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, 2006

     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)

                 COLORADO                                 98-0347827
        (State or other jurisdiction of                (I.R.S. Employer
        incorporation or organization)                Identification No.)

              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: $48,095,185.60 AS OF MAY 31, 2006

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 83,661,968 AS OF JANUARY 31,
2007

Documents incorporated by reference:  NONE





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26

                 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


                                       3

<PAGE>

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.

         MMCF. Million 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.



                                       4
<PAGE>
                                     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. As of March 1, 2007 we had interests
         in three producing wells and five wells in various stages of completion
         in the basin. During 2006 we drilled, as operator, four wells in the
         basin, one of which has been completed and is awaiting a pipeline
         connection, one of which has been partially completed, one on which
         completion work has not been commenced, and one of which was abandoned
         after encountering technical difficulties during the drilling phase.
         Each of the four operated wells was drilled in accordance with a
         participation agreement with our partner, Exxel Energy Corp.("Exxel"),
         a related party, under which Exxel paid the first $14 million of
         operational expenditures and paid us a management fee for operating the
         project. In August 2006 Exxel reached the $14 million expenditure point
         and we began to pay our proportionate 25% share of costs incurred
         thereafter.

     o   THE POWDER RIVER BASIN LOCATED IN WYOMING AND MONTANA. Over the last
         few years we have acquired leasehold interests in and are developing
         five different coal bed methane ("CBM") project areas in the basin. As
         of March 1, 2007 we had interests in 173 completed wells, 57 wells in
         various stages of completion and eight water disposal wells. Of the
         completed wells, 22 are currently producing natural gas, 54 are still
         dewatering, a precursor to the production of natural gas, and the
         remainder are shut-in pending future infrastructure development work.
         We have entered into an agreement to sell our interests in the Powder
         River Basin to PetroHunter Energy Corporation ("PetroHunter"), a
         Maryland corporation and a related party, subject to PetroHunter
         receiving financing to complete the transaction.

         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.
         Production casing was set, and testing operations were conducted from
         several zones of interest in the well. Based on results obtained, the
         joint venture group decided to plug and abandon this first well and
         undertake a seismic program to help identify priority areas on the
         prospect for further drilling. Our interest in this project could drop
         to 24%, depending upon the outcome of the future drilling program.

     o   JIU VALLEY OF ROMANIA. This is a 21,500-acre coal bed methane project.
         The initial test well in this project finished drilling in September
         2005. The core analyses and preliminary desorption measurements in the
         field indicated the potential presence of coal bed methane in multiple
         horizons, but gave no indication at the 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 determined to commence completion and testing
         operations. A fracture stimulation treatment has been completed in the
         lower zones penetrated, and testing for potential gas production is
         underway. Our partner in this play is Falcon Oil & Gas Ltd., a related
         party.

         We also hold leases on 1,560 undeveloped net acres in Texas. These
leases cover six identified prospects in Rusk and Nacogdoches counties. We do
not currently have the financial resources to drill these properties. Leases
covering this acreage expire from June 2007 to December 2007. Discussions have
been underway to farm out or sell these leases.


                                       5
<PAGE>

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. 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 a
report published in OIL AND GAS INVESTOR in August 2005. 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 Corp., a related party, which is our partner in the project, as of
March 1, 2007 we controlled approximately 6,000 net acres (1,500 net to Galaxy)
in the Piceance Basin. Under our agreement with Exxel, we will hold 25% of the
available working interest in the wells that we drill in the basin, and Exxel
will hold the remaining 75% of available working interest. We currently have gas
production and sales from the Clough 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, and from two additional wells in which
we participated for a 0.33203% working interest, Trant 32A & 42A, drilled and
operated by another unrelated oil and gas company. We also participated for an
8.33% working interest in a well, operated by a third unrelated oil and gas
company, which has been completed and is pending further operations and
availability of a gas sales pipeline. In addition, we have completed, along with
our partner Exxel, drilling four new wells and commencing four more as part of a
planned continuous drilling program in the basin. We own a 25% working interest
in each of these 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 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.


                                       6
<PAGE>

         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 coal bed methane wells often produce water for six to twelve months,
and in some cases for longer periods 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
43,600 net acres in four project areas in Sheridan, Johnson and Campbell
counties, plus working interests in a total of 212 coal bed 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 2006.

            Our Montana properties in the Powder River Basin consist of about
26,250 net acres in two project areas in Big Horn, Custer, Powder River and
Rosebud counties, plus working interests in 18 non-operated wells in various
stages of completion and production.

PROPOSED SALE TO PETROHUNTER ENERGY CORPORATION

         On December 29, 2006, we entered into a Purchase and Sale Agreement
(the "PSA") with PetroHunter Energy Corporation ("PetroHunter") and its wholly
owned subsidiary, PetroHunter Operating Company, a related party. Pursuant to
the PSA, we agreed to sell all of our oil and gas interests in the Powder River
Basin of Wyoming and Montana (the "Powder River Basin Assets").

         Marc A. Bruner, who is our largest shareholder, was at January 31, 2007
a 33.4% beneficial shareholder of PetroHunter. Marc A. Bruner is the father of
Marc E. Bruner, our President, Chief Executive Officer and a director. Marc E.
Bruner is the stepson of Carmen J. Lotito, the Chief Financial Officer and a
director of PetroHunter.

         The purchase price for the Powder River Basin Assets is $45 million,
with $20 million to be paid in cash and $25 million to be paid in shares of
PetroHunter common stock at the rate of $1.50 per share.

         Closing of the transaction is subject to approval by our secured note
holders, approval of all matters in its discretion by our Board of Directors,
PetroHunter obtaining outside financing on terms acceptable to its Board of
Directors, and various other terms and conditions. Either party may terminate
the agreement if closing has not occurred by March 31, 2007.

         As required under the PSA, PetroHunter made an initial earnest money
payment of $2.0 million in January 2007. In the event the closing does not occur
for any reason other than a material breach by us, the deposit shall convert
into a promissory note (the "Note"), payable to PetroHunter, and shall be an
unsecured subordinated debt of our company, which is payable only after
repayment of our senior indebtedness.

         PetroHunter became the contract operator of the Powder River Basin
Assets beginning January 1, 2007. At closing, the operating expenses incurred by
PetroHunter as the contract operator will be credited toward the purchase price,
or if closing does not occur, will be added to the principal amount of the Note.


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<PAGE>

         MAB Resources LLC, a Delaware limited liability company controlled by
Marc A. Bruner, has orally agreed to guarantee our performance under the PSA
(including but not limited to all their obligations under the Note), and has
orally agreed to reimburse PetroHunter for certain losses and damages which
might be incurred as a result of those parties entering into the PSA. We expect
that a written agreement will be entered into by the parties prior to closing.

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 phases 1 and 2.
Drilling on the first test well on the property reached total depth in late
January 2006. Production casing was set, and testing operations were conducted
from several zones of interest in the well. Based on results obtained, the joint
venture group decided to plug and abandon this first well and undertake a
seismic program to help identify priority areas on the prospect for further
drilling. 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 coal bed
thicknesses greater than 5 meters and are currently considered to be prospective
for coal bed 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 indicated the potential presence of coal bed methane
in multiple horizons, but gave no indication at the 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 determined to commence completion and testing operations. A fracture
stimulation treatment has been completed in the lower zones penetrated, and
testing for potential gas production is underway. Our partner in the project is
Falcon Oil & Gas Ltd., a related party.

EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES

         During the fiscal years ended November 30, 2006, 2005 and 2004, we
incurred $4,145,611, $18,164,329, and $34,029,772, 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.


                                       8
<PAGE>

         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 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


                                       9
<PAGE>


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.

         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, 2006, we had a total of seven full time employees
and one part-time employee. 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. THE REPORT ON OUR FINANCIAL STATEMENTS CONTAINS A
PARAGRAPH RELATING TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.

         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 and those properties are proposed to be sold. Our principal
activities have been raising capital through the sale of our securities and
identifying and evaluating potential oil and gas properties.

         The report of our independent registered public accounting firm on the
financial statements for the year ended November 30, 2006, includes an
explanatory paragraph indicating that there is substantial doubt as to our
ability to continue as a going concern. From inception to November 30, 2006, we
have an accumulated deficit of $63,699,517. For the 2007 fiscal year, while we
do expect increasing operating cash flow, 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.


                                       10
<PAGE>

OUR SHORT-TERM CASH COMMITMENTS REQUIRE US TO SELL A SIGNIFICANT PORTION OF OUR
ASSETS, WHICH LEAVES US WITH FEWER ASSETS TO DEVELOP FOR OUR FUTURE GROWTH.

         At November 30, 2006, our working capital deficit was $19,868,880. As
of December 1, 2006, we had contractual obligations due by November 30, 2007
totaling $24,328,706. To meet these obligations and working capital needs, we
have entered into a PSA with PetroHunter a related party. Pursuant to the PSA,
we agreed to sell all of our Powder River Basin Assets. The purchase price for
the Powder River Basin Assets is $45 million, with $20 million to be paid in
cash and $25 million to be paid in shares of PetroHunter common stock at the
rate of $1.50 per share. There are significant contingencies in connection with
this proposed sale, including the ability of PetroHunter to raise the funds
required to complete this transaction.

         If this proposed sale is not completed, we will be forced to find
another buyer and suitable terms for a sale of the property. If we cannot find
another buyer and suitable terms for a sale, we may be forced to seek the
protection of bankruptcy laws. Furthermore, we may be required to reduce the
sale price, which could result in a significant impairment (and loss to the
Company) to the carrying value of this asset.

WE ARE CURRENTLY DEPENDENT UPON LOANS FROM RELATED PARTIES TO PROVIDE WORKING
CAPITAL.

         Through March 1, 2007, we have borrowed $6,900,000 from Bruner Family
Trust UTD March 28, 2005. The related promissory notes are subordinated and
unsecured. Interest accrues at the rate of 8% per annum and the notes mature on
the later of 120 days from the date of the loans or the time at which our senior
indebtedness has been paid in full. In connection with these loans, we and the
lender executed subordination agreements with the holders of the senior
indebtedness. One of the trustees of the Bruner Family Trust UTD March 28, 2005
is Marc E. Bruner, the president and a director of the company.

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

         As of November 30, 2006, we had established very limited production of
natural gas from a limited number of wells, and limited proved reserves. We
propose to sell most of these wells to PetroHunter, a related party. While we
expect production to commence from our Piceance basin wells during 2007, until
that actually occurs it will be difficult for us 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%,


                                       11
<PAGE>

depending upon the nature and location of the property. This overriding royalty
interest continues after the repayment of the notes. The note holders also
retain, 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.

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



                                       12
<PAGE>
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.
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 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.

         Through shares owned individually and by Resource Venture Management
and Bruner Group, LLP, Marc A. Bruner beneficially owned approximately 14.1% of
our stock as of January 19, 2007. In addition, he is the father of our
president, Marc E. Bruner. This control by Marc A. 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


                                       13
<PAGE>
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.

         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 $4.2 million at November 30, 2006. 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.

         We issued $7.0 million in convertible debentures in April and June
2006, which are convertible into shares of our common stock at a conversion
price of $1.56 per share, subject to adjustments for stock splits, stock
dividends, stock combinations, and other similar transactions.

                                       14
<PAGE>

         In addition to the convertible debt, 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 these warrants has been
lowered to $1.25 per share. Lastly, we issued five-year warrants to the holders
of convertible debentures in April and June 2006 to purchase an aggregate of
1,346,152 shares of our common stock at an exercise price of $1.60 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 debt 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 covering the resale of the common stock underlying the convertible
debt 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:

         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
$625,000 and accrued interest under the terms of the August 2004 financing, as
well as quarterly payments of accrued interest under the terms of the May 2005
financing. 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 may 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.


                                       15
<PAGE>

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. FURTHER, WE HAVE ENGAGED IN SEVERAL RELATED
PARTY TRANSACTIONS.

         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., a Nevada corporation whose stock is
traded on the American Stock Exchange, and chairman of the board, president and
chief executive officer of Falcon Oil & Gas Ltd., a British Columbia corporation
whose stock is traded on the TSX Venture Exchange ("Falcon"). He is also the
controlling shareholder of PetroHunter Energy Corporation, a Maryland
corporation whose stock is traded on the OTC Bulletin Board ("PetroHunter"), and
a significant shareholder of Exxel Energy Corp., a British Columbia corporation
("Exxel"), whose stock is traded on the TSX Venture Exchange. Marc A. Bruner is
the father of our President, Marc E. Bruner. James Edwards, one of our
directors, is the chief operating officer of Falcon.

         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.

         In March 2005, Mr. Bruner assigned all of his rights and obligations
under our participation agreement to Exxel. As of August 2, 2006, Mr. Bruner
owned approximately 18.5% 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.

         In August 2006, we entered into a non-binding letter of intent with
Exxel to purchase our interest in our properties in the Piceance Basin. It was
proposed that Exxel's wholly-owned subsidiary, Exxel Energy USA Inc., would pay
$50 million (US) to acquire our undivided 25% working interest in the Garfield
county, Colorado, project known as Rifle Creek. The purchase amount was later
reduced to $40 million in an amended letter of intent. Exxel USA owns the other
75% working interest in Rifle Creek. The proposed transaction was subject to
Exxel's


                                       16
<PAGE>

obtaining financing, approval by our senior lenders, and other terms and
conditions. In October 2006, we announced our intention not to proceed with this
transaction.

         In December 2006, we entered into a purchase and sale agreement with
PetroHunter to purchase our properties in the Powder River Basin for $45
million, with $20 million to be paid in cash and $25 million to be paid in
PetroHunter common stock. The proposed transaction is subject to PetroHunter
obtaining financing on terms acceptable to PetroHunter, approval by our senior
lenders, and various other terms and conditions.


ITEM 1B. UNRESOLVED STAFF COMMENTS.

         Not applicable.


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.
Following that, we began to participate for our 25% working interest in the
project.

         We commenced drilling operations on our first operated well on December
5, 2005. We own a 25% working interest in that well which has been completed and
is shut in pending availability of a gas sales pipeline. The three additional
wells drilled together with our partner, Exxel a related party, include one
which has production casing set and has been partially completed, one in which
production casing has been set and completion work has not been commenced, and
one which was abandoned due to mechanical problems after reaching planned total
depth. Four additional new wells have been commenced on one pad with conductor
casing set in each.

         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 were required to commence nine additional wells by August 22, 2006.
As of this date, all of these requirements have been satisfactorily met.

         Sellers have reserved in the assignments 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 were to be vested with an undivided 12 1/2% of
our interest in the leases. Exxel and Galaxy have agreed to purchase a portion
of this back-in working interest from Sellers so that it will be reduced from 12
1/2% to 10%. Our share of the purchase price will be $325,000, which will be
paid, in four monthly installments of $81,250 on the first business day of each
month commencing April 2, 2007.

         POWDER RIVER BASIN - WYOMING (GLASGOW AND WEST RECLUSE). This project
consists of approximately 4,250 net acres of oil and gas leases in Campbell and
Converse counties on the eastern side of the Powder River


                                       17
<PAGE>

Basin. As of March 1, 2007, a total of 43 wells have been drilled on the
acreage, 37 of which have been completed. Of these wells, 22 are producing gas
at various levels of production along with some produced water at West Recluse.
The 15 completed wells at Glasgow are currently shut in due to low gas sales
prices and resulting uneconomical producing operations. As of March 1, 2007, gas
production from the West Recluse area wells was approximately seven hundred
thousand 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 250 wells, with up to four coal zone completions per well.

                The four projects are in the early implementation stages with
104 wells drilled to various depths as of March 1, 2007. 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 were executed and
construction is complete in the Pipeline Ridge area. As of March 1, 2007, 32
production wells and 6 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. Managed irrigation on 40 acres was implemented on September 12, 2006. In
addition, the cost of dewatering the production wells is approximately $87,000
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 1, 2007, these two areas contained 42 completed wells, 5
wells that are partly completed and 2 water disposal wells. Construction of
gathering systems for both areas, together with field facilities for the Leiter
wells, were completed during 2005 and dewatering of a number of the Leiter wells
was begun. However, the amount of water produced from the wells was sufficient
to overwhelm the installed water handling capabilities, and the wells were taken
off production until additional water handling facilities that are being
developed allow dewatering to recommence. We estimate that the cost to add the
new water handling facilities at the Leiter Field


                                       18
<PAGE>

will be approximately $1,320,000 and that the cost for the Ucross Field will be
approximately $1,775,000 based on utilizing a combination of additional
reservoirs, evaporators, drip & managed irrigation, injection wells, and
treatment & discharge.

         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 standard cubic feet per ton if fully saturated with gas. Initial
production testing showed higher than expected permeability in the Pawnee seam,
with one well flowing 10-20 Mcf per day immediately upon coming online. The
presence of immediately producible gas confirms that these coals are fully gas
saturated, and have approximately 400 Mmcf of gas 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 eight
wells as co-mingled perforated completions in the Cook and Wall coals, and eight
wells as perforated completions in the Wall coal. Five wells remain to be
perforated, and these operations are underway with completion schedule before
April 1, 2007.

         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, but no ruling has been issued, and we have drafted a
comprehensive water management plan that includes surface and subsurface
storage, evaporation, managed irrigation, and treatment/discharge.

         POWDER RIVER BASIN - WYOMING (BEAVER CREEK). This project consists of
various non-operated working interests in approximately 24,400 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 in which we have participation drilled to
various depths as of March 1, 2007. Of these, seven have been completed, but are
not yet connected to a gathering system. The operator is 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 12.5% and 25%
non-operated working interests in certain oil and gas leases covering
approximately 173,600 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


                                       19
<PAGE>

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.

         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 development for the Kirby Area. Operations are underway for dewatering
an initial 16-well pilot, and field facilities for these operations are in place
and working. We also have 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 1,560
undeveloped net acres in the vicinity of the Trawick Field, located in Rusk and
Nacogdoches counties, Texas. Leases covering this acreage expire from June 2007
through December 2007. Discussions have been underway to farm out or sell these
leases.

         JIU VALLEY. 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 coal bed thicknesses greater than 5 meters are considered to
be prospective for coal bed 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 called 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 Falcon paid 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 was subject to
Romanian government approval, as well as other regulatory approvals, all of
which have been obtained. Pannonian initially acted as Falcon's contract
operator during drilling on the first Jiu Valley well.

         Drilling of the first test well on the property was completed in
September 2005. The core analyses and preliminary desorption measurements in the
field indicated the potential presence of coal bed methane in multiple horizons
but gave no indication at the 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 determined to
commence completion and testing operations. A fracture stimulation treatment has
been completed in the lower zones penetrated, and testing for potential gas
production is underway.

         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. If the concession is granted, Pannonian will have a 25% interest and
Falcon will have a 75% interest. All of the costs related to the concession
application are being borne 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. In December 2006, we were granted a three-year extension on the Permit
due to satisfactory completion of the 2005-2006 work program and based on future
work commitments for subsequent years.

         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 called for Empyrean to
initially earn a 40%


                                       20
<PAGE>

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 existed and were subsequently tested through
casing. Due to results obtained, the joint venture group decided to abandon this
first well and undertake a seismic program to help identify priority areas on
the Permit for further drilling.

PRODUCTION AND PRICES

         The following table sets forth information regarding net production of
oil and natural gas, and certain price and cost information for fiscal years
ended November 30, 2006 and 2005. We did not have any production during the
fiscal year ended November 30, 2004.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                 FOR THE FISCAL YEAR ENDED         FOR THE FISCAL YEAR ENDED
                                         NOVEMBER 30, 2006                 NOVEMBER 30, 2005
---------------------------------------------------------------------------------------------
<S>                                                <C>                               <C>
PRODUCTION DATA:
---------------------------------------------------------------------------------------------
Natural gas (Mcf)                                  210,439                           211,481
---------------------------------------------------------------------------------------------
Oil (Bbls)                                              --                                --
---------------------------------------------------------------------------------------------
AVERAGE PRICES:
---------------------------------------------------------------------------------------------
Natural gas (per Mcf)                                $5.68                             $6.13
---------------------------------------------------------------------------------------------
Oil (per Bbl)                                           --                                --
---------------------------------------------------------------------------------------------
</TABLE>

PRODUCTIVE GAS WELLS

         The following summarizes our productive and shut-in gas wells as of
November 30, 2006. 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                            71              53.58
        Shut-in gas wells                              99              91.18
        Wells in various stages of com-
        pletion and water disposal wells               75              64.05
                                                      ---             ------
            Total                                     245             208.81
                                                      ===             ======

ESTIMATED PROVED OIL AND GAS RESERVES

         We recognized our 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, LLC, 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 and
Exchange Commission. Estimated values of proved reserves were computed using
prices in effect at November 30, 2006 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.

         Estimated proved reserves as on November 30, 2006:
<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------------------------
                                                     Estimated Future Net      Estimated Future Net Revenues
         Oil (bbls)             Gas (Mcf)                  Revenues                  Discounted at 10%
     --------------------------------------------------------------------------------------------------------
<S>                             <C>                       <C>                            <C>
             320                1,005,421                 $3,475,680                     $2,743,072
     --------------------------------------------------------------------------------------------------------
</TABLE>


                                       21
<PAGE>

OIL AND GAS ACREAGE

         The following table sets forth the undeveloped and developed leasehold
acreage, by area, held by us as of November 30, 2006. 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 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                  84,209             36,072                    7,920             7,570
        Montana                 172,956             26,164                      720                90
        East Texas                1,560              1,560                        0                 0
        Colorado                 11,976              1,379                    1,640                190
        Romania                  21,538              5,385                        0                 0
        Germany                 149,000             44,700                        0                 0
                                -------            -------                    ------            ------
             Total              441,239            115,260                    10,280            7,850
                                =======            =======                    ======            ======
</TABLE>

DRILLING ACTIVITY

         The following table sets forth our drilling activity during the years
ended November 30, 2006, 2005 and 2004.

    ----------------------------------------------------------------------------
                               2006               2005                2004
    ----------------------------------------------------------------------------
                          GROSS      NET     GROSS      NET     GROSS      NET
    ----------------------------------------------------------------------------
    Exploratory wells:
    ----------------------------------------------------------------------------
       Productive           5        0.8       23       6.2      135      119.4
    ----------------------------------------------------------------------------
       Dry                  1        0.2      -0-       -0-      -0-       -0-
    ----------------------------------------------------------------------------

    ----------------------------------------------------------------------------
    Development wells:
    ----------------------------------------------------------------------------
       Productive           3         3       -0-       -0-      -0-       -0-
    ----------------------------------------------------------------------------
       Dry                  0         0       -0-       -0-      -0-       -0-
    ----------------------------------------------------------------------------

    ----------------------------------------------------------------------------
          Total wells       9         4        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.

         None.


                                       22
<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
         May 31, 2006.........................      $   0.90          $   0.86
         August 31, 2006......................      $   0.40          $   0.36
         November 30, 2006....................      $   0.28          $   0.26

                                      OTCBB

         FISCAL QUARTER ENDING                      HIGH BID         LOW BID


         February 28, 2005....................      $   1.79         $   1.22
         May 31, 2005.........................      $   1.16         $   1.13
         August 31, 2005......................      $   1.06         $   0.98

         On March 6, 2007, the closing price for the common stock was $0.18.

         As of January 19, 2007, there were approximately 100 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.




                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED NOVEMBER 30,                            FROM
                                                                                                         INCEPTION
                                                                                                         (JUNE 18,
                                                                                                          2002) TO
                                                                                                        NOVEMBER 30,
                                          2006             2005            2004             2003            2002
                                          ----             ----            ----             ----            ----
<S>                                  <C>               <C>             <C>              <C>             <C>
Summary of Operations:
   Revenue                           $    1,274,116    $  1,538,342    $    122,455     $          -    $           -
   Lease operating costs                    781,136         965,069          59,247                -                -
   General & administrative                                                                2,095,495        1,140,066
      expense                             5,016,534       5,316,588       3,517,218
   Depreciation, depletion and
      amortization                          779,446       1,887,074          76,390              685                -
   Impairment of oil and gas
      properties                          1,328,432       5,273,795               -                -                -
   Net (loss)                           (26,163,107)    (24,876,200)     (9,831,104)      (2,579,595)      (1,140,066)
   Net (loss) per share                       (0.36)          (0.37)          (0.18)           (0.08)           (0.04)

                                                                   AS OF NOVEMBER 30,
                                          2006             2005            2004             2003            2002
                                          ----             ----            ----             ----            ----
Balance Sheet:
   Working capital (deficiency)      $  (19,868,880)   $ (7,085,181)   $   (626,108)    $  1,756,776    $  (1,012,916)
   Cash and cash equivalents                608,180       1,328,469      10,513,847        2,239,520           41,320
   Oil and gas properties, net           44,793,140      44,358,725      37,491,529        2,799,720          873,797
   Total assets                          47,760,258      48,459,378      49,648,165        5,655,433          954,359
   Long-term debt                        16,881,267      11,188,252      10,915,928        2,483,557           50,000
   Stockholders' equity                   7,919,911      25,418,378      26,681,207        2,634,559         (149,897)
</TABLE>


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

OVERVIEW AND PLAN OF OPERATION

         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. Most of this funding has been
high-interest debt financing.

         Our tasks now are to establish reserves on our properties and to place
our properties into production. As of March 1, 2007, we had interests in 175
completed wells (22 of which were delivering natural gas into sales pipelines),
60 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 700 thousand cubic feet per day.
As our first wells come online in the Piceance Basin over the next few months
and as our coal bed 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 2005 and 2006, will not be sufficient to
fund completely our planned operations, debt repayment and commitments.

         At November 30, 2006, our working capital deficit was $19,868,880. As
of December 1, 2006, we had contractual obligations due by November 30, 2007
totaling $24,328,706, as explained more fully below. To meet these obligations
and working capital needs, we have entered into a Purchase and Sale Agreement
("PSA") with PetroHunter a related party. Pursuant to the PSA, we agreed to sell
all of our Powder River Basin Assets. The purchase price for the Powder River
Basin Assets is $45 million, with $20 million to be paid in cash and $25 million
to be paid in shares of PetroHunter common stock at the rate of $1.50 per share.
If this sale is completed, we would


                                       24
<PAGE>

pay off all of our convertible debt, leaving as our only outstanding debt the
notes due to Bruner Family Trust, totaling $6,900,000 as of March 1, 2007 and a
note purchased by Bruner Family Trust in the principal amount of $2,049,728 at
November 30, 2006. We believe that we would then be able to continue to pursue
funding and industry participation alternatives to ensure our ability to
continue to acquire additional acreage and complete additional drilling activity
in the Piceance Basin.

         There are significant contingencies in connection with this proposed
sale, including the ability of PetroHunter to raise the funds required to
complete this transaction. If this proposed sale is not completed, we will be
forced to find another buyer and suitable terms for a sale of the property. If
we cannot find another buyer and suitable terms for a sale, we may be forced to
seek the protection of bankruptcy laws. Furthermore, we may be required to
reduce the sale price, which could result in a significant impairment (and loss
to the Company) to the carrying value of this asset.

GOING CONCERN

         The report of our independent registered public accounting firm on the
financial statements for the year ended November 30, 2006, includes an
explanatory paragraph indicating substantial doubt as to our ability to continue
as a going concern. We have incurred a cumulative net loss $63,699,517 for the
period from inception to November 30, 2006. We require significant additional
funding to sustain our operations and satisfy our contractual obligations for
our planned oil and gas exploration and development operations. Our ability to
establish the Company as a going concern is dependent upon our ability to obtain
additional financing, in order to fund our planned operations and ultimately, to
achieve profitable operations.

LIQUIDITY AND CAPITAL RESOURCES

         OPERATING ACTIVITIES. For the 2006 fiscal year, we used $6,077,479 for
operating activities, as compared to $5,786,772 for fiscal 2005 and $4,259,586
for fiscal 2004. Among the larger adjustments to reconcile the net loss of
$26,163,107 to net cash used by operating activities for fiscal 2006 was
$10,611,349 for amortization of discount and deferred financing costs on
convertible debt and $3,457,101 for finance costs incurred for the waiver of
triggering event described below. In contrast, the adjustments for fiscal 2005
to the net loss of $23,985,645 included $3,695,884 for stock issued for
interest, $4,870,043 for amortization of discount and deferred financing costs
on convertible debt, $2,162,597 for write-off of discount and deferred financing
costs upon conversion of convertible debt, and $5,273,795 for impairment of oil
and gas properties. For fiscal 2004, we incurred a smaller net loss of
$9,831,104, but also had smaller adjustments, the more significant of which
included $2,085,491 for amortization of discount and deferred financing costs on
convertible debt and $2,979,404 for write-off of discount and deferred financing
costs upon extinguishment of convertible debt.

         INVESTING ACTIVITIES. We used $2,431,777 for net investing activities,
after recoveries, in fiscal 2006, as compared to $19,141,078 and $20,412,277 in
fiscal 2005 and 2004, respectively. We used substantially less cash for
additions to oil and gas properties in 2006, $4,145,612, compared to $18,873,239
and $20,266,368 in 2005 and 2004, respectively. The significant decrease in cash
expenditures during 2006 reflects: (1) our capital constraints during the year
and (2) our focus on the Piceance Basin operations rather that the Powder River
as in earlier years. In the Piceance we were carried for the first $14 million
of operational expenditures and had only a 25% working interest thereafter; in
2005 and 2004 we focused on the Powder River Basin, in which we have generally
have much higher working interests. During 2006 we drilled 4 wells and acquired
additional acreage in the Piceance Basin, expending a total of approximately
$15.7 million of which our share of expenditures was approximately $1.7 million.
We also recovered $1.7 million in management fees under the joint venture
agreement with Exxel. This recovered amount was offset against the capital costs
incurred in accordance with full cost accounting rules. In the Powder River
Basin we expended approximately $2.5 million primarily on dewatering operations
and development drilling in the West Recluse area.

         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 $70,179,037 through the period ended November 30, 2006.
Financing activities provided cash of $7,788,967 in fiscal 2006, as compared to
$15,742,472 and $32,946,190 in fiscal 2005 and 2004, respectively.



                                       25
<PAGE>

         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, we 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 we 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.

         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.



                                       26
<PAGE>

         On December 1, 2005, we entered into a Waiver and Amendment Agreement
(the "2005 Waiver and Amendment") 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 us having paid about 50% of the land cost to get the
project started.

         In addition, the 2005 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.

         On April 25, 2006, we entered into a Securities Purchase Agreement with
several accredited investors pursuant to which the investors purchased in the
aggregate, $4,500,000 principal amount of Subordinated Convertible Debentures.
In addition, the investors also received three-year warrants that allow the
holders to purchase 865,383 shares of common stock at $1.60 per share. The
debentures are convertible at any time by the holders into shares of our common
stock at a price equal to $1.56; are subordinated to all of our senior debt; pay
interest at 15% per annum, payable at maturity; and have a term of 30 months,
which will extend automatically until all of our senior debt has been retired.
Additionally, in the event the debentures are retired at maturity, the holders
are entitled to an additional payment equal to the sum of 25% plus 0.75% for
each month (or part thereof) in excess of 30 months that the debentures have
remained outstanding.

         On June 20, 2006, we entered into a Securities Purchase Agreement with
an accredited investor pursuant to which the investor purchased $2,500,000
principal amount of Subordinated Convertible Debentures on the same terms and
conditions set forth in the previous paragraph.

         During the year ended November 30, 2006,we issued four separate
subordinated unsecured promissory notes for a total of $5,500,000 in favor of
Bruner Family Trust UTD March 28, 2005 (the "Bruner Family Trust"), a related
party. One of the trustees of the Bruner Family Trust is Marc E. Bruner, the
president and a director of the company. Interest accrues at the rate of 8% per
annum and the note matures at the later of 120 days from issue or the time at
which our senior indebtedness has been paid in full

         On November 29, 2006, we entered into a Waiver and Amendment Agreement
(the "2006 Waiver and Amendment") with the holders of the 2004 Notes and the
2005 Notes. We had earlier notified the holders of the 2004 Notes and May 2005
Notes of the fact that our accounts payable had exceeded the permitted
$2,500,000 ceiling set forth in the 2004 Notes and May 2005 Notes, thereby
resulting in a Triggering Event under the terms of those Notes. Among other
things, this would have enabled the holders of the Notes to require us to redeem
all or any portion of the outstanding principal amount of the Notes at a price
equal to the greater of (i) 125% of such principal plus accrued and unpaid
interest and (ii) the product of the current conversion rate in effect under the
Notes multiplied by the volume-weighted average price of our common stock. The
holders agreed to waive the Triggering Event in consideration for an amendment
to the 2004 Notes and May 2005 Notes that reset the principal amounts of the
Notes to 125% of the amounts outstanding as of October 31, 2006. We and the
holders also agreed to waive any future Triggering Event that might result from
our accounts payable exceeding $2,500,000. However, if our accounts payable
should exceed $5,000,000, it would result in an immediate breach of the Notes.
We and the holders agreed to other amendments with respect to the 2004 Notes and
May 2005 Notes and warrants previously issued by us to the holders.



                                       27
<PAGE>

         We also obtained the consent of the holders of the 2004 Notes and May
2005 Notes to the proposed sale of our Powder River Basin assets (the "PRB
Sale") to PetroHunter as described herein under Item 1. Business - Proposed Sale
to PetroHunter Energy Corporation. Such consent is required as the holders have
a security interest covering these assets. As a condition to the note holders'
consent, the PRB Sale must be completed by March 31, 2007, we must be in
compliance with the Waiver and Amendment Agreement and all of our obligations
under the various agreements with the note holders. Further, we will be required
to (i) pay the 2004 Notes and May 2005 Notes in full, (ii) deliver to the
holders 1,000,000 of the PetroHunter shares to be received by us as part of the
PRB Sale consideration and 10,000,000 shares of our common stock and (iii)
retire all of our outstanding subordinated convertible debt using the
consideration we receive in the PRB Sale. Additionally, the holders and
PetroHunter must enter into a suitable registration rights agreement with
respect to the 1,000,000 PetroHunter shares.

         Because the PRB Sale was not consummated by January 31, 2007, we issued
2,000,000 additional shares of our common stock to the holders in order to
maintain their consent to the PRB Sale, as required under the 2006 Waiver and
Amendment. We have agreed to register these shares.

         In October 2006, Bruner Family Trust, a related party, acquired a
promissory note we had issued to DAR, LLC in the original principal amount of
$2,600,000. While the note, as amended, had a stated maturity date of December
1, 2006, Bruner Family Trust has stated that it will not enforce its rights
under the note until June 30, 2007.

         WORKING CAPITAL DEFICIENCY. As of November 30, 2006, we had a working
capital deficiency of $19,868,880 compared to a working capital deficiency of
$6,690,444 at November 30, 2005. Included in current liabilities at November 30,
2006 is the current portion of convertible notes payable of $10,019,996 and
related accrued interest of $2,204,078. We may, subject to certain conditions,
make payment of these amounts in shares of common stock rather than cash. For
the year ended November 30, 2006, we made total payments on the 2004 Notes of
$10,769,129, consisting of $9,296,595 in principal repayments and $1,472,534 of
interest. Of that amount we have paid $4,812,248 using shares of common stock,
with the balance $5,956,881 paid in cash.

         We may, subject to certain conditions, make payment of the amounts due
on the convertible notes in shares of common stock rather than cash. For the
time being, however, we expect to make these payments in cash.

         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, 2006.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                        PAYMENTS DUE BY PERIOD
                                                ---------------------------------------------------------------------
                                                                                                              MORE
                                                                 LESS THAN 1                                 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                                     $31,355,505     $11,855,505     $7,000,000   $12,500,000       --
   Interest                                       12,224,215       4,437,161      6,502,466     1,284,589       --
Notes payable and accrued interest                 7,932,158       7,932,158             --            --       --
---------------------------------------------------------------------------------------------------------------------
Office and equipment leases                          366,587         103,882        217,251        45,454       --
---------------------------------------------------------------------------------------------------------------------
TOTAL                                            $51,878,465     $24,328,706    $13,719,717   $13,830,043
---------------------------------------------------------------------------------------------------------------------
------------------
                                       28
<PAGE>


<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 15% to 15.5%.
</FN>
</TABLE>

RESULTS OF OPERATIONS

         YEAR ENDED NOVEMBER 30, 2006 COMPARED TO YEAR ENDED NOVEMBER 30, 2005.
During the year ended November 30, 2006, revenues from natural gas sales
decreased slightly to $1,194,642 from $1,297,194 the year before. A total of 40
wells produced and sold 210,439 Mcf of natural gas in 2006, compared to 38 wells
that sold 211,481 Mcf in 2005. Average prices received for gas sold decreased to
$5.68 in 2006 from $6.13 in 2005. Lease operating and production tax expenses
also decreased in 2006 to $781,136 or $3.71/Mcf, compared to $965,069 or
$4.56/Mcf the year before. This decrease reflects the effect of shutting in
production of one of our Powder River Basin fields with higher operating costs,
together with increased operating efficiencies achieved in the other Powder
River Basin fields. Depreciation, depletion and amortization expense ("DD&A") of
$779,446 in 2006 reflects a significant decrease from the 2005 amount,
$1,887,074. The decrease reflects lower DD&A on oil and gas properties of
$461,711 or $2.19/Mcf in 2006 compared to $1,753,798 or $8.29/Mcf in 2005. The
lower DD&A reflects a much lower amortization base following the impairment
write-downs of $5,273,795 in 2005 and $1,328,432 in 2006. The impairment
write-downs represented the excess of capitalized costs over the ceiling as
calculated in accordance with the full cost rules. The decreased DD&A of oil and
gas assets was partially offset by increased depreciation of ARO asset and
accretion of our ARO in 2006 to $243,306 from $69,914 in 2005. This increase
reflects the anticipated acceleration of the abandonment obligation of wells in
the Powder River field shut in during 2006

         For the year ended, 2006 and 2005, we incurred general and
administrative expenses of $5,016,534 and $5,316,588, respectively, as
summarized below:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                 2006                       2005
---------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                       <C>
Stock based compensation                                                        $1,525,752                $   167,137
---------------------------------------------------------------------------------------------------------------------
Salaries and benefits                                                              940,803                  1,040,138
---------------------------------------------------------------------------------------------------------------------
Professional and consulting fees                                                   281,707                  1,216,186
---------------------------------------------------------------------------------------------------------------------
Investor relations                                                                 814,745                    746,804
---------------------------------------------------------------------------------------------------------------------
Legal                                                                              480,607                    631,921
---------------------------------------------------------------------------------------------------------------------
Travel and entertainment                                                            99,960                    473,238
---------------------------------------------------------------------------------------------------------------------
Office lease and expenses                                                          213,008                    294,140
---------------------------------------------------------------------------------------------------------------------
Audit and accounting                                                               275,287                    224,403
---------------------------------------------------------------------------------------------------------------------
Directors fees                                                                     198,774                    196,000
---------------------------------------------------------------------------------------------------------------------
Prospect generation, maintenance and presentation                                   29,716                    191,193
---------------------------------------------------------------------------------------------------------------------
Insurance and other                                                                156,174                    135,428
---------------------------------------------------------------------------------------------------------------------
                                                          Total                 $5,016,534                $ 5,316,588
---------------------------------------------------------------------------------------------------------------------
</TABLE>

     Significant year-to-year variances include: - on all these you should be
more spefic as to why the $ change -
     o   Stock based compensation expenses in 2006 include the effect of grant
         date fair value accounting of vested employee stock options in
         accordance with SFAS 123R adopted by us on December 1, 2005.  The 2005
         expense was calculated in accordance with the provisions of Accounting
         Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
         to Employees," and related interpretations.
     o   Salaries in 2006 showed a net decrease of $80,000 reflecting staff
         reductions in 2005 ($150,000) partially offset by the reclassification
         of an employee from consultant to full time employee ($70,000). In
         addition, relocation and temporary housing expenses decrease by
         approximately $30,000 in 2006 compared to 2005.



                                       29
<PAGE>
         These reductions were partially offset by increased costs of medical
         insurance and other employee benefits of $10,000.
     o   Professional and consulting fees in 2005 included $732,687 recorded as
         consulting fees representing the fair value of the overriding royalty
         interest assigned to a consultant. No such amount was recorded in 2006.
         The Company termination of the consulting agreement with the founder of
         the Company effective March 1, 2006 reducing consulting fees by $90,000
         in 2006 compared to 2005 and lower. We also recorded lower consulting
         fees for professional engineering ($70,000) following the
         reclassification of a former consultant to employee, and geological
         consulting expenses ($40,000).
     o   Increased investor relations costs reflect the utilization of
         additional shareholder relations professionals ($20,000) in 2006, the
         costs of the February 2006 special shareholders meeting ($25,000) and
         the higher costs of costs of preparing and distributing the 2006 annual
         report to shareholders (5,000) and increased stock exchange listing
         fees reflecting a greater number of shares issued in 2006 compared to
         2005 ($20,000).
     o   Lower legal fees in 2006 reflects our effort to reduce G&A overall
         ($30,000) less new venture activity in 2006 requiring legal advice, as
         compared to the 2005 period when we were negotiating new contracts and
         entering into new ventures in the Piceance Basin ($35,000), and Germany
         and Romania ($60,000).
     o   Lower travel and entertainment costs in 2006 also reflect the reduction
         of new venture activity and less travel associated with new financing
         arrangements as compared to 2005 when we were in negotiations for two
         debt financings.
     o   Lower office expenses in 2006 reflect the full year effect the closing
         of our Miami, Florida office in fiscal 2005 ($60,000), the closing of
         our Casper, Wyoming office in mid 2006 ($3,000) and reduced costs in
         our Denver office as a result of reduced staffing ($18,000).
     o   Increased audit and accounting expenses in 2006 primarily reflect
         additional fees paid for outsourced accounting services ($50,000)
         necessary to accommodate the increase in oil and gas operational
         activity, together with higher audit fees required to review such
         activity.
     o   Lower prospect generation, maintenance and presentation fees in 2006
         reflect the fact we successfully marketed our German and Romanian
         projects in 2005 and had no such activity in 2006.

         During the year ended November 30, 2006, we recorded a gain on the sale
of oil and gas properties of $79,474, reflecting the excess of proceeds received
on the farm-out of the Jiu Valley concession in Romania. In 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. Late in the year ended November 30, 2005, we began to record
operating revenues associated with fees charged to joint venture partners for
operating drilling programs. In 2005 we recorded a total of $43,472 of fees
charged to a joint venture partner for operating the Neues Bergland drilling
programs in Germany. No such operating revenues were recorded in 2006.

         Interest income for the year ended November 30, 2006 includes interest
income earned on cash deposits in commercial banks of $15,614 compared to
$163,261 of interest income during the same period in 2005. The decrease in
interest income reflects the lower balances of cash on deposit in 2006, as a
result of expenditures incurred on oil and gas asset acquisition, exploration
and development and debt service.

         Interest and financing costs increased to $19,547,289 in 2006 from
$12,244,752 in 2005 reflecting the higher debt levels in 2006 and additional
finance costs associated with the waiver of a triggering event in the fourth
quarter of 2006. The table below summarizes interest and financing costs for the
years ended November 30, 2006 and 2005.


                                       30
<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                        2006              2005
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>               <C>
Interest on outstanding debt                                                          $ 4,858,276       $ 3,811,005
--------------------------------------------------------------------------------------------------------------------
Amortization of discount                                                               10,300,875         3,811,970
--------------------------------------------------------------------------------------------------------------------
Amortization of deferred finance costs                                                    310,474         1,058,072
--------------------------------------------------------------------------------------------------------------------
Discount on shares issued upon conversion of principal and interest at below
market rates                                                                              545.563         1,074,428
--------------------------------------------------------------------------------------------------------------------
Liquidated damages on failure to timely register shares and fees paid to extend
note                                                                                       75,000           326,680
--------------------------------------------------------------------------------------------------------------------
Write-off of unamortized discount and deferred financing costs upon issuance of                 -
new debt                                                                                                  3,053,152
--------------------------------------------------------------------------------------------------------------------
Finance costs associated with triggering event                                          3,457,101
--------------------------------------------------------------------------------------------------------------------
                                                                            Total     $19,547,289       $13,135,307
--------------------------------------------------------------------------------------------------------------------
</TABLE>

     Significant year-to-year variances include:
     o   Higher interest on outstanding debt in 2006 compared to 2005 reflects
         the full year effect of the March 2005 and May 2005 convertible notes
         issuances, coupled with higher interest rates on all debt in 2006.
     o   Higher amortization of discount in 2006 reflects (I) the shorter
         amortization period for the 2004 Notes and March 2005 Notes following
         the extinguishment of existing debt and write-off of existing discount
         and the reissue of new debt and recording of new discount effective
         November 30, 2005; (ii) the full year effect of amortization of
         discount on the May 2005 Notes; and (iii) amortization of discount on
         the newly issued April 2006 and June 2006 Notes.
     o   Lower amortization of discount in 2006 reflects reduced deferred
         finance cost balance to be amortized following the extinguishment of
         existing debt and write-off of existing deferred finance costs
         effective November 30, 2005.
     o   Lower discount on shares issued reflects reduced amount of debt and
         interest converted in 2006 ($4.8 million) compared to 2005 ($8.7
         million).
     o   Liquidated damages and extension - in 2005 we incurred $226,680 of
         liquidated damages for failure to timely register shares for resale. No
         such damages were incurred in 2006.
     o   The write-off of unamortized discount and deferred finance costs as a
         result of the extinguishment of existing debt and the reissue of new
         debt was not was recorded in 2005. No such expense was incurred in
         2006.
     o   The finance cost associated with a triggering event recorded in 2006
         reflects the cost of a negotiated settlement with our senior secured
         creditors.  We had notified the holders of the 2004 Notes and the May
         2005 Notes of the fact that a Triggering Event under the terms of the
         Notes had occurred as of August 31, 2006.  Among other things, this
         would have enabled the holders of the Notes to require us to redeem all
         or any portion of the outstanding principal amount of the Notes at a
         price equal to the greater of (i) 125% of such principal plus accrued
         and unpaid interest and (ii) the product of the current conversion rate
         in effect under the Notes multiplied by the volume-weighted average
         price of our common stock.  The holders agreed to waive the Triggering
         Event in consideration for an amendment to the Notes that reset the
         principal amounts of the Notes to 125% of the amounts outstanding as of
         October 31, 2006.  The increased principal in the amount of $957,101
         on the 2004 Notes and $2,500,000 on the May 2005 Notes is included in
         interest expense for the year.

         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 that
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 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



                                       31

<PAGE>

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                                                          $ 1,040,138                $   583,141
----------------------------------------------------------------------------------------------------------------------
Professional and consulting fees                                                 1,216,186                    568,789
----------------------------------------------------------------------------------------------------------------------
Investor relations                                                                 746,804                    537,090
----------------------------------------------------------------------------------------------------------------------
Legal                                                                              631,921                    581,393
----------------------------------------------------------------------------------------------------------------------
Travel and entertainment                                                           473,238                    447,202
----------------------------------------------------------------------------------------------------------------------
Office lease and expenses                                                          294,140                    228,703
----------------------------------------------------------------------------------------------------------------------
Audit and accounting                                                               224,403                    147,769
----------------------------------------------------------------------------------------------------------------------
Directors fees                                                                     196,000                    180,395
----------------------------------------------------------------------------------------------------------------------
Prospect generation, maintenance and presentation                                  191,193                    111,836
----------------------------------------------------------------------------------------------------------------------
Insurance and other                                                                135,428                     96,749
----------------------------------------------------------------------------------------------------------------------
Stock based compensation                                                           167,137                     34.151
----------------------------------------------------------------------------------------------------------------------
                                                          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.

         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.

                                       32
<PAGE>

         Interest and financing costs increased in 2005 to $10,082,155 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, 2005 and 2004:

<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                                                                                 3,053,152
----------------------------------------------------------------------------------------------------------------------
                                                                            Total     $ 13,135,307        $ 6,352,100
----------------------------------------------------------------------------------------------------------------------
</TABLE>

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, 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 years ended November 30, 2006 and 2005, we
recognized impairment expense of $1,328,432 and $5,273,795, respectively,
representing the excess of capitalized costs over the ceiling amount.


                                       33
<PAGE>

         The Company intends to sell a significant portion of its oil and gas
properties and has negotiated a purchase and sale agreement with a related party
to dispose of those assets. Full cost accounting rules do not include provisions
for segregating those assets and identifying them as held for sale. Accordingly,
those assets are reflected on the balance sheet as either evaluated and
unevaluated oil and gas properties, as appropriate.

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, 2006, we had, through acquisition and drilling,
acquired working interests in 249 natural gas wells. A limited number of these
wells had initial gas production during the period, and the others were in
various stages of completion and hook up at November 30, 2006. 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

         On December 1, 2005, we adopted FAS No. 123(R), "Accounting for
Stock-Based Compensation," using the modified prospective method, which results
in the provisions of FAS 123(R) being applied to the consolidated financial
statements on a going-forward basis. Prior periods have not been restated. FAS
123(R) requires companies to recognize share-based payments to employees as
compensation expense on a fair value method. Under the fair value recognition
provisions of FAS 123(R), stock-based compensation cost is measured at the grant
date based on the fair value of the award and is recognized as expense over the
service period, which generally represents the vesting period. The expense
recognized over the service period is required to include an estimate of the
awards that will be forfeited. Previously, no such forfeitures have occurred. We
are assuming no forfeitures going forward based on our historical forfeiture
experience. The fair value of stock options is calculated using the
Black-Scholes option-pricing model.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2006, the FASB issued FASB Staff Position ("FSP") EITF
00-19-2, "Accounting for Registration Payment Arrangements." This FSP specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with FASB Statement No. 5, "Accounting for
Contingencies". This FSP is effective immediately for registration payment
arrangements and the financial instruments subject to those arrangements that
are entered into or modified subsequent to December 31, 2006. For registration
payment arrangements and financial


                                       34
<PAGE>

instruments subject to those arrangements that were entered into prior to
December 31, 2006, the guidance in the FSP is effective January 1, 2006 for us.
We do not believe that this FSP will have a material impact on our financial
position or results from operations.

         In February 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an
amendment of FASB Statements No. 133 and 140." SFAS No. 155 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," and also resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, "Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets." SFAS No. 155 was issued to eliminate
the exemption from applying SFAS No. 133 to interests in securitized financial
assets so that similar instruments are accounted for in a similar fashion,
regardless of the instrument's form. We do not believe that our financial
position, results of operations or cash flows will be impacted by SFAS No. 155
as we do not currently hold any hybrid financial instruments.

         In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes. The interpretation clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. Specifically, the pronouncement prescribes a
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on the related
derecognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. We will be
required to adopt FIN 48 for the fiscal year ended November 30, 2008. We are
reviewing and evaluating the effect, if any, of adopting FIN 48 on our financial
position and results of operations.

         In September 2006, the FASB issued SFAS 157, "Fair Value Measurements".
This Statement defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure related to the use of fair value
measures in financial statements. The Statement is to be effective for our
financial statements issued in 2008; however, earlier application is encouraged.
We are currently evaluating the timing of adoption and the impact that adoption
might have on our financial position or results of operations.

         In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 108 ("SAB 108"). Due to diversity in
practice among registrants, SAB 108 expresses SEC staff views regarding the
process by which misstatements in financial statements are evaluated for
purposes of determining whether financial statement restatement is necessary.
SAB 108 is effective for us on December 1, 2006. We do not believe SAB 108 will
have a material impact on our financial position or results from operations.

OFF BALANCE SHEET ARRANGEMENTS

         From time to time, we enter into off-balance sheet arrangements and
transactions that can give rise to off-balance sheet obligations. As of November
30, 2006, the off-balance sheet arrangements and transactions that we have
entered into include operating lease agreements. We do not believe that these
arrangements are reasonably likely to materially affect our liquidity or
availability of, or requirements for, capital resources.


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 and
Piceance Basin in western Colorado. 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.



                                       35
<PAGE>

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

         None.


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.

















                                       36
<PAGE>


                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

         Our executive officers and directors are:

        NAME                            AGE     POSITION
        ----                            ---     --------
        Marc E. Bruner                   33     President and Director
        Christopher Hardesty             62     Senior Vice President, Chief
                                                Financial Officer, Secretary and
                                                Treasurer
        Cecil D. Gritz                   63     Chief Operating Officer and
                                                Director
        Richard E. Kurtenbach            51     Vice President - Administration
                                                and Controller
        Nathan C. Collins                72     Director
        Dr. James M. Edwards             60     Director
        Robert Thomas Fetters, Jr.       67     Director
        Ronald P. Trout                  67     Director

         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, and a related party. 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 for companies in Denver, Colorado. He was the vice
president of engineering and operations for Vista Resources,


                                       37
<PAGE>

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 was also a 50% owner of that company,
which is no longer active. 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. Dr. Edwards has been the
chief operating officer of Falcon Oil & Gas Ltd., a related party, since June
2006.

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 production for the Exploration Company of
Louisiana, and from 1995 to 1997, he was the senior vice president of


                                       38
<PAGE>

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.

RONALD P. TROUT, DIRECTOR

         Ronald P. Trout became a director in November 2006.  Mr. Trout is a
former senior vice president and was one of the founding partners of Hourglass
Capital Management, Inc., a Texas-based investment management company. While at
Hourglass, he had primary research responsibility for various sectors of the
stock market including machinery, insurance, utilities, and energy. Mr. Trout
retired from Hourglass in April 2001. Prior to the formation of Hourglass, he
was the senior vice president of Mercantile Securities Corp., the trust
investment arm of Mercantile Bank. Mr. Trout has been a Chartered Financial
Analyst (CFA) since 1974. He is a current member of the Dallas Association of
Investment Analysts and the past president of the Oklahoma Chapter of Investment
Analysts. Mr. Trout received bachelor of science and master of science degrees
from the University of Missouri with a major in Finance.

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 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, Fetters and
Trout, 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 Messrs. Collins and Trout
are audit committee financial experts with the meaning set forth in the rules
and regulations under the Securities Exchange Act of 1934.


                                       39
<PAGE>


         The Compensation Committee currently consists of Messrs., Edwards,
Fetters, 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 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.

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, 2006, there was compliance with all
Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners.







                                       40

<PAGE>


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, 2006, 2005 and 2004.

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

                                                                          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     2006     $120,000        -0-          -0-          -0-          -0-          -0-          -0-
  President (1)<F1> 2005     $120,000        -0-          -0-          -0-      100,000 (2)<F2>  -0-          -0-
                    2004     $108,000        -0-          -0-          -0-      750,000 (2)<F2>  -0-          -0-

-----------------------------------------------------------------------------------------------------------------------
  Cecil Gritz,      2006     $110,000        -0-          -0-          -0-          -0-          -0-          -0-
 Chief Operating    2005     $110,000        -0-          -0-          -0-      100,000 (2)<F2>  -0-          -0-
     Officer        2004     $104,450        -0-          -0-          -0-      625,000 (2)<F2>  -0-          -0-
-----------------------------------------------------------------------------------------------------------------------
   Christopher      2006     $100,000        -0-          -0-          -0-          -0-          -0-          -0-
    Hardesty        2005     $100,000        -0-          -0-          -0-      300,000 (2)<F2>  -0-          -0-
 Chief Financial
     Officer
-----------------------------------------------------------------------------------------------------------------------
     Richard        2006     $108,000      $25,000        -0-          -0-          -0-          -0-          -0-
   Kurtenbach       2005     $108,000                                           75,000 (2)<F2>   -0-          -0-
 Vice President,
Chief Accounting
     Officer
-----------------------------------------------------------------------------------------------------------------------
<FN>
(1)<F1> Mr. Bruner has been the President since November 13, 2002.
(2)<F2> These stock options vest in equal amounts quarterly over a five-year
        period.
</FN>
</TABLE>

         No stock options were granted during the year ended November 30, 2006
to the executive officers named in the above table. No options have been
exercised by any of our executive officers.

<TABLE>
<CAPTION>
                   AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
---------------------------------------------------------------------------------------------------------------------------
                                                                       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-               452,500/397,500               -0-/-0-
---------------------------------------------------------------------------------------------------------------------------
      Cecil Gritz                 -0-                   -0-               383,750/341,250               -0-/-0-
---------------------------------------------------------------------------------------------------------------------------
 Christopher Hardesty             -0-                   -0-               120,000/180,000               -0-/-0-
---------------------------------------------------------------------------------------------------------------------------
  Richard Kurtenbach              -0-                   -0-               236,250/213,750               -0-/-0-
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

         Since March 1, 2004, we have paid our outside directors $2,500 per
month, plus an additional $500 per month for each committee on which they serve.
On January 1 of each year, we grant each of our outside directors options to
purchase 60,000 shares of common stock, which vest immediately and are
exercisable for ten years at the market price as of date of grant. The options
granted in January 2006 vested immediately and are exercisable through January
4, 2016 at $1.19 per share. The options granted in January 2007 vested
immediately and are exercisable through January 1, 2017 at $0.19 per share.


                                       41
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During the last fiscal year, the Compensation Committee of the board
was comprised of three directors, Messrs. Edwards, Fetters 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 Compensation
Committee for the year ended November 30, 2006 was composed of Messrs. Edwards,
Fetters, Collins, and Trout 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 2006, 2005 and 2004, the Company
granted common stock options to the Company's employees, consultants and
directors in the amounts of 240,000, 975,000 and 3,500,000, respectively. In
April 2004, 60,000 of the 2004 options were relinquished.

         COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. During the year ended
November 30, 2006, Marc E. Bruner, President and Chief Executive Officer
received total compensation of $120,000 in salary and no cash bonus. The
Compensation Committee considered the factors described above to determine that
the compensation paid to Mr. Bruner during 2006 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,
2006, 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


                                       42
<PAGE>

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.


                                [OBJECT OMITTED]

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
TOTAL RETURN ANALYSIS
                            11/13/2002   11/30/2002    11/30/2003     11/30/2004     11/30/2005    11/30/2006
----------------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>           <C>            <C>            <C>           <C>
GALAXY ENERGY CORPORATION    $ 100.00     $  85.82      $ 170.90       $ 105.22       $  92.00      $ 19.29
----------------------------------------------------------------------------------------------------------------
S&P SC ENERGY INDEX          $ 100.00     $ 115.39      $ 152.21       $ 270.66       $ 389.64      $ 489.72
----------------------------------------------------------------------------------------------------------------
AMEX COMPOSITE               $ 100.00     $  99.71      $ 134.73       $ 172.51       $ 248.34      $ 304.09
----------------------------------------------------------------------------------------------------------------
   Source:  CTA Integrated Communications www.ctaintegrated.com (303) 665-4200.  Data
   from ReutersBRIDGE Data Networks
</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
employment for cause or 30 days after the voluntary termination of employment or
service by the optionee. If an



                                       43
<PAGE>

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, 2006, options to purchase 4,715,000 shares were
outstanding at an average exercise price of $2.10 per share and 1,785,000 shares
were available for future grant.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

         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 January 19, 2007:

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

Marc A. Bruner                                                     11,701,799 (3)<F3>                14.1%
29 Blauenweg
Metzerlen, Switzerland 4116

Resource Venture Management                                         4,899,525                         5.9%
29 Blauenweg
Metzerlen, Switzerland 4116



                                       44
<PAGE>
<CAPTION>
                                                                 AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1>                  OF BENEFICIAL OWNERSHIP        PERCENT OF CLASS (2)<F2>
----------------------------------------                      -----------------------        --------------------
<S>                                                               <C>                                <C>
Bruner Group, LLP                                                   4,500,000                         5.4%
1775 Sherman Street #1375
Denver, Colorado 80203

Marc E. Bruner                                                      2,000,000 (4)<F4>                 2.4%

Cecil D. Gritz                                                        425,000 (5)<F5>                   *

Dr. James Edwards                                                     300,000 (6)<F6>                   *

Richard E. Kurtenbach                                                 262,500 (7)<F7>                   *

Robert Thomas Fetters, Jr.                                            240,000 (8)<F8>                   *

Nathan C. Collins                                                     240,000 (8)<F8>                   *

Christopher S. Hardesty                                               166,000 (9)<F9>                   *

Ronald P. Trout                                                        60,000 (10)<F10>                 *

All officers and directors as a group  (9 persons)                  3,693,500 (11)<F11>               4.4%
*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 82,661,968 shares of Common Stock outstanding as
         of January 19, 2007. If a person listed on this table has the right to
         obtain additional shares of Common Stock within sixty (60) days from
         January 19, 2007, 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 500,000 shares issuable upon exercise of stock options.

(5)<F5>  Includes 425,000 shares issuable upon exercise of stock options.

(6)<F6>  Includes 300,000 shares issuable upon exercise of stock options.

(7)<F7>  Includes 262,500 shares issuable upon exercise of stock options.

(8)<F8>  Includes 240,000 shares issuable upon exercise of stock options.

(9)<F9>  Includes 150,000 shares issuable upon exercise of stock options.

(10)<F10>Includes 60,000 shares issuable upon exercise of stock options.

(11)<F11>Includes 2,177,500 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.


                                       45
<PAGE>


EQUITY COMPENSATION PLANS

         At November 30, 2006, 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              4,715,000                      $2.10                      1,785,000
 approved by security holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not               -0-                          --                           -0-
 approved by security holders
-------------------------------------------------------------------------------------------------------------------
            Total                        4,715,000                      $2.10                      1,785,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE.

         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, chief executive officer 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. Resource Venture Management currently has only one
employee, Marc A. Bruner. During years ended November 30, 2006, 2005 and 2004,
we paid management fees of $30,000, $120,000, and $120,000, respectively, to
Resource Venture Management. We also incurred other costs and expenses of $-0-,
$30,000 and $79,929 with Resource Venture Management for those same periods, of
which $-0-, $12,079 and $37,826 remained outstanding as of the respective period
ends.

HARBOR PETROLEUM, LLC AND FLORIDA ENERGY, INC.

         We used the services of Harbor Petroleum, LLC to acquire 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. As of November 30, 2006, we held leases covering
approximately 1,955 net acres. 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


                                       46
<PAGE>

         During the years ended November 30, 2005 and 2004, we incurred costs
and expenses with Harbor of $41,681and $271,588, respectively. Of those amounts,
compensation expenses paid to Harbor for services provided by the COO and other
Harbor staff, were $27,500 and $163,737 for the corresponding years.
Reimbursement of costs advanced by Harbor on behalf of us of $14,181 and
$132,197 were paid during the years ended November 30, 2005 and 2004,
respectively. We did not make any payments to Harbor during the year ended
November 30, 2006.

THOMAS FAILS/ PANNONIAN INTERNATIONAL

         In connection with the acquisition of Pannonian, we assumed liabilities
due from Pannonian to related parties, including advances from Marc A. Bruner of
$39,500; notes payable and accrued interest due to the Thomas G. Fails,
President of Pannonian, of $37,508; notes payable and accrued interest to a
company wholly owned by Mr. Fails 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 were paid in full. As of November 30, 2005 and 2006, we
owed Mr. Fails $37,400 and $50,999 for office and personnel expenses advanced by
him. These amounts are included in accounts payable, related as of the
respective dates.

BRIAN HUGHES

         In April 2004, we executed a strategic consulting agreement with Brian
Hughes, who was a member of our Advisory Committee. Under the terms of the
agreement, the individual was 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 our acreage in the Powder River Basin
in Wyoming and Montana. In addition, we 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,
we paid Mr. Hughes $21,250 and $590,000 in location fees. During the year ended
November 30, 2005, we assigned overriding royalty interests with a fair value of
$732,687 to Mr. Hughes. We did not pay any location or consulting fees to Mr.
Hughes during the year ended November 30, 2006.

EXXEL ENERGY CORP.

         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. 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. ("Exxel") In exchange
for the assignment of his rights and obligations to Exxel, he received a
significant ownership percentage of Exxel, thereby establishing Exxel as a
related party to Galaxy.

         The terms of the Participation Agreement as amended, required the Exxel
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, 2006, we, as operator of the Piceance Basin project, acquired additional
acreage and drilled four wells on acreage jointly owned by us and Exxel. In
accordance with the terms of the Participation Agreement, Exxel paid the first
$14,000,000 of lease acquisition, drilling, completion, and facilities costs. In
addition, Exxel paid us $1,695,830 as compensation for management of the
drilling program during the year. As of November 30, 2006, Exxel owed us
$923,172 for its share of joint venture costs and management fees. This amount,
included in accounts receivable, joint interest at November 30, 2006, was paid
by Exxel in December 2006 and February 2007.

FALCON OIL & GAS LTD.

        In June 2005, we entered into a farmout agreement with Falcon Oil & Gas
Ltd. ("Falcon") to evaluate the 21,538-gross acre concession held by our
subsidiary in the Jiu Valley Coal Basin in Romania. Marc A. Bruner is the


                                       47
<PAGE>

Chairman of the Board, President and CEO of Falcon. The farmout agreement
required Falcon to pay 100 % of the costs to drill an initial test well and a
second optional well on the concession, and to pay us $100,000 upon approval by
the Romanian government of the assignment of the concession to Falcon to earn a
75% interest in the concession. We recognized a gain of $72,713 on the
transaction, representing the excess of the proceeds over the original cost of
the property. We have completed the drilling of the first test well on the
concession and are evaluating completion and testing operations to be
undertaken.

PETROHUNTER ENERGY CORPORATION

         During the year ended November 30, 2006, we entered into an agreement
with PetroHunter Energy Corporation ("PetroHunter") to utilize a drilling rig
owned and operated by a non-related third party drilling contractor. At January
31 2007, Marc A. Bruner was a 33.4% beneficial shareholder of PetroHunter. The
contract called for drilling costs incurred on our well to be invoiced to and
paid by PetroHunter and then invoiced by PetroHunter to us. We paid PetroHunter
$703,970 under this arrangement during the year ended November 30, 2007. As of
November 30, 2006, we owed PetroHunter $8,860 under the terms of the agreement.
We subsequently paid this amount to PetroHunter in January 2007.

         On December 29, 2006, we entered into a Purchase and Sale Agreement
(the "PSA") with PetroHunter and its wholly owned subsidiary, PetroHunter
Operating Company. Pursuant to the PSA, we agreed to sell all of our oil and gas
interests in the Powder River Basin of Wyoming and Montana (the "Powder River
Basin Assets").

         The purchase price for Powder River Basin Assets is $45 million, with
$20 million to be paid in cash and $25 million to be paid in shares of
PetroHunter common stock at the rate of $1.50 per share.

         Closing of the transaction is subject to approval by our secured note
holders, approval of all matters in its discretion by our Board of Directors,
PetroHunter obtaining outside financing on terms acceptable to its Board of
Directors, and various other terms and conditions. Either party may terminate
the agreement if closing has not occurred by March 31, 2007.

         As required by the PSA, PetroHunter made an initial earnest money
payment of $2.0 million in January 2007. In the event the closing does not occur
for any reason other than a material breach by us, the deposit shall convert
into a promissory note (the "Note"), payable to PetroHunter, and shall be an
unsecured subordinated debt of our company, which is payable only after
repayment of our senior indebtedness.

         PetroHunter became the contract operator of the Powder River Basin
Assets beginning January 1, 2007. At closing, the operating expenses incurred by
PetroHunter as the contract operator will be credited toward the purchase price,
or if closing does not occur, will be added to the principal amount of the Note.

         MAB Resources LLC, a Delaware limited liability company controlled by
Marc A. Bruner, has orally agreed to guarantee our performance under the PSA
(including but not limited to all our obligations under the Note), and has
orally agreed to reimburse PetroHunter for certain losses and damages which
might be incurred as a result of those parties entering into the PSA. We expect
that a written agreement will be entered into by the parties prior to closing.

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.


                                       48

<PAGE>

DIRECTOR INDEPENDENCE

         For a director to be considered independent under the Listing Standards
of the American Stock Exchange ("AMEX"), the board must affirmatively determine
that the director has no direct or indirect material relationship with us. The
AMEX Listing Standards contain guidelines for determining whether a director
should be considered independent. These guidelines are used by the board in
making determinations regarding independence. The board has determined that the
following directors are independent: Dr. James Edwards, Robert Thomas Fetters,
Jr., Nathan C. Collins, and Ronald P. Trout.

         All of the members of our compensation, nominating, and audit
committees are independent.


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

AUDIT FEES

         For the fiscal year ended November 30, 2006, Hein & Associates LLP
("Hein") is expected to bill approximately $140,000 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, 2005, Hein billed $135,313 for
the audit of our annual financial statements and its review of our Form 10-Q
filings and registration statements.

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 2006 and 2005.

TAX FEES

         For the fiscal years ended November 30, 2006 and 2005, Hein billed $263
and $4,419, respectively, for tax compliance, tax advice, and tax planning
services.

ALL OTHER FEES

         There were no fees billed by Hein, other than for the services
described above, for fiscal years 2006 and 2005.

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.




                                       49

<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, 2006 and 2005 and for each of
the three years in the period ended November 30, 2006, and the Report of
Independent Registered Public Accounting Firm 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
--------------------------------------------------------------------------------
    2.1       Purchase and Sale Agreement Between Dolphin Energy Corporation,
              and Galaxy Energy Corporation and PetroHunter Operating Company,
              and PetroHunter Energy Corporation Dated December 29, 2006 (1)
--------------------------------------------------------------------------------
    2.2       Second Amendment to Purchase and Sale Agreement dated February 28,
              2007 (2)
--------------------------------------------------------------------------------
    3.1       Articles of Incorporation (3)
--------------------------------------------------------------------------------
    3.2       Articles of Amendment to Articles of Incorporation (4)(5)
--------------------------------------------------------------------------------
    3.3       Bylaws (3)
--------------------------------------------------------------------------------
   10.1       2003 Stock Option Plan (4)
--------------------------------------------------------------------------------
   10.2       Securities Purchase Agreement dated August 19, 2004 between Galaxy
              Energy Corporation and the Buyers named therein (6)
--------------------------------------------------------------------------------
   10.3       Form of Initial Note (6)
--------------------------------------------------------------------------------
   10.4       Form of Conditional Note (6)
--------------------------------------------------------------------------------
   10.5       Form of Common Stock Purchase Warrant (6)
--------------------------------------------------------------------------------
   10.6       Registration Rights Agreement dated August 19, 2004 between Galaxy
              Energy Corporation and the Buyers named therein (6)
--------------------------------------------------------------------------------
   10.7       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 (6)
--------------------------------------------------------------------------------


                                       50
<PAGE>
--------------------------------------------------------------------------------
REGULATION
S-K NUMBER                               EXHIBIT
--------------------------------------------------------------------------------
   10.8       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 (6)
--------------------------------------------------------------------------------
   10.9       Form of Mortgage (6)
--------------------------------------------------------------------------------
   10.10      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 (7)
--------------------------------------------------------------------------------
   10.11      Participation Agreement between Dolphin Energy Corporation and
              Marc A. Bruner dated February 23, 2005 (7)
--------------------------------------------------------------------------------
   10.12      Securities Purchase Agreement dated March 1, 2005 between Galaxy
              Energy Corporation and the Buyers named therein (7)
--------------------------------------------------------------------------------
   10.13      Form of Note (7)
--------------------------------------------------------------------------------
   10.14      Form of Common Stock Purchase Warrant (7)
--------------------------------------------------------------------------------
   10.15      Registration Rights Agreement dated March 1, 2005 between Galaxy
              Energy Corporation and the Buyers named therein (7)
--------------------------------------------------------------------------------
   10.16      Subordination Agreement (7)
--------------------------------------------------------------------------------
   10.17      Amended Participation Agreement between Marc A. Bruner and Dolphin
              Energy Corporation dated March 16, 2005 (8)
--------------------------------------------------------------------------------
   10.18      Second Amendment to Participation Agreement dated May 24, 2005 (9)
--------------------------------------------------------------------------------
   10.19      Securities Purchase Agreement dated May 31, 2005 between Galaxy
              Energy Corporation and the Buyers named therein (10)
--------------------------------------------------------------------------------
   10.20      Form of Note (10)
--------------------------------------------------------------------------------
   10.21      Form of Qualifying Issuance Warrants (10)
--------------------------------------------------------------------------------
   10.22      Form of Repurchase Warrants (10)
--------------------------------------------------------------------------------
   10.23      Form of Registration Rights Agreement (10)
--------------------------------------------------------------------------------
   10.24      Form of First Amendment to Security Agreement, Pledge Agreement
              and Guaranty (10)
--------------------------------------------------------------------------------
   10.25      Form of Mortgage Amendment (10)
--------------------------------------------------------------------------------
   10.26      Form of Waiver and Amendment to 2004 Notes and Warrants (11)
--------------------------------------------------------------------------------
   10.27      Form of Waiver and Amendment to March 2005 Notes and Warrants (10)
--------------------------------------------------------------------------------
   10.28      Form of Conveyances of Overriding Royalty Interests (10)
--------------------------------------------------------------------------------
   10.29      Form of March 2005 Subordination Agreement (10)
--------------------------------------------------------------------------------
   10.30      Second Amendment to Lease Acquisition and Development Agreement
              (12)
--------------------------------------------------------------------------------


                                       51
<PAGE>
--------------------------------------------------------------------------------
REGULATION
S-K NUMBER                               EXHIBIT
--------------------------------------------------------------------------------
   10.31      Third Amendment to Participation Agreement dated October 4, 2005
              (13)
--------------------------------------------------------------------------------
   10.32      Waiver and Amendment dated December 1, 2005 between Galaxy
                   Energy Corporation and the investors named therein (14)
--------------------------------------------------------------------------------
   10.33      Securities Purchase Agreement dated April 25, 2006 between Galaxy
              Energy Corporation and the Buyers named therein (15)
--------------------------------------------------------------------------------
   10.34      Form of Debenture (15)
--------------------------------------------------------------------------------
   10.35      Form of Warrant (15)
--------------------------------------------------------------------------------
   10.36      Form of Subordination Agreement (15)
--------------------------------------------------------------------------------
   10.37      Securities Purchase Agreement dated June 20, 2006 between Galaxy
              Energy Corporation and the Buyers named therein (16)
--------------------------------------------------------------------------------
   10.38      Waiver and Agreement dated July 7, 2006 between Galaxy Energy
              Corporation and the investors named therein (17)
--------------------------------------------------------------------------------
   10.39      Subordinated Unsecured Promissory Note dated September 28, 2006 to
              Bruner Family Trust UTD March 28, 2005 (18)
--------------------------------------------------------------------------------
   10.40      Subordination Agreement dated September 28, 2006 (18)
--------------------------------------------------------------------------------
   10.41      Subordinated Unsecured Promissory Note dated November 1, 2006 to
              Bruner Family Trust UTD March 28, 2005 (19)
--------------------------------------------------------------------------------
   10.42      Subordination Agreement dated November 1, 2006 (19)
--------------------------------------------------------------------------------
   10.43      Subordinated Unsecured Promissory Note dated November 13, 2006 to
              Bruner Family Trust UTD March 28, 2005 (20)
--------------------------------------------------------------------------------
   10.44      Subordination Agreement dated November 13, 2006 (20)
--------------------------------------------------------------------------------
   10.45      November 2006 Waiver and Amendment Agreement dated November
              29, 2006 among Galaxy Energy Corporation, its subsidiaries
              and the investors named therein (21)
--------------------------------------------------------------------------------
   10.46      Registration Rights Agreement dated November 29, 2006 (21)
--------------------------------------------------------------------------------
   10.47      Subordinated Unsecured Promissory Note dated November 30, 2006 to
              Bruner Family Trust UTD March 28, 2005 (22)
--------------------------------------------------------------------------------
   10.48      Subordination Agreement dated November 30, 2006 (22)
--------------------------------------------------------------------------------
   10.49      Subordinated Unsecured Promissory Note dated February 1, 2007 to
              Bruner Family Trust UTD March 28, 2005 (23)
--------------------------------------------------------------------------------
   10.50      Subordination Agreement dated February 1, 2007 (23)
--------------------------------------------------------------------------------
   10.51      Subordinated Unsecured Promissory Note dated February 26, 2007 to
              Bruner Family Trust UTD March 28, 2005 (24)
--------------------------------------------------------------------------------
   10.52      Subordination Agreement dated February 26, 2007 (24)
--------------------------------------------------------------------------------


                                       52
<PAGE>
--------------------------------------------------------------------------------
REGULATION
S-K NUMBER                               EXHIBIT
--------------------------------------------------------------------------------
   10.53      Combined Amendment to Lease Acquisition and Development Agreements
              and to Participation Agreement (25)
--------------------------------------------------------------------------------
   10.54      Forbearance Agreement between Galaxy Energy Corporation and
              Bruner Family Trust UTD March 28, 2005 dated effective
              December 1, 2006
--------------------------------------------------------------------------------
    21        Subsidiaries of the registrant (4)
--------------------------------------------------------------------------------
   23.1       Consent of Independent Registered Public Accounting Firm, Hein &
              Associates LLP dated March 14, 2007
--------------------------------------------------------------------------------
   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 exhibit to the registrant's current
         report on Form 8-K dated December 29, 2006, filed January 4, 2007, file
         number 0-32237.
(2)      Incorporated by reference to the exhibits to amendment no. 1 to the
         registrant's current report on Form 8-K dated December 29, 2006, filed
         March 1, 2007.
(3)      Incorporated by reference to the exhibits to the registrant's
         registration statement on Form 10-SB, file number 0-32237.
(4)      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.
(5)      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.
(6)      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.
(7)      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.
(8)      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.
(9)      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.
(10)     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.
(11)     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.
(12)     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.
(13)     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.
(14)     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.
(15)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated April 25, 2006, filed April 26, 2006, file
         number 0-32237.



                                       53
<PAGE>


(16)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated June 20, 2006, filed June 26, 2006, file
         number 0-32237.
(17)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated July 7, 2006, filed July 11, 2006, file number
         0-32237.
(18)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated September 28, 2006, filed October 3, 2006,
         file number 0-32237.
(19)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated November 1, 2006, filed November 2, 2006, file
         number 0-32237.
(20)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated November 13, 2006, filed November 16, 2006,
         file number 0-32237.
(21)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated November 29, 2006, filed November 30, 2006,
         file number 0-32237.
(22)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated November 30, 2006, filed December 1, 2006,
         file number 0-32237.
(23)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated February 1, 2007, filed February 1, 2007, file
         number 0-32237.
(24)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated February 26, 2007, filed February 27, 2007,
         file number 0-32237.
(25)     Incorporated by reference to the exhibit to the registrant's current
         report on Form 8-K dated March 12, 2007, filed March 14, 2007, file
         number 0-32237.















                                       54

<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, 2007                  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, 2007
------------------------------------
Marc E. Bruner

                                         Chief Operating Officer and
/s/ CECIL D. GRITZ                       Director                                       March 15, 2007
------------------------------------
Cecil D. Gritz
                                         Senior Vice President, Chief Financial
                                         Officer, Treasurer and Secretary (Principal
/s/ CHRISTOPHER S. HARDESTY              Financial Officer)                             March 15, 2007
------------------------------------
Christopher S. Hardesty

                                         Vice President - Administration and
/s/ RICHARD E. KURTENBACH                Controller (Principal Accounting Officer)      March 15, 2007
------------------------------------
Richard E. Kurtenbach


/s/ NATHAN C. COLLINS                    Director                                       March 15, 2007
------------------------------------
Nathan C. Collins


/s/ DR. JAMES M. EDWARDS                 Director                                       March 15, 2007
------------------------------------
Dr. James M. Edwards


                                         Director
------------------------------------
Robert Thomas Fetters, Jr.


                                         Director
------------------------------------
Ronald P. Trout

</TABLE>



                                       55

<PAGE>





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








          Report of Independent Registered Public Accounting Firm

          Consolidated Balance Sheets
             November 30, 2006 and 2005

          Consolidated Statements of Operations
             Years ended November 30, 2006, 2005 and 2004, and
             Cumulative Amounts from Inception to November 30, 2006

          Consolidated Statement of Stockholders' Equity
             Period from Inception (June 18, 2002) to  November 30,
             2003, and Years ended November 30, 2006, 2005 and 2004

          Consolidated Statements of Cash Flows
             Years ended November 30, 2006, 2005 and 2004, and
             Cumulative Amounts from Inception to November 30, 2006

          Notes to Consolidated Financial Statements
















                                      F-1


<PAGE>




             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Galaxy Energy Corporation
Denver, Colorado

We have audited the consolidated balance sheets of Galaxy Energy Corporation and
subsidiaries (the "Company"),  a development  stage company,  as of November 30,
2006  and  2005,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash flows for the three year period 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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
November 30, 2006 and 2005,  and the results of their  operations and their cash
flows for the three year period then ended,  in conformity  with U.S.  generally
accepted accounting principles.

The financial  statements of the Company for 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, 2006. 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, 2007


                                      F-2
<PAGE>

                           GALAXY ENERGY CORPORATION
                         (A Development Stage Company)
                          CONSOLIDATED BALANCE SHEETS
                           NOVEMBER 30, 2006 and 2005

<TABLE>
<CAPTION>

                                                                            2006                  2005
<S>                                                               <C>                   <C>
                                     ASSETS
Current assets
      Cash and cash equivalents                                   $         608,180     $       1,328,469
      Accounts receivable, joint interest                                    60,475               744,037
      Accounts receivable, joint interest, related party                    923,172                32,845
      Accounts receivable, other                                            102,800               510,196
      Prepaid and other                                                     107,236               167,513
                                                                  ------------------    ------------------
           Total Current Assets                                           1,801,863             2,783,060
                                                                  ------------------    ------------------

Oil and gas properties, at cost, full cost method of accounting
      Evaluated oil and gas properties                                   10,991,945             9,991,629
      Unevaluated oil and gas properties                                 42,767,330            41,464,395
      Less accumulated depletion, amortization and impairment            (8,966,135)           (7,097,299)
                                                                  ------------------    ------------------
                                                                         44,793,140            44,358,725
                                                                  ------------------    ------------------

                                                                  ------------------    ------------------
Furniture and equipment, net                                                121,945               194,877
                                                                  ------------------    ------------------

Other assets
      Deferred financing costs, net                                         565,524               721,024
      Restricted investments                                                459,783               379,782
      Other                                                                  18,003                21,910
                                                                  ------------------    ------------------
                                                                          1,043,310             1,122,716

                                                                  ------------------    ------------------
TOTAL ASSETS                                                      $      47,760,258     $      48,459,378
                                                                  ==================    ==================


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
      Accounts payable and accrued expenses                       $       1,548,168     $       1,880,290
      Accounts payable  - related party                                      64,400                99,078
      Notes payable - related party                                       7,549,728                     -
      Current portion convertible notes payable, net                     10,019,996             5,041,524
      Notes payable                                                               -             2,049,728
      Interest payable                                                    2,488,451               402,884
                                                                  ------------------    ------------------
           Total Current Liabilities                                     21,670,743             9,473,504
                                                                  ------------------    ------------------

Non-current obligations
      Convertible notes payable, net                                     16,308,801            10,392,434
      Interest Payable                                                      572,466               744,833
      Asset retirement obligation                                         1,288,337             1,242,967
                                                                  ------------------    ------------------
           Total Non-current Obligations                                 18,169,603            12,380,234
                                                                  ------------------    ------------------

Commitments and contingencies ( Notes 2 and 10)                                   -                     -

Stockholders' equity
      Preferred stock, $001 par value
           Authorized - 25,000,000 shares
           Issued - none                                                          -                     -
      Common stock, $.001 par value
           Authorized - 400,000,000 shares
           Issued and outstanding - 81,661,968 shares and
           and 68,668,029 shares                                             81,662                68,668
      Capital in excess of par value                                     71,537,766            64,073,382
      Deficit accumulated during the development stage                  (63,699,517)          (37,536,410)
                                                                  ------------------    ------------------
           Total Stockholders' Equity                                     7,919,911            26,605,640

                                                                  ------------------    ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $      47,760,258     $      48,459,378
                                                                  ==================    ==================
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      F-3
<PAGE>
                           GALAXY ENERGY CORPORATION
                         (A Development Stage Company)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                          Cumulative
                                                   Year Ended        Year Ended        Year Ended      From Inception
                                                  November 30,      November 30,      November 30,   (June 18, 2002) to
                                                      2006              2005              2004        November 30, 2006
<S>                                             <C>               <C>               <C>               <C>
Revenue
   Natural gas sales                            $    1,194,642    $    1,297,194    $      122,455    $       2,614,291
   Gain on disposition of oil and gas property               -           197,676                 -              197,676
   Gain on disposition of oil and gas property,
    and other income, related party                     79,474            43,472                 -              122,946
                                                ------------------------------------------------------------------------
                                                     1,274,116         1,538,342           122,455            2,934,913
                                                ------------------------------------------------------------------------

Costs and expenses
   Lease operating expense                             781,136           965,069            59,247            1,805,451
   General and administrative                        5,016,534         5,316,588         3,517,218           17,085,902
   Impairment of oil and gas properties              1,328,432         5,273,795                 -            6,667,996
   Depreciation, depletion and amortization            779,446         1,887,074            76,390            2,743,595
                                                ------------------------------------------------------------------------
                                                     7,905,548        13,442,526         3,652,855           28,302,944
                                                ------------------------------------------------------------------------

Other income (expense)
   Interest and other  income                           15,614           163,291            51,396              230,301
   Interest expense and financing costs            (19,547,289)      (12,244,752)       (6,352,100)         (38,561,787)
                                                ------------------------------------------------------------------------
                                                   (19,531,675)      (12,081,461)       (6,300,704)         (38,331,486)
                                                ------------------------------------------------------------------------

Net Loss                                        $  (26,163,107)   $  (23,985,645)   $   (9,831,104)   $     (63,699,517)
                                                ========================================================================

Net loss per common share - basic and diluted   $        (0.36)   $        (0.37)   $        (0.18)   $           (1.21)
                                                ========================================================================
Weighed average number of common
   shares outstanding - basic and diluted           72,094,609        64,698,889        53,488,853           52,553,620
                                                ========================================================================
</TABLE>

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

                                      F-4

<PAGE>
                           GALAXY ENERGY CORPORATION
                         (A Development Stage Company)
                       STATEMENT OF STOCKHOLDERS' EQUITY
   PERIOD FROM INCEPTION (June 18, 2002) TO NOVEMBER 30, 2002 AND YEARS ENDED
                     NOVEMBER 30, 2003, 2004, 2005 AND 2006

<TABLE>
<CAPTION>
                                                                                                                Deficit
                                                                                                              Accumulated
                                                                                              Capital          During the
                                                                    Common Stock             In Excess         Development
                                                              Shares            Amount       Par Value            Stage
<S>                                                        <C>               <C>           <C>               <C>
Balance, June 18, 2002 (Inception)                                   -       $     -       $         -       $         -

   Issuance of common stock for services
     at $0.05 per share                                      4,000,000           4,000           196,000
   Sale of common stock for cash at:
     $0.001 per share                                       11,500,000          11,500               -
     $0.02 per share                                           500,000             500             9,500
     $0.05 per share                                         3,000,000           3,000           147,000
     $0.34 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         1,598,228
   Issuance of common stock for services at:
     $1.00 per share                                            10,000              10             9,990
     $ .91 per share                                            60,000              60            54,540
   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
   Common stock issued to acquire subsidiary                 1,951,241           1,952          (204,184)
   Warrants to acquire common stock in conjunction with
     convertible debenture issuance                                                            1,285,995
   Intrinsic value of debentures beneficial conversion
     feature                                                                                   2,292,654
   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                                             157,599
     with common stock
   Costs of offering                                                                          (1,784,448)
   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 common stock                                                                           900,504
   Costs of offering                                                                            (449,439)
   Issuance of common stock upon conversion of
     convertible debenture                                   1,525,424           1,525           898,475
   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              8,054,364           8,054         4,744,021


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

                                      F-5
<PAGE>
<CAPTION>
                                                                                                                Deficit
                                                                                                              Accumulated
                                                                                              Capital          During the
                                                                    Common Stock             In Excess         Development
                                                              Shares            Amount       Par Value            Stage
<S>                                                        <C>               <C>           <C>               <C>
   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)
   Warrants issued to placement agents in
      connection with convertible notes payable                                                   27,274
   Discount on convertible notes payable due to
      issuance of detachable warrants                                                            395,986
   Stock based compensation costs for stock
      options granted to employees & non-employees                                             1,525,751
   Discount on convertible notes payable due to
      issuance of detachable warrants                                                            170,555
   Issuance of common stock upon conversion of
      convertible notes and accrued interest                12,993,939          12,994         4,799,255
   Discount on issuance of common stock
      below market value                                                                         545,563
   Net loss                                                                                                    (26,163,107)

                                                         ------------------------------------------------------------------
Balance, November 30, 2006                                  81,661,968       $  81,662     $  71,537,766     $ (63,699,517)
                                                         ==================================================================

</TABLE>


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

                                      F-6
<PAGE>
                           GALAXY ENERGY CORPORATION
                         (A Development Stage Company)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                              Cumulative
                                                          Year Ended       Year Ended       Year Ended       From Inception
                                                          November 30,     November 30,     November 30,   (June 18, 2002) to
                                                              2006             2005             2004        November 30, 2006
<S>                                                      <C>              <C>              <C>               <C>
Cash flows from operating activities
    Net loss                                             $ (26,163,107)   $ (23,985,645)   $  (9,831,104)    $  (63,699,517)
    Adjustments to reconcile net loss to net
       cash (used) by operating activities
    Stock for interest                                         644,549        3,695,884           12,075          4,352,508
    Stock for services                                             -                -                -              264,600
    Stock for services - related party                             -                -                -               90,000
    Oil and gas properties for services                            -            732,687              -              732,687
    Stock for debt - related party                                 -                -                -              233,204
    Amortization of discount and deferred financing
      costs on convertible debt                             10,611,349        4,870,043        2,085,491         17,908,562
    Finance costs incurred  for waiver of triggering
      event                                                  3,457,101              -                -            3,457,101
    Write-off of discount and deferred financing costs
       upon conversion of convertible debt                         -                -          2,979,404          2,979,404
    Write-off of discount and deferred financing costs
       upon extinguishment of convertible debt                     -          2,162,597              -            2,162,597
    Compensation expense on vested stock options             1,525,752          167,137           34,521          1,727,410
    Depreciation, depletion and amortization
       and accretion of ARO expense                            779,446        1,887,074           76,390          2,738,594
    Gain on disposition of oil and gas assets                  (72,713)        (197,676)             -             (270,389)
    Impairment of oil and gas properties                     1,328,432        5,273,795              -            6,667,996
    Other                                                          -                -                -               11,178
    Changes in assets and liabilities:
    Accounts payable - trade, accruals, bank                  (332,121)         454,463          (63,539)            39,658
    overdrafts
    Accounts payable - related                                 (34,679)         (14,679)         (46,274)            64,400
    Interest payable                                         1,913,199          441,998          631,000          3,060,917
    Accounts receivable, prepaids and other
       current assets                                          260,908       (1,256,589)        (142,523)        (1,187,776)
    Other                                                        4,405          (17,861)           4,973            (18,443)
                                                        --------------------------------------------------------------------
Net cash used by operating activities                       (6,077,479)      (5,786,772)      (4,259,586)       (18,685,309)
                                                        --------------------------------------------------------------------

Cash flows from investing activities
    Additions to oil and gas properties                     (4,145,612)     (18,873,239)     (20,266,368)       (45,425,027)
    Management fees earned on operated properties            1,695,830              -                -            1,695,830
    Purchase of furniture and equipment                         (1,995)        (128,056)        (145,909)          (281,172)
    Purchase surety bonds                                      (80,000)        (379,783)             -             (459,783)
    Proceeds from sale of oil and gas asset                    100,000          240,000              -              340,000
    Advance to affiliate                                                            -                -              (60,000)
    Cash received upon recapitalization and merger                                  -                -                4,234
                                                        --------------------------------------------------------------------
Net cash used by investing activities                       (2,431,777)     (19,141,078)     (20,412,277)       (44,185,918)
                                                        --------------------------------------------------------------------


                                      F-7
<PAGE>
<CAPTION>
                                                                                                              Cumulative
                                                          Year Ended       Year Ended       Year Ended       From Inception
                                                          November 30,     November 30,     November 30,   (June 18, 2002) to
                                                              2006             2005             2004        November 30, 2006
<S>                                                      <C>              <C>              <C>               <C>
Cash flows from financing activities
    Proceeds from sale of common stock                             -                -         15,452,800         17,905,300
    Proceeds from sale of convertible notes payable          7,000,000       17,695,000       20,000,000         44,695,000
    Proceeds from sale of convertible debentures                   -                -                -            5,040,000
    Proceed for sale on notes payable - related party        5,500,000                                            5,500,000
    Proceeds from exercise of warrants                             -            992,306           27,000          1,019,306
    Debt and stock offering costs                             (127,700)        (942,169)      (2,419,978)        (3,980,569)
    Payment of convertible notes payable                    (4,583,333)      (1,436,447)             -           (6,019,780)
    Payment of note payable - related party                        -            (15,946)        (113,632)          (129,578)
    Payment of note payable                                                    (550,272)             -             (550,272)
                                                        --------------------------------------------------------------------
Net cash provided by financing activities                    7,788,967       15,742,472       32,946,190         63,479,407
                                                        --------------------------------------------------------------------

Net (decrease) increase in cash                               (720,289)      (9,185,378)       8,274,327            608,180

Cash and cash equivalents, beginning of period               1,328,469       10,513,847        2,239,520                -
                                                        --------------------------------------------------------------------
Cash and cash equivalents, end of period                $      608,180    $   1,328,469    $  10,513,847     $      608,180
                                                        ====================================================================


Supplemental schedule of cash flow information
    Cash paid for interest                              $    2,846,091    $   1,065,442    $     205,084     $    4,559,284
                                                        ====================================================================

Supplemental disclosures of non-cash investing and
financing activities
    Debt incurred for oil and gas properties            $          -      $         -      $   2,600,000     $    3,646,000
                                                        ====================================================================
    Debt incurred for finance costs                     $    3,547,101    $         -      $         -       $    3,547,101
                                                        ====================================================================
    Stock issued for services                           $          -      $         -      $         -       $      354,600
                                                        ====================================================================
    Stock issued for interest and debt                  $    4,812,249    $   8,685,009    $      12,075     $   13,742,538
                                                        ====================================================================
    Stock issued for convertible debentures             $          -      $         -      $   5,640,000     $    5,640,000
                                                        ====================================================================
    Warrants issued for offering and financing costs    $       27,274    $      88,874    $   1,462,124     $    1,685,850
                                                        ====================================================================
    Discount on convertible debt issued                 $      566,541    $  16,538,498    $   4,336,316     $   14,883,630
                                                        ====================================================================
    Conversion of interest to debt                      $          -      $         -      $         -       $       11,178
                                                        ====================================================================
    Stock issued for subsidiary - related               $          -      $         -      $         -       $     (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 financial statements.

                                      F-8

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


NOTE 1 - ORGANIZATION AND BUSINESS COMBINATIONS

Galaxy Energy  Corporation  ("Galaxy")  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,  Galaxy  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. Galaxy 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 is 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
Galaxy.  Since this transaction  resulted in the former  shareholders of Dolphin
acquiring  control of Galaxy,  for  financial  reporting  purposes  the business
combination  was  accounted  for as an  additional  capitalization  of Galaxy (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,  Galaxy 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 Galaxy.

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-9
<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 Galaxy 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 Galaxy
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, 2005 and 2006, the consolidated  financial  statements include Galaxy,
Dolphin,   and  Pannonian  (the   "Company").   All   significant   intercompany
transactions have been eliminated upon consolidation.

LIQUIDITY AND GOING CONCERN

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,
2006 the  Company  incurred  operating  losses of  $26,163,107  and used cash in
operating activities of $6,077,479.  During the year ended November 30, 2006 the
Company's  working capital  deficit  increased to $19,868,880  from  $6,690,444,
while its cash balance  decreased to $608,180 from the November 30, 2005 balance
of $1,328,469. These matters raise substantial doubt about the Company's ability
to continue as a going concern.  The Company's continued operation is contingent
upon its ability to raise additional  capital through debt or equity  placements
or sell  assets  and  ultimately  attaining  profitability  from its oil and gas
operations.  As further discussed in Note 11 - Subsequent Events,  subsequent to
November 30, 2006, the Company entered into a Purchase and Sale Agreement with a
related  party to sell all of the  Company's oil and gas interests in the Powder
River Basin of Wyoming and  Montana  (the  "Powder  River  Basin  Assets").  The
purchase  price for the  Powder  River  Basin  Assets is $45  million,  with $20
million  to be paid  in  cash  and $25  million  to be  paid  in  shares  of the
purchaser's  common stock.  Closing of the transaction is subject to approval by
the Company's secured noteholders,  approval of all matters in its discretion by
the Company's Board of Directors,  the purchaser  obtaining outside financing on
terms  acceptable  to its  Board of  Directors,  and  various  other  terms  and
conditions.  The  Company  intends to use the cash  proceeds to repay the senior
secured   convertible  notes  and  is  in  negotiations  with  the  subordinated
noteholders to repay the principal and accrued interest on their notes utilizing
the shares of common stock of the  purchaser.  If the Company is unable to close
the asset sale to the related  party,  those  assets will be offered for sale to
other  potential  buyers;  however  there is no  assurance  such a sale would be
completed  or that the  Company  will  realize  the full  carrying  value of the
assets.  In such an event the  Company may be required to write off a portion of
the carrying value and such write-off could be material.

The  Company's  continued  operation  is  contingent  upon its  ability to raise
additional capital and ultimately  attaining  profitability from its oil and gas
operations. In addition to the sale of Powder River Basin Assets, the Company is
considering  other  options  for  raising  additional  capital  to fund its 2007
operational  budget such as debt and equity  offerings,  other asset sales,  the
farm-out of some of its 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 additional assets
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.


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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 - Property and Equipment,  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 Company has  negotiated a purchase and sale
agreement with a related party to sell certain of its evaluated and  unevaluated
oil and gas  properties.  The value at which  such  assets  are  carried  on the
balance sheet is supported by an independent  third party appraisal of an amount
approximately  equal to such carrying value,  and the negotiated sales price for
the assets is in excess of the carrying value. If the Company is unable to close
the asset sale to the related  party,  those  assets will be offered for sale to
other  potential  buyers;  however  there is no  assurance  such a sale would be
completed  or that the  Company  will  realize  the full  carrying  value of the
assets.  In such an event the  Company  may be required to write off in the near
term a portion of the carrying value and such write-off 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 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, 2006, the Company has determined no allowance for  uncollectible
receivables is necessary.






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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 has identified  certain oil and gas  properties  which it intends to
sell and has  negotiated a purchase and sale  agreement  with a related party to
dispose of those assets. Full cost accounting rules do no include provisions for
segregating  those assets and  identifying  them as held for sale or segregating
related  revenues and expenses as discontinued  operations.  Accordingly,  those
assets are  reflected on the balance sheet as either  evaluated and  unevaluated
oil and gas properties,  as appropriate and the statement of operations reflects
the related revenues and expenses with other continuing operations.

As of November  30,  2006,  based on oil and gas prices of $49.50 per barrel and
$6.74 per mcf,  the full cost  pool  exceeded  the  above-described  ceiling  by
$297,272 and the Company recorded an impairment of such amount. As of August 31,
2006, the Company's full cost pool exceeded the ceiling  limitation based on oil
and gas prices of $50.00 per barrel and $5.27 per mcf and the Company recognized
impairment expense of $1,031,160 during the quarter ended August 31, 2006.

As of November 30, 2005,  based upon oil and gas prices of $59.35 per barrel and
$6.79  per mcf,  the  Company  recorded  an  impairment  expense  of  $5,273,795
representing the excess of capitalized costs over the ceiling amount.

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.



                                      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 $74,428,  $63,263 and $20,353 was recorded for the years
ended November 30, 2006, 2005 and 2004, respectively.

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 $310,474,
$495,475  and $442,816  for the years ended  November  30, 2006,  2005 and 2004,
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, 2006,  the Company had,  through  acquisition  and  drilling,
acquired  working  interests  in 249 natural  gas and water  disposal  wells.  A
limited number of these wells have recorded gas  production,  and the others are
in various stages of completion  and hook up at,  November 30, 2006. The Company
records 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  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, 2006 and 2005:
                                                     2006             2005
                                                     ----             ----
    Balance beginning of period                $1,242,967        $ 713,073
         Change in estimate                      (161,483)               -
         Liabilities incurred                      42,238          481,193
         Liabilities settled                            -                -
         Accretion                                164,613            48,701
                                               -----------       -----------
    Balance end of period                      $1,288,335        $1,242,967
                                               ===========       ===========

The change in estimate during the year reflects updated plugging and restoration
costs and the  effect of an  increase  of the  Company's  interest  rate used to
calculate the ARO.

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, 2006 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

The Company has followed  Accounting  Principles  Board ("APB")  Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, through
November  30, 2005,  which  resulted in the  accounting  for grants of awards to
employees at their intrinsic  value in the  consolidated  financial  statements.
Additionally,  the Company has recognized  compensation expense in the financial
statements for awards  granted to  consultants,  which must be re-measured  each
period  under the  mark-to-market  as  required  under  EITF  96-18.  Galaxy had
previously  adopted the provisions of FAS No. 123,  "Accounting  for Stock-Based
Compensation,"   as  amended  by  FAS  No.  148,   "Accounting  for  Stock-Based
Compensation --Transition and Disclosure," through disclosure only.

On  December 1, 2005,  the  Company  adopted  FAS No.  123(R),  "Accounting  for
Stock-Based  Compensation," using the modified prospective method, which results
in the  provisions  of FAS 123(R) being  applied to the  consolidated  financial
statements on a going-forward  basis. Prior periods have not been restated.  FAS
123(R)  requires  companies  to recognize  share-based  payments to employees as
compensation  expense on a fair value method.  Under the fair value  recognition
provisions of FAS 123(R), stock-based compensation cost is measured at the grant
date based on the fair value of the award and is  recognized as expense over the
service  period,  which  generally  represents the vesting  period.  The expense
recognized  over the  service  period is  required to include an estimate of the
awards that will be forfeited.  Previously,  no such  forfeitures have occurred.
The Company is assuming no  forfeitures  going  forward  based on the  Company's
historical forfeiture experience.  The fair value of stock options is calculated
using the Black-Scholes option-pricing model.

As of November 30, 2006, options to purchase an aggregate of 4,715,000 shares of
the Company's common stock were  outstanding.  These options were granted during
2006, 2005, and 2004, to the Company's  employees,  directors and consultants at
exercise  prices  ranging  from $1.00 to $3.51 per share.  The  options  vest at
varying  schedules  within five years of their grant date and  typically  expire
within ten years from the grant  date.  Stock-based  employee  compensation  and
stock-based  non-employee  compensation costs were $1,525,752 before tax for the
year ended  November 30, 2006.  These  amounts  were  charged to  operations  as
compensation expense.  Stock-based non-employee  compensation expense granted to
consultants of the Company of $167,137 was charged to operations during the year
ended November 30, 2005. There was no such expense recognized for the year ended
November 30, 2006.

The Company had previously  adopted the  provisions of FAS No. 123,  "Accounting
for  Stock-Based  Compensation,"  as amended  by FAS No.  148,  "Accounting  for
Stock-Based Compensation  --Transition and Disclosure," through disclosure only.
The following table  illustrates the effect on net income and earnings per share
for the years ended November 30, 2005 and 2004 as if the Company had applied the
fair value  recognition  provisions  of FAS No.  123(R) to stock based  employee
awards.



                                      F-15

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>
<CAPTION>
                                                                         Year Ended                  Year Ended
              Net loss:                                              November 30, 2005           November 30, 2004
                                                                   ---------------------       ----------------------
<S>                                                                        <C>                       <C>
              As reported                                                  $(23,985,645)              $(9,831,104)
              Add: Stock-based compensation included in
              net loss                                                          167,132                    34,525
              Less: Stock-based compensation determined
              under the fair value based method
                                                                             (1,253,350)               (1,561,351)
              Pro forma                                                    $(25,071,863)             $(11,357,930)

         Net loss per common share:
              As reported                                                        $(0.37)                   $(0.18)
              Pro forma                                                          $(0.40)                   $(0.21)
</TABLE>

The Company  uses the  Black-Scholes  option-pricing  model to estimate the fair
value of the options at the grant and vesting date. The Company  granted 240,000
and 975,000 options to purchase common stock during the years ended November 30,
2006 and 2005 respectively. The fair values of options granted and vested during
2006,  2005  and 2004  were  calculated  using  the  following  weighted-average
assumptions:

<TABLE>
<CAPTION>
                                                               YEAR ENDED NOVEMBER 30,
                                                     2006               2005                2004
                                                     ----               ----                ----
<S>                                              <C>                <C>                   <C>
           Expected dividend yield                         --                 --                   --
           Expected price volatility             75.51--64.34%       80.33-75.51%         84.19-80.50%
           Risk free interest rate                       4.25%       3.5% to 4.5%                 3.5%
           Expected term of
            options (in years)                        5 years        5--6.5 years         5--6.5 years
</TABLE>

(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. The dilutive weighted average number of
common shares  outstanding  excluded potential common shares from the conversion
of  convertible  debt  and  the  exercise  of  stock  options  and  warrants  of
approximately 10,748,000 for the fiscal year ending November 30, 2006.

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.



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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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,  2006,  2005 and 2004,
purchases  by the  following  companies  exceeded  10% of the  total oil and gas
revenues of the Company:

                                      2006            2005            2004
                                      ----            ----            ----
    Enserco Energy Inc.                94%             82%             100%
    Western Gas Resources               -              13%              -

RECLASSIFICATION

Certain amounts in the 2005 and 2004 and inception to date financial  statements
have been reclassified to conform to the 2006 financial statement presentation.

OFF BALANCE SHEET ARRANGEMENTS

From time-to-time, we enter into off-balance sheet arrangements and transactions
that can give rise to off-balance  sheet  obligations.  As of November 30, 2006,
the off-balance  sheet  arrangements and transactions  that we have entered into
include  operating  lease  agreements and gas  transportation  commitments.  The
Company  does not  believe  that these  arrangements  are  reasonably  likely to
materially affect its liquidity or availability of, or requirements for, capital
resources.

RECENT ACCOUNTING PRONOUNCEMENTS

In December  2006,  the FASB issued FASB Staff  Position  ("FSP") EITF  00-19-2,
"Accounting for Registration Payment  Arrangements." This FSP specifies that the
contingent   obligation   to  make  future   payments  or   otherwise   transfer
consideration  under a  registration  payment  arrangement  should be separately
recognized and measured in accordance with FASB Statement No. 5, "Accounting for
Contingencies".  This FSP is  effective  immediately  for  registration  payment
arrangements and the financial  instruments  subject to those  arrangements that
are entered into or modified  subsequent to December 31, 2006. For  registration
payment  arrangements and financial  instruments  subject to those  arrangements
that were entered  into prior to December  31, 2006,  the guidance in the FSP is
effective  January 1, 2006 for the  Company.  The Company  does not believe that
this FSP will have a material  impact on its financial  position or results from
operations.


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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In February 2006, the Financial  Accounting  Standards  Board (FASB) issued SFAS
No. 155,  "Accounting for Certain Hybrid Financial  Instruments-an  amendment of
FASB Statements No. 133 and 140." SFAS No. 155 amends SFAS No. 133,  "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities," and also resolves issues addressed in SFAS No. 133  Implementation
Issue  No.  D1,  "Application  of  Statement  133  to  Beneficial  Interests  in
Securitized  Financial  Assets."  SFAS  No.  155 was  issued  to  eliminate  the
exemption  from  applying  SFAS No. 133 to  interests in  securitized  financial
assets so that  similar  instruments  are  accounted  for in a similar  fashion,
regardless  of the  instrument's  form.  The Company  does not believe  that its
financial position, results of operations or cash flows will be impacted by SFAS
No. 155 as the Company does not currently hold any hybrid financial instruments.

In June 2006, the FASB issued FASB  Interpretation  No. 48 (FIN 48),  Accounting
for Uncertainty in Income Taxes. The interpretation clarifies the accounting for
uncertainty in income taxes  recognized in a company's  financial  statements in
accordance with Statement of Financial  Accounting Standards No. 109, Accounting
for Income  Taxes.  Specifically,  the  pronouncement  prescribes a  recognition
threshold and a measurement  attribute for the financial  statement  recognition
and measurement of a tax position taken or expected to be taken in a tax return.
The  interpretation  also  provides  guidance  on  the  related   derecognition,
classification,   interest  and  penalties,   accounting  for  interim  periods,
disclosure  and  transition  of  uncertain  tax  positions.  The Company will be
required  to adopt FIN 48 for the  fiscal  year ended  November  30,  2008.  The
Company is reviewing and  evaluating  the effect,  if any, of adopting FIN 48 on
its financial position and results of operations.

In September  2006,  the FASB issued SFAS 157, "Fair Value  Measurements".  This
Statement  defines  fair value as used in  numerous  accounting  pronouncements,
establishes  a  framework  for  measuring  fair  value  in  generally   accepted
accounting  principles and expands  disclosure  related to the use of fair value
measures in financial  statements.  The  Statement  is to be  effective  for the
Company's financial  statements issued in 2008; however,  earlier application is
encouraged.  The Company is currently  evaluating the timing of adoption and the
impact  that  adoption  might  have on its  financial  position  or  results  of
operations.

In September 2006, the Securities and Exchange  Commission  ("SEC") issued Staff
Accounting  Bulletin  No. 108 ("SAB 108").  Due to  diversity in practice  among
registrants,  SAB 108 expresses  SEC staff views  regarding the process by which
misstatements in financial  statements are evaluated for purposes of determining
whether financial statement  restatement is necessary.  SAB 108 is effective for
the Company on December 1, 2006.  The Company does not believe SAB 108 will have
a material impact on its financial position or results from operations.


                                      F-18

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


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.

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.  During  2006  the  Company  continued  limited
drilling operations in the Powder River Basin and conducted extended de-watering
operations on certain  prospects in the basin.  As further  discussed in Note 9,
subsequent  to November 30, 2006,  the Company  entered into a Purchase and Sale
Agreement  with a  related  party  to  sell  all of the  Company's  oil  and gas
interests in the Powder  River Basin of Wyoming and Montana  (the "Powder  River
Basin Assets").

In 2005 the Company entered into an exploration project in the Piceance Basin of
northwestern  Colorado,  acquiring prospective acreage,  evaluating and planning
for an exploratory  drilling program. In 2006 the Company, as operator,  drilled
four wells and  participated  as non-operator in the drilling of four additional
wells in the Piceance  basin.  As of November 30, 2006,  three of the  Company's
operated  wells  are shut in  pending  completion  operations  and  three of the
non-operated  wells have  commenced  production of natural gas,  condensate  and
other hydrocarbon liquids.

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.  In December 2005, the Company commenced drilling
the  initial  test well on the  permit.  The well,  in which the  Company  had a
carried  interest,  was  completed in January  2006.  In July 2006,  the Company
completed  the testing of the four  primary  zones of interest in the  Glantal-1
well and no  significant  natural gas flows were  encountered.  The wellbore was
plugged and abandoned in August 2006. The Company and its joint venture partners
are evaluating further  operations on the permit,  which could include a seismic
program  and  additional  exploratory  drilling.  The  Company's  balance  sheet
reflects no capitalized oil and gas costs related to the Germany cost center.


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


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

ROMANIA COST CENTER

In May 2005 the Company, through its wholly owned subsidiary, Pannonian, entered
into a farmout  agreement with a related party whose  President is a significant
shareholder  of the  Company  (Falcon  Oil &Gas or  "Falcon")  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 Falcon; 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 Falcon.  In addition  Falcon paid  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 Company recognized a gain
of $72,713 on the transaction,  representing the excess of the proceeds over the
original cost of the property. The first test well on the property, in which the
Company has a carried  interest,  has been completed.  Based upon results of the
drilling  operations,  the partners in the project have  determined  to commence
completion  and testing  operations.  As of  November  30 2006,  the Company and
Falcon are planning the  completion  program for the first well and the drilling
of a second well to be carried out in 2007.  Following  the  recognition  of the
gain on farmout, the Company's balance sheet reflects no capitalized oil and gas
costs for the Romanian cost center.

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:

<TABLE>
<CAPTION>
                                                               For the Years Ended November 30,
                                              -------------------------------------------------------------
                                                   2006                     2005                   2004
                                                   ----                     ----                   ----
<S>                                           <C>                      <C>                   <C>
Acquisition of unevaluated properties         $    374,756             $  8,051,122          $  19,365,549
Exploration costs
      United States                              3,607,563                9,613,262             14,645,548
      Europe                                           -                        -                   18,675
Development costs                                  163,292                  499,945                    -
                                              -------------------------------------------------------------
            Oil and gas expenditures             4,145,611               18,164,329             34,029,772
Asset retirement obligations                        42,238                  481,193                710,731
                                              -------------------------------------------------------------
                                              $  4,187,849             $ 18,645,522          $  34,740,503
                                              =============================================================
</TABLE>

During the year ended 2006, the Company  recorded  $1,695,830 in management fees
from Exxel, a related party,  in connection with the development of the Piceance
property.  These  amounts were  recorded as a reduction  to related  exploration
costs incurred by the Company.



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


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

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 years ended November 30, 2006 and 2005, depreciation,
depletion and  amortization  expense  recorded for the United States cost center
was $2.19 and $8.29 per MCF,  respectively.  The Company  recognized  impairment
expense of $1,328,432 in 2006 and $5,273,795 in 2005, representing the excess of
capitalized  costs over the ceiling as calculated  in  accordance  with the full
cost rules.  The Company has identified  certain oil and gas properties which it
intends to sell, and has negotiated a purchase and sale agreement with a related
party to dispose of those assets. All evaluated properties are included in those
assets to be sold.  These  assets  accounted  for a  significant  portion of the
Company's oil and gas sales  revenues  recorded in the years ended  November 30,
2006,  2005 and 2004.  There is no assurance  that the related party sale or any
other asset sale will be completed or that the Company will realize the full net
book value of the assets.  The Company  will  continue to evaluate  the value of
assets held for sale on a quarterly basis as new information  becomes  available
and should impairment of such assets be determined appropriate,  the Company may
be  required  to write off a portion of the  carrying  value and such  write-off
could be material

The table below represents movements of costs within the United States evaluated
properties full cost pool and accumulated depreciation,  depletion, amortization
and impairment for the years ended November 30, 2006, 2005 and 2004:

<TABLE>
<CAPTION>
                                                               2006              2005             2004
                                                               ----              ----             ----
<S>                                                       <C>                <C>              <C>
Full Cost Pool - Evaluated Properties
      Balance beginning of period                         $   9,991,629      $          -     $          -
      Properties with proved reserves                           204,525         4,640,738                -
      Reclassification of impaired, unevaluated
      properties                                                473,265         5,055,320                -
      Asset retirement obligation                               322,526           295,571                -
                                                        ---------------------------------------------------

      Balance end of period                               $  10,991,945      $  9,991,629     $          -
                                                        ===================================================


Depreciation, Depletion, Amortization
      and Impairment
       Balance beginning of period                        $   7,097,299      $     48,394     $          -
      Depreciation, depletion and amortization                  540,404         1,775,110           48,394
      Impairment of oil and gas properties                    1,328,432         5,273,795                -
                                                       ----------------------------------------------------

      Balance end of period                               $   8,966,135      $  7,097,299     $     48,394
                                                        ==================== ==============================
</TABLE>


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


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

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 years ended November 30, 2006 and 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,   $473,265  in  2006,  and
$5,055,320, were reclassified from unevaluated to evaluated properties and added
to the full cost pool amortization base.

The Company has identified  certain oil and gas  properties  which it intends to
sell,  and has  negotiated a purchase and sale agreement with a related party to
dispose of those assets.  The Powder River Basin properties as summarized in the
table below are included in those assets to be sold.

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:

<TABLE>
<CAPTION>
                                                    2006             2005             2004
<S>                                           <C>              <C>              <C>
United States Cost Center
      Powder River  Basin
         Wyoming                              $  33,225,926    $  31,071,223    $  32,280,054
         Montana                                  2,064,659        1,974,470        3,724,593
      Piceance Basin
         Colorado                                 7,022,463        7,022,099
      Other
         Texas                                          -            473,265          739,336
         ARO Asset and other                        454,282          896,052          710,031
                                           -----------------------------------------------------
                                                 42,767,330       41,437,109       37,454,014

German Cost Center                                      -                -             42,234

Romania Cost Center                                     -             27,286           43,585
                                           -----------------------------------------------------
Total Unevaluated Properties                  $  42,767,330    $  41,464,395    $  37,539,833
                                           =====================================================
</TABLE>

Based upon the stage of  development  of the projects,  the Company's  leasehold
position and geological  interpretations,  each prospect meets the  requirements
for continued  capitalization  and  classification  as exploratory in accordance
with the full cost rules and FASB Staff Position No. FAS 19-1,  "Accounting  for
Suspended  Well Costs." In addition,  the value of the Powder River Basin assets
which the  Company  plans to sell is  supported  by an  independent  third party
expert appraisal.




                                      F-22
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)

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

Net Costs Incurred During Periods Ended
        November 30, 2006                               $   2,095,726
        November 30, 2005                                  17,870,729
        November 30, 2004                                  21,734,634
        November 30, 2003                                     603,991
        November 30, 2002                                     462,250
                                                        -------------
                                                        $  42,767,330
                                                        =============

ASSETS IDENTIFIED FOR SALE

Included  in  evaluated  and  unevaluated  properties  is  $36,749,568  of costs
associated  with the properties  underlying the PSA with  PetroHunter  (see Note
11). Substantially all of the Company's oil and gas revenues and lease operating
expenses are associated with these properties.

FURNITURE AND EQUIPMENT

At November 30, 2006 and 2005, furniture and equipment is as follows:

                                                2006               2005
        Furniture and equipment             $   280,429        $   279,178
        Less accumulated depreciation          (158,484)           (84,301)
                                            -------------------------------
                                            $   121,945        $   196,882
                                            ===============================

NOTE 4 - NOTES PAYABLE

RELATED PARTIES

During the year  ended  November  30,  2006 the  Company  issued  four  separate
subordinated  unsecured  promissory  notes for a total of $5,500,000 in favor of
Bruner Family Trust UTD March 28, 2005,  (the "Bruner  Trust") a related  party.
One of the  trustees  of the Bruner  Family  Trust UTD March 28, 2005 is Marc E.
Bruner,  the  president and a director of the company.  Interest  accrues at the
rate of 8% per annum and the note  matures  as  summarized  below or the time at
which the  registrant's  senior  indebtedness  has been paid in full. In October
2006, the remaining  balance of promissory  note  originally  issued to DAR LLC,
together with accrued  interest,  was acquired by the Bruner Trust. The note, in
the amount of  $2,049,728  accrues  interest at the rate of 12% per annum and is
due on December 1, 2006.  Subsequent  to November 30, 2006,  the Company and the
Bruner trust executed a Forbearance Agreement whereby the Bruner Trust agreed to
forbear  from  enforcing  its rights  that  arise as a result of the  failure by
Borrower to make payment on the note by the due date until June 30, 2007.



                                      F-23
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - NOTES PAYABLE (CONTINUED)

At November 30, 2006 notes payable to the Bruner Trust are as follows:

    Issue Date                  Due Date                  Amount
September 28, 2006          January 26, 2007          $   2,500,000
November 1, 2006            March 1, 2007                 1,000,000
November 13, 2006           March 13, 2007                  500,000
November 30, 2006           March 30, 2007                1,500,000
January 14, 2004            December 1, 2006              2,049,728
                                                      -------------
                                                      $   7,549,728
                                                      =============

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.
At November 30, 2005, the remaining  balance of the note payable was $2,049,728.
The note  together  with  accrued  interest  was acquired by the Bruner Trust in
October 2006.


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.  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.  Monthly  principal  repayments  of  $833,333,  plus accrued
interest  commenced on March 1, 2005. At the Company's option,  and assuming the
satisfaction of certain conditions, the Company may pay the monthly installments
in cash or  through  a  partial  conversion  of the  Notes  into  shares  of the
Company's common stock at a conversion rate equal to the lesser of $1.87 (as may
be adjusted to prevent  dilution),  or 93% of the weighted average trading price
of the Company's common stock on the trading day preceding the conversion.  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.




                                      F-24

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


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

On December 1, 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
to $1.25 per share,  granted  additional  warrants to purchase  shares of common
stock and lowered the exercise  price of existing  and newly issued  warrants to
$1.25 per share. In accordance with SFAS 5,  Accounting for  Contingencies,  the
Company 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.  During
the year ended  November  30, 2006,  the Company  recorded  amortization  of the
discount in the amount of $7,012,918 as interest expense.

On July 7, 2006, the Company and the holders of its senior  secured  convertible
notes issued in 2004 and 2005 entered into a Waiver and  Agreement.  The Company
had notified the holders of the 2004 Notes of an Equity  Liquidity  Test Failure
on July 3, 2006, as defined in its agreements  with the holders,  triggering the
holders' right to make an early  repayment  election in the aggregate  amount of
$1,217,929.

In the  Waiver  and  Agreement,  the  Company  and  the  holders  agreed  to the
following:

       o      The  waiver  of the  holders'  right  to make an  early  repayment
              election  as a  result  of the July  2006  Equity  Liquidity  Test
              Failure and any Equity Liquidity Test Failure as of August 1, 2006
              and/or September 1, 2006;

       o      The deferral  of  the  August 2006  and September 2006 installment
              payments  on  the 2004 Notes until October 2, 2006, unless earlier
              converted by the holders;

       o      The  ability  of  the  holders  to  convert  up to  $5,000,000  in
              principal  amount of the 2004 Notes,  plus  related  interest,  at
              their option as a "Company Alternative Conversion" under the notes
              through  September  30,  2006,  with the amounts  converted  to be
              applied first to the August 2006  installment  payment,  second to
              the  September  2006  installment   payment,  and  then  to  those
              installments nearest to the maturity date of the 2004 Notes; and

       o      The  waiver of the  Company's right to prepay any part of the 2004
              or 2005 Notes.

During  July,  August and  September  2006,  the  holders  converted  a total of
$4,812,249  of principal  and accrued  interest  into  12,993,939  shares of the
Company's  common  stock,  in  accordance  with  the  terms  of the  Waiver  and
Agreement.



                                      F-25

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


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

On November 29, 2006, the Company and the holders of the 2004 Notes entered into
a Waiver and  Amendment  Agreement.  The Company had notified the holders of the
2004 Notes of the fact that a Triggering  Event under the terms of the Notes had
occurred as of August 31, 2006. Among other things,  this would have enabled the
holders of the Notes to require  the Company to redeem all or any portion of the
outstanding principal amount of the Notes at a price equal to the greater of (i)
125% of such principal plus accrued and unpaid  interest and (ii) the product of
the  current  conversion  rate in  effect  under  the  Notes  multiplied  by the
volume-weighted  average price of Galaxy's  common stock.  The holders agreed to
waive the Triggering Event in  consideration  for an amendment to the 2004 Notes
that reset the principal amounts of the Notes to 125% of the amounts outstanding
as of October 31,  2006.  The  increased  principal in the amount of $957,101 is
included in interest expense for the year.

MARCH 2005 NOTES

In March 2005, the Company  completed a private offering of Senior  Subordinated
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 connection with the December 1, 2005 agreement  entered into with the holders
of the 2004 Notes,  as discussed  above,  the terms of the March 2005 Notes were
also  amended to lower the  conversion  price to $1.25 per share,  and lower the
exercise price of existing  warrants to $1.25 per share. In accordance with SFAS
5,  Accounting  for  Contingencies,  the  Company  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.  During the year ended  November  30,  2006,  the  Company  recorded
amortization of the discount in the amount of $2,370,925 as interest expense.







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


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

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 $791,114
and  $394,479 is included in interest  expense for the years ended  November 30,
2006 and 2005 respectively.

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 years ended November 30, 2006 and 2005  amortization  of deferred  financing
costs of $127,907 and $64,129, respectively is included in interest expense.

On November 29, 2006,  the Company and the holders of the May 2005 Notes entered
into a Waiver and Amendment  Agreement.  The Company had notified the holders of
the May 2005 Notes of the fact that a  Triggering  Event  under the terms of the
Notes had occurred as of August 31, 2006.  Among other  things,  this would have
enabled  the  holders of the Notes to require  the  Company to redeem all or any
portion of the outstanding principal amount of the Notes at a price equal to the
greater of (i) 125% of such principal plus accrued and unpaid  interest and (ii)
the product of the current  conversion rate in effect under the Notes multiplied
by the  volume-weighted  average  price of Galaxy's  common  stock.  The holders
agreed to waive the Triggering  Event in  consideration  for an amendment to the
May 2005  Notes  that  reset the  principal  amounts of the Notes to 125% of the
amounts  outstanding  as of October 31,  2006.  The  increased  principal in the
amount of $2,500,000 is included in interest expense for the year.

APRIL 2006 DEBENTURES

In April  2006,  the  Company  completed  a  private  offering  of  Subordinated
Convertible  Debentures and Warrants to a group of accredited  investors.  Gross
proceeds from the offering were  $4,500,000.  The Debentures pay interest at 15%
per annum,  have a 30-month  maturity  which will extend  under the terms of the
financing  until all of the  Company's  senior  debt has been  retired,  and are
subordinated  to Galaxy's  secured debt and existing senior debt. The Debentures
are  convertible  into  2,884,615  shares of common  stock based on a conversion
price of $1.56 per share.  Debenture  purchasers  received  warrants to purchase
865,383  shares of the Company's  common stock at an exercise price of $1.60 per
share, for a period of five years.  Principal and interest on the Debentures are
payable upon maturity.


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


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

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 $1.06 per share,  zero  dividends,  expected  volatility of
67.46%,  risk free interest  rate of 4.875% and expected life of 2.5 years.  The
fair value of the warrants of $295,029  resulted in a discount of $395,986 which
has been  recorded  as  additional  paid in  capital  and as a  discount  to the
Debentures and is being amortized over the term of the Debentures.  Amortization
of the  discount of $95,315 is  included in interest  expense for the year ended
November 30, 2006.

JUNE 2006 DEBENTURES

In  June  2006,  the  Company  completed  a  private  offering  of  Subordinated
Convertible  Debentures and Warrants to an accredited  investor.  Gross proceeds
from the offering were $2,500,000. The Debentures pay interest at 15% per annum,
have a 30-month  maturity  which will  extend  under the terms of the  financing
until all of the Company's senior debt has been retired, and are subordinated to
Galaxy's  secured debt and existing  senior debt. The Debentures are convertible
into 1,602,564  shares of common stock based on a conversion  price of $1.56 per
share. The Debenture  purchaser  received warrants to purchase 480,769 shares of
the Company's common stock at an exercise price of $1.60 per share, for a period
of five years.  Principal  and  interest  on the  Debentures  are  payable  upon
maturity.

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 $0.79 per share,  zero  dividends,  expected  volatility of
67.36%,  risk free interest  rate of 5.125% and expected life of 2.5 years.  The
fair value of the warrants of $92,695  resulted in a discount of $170,555  which
has been  recorded  as  additional  paid in  capital  and as a  discount  to the
Debentures and is being amortized over the term of the Debentures.  Amortization
of the  discount of $30,603 is  included in interest  expense for the year ended
November 30, 2006

The Company has evaluated the embedded conversion feature in the 2004, the March
2005,  and the May 2005 Notes,  and the April 2006 and the June 2006  Debentures
and  concluded  the feature  does not  require  classification  as a  derivative
instrument  because  the  feature  would be  classified  as  equity if it were a
freestanding  instrument and therefore,  meets the scope exception found in SFAS
133, ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133").
Included in the evaluation is the  conclusion the Notes and Debentures  meet the
definition of "conventional  convertible  instrument" and therefore the embedded
conversion  feature is not subject to the  provisions of EITF 00-19.  Further we
have  evaluated the detachable  warrants  related to the 2004 and the March 2005
Notes and the April 2006 and the June 2006  Debentures,  and concluded  that the
warrants also meet the scope exception  found in SFAS 133 and are  appropriately
classified  as equity.  We have also  evaluated  the  freestanding  registration
rights  agreements  attached to the Notes and Debentures and have concluded they
do meet the definition of derivative  instruments under SFAS 133. The fair value
of the derivative liabilities has been determined to not be significant based on
a probability- weighted, discounted cash flow evaluation of its terms.



                                      F-28
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - CONVERTIBLE NOTES PAYABLE (CONTINUED)

At November 30, 2006and 2005 convertible notes consist of the following:

                                                      As of November 30,
                                                   2006                2005
      2004 Notes                             $   4,160,505       $   12,500,000
         Less unamortized discount                (663,002)          (7,675,920)
      March 2005 Notes                           7,695,000            7,695,000
         Less unamortized discount              (1,172,506)          (3,543,431)
      May 2005 Notes                            12,500,000           10,000,000
         Less unamortized discount              (2,750,577)          (3,541,691)
      April 2006 Notes                           4,500,000                  -
         Less unamortized discount                (300,671)                 -
      June 2006 Notes                            2,500,000                  -
         Less unamortized discount                (139,951)                 -
                                              ----------------------------------
                                                26,328,798           15,433,958
      Less current portion, net                (10,019,996)          (5,041,524)
                                              ----------------------------------
      long term portion, net                 $  16,308,801       $   10,392,434
                                             ===================================

Total  principal  payments  due in the next twelve  months for the notes  listed
above are $11,855,505. 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, 2006 the Company's  debt maturity  schedule,  including  related
party debt is as follows:


                        2007                        $19,405,233
                        2008                          4,500,000
                        2009                          2,500,000
                        2010                         12,500,000
                                                    -----------
                                                    $38,905,233
                                                    ===========


NOTE 6 - STOCKHOLDERS' EQUITY

COMMON STOCK

During the year ended November 30, 2006, the Company issued shares of its common
stock as follows:
    o    12,993,939 shares issued Holders of Senior Secured Convertible Notes in
         connection  with the  conversion of $4,812,248 of principal and accrued
         interest at various  conversion rates,  ranging from $0.28 to $0.60 per
         share.


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


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

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

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), a related party,
         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).



                                      F-30
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

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 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
December 2005 the exercise price was reset to $1.25 per share in connection with
the Waiver and Amendment  entered into with the holders of the 2004 and May 2005
Notes.




                                      F-31
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

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 December 2005 in connection with
the Waiver and Amendment  entered into with the holders of the 2004 and May 2005
Notes the number or warrants was increased to 6,400,001  and the exercise  price
was  reset to $1.25  per  share.  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 December  2005 the  exercise  price was reset to
$1.25 per share in connection  with the Waiver and  Amendment  entered into with
the holders of the 2004 and May 2005 Notes.

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 December 2005 the exercise price
was reset to $1.25 per share in connection with the Waiver and Amendment entered
into with the holders of the 2004 and May 2005 Notes.

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.  In December 2005 the exercise price
was reset to $1.25 per share in connection with the Waiver and Amendment entered
into with the holders of the 2004 and May 2005 Notes.

In April 2006, in connection  with the private  placement of convertible  notes,
the Company issued warrants to purchase  868,383 shares of common stock at $1.60
per share for a period of five years.

In June 2006, in connection with the private placement of convertible notes, the
Company issued warrants to purchase  480,769 shares of common stock at $1.60 per
share for a period of five years.

As of November 30, 2006, warrants issued and outstanding are as follows:

<TABLE>
<CAPTION>
            Issue                         Shares            Exercise       Expiration
            Date                       Exercisable           Price            Date
<S>                                      <C>             <C>            <C>

      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              $$1.25  December 18, 2007
      January 15, 2004                   1,680,414               $1.25  January 15, 2009
      August 19, 2004                    5,494,805               $1.25  August 19, 2009
      October 27, 2004                     100,000               $1.25  October 27, 2009
      March 1, 2005                      1,637,234               $1.25  March 1, 2008
      May 31, 2005                         200,000               $1.25  May 31, 2010
      December 1, 2005                   1,205,196               $1.25  August 19, 2009
      April 26, 2006                       868,383               $1.60  April 26, 2011
      June 20, 2006                        480,769               $1.60  June 20, 2011

                                        14,832,341
                                        ==========
</TABLE>

At November 30, 2006 and 2005 the weighted  average  exercise price for warrants
outstanding is $1.20 and $1.43, respectively, and the weighted average remaining
contractual life is 1.6 and 2.3 years, respectively.



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


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  shares of common stock for
the plan.  At November  30, 2006,  and  November  30, 2005,  options to purchase
1,785,000  and  2,025,000  shares,  respectively,  were  available to be granted
pursuant to the stock option plan.

On January 4, 2006, the Company granted each of the Company's  outside directors
options to purchase  60,000 shares of the  Company's  common stock for a term 10
years at the closing price of the common stock on the date of grant. The options
were vested upon grant.  On September 1, 2006, the Company  amended the terms of
the options  previously  granted to two  directors who retired from the Board of
Directors during the period.  The amendment revised the term so that the options
will not expire 30 days after the  termination  of  services,  but instead  will
expire  according to their original  expiration  dates and will continue to vest
according to their original vesting schedules.

A summary of option activity under the Plan as of November 30, 2006 and 2005 and
changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                                                                      Weighted Avg
                                                  Number of        Weighted Avg         Remaining         Aggregate
                                                                     Exercise          Contractual
                                                   Shares              Price              Term         Intrinsic Value
<S>                                                  <C>              <C>                 <C>            <C>

Options outstanding - December 1, 2004               3,500,000        $ 2.37
      Granted during period                            975,000        $ 1.32
      Exercised during period                                -             -
      Forfeited during period                                -             -
      Expired during period                                  -             -
Options outstanding -November 30, 2005               4,475,000        $ 2.15

Options outstanding - December 1, 2005               4,475,000        $ 2.15
      Granted during period                            240,000        $ 1.19
      Exercised during period                                -             -
      Forfeited during period                                -             -
      Expired during period                                  -             -
                                               -----------------------------------------------------------------------
Options outstanding -November 30, 2006               4,715,000        $ 2.10              7.61           $ 7,207,557
                                               =======================================================================

Exercisable at November 30, 2006                     2,825,000        $ 2.10              7.63           $ 5,919,800
                                               =======================================================================
</TABLE>

The weighted  average grant date fair value of options  granted during the years
ended November 30, 2006 and 2005 was $ 0.69 and $0.97 per share. There have been
no options exercised under the terms of the Plan.



                                      F-33
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - STOCK OPTION PLAN (CONTINUED)

A summary of the status of the  Company's  nonvested  options as of November 30,
2006 and 2005 and changes during the years then ended is presented below.

<TABLE>
<CAPTION>
                                                                                        Weighted Average
                                                                   Number of Shares         Fair Value
                                                                   -------------------------------------
<S>                                                                 <C>                   <C>
Non-Vested Options - December 1, 2004                                2,566,250            $     1.77
      Granted during  period                                           975,000            $     0.97
      Exercised during period                                              -              $       -
      Vested during period                                            (841,250)           $     1.49
      Forfeited during period                                              -              $       -
                                                                   ------------
Non-Vested Options - November 30, 2005                               2,700,000            $     1.55
      Granted during  period                                           240,000            $     0.69
      Exercised during period                                              -              $       -
      Vested during period                                          (1,050,000)           $     1.29
      Forfeited during period                                              -              $       -
                                                                   -------------
Non-Vested Options - November 30, 2006                               1,890,000            $     1.47
                                                                   =============
</TABLE>

As of November 30, 2006, there is $2,772,765 of total unrecognized  compensation
cost related to nonvested  share-based  compensation  arrangements granted under
the Plan. That cost is expected to be recognized over a weighted-average  period
of 2.42  years.  The total  fair  value of shares  vested  during the year ended
November 30, 2006 and 2005 was $1,358,392 and $1,253,350, respectively.

The  following  table  presents  additional  information  related to the options
outstanding at November 30, 2006:

<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                    6.5
                 1.07                   50,000                   10,000                    9.0
                 1.19                  240,000                  240,000                    9.1
                 1.26                   50,000                   50,000                    8.1
                 1.30                  200,000                  200,000                    7.7
                 1.34                  875,000                  153,750                    8.0
                 1.50                  300,000                  112,500                    7.4
                 1.55                  325,000                  137,500                    7.6
                 2.24                   60,000                   60,000                    7.4
                 2.64                2,375,000                  831,250                    7.4
                 3.51                  180,000                  180,000                    7.3
                                    ----------                 --------

                                     4,475,000                1,775,000                    7.6
                                    ==========                =========                    ====
</TABLE>




                                      F-34

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


NOTE 8 - INCOME TAXES

The Company has not filed its Federal income tax returns for 2005 and 2006.
Upon filing of the returns adjustments may be required to the components of
the deferred tax assets and liabilities.  However, no tax expense will be
recorded as a result of a full valuation allowance.

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

<TABLE>
<CAPTION>
                                                                        Years Ended November 30,
                                                                 2006           2005             2004
<S>                                                            <C>             <C>              <C>
Federal statutory income tax rate                               (35.0%)        (35.0%)          (34.0%)
State income taxes                                              (3.25%)         (3.3%)           (3.3%)
Permanent differences - interest on convertible
    Debt                                                        16.25%           6.5%            15.1%
    Other
Increase in valuation allowance                                 22.0%           31.8%            22.2%
                                                               ------          ------           ------
NET INCOME TAX PROVISION (BENEFIT)                                 -               -                -
                                                               ======          ======           ======
</TABLE>

The principal sources of temporary  differences resulting in deferred tax assets
and tax liabilities at November 30, 2004 are as follows:
<TABLE>
<CAPTION>
                                                         2006               2005                2004
<S>                                                 <C>              <C>                 <C>
Deferred tax assets
   Federal and state net operating loss
         Carryovers                                 $  14,614,819    $    13,155,000     $       3,671,000
   Asset retirement obligation                            711,757            472,000               265,000
    Oil and gas property                                                     657,000                     -
    Accrued related party interest and interest on
     convertible debt                                   1,612,567
   Other                                                        -             10,000                     -
                                                    --------------   ----------------    ------------------
     Total deferred taxes                           $  16,939,143    $    14,294,000     $       3,936,000
                                                    ==============   ================    ==================

Deferred tax liabilities
  Intangible drilling costs and other exploration
     costs capitalized for financial reporting
     purposes                                       $  (2,916,082)                 -              (319,000)
   Deferred financing costs                              (216,313)
   Property and equipment                                    (778)
     Other                                                                                         (15,000)
                                                    --------------   ----------------    ------------------
   Total deferred liabilities                          (3,133,173)                 -              (334,000)

   Net deferred tax asset                              13,805,970         14,294,000             3,602,000
   Less:  valuation allowance                         (13,805,970)       (14,294,000)           (3,602,000)
                                                    --------------   ----------------    ------------------
   Deferred tax liability                           $           -    $             -     $               -
                                                    ==============   ================    ==================
</TABLE>



                                      F-35
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - INCOME TAXES (CONTINUED)

The Company has a $38,208,676  net operating  loss  carryover as of November 30,
2006.  The net operating  losses may offset  against  taxable income through the
year ended November 2026. A portion of the net operating loss  carryovers  begin
expiring in 2020 and may be subject to U.S.  Internal  Revenue  code Section 382
limitations.

The Company has  provided a valuation  allowance  for the  deferred tax asset at
November 30, 2006, as the  likelihood of the  realization  of the tax benefit of
the  net  operating  loss  carryforward  cannot  be  determined.  The  valuation
allowance  decreased by approximately  $488,030 and increased by $10,692,000 for
the years ended November 30, 2006 and 2005, respectively.


NOTE 9 - RELATED PARTY TRANSACTIONS

The Company incurred  consulting fees related to services provided by RVM in the
amounts of$30,000,  $120,000 and $120,000 for the years ended November 30, 2006,
2005 and 2004,  respectively.  RVM also billed the Company,  $-0-, $30,000,  and
$79,929,  for  reimbursement  of costs and  expenses  incurred  on behalf of the
Company during the same years.

All amounts paid in 2006, 2005 and 2004 were paid in cash. At November 30, 2006,
2005 and 2004 the  Company  included  amounts  due to RVM of $-0-,  $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 Marc A. Bruner to acquire all or a portion
of the remaining  41-2/3% working  interest in the subject  properties.  Marc A.
Bruner subsequently assigned his rights and obligations under the Agreement to a
third party company (the  "Assignee"),  unrelated at the time of assignment.  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, 2006 the Company,  as operator of the Piceance Basin
project,  acquired  additional acreage and drilled four wells on acreage jointly
owned by the  Assignee  and the  Company.  In  accordance  with the terms of the
Participation  Agreement  the  Assignee  paid  the  first  $14,000,000  of lease
acquisition,  drilling,  completion,  and  facilities  costs.  In addition,  the
Assignee  paid the Company  $1,695,830  as  compensation  for  management of the
drilling program during the year. As of November 30, 2006, the Assignee owed the
Company  $923,172 for its share of joint venture costs and management fees. This
amount, included in accounts receivable, joint interest at November 30, 2006 was
paid by the Assignee in December 2006 and February 2007.

During the year ended 2006, the Company  recorded  $1,695,830 in management fees
from Exxel, a related party,  in connection with the development of the Piceance
property.  These  amounts were  recorded as a reduction  to related  exploration
costs incurred by the Company.


                                      F-36

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


NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

During the year ended  November  30,  2005,  the Company  entered into a farmout
agreement with Falcon Oil and Gas Ltd., ("Falcon").  Marc A. Bruner is President
and CEO of Falcon  and is the  founder of the  Company.  The  farmout  agreement
called for Falcon and the Company to evaluate the concession held by the Company
in the Jiu Valley Coal Basin in Romania.  The farmout agreement  required Falcon
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 Falcon to earn a 75%
interest  in the  concession.  The Company  recognized  a gain of $72,713 on the
transaction,  representing  the excess of the proceeds over the original cost of
the  property.  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  Petroleum  LLC,  ("Harbor")  is a company  owned 50% and  managed by the
Company's Chief Operating  Officer ("COO").  During the years ended November 30,
2005 and, 2004 the Company incurred costs and expenses with Harbor of $41,681and
$271,588,  respectively.  Of those amounts, compensation expenses paid to Harbor
for  services  provided  by the COO and other  Harbor  staff,  were  $27,500 and
$163,737 for the corresponding years.  Reimbursement of costs advanced by Harbor
on behalf of the  Company of $14,181  and  $132,197  were paid  during the years
ended  November  30, 2005 and,  2004,  respectively.  The  Company  paid made no
payments to Harbor during the year ended November 30, 2006

Florida Energy,  Inc.  ("Florida") is a company owned and managed by the brother
of Marc A.  Bruner and the uncle of our  President - Marc E.  Bruner.  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  $198,775,  $193,500and  $180,000
during the years ended November 30, 2006, 2005 and 2004. As of November 30, 2006
and 2005,  $27,000  and  $36,000 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  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. The Company paid no location or
consulting fees to the individual in the year ended November 30, 2006.



                                      F-37
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

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.  As of November 30, 2005 and
2006 the Company owed the President of Pannonian  $37,400 and $50,999 for office
and personnel expenses advanced by the President.  These amounts are included in
accounts payable, related as of the respective dates.

During the year ended November 30, 2006,  the Company  entered into an agreement
with PetroHunter Energy Corporation  ("PetroHunter"),  a corporation whose major
shareholder is Marc A. Bruner, to utilize a drilling rig owned and operated by a
non-related  third party  drilling  contractor,  which was under  contract  with
PetroHunter at the time. The Company's largest  shareholder,  was at January 31,
2007 a 33.4%  beneficial  shareholder of  PetroHunter.  The contract  called for
drilling  costs  incurred  on the  Company's  well to be invoiced to and paid by
PetroHunter and then invoiced by PetroHunter to the Company.  As of November 30,
2006, the Company owed PetroHunter $8,860 under the terms of the agreement. Such
amount was subsequently paid by the Company to PetroHunter.

See also Note 11 - Subsequent  Events for the  discussion of a purchase and sale
agreement entered into by the Company and PetroHunter subsequent to November 30,
2006

See Note 4 - Notes  Payable - Related  Parties  for the  discussion  of notes to
related parties.


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.
Total minimum rental payments for non-cancelable  operating leases for the years
ending November 30 are as follows:

                      2007                $103,881
                      2008                $107,834
                      2009                $109,416
                      2010                $ 45,454


Rent  expense was  approximately  $113,695,  $125,616  and $98,000 for the years
ended November 30, 2006, 2005 and 2004, respectively.


                                      F-38
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

DELAY RENTALS

In conjunction with the Company's  working  interests in undeveloped oil and gas
prospects,  the Company  must pay  approximately  $104,000 in delay  rentals and
other  costs  during the fiscal year ending  November  30, 2007 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 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 29, 2006, the Company  entered into a Purchase and Sale Agreement
(the "PSA") with PetroHunter Energy Corporation  ("PetroHunter")  and its wholly
owned subsidiary,  PetroHunter  Operating Company, a related party.  Pursuant to
the PSA,  the  Company  agreed to sell all of its oil and gas  interests  in the
Powder River Basin of Wyoming and Montana (the "Powder River Basin Assets").

Marc A. Bruner,  who is the Company's  largest  shareholder,  was at January 31,
2007 a 33.4% beneficial shareholder of PetroHunter. Marc A. Bruner is the father
of Marc E.  Bruner,  the  Company's  President,  Chief  Executive  Officer and a
director. Marc E. Bruner is the stepson of Carmen J. Lotito, the Chief Financial
Officer and a director of PetroHunter.

The purchase  price for the Powder  River Basin Assets is $45 million,  with $20
million to be paid in cash and $25  million to be paid in shares of  PetroHunter
common stock at the rate of $1.50 per share.

Closing of the  transaction  is subject to  approval  by the  Company's  secured
noteholders,  approval  of  all  matters  in its  discretion  by  our  Board  of
Directors,  PetroHunter  obtaining  outside financing on terms acceptable to its
Board of  Directors,  and various other terms and  conditions.  Either party may
terminate the agreement if closing has not occurred by March 31, 2007.


                                      F-39
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - SUBSEQUENT EVENTS (CONTINUED)

Within ten (10) days of signing the PSA,  PetroHunter  was required and did make
an initial earnest money payment of $1.4 million. PetroHunter made an additional
earnest money payment of $600,000 in January 2007. In the event the closing does
not occur for any  reason  other  than a  material  breach by the  Company,  the
deposit  shall  convert  into  a  promissory  note  (the  "Note"),   payable  to
PetroHunter,  and shall be an unsecured  subordinated debt of the Company, which
is payable only after repayment of our senior indebtedness.

PetroHunter  became the  contract  operator  of the Powder  River  Basin  Assets
beginning  January 1, 2007.  At  closing,  the  operating  expenses  incurred by
PetroHunter as the contract operator will be credited toward the purchase price,
or if closing does not occur, will be added to the principal amount of the Note.

b) On February 1, 2007 and February 26, 2007 the Company issued two subordinated
unsecured   promissory   notes  in  the  amounts  of  $500,000   and   $900,000,
respectively, in favor of Bruner Trust, a related party. Interest accrues at the
rate of 8% per annum and the notes mature on the later of 120 days from issue or
the time at which the registrant's senior indebtedness has been paid in full.

c) The  Company  failed to make  payment  of the Note  Payable  in the amount of
$2,049,728  due to the Bruner Trust on December 1, 2006. On March 14, 2007,  the
Company and the Bruner Trust executed a Forbearance Agreement with regard to the
Note  Payable  whereby the Bruner Trust  agreed to forbear  from  enforcing  its
rights that arise as a result of the failure by Borrower to make  payment on the
note by the due date until June 30, 2007.

d) The  Company  has made cash  payments  on the 2004 of  $625,000  on the first
business day December 2006 and January, February and March 2007. As of March 15,
2007 the remaining balance of the 2004 Notes is $1,660,505.












                                      F-40

<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, 2006, 2005, and 2004:

<TABLE>
<CAPTION>
                                                                             Three months ended
                                                       02/28/06           05/31/06          08/31/06           11/30/06
<S>                                               <C>                 <C>                <C>               <C>
Revenues
  Natural gas sales                               $        425,675    $      248,661     $     281,559     $      238,747
  Gain on disposition of oil and
  gas property and other income, related party                   -                 -                 -             79,474
  Operating revenues                                             -                 -                 -                  -
                                                  -----------------   ---------------    --------------    ---------------
                                                           425,675           248,661           281,559            318,221
                                                  -----------------   ---------------    --------------    ---------------

Operating expenses
  Lease operating expenses                                 294,308           106,510           189,493            190,825
  General and administrative                             1,154,718         1,327,423         1,172,301          1,362,092
  Impairment oil and gas properties                              -                 -         1,031,160            297,272
  Depreciation and amortization                            176,344           185,984           318,379             98,739
                                                  -----------------   ---------------    --------------    ---------------

Other income (expense)
  Interest and other                                         4,199             7,390             3,283                742
  Interest and financing costs                          (4,582,103)       (4,365,863)       (3,970,113)        (6,629,210)
                                                  -----------------   ---------------    --------------    ---------------
                                                        (4,577,904        (4,358,473)       (3,966,830)        (6,628,468)
                                                  -----------------   ---------------    --------------    ---------------
Net (loss)                                        $     (5,777,599)   $   (5,729,729)    $  (6,396,604)    $   (8,259,175)
                                                  =================   ===============    ==============    ===============
Net (loss) per common share
  Basic and diluted                               $          (0.08)   $        (0.08)    $       (0.09)    $        (0.11)
                                                  =================   ===============    ==============    ===============
</TABLE>



                                      F-41
<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
                                        02/28/05         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  $5,273,795  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-42
<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.





                                      F-43


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


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, 2006 and 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, 2006 and 2005 are$49.50per bbl of oil
and $6.74  per mcf of gas,  and  $59.37per  bbl of oil and $6.76 per mcf of gas,
respectively.  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.

<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
  Revisions to previous estimates                                254,143                (8)
  Extensions and discoveries                                       1,773                20
  Production                                                    (210,439)               45
                                                             -------------------------------
Balance, November 30, 2006                                     1,005,421               320
                                                             ===============================
</TABLE>

PROVED DEVELOPED RESERVES AS OF NOVEMBER 30
<TABLE>
<CAPTION>
                                                                   2006             2005
<S>                                                             <C>               <C>
    Gas (Mcf)                                                    435,691          648,302
                                                              ==============================
    Oil (Bbls)                                                       320              353
                                                              ==============================
</TABLE>

Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
                                                                   November 30,      November 30
                                                                       2006              2005
<S>                                                              <C>               <C>
Future cash inflows                                              $   6,769,792     $    6,529,934
Future cash outflows
  Production costs                                                  (2,954,112)        (2,498,340)
  Development costs                                                   (340,000)           (84,000)
                                                                 ---------------------------------
Future net cash before income taxes                                  3,475,680          3,947,594
Future income taxes                                                        -                  -
                                                                 ---------------------------------
Future net cash flows                                                3,475,680          3,947,594
Adjustment to discount future annual net cash flows at 10%            (732,608)        (1,005,320)
                                                                 ---------------------------------
Standardized measure of discounted future net cash flows         $   2,734,072     $    2,942,274
                                                                 =================================


                                      F-44
<PAGE>
                            GALAXY ENERGY CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

<CAPTION>
                                                                   November 30,      November 30
                                                                       2006              2005
<S>                                                              <C>               <C>

Changes in the Standardized Measure of Discounted Future Net Cash Flows
Standardized measure, beginning of period                        $   2,942,274     $          -
Sales of oil and gas, net of production costs and taxes               (414,000)          (332,125)
Net change in sales prices, net of production costs                   (242,000)               -
Discoveries, extensions and improved recoveries, net of                                 3,274,399
  future development costs                                               2,000                -
Change in future development costs                                    (276,000)               -
Revisions of quantity estimates                                        449,000                -
Accretion of discount                                                  294,000                -
Other                                                                  (12,202)               -
                                                                 ---------------------------------
Standardized measure, end of period                              $   2,743,072     $    2,942,274
                                                                 =================================
</TABLE>




















                                      F-45