all of the acquisition costs and maintenance costs of
the leases. Dolphin owns all of the working interests acquired under the leases,
except for a 2% overriding royalty interest, shared equally by Harbor Petroleum
and Florida Energy. However, with respect to 400 contiguous acres designated by
Florida Energy, Florida Energy shall have a 3.125% overriding royalty interest
instead of a 1% overriding royalty interest. In addition, Dolphin paid Florida
Energy a bonus of $50,000 for identifying this lease play

         During the fiscal years ended November 30, 2005, 2004 and 2003, we paid
Harbor $27,500, $104,450 and $13,900 in compensation for Mr. Gritz's services as
our chief operating officer. The Company also paid living expenses of $19,800
and $24,348 directly to third parties for the benefit of the chief operating
officer during the years ended November 30, 2005 and 2004. At November 30, 2003,
$4,375 was owed to Harbor for Mr. Gritz's services and expense reimbursement.

         FUTURE TRANSACTIONS. All future affiliated transactions will be made or
entered into on terms that are no less favorable to us than those that can be
obtained from any unaffiliated third party. A majority of the independent,
disinterested members of our board of directors will approve future affiliated
transactions.

         We believe that of the transactions described above have been on terms
as favorable to us as could have been obtained from unaffiliated third parties
as a result of arm's length negotiations.



                                       45
<PAGE>


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

         On October 22, 2004, we dismissed Wheeler Wasoff, P.C. ("WW-PC") as our
independent public accountants. WW-PC had audited our financial statements for
the fiscal years ended November 30, 2002 and 2003. On October 23, 2004, we
engaged Hein & Associates LLP ("Hein") to serve as our independent public
accountants for the fiscal year ending November 30, 2004.

AUDIT FEES

         For the fiscal year ended November 30, 2005, Hein is expected to bill
approximately $100,000 for the audit of our annual financial statements, the
review of our Form 10-Q filings and for the review of our registration
statements.

          For the fiscal year ended November 30, 2004, Hein billed $82,455 for
the audit of our annual financial statements. For the fiscal year ended November
30, 2004, WW-PC, billed $15,408 for the review of our Form 10-QSB filings

AUDIT-RELATED FEES

         There were no fees billed for services reasonably related to the
performance of the audit or review of our financial statements outside of those
fees disclosed above under "Audit Fees" for fiscal years 2005 and 2004.

TAX FEES

         For the fiscal year ended November 30, 2005, Hein billed $4,419 for tax
compliance, tax advice, and tax planning services. For the fiscal year ended
November 30, 2005 and 2004 WW-PC billed $-0- and $-0- for tax compliance, tax
advice, and tax planning services.

ALL OTHER FEES

         For the year ended November 30, 2005, Hein billed $-0- in connection
with the review of our registration statements on Form SB-2, review of our
current reports on Form 8-K, and review of our private placement documentation.
For the fiscal years ended November 30, 2005 and 2004, WW-PC billed $3,000 and
$12,635, respectively, in connection with the review of our registration
statements on Form SB-2, review of our current reports on Form 8-K, and review
of our private placement documentation.

PRE-APPROVAL POLICIES AND PROCEDURES

         Prior to engaging our accountants to perform a particular service, our
audit committee obtains an estimate for the service to be performed. The audit
committee in accordance with procedures for the company approved all of the
services described above.

         There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the preceding paragraph.




                                       46

<PAGE>
                                     PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

FINANCIAL STATEMENTS:

The following documents are either filed herewith or incorporated herein by
reference:

The audited consolidated financial statements of Galaxy Energy Corporation and
subsidiaries as of November 30, 2005 and 2004 and for each of the three years in
the period ended November 30, 2005, and the Reports of Independent Registered
Public Accounting Firms thereon, are included herein as shown in the "Index to
the Consolidated Financial Statements" set forth in Item 8.

FINANCIAL STATEMENT SCHEDULES:

No Financial Statement Schedules are included herein because either the amounts
are not sufficient to require submission of the schedules or because the
information is included in the Financial Statements or notes thereto.

EXHIBITS:

--------------------------------------------------------------------------------
 REGULATION S-K
     NUMBER                              EXHIBIT
--------------------------------------------------------------------------------
       3.1         Articles of Incorporation (1)
--------------------------------------------------------------------------------
       3.2         Articles of Amendment to Articles of Incorporation (2)(7)
--------------------------------------------------------------------------------
       3.3         Bylaws (1)
--------------------------------------------------------------------------------
      10.1         2003 Stock Option Plan (2)
--------------------------------------------------------------------------------
      10.2         Purchase and Sale Agreement by and between Continental
                   Industries, LC and DAR, LLC and Galaxy Energy Corporation
                   dated January 14, 2004 (3)
--------------------------------------------------------------------------------
      10.3         Strategic Consulting Agreement Between Brian Hughes and
                   Dolphin Energy Corporation (4)
--------------------------------------------------------------------------------
      10.4         Securities Purchase Agreement dated August 19, 2004 between
                   Galaxy Energy Corporation and the Buyers named therein (5)
--------------------------------------------------------------------------------
      10.5         Form of Initial Note (5)
--------------------------------------------------------------------------------
      10.6         Form of Conditional Note (5)
--------------------------------------------------------------------------------
      10.7         Form of Common Stock Purchase Warrant (5)
--------------------------------------------------------------------------------
      10.8         Registration Rights Agreement dated August 19, 2004 between
                   Galaxy Energy Corporation and the Buyers named therein (5)
--------------------------------------------------------------------------------
      10.9         Security Agreement dated August 19, 2004 among Galaxy Energy
                   Corporation, Dolphin Energy Corporation, and Pannonian
                   International, Ltd. and Promethean Asset Management L.L.C. a
                   Delaware limited liability company, in its capacity as
                   collateral agent for the Lender (5)
--------------------------------------------------------------------------------
      10.10        Guaranty dated August 19, 2004 by Dolphin Energy Corporation
                   and Pannonian International, Ltd. in favor of Promethean
                   Asset Management L.L.C. in its own behalf and in its capacity
                   as agent for the benefit of the Buyers (5)
--------------------------------------------------------------------------------


                                       47
<PAGE>

--------------------------------------------------------------------------------
 REGULATION S-K
     NUMBER                              EXHIBIT
--------------------------------------------------------------------------------
      10.11        Form of Mortgage (5)
--------------------------------------------------------------------------------
      10.12        Purchase and Sale Agreement by and among Tower Colombia
                   Corporation, North Finn, LLC and American Oil & Gas, Inc., as
                   Sellers and Dolphin Energy Corporation, as Buyer dated July
                   15, 2004 (6)
--------------------------------------------------------------------------------
      10.13        Coal Bed Methane Participation Agreement dated November 2,
                   2004 between Dolphin Energy Corporation and Horizon Gas, Inc.
                   (8)
--------------------------------------------------------------------------------
      10.14        Lease Acquisition and Development Agreement between Dolphin
                   Energy Corporation (Buyer/Operator) and Apollo Energy LLC and
                   ATEC Energy Ventures, LLC (Seller/Non-Operator) dated
                   February 22, 2005 (9)
--------------------------------------------------------------------------------
      10.15        Participation Agreement between Dolphin Energy Corporation
                   and Marc A. Bruner dated February 23, 2005 (9)
--------------------------------------------------------------------------------
      10.16        Securities Purchase Agreement dated March 1, 2005 between
                   Galaxy Energy Corporation and the Buyers named therein (9)
--------------------------------------------------------------------------------
      10.17        Form of Note (9)
--------------------------------------------------------------------------------
      10.18        Form of Common Stock Purchase Warrant (9)
--------------------------------------------------------------------------------
      10.19        Registration Rights Agreement dated March 1, 2005 between
                   Galaxy Energy Corporation and the Buyers named therein (9)
--------------------------------------------------------------------------------
      10.20        Subordination Agreement (9)
--------------------------------------------------------------------------------
      10.21        Amended Participation Agreement between Marc A. Bruner and
                   Dolphin Energy Corporation dated March 16, 2005 (10)
--------------------------------------------------------------------------------
      10.22        Second Amendment to Participation Agreement dated May 24,
                   2005 (11)
--------------------------------------------------------------------------------
      10.23        Securities Purchase Agreement dated May 31, 2005 between
                   Galaxy Energy Corporation and the Buyers named therein (12)
--------------------------------------------------------------------------------
      10.24        Form of Note (12)
--------------------------------------------------------------------------------
      10.25        Form of Qualifying Issuance Warrants (12)
--------------------------------------------------------------------------------
      10.26        Form of Repurchase Warrants (12)
--------------------------------------------------------------------------------
      10.27        Form of Registration Rights Agreement (12)
--------------------------------------------------------------------------------
      10.28        Form of First Amendment to Security Agreement, Pledge
                   Agreement and Guaranty (12)
--------------------------------------------------------------------------------
      10.29        Form of Mortgage Amendment (12)
--------------------------------------------------------------------------------
      10.30        Form of Waiver and Amendment to 2004 Notes and Warrants (13)
--------------------------------------------------------------------------------
      10.31        Form of Waiver and Amendment to March 2005 Notes and Warrants
                   (12)
--------------------------------------------------------------------------------
      10.32        Form of Conveyances of Overriding Royalty Interests (12)
--------------------------------------------------------------------------------


                                       48
<PAGE>
--------------------------------------------------------------------------------
 REGULATION S-K
     NUMBER                              EXHIBIT
--------------------------------------------------------------------------------
      10.33        Form of March 2005 Subordination Agreement (12)
--------------------------------------------------------------------------------
      10.34        Second Amendment to Lease Acquisition and Development
                   Agreement (14)
--------------------------------------------------------------------------------
      10.35        Third Amendment to Participation Agreement dated October 4,
                   2005 (15)
--------------------------------------------------------------------------------
      10.36        Waiver and Amendment dated December 1, 2005 between Galaxy
                   Energy Corporation and the investors named therein (16)
--------------------------------------------------------------------------------
      16.1         Letter from Wheeler Wasoff, P.C. (7)
--------------------------------------------------------------------------------
       21          Subsidiaries of the registrant (2)
--------------------------------------------------------------------------------
      23.1         Consent of Independent Registered Public Accounting Firm,
                   Hein & Associates LLP dated March 14, 2006
--------------------------------------------------------------------------------
      23.2         Consent of Independent Registered Public Accounting Firm,
                   Wheeler Wasoff, P.C. dated March 14, 2006
--------------------------------------------------------------------------------
      31.1         Rule 13a-14(a) Certification of Chief Executive Officer
--------------------------------------------------------------------------------
      31.2         Rule 13a-14(a) Certification of Chief Financial Officer
--------------------------------------------------------------------------------
      32.1         Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
                   Chief Executive Officer
--------------------------------------------------------------------------------
      32.2         Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
                   Chief Financial Officer
--------------------------------------------------------------------------------

----------------------
(1)      Incorporated by reference to the exhibits to the registrant's
         registration statement on Form 10-SB, file number 0-32237.
(2)      Incorporated by reference to the exhibits to the registrant's quarterly
         report on Form 10-QSB for the quarter ended May 31, 2003, file number
         0-32237.
(3)      Incorporated by reference to the exhibits to the registrant's amended
         current report on Form 8-K dated January 14, 2004, filed January 20,
         2004, file number 0-32237.
(4)      Incorporated by reference to the exhibits to post-effective amendment
         no. 1 to the registrant's registration statement on Form SB-2, filed
         August 2, 2004, file number 333-110053
(5)      Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated August 19, 2004, filed August 20, 2004, file
         number 0-32237.
(6)      Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated September 30, 2004, filed October 5, 2004,
         file number 0-32237.
(7)      Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated October 22, 2004, filed October 26, 2004, file
         number 0-32237.
(8)      Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated November 2, 2004, filed November 4, 2004, file
         number 0-32237.
(9)      Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated March 1, 2005, filed March 4, 2005, file
         number 0-32237.
(10)     Incorporated by reference to the exhibits to amendment no. 1 to the
         registrant's current report on Form 8-K dated March 1, 2005, filed
         March 21, 2005.
(11)     Incorporated by reference to the exhibits to amendment no. 2 to the
         registrant's current report on Form 8-K dated March 1, 2005, filed May
         26, 2005.
(12)     Incorporated by reference to the exhibits to the registrant's current
         report on Form 8-K dated May 31, 2005, filed June 1, 2005, file number
         0-32237.


                                       49
<PAGE>


(13)     Incorporated by reference to the exhibits to amendment no. 1 to the
         registrant's current report on Form 8-K dated May 31, 2005, filed June
         2, 2005, file number 0-32237.
(14)     Incorporated by reference to the exhibits to amendment no. 3 to the
         registrant's current report on Form 8-K dated March 1, 2005, filed June
         2, 2005, file number 0-32237.
(15)     Incorporated by reference to the exhibits to amendment no. 4 to the
         registrant's current report on Form 8-K dated March 1, 2005, filed
         October 6, 2005, file number 0-32237.
(16)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated December 1, 2005, filed December 2, 2005, file
         number 0-32237.



























                                       50

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

                                      GALAXY ENERGY CORPORATION



Date:  March 15, 2006                 By: /s/ MARC E. BRUNER
                                         ---------------------------------------
                                             Marc E. Bruner, President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                TITLE                                          DATE
<S>                                      <C>                                            <C>


                                         President and Director (Principal Executive
/s/ MARC E. BRUNER                       Officer)                                       March 15, 2006
------------------------------------
Marc E. Bruner

                                         Chief Operating Officer and
/s/ CECIL D. GRITZ                       Director                                       March 15, 2006
------------------------------------
Cecil D. Gritz
                                         Senior Vice President, Chief Financial
                                         Officer, Treasurer and Secretary (Principal
/s/ CHRISTOPHER S. HARDESTY              Financial Officer)                             March 15, 2006
------------------------------------
Christopher S. Hardesty

                                         Vice President - Administration and
/s/ RICHARD E. KURTENBACH                Controller (Principal Accounting Officer)      March 15, 2006
------------------------------------
Richard E. Kurtenbach


/s/ NATHAN C. COLLINS                    Director                                       March 15, 2006
------------------------------------
Nathan C. Collins


                                         Director
------------------------------------

Dr. James M. Edwards


/s/ ROBERT THOMAS FETTERS, JR.           Director                                       March 15, 2006
------------------------------------
Robert Thomas Fetters, Jr.


/s/ THOMAS W. ROLLINS                    Director                                       March 15, 2006
------------------------------------
Thomas W. Rollins


/s/ CARMEN J. LOTITO                     Director                                       March 15, 2006
------------------------------------
Carmen J. Lotito

</TABLE>



                                       51
<PAGE>

                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS








   Reports of Independent Registered Public Accounting Firms

   Consolidated Balance Sheets
      November 30, 2005 and 2004

   Consolidated Statements of Operations
      Years ended November 30, 2005, 2004 and 2003, and
      Cumulative Amounts from Inception to November 30, 2005

   Consolidated Statement of Stockholders' Equity
      Period from Inception (June 18, 2002) to November 30,
      2002, and Years ended November 30, 2005, 2004 and 2003

   Consolidated Statements of Cash Flows
      Years ended November 30, 2005, 2004 and 2003, and
      Cumulative Amounts from Inception to November 30, 2005

   Notes to Consolidated Financial Statements

















                                      F-1

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Galaxy Energy Corporation
Denver, CO

We have audited the consolidated balance sheets of Galaxy Energy Corporation and
subsidiaries (the "Company"),  a development  stage company,  as of November 30,
2005  and  2004,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity  and cash  flows for years  then  ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our  audits  and the  report of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects, the financial position of the Company as of November 30, 2005
and 2004, and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.

The financial statements of the Company as of November 30, 2003 and for the year
then ended and the period from  inception  (June 18,  2002) to November 30, 2003
were audited by other auditors,  whose report dated February 24, 2004, expressed
an  unqualified  opinion on those  financial  statements.  We have  audited  the
combination in the accompanying statements of operations,  stockholders' equity,
and cash flows for the period from  inception  (June 18,  2002) to November  30,
2003 into the period from inception (June 18, 2002) to November 30, 2005. In our
opinion, such financial statements have been properly combined.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements,  the Company has suffered recurring losses from operations
and its total  liabilities  exceeds its total  assets.  This raises  substantial
doubt about the Company's  ability to continue as a going concern.  Management's
plans in regard to these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

/s/ Hein & Associates LLP

Denver, Colorado
March 14, 2006









                                      F-2
<PAGE>







             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To The Board of Directors and Stockholders
Galaxy Energy Corporation


We have audited the consolidated statements of operations,  stockholders' equity
and cash flows of Galaxy Energy Corporation (formerly Galaxy Investments,  Inc.)
(a  development  stage  company)  for the year  ended  November  30,  2003,  and
cumulative  amounts from inception  (June 18, 2002) to November 30, 2003.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Galaxy Energy  Corporation  for the year ended November 30, 2003, and cumulative
amounts from inception  (June 18, 2002) to November 30, 2003 in conformity  with
accounting principles generally accepted in the United States of America.


                              /s/ WHEELER WASOFF, P.C.


                              Wheeler Wasoff, P.C.




Denver, Colorado
February 24, 2004





                                      F-3

<PAGE>

                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                           CONSOLIDATED BALANCE SHEETS
                           NOVEMBER 30, 2005 AND 2004

<TABLE>
<CAPTION>
                                 ASSETS                                        2005                   2004
<S>                                                                     <C>                    <C>
CURRENT ASSETS
     Cash and cash equivalents                                          $     1,328,469        $    10,513,847
     Accounts receivable, joint interest                                        776,882                      -
     Accounts receivable, other                                                 510,196                 43,786
     Prepaid and other                                                          167,513                154,216
                                                                        ----------------       ----------------
         Total Current Assets                                                 2,783,060             10,711,849
                                                                        ----------------       ----------------

OIL AND GAS PROPERTIES, AT COST, FULL COST METHOD OF ACCOUNTING
     Evaluated  oil and gas properties                                        9,991,629                      -
     Unevaluated oil and gas properties                                      41,464,395             37,539,923
     Less accumulated, depletion, amortization and impairment                (7,097,299)               (48,394)
                                                                        ----------------       ----------------
                                                                             44,358,725             37,491,529
                                                                        ----------------       ----------------

FURNITURE AND EQUIPMENT, NET                                                    194,877                130,083
                                                                        ----------------       ----------------
OTHER ASSETS
     Deferred financing costs, net                                              721,024              1,310,650
     Restricted investments                                                     379,782                      -
     Other                                                                       21,910                  4,054
                                                                        ----------------       ----------------
                                                                              1,122,716              1,314,704
                                                                        ----------------       ----------------

TOTAL ASSETS                                                            $    48,459,378        $    49,648,165
                                                                        ================       ================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable and accrued expenses                              $     1,880,290        $     2,152,977
     Accounts payable - related party                                            99,078                113,758
     Current portion of notes payable - related party                                 -                 15,946
     Current portion of convertible notes payable, net                        5,041,524              6,249,557
     Notes payable                                                            2,049,728              2,100,000
     Interest payable                                                           402,884                705,719
                                                                        ----------------       ----------------
         Total Current Liabilities                                            9,473,504             11,337,957
                                                                        ----------------       ----------------

LONG TERM OBLIGATIONS
     Convertible notes payable, net                                          10,392,434             10,415,928
     Notes payable                                                                    -                500,000
     Interest payable                                                           744,833                      -
     Asset retirement obligation                                              1,242,967                713,073
                                                                        ----------------       ----------------
         Total long term obligations                                         12,380,234             11,629,001
                                                                        ----------------       ----------------

COMMITMENTS AND CONTINGENCIES (NOTES 2, 10 AND 11)

STOCKHOLDERS' EQUITY
     Preferred stock, $.001 par value
         Authorized - 25,000,000 shares
         Issued - none                                                                -                      -
     Common stock, $.001 par value
         Authorized - 400,000,000 shares and
         100,000,000 shares
         Issued and outstanding - 68,668,029 shares
         and 58,871,509 shares                                                   68,668                 58,818
     Capital in excess of par value                                          64,073,382             40,173,154
     Deficit accumulated during the development stage                       (37,536,410)           (13,550,765)
                                                                        ----------------       ----------------
         Total Stockholders' Equity                                          26,605,640             26,681,207
                                                                        ----------------       ----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $    48,459,378        $    49,648,165
                                                                        ================       ================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-4
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                               CUMULATIVE FROM
                                                                                                  INCEPTION
                                      YEAR ENDED          YEAR ENDED          YEAR ENDED       (JUNE 18, 2002)
                                     NOVEMBER 30,        NOVEMBER 30,        NOVEMBER 30,             TO
                                         2005                2004                2003            NOVEMBER 30,
                                                                                                     2005
<S>                                  <C>                 <C>                 <C>                <C>
REVENUE
     Natural gas sales               $   1,297,194       $     122,455       $            -     $    1,419,649
     Gain on disposition of
       oil and gas properties              197,676                   -                    -            197,676
     Operating revenue                      43,472                   -                    -             43,472
                                     --------------      --------------      ---------------    ---------------
                                         1,538,342             122,455                    -          1,660,797
                                     --------------      --------------      ---------------    ---------------

COSTS AND EXPENSES
     Lease operating expense               965,069              59,247                    -          1,024,315
     General and
       administrative                    5,316,588           3,517,218            2,095,495         12,069,368
     Impairment, oil and gas
       properties                        5,273,795                   -               65,769          5,339,564
     Depreciation and
       amortization                      1,887,074              76,390                  685          1,964,149
                                     --------------      --------------      ---------------    ---------------
                                        13,442,526           3,652,855            2,161,949         20,397,396
                                     --------------      --------------      ---------------    ---------------

OTHER INCOME (EXPENSE)
     Interest and other income             163,291              51,396                    -            214,687
     Interest expense and
       financing costs                 (12,244,752)         (6,352,100)            (417,646)       (19,014,498)
                                     --------------      --------------      ---------------    ---------------
                                       (12,081,461)         (6,300,704)            (417,646)       (18,799,811)
                                     --------------      --------------      ---------------    ---------------

NET (LOSS)                           $ (23,985,645)      $  (9,831,104)      $   (2,579,595)    $  (37,536,410)
                                     ==============      ==============      ===============    ===============

NET (LOSS) PER COMMON SHARE -
   BASIC AND DILUTED                 $       (0.38)      $       (0.18)      $        (0.08)    $        (0.81)
                                     ==============      ==============      ===============    ===============

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING BASIC
AND DILUTED                             64,698,889          53,488,853           32,391,981         46,878,530
                                     ==============      ==============      ===============    ==============
</TABLE>



              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-5
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
   PERIOD FROM INCEPTION (JUNE 18, 2002) TO NOVEMBER 30, 2002, AND YEARS ENDED
                        NOVEMBER 30, 2003, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                                                        (DEFICIT)
                                                                                                       ACCUMULATED
                                                                                    CAPITAL IN         DURING THE
                                                              COMMON STOCK          EXCESS OF          DEVELOPMENT
                                                         SHARES        AMOUNT       PAR VALUE             STAGE
<S>                                                  <C>             <C>           <C>                 <C>

BALANCE, JUNE 18, 2002 (INCEPTION)                             -     $       -     $          -        $            -

   Issuance of common stock for
     services at $.05 per share                        4,000,000         4,000          196,000                     -
   Sale of common stock for cash at:
     $.001 per share                                  11,500,000        11,500                -                     -
     $.02 per share                                      500,000           500            9,500                     -
     $.05 per share                                    3,000,000         3,000          147,000                     -
     $.34 per share                                    1,997,058         1,997          677,003                     -
   Recapitalization of shares
     issued prior to merger                            9,028,000         9,028          (69,359)                    -
   Net loss                                                    -             -                -            (1,140,066)
                                                     -----------     ---------     -------------       ---------------

BALANCE, NOVEMBER 30, 2002                            30,025,058        30,025          960,144            (1,140,066)

   Issuance of common stock for
      cash at $1.00 per share                          1,602,000         1,602        1,600,398                     -
   Costs of offering                                           -             -           (2,170)                    -
   Issuance of common stock for  services at:
     $ .91 per share                                      60,000            60           54,540                     -
     $1.00 per share                                      10,000            10            9,990                     -
   Issuance of common stock to related party
      upon conversion of outstanding debt
      at $1.00 per share                                 233,204           233          232,971                     -
   Issuance of common stock to related party
      for services at $1.00 per share                     90,000            90           89,910                     -
   Issuance of common stock to acquire
       Subsidiary                                      1,951,241         1,952         (204,184)                    -
   Discount on convertible debentures due to
      issuance of detachable warrants and
      beneficial conversion feature                            -             -        3,471,071                     -
   Warrants issued to placement agent in
      connection with convertible debenture
      offering                                                 -             -          107,578                     -
   Net loss                                                    -             -                -            (2,579,595)
                                                     -----------     ---------     -------------       ---------------

BALANCE, NOVEMBER 30, 2003                            33,971,503     $  33,972     $  6,320,248        $   (3,719,661)


   Issuance of common stock upon warrant
     conversion                                           45,763     $      46     $     26,954        $            -
   Issuance of common stock for cash at $1.40
     per share                                         2,503,571         2,504        3,502,496                     -
   Warrants issued to placement agents in
     connection with issuance of common stock                  -             -          157,599                     -



              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-6
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
   PERIOD FROM INCEPTION (JUNE 18, 2002) TO NOVEMBER 30, 2002, AND YEARS ENDED
                  NOVEMBER 30, 2003, 2004 AND 2005 (CONTINUED)

<CAPTION>
                                                                                                        (DEFICIT)
                                                                                                       ACCUMULATED
                                                                                    CAPITAL IN         DURING THE
                                                              COMMON STOCK          EXCESS OF          DEVELOPMENT
                                                         SHARES        AMOUNT       PAR VALUE             STAGE
<S>                                                  <C>             <C>           <C>                 <C>

   Costs of offering                                           -             -         (449,439)                    -
   Issuance of common stock for oil and gas
     properties at $1.40 per share                     2,000,000         2,000        2,798,000                     -
   Issuance of common stock for oil and gas
     properties at $1.80 per share                     3,000,000         3,000        5,397,000                     -
   Issuance of common stock for cash at $1.80
     per share                                         6,637,671         6,638       11,941,161                     -
   Warrants issued to placement agents in
     connection with issuance of common stock                  -             -          900,504                     -
   Costs of offering                                           -             -       (1,784,448)                    -
   Issuance of common stock for oil and gas
     properties at $2.63 per share                       360,000           360          946,440                     -
   Issuance of common stock upon conversion of
     convertible debenture and accrued interest        9,579,788         9,579        5,642,496                     -
   Issuance of common stock for cashless
     exercise of placement agent warrants                719,213           719             (719)                    -
   Discount on convertible notes payable due to
     issuance of detachable warrants                           -             -        4,336,316                     -
   Warrants issued to placement agents in
     connection with convertible notes payable                 -             -          404,021                     -
   Stock based compensation costs for stock
     options granted to non-employees                          -             -           34,525                     -
   Net loss                                                    -             -                -            (9,831,104)
                                                     -----------     ---------     -------------       ---------------
   BALANCE, NOVEMBER 30, 2004                         58,817,509        58,818       40,173,154           (13,550,765)


   Issuance of common stock upon warrant
     Conversion                                        1,332,676         1,332          990,970                     -
   Issuance of common stock for cashless
     exercise of warrants                                577,033           577             (577)                    -
   Issuance of common stock upon conversion of
     convertible notes and accrued interest            7,940,811         7,941        8,677,068                     -
   Discount on convertible notes payable due to
     issuance of detachable warrants                           -             -       12,902,328                     -
   Discount on issuance of common stock
     below market value                                                               1,074,428
   Warrants issued to placement agents in
     connection with convertible notes payable                 -             -           88,874                     -
   Stock based compensation costs for stock
     options granted to non-employees                          -             -          167,137                     -
   Net loss                                                    -             -                -           (23,985,645)
                                                     -----------     ---------     -------------       ---------------
   BALANCE, NOVEMBER 30, 2005                         68,668,029     $  68,668     $ 64,073,382        $  (37,536,410)
                                                     ===========     =========     =============       ===============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.
                                      F-7
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                     CUMULATIVE
                                                                                                   FROM INCEPTION
                                                                                                   (JUNE 18, 2002)
                                           YEAR ENDED         YEAR ENDED          YEAR ENDED              TO
                                          NOVEMBER 30,       NOVEMBER 30,        NOVEMBER 30,        NOVEMBER 30,
                                              2005               2004                2003                2005
<S>                                      <C>                <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                              $ (23,985,645)     $  (9,831,104)      $  (2,579,595)     $  (37,536,410)
   Adjustments to reconcile net loss
      to net cash used by operating
      activities
   Stock for services                                -                  -              64,600             264,600
   Stock for services - related party                -                  -              90,000              90,000
   Stock for Interest                        3,695,884             12,075                   -           3,707,959
   Oil and gas properties for services         732,687                  -                   -             732,687
   Stock for debt-related                            -                  -             233,204             233,204
   Amortization of discount on
     convertible debt                        3,811,971          1,642,675             292,682           5,747,328
   Amortization of deferred
      financing costs                        1,058,072            442,816              48,997           1,549,885
   Writeoff of discount and deferred
      financing costs upon reissue           2,162,597                  -                   -           2,162,597
   Writeoff of discount on convert-
      ible debentures and deferred
      financing costs upon conversion                           2,979,404                   -           2,979,404
   Compensation expense on vested
     stock options to non-employees            167,137             34,521                   -             201,658
   Depreciation, depletion, and
     amortization expense                    1,887,074             76,390                 685           1,959,148
   Impairment of oil and gas
     properties                              5,273,795                  -              65,769           5,339,564
   Gain on sale of oil & gas asset            (197,676)                 -                   -            (197,676)
   Other                                             -                  -              11,178              11,178
   Changes in assets and liabilities
   Accounts receivable, prepaids
     and other current assets               (1,256,589)          (142,523)            (54,573)         (1,448,684)
   Accounts payable                            454,463            (63,539)           (303,488)            371,779
   Accounts payable - related                  (14,679)           (46,274)            (73,172)             99,079
   Interest payable                            441,998            631,000              74,720           1,147,718
   Other                                       (17,861)             4,973                   -             (22,848)
                                         --------------     --------------      --------------     ---------------

   Net cash used by operating
     activities                             (5,786,772)        (4,259,586)         (2,128,993)        (12,607,830)
                                         --------------     --------------      --------------     ---------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Additions to oil and gas properties     (18,873,239)       (20,266,368)         (1,787,926)        (41,279,415)
   Purchase of furniture and equipment        (128,056)          (145,909)             (2,419)           (279,177)
   Purchase of surety bonds                   (379,783)                 -                   -            (379,783)
   Proceeds from sale of oil & gas
     asset                                     240,000                  -                   -             240,000
   Advance to affiliate                                                 -             (35,000)            (60,000)
   Cash received upon recapitaliza-
      tion and merger                                -                  -               1,260               4,234
                                         --------------     --------------      --------------     ---------------

Net cash used in investing activities      (19,141,078)       (20,412,277)         (1,824,085)        (41,754,141)
                                         --------------     --------------      --------------     ---------------

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-8
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
                                                                                                     CUMULATIVE
                                                                                                   FROM INCEPTION
                                                                                                   (JUNE 18, 2002)
                                           YEAR ENDED         YEAR ENDED          YEAR ENDED              TO
                                          NOVEMBER 30,       NOVEMBER 30,        NOVEMBER 30,        NOVEMBER 30,
                                              2005               2004                2003                2005
<S>                                      <C>                <C>                 <C>                <C>

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from sale of common                      -         15,452,800           1,602,000          17,905,300
     stock
   Proceeds from the sale of
     convertible notes payable              17,695,000         20,000,000                   -          37,695,000
   Proceeds from sale of convertible
     debentures                                      -                  -           5,040,000           5,040,000
   Payment of convertible notes
     payable                                (1,436,447)                 -                   -          (1,436,447)
   Debt and stock offering costs              (942,169         (2,419,978)           (490,722)         (3,852,869)
   Payment of note payable                    (550,272)                 -                   -            (550,272)
   Payment of note payable -
      related party                            (15,946)          (113,632)                  -            (129,578)
   Proceeds from exercise of
     warrants                                  992,306             27,000                   -           1,019,306
                                         --------------     --------------      --------------     ---------------

Net cash provided by financing              15,742,472         32,946,190           6,151,278          55,690,440
                                         --------------     --------------      --------------     ---------------
activities

NET INCREASE (DECREASE) IN CASH             (9,185,378)         8,274,327           2,198,200           1,328,469

CASH AND CASH EQUIVALENTS,
 BEGINNING OF PERIODS                       10,513,847          2,239,520              41,320                   -
                                         --------------     --------------      --------------     ---------------

CASH AND CASH EQUIVALENTS,
 END OF PERIODS                          $   1,328,469      $  10,513,847       $   2,239,520      $    1,328,469
                                         ==============     ==============      ==============     ===============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
   Cash paid for interest                $   1,065,442      $     205,084       $       3,617      $    1,713,193
                                         ==============     ==============      ==============     ===============

SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
   Debt incurred for oil and gas
     properties                          $           -      $   2,600,000       $     600,000      $    3,646,000
                                         ==============     ==============      ==============     ===============
   Stock issued for services             $           -      $           -       $     154,600      $      354,600
                                         ==============     ==============      ==============     ===============
   Stock issued for interest and debt    $   8,685,009      $      12,075       $     233,204      $    8,930,289
                                         ==============     ==============      ==============     ===============
   Stock issued for convertible debt     $           -      $   5,640,000       $           -      $    5,640,000
                                         ==============     ==============      ==============     ===============
   Warrants issued for offering and
     financing costs                     $      88,874      $   1,462,124       $     107,578      $    1,658,576
                                         ==============     ==============      ==============     ===============
   Discount on convertible notes
     and debentures issued               $  16,538,498      $   4,336,316       $   3,471,001      $   14,317,089
                                         ==============     ==============      ==============     ===============
   Conversion of interest to debt        $           -      $           -       $      11,178      $       11,178
                                         ==============     ==============      ==============     ===============
   Stock issued for subsidiary -
   related                               $           -      $           -       $    (202,232)     $     (202,232)
                                         ==============     ==============      ==============     ===============
   Stock issued for oil and gas
     properties                          $           -      $   9,146,800       $           -      $    9,146,800
                                         ==============     ==============      ==============     ===============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.
                                      F-9
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND BUSINESS COMBINATIONS

Galaxy Energy Corporation (the "Company") was incorporated under the laws of the
State of  Colorado on  December  17,  1999,  for the  purpose of  acquiring  and
developing  mineral  properties.  On November 13, 2002, the Company completed an
Agreement  and  Plan of  Reorganization  (the  "Agreement")  whereby  it  issued
20,997,058  shares of its common  stock to acquire  all of the shares of Dolphin
Energy Corporation  ("Dolphin"),  a private corporation incorporated on June 18,
2002,  under the laws of the State of Nevada.  The Company was a public  company
and had no  operations  prior  to  entering  into  the  Agreement.  Dolphin,  an
independent   energy  company  engaged  in  the  exploration,   development  and
acquisition  of crude oil and natural gas reserves in the western United States,
is considered a  development  stage company as defined by Statement of Financial
Accounting  Standards (SFAS) No. 7. Dolphin was an exploration stage oil and gas
company and had not earned any production revenue, nor found proved resources on
any of its properties.  Dolphin's principal  activities had been raising capital
through the sale of its securities and identifying and evaluating  potential oil
and gas properties.

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

The fair value of the assets  acquired and liabilities  assumed  pursuant to the
transaction with Dolphin are as follows:

               Net cash acquired                        $      2,974
               Liabilities assumed                           (63,305)
                                                        -------------

               Net liabilities assumed                  $    (60,331)
                                                        =============

On June 2, 2003,  the Company  completed a Share Exchange  Agreement  whereby it
issued  1,951,241  shares  of its  common  stock to  acquire  all the  shares of
Pannonian International,  Ltd. ("Pannonian"),  a related entity. Pannonian was a
private  corporation  incorporated  on January 18,  2000,  under the laws of the
State of Colorado.  The shares issued were valued at the predecessor cost of the
net assets of Pannonian  acquired.  As a result of the June 2, 2003 transaction,
Pannonian became a wholly owned subsidiary of the Company.

The predecessor cost of the assets acquired and liabilities  assumed pursuant to
the transaction with Pannonian were:

               Net cash acquired                        $        1,260
               Undeveloped oil and gas properties               75,680
               Liabilities assumed                            (279,173)
                                                        ---------------

               Net liabilities assumed                  $     (202,233)
                                                        ===============

                                      F-10
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying  consolidated  financial statements include the Company for the
period from  November  13,  2002 to  November  30,  2002,  and its wholly  owned
subsidiary, Dolphin, for the period from June 18, 2002 to November 30, 2002. For
the year ended November 30, 2003, the consolidated  financial statements include
the Company and Dolphin  for the entire year and  Pannonian  from the  effective
date of the acquisition, June 2, 2003, to November 30, 2003. For the years ended
November 30, 2004 and 2005, the consolidated  financial  statements  include the
Company,  Dolphin, and Pannonian. All significant intercompany transactions have
been eliminated upon consolidation.

LIQUIDITY

The accompanying consolidated financial statements have been prepared on a going
concern basis,  which contemplates the realization of assets and satisfaction of
liabilities  in the normal course of business.  For the year ended  November 30,
2005 the  Company  incurred  operating  losses of  $23,985,645  and used cash in
operating  activities of 5,786,772.  During the year ended November 30, 2005 the
Company's working capital deficit increased to $6,690,444  from $626,108,  while
its cash balance  decreased to $1,328,469  from the November 30, 2004 balance of
$10,513,847.  These matters raise  substantial doubt about the Company's ability
to continue as a going concern.  The Company's continued operation is contingent
upon  it  ability  to  raise  additional  capital,   and  ultimately   attaining
profitability  from  its oil and gas  operations.  The  Company  is  considering
several  options for  raising  additional  capital to fund its 2005  operational
budget such as debt and equity  offerings,  asset sales, the farm-out of some of
the Company's acreage and other similar type transactions. There is no assurance
that financing will be available to the Company on favorable  terms or at all or
that any asset sale transaction  will close. Any financing  obtained through the
sale of  Company  equity  will  likely  result in  substantial  dilution  to the
Company's  stockholders.  If the  Company is forced to sell an asset to meet its
current  liquidity  needs, it may not realize the full market value of the asset
and the sales  price  could be less  than the  Company's  carrying  value of the
asset.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reported  period.  Significant  estimates are required for proved oil
and gas reserves which, as described in Note 3 - Oil and Gas Properties,  have a
material  impact on the  carrying  value of oil and gas  property.  In addition,
significant  estimates are required in the valuation of undeveloped  oil and gas
properties.   Actual  results  could  differ  from  those   estimates  and  such
differences could be material.

The oil and gas industry is subject, by its nature, to environmental hazards and
clean-up  costs.  At this time,  management  knows of no substantial  costs from
environmental accidents or events for which the Company may be currently liable.
In addition,  the Company's oil and gas business  makes it vulnerable to changes
in wellhead  prices of crude oil and natural gas. Such prices have been volatile
in the past and can be expected to be  volatile  in the future.  By  definition,
proved reserves


                                      F-11
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES (CONTINUED)

are based on current oil and gas prices and estimated  reserves.  Price declines
reduce  the  estimated   quantity  of  proved   reserves  and  increase   annual
amortization expense (which is based on proved reserves).

CASH EQUIVALENTS

For purposes of reporting cash flows, the Company  considers as cash equivalents
all highly  liquid  investments  with a maturity of three  months or less at the
time of  purchase.  The  Company  may have cash in banks in excess of  federally
insured amounts.

ACCOUNTS RECEIVABLE AND CREDIT POLICIES

The  Company  has  certain  trade  receivables  consisting  of oil and gas sales
obligations  due under normal trade terms.  Management  regularly  reviews trade
receivables  and  reduces the  carrying  amount by a  valuation  allowance  that
reflects  management's  best estimate of the amount that may not be collectible.
At November 30, 2005, the Company has determined no allowance for  uncollectible
receivables is necessary.

OIL AND GAS PROPERTIES

The  Company  utilizes  the  full  cost  method  of  accounting  for oil and gas
activities. Under this method, subject to a limitation based on estimated value,
all costs  associated with property  acquisition,  exploration and  development,
including  costs of  unsuccessful  exploration,  are  capitalized  within a cost
center.  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.  Depreciation,  depletion  and  amortization  of oil  and gas
properties  is  computed  on the  units of  production  method  based on  proved
reserves.  Amortizable  costs include  estimates of future  development costs of
proved undeveloped reserves.

Capitalized  costs of oil and gas  properties  may not exceed an amount equal to
the present  value,  discounted at 10%, of the  estimated  future net cash flows
from proved oil and gas reserves plus the cost, or estimated  fair market value,
if lower, of unproved properties.  Should capitalized costs exceed this ceiling,
an impairment  is  recognized.  The present  value of estimated  future net cash
flows  is  computed  by  applying  year end  prices  of oil and  natural  gas to
estimated future  production of proved oil and gas reserves as of year end, less
estimated  future  expenditures  to be incurred in developing  and producing the
proved reserves and assuming continuation of existing economic conditions.

The Company  applies SFAS 144,  "Accounting  for the  Impairment and Disposal of
Long-Lived Assets," which requires that long-lived assets to be held and used be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that  the  carrying  amount  of an  asset  may not be  recoverable.  Oil and gas
properties  accounted for using the full cost method of  accounting,  the method
utilized by the Company,  are excluded from this requirement,  but will continue
to be subject to the ceiling test  limitations  as described  above.  During the
year ended  November 30, 2005,  the Company  recorded an  impairment  expense of
$5,273,795 representing the excess of capitalized costs over the ceiling amount.


                                      F-12
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Furniture and equipment is recorded at cost.  Depreciation  is to be provided by
use of the  straight-line  method over the estimated useful lives of the related
assets of three to five years.  Expenditures  for  replacements,  renewals,  and
betterments are  capitalized.  Maintenance and repairs are charged to operations
as incurred. Long-lived assets, other than oil and gas properties, are evaluated
for  impairment  to determine  if current  circumstances  and market  conditions
indicate  the  carrying  amount  may not be  recoverable.  The  Company  has not
recognized any impairment losses on non oil and gas long-lived assets.

Depreciation  expense of $63,263,  $20,353 and $685 was  recorded  for the years
ended November 30, 2005, 2004 and 2003,  respectively.  No depreciation  expense
was recorded for the period from inception (June 18, 2002) to November 30, 2002.

DEFERRED FINANCING COSTS

The Company  capitalizes costs associated with the issuance of debt instruments.
These costs are  amortized  utilizing  the interest  method over the term of the
debt  agreements.   Amortization   expense  of  deferred  financing  costs  were
$1,058,792, $442,816 and $48,997 for the years ended November 30, 2005, 2004 and
2003, respectively.

ASSET RETIREMENT OBLIGATION

In  2001,  the  FASB  issued  SFAS  143,   "Accounting   for  Asset   Retirement
Obligations."  SFAS  143  addresses  financial   accounting  and  reporting  for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement  requires  companies to record
the present  value of  obligations  associated  with the  retirement of tangible
long-lived  assets  in the  period in which it is  incurred.  The  liability  is
capitalized as part of the related  long-lived  asset's  carrying  amount.  Over
time,  accretion of the liability is recognized as an operating  expense and the
capitalized  cost is  depreciated  over the expected  useful life of the related
asset.  The Company's asset retirement  obligations  ("ARO") relate primarily to
the plugging, dismantlement, removal, site reclamation and similar activities of
its oil and gas properties.

As of November 30, 2005,  the Company had,  through  acquisition  and  drilling,
acquired  working  interests  in 235 natural  gas and water  disposal  wells.  A
limited  number of these wells have  recorded  gas  production  during,  and the
others are in various  stages of completion  and hook up at,  November 30, 2005.
The Company adopted the provisions of SFAS 143 to record the ARO associated with
all wells in which the  Company  owns an  interest  on the date such  obligation
arose. Depreciation of the related asset, and accretion of the ARO on wells from
which production has commenced, has been calculated using the Company's estimate
of the life of the wells,  based upon the lives of comparable wells in the area.
The amounts  recognized  upon  adoption are based upon  numerous  estimates  and
assumptions, including future retirement costs, future recoverable quantities of
oil and gas, future inflation rates and the  credit-adjusted  risk-free interest
rate.


                                      F-13
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The  information  below  reflects  the change in the ARO during the years  ended
November 30, 2005 and 2004:

                                               2005              2004
     Balance beginning of period           $713,073          $      -
         Liabilities incurred               481,193           710,431
         Liabilities settled                      -                 -
         Accretion                           48,701             2,642
                                             ------             -----
     Balance end of period               $1,242,967          $713,073
                                         ----------          --------

FAIR VALUE

The carrying amount reported in the balance sheet for cash, accounts receivable,
prepaids,  and accounts payable and accrued liabilities  approximates fair value
because of the immediate or short-term maturity of these financial instruments.

Based upon the borrowing rates currently available to the Company for loans with
similar  terms  and  average  maturities,  the  fair  value  of  long-term  debt
approximates its carrying value.

INCOME TAXES

The  Company  has adopted the  provisions  of SFAS 109,  "Accounting  for Income
Taxes." SFAS 109 requires recognition of deferred tax liabilities and assets for
the expected  future tax  consequences  of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and  assets  are  determined  based  on the  difference  between  the  financial
statement  and tax basis of assets and  liabilities  using  enacted tax rates in
effect for the year in which the differences are expected to reverse.

Temporary  differences between the time of reporting certain items for financial
and tax reporting  purposes  consist  primarily of exploration  and  development
costs on oil and gas properties,  depreciation  and depletion,  asset retirement
obligation, and amortization of discount on convertible debentures.

REVENUE RECOGNITION
We record  revenues  from the sales of natural gas and oil when  delivery to the
customer has occurred and title has transferred. This occurs when oil or gas has
been  delivered  to a pipeline or a tank  lifting has  occurred.  We may have an
interest with other  producers in certain  properties,  in which case we use the
sales  method to  account  for gas  imbalances.  Under this  method,  revenue is
recorded on the basis of natural gas actually sold by the Company.  In addition,
we record  revenue for our share of natural gas sold by other owners that cannot
be volumetrically balanced in the future due to insufficient remaining reserves.
We also reduce  revenue for other owners' gas sold by the Company that cannot be
volumetrically  balanced in the future due to insufficient  remaining  reserves.
Our remaining over-and  under-produced gas balancing positions are considered in
our proved  reserves.  Gas  imbalances as of November 30, 2004 and 2005 were not
significant.



                                      F-14
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SHARE BASED COMPENSATION

In  October  1995,  the  FASB  issued  SFAS  123,   Accounting  for  Stock-Based
Compensation, effective for fiscal years beginning after December 15, 1995. This
statement  defines a fair value method of accounting  for employee stock options
and  encourages  entities  to adopt  that  method  of  accounting  for its stock
compensation   plans.   SFAS  123  allows  an  entity  to  continue  to  measure
compensation  costs for these plans using the  intrinsic  value based  method of
accounting as prescribed in Accounting  Pronouncement  Bulletin  Opinion No. 25,
Accounting  for Stock Issued to  Employees  (APB 25). The Company has elected to
continue to account for its  employee  stock  compensation  plans as  prescribed
under APB 25. Had compensation cost for the Company's  stock-based  compensation
plans  been  determined  based on the fair  value at the grant  dates for awards
under  those  plans  consistent  with the  method  prescribed  in SFAS 123,  the
Company's net (loss) and (loss) per share for the years ended  November 30 would
have been adjusted to the pro-forma amounts indicated below.

<TABLE>
<CAPTION>
                                                             2005               2004              2003
<S>                                                    <C>                  <C>               <C>
        Net loss as reported                             $(23,985,645)       $(9,831,104)     $(2,579,595)
        Add stock based compensation included in
             reported loss                                    167,137             34,525                -
        Deduct stock based compensation expense
             determined under fair value method            (1,533,743)        (1,868,653)               -

                                                       ----------------------------------------------------
        Pro-forma net loss                               $(25,352,251)      $(11,665,232)     $(2,579,595)
                                                       ====================================================

        Net loss per share
                                        As reported            $(0.38)            $(0.18)          $(0.08)
                                                       ====================================================
                                          Pro-froma            $(0.39)            $(0.22)          $(0.08)
                                                       ====================================================
</TABLE>

The  calculated  value of stock  options  granted  under these plans,  following
calculation  methods prescribed by SFAS 123, uses the Black-Scholes stock option
pricing model with the following assumptions used:

<TABLE>
<CAPTION>
                                                             2005               2004              2003
<S>                                                        <C>              <C>                   <C>
        Expected option life-years                                 10               10                 10
        Risk-free interest rate                            4.25-4.50%       2 - 4.75 %            3.625 %
        Dividend yield                                              0                0                  0
        Volatility                                           54 - 78%        79 - 110%                39%
</TABLE>

There were no options  granted in the period from  inception  (June 18, 2002) to
November 30, 2002.

                                      F-15

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(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,  warrants,  convertible  debentures and notes payable are
excluded from the  computation  of diluted loss per share,  as the effect of the
assumed exercises would be antidilutive.

CONCENTRATIONS

Financial  instruments,  which potentially subject the Company to concentrations
of credit risk, consist of cash and cash equivalents. The Company maintains cash
and  cash  equivalent  accounts  at  two  financial  institutions.  The  Company
periodically  evaluates  the credit  worthiness of financial  institutions,  and
maintains cash accounts only in large high quality financial institutions.

The Company's  receivables are comprised of oil and gas revenue  receivables and
joint interest billings receivable. The amounts are due from a limited number of
entities.  Therefore,  the collectability is dependent upon the general economic
conditions of the few purchasers and joint interest owners.  The receivables are
not collateralized. However, to date the Company has had no bad debts.

SIGNIFICANT CUSTOMERS

Although the Company sells its  production to only three  purchasers,  there are
other  purchasers  in the  areas in which  the  Company  produces  natural  gas;
therefore,  the loss of its significant customers would not adversely affect the
Company's operations.  For the years ended November 30, 2005 and 2004, purchases
by the following companies exceeded 10% of the total oil and gas revenues of the
Company:

                                          2005            2004
       Western Gas Resources               13%              -
       Enserco Energy Inc.                 82%            100%

RECLASSIFICATION

Certain amounts in the 2004 and 2003 and inception to date financial  statements
have been reclassified to conform to the 2005 financial statement presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R),  "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective  for public  companies  for the first fiscal year  beginning
after June 15, 2005,  supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees,  and amends SFAS No. 95, Statement of Cash Flows.  SFAS No. 123(R)
requires all  share-based  payments to employees,  including  grants of employee
stock options, to be recognized in the income statement based on


                                      F-16
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

their fair values.  Pro-forma  disclosure is no longer an  alternative.  The new
standard will be effective for the Company, beginning December 1, 2005. SFAS No.
123R  permits  companies  to adopt its  requirements  using  either a  "modified
prospective" method, or a "modified  retrospective"  method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective  date,  based on the  requirements of SFAS No. 123R
for  all  share-based  payments  granted  after  that  date,  and  based  on the
requirements  of SFAS  No.  123 for all  unvested  awards  granted  prior to the
effective date of SFAS No. 123R. Under the "modified  retrospective" method, the
requirements are the same as under the "modified  prospective"  method, but also
permits entities to restate financial statements of previous periods, either for
all prior periods  presented or to the beginning of the fiscal year in which the
statement is adopted, based on previous pro forma disclosures made in accordance
with SFAS No. 123.  The Company is currently  evaluating  the impact of this new
standard and estimates  that the adoption SFAS No. 123(R) will have an effect on
the financial  statements similar to the pro-forma effects reported in the Stock
Based Compensation disclosure elsewhere in this report.

The Securities and Exchange  Commission  issued Staff Accounting  Bulletin (SAB)
No. 106 in September 2004 regarding the application of SFAS No. 143, "Accounting
for Asset  Retirement  Obligations,"  for oil and gas  producing  entities  that
follow the full cost accounting  method. SAB No. 106, states that after adoption
of SFAS No.  143,  the future  cash  outflows  associated  with  settling  asset
retirement  obligations  that have been  accrued on the balance  sheet should be
excluded from the present value of estimated  future net cash flows used for the
full cost ceiling test calculation.  The Company has calculated its ceiling test
computation  in this  manner  and,  therefore,  SAB No. 106 had no effect on the
Company's financial statements.

In March 2005,  the FASB issued  Interpretation  (FIN) No. 47,  "Accounting  for
Conditional Asset Retirement  Obligations -- An Interpretation of SFAS No. 143",
which clarifies the term "conditional asset retirement  obligation" used in SFAS
No. 143, "Accounting for Asset Retirement Obligations", and specifically when an
entity would have sufficient  information to reasonably  estimate the fair value
of an asset  retirement  obligation.  The adoption did not have an impact on the
company's financial statements.

In December  2004, the FASB issued SFAS 153,  Exchanges of  Nonmonetary  Assets,
which changes the guidance in APB 29,  Accounting for Nonmonetary  Transactions.
This  Statement  amends  APB  29 to  eliminate  the  exception  for  nonmonetary
exchanges of similar  productive assets and replaces it with a general exception
for exchanges of nonmonetary  assets that do not have  commercial  substance.  A
nonmonetary  exchange has  commercial  substance if the future cash flows of the
entity are expected to change  significantly  as a result of the exchange.  SFAS
153 is effective  during fiscal years  beginning  after June 15, 2005. We do not
believe the  adoption of SFAS 153 will have a material  impact on our  financial
statements.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections",  which  replaces  Accounting  Principles  Board  Opinion  No.  20,
Accounting  Changes and SFAS No. 3. SFAS 154 provides guidance on the accounting
for and reporting of accounting  changes and error  corrections.  It establishes
retrospective  application,  or the latest  practicable  date,  as the  required
method for  reporting a change in  accounting  principle  and the reporting of a
correction  of an  error.  SFAS 154 is  effective  for  accounting  changes  and
corrections of errors made in


                                      F-17
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

fiscal years beginning after December 15, 2005. The Company does not expect that
the  adoption  of SFAS No.  154 will have an impact on the  Company's  financial
statements.

In June 2005, the Financial  Accounting  Standards  Board ("FASB")  ratified the
consensus  reached by the Emerging  Issues Task Force ("EITF") on EITF Issue No.
05-02 THE MEANING OF  "CONVENTIONAL  CONVERTIBLE  DEBT  INSTRUMENT" IN ISSUE NO.
00-19  ("EITF  05-02").  The  abstract  clarified  the meaning of  "conventional
convertible  debt  instruments"  and confirmed that  instruments  which meet its
definition should continue to receive an exception to certain provisions of EITF
Issue No. 00-19 ACCOUNTING FOR DERIVATIVE FINANCIAL  INSTRUMENTS INDEXED TO, AND
POTENTIALLY  SETTLED IN, A COMPANY'S  OWN STOCK  ("EITF  00-19").  The  guidance
should be applied to new instruments  entered into and  instruments  modified in
periods  beginning after June 29, 2005. The adoption of EITF 05-02 has not had a
material impact on our consolidated financial statements.

In September  2005, the FASB ratified the consensus  reached by the EITF on EITF
Issue No. 05-08,  INCOME TAX  CONSEQUENCES  OF ISSUING  CONVERTIBLE  DEBT WITH A
BENEFICIAL  CONVERSION FEATURE ("EITF 05-08"). The EITF consensus noted that for
the  purpose of applying  SFAS No. 109,  ACCOUNTING  FOR INCOME  TAXES,  (1) the
issuance of convertible debt with a beneficial  conversion  feature results in a
basis difference, (2) the basis difference is a temporary difference and (3) the
recognition  of deferred taxes for the temporary  difference of the  convertible
debt with a beneficial conversion feature should be recorded as an adjustment to
additional paid-in capital.  The EITF also reached a consensus that the guidance
in EITF 05-08 should be applied to financial  statements  beginning in the first
interim or annual  reporting  period  beginning  after  December 15,  2005.  The
guidance  should be applied by  retrospective  application  pursuant to SFAS No.
154,  ACCOUNTING  CHANGES  AND  ERROR  CORRECTIONS,  to all  instruments  with a
beneficial  conversion  feature  accounted  for  under  EITF  Issue  No.  00-27,
APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS.  We will adopt
the  guidance  in EITF  05-08 for our  quarter  ending  April 30,  2006.  We are
currently  assessing  the impact  that  adoption  of EITF 05-08 will have on our
consolidated financial statements.

In September  2005,  the FASB staff  reported  that the EITF  postponed  further
deliberations on Issue No. 05-04 THE EFFECT OF A LIQUIDATED  DAMAGES CLAUSE ON A
FREESTANDING  FINANCIAL  INSTRUMENT  SUBJECT TO ISSUE NO. 00-19  ("EITF  05-04")
pending  the FASB  reaching a  conclusion  as to whether a  registration  rights
agreement meets the definition of a derivative instrument.  The legal agreements
related to our 8% Convertible  Debentures  include a  freestanding  registration
rights  agreement.  Once the FASB ratifies the  then-completed  consensus of the
EITF on EITF  05-04,  we will  assess the impact on our  consolidated  financial
statements  of  adopting  the  standard  and,  if an impact  exists,  follow the
transition guidance for implementation.


NOTE 3 - PROPERTY AND EQUIPMENT

OIL AND GAS PROPERTIES

The Company  recognizes  three cost centers for its oil and gas activities,  the
United States Cost Center, the Germany Cost Center and the Romania Cost Center.


                                      F-18
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

United States Cost Center

In 2003 the Company began the  acquisition of unevaluated oil and gas properties
primarily in the Powder River Basin region of the Rocky  Mountain  area. In 2004
the Company acquired additional  unevaluated  properties,  began its exploration
program by drilling 135 wells and commenced limited production of natural gas in
the Powder River Basin. During 2005 exploratory drilling activities continued in
the Powder River Basin,  development of certain areas  commenced and natural gas
production reached a level that allowed the Company to recognize proved reserves
on  those  producing  properties.  In  addition  the  Company  entered  into  an
exploration  project in the Piceance Basin of northwestern  Colorado,  acquiring
prospective  acreage,  and evaluating  and planning for an exploratory  drilling
program which commenced subsequent to November 30, 2005.

Germany Cost Center

In March 2005 the  Company,  through  its wholly  owned  subsidiary,  Pannonian,
entered  into a farmout  agreement  with an  unrelated  party (the  "Farmee") to
conduct  exploration  activities  on its Neues  Bergland  Exploration  Permit in
Germany.  Prior to the  farmout  Pannonian  owned a 50%  interest in the permit.
Under the terms of the agreement the Farmee made an initial  payment of $750,000
to Pannonian  and its partners to acquire a 40% interest in the permit,  thereby
reducing Pannonian's ownership interest to 30%. The Company recognized a gain of
$197,676 on the  transaction,  representing  the excess of the proceeds over the
original  cost of the  property.  Subsequent  to November 30, 2005,  the Company
commenced  drilling the initial test well on the permit.  The well was completed
in January,  2006 and based upon the initial review of the drilling results, the
joint  venture  group has decided to  undertake a detailed  analysis to identify
priority  zones for further  development.  As of November  30, 2005 there are no
capitalized oil and gas costs related to the Germany cost center.

Romania Cost Center

In May 2005 the Company, through its wholly owned subsidiary, Pannonian, entered
into a  farmout  agreement  with an  affiliated  company  whose  President  is a
significant shareholder of the Company (the "Farmee") to evaluate the concession
held by Pannonian in the Jiu Valley Coal Basin in Romania.  This  concession had
been assigned to Pannonian by the Romanian  government,  in October 2002,  under
the terms of a Concession  Agreement (the  "Concession").  The farmout agreement
call for the assignment of the Concession to the Farmee; the assignment of a 75%
working  interest in the Concession  area; and for the drilling of one test well
and an additional,  optional,  test well, the cost of which will be paid 100% by
the Farmee. In addition the Farmee will pay Pannonian  $100,000 upon approval by
the Romanian  government of the assignment of the  Concession,  and will pay the
first  $250,000 of  Pannonian's  proportionate  share of drilling and  operating
costs  subsequent to the drilling of the first two wells. The first test well on
the property has been completed.  Based results of the drilling operations,  the
partners in the project  have  determined  to  commence  completion  and testing
operations

Acquisition, Exploration and Development Costs Incurred

The  following  table  presents  information  regarding  the Company's net costs
incurred in the  purchase  of  unevaluated  properties  and in  exploration  and
developments activities:


                                      F-19
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

<TABLE>
<CAPTION>
                                                                  For the Years Ended November 30,
                                                                2005              2004               2003
<S>                                                         <C>               <C>                 <C>
Acquisition of unevaluated properties                        $8,051,122       $19,365,549         $2,239,175
Exploration Costs                                                                                          -
   United States                                              9,613,262        14,645,548
   Europe                                                             -            18,675             67,234
Development Costs                                               499,945                 -                  -
                                                                -------                 -                  -
                 Oil and gas expenditures                    18,164,329       $34,029,772         $2,306,409
Asset retirement obligations                                    481,193           710,431                  -
                                                                -------           -------                  -
                                                            $18,645,522       $34,740,203         $2,306,409
                                                            ===========       ===========         ==========
</TABLE>

Evaluated Properties

During  2005 the  Company  recognized  its first  proved  reserves.  The Company
reclassified  the accumulated  capitalized  costs associated with the properties
with reserves to evaluated  properties and added the costs to the full cost pool
amortization base. For the year ended November 30, 2005, depreciation, depletion
and  amortization  expense  recorded for the United States cost center was $8.29
per MCF. The Company recognized  impairment expense of $5,273,795,  representing
the excess of  capitalized  costs over the ceiling as  calculated  in accordance
with the full cost rules. The table below  represents  movements of costs within
the  United  States   evaluated   properties  full  cost  pool  and  accumulated
depreciation,  depletion and  amortization  and  impairment  for the years ended
November 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                    2005            2004
<S>                                                           <C>               <C>
     Full Cost Pool - Evaluated Properties
        Balance beginning of period                           $           -     $        -
        Properties with proved reserves                           4,640,738              -
        Reclassification of impaired, unevaluated
        properties                                                5,055,320              -
        Asset Retirement obligation asset                           295,571              -
                                                              -------------     ----------
        Balance end of period                                 $   9,991,629              -
                                                              =============     ==========

                                                                    2005            2004
     Depreciation, Depletion, Amortization and Impairment
        Balance beginning of period                           $      48,394     $        -
        Depreciation, depletion and amortization                  1,775,110         48,394
        Impairment, oil and gas properties                        5,273,795              -
                                                              -------------     ----------
        Balance end of period                                 $   7,097,299     $   48,394
                                                              =============     ==========
</TABLE>

Unevaluated Properties

Costs directly  associated with the acquisition,  exploration and development of
unevaluated  properties are excluded from the full cost amortization pool, until
they are  evaluated.  During the year ended  November 30,  2005,  as part of its
assessment of unevaluated  properties  for  impairment,  the Company  identified
three unevaluated  properties as either partially or wholly impaired.  The costs
related  to  those  impaired  properties,  $5,055,320,  were  reclassified  from
unevaluated to evaluated properties and added to the full cost pool amortization
base.


                                      F-20
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

In May 2005 Investors in a Senior Secured  Convertible Notes offering received a
perpetual  overriding  royalty  interest  ("ORRI") in Galaxy's  domestic acreage
averaging from 1% to 3%, depending upon the nature and location of the property.
The fair value of the ORRI,  calculated  to be  $3,936,170,  was  recorded  as a
reduction of the Company's  unevaluated oil and gas properties and as a discount
to the notes.  Also in the year ended November 30, 2005, the Company assigned an
ORRI in certain  producing  and  non-producing  properties to a related party in
accordance with the terms of a Strategic  Consulting Agreement (see Note 9). The
computed  fair value of the ORRI at the time of the  assignment,  $732,687,  was
recorded as a reduction of the Company's undeveloped oil and gas properties, and
as consulting expense.

At November 30, the  Company's  unevaluated  properties in the United States and
European costs centers properties consist of acquisition costs,  exploration and
development costs in the following areas:
                                                  2005                 2004
       United States Cost Center
         Wyoming                            $  31,071,223         $ 32,280,054
         Montana                                1,974,470            3,724,593
         Texas                                    473,265              739,336
         Colorado                               7,022,099                    -
         ARO asset                                896,052              710,031
                                                  -------              -------
       Total                                   41,437,109           37,454,014
                                               ----------           ----------
       European Cost Center
         Romania                                   27,286               43,585
         Germany                                        -               42,324
                                                   ------               ------
       Total                                       27,286               85,909
                                                   ------               ------
       Total Unevaluated Properties         $  41,464,395         $ 37,539,923
                                            =============         ============

The following  table shows by date incurred the unevaluated oil and gas property
costs (net of transfers to the full cost pool and sales proceeds)

       Net Costs Incurred During Periods Ended
           November 30, 2005                        $ 18,438,578
           November 30, 2004                          20,392,168
           November 30, 2003                           1,925,923
           November 30, 2002                             607,726
                                                         -------
                                                      41,364,395
                                                      ==========

FURNITURE AND EQUIPMENT

At November 30, 2005 and 2004, furniture and equipment is as follows:

                                                2005               2004
       Furniture and equipment               $ 279,178          $ 151,122
       Less accumulated depreciation           (84,301)           (21,039)
                                               --------           --------
                                             $ 194,877          $ 130,083
                                              =========          =========


                                      F-21
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - NOTES PAYABLE

RELATED PARTIES

At  November  30,  2004,  notes  payable to related  parties  consists of a note
payable to the  President of  Pannonian in the amount of $15,946.  The note bore
interest at the rate of 6.5% and was paid in full on the due date,  February 15,
2005.

OTHER

In  connection  with the  acquisition  of oil and gas  properties  from DAR LLC,
("DAR") the Company issued a promissory note to DAR in the amount of $2,600,000.
The  note  called  for  interest  at a rate of 6% per  annum  and for  principal
payments of $1,000,000 on January 14, 2005 and $1,600,000 on June 24, 2005.

During the year ended  November 30, 2005,  the Company and DAR amended the terms
of the promissory note to revise the payment  schedule.  Under the revised terms
the Company made payments to DAR of $800,000 consisting of $550,272 of principal
and $249,728 of interest and fees. As of November 30, the repayment  schedule is
as follows:

      On or before January 15, 2006         $200,000
      On or before April 1, 2006            All remaining principal and interest

Subsequent  to  November  30,  2005 the  Company  and DAR  further  amended  the
agreement to include the following repayment schedule:

      On or before March 15, 2006           $200,000
      On or before April 1, 2006            All remaining principal and interest

At November 30, 2005, the balance of notes payable is $2,049,728.


NOTE 5 - CONVERTIBLE NOTES PAYABLE

2004 NOTES

In August and October  2004,  the Company  completed  two  tranches of a private
offering of Senior  Secured  Convertible  Notes and Warrants (the "2004 Notes").
Gross proceeds from the initial tranche of the offering were $15,000,000.  Gross
proceeds from the second tranche of the offering were $5,000,000.  The Notes pay
interest at the prime rate plus 7.25% per annum,  mature two years from the date
of issue, are  collateralized by substantially all the Company's assets, and are
convertible  into  10,695,187  shares of the  Company's  common stock based on a
conversion  price of $1.87 per  share.  Note  purchasers  received  warrants  to
purchase  5,194,806 shares of the Company's common stock at an exercise price of
$1.54 per share, for a period of three years (the "Warrants").

Pursuant  to EITF  98-5  and EITF  00-27,  the fair  value of the  Warrants  was
estimated as of the issue date under the  Black-Scholes  pricing model, with the
following assumptions:  common stock based on a market price of $1.21 per share,
zero dividends, expected volatility of 109.21%,


                                      F-22

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

risk free  interest  rate of 2.75% and expected  life of three  years.  The fair
value of the  Warrants  of  $3,946,833,  resulted  in a discount to the notes of
$4,336,316.  Amortization  of the  discount  of  $2,562,778  and  $1,001,801  is
included in interest  expense  for the years ended  November  30, 2005 and 2004,
respectively.

Deferred  financing costs  associated with the notes in the amount of $1,648,218
have been  capitalized and are being  amortized over the life of the notes.  For
the years ended November 30, 2005 and 2004  amortization  of financing  costs of
$863,558 and $337,569 was recorded as interest.

As  discussed  in Note 11,  subsequent  to November 30, 2005 the Company and the
holders of the 2004 Notes  entered  into an  agreement,  that among other things
lowered  the  conversion  price of the Notes,  granted  additional  warrants  to
purchase shares of common stock and lowered the  exercise  price of existing and
newly issued warrants.  In accordance with SFAS 5, Accounting for Contingencies,
the  Company  has  recorded  the  effect  of  this  agreement  in the  financial
statements  as of November 30, 2005.  In  accordance  with EITF 96-19,  Debtor's
Accounting  for a  Modification  or  Exchange of Debt  Instruments,  the Company
recognized this  transaction as an  extinguishment  of the existing debt and the
issuance of new debt.  The Company wrote off  unamortized  discount and deferred
financing associated with the original debt in the amount of $773,564, including
the amount in interest and financing expense. In addition,  in  accordance  with
EITF 98-5 and EITF 00-27 the Company  recognized  the fair value of the warrants
and the beneficial  conversion  feature  associated  with the Notes  aggregating
$7,375,920 as a discount to the Notes and as additional paid in capital.

MARCH 2005 NOTES

In March 2005,  the  Company  completed  a private  offering  of Senior  Secured
Convertible  Notes  and  Warrants  to a group  of  accredited  investors.  Gross
proceeds from the offering were $7,695,000.  The notes pay interest at the prime
rate plus 6.75% per annum,  mature April 30, 2007, are  subordinated to Galaxy's
secured debt and existing senior debt, and are convertible into 4,093,085 shares
of  common  stock  based on a  conversion  price of $1.88  per  share  beginning
September  1, 2005.  Note  purchasers  received  warrants to purchase  1,637,235
shares of the  Company's  common stock at an exercise  price of $1.88 per share,
for a period of three  years.  Principal  and  interest on the notes are payable
upon maturity.

In  accordance  with  Emerging  Issues Task Force Issue No. 98-5 ("EITF  98-5"),
"Accounting for Convertible  Securities with Beneficial  Conversion  Features or
Contingently  Adjustable  Conversion  Ratios",  and EITF 00-27,  "Application of
Issue No. 98-5 to Certain Convertible  Instruments",  the Company recognized the
advantageous  value  of  conversion  rights  attached  to  convertible  debt and
warrants as a discount to the related  debt and an addition to capital in excess
of par value.  The fair  value of the  warrants  estimated  as of the issue date
under the Black-Scholes  pricing model, of $1,545,147  resulted in a discount to
the Notes of  $1,286,766,  and a beneficial  conversion  feature to the notes of
$1,286,766.  The  resulting  discount  attributable  to  the  warrants  and  the
beneficial  conversion  feature  of the notes  aggregating  $2,573,532  has been
recorded as a discount to the notes and is being  amortized over the term of the
notes.  Amortization of the discount of $854,713 is included in interest expense
for the year ended November 30, 2005.  Deferred  financing costs associated with
the  notes in the  amount  of  $391,155  have  been  capitalized  and are  being
amortized  over the life of the notes.  For the year



                                      F-23

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

ended November 30, 2005 amortization of deferred financing costs of $130,385, is
included in interest expense.

In  connection  with the  agreement  entered  into with the  Holders of the 2004
notes,  as  discussed  in Note 11,  the terms of the March  2005 Notes were also
amended to lower the conversion  price,  grant  additional  warrants to purchase
share of common stock and lower the exercise  price of existing and newly issued
warrants.  In accordance with SFAS 5, Accounting for Contingencies,  the Company
has recorded  the effect of this  agreement in the  financial  statements  as of
November 30, 2005.  In accordance  with EITF 96-19,  Debtor's  Accounting  for a
Modification  or  Exchange of Debt  Instruments,  the  Company  recognized  this
transaction  as an  extinguishment  of the existing debt and the issuance of new
debt.  The  Company  wrote  off  unamortized  discount  and  deferred  financing
associated  with the original  debt in the amount of  $1,389,033  including  the
amount in interest and financing cost. In addition, in accordance with EITF 98-5
and EITF 00-27 the Company  recognized  the fair value of the  warrants  and the
beneficial  conversion feature associated with the Notes aggregating  $2,802,876
as a discount to the Notes and as additional paid in capital.

MAY 2005 NOTES

In May 2005,  the  Company  completed  a  private  offering  of  Senior  Secured
Convertible  Notes to a group of accredited  investors.  Gross proceeds from the
offering were  $10,000,000.  The notes are secured by a security interest in all
of the assets of Galaxy and the domestic  properties of its  subsidiaries.  Such
security  interest ranks equally with that of the 2004 Notes,  and senior to the
March 2005 Notes.  The notes pay interest at the prime rate plus 7.25%  adjusted
and  payable  quarterly.  They mature May 31,  2010,  and are  convertible  into
5,319,149  shares of common stock at any time,  based on a  conversion  price of
$1.88 per share.  In addition,  the  Investors  received a perpetual  overriding
royalty interest  ("ORRI") in Galaxy's domestic acreage averaging from 1% to 3%,
depending upon the nature and location of the property, a right of first refusal
with respect to future debt and/or equity financings, and a right to participate
in any farm-out financing transactions that do not have operating obligations by
the financing party as a material component. The fair value of the ORRI has been
calculated to be the  difference  between the market price per share at the date
of issue ($1.14) and the conversion  price  ($1.88),  times the number of shares
into which the notes are convertible  (5,319,149) or $3,936,170.  This value has
been recorded as a charge to the Company's  undeveloped  oil and gas  properties
full cost pool and as a discount to the notes.  The  discount  will be amortized
over the five-year term of the notes. Amortization of the discount of 394,479 is
included in interest expense for the year ended November 30, 2005.

Deferred  financing  costs  associated  with the notes in the amount of $639,888
have been  capitalized and are being  amortized over the life of the notes.  For
the year ended  November,  2005  amortization  of  deferred  financing  costs of
$64,129 is included in interest expense.



                                      F-24
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

At November 30, 2005 and 2004 convertible notes consist of the following:

                                            November 30,        November 30,
                                                2005                2004
     2004 Notes                          $    12,500,000     $    20,000,000
        Less unamortized discount             (7,675,920)         (3,334,515)
        March 2005 Notes                       7,695,000
        Less unamortized discount             (3,543,431)
        May 2005 Notes                        10,000,000
        Less unamortized discount             (3,541,691)
                                         ----------------    ----------------
                                              15,433,958          16,665,485
        Less current portion, net             (5,041,524)         (6,249,557)
                                         ----------------    ----------------
        Long term portion, net           $    10,392,434     $    10,415,928
                                         ================    ================

Total  principal  payments  due in the next twelve  months for the notes  listed
above are $10,000,000. If the Company's common stock meets certain conditions of
trading volume and price,  all principal  payments may be paid by issuing shares
of common stock.

At November 30, 2005 the Company's debt maturity schedule is as follows:

                   2006                        $12,049,728
                   2007                         10,195,000
                   2008                                  -
                   2009                                  -
                   2010                         10,000,000
                                                ----------
                                               $32,244,728

NOTE 6 - STOCKHOLDERS' EQUITY

COMMON STOCK

During the year ended November 30, 2005, the Company issued shares of its common
stock as follows:


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

   o     305,656  shares  issued in  conjunction  with the cashless  exercise of
         508,475 Series "A" warrants associated with the convertible  debentures
         dated September 24, 2003.
   o     271,377  shares  issued in  conjunction  with the cashless  exercise of
         508,475 Series "B" warrants associated with the convertible  debentures
         dated October 3, 2003
   o     1,332,676  shares  for  $992,302 cash  for the exercise of 1,332,676 of
         warrants at exercise  prices  ranging from $0.71 to $1.54 per share.
   o     7,940,811 shares issued to Holders of Senior Secured  Convertible Notes
         in  connection  with the  conversion  of  $8,685,009  of principal  and
         accrued  interest at various  conversion  rates,  ranging from $0.90 to
         $1.55 per share.



                                      F-25
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)


During the year ended November 30, 2004, the Company issued shares of its common
stock as follows:

   o     45,763  shares for  $27,000 cash for the exercise 45,763 warrants at an
         exercise price of $0.59 per share
   o     2,503,571 shares for cash at $1.40  per share
   o     2,000,000  shares  for  partial  consideration  of acquired oil and gas
         properties at $1.40 per share
   o     6,637,671 shares for cash of $1.80 per share
   o     3,000,000  shares  for  partial consideration  of acquired  oil and gas
         properties at $1.80 per share
   o     360,000  shares  for  partial  consideration  of  acquired  oil and gas
         properties at $2.63 share
   o     1,525,424 shares upon  conversion of $900,000 of convertible debentures
         at a conversion price of $.59 per share
   o     8,033,898   shares   upon  conversion  of  $4,740,000  of   convertible
         debentures at a conversion  price of $.59 per share
   o     20,466   shares  upon  conversion  of  $12,075  of accrued  interest on
         convertible debentures at a conversion price of $.59 per share
   o     371,206  shares  issued in  conjunction  with the cashless  exercise of
         508,475 Series "A" warrants associated with the convertible  debentures
         dated September 24, 2003
   o     348,005  shares  issued in  conjunction  with the cashless  exercise of
         508,475 Series "B" warrants associated with the convertible  debentures
         dated October 3, 2003

During the year ended November 30, 2003, the Company issued shares of its common
stock as follows:

   o     1,602,000 shares for cash at $1.00 per share
   o     10,000 shares for services at $1.00 per share
   o     60,000 shares for services at $.91 per share
   o     233,204 shares to Resource  Venture  Management (RVM),  an entity owned
         by a founder of the Company,  as  payment of  an outstanding  debt,  at
         $1.00 per share
   o     90,000  shares  to  RVM for services rendered, valued at $90,000 ($1.00
         per share)
   o     1,951,241  shares to the  shareholders  of Pannonian in accordance with
         the Share Exchange  Agreement to acquire all the outstanding  shares of
         Pannonian (Note 1).

During the period  ended  November 30, 2002,  the Company  issued  shares of its
common stock as follows:

   o     11,500,000 shares at inception to officers/directors/founders  for cash
         at $.001 per share
   o     500,000 shares for cash at $.02 per share
   o     4,000,000  shares  to  RVM, for services  rendered,  valued at $200,000
         ($.05 per share)
   o     3,000,000 shares for cash at $.05 per share
   o     1,997,058 shares for cash at $.34 per share

Effective  November 13, 2002, the Company  completed the  acquisition of Dolphin
(Note 1). In conjunction with the acquisition,  the Company exchanged 20,997,058
shares of its common stock for 100% of the outstanding common shares of Dolphin.
The 9,028,000  shares of common stock of




                                      F-26
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

the Company outstanding at the date of acquisition were recapitalized at the net
asset value of the Company at that date of $(60,331).  For  financial  statement
reporting purposes this transaction was treated as a reverse acquisition whereby
Dolphin was considered the surviving and reporting  entity.  For legal purposes,
the Company remained as the surviving entity;  therefore,  the capital structure
of the Company was accordingly restated.

The value of all common stock issued for non-cash  consideration  represents the
non-discounted  cash price of equivalent shares of the Company's common stock at
the transaction date.

WARRANTS

In  connection  with the issuance of  convertible  debentures  in September  and
October 2003, the Company issued warrants to purchase 2,867,797 shares of common
stock at $.71 per share, and 2,867,797, shares of common stock at $.83 per share
to purchasers of the debentures,  and issued warrants to purchase 230,847 shares
of common stock at $.59 per share to placement agents for the issue.

In connection  with sales of common stock in December 2003 and January 2004, the
Company issued warrants to purchase  500,715 shares of common stock at $2.71 per
share,  and 1,327,535 shares of common stock at $4.05 per share to purchasers of
the stock,  and issued warrants to purchase 105,166 and 358,435 shares of common
stock at $1.40 and $1.80 per share,  respectively,  to placement  agents for the
issue. The fair value of the placement agent warrants, estimated as of the issue
dates under the  Black-Scholes  pricing  model was $157,599 and $900,504 for the
December  2003 and January  2004 common  stock  offerings,  respectively.  These
amounts were recorded as issue costs for the respective  common stock  offering.
In accordance with the antidilutive  rights  provisions,  the exercise prices of
those warrants with original  exercise prices in excess of $1.54 have been reset
to $1.54 per share, in connection with the issuance of the 2004 notes.

In August 2004, in connection with the private  placement of convertible  notes,
the Company  issued  warrants to purchase  5,194,806  shares of common  stock at
$1.54 per share for a period of three years. In addition,  placement  agents for
the  convertible  notes received  warrants to purchase  400,000 shares of common
stock at $1.54 per share for a period of five years.

In March 2005, in connection  with the private  placement of convertible  notes,
the Company  issued  warrants to purchase  1,637,234  shares of common  stock at
$1.88 per share for a period of three years.

In May 2005,  in connection  with the private  placement of  convertible  notes,
placement agents received warrants to purchase 200,000 shares of common stock at
$1.88 per share for a period of five years.


                                      F-27
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

As of November 30, 2005, warrants issued and outstanding are as follows:

          Issue                  Shares          Exercise       Expiration
          Date                Exercisable         Price            Date

   September 24, 2003          2,008,474      $ .59 - $ .83   September 24, 2008
   October 3, 2003               551,186      $ .59 - $ .83   October 3, 2008
   December 18, 2003             605,880      $1.40 - $1.54   December 18, 2007
   January 15, 2004            1,680,414              $1.54   January 15, 2009
   August 19, 2004             5,494,805              $1.54   August 19, 2009
   October 27, 2004              100,000              $1.54   October 27, 2009
   March 1, 2005               1,637,234              $1.88   March 1, 2008
   May 31, 2005                  200,000              $1.88   May 31, 2010

                             12,277,993
                             ==========

At November 30, 2005 and 2004 the weighted  average  exercise price for warrants
outstanding is $1.43 and $1.27, respectively, and the weighted average remaining
contractual life is 2.3 and 3.4 years, respectively.

NOTE 7 - STOCK OPTION PLAN

The Company adopted the 2003 Stock Option Plan (the "Plan"),  as amended.  Under
the Plan,  stock  options may be granted at an exercise  price not less than the
fair market value of the  Company's  common stock at the date of grant.  Options
may be granted to key employees and other persons who  contribute to the success
of the Company. The Company has reserved 6,500,000 (2005 and 2004) and 3,500,000
(2003) shares of common stock for the plan. At November 30, 2005, 2004 and 2003,
options to purchase  2,025,000,  3,000,000  and 3,380,000 shares,  respectively,
were available to be granted pursuant to the stock option plan.

The status of outstanding options granted pursuant to the plans are as follows:

<TABLE>
<CAPTION>
                                                           Number of     Weighted Avg. Exercise    Weighted Avg. Fair
                                                             Shares              Price                   Value
<S>                                                    <C>                       <C>                     <C>
     Options Outstanding - November 30, 2002                    -                $   -                   $   -

     Granted                                              120,000                $1.00                   $0.52
                                                       -----------
     Options Outstanding - November 30, 2003
       (None exercisable)                                 120,000                $1.00                   $0.52

     Granted                                            3,500,000                $2.42                   $2.07
     Cancelled                                           (120,000)               $2.26
                                                       -----------


                                      F-28
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK OPTION PLAN (CONTINUED)
<CAPTION>
<S>                                                    <C>                       <C>                     <C>
     Options Outstanding - November 30, 2004
       (921,250 exercisable)                            3,500,000                $2.37

     Granted                                              975,000                $1.32                   $1.12

     Options Outstanding - November 30, 2005
       (1,775,000 exercisable)                          4,475,000                $2.15                   $1.88
</TABLE>

There have been no options exercised to date.

The  following  table  presents  additional  information  related to the options
outstanding at November 30, 2005:

<TABLE>
<CAPTION>
                                                                                    Weighted average
         Exercise price         Number of options       Number of options         remaining contractual
            per share              outstanding             Exercisable                life (Years)
<S>                                  <C>                     <C>                           <C>
                $ 1.00                   60,000                 40,000                      7.5
                  1.07                   50,000                 10,000                     10.0
                  1.26                   50,000                 50,000                      9.1
                  1.30                  200,000                200,000                      8.7
                  1.34                  875,000                153,750                      9.0

                  1.50                  300,000                112,500                      8.4

                  1.55                  325,000                137,500                      8.6

                  2.24                   60,000                 60,000                      8.4

                  2.64                2,375,000                831,250                      8.4

                  3.51                  180,000                180,000                      8.3
                                     ----------                -------

                                      4,475,000              1,775,000                      9.4
                                     ==========              =========
</TABLE>

NOTE 8 - INCOME TAXES

The Company  follows the asset and liability  method of accounting  for deferred
income taxes.  Deferred tax assets and liabilities  are determined  based on the
temporary  differences  between the financial  statement and tax basis of assets
and liabilities. At November 30, 2005, the Company had approximately $25,346,000
of net operating  losses and $213,000 of statutory  depletion  carry forward for
tax return purposes.

The income tax expense  recorded in the  consolidated  statements  of operations
consists of the following:

                                               Years Ended November 30,
                                          2005           2004           2003

      Current                        $          -   $          -   $         -
      Deferred                         14,294,000      3,602,000       801,301
      Less valuation allowance        (14,294,000)    (3,602,000)     (801,301)
                                     -------------  -------------  ------------

                                     $          -   $          -   $         -
                                     =============  =============  ============


                                      F-29
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - STOCK OPTION PLAN (CONTINUED)

The effective income tax rate differs from the U.S. Federal statutory income tax
rate due to the following:

                                                  Years Ended November 30,
                                              2005          2004         2003

     Federal statutory income tax rate       (35.0%)       (34.0%)       (34%)
     State income taxes                       (3.3%)        (3.3%)      (3.3%)
     Permanent differences                     6.5%         15.1%        6.0%
     Increase in valuation allowance          31.8%         22.2%       31.3%
                                            --------      --------     -------

                                                 -             -           -
                                            ========      ========     =======

The principal sources of temporary  differences resulting in deferred tax assets
and tax liabilities at November 30, 2004 are as follows:

<TABLE>
<CAPTION>
                                                 2005               2004              2003
<S>                                        <C>               <C>                <C>
     Deferred tax assets
       Asset retirement obligation         $     472,000     $      265,000     $            -
       Oil and gas property                      657,000                  -                  -
       Tax loss carryforward                  13,155,000          3,671,000            801,000
       Other                                      10,000                  -                  -
                                           --------------    ---------------    ---------------
          Total deferred taxes             $  14,294,000     $    3,936,000     $      801,000
                                           --------------    ---------------    ---------------

     Deferred tax liabilities
       Intangible drilling and other
         exploration costs capitalized
         for financial reporting purposes              -           (319,000)                 -
       Other                                           -            (15,000)                 -
                                           --------------    ---------------    ---------------

     Total deferred tax liabilities                    -           (334,000)                 -
                                           --------------    ---------------    ---------------

     Net deferred tax asset                   14,294,000          3,602,000            801,000
       Valuation allowance                   (14,294,000)        (3,602,000)          (801,000)
                                           --------------    ---------------    ---------------

     Net deferred taxes                    $           -     $            -     $            -
                                           ==============    ===============    ===============
</TABLE>

The valuation  allowance increased by approximately $10,692,000,  $2,801,000 and
$791,000 in 2005, 2004 and 2003, respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company incurred  consulting fees related to services provided by RVM in the
amounts of $120,000  $120,000,  and  $320,000  for the years ended  November 30,
2005, 2004, and 2003 respectively. RVM also billed the Company $30,000, $79,929,
and $77,500 for  reimbursement  of costs and expenses  incurred on behalf of the
Company  during the same  years.  During the year ended  November  30,  2003 the
Company  issued  323,204 shares of common stock valued at $1.00


<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

per share to RVM for outstanding debt at November 30, 2002 and services rendered
in 2003.  All other amounts paid in 2005,  2004,  and 2003 were paid in cash. At
November  30, 2005 and 2004 the Company  included  amounts due to RVM of $12,079
and $37,826, respectively, in accounts payable related parties.

During the year ended November 30, 2005, in connection with a Lease  Acquisition
and Development  Agreement to acquire a  58-1/3%working  interest in unevaluated
oil and gas  properties in the Piceance Basin in Colorado,  the Company  entered
into a Participation Agreement with the founder of the Company to acquire all or
a portion of the remaining  41-2/3% working interest in the subject  properties.
The  founder of the Company  subsequently  assigned  his rights and  obligations
under the  Agreement to an unrelated  third party company (the  "Assignee").  In
exchange for the assignment of his rights and obligations,  the founder received
a significant  ownership  percentage of the Assignee,  thereby  establishing the
Assignee  as a  related  party.  The  terms of the  Participation  Agreement  as
amended, required the Assignee to pay the next $14,000,000 of lease acquisition,
drilling completion, and facilities costs to be incurred on the project.

During the year ended  November  30,  2005,  the Company  entered into a farmout
agreement with a company (the "Farmee"),  whose President and CEO is the founder
of the Company, to evaluate the concession held by the Company in the Jui Valley
Coal Basin in Romania. The farmout agreement required the Farmee to pay 100 % of
the costs to drill an  initial  test well and an second,  optional,  well on the
concession,  and to pay the  Company  $100,000  upon  approval  by the  Romanian
government  of the  assignment  of the  concession  to the  Farmee to earn a 75%
interest in the concession.  The Company has completed the drilling of the first
test well on the concession and is evaluating  completion and testing operations
to be undertaken

Harbor is a company  owned 50% and  managed  by the  Company's  Chief  Operating
Officer  ("COO").  During the years ended  November 30, 2005,  2004,  2003,  the
Company incurred costs and expenses with Harbor as follows:  $41,681,  $271,588,
$344,294  and.  Of those  amounts,  compensation  expenses  paid to  Harbor  for
services provided by the COO and other Harbor staff, were $27,500, $163,737, and
$90,210 for the corresponding  years.  Reimbursement of costs advanced by Harbor
on behalf of the Company of $14,181,  $132,197 and $254,084 were paid during the
years ended November 30, 2005, 2004, and 2003, respectively.

Florida Energy,  Inc.  ("Florida") is a company owned and managed by the brother
of the  founder of the  Company.  Under the terms of the  agreement  between the
Company,  Harbor,  and  Florida,  Harbor  and  Florida  will  each  retain  a 1%
overriding  royalty  interest in the acquired  leases in Texas,  including those
leases  acquired as of the date of the agreement.  However,  with respect to 400
contiguous acres designated by Florida,  Florida shall have a 3.125%  overriding
royalty instead of a 1% overriding royalty interest.

The Company  incurred  Directors' fees totaling  $193,500,  $180,000 and $27,500
during the years ended November 30, 2005, 2004 and 2003. As of November 30, 2005
and 2004,  $36,000  and  $31,000 of  Directors'  fees are  included  in accounts
payable, related.

In April 2004,  the Company  executed a strategic  consulting  agreement  with a
member of the Company's  Advisory  Committee.  Under the terms of the Agreement,
the  individual is to be paid a consulting  fee of $95 per hour for all services
in excess of 40 hours per  calendar  month and a location fee of $5,000 per well
for each well drilled on the Company's acreage in the Powder


                                      F-30

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

River  Basin in Wyoming  and  Montana.  In  addition,  we have  agreed to pay an
overriding royalty interest in oil and gas production from all of our properties
in the Powder River Basin not to exceed 2%. During the years ended  November 30,
2005 and 2004, the Company paid the individual  $21,250 and $590,000 in location
fees.  In the year ended  November 30,  2005,  the Company  assigned  overriding
royalty interests with a fair value of $732,687 to the individual.

In connection with the acquisition of Pannonian, the Company assumed liabilities
due from Pannonian to related parties including advances from the founder of the
Company of $39,500;  notes payable and accrued  interest due to the President of
Pannonian of $37,508;  notes  payable and accrued  interest to a company  wholly
owned by the  President  of  Pannonian  of  $44,400;  and  accounts  payable  to
Directors of the Company for services rendered and costs advanced of $63,346. As
of November  30, 2005,  all amounts due to related  parties  resulting  from the
acquisition of Pannonian have been paid in full.


NOTE 10 - COMMITMENTS AND CONTINGENCIES

OFFICE LEASES

The Company currently leases space in Denver,  Colorado. In addition the Company
pays a portion of the office rental for Pannonian's  office, also in Denver, and
leases an office  suite in  Casper  Wyoming  on a  month-to-month  basis.  Total
minimum rental payments for non-cancelable operating leases for the years ending
November 30 are as follows:

                      2006                     $ 99,600
                      2007                     $103,881
                      2008                     $107,834
                      2009                     $107,447
                      2010                     $ 45,454

Rent  expense was  approximately  $125,616,  $98,000,  and $51,000 for the years
ended November 30, 2005, 2004 and 2003, respectively.

DELAY RENTALS

In conjunction with the Company's  working  interests in undeveloped oil and gas
prospects,  the Company  must pay  approximately  $107,000 in delay  rentals and
other  costs  during the fiscal year ending  November  30, 2006 to maintain  the
right  to  explore  these  prospects.  The  Company  continually  evaluates  its
leasehold interests, therefore certain leases may be abandoned by the Company in
the normal course of business.

ENVIRONMENTAL

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


                                      F-31

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

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  noncapital  nature  are  recorded  when  environmental
assessment  and/or  remediation  is  probable,  and the costs can be  reasonably
estimated.

CONTINGENCIES

The  Company  may from time to time be  involved  in various  claims,  lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract incidental to the operations of its business.  The Company is
not currently involved in any such incidental litigation which it believes could
have a  materially  adverse  effect on its  financial  condition  or  results of
operations.


NOTE 11 - SUBSEQUENT EVENTS

a)      On December 1, 2005, the Company  and the  holders of the 2004 Notes and
holders of May 2005 Notes  entered into a Waiver and  Amendment  agreement  (the
"Agreement").  The terms of the  Agreement  among  other  things,  effected  the
following changes:
   o   Lowered the conversion  price to $1.25 for conversions by the holders of
       the 2004 and 2005 Notes;
   o   Lowered the exercise price of the 2004 Warrants to $1.25 per share and
       increased the aggregate number of shares purchasable under the warrants
       from 5,194,806 to 6,400,002;
   o   Caused the exercise price of warrants issued in December 2003 and January
       2004 being  lowered to $1.25  under the  anti-dilution provisions of such
       warrants;
   o   Deferred  monthly  installment  payments on the 2004 Notes until April 1,
       2006;
   o   Extended the maturity date of the 2004 Notes to July 1, 2007; and
   o   Extended any  redemption or  conversion of the 2004 Notes by Galaxy until
       June 22, 2006.

As a result of the  lower  conversion  and  exercise  price,  the  Company  will
recognize  additional  beneficial  conversion feature and additional discount to
the  outstanding  debt,  which will  ultimately  increase the amounts charged as
interest and financing costs in future periods.

b)    At a special meeting held February 22, 2006, shareholders of Galaxy Energy
Corporation  approved the issuance of shares of common stock upon  conversion of
the  convertible  notes issued in 2004 and May 2005, in lieu of cash payments on
the convertible  notes,  and upon exercise of the warrants that have been issued
or are issuable under the terms of the notes,  to the extent such issuance would
require shareholder approval under the rules of the American Stock Exchange.


                                      F-32
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the Unaudited  financial data for each quarter for
the years ended November 30, 2005, 2004, and 2003:

<TABLE>
<CAPTION>
                                                               Three months ended
                                         02/28/05           05/31/05          08/31/05          11/30/05
<S>                                 <C>                <C>               <C>                <C>
Revenues
  Natural gas sales                 $       111,877    $      247,399    $      323,313     $      614,605
  Gain on disposition of oil and
  gas properties                                  -           197,676                 -
                                                                                      -
  Operating revenues                              -                 -                               43,472
                                    ----------------   ---------------   ---------------    ---------------
                                            111,877           445,075           323,313            658,077
                                    ----------------   ---------------   ---------------    --------------


Operating expenses
  Lease operating expenses                  172,137           204,273           377,435            211,224
  General and administrative              1,255,511         1,247,864           906,760          1,906,453
  Impairment oil and gas
  properties                                      -                 -                 -          5,273,795
  Depreciation and amortization              68,904           104,990           160,258          1,552,922
                                    ----------------   ---------------   ---------------    --------------
                                          1,496,552         1,557,127         1,444,453          8,944,394

Other income (expense)
  Interest and other                         36,560            43,922            37,087             45,722
  Interest and financing costs           (2,035,355)       (2,474,651)       (2,745,696)        (2,826,453)
                                    -----------------  ---------------   ---------------    ---------------
                                         (1,998,795)       (2,233,053)       (2,708,609)        (2,780,731)
                                    -----------------  ---------------   ---------------    ---------------

Net (loss)                          $    (3,383,470)   $   (3,542,781)   $   (3,829,749)    $  (11,067,048)
                                    =================  ===============   ===============    ===============

Net (loss) per common share
  Basic and diluted                 $         (0.06)   $        (0.06)   $        (0.02)    $        (0.17)
                                    ================   ===============   ===============    ===============
</TABLE>


During the fourth  quarter of the year ended  November  30,  2005,  the  Company
recorded its first  proved  reserves and  transferred  capitalized  costs of the
prospects  with reserves to the full cost pool  amortization  base.  Also in the
fourth quarter,  the Company  determined that three of its oil and gas prospects
were either  partially or wholly  impaired and transferred a total of $5,055,320
to  the  full  cost  pool  amortization  base.  Following  these  transfers  the
amortization  rate  increased  from $1.83 per MCF  recognized in the first three
quarters of the year to $8.29 per MCF for the fourth  quarter.  After  recording
amortization  for the year,  the Company  recognized  impairment  expense of its
evaluated  properties  in the amount of  $6,169,847  during the fourth  quarter,
representing  the  excess of the full cost  pool over the full cost  ceiling  as
computed in accordance with the full cost rules.


                                      F-33

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                                               Three months ended
                                         02/28/04           05/31/04          08/31/04          11/30/04
<S>                                 <C>                <C>               <C>                <C>
Revenues
  Natural gas sales                 $          -       $          -      $     23,780       $    98,675
                                    -------------      -------------     -------------      -------------

Operating expenses
  Lease operating expenses                     -                  -            15,215            44,032
  General and administrative             676,424          1,047,625           874,001           919,168
  Abandoned oil and gas properties             -                  -                 -                 -
  Depreciation and amortization            1,335             21,767            18,207            35,081
                                    -------------      -------------     -------------      ------------
                                         677,759          1,069,392           907,423           998,281

Other income (expense)
  Interest                                13,337              9,897             7,652            20,510
  Interest and financing costs          (771,594)        (2,288,633)         (191,268)       (3,100,605)
                                    -------------      -------------     -------------      ------------
                                        (758,257)        (2,278,736)         (183,616)       (3,080,095)
                                    -------------      -------------     -------------      ------------

Net (loss)                          $ (1,436,016)      $ (3,348,128)     $ (1,067,259)      $(3,979,701)
                                    =============      =============     =============      ============

Net (loss) per common share
  Basic and diluted                 $      (0.03)      $      (0.06)     $      (0.02)      $     (0.07)
                                    =============      =============     =============      ============
</TABLE>


During the 4th quarter of the year ended November 30, 2004, the Company recorded
a cumulative  adjustment in the amount of $1,306,608 to reflect the write-off of
the  unamortized  balance of the discount  attributable to the fair value of the
warrants,  $864,722,  and the unamortized  balance of deferred  financing costs,
$441,886, at the date of conversion of the convertible  debentures issued in the
prior fiscal  year.  The amounts  have been  charged to  operations  as interest
expense.

<TABLE>
<CAPTION>
                                                               Three months ended
                                         02/28/03           05/31/03          08/31/03          11/30/03
<S>                                 <C>                <C>               <C>                <C>
Revenues
  Natural gas sales                 $          -       $          -      $          -       $         -
                                    -------------      -------------     -------------      -------------

Operating expenses
  Lease operating expenses                     -                  -                 -                 -
  General and administrative             428,216            441,585           654,990           570,704
  Abandoned oil and gas properties             -                  -                 -            65,769
  Depreciation and amortization
                                               -                  -                 -               685
                                    -------------      -------------     -------------      ------------
                                         428,216            441,585           654,990           637,158

Other income (expense)
  Interest                                     -                  -                 -                 -
  Interest and financing costs                 -                  -                 -          (417,646)
                                    -------------      -------------     -------------      ------------
                                               -                  -                 -          (417,646)
                                    -------------      -------------     -------------      ------------
Net (loss)                          $   (428,216)      $   (441,585)     $   (654,990)      $(1,054,804)
                                    =============      =============     =============      ============

Net (loss) per common share
  Basic and diluted                 $      (0.01)      $      (0.01)     $      (0.02)      $     (0.04)
                                    =============      =============     =============      ============
</TABLE>


                                      F-34
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

                                            Period from
                                             Inception           Three
                                          (June 18, 2002)        Months
                                                 To              ended
                                              08/31/02          11/30/02
Revenues
  Natural gas sales                       $            -     $           -
                                          ---------------    --------------

Operating expenses
  Lease operating expenses                             -                 -
  General and administrative                     456,821           683,245
  Abandoned oil and gas properties                     -                 -
  Depreciation and amortization                        -                 -
                                         ---------------     --------------
                                                 456,821           683,245

Other income (expense)
  Interest                                             -                 -
  Interest and financing costs                         -                 -
                                         ---------------     --------------
                                                       -                 -
                                         ---------------     --------------

Net (loss)                               $      (456,821)    $    (683,245)
                                         ================    ==============

Net (loss) per common share
  Basic and diluted                      $         (0.06)    $       (0.02)
                                         ================    ==============

NOTE 13 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)

The  following  reserve  quantity and future net cash flow  information  for the
Company represents proved reserves located in the United States. The reserves as
of  November  30,  2005 have  been  estimated  by  Gustavson  Associates,  Inc.,
independent  petroleum  engineers.  The determination of oil and gas reserves is
based on estimates, which are highly complex and interpretive. The estimates are
subject to continuing change as additional information becomes available.

The standardized  measure of discounted  future net cash flows is prepared under
the guidelines set forth by the  Securities and Exchange  Commission  (SEC) that
require the calculation to be performed  using year-end oil and gas prices.  The
oil and gas prices  used as of  November  30, 2005 are $59.37 per bbl of oil and
$6.76 per mcf of gas.  Future  production  costs are based on year-end costs and
include  severance taxes.  Each property that is operated by the Company is also
charged with field-level overhead in the reserve calculation.  The present value
of future cash inflows is based on a 10%  discount  rate.  Due to the  Company's
current  liquidity  issues,   proved  undeveloped  reserves  identified  in  the
Gustavson  Associates  report have been excluded from the disclosures  below and
have been excluded from the Company's DD&A and ceiling test calculations


                                      F-35

<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
Proved Reserves                                                             Gas (Mcf)         Oil (Bbls)
<S>                                                                         <C>                     <C>
  Balance, November 30, 2004                                                        -                 -
   Extensions and discoveries                                               1,171,425               353
   Production                                                                (211,481)                -
                                                                        ---------------------------------
   Balance, November 30, 2005                                                 959,944               353
                                                                        =================================
</TABLE>


Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
                                                                         November 30,
                                                                             2005
                                                                        --------------
<S>                                                                     <C>
  Future cash flows                                                     $   6,529,934
  Future production and development costs                                  (2,582,340)
  Future income taxes                                                               -
                                                                        --------------
  Future net cash flows before discount                                     3,947,594
                                                                        --------------
  10% discount to present value                                            (1,005,320)
                                                                        --------------
  Standardized measure of discounted future net cash flows              $   2,942,274
                                                                        ==============


Changes in the Standardized Measure of Discounted Future
  Net Cash Flows                                                         November 30,
                                                                             2005
                                                                        --------------
  Standardized measure of discounted future net cash flows at
    the beginning of year                                               $           -
  Extensions and discoveries, net of future production and
   development costs                                                        3,274,399
  Sales of oil and gas produced, net of production costs                     (332,125)
  Standardized measure of discounted future net cash flows at           --------------
   the end of year                                                      $   2,942,274
                                                                        ==============
</TABLE>






                                      F-36