UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
        10-K/A**


**Amendment
        No. 1**





(Mark
      One)


:
            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:  **1-32682**





**GALAXY
      ENERGY CORPORATION**


(Name
      of
      registrant as specified in its charter)




**Colorado**
              **98-0347827**(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer 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:





Title
                  of each class
              Name
                  of each exchange on which registered**Common
                  Stock, $0.001 par value**
              **American
                  Stock Exchange**





Securities
        registered pursuant to Section 12(g) of the
        Act:  **None**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.9Yes: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.9Yes: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.


:Yes                      9No





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§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.  9





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 9                                 Accelerated
      filer 9                                      Non-accelerated
      filer :





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). 9Yes  :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**





EXPLANATORY
        NOTE





We
        are
        filing this Amendment No. 1 to Form 10-K for the fiscal year ended November
        30,
        2006, as originally filed with the SEC on March 15, 2007, to clarify and/or
        correct certain items of information and to file a revised report of independent
        registered public accounting firm that will include the period from inception
        of
        the company.





This
        Amendment No. 1 continues to speak as of the date of the Form 10-K for the
        fiscal year ended November 30, 2006, and we have not updated or amended the
        disclosures contained herein to reflect events that have occurred since the
        filing of the Form 10-K, or modified or updated those disclosures in any
        way
        other than as described in the preceding paragraphs.  Accordingly,
        this Amendment No. 1 to Form 10-K should be read in conjunction with our
        filings
        made with the SEC subsequent to the filing of the original Form 10-K on March
        15, 2007.








**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


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


**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:





·
            *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.





·
            *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:





·
            *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.





·
            *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


**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.  It should be noted, however, that these volume estimates are
        much less reliable than if they were proved reserves.  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


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.





7


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
      Product**s





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


***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




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


*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
 
 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:




·
            the
                timing of the drilling and recompleting of
                wells;


·
            the
                timing and amounts of production;
                and


·
            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
 
 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
 
 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:




·
            worldwide
                or regional demand for energy;


·
            domestic
                and foreign supply of natural gas and
                oil;


·
            weather
                conditions;


·
            domestic
                and foreign governmental
                regulations;


·
            political
                conditions in natural gas or oil producing
                regions;


·
            price
                and availability of alternative fuels;


·
            availability
                and cost of drilling equipment;


·
            our
                ability to establish and maintain key relationships with lessors,
                drilling
                partners and drilling funds;


·
            the
                amount and timing of operating costs and capital expenditures relating
                to
                maintaining our business, operations, and infrastructure;
                and


·
            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:




·
            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;


·
            our
                failure to comply with specific registration and listing obligations
                applicable to the common stock into which the convertible notes are
                convertible; and


·
            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
 
 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:





·
            125%
                of the principal amount, plus accrued interest;
                or


·
            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


*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


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******–******Colora******do*** 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 121⁄2% 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
 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
 
 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
 
 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 as of March 15, 2007.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
 
 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.




**For
                  the fiscal year ended**
                **November
                  30, 2006**
              **For
                  the fiscal year ended**
                **November
                  30, 2005****Production
                  Data:**Natural
                  gas (Mcf)
              210,439
              211,481Oil
                  (Bbls)
              --
              --**Average
                  Prices:**Natural
                  gas (per Mcf)
              $5.68
              $6.13Oil
                  (per Bbl)
              --
              --**Production
                  Costs:**Natural
                  gas (per Mcf)
              $3.71
              $4.56Oil
                  (per Bbl)
              --
              --





**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
            53.58Shut-in
                gas wells
            99
            91.18Wells
                in various stages of completion and water disposal wells
            75
            64.05Total
            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 the Glasgow and West Recluse 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.


21


Estimated
      proved reserves as on November 30, 2006:




**Oil
                (bbls)**
            **Gas
                (Mcf)**
            **Estimated
                Future Net**
              **Revenues**
            **Estimated
                Future Net Revenues**
              **Discounted
                at 10%**320
            1,005,421
            $3,475,680
            $2,743,072





**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.





**Undeveloped
                Acres**
            
            **Developed
                Acres****Gross**
            **Net**
            
            **Gross**
            **Net**Wyoming
            84,209
            36,072
            
            7,920
            7,570Montana
            172,956
            26,164
            
            720
            90East
                Texas
            1,560
            1,560
            
            0
            0Colorado
            11,976
            1,379
            
            1,640
            190Romania
            21,538
            5,385
            
            0
            0Germany
            149,000
            44,700
            
            0
            0Total
            441,239
            115,260
            
            10,280
            7,850






The
        following table summarizes the
        gross and net undeveloped acres by area that will expire in each of the next
        three years.  Our acreage positions are maintained by the payment of
        delay rentals or by the existence of a producing well on the
        acreage.




**Expiring
                  through**
                **11/30/07**
              **Expiring
                  through**
                **11/30/08**
              **Expiring
                  through**
                **11/30/09****Gross**
              **Net**
              **Gross**
              **Net**
              **Gross**
              **Net**Wyoming
              920
              844
              1,980
              322
              1,762
              1,522Montana
              11,002
              2,805
              45,985
              5,748
              6,163
              770East
                  Texas
              1,507
              1,507
              53
              53
              --
              --Colorado
              339
              56
              6,269
              841
              5,248
              452Romania
              --
              --
              --
              --
              --
              --Germany
              --
              --
              --
              --
              --
              --Total
              13,768
              5,212
              54,287
              6,964
              13,173
              2,744


22


**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
            119.4Dry
            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.


23


**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
                February
                  28, 2006
                May
                  31, 2006
                August
                  31, 2006
                November
                  30,
                  2006
              $1.30
                $1.07
                $0.90
                $0.40
                $0.28
              $1.22
                $1.01
                $0.86
                $0.36
                $0.26





**OTCBB**


**Fiscal
                Quarter Ending**
            **High
                Bid**
            **Low
                Bid**February
                28, 2005
              May
                31, 2005
              August
                31, 2005
            $1.79
              $1.16
              $1.06
            $1.22
              $1.13
              $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.





24





**Year
                ended November 30,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **From
                Inception**
              **(June
                18, 2002) to**
              **November
                30, 2002**Summary
                of Operations:Revenue
            
            $
            1,274,116
            
            
            $
            1,538,342
            
            
            $
            122,455
            
            
            $
            -
            
            
            $
            -Lease
                operating costs
            
            
            781,136
            
            
            
            965,069
            
            
            
            59,247
            
            
            
            -
            
            
            
            -General
                & administrativeexpense
            
            
            5,016,534
            
            
            
            5,316,588
            
            
            
            3,517,218
            
            
            
            2,095,495
            
            
            
            1,140,066Depreciation,
                depletion andamortization
            
            
            779,446
            
            
            
            1,887,074
            
            
            
            76,390
            
            
            
            685
            
            
            
            -Impairment
                of oil and gasproperties
            
            
            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
            
            
            
            41,320Oil
                and gas properties, net
            
            
            44,793,140
            
            
            
            44,358,725
            
            
            
            37,491,529
            
            
            
            2,799,720
            
            
            
            873,797Total
                assets
            
            
            47,760,258
            
            
            
            48,459,378
            
            
            
            49,648,165
            
            
            
            5,655,433
            
            
            
            954,359Long-term
                debt
            
            
            16,881,267
            
            
            
            11,188,252
            
            
            
            10,915,928
            
            
            
            2,483,557
            
            
            
            50,000Stockholders’
                equity
            
            
            7,919,911
            
            
            
            25,418,378
            
            
            
            26,681,207
            
            
            
            2,634,559
            
            
            
            (149,897
            )




**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 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.


25


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
      $6,077,480 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.





26


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.





27
 
 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:


·
            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;


·
            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;


·
            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;


·
            Deferred
                monthly installment payments on the 2004 Notes until April 1,
                2006;


·
            Extended
                the maturity date of the 2004 Notes to July 1, 2007;
                and


·
            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.




28
 
 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.




**Contractual
                obligations (1)**
            **Payments
                due by period****Total**
            **Less
                than 1**
              **year**
            **1-3
                years**
            **3-5
                years**
            **More
                than 5 years**Convertible
                Notes Payable (2)
              Principal
              Interest
              Notes
                payable and accrued interest
            $31,355,505
              12,224,215
              7,932,158
            $11,855,505
              4,437,161
              7,932,158
            $7,000,000
              6,502,466
              --
            12,500,000
              1,284,589
              --
            --
              --
              --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






29


(1)
            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)
            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%.




**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:




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




Significant
      year-to-year variances include: - on all these you should be more spefic as
      to
      why the $ change -


·
            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.


·
            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.




30







These
              reductions were partially offset by increased costs of medical insurance
              and other employee benefits of $10,000.


·
            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).


·
            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).


·
            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).


·
            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.


·
            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).


·
            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.


·
            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.


31






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





Significant
      year-to-year variances include:


·
            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.


·
            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.


·
                ******
            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.


·
                ******
            Lower
                discount on shares issued reflects reduced amount of debt and interest
                converted in 2006 ($4.8 million) compared to 2005 ($8.7
                million)


·
                ******
            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.


·
                ******
            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.


·******
              The
                  write off of unamortized discount and deferred financing costs
                  upon
                  issuance of new debt in 2006 relates to the extinguishment of the
                  existing
                  2004 Notes and May 2005 Notes and issuance of new debt effective
                  November
                  29, 2006.  The 2005 amount relates to the extinguishment of the
                  existing 2004 Notes and March 2005 Notes and issuance of new debt
                  effective November 30, 2005.




***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 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.


32
 
  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:


2005
            2006Salaries
              and benefits
            $ 
              1,040,138
            $583,141Professional
                and consulting fees
            1,216,186
            568,789Investor
                relations
            746,804
            537,090Legal
            631,921
            581,393Travel
                and entertainment
            473,238
            447,202Office
                lease and expenses
            294,140
            228,703Audit
                and accounting
            224,403
            147,769Directors
                fees
            196,000
            180,395Prospect
                generation, maintenance and presentation
            191,193
            111,836Insurance
                and other
            135,428
            96,749Stock
                based compensation
            167,137
            34.151Total
            $   5,316,588
            $   3,517,218




Significant
      year-to-year variances include:


·
            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,


·
            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.


·
            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.


·
            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,


·
            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


·
            Director
                fee increase in 2005 reflects higher rates of compensation for the
                entire
                year in 2005 compared to only eight months of
                2004.


·
            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.


·
            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.




33
 
  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:


2005
            2004Interest
              on outstanding debt
            $  
              3,811,005
            $  
              848,107Amortization
                of discount
            3,811,970
            4,180,240Amortization
                of deferred finance costs
            1,058,072
            884,703Discount
                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
            439,050Writeoff
                of unamortized discount and deferred financing costs upon issuance
                of new
                debt
            3,053,152Total
            $   13,135,307
            $   6,352,100




**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.





34
 
  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 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.





35
 
  **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 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.







36
 
  **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.
 **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.


37


**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 DirectorChristopher
                Hardesty
            62
            Senior
                Vice President, Chief Financial Officer, Secretary and
                TreasurerCecil
                D. Gritz
            63
            Chief
                Operating Officer and DirectorRichard
                E. Kurtenbach
            51
            Vice
                President – Administration and ControllerNathan
                C. Collins
            72
            DirectorDr.
                James M. Edwards
            60
            DirectorRobert
                Thomas Fetters, Jr.
            67
            DirectorRonald
                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 gasindustry 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,




38
 
  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




39


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.





40


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.








41


**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.





**SUMMARY
      COMPENSATION TABLE**


**Name
                and**
              **Principal
                Position**
            **Annual
                Compensation**
            **Long
                Term Compensation**
            **All
                Other Compensation**
              **($)****Awards**
            **Payouts****Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Other**
              **Annual
                Compensation**
              **($)**
            **Restricted**
              **Stock**
              **Award(s)**
              **($)**
            **Securities
                Underlying Options/**
              **SARs
                (#)**
            **LTIP**
              **Payouts**
              **($)**Marc
                E. Bruner
              President
                (1)
            2006
              2005
              2004
            $120,000
              $120,000
              $108,000
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-
            -0-
              100,000
                (2)
              750,000
                (2)
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-Cecil
                Gritz, Chief Operating Officer
            2006
              2005
              2004
            $110,000
              $110,000
              $104,450
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-
            -0-
              100,000
                (2)
              625,000
                (2)
            -0-
              -0-
              -0-
            -0-
              -0-
              -0-Christopher
                Hardesty
              Chief
                Financial Officer
            2006
              2005
            $100,000
              $100,000
            -0-
              -0-
            -0-
              -0-
            -0-
              -0-
            -0-
              300,000
                (2)
            -0-
              -0-
            -0-
              -0-Richard
                Kurtenbach
              Vice
                President, Chief Accounting Officer
            2006
              2005
            $108,000
              $108,000
            $25,000
            -0-
            -0-
            -0-
              75,000
                (2)
            -0-
              -0-
            -0-
              -0-




(1)           Mr.
      Bruner has been the President since November 13, 2002.


(2)           These
      stock options vest in equal amounts quarterly over a five-year
      period.




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.





**AGGREGATED
      OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
      VALUES**


**Name**
            **Shares
                Acquired on**
              **Exercise
                ($)**
            **Value**
              **Realized
                ($)**
            **Number
                of Securities**
              **Underlying
                Unexercised Options/SARs at FY-End**
              **(#)**
              **Exercisable/Unexercisable**
            **Value
                of Unexercised In-**
              **the-Money
                Options/SARs**
              **at
                FY-End ($) Exercisable/Unexercisable**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-




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.




42
 
 **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


43
 
 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.












**Total
                Return Analysis**11/13/2002
            11/30/2002
            11/30/2003
            11/30/2004
            11/30/2005
            11/30/2006**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





**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




44
 
 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:





**Name
                and Address of Beneficial Owner (1)**
            **Amount
                and Nature of**
              **Beneficial
                Ownership**
            **Percent
                of Class (2)**Marc
                A. Bruner
              29
                Blauenweg
              Metzerlen,
                Switzerland 4116
            11,701,799
                (3)
            14.1%Resource
                Venture Management
              29
                Blauenweg
              Metzerlen,
                Switzerland 4116
            4,899,525
            5.9%






45


**Name
                and Address of Beneficial Owner (1)**
            **Amount
                and Nature of**
              **Beneficial
                Ownership**
            **Percent
                  of Class (2)**Bruner
                Group, LLP
              1775
                Sherman Street #1375
              Denver,
                Colorado 80203
            4,500,000
            5.4%Marc
                E. Bruner
            2,000,000
                (4)
            2.4%Cecil
                D. Gritz
            425,000
                (5)
            *Dr.
                James Edwards
            300,000
                (6)
            *Richard
                E. Kurtenbach
            262,500
                (7)
            *Robert
                Thomas Fetters, Jr.
            240,000
                (8)
            *Nathan
                C. Collins
            240,000
                (8)
            *Christopher
                S. Hardesty
            166,000
                (9)
            *Ronald
                P. Trout
            60,000
                (10)
            *All
                officers and directors as a group  (9 persons)
            3,693,500
                (11)
            4.4%




*less
      than one percent (1%)


_________________


(1)
            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)
            This
                table is based on 82,661,968shares
                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)
            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)           Includes
      500,000 shares issuable upon exercise of stock options.




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




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




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




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




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




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




(11)
            Includes
                2,177,500 shares issuable upon exercise of stock
                options.




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


46
 
 **Equity
        Compensation Plans**




At
      November 30, 2006, our equity compensation plans were as follows:





**Plan
                category**
            **Number
                of securities to be**
              **issued
                upon exercise of outstanding options, warrants and
                rights**
            **Weighted
                average exercise**
              **price
                of outstanding options,**
              **warrants
                and rights**
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance**Equity
                compensation plans approved by security holders
            4,715,000
            $2.10
            1,785,000Equity
                compensation plans not approved by security holders
            -0-
            --
            -0-Total
            4,715,000
            $2.10
            1,785,000




**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





47


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




48


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 thirdparty 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.





49


**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.


50


**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.





**Exhibi****ts**:





**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)




51





**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)






52





**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)






53





**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 (26)10.55
              April
                  2007 Waiver, Amendment and Agreement as to 2005 Subordinated
                  Notes21
              Subsidiaries
                  of the registrant (4)23.1
              Consent
                  of Independent Registered Public Accounting Firm, Hein & Associates
                  LLP dated March 14, 200731.1
              Rule
                  13a-14(a) Certification of Chief Executive Officer31.2
              Rule
                  13a-14(a) Certification of Chief Financial Officer32.1
              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
                  Officer32.2
              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.
    54
 
 
 
 (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. (26)
                Incorporated
                  by reference to the exhibit to the registrant's annual report on
                  Form 10-K
                  for the fiscal year ended November 30, 2006, filed March 15, 2007,
                  file
                  number 0-32237.


55




**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: 
                  November 29, 2007
              By:
              /s/  
                Marc E. BrunerMarc
                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.
  **Signature**
              
              **Title**
              
              **Date**/s/
                  Marc E.
                  Bruner
              
              President
                  and
                  Director (Principal Executive Oficer)
              
              November
                  29,
                  2007Marc
                  E.
                  Bruner/s/
                Cecil D. Gritz
              
              Chief
                Operating Officer and Director
              
              November
                29, 2007Cecil
                D. Gritz/s/ 
                  Christopher S. Hardesty
              
              Senior
                  Vice
                  President, Chief Financial Officer, Secretary, and Treasurer (Principal
                  Financial and Accounting Officer)
              
              November
                  29,
                  2007Christopher
                  S.
                  Hardesty/s/
                  Nathan C.
                  Collins
              
              Director
              
              November
                  29,
                  2007Nathan
                  C.
                  CollinsDirectorDr.
                James M. EdwardsDirectorRobert
                Thomas Fetters, Jr./s/
                Ronald P. Trout
              
              Director
              
              November
                29, 2007Ronald
                P. Trout
       56
  **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
 
 
 **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 each of the three years in the period
              ended November 30, 2006 and for the period from inception (June 18,
              2002) to
              November 30, 2006.  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
              each of the three years in the period ended November 30, 2006 and for
              the period
              from inception (June 18, 2002) to November 30, 2006, in conformity
              with U.S.
              generally accepted accounting principles.
 
 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
 
 ***HEIN****&
ASSOCIATES
              LLP*
 
 Denver,
              Colorado
 March
              14,
              2007, except for the period from inception (June 18, 2002) to November
              30, 2006,
              as included on F-4 through F-8, for which the date is November 12,
              2007.
  F-2
 GALAXY
            ENERGY CORPORATION
 (A
        Development Stage Company)
 CONSOLIDATED
        BALANCE SHEETS
 NOVEMBER
        30, 2006 and 2005
  2006
              
              
              2005**ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              608,180
              
              
              $
              1,328,469Accounts
                  receivable, joint interest
              
              
              60,475
              
              
              
              744,037Accounts
                  receivable, joint interest, related party
              
              
              923,172
              
              
              
              32,845Accounts
                  receivable, other
              
              
              102,800
              
              
              
              510,196Prepaid
                  and other
              
              
              107,236
              
              
              
              167,513Total
                  Current Assets
              
              
              1,801,863
              
              
              
              2,783,060Oil
                  and gas properties, at cost, full cost method of
                  accountingEvaluated
                  oil and gas properties
              
              
              10,991,945
              
              
              
              9,991,629Unevaluated
                  oil and gas properties
              
              
              42,767,330
              
              
              
              41,464,395Less
                  accumulated depletion, amortization and impairment
              
              
              (8,966,135
              )
              
              
              (7,097,299
              )44,793,140
              
              
              
              44,358,725Furniture
                  and equipment, net
              
              
              121,945
              
              
              
              194,877Other
                  assetsDeferred
                  financing costs, net
              
              
              565,524
              
              
              
              721,024Restricted
                  investments
              
              
              459,783
              
              
              
              379,782Other
              
              
              18,003
              
              
              
              21,9101,043,310
              
              
              
              1,122,716**Total
                  Assets**
              
              **$**
              **47,760,258**
              
              
              **$**
              **48,459,378****LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilitiesAccounts
                  payable and accrued expenses
              
              $
              1,548,168
              
              
              $
              1,880,290Accounts
                  payable  - related party
              
              
              64,400
              
              
              
              99,078Notes
                  payable - related party
              
              
              7,549,728
              
              
              
              -Current
                  portion convertible notes payable, net
              
              
              10,019,996
              
              
              
              5,041,524Notes
                  payable
              
              
              -
              
              
              
              2,049,728Interest
                  payable
              
              
              2,488,451
              
              
              
              402,884Total
                  Current Liabilities
              
              
              21,670,743
              
              
              
              9,473,504Non-current
                  obligationsConvertible
                  notes payable, net
              
              
              16,308,801
              
              
              
              10,392,434Interest
                  Payable
              
              
              572,466
              
              
              
              744,833Asset
                  retirement obligation
              
              
              1,288,337
              
              
              
              1,242,967Total
                  Non-current Obligations
              
              
              18,169,603
              
              
              
              12,380,234Commitments
                  and contingencies ( Notes 2 and 10)
              
              
              -
              
              
              
              -Stockholders'
                  equityPreferred
                  stock, $001 par valueAuthorized
                  - 25,000,000 sharesIssued
                  - none
              
              
              -
              
              
              
              -Common
                  stock, $.001 par valueAuthorized
                  - 400,000,000 sharesIssued and outstanding - 81,661,968 sharesand
                  68,668,029 shares
              
              
              81,662
              
              
              
              68,668Capital
                  in excess of par value
              
              
              71,537,766
              
              
              
              64,073,382Deficit
                  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**
 The
        accompanying notes are an integral part of these financial
        statements.
 
 F-3
 GALAXY
          ENERGY CORPORATION
 (A
          Development Stage Company)
 CONSOLIDATED
          STATEMENTS OF
          OPERATIONS
 
 CumulativeYear
                  Ended
              
              
              Year
                  Ended
              
              
              Year
                  Ended
              
              
              From
                  InceptionNovember
                  30,
              
              
              November
                  30,
              
              
              November
                  30,
              
              
              (June
                  18, 2002) to2006
              
              
              2005
              
              
              2004
              
              
              November
                  30, 2006RevenueNatural
                  gas sales
              
              $
              1,194,642
              
              
              $
              1,297,194
              
              
              $
              122,455
              
              
              $
              2,614,291Gain
                  on disposition of oil and gas property
              
              
              -
              
              
              
              197,676
              
              
              
              -
              
              
              
              197,676Gain
                  on disposition of oil and gas property,and
                  other income, related party
              
              
              79,474
              
              
              
              43,472
              
              
              
              
              
              
              
              122,9461,274,116
              
              
              
              1,538,342
              
              
              
              122,455
              
              
              
              2,934,913Costs
                  and expensesLease
                  operating expense
              
              
              781,136
              
              
              
              965,069
              
              
              
              59,247
              
              
              
              1,805,451General
                  and administrative
              
              
              5,016,534
              
              
              
              5,316,588
              
              
              
              3,517,218
              
              
              
              17,085,902Impairment
                  of oil and gas properties
              
              
              1,328,432
              
              
              
              5,273,795
              
              
              
              -
              
              
              
              6,667,996Depreciation,
                  depletion and amortization
              
              
              779,446
              
              
              
              1,887,074
              
              
              
              76,390
              
              
              
              2,743,5957,905,548
              
              
              
              13,442,526
              
              
              
              3,652,855
              
              
              
              28,302,944Other
                  income (expense)Interest
                  and other  income
              
              
              15,614
              
              
              
              163,291
              
              
              
              51,396
              
              
              
              230,301Interest
                  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 commonshares
                  outstanding - basic and diluted
              
              
              72,094,609
              
              
              
              64,698,889
              
              
              
              53,488,853
              
              
              
              52,553,620
 The
        accompanying notes are an integral part of these
        financial statements.
 
 F-4
 GALAXY
          ENERGY CORPORATION
 (A
          Development Stage Company)
 STATEMENT
          OF STOCKHOLDER'S EQUITY
 PERIOD
          FROM INCEPTION (June 18, 2002) TO NOVEMBER 30,
          2002 AND YEARS ENDED
 NOVEMBER
          30, 2003, 2004, 2005 AND
          2006
 
 DeficitAccumulatedCapital
              
              
              During
                  theCommon
                  Stock
              
              
              In
                  Excess
              
              
              DevelopmentShares
              
              
              Amount
              
              
              Par
                  Value
              
              
              StageBalance,
                  June 18, 2002 (Inception)
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Issuance
                  of common stock for servicesat
                  $0.05 per share
              
              
              4,000,000
              
              
              
              4,000
              
              
              
              196,000Sale
                  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
              
              
              
              677,003Recapitalization
                  of shares issuedprior
                  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 cashat
                  $1.00 per share
              
              
              1,602,000
              
              
              
              1,602
              
              
              
              1,598,228Issuance
                  of common stock for services at:$1.00
                  per share
              
              
              10,000
              
              
              
              10
              
              
              
              9,990$
                  .91 per share
              
              
              60,000
              
              
              
              60
              
              
              
              54,540Issuance
                  of common stock to related partyupon
                  conversion of outstanding debt at $1.00 per share
              
              
              233,204
              
              
              
              233
              
              
              
              232,971Issuance
                  of common stock to related partyfor
                  services at $1.00 per share
              
              
              90,000
              
              
              
              90
              
              
              
              89,910Common
                  stock issued to acquire subsidiary
              
              
              1,951,241
              
              
              ****
              1,952
              
              
              ****
              (204,184
              )Warrants
                  to acquire common stock in conjunction withconvertible
                  debenture issuance
              
              
              
              
              
              
              
              
              
              
              1,285,995Intrinsic
                  value of debentures beneficial conversion feature
              
              
              
              
              
              
              
              2,292,654Net
                  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
              
              
              
              26,954Issuance
                  of common stock for cash at $1.40 per share
              
              
              2,503,571
              
              
              
              2,504
              
              
              
              3,502,496Warrants
                  issued to placement agents in connection with
              
              
              
              
              
              
              
              157,599common
                  stockCosts
                  of offering
              
              
              
              
              
              
              
              
              
              
              (1,784,448
              )Issuance
                  of common stock for oil and gas propertiesat
                  $1.40 per share
              
              
              2,000,000
              
              
              
              2,000
              
              
              
              2,798,000Issuance
                  of common stock for oil and gas propertiesat
                  $1.80 per share
              
              
              3,000,000
              
              
              
              3,000
              
              
              
              5,397,000Issuance
                  of common stock for cash at $1.80 per share
              
              
              6,637,671
              
              
              
              6,638
              
              
              
              11,941,161Warrants
                  issued to placement agents in connection withcommon
                  stock
              
              
              
              
              
              
              
              
              
              
              900,504Costs
                  of offering
              
              
              
              
              
              
              
              
              
              
              (449,439
              )Issuance
                  of common stock upon conversion ofconvertible
                  debenture
              
              
              1,525,424
              
              
              
              1,525
              
              
              
              898,475Issuance
                  of common stock for oil and gas propertiesat
                  $2.63 per share
              
              
              360,000
              
              
              
              360
              
              
              
              946,440Issuance
                  of common stock upon conversion ofconvertible
                  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
 
 GALAXY
              ENERGY CORPORATION
 (A
              Development Stage Company)
 STATEMENT
              OF STOCKHOLDER'S EQUITY
 PERIOD
              FROM INCEPTION (June 18, 2002) TO NOVEMBER 30,
              2002 AND YEARS ENDED
 NOVEMBER
              30, 2003, 2004, 2005 AND
              2006
 
 DeficitAccumulatedCapital
              
              
              
              During
                  theCommon
                  Stock
              
              
              
              In
                  Excess
              
              
              
              DevelopmentShares
              
              
              
              Amount
              
              
              
              Par
                  Value
              
              
              
              StageIssuance
                of common stock for cashless exercise ofplacement
                  agent warrants
              
              
              719,213
              
              
              
              719
              
              
              
              (719
              )Discount
                  on convertible notes payable due to issuanceof
                  detachable warrants
              
              
              
              
              
              
              
              
              
              
              4,336,316Warrants
                  issued to placement agents in connection withconvertible
                  notes payable
              
              
              
              
              
              
              
              
              
              
              404,021Stock
                  based compensation costs for stock options grantedto
                  non-employees
              
              
              
              
              
              
              
              
              
              
              34,525Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              (9,831,104
              )Balance,
                  November 30, 2004
              
              
              58,817,509
              
              
              
              58,818
              
              
              
              40,173,154
              
              
              
              (13,550,765
              )Issuance
                  of common stock upon warrantconversion
              
              
              1,332,676
              
              
              
              1,332
              
              
              
              990,970Issuance
                  of common stock for cashlessexercise
                  of warrants
              
              
              577,033
              
              
              
              577
              
              
              
              (577
              )Issuance
                  of common stock upon conversion ofconvertible
                  notes and accrued interest
              
              
              7,940,811
              
              
              
              7,941
              
              
              
              8,677,068Discount
                  on convertible notes payable due toissuance
                  of detachable warrants
              
              
              
              
              
              
              
              
              
              
              12,902,328Discount
                  on issuance of common stockbelow
                  market value
              
              
              
              
              
              
              
              
              
              
              1,074,428Warrants
                  issued to placement agents inconnection
                  with convertible notes payable
              
              
              
              
              
              
              
              
              
              
              88,874Stock
                  based compensation costs for stockoptions
                  granted to non-employees
              
              
              
              
              
              
              
              
              
              
              167,137Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (23,985,645
              )Balance,
                  November 30, 2005
              
              
              68,668,029
              
              
              
              68,668
              
              
              
              64,073,382
              
              
              
              (37,536,410
              )Warrants
                  issued to placement agents inconnection
                  with convertible notes payable
              
              
              
              
              
              
              
              
              
              
              27,274Discount
                  on convertible notes payable due toissuance
                  of detachable warrants
              
              
              
              
              
              
              
              
              
              
              395,986Stock
                  based compensation costs for stockoptions
                  granted to employees & non-employees
              
              
              
              
              
              
              
              1,525,751Discount
                  on convertible notes payable due toissuance
                  of detachable warrants
              
              
              
              
              
              
              
              
              
              
              170,555Issuance
                  of common stock upon conversion ofconvertible
                  notes and accrued interest
              
              
              12,993,939
              
              
              
              12,994
              
              
              
              4,799,255Discount
                  on issuance of common stockbelow
                  market value
              
              
              
              
              
              
              
              
              
              
              545,563Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (26,163,107
              )Balance,
                  November 30, 2006
              
              
              81,661,968
              
              
              $
              81,662
              
              
              $
              71,537,766
              
              
              $
              (63,699,517
              )
  The
        accompanying notes are an integral part of these
        financial statements.
 F-6
 GALAXY
            ENERGY CORPORATION
 (A
            Development Stage Company)
 CONSOLIDATED
            STATEMENTS OF CASH
            FLOWS
 
 CumulativeYear
                  Ended
              
              
              Year
                  Ended
              
              
              Year
                  Ended
              
              
              From
                  InceptionNovember
                  30,
              
              
              November
                  30,
              
              
              November
                  30,
              
              
              (June
                  18, 2002) to2006
              
              
              2005
              
              
              2004
              
              
              November
                  30, 2006Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (26,163,107
              )
              
              $
              (23,985,645
              )
              
              $
              (9,831,104
              )
              
              $
              (63,699,517
              )Adjustments
                  to reconcile net loss to netcash
                  (used) by operating activitiesStock
                  for interest
              
              
              644,549
              
              
              
              3,695,884
              
              
              
              12,075
              
              
              
              4,352,508Stock
                  for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              264,600Stock
                  for services - related party
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              90,000Oil
                  and gas properties for services
              
              
              -
              
              
              
              732,687
              
              
              
              -
              
              
              
              732,687Stock
                  for debt - related party
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              233,204Amortization
                  of discount and deferred financing costson
                  convertible debt
              
              
              10,611,349
              
              
              
              4,870,043
              
              
              
              2,085,491
              
              
              
              17,908,562Finance
                  costs incurred  for waiver of triggering event
              
              
              3,457,101
              
              
              
              -
              
              
              
              -
              
              
              
              3,457,101Write-off
                  of discount and deferred financing costsupon
                  conversion of convertible debt
              
              
              -
              
              
              
              -
              
              
              
              2,979,404
              
              
              
              2,979,404Write-off
                  of discount and deferred financing costsupon
                  extiguishment of convertible debt
              
              
              -
              
              
              
              2,162,597
              
              
              
              -
              
              
              
              2,162,597Compensation
                  expense on vested stock options
              
              
              1,525,752
              
              
              
              167,137
              
              
              
              34,521
              
              
              
              1,727,410Depreciation,
                  depletion and amortizationand
                  accretion of ARO expense
              
              
              779,446
              
              
              
              1,887,074
              
              
              
              76,390
              
              
              
              2,738,594Gain
                  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
              
              
              
              -
              
              
              
              6,667,996Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              11,178Changes
                  in assets and liabilities:Accounts
                  payable - trade, accruals, bank overdrafts
              
              
              (332,121
              )
              
              
              454,463
              
              
              
              (63,539
              )
              
              
              39,658Accounts
                  payable - related
              
              
              (34,679
              )
              
              
              (14,679
              )
              
              
              (46,274
              )
              
              
              64,400Interest
                  payable
              
              
              1,913,199
              
              
              
              441,998
              
              
              
              631,000
              
              
              
              3,060,917Accounts
                  receivable, prepaids and othercurrent
                  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 activitiesAdditions
                  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
              
              
              
              -
              
              
              
              -
              
              
              
              1,695,830Purchase
                  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
              
              
              
              -
              
              
              
              340,000Advance
                  to affiliate
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              (60,000
              )Cash
                received upon recapitalization and merger
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              4,234Net
                  cash used by investing activities
              
              
              (2,431,777
              )
              
              
              (19,141,078
              )
              
              
              (20,412,277
              )
              
              
              (44,185,918
              )
  The
        accompanying notes are an integral part of these
        financial statements.
 F-7
 
 GALAXY
              ENERGY CORPORATION
 (A
              Development Stage Company)
 CONSOLIDATED
              STATEMENTS OF CASH
              FLOWS
 
 CumulativeFrom
                  InceptionYear
                  Ended
              
              
              
              Year
                  Ended
              
              
              
              Year
                  Ended
              
              (June
                  18, 2002)November
                  30, 2006
              
              
              
              November
                  30, 2005
              
              
              
              November
                  30, 2004
              
              
              toNovember
                30,
                  2006Cash
                  flows from financing activitiesProceeds
                  from sale of common stock
              
              
              -
              
              
              
              -
              
              
              
              15,452,800
              
              
              
              17,905,300Proceeds
                  from sale of convertible notes payable
              
              
              7,000,000
              
              
              
              17,695,000
              
              
              
              20,000,000
              
              
              
              44,695,000Proceeds
                  from sale of convertible debentures
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,040,000Proceed
                  for sale on notes payable - related party
              
              
              5,500,000
              
              
              
              
              
              
              
              
              
              
              
              5,500,000Proceeds
                  from exercise of warrants
              
              
              -
              
              
              
              992,306
              
              
              
              27,000
              
              
              
              1,019,306Debt
                  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
              
              
              
              63,479,407Net
                  (decrease) increase in cash
              
              
              (720,289
              )
              
              
              (9,185,378
              )
              
              
              8,274,327
              
              
              
              608,180Cash
                  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
              
              
              $
              608,180Supplemental
                  schedule of cash flow informationCash
                  paid for interest
              
              $
              2,846,091
              
              
              $
              1,065,442
              
              
              $
              205,084
              
              
              $
              4,559,284Supplemental
                  disclosures of non-cash investing andfinancing
                  activitiesDebt
                  incurred for oil and gas properties
              
              $
              -
              
              
              $
              -
              
              
              $
              2,600,000
              
              
              $
              3,646,000Debt
                  incurred for finance costs
              
              $
              3,547,101
              
              
              $
              -
              
              
              $
              -
              
              
              $
              3,547,101Stock
                  issued for services
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              354,600Stock
                  issued for interest and debt
              
              $
              4,812,249
              
              
              $
              8,685,009
              
              
              $
              12,075
              
              
              $
              13,742,538Stock
                  issued for convertible debentures
              
              $
              -
              
              
              $
              -
              
              
              $
              5,640,000
              
              
              $
              5,640,000Warrants
                  issued for offering and financing costs
              
              $
              27,274
              
              
              $
              88,874
              
              
              $
              1,462,124
              
              
              $
              1,685,850Discount
                  on convertible debt issued
              
              $
              566,541
              
              
              $
              16,538,498
              
              
              $
              4,336,316
              
              
              $
              14,883,630Conversion
                  of interest to debt
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              11,178Stock
                  issued for subsidiary - related
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              (202,232
              )Stock
                  issued for oil and gas properties
              
              $
              -
              
              
              $
              -
              
              
              $
              9,146,800
              
              
              $
              9,146,800
 The
        accompanying notes are an integral part of these
        financial statements.
 
 F-8
 **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
              
              $
              2,974Liabilities
                  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
              
              $
              1,260Undeveloped
                  oil and gas properties
              
              
              75,680Liabilities
                  assumed
              
              
              (279,173
              )Net
                  liabilities assumed
              
              $
              (202,233
              )
 
 F-9
 **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
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 DEVELOPMENT
        STAGE
 
 The
        Company is considered a development stage company as defined by Statement
        of
        Financial Accounting Standards (“SFAS”) No. 7, and its principal activities
        since inception have been raising capital through the sale of common stock
        and
        convertible notes and the acquisition of oil and gas properties in the Western
        United States, Germany and Romania.  The Company has recorded limited
        production from wells in the Powder River Basin of Wyoming and the Piceance
        Basin of Colorado; however, management does not consider that the Company
        has
        commenced principal operations as of November 30, 2006.
 
 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.
 
 
 F-11
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 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.
 
 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.
 
 
 F-12
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 OIL
        AND
        GAS PROPERTIES (Continued)
  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.
 
 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
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 ASSET
        RETIREMENT OBLIGATION (Continued)
 
 The
        information below reflects the change in the ARO during the years ended November
        30, 2006 and 2005:
 2006
              
              
              2005Balance
                  beginning of period
              
              $
              1,242,967
              
              
              $
              713,073Change in estimate
              
              
              (161,483
              )
              
              
              -Liabilities incurred
              
              
              42,238
              
              
              
              481,193Liabilities settled
              
              
              -
              
              
              
              -Accretion
              
              
              164,613
              
              
              
              48,701Balance
                  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
 **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
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 Year
                  Ended
              
              
              Year
                  EndedNet
                  loss:
              
              November
                  30, 2005
              
              
              November
                  30, 2004As
                  reported
              
              $
              (23,985,645
              )
              
              $
              (9,831,104
              )Add:
                  Stock-based compensation included in net loss
              
              
              167,132
              
              
              
              34,525Less:
                  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
              )
 
 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:
 
 Year
                  ended November 30,2006
              
              
              2005
              
              
              2004Expected
                  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 ofoptions
                  (in years)
              
              5
                  years
              
              
              5—6.5
                  years
              
              
              5—6.5
                  years
 
 (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
 **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
              2004Enserco
                  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.  We may enter into gas
        transportation commitments in the future that would give rise to off-balance
        sheet obligations.  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
 **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
 **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
 **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:
 
 For
                  the Years Ended November 30,2006
              
              
              2005
              
              
              2004Acquisition
                  of unevaluated properties
              
              $
              374,756
              
              
              $
              8,051,122
              
              
              $
              19,365,549Exploration
                  costsUnited
                  States
              
              
              3,607,563
              
              
              
              9,613,262
              
              
              
              14,645,548Europe
              
              
              -
              
              
              
              -
              
              
              
              18,675Development
                  costs
              
              
              163,292
              
              
              
              499,945
              
              
              
              -Oil and gas expenditures
              
              
              4,145,611
              
              
              
              18,164,329
              
              
              
              34,029,772Asset
                  retirement obligations
              
              
              42,238
              
              
              
              481,193
              
              
              
              710,731$
              4,187,849
              
              
              $
              18,645,522
              
              
              $
              34,740,503
 
 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
 **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:
 
 2006
              
              
              2005
              
              
              2004Full
                  Cost Pool - Evaluated PropertiesBalance beginning of period
              
              $
              9,991,629
              
              
              $
              -
              
              
              $
              -Properties with proved reserves
              
              
              204,525
              
              
              
              4,640,738
              
              
              
              -Reclassification of impaired, unevaluatedproperties
              
              
              473,265
              
              
              
              5,055,320
              
              
              
              -Asset retirement obligation
              
              
              322,526
              
              
              
              295,571
              
              
              
              -Balance end of period
              
              $
              10,991,945
              
              
              $
              9,991,629
              
              
              $
              -Depreciation,
                  Depletion, Amortizationand ImpairmentBalance beginning of period
              
              $
              7,097,299
              
              
              $
              48,394.00
              
              
              $
              -Depreciation, depletion and amortization
              
              
              540,404
              
              
              
              1,775,110
              
              
              
              48,394Impairment of oil and gas properties
              
              
              1,328,432
              
              
              
              5,273,795
              
              
              
              -Balance end of period
              
              $
              8,966,135
              
              
              $
              7,097,299
              
              
              $
              48,394
 
 
 F-21
 **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:
 
 2006
              
              
              2005
              
              
              2004United
                  States Cost CenterPowder River  BasinWyoming
              
              $
              33,225,926
              
              
              $
              31,071,223
              
              
              $
              32,280,054Montana
              
              
              2,064,659
              
              
              
              1,974,470
              
              
              
              3,724,593Piceance BasinColorado
              
              
              7,022,463
              
              
              
              7,022,099OtherTexas
              
              
              -
              
              
              
              473,265
              
              
              
              739,336ARO Asset and other
              
              
              454,282
              
              
              
              896,052
              
              
              
              710,03142,767,330
              
              
              
              41,437,109
              
              
              
              37,454,014German
                  Cost Center
              
              
              -
              
              
              
              -
              
              
              
              42,234Romania
                  Cost Center
              
              
              -
              
              
              
              27,286
              
              
              
              43,585Total
                  Unevaluated Properties
              
              $
              42,767,330
              
              
              $
              41,464,395
              
              
              $
              37,539,833
 
 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
 **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 EndedNovember 30, 2006
              
              $
              2,095,726November 30, 2005
              
              
              17,870,729November 30, 2004
              
              
              21,734,634November 30, 2003
              
              
              603,991November 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
              
              
              2005Furniture and equipment
              
              $
              280,429
              
              
              $
              279,178Less 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
 **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
              
              AmountSeptember
                  28, 2006
              January
                  26, 2007
              
              $
              2,500,000November
                  1, 2006
              March
                  1, 2007
              
              
              1,000,000November
                  13, 2006
              March
                  13, 2007
              
              
              500,000November
                  30, 2006
              March
                  30, 2007
              
              
              1,500,000January
                  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.
  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.
 
 F-24
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        5 – CONVERTIBLE NOTES PAYABLE (continued)**
 
 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:
  ·
              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;
  ·
              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;
  ·
              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
  ·
              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.
 
 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.
        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 $957,101 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 $663,002 as a discount to the Notes.
 
 
 F-25
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        5 – CONVERTIBLE NOTES PAYABLE (continued)**
  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.
 
 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.
  
 F-26
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        5 – CONVERTIBLE NOTES PAYABLE (continued)**
 
 MAY
        2005
        NOTES (Continued)
  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.
        In accordance with EITF 96-19, 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 $2,500,000 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 $2,750,577
        as a discount to the Notes.
 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.
  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.
 
 
 F-27
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        5 – CONVERTIBLE NOTES PAYABLE (continued)**
  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
 **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
              
              
              20052004
                  Notes
              
              $
              4,160,505
              
              
              $
              12,500,000Less
                  unamortized discount
              
              
              (663,002
              )
              
              
              (7,675,920
              )March
                  2005 Notes
              
              
              7,695,000
              
              
              
              7,695,000Less
                  unamortized discount
              
              
              (1,172,506
              )
              
              
              (3,543,431
              )May
                  2005 Notes
              
              
              12,500,000
              
              
              
              10,000,000Less
                  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
              
              
              
              15,433,958Less
                  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
              
              $
              19,405,2332008
              
              
              4,500,0002009
              
              
              2,500,0002010
              
              
              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:
 ·
              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
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        6 – STOCKHOLDERS’ EQUITY (Continued)**
 
 COMMON
        STOCK (Continued)
 
 During
        the year ended November 30, 2005, the Company issued shares of its common
        stock
        as follows:
 ·
              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.
 ·
              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
 ·
              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.
 ·
              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:
 ·
              45,763
                  shares for $27,000 cash for the exercise 45,763 warrants at an
                  exercise
                  price of  $0.59 per share
 ·
              2,503,571
                  shares for cash at $1.40 per share
 ·
              2,000,000
                  shares for partial consideration of acquired oil and gas properties
                  at
                  $1.40 per share
 ·
              6,637,671
                  shares for cash of $1.80 per share
 ·
              3,000,000
                  shares for partial consideration of acquired oil and gas properties
                  at
                  $1.80 per share
 ·
              360,000
                  shares for partial consideration of acquired oil and gas properties
                  at
                  $2.63 share
 ·
              1,525,424
                  shares upon conversion of $900,000 of convertible debentures at
                  a
                  conversion price of $.59 per share
 ·
              8,033,898
                  shares upon conversion of $4,740,000 of convertible debentures
                  at a
                  conversion price of $.59 per share
 ·
              20,466
                  shares upon conversion of $12,075 of accrued interest on convertible
                  debentures at a conversion price of $.59 per
                  share
 ·
              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
 ·
              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:
 
 ·
              1,602,000
                  shares for cash at $1.00 per share
 ·
              10,000
                  shares for services at $1.00 per
                  share
 ·
              60,000
                  shares for services at $.91 per
                  share
 ·
              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
 ·
              90,000
                  shares to RVM for services rendered, valued at $90,000 ($1.00 per
                  share)
 ·
              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
 **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:
 
 ·
              11,500,000
                  shares at inception to officers/directors/founders for cash at
                  $.001 per
                  share
 ·
              500,000
                  shares for cash at $.02 per share
 ·
              4,000,000
                  shares to RVM, for services rendered, valued at $200,000 ($.05
                  per
                  share)
 ·
              3,000,000
                  shares for cash at $.05 per share
 ·
              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
 **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:
 
 Issue
                Date
              
              Shares
                Exercisable
              
              
              Exercise
                Price
              
              Expiration
                DateSeptember 24, 2003
              
              
              2,008,474
              
              
              $
              .59
                  - $ .83
              
              September 24, 2008October 3, 2003
              
              
              551,186
              
              
              $
              .59
                  - $ .83
              
              October 3, 2008December 18, 2003
              
              
              605,880
              
              
              $
              $1.25
              
              December 18, 2007January 15, 2004
              
              
              1,680,414
              
              
              $
              1.25
              
              January 15, 2009August 19, 2004
              
              
              5,494,805
              
              
              $
              1.25
              
              August 19, 2009October 27, 2004
              
              
              100,000
              
              
              $
              1.25
              
              October 27, 2009March 1, 2005
              
              
              1,637,234
              
              
              $
              1.25
              
              March 1, 2008May 31, 2005
              
              
              200,000
              
              
              $
              1.25
              
              May 31, 2010December 1, 2005
              
              
              1,205,196
              
              
              $
              1.25
              
              August 19, 2009April 26, 2006
              
              
              868,383
              
              
              $
              1.60
              
              April 26, 2011June 20, 2006
              
              
              480,769
              
              
              $
              1.60
              
              June 20, 201114,832,341
 
 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
 **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:
 
 Weighted
                  AvgNumber
                  of
              
              
              Weighted
                  Avg
              
              Remaining
              AggregateShares
              
              
              Exercise
                Price
              
              Contractual
                Term
              Intrinsic
                  ValueOptions
                  outstanding - December 1, 2004
              
              
              3,500,000
              
              
              $
              2.37Granted
                  during period
              
              
              975,000
              
              
              $
              1.32Exercised
                  during period
              
              
              -
              
              
              
              -Forfeited
                  during period
              
              
              -
              
              
              
              -Expired
                  during period
              
              
              -
              
              
              
              -Options
                  outstanding -November 30, 2005
              
              
              4,475,000
              
              
              $
              2.15Options
                  outstanding - December 1, 2005
              
              
              4,475,000
              
              
              $
              2.15Granted
                  during period
              
              
              240,000
              
              
              $
              1.19Exercised
                  during period
              
              
              -
              
              
              
              -Forfeited
                  during period
              
              
              -
              
              
              
              -Expired
                  during period
              
              
              -
              
              
              
              -Options
                  outstanding -November 30, 2006
              
              
              4,715,000
              
              
              $
              2.10
              
              7.61
              $   7,207,557Exercisable
                  at November 30, 2006
              
              
              2,825,000
              
              
              $
              2.10
              
              7.63
              $   5,919,800
 
 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
 **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.
 Number
                  of Shares
              
              
              Weighted
                  Average
                Fair
                  ValueNon-Vested
                  Options - December 1, 2004
              
              
              2,566,250
              
              
              $
              1.77Granted
                  during  period
              
              
              975,000
              
              
              $
              0.97Exercised
                  during period
              
              
              -
              
              
              $
              -Vested
                  during period
              
              
              (841,250
              )
              
              $
              1.49Forfeited
                  during period
              
              
              -
              
              
              $
              -Non-Vested
                  Options - November 30, 2005
              
              
              2,700,000
              
              
              $
              1.55Granted
                  during  period
              
              
              240,000
              
              
              $
              0.69Exercised
                  during period
              
              
              -
              
              
              $
              -Vested
                  during period
              
              
              (1,050,000
              )
              
              $
              1.29Forfeited
                  during period
              
              
              -
              
              
              $
              -Non-Vested
                  Options - November 30, 2006
              
              
              1,890,000
              
              
              $
              1.47
 
 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:
 Weighted
                  averageExercise
                  price
              
              
              Number
                  of options
              
              
              Number
                  of options
              
              
              remaining
                  contractualper
                  share
              
              
              outstanding
              
              
              Exercisable
              
              
              life
                  (Years)$
              1.00
              
              
              
              60,000
              
              
              
              40,000
              
              
              
              6.51.07
              
              
              
              50,000
              
              
              
              10,000
              
              
              
              9.01.19
              
              
              
              240,000
              
              
              
              240,000
              
              
              
              9.11.26
              
              
              
              50,000
              
              
              
              50,000
              
              
              
              8.11.30
              
              
              
              200,000
              
              
              
              200,000
              
              
              
              7.71.34
              
              
              
              875,000
              
              
              
              153,750
              
              
              
              8.01.50
              
              
              
              300,000
              
              
              
              112,500
              
              
              
              7.41.55
              
              
              
              325,000
              
              
              
              137,500
              
              
              
              7.62.24
              
              
              
              60,000
              
              
              
              60,000
              
              
              
              7.42.64
              
              
              
              2,375,000
              
              
              
              831,250
              
              
              
              7.43.51
              
              
              
              180,000
              
              
              
              180,000
              
              
              
              7.34,475,000
              
              
              
              1,775,000
              
              
              
              7.6
 
 
 F-34
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        8 – INCOME TAXES**
  The
        effective income tax rate differs from the U.S. Federal statutory income
        tax
        rate due to the following:
  Years
                  Ended November 30,2006
              
              
              2005
              
              
              2004Federal
                  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
                Other
              
              
              16.25
              %
              
              
              6.5
              %
              
              
              15.1
              %Increase
                  in valuation allowance
              
              
              22.0
              %
              
              
              31.8
              %
              
              
              22.2
              %Net
                  income tax provision (benefit)
              
              
              -
              
              
              
              -
              
              
              
              -
 
 The
        principal sources of temporary differences resulting in deferred tax assets
        and
        tax liabilities at November 30, 2004 are as follows:
 
 2006
              
              
              2005
              
              
              2004Deferred
                  tax assetsFederal
                  and state net operating
                  loss
                Carryovers
              
              $
              13,700,000
              
              
              $
              13,155,000
              
              
              $
              3,671,000Asset
                  retirement
                  obligation
              
              
              712,000
              
              
              
              472,000
              
              
              
              265,000Oil
                  and gas property
              
              
              
              
              
              
              657,000
              
              
              
              -Accrued
                  related party interest and interest on
                convertible
                  debt
              
              
              952,000
              
              
              
              -
              
              
              
              -Deferred compensation
              
              
              661,000
              
              
              
              -
              
              
              
              -Other
              
              
              -
              
              
              
              10,000
              
              
              
              -Total
                  deferred
                  taxes
              
              $
              16,025,000
              
              
              $
              14,294,000
              
              
              $
              3,936,000Deferred
                  tax liabilitiesIntangible
                  drilling costs and other exploration costs capitalized for financial
                  reporting purposes
              
              $
              (3,085,000
              )
              
              
              -
              
              
              
              (319,000
              )Deferred
                  financing
                  costs
              
              
              (216,000
              )Property
                  and
                  equipment
              
              
              (2,000
              )Other
              
              ___________
              
              
              ____________
              
              
              
              (15,000
              )Total
                  deferred
                  liabilities
              
              
              (3,303,000
              )
              
              
              -
              
              
              
              (334,000
              )Net
                  deferred tax
                  asset
              
              
              12,722,000
              
              
              
              14,294,000
              
              
              
              3,602,000Less:  valuation
                  allowance
              
              
              (12,722,000
              )
              
              
              (14,294,000
              )
              
              
              (3,602,000
              )Deferred
                  tax
                  liability
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 
 F-35
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        8 – INCOME TAXES (continued)**
 
 The
        Company has a $38,800,000 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 $1,572,000 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
 **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
 **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
              $103,8812008
              $107,8342009
              $109,4162010
              $
                  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
 **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
 **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
 **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:
 
 Three
                  months ended02/28/06
              
              
              05/31/06
              
              
              08/31/06
              
              
              11/30/06RevenuesNatural
                  gas
                  sales
              
              $
              425,675
              
              
              $
              248,661
              
              
              $
              281,559
              
              
              $
              238,747Gain
                  on disposition of oil and
                  gas property and other income, related party
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              79,474Operating
                  revenues
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -425,675
              
              
              
              248,661
              
              
              
              281,559
              
              
              
              318,221Operating
                  expensesLease
                  operating
                  expenses
              
              
              294,308
              
              
              
              106,510
              
              
              
              189,493
              
              
              
              190,825General
                  and
                  administrative
              
              
              1,154,718
              
              
              
              1,327,423
              
              
              
              1,172,301
              
              
              
              1,362,092Impairment
                  oil and gas properties
              
              
              -
              
              
              
              -
              
              
              
              1,031,160
              
              
              
              297,272Depreciation
                  and amortization
              
              
              176,344
              
              
              
              185,984
              
              
              
              318,379
              
              
              
              98,739Other
                  income (expense)Interest
                  and
                  other
              
              
              4,199
              
              
              
              7,390
              
              
              
              3,283
              
              
              
              742Interest
                  and financing
                  costs
              
              
              (4,582,103
              )
              
              
              (4,365,863
              )
              
              
              (3,970,113
              )
              
              
              (6,629,210
              )(4,577,904
              
              
              
              (4,358,473
              )
              
              
              (3,966,830
              )
              
              
              (6,628468
              )Net
                  (loss)
              
              $
              (5,777,599
              )
              
              $
              (5,729,729
              )
              
              $
              (6,396,604
              )
              
              $
              (8,259,175
              )Net
                  (loss) per common shareBasic
                  and
                  diluted
              
              $
              (0.08
              )
              
              $
              (0.08
              )
              
              $
              (0.09
              )
              
              $
              (0.11
              )
 
 
 F-41
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        12 – QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)**
 
 Three
                  months ended02/28/05
              
              
              05/31/05
              
              
              08/31/05
              
              
              11/30/05RevenuesNatural
                  gas
                  sales
              
              $
              111,877
              
              
              $
              247,399
              
              
              $
              323,313
              
              
              $
              614,605Gain
                  on disposition of oil and
                  gas properties
              
              
              -
              
              
              
              197,676
              
              
              
              -Operating
                  revenues
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              43,472111,877
              
              
              
              445,075
              
              
              
              323,313
              
              
              
              658,077Operating
                  expensesLease
                  operating
                  expenses
              
              
              172,137
              
              
              
              204,273
              
              
              
              377,435
              
              
              
              211,224General
                  and
                  administrative
              
              
              1,255,511
              
              
              
              1,247,864
              
              
              
              906,760
              
              
              
              1,906,453Impairment
                  oil and gas properties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,273,795Depreciation
                  and amortization
              
              
              68,904
              
              
              
              104,990
              
              
              
              160,258
              
              
              
              1,552,9221,496,552
              
              
              
              1,557,127
              
              
              
              1,444,453
              
              
              
              8,944,394Other
                  income (expense)Interest
                  and
                  other
              
              
              36,560
              
              
              
              43,922
              
              
              
              37,087
              
              
              
              45,722Interest
                  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 shareBasic
                  and
                  diluted
              
              $
              (0.06
              )
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.17
              )
 
 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
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        12 – QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)**
  Three
                  months ended02/28/04
              
              
              05/31/04
              
              
              08/31/04
              
              
              11/30/04RevenuesNatural
                  gas
                  sales
              
              $
              -
              
              
              $
              -
              
              
              $
              23,780
              
              
              $
              98,675Operating
                  expensesLease
                  operating
                  expenses
              
              
              -
              
              
              
              -
              
              
              
              15,215
              
              
              
              44,032General
                  and
                  administrative
              
              
              676,424
              
              
              
              1,047,625
              
              
              
              874,001
              
              
              
              919,168Abandoned
                  oil and gas
                  properties
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
                  and
                  amortization
              
              
              1,335
              
              
              
              21,767
              
              
              
              18,207
              
              
              
              35,081677,759
              
              
              
              1,069,392
              
              
              
              907,423
              
              
              
              998,281Other
                  income (expense)Interest
              
              
              13,337
              
              
              
              9,897
              
              
              
              7,652
              
              
              
              20,510Interest
                  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 shareBasic
                  and
                  diluted
              
              $
              (0.03
              )
              
              $
              (0.06
              )
              
              $
              (0.02
              )
              
              $
              (0.07
              )
 
 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
 **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.
  **Proved
                  Reserves**
              
              Gas
                  (Mcf)
              
              
              Oil
                  (Bbls)Balance,
                  November 30, 2004
              
              
              -
              
              
              
              -Extensions
                  and Discoveries
              
              
              1,171,425
              
              
              
              353Production
              
              
              (211,481
              )
              
              
              -Balance,
                  November 30, 2005
              
              
              959,944
              
              
              
              353Revisions
                  to previous estimates
              
              
              254,143
              
              
              
              (8
              )Extensions
                  and discoveries
              
              
              1,773
              
              
              
              20Production
              
              
              (210,439
              )
              
              
              (45
              )Balance,
                  November 30, 2006
              
              
              1,005,421
              
              
              
              320**Proved
                  Developed Reserves as of November 30**2006
              
              
              2005Gas
                  (Mcf)
              
              
              1,005,421
              
              
              
              648,302Oil
                  ( Bbls)
              
              
              320
              
              
              
              353Standardized
                  Measure of Discounted Future Cash FlowsNovember
                  30
              
              
              November
                  302006
              
              
              2005Future
                  cash inflows
              
              $
              6,769,792
              
              
              $
              6,529,934Future
                  cash outflowsProduction
                  costs
              
              
              (2,954,112
              )
              
              
              (2,498,340
              )Development
                  costs
              
              
              (340,000
              )
              
              
              (84,000
              )Future
                  income taxes
              
              
              -
              
              
              
              -Future
                  net cash flows
              
              
              3,475,680
              
              
              
              3,947,594Adjustment
                  to discount future annual net cash flows at 10%
              
              
              (732,608
              )
              
              
              (1,005,320
              )Standardized
                  measure of discounted future net cash flows
              
              $
              2,743,072
              
              
              $
              2,942,274
  F-44
 **GALAXY
          ENERGY CORPORATION**
 **(A
          Development Stage Company)**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
        13 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited)
        (continued)**
 
 Changes
                  in the Standardized Measure of Discounted Future Net Cash
                  FlowsStandardized
                  measure, beginning of period
              
              $
              2,942,274
              
              
              $
              -Sale
                  of oil and gas, net of production costs and taxes
              
              
              (414,000
              )
              
              
              (332,125
              )Net
                  change in sales prices, net of production cots
              
              
              (242,000
              )
              
              
              -Discoveries,
                  extensions and improved recoveries, net of
              
              
              
              
              
              
              3,274,399future
                  development cost
              
              
              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
         F-45