UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(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,
2007





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 1050, 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 registeredCommon
      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.[  ]Yes[X]No





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





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    [X]No





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.  [  ]





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








Large accelerated filer
      [  ]
            Accelerated
      filer [  ]Non-accelerated
      filer [  ]
            Smaller
      reporting company [X]





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


[  ]Yes          [X] No





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal
quarter:  $10,879,724 as ofMay 31, 2007.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:  83,661,968as of
April 18, 2008.





Documents
incorporated by reference:  None











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.





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.





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 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.





3


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.





Galaxy Energy Corporation (“we,” “us,”
“our” or the “Company”) is 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 through two wholly-owned
subsidiaries, Dolphin Energy Corporation (“Dolphin”) and Pannonian
International, Ltd (“Pannonian”).  As we commence production, the
natural gas will be sold to purchasers in the immediate area of the
production.  Our operations are focused in the following core
operating areas in the United States:





·
            The Piceance Basin of western
      Colorado.  We have drilled 23 wells in the basin, two of
      which were not productive, and three more are in the early stages of
      drilling.  Our leasehold locations are located in close
      proximity to natural gas pipelines and the roads needed for efficient
      development. We have partnered with Exxel Energy Corp.(“Exxel”), a related
      party, in our acreage in the Piceance Basin.   Exxel holds
      a 75% interest to our 25% interest in the Area of Mutual Interest (“AMI”).
      After our initial investment of $7 million, Exxel paid the next $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 have paid 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 April 7, 2008 we had
      interests in 178 completed wells, 51 wells in various stages of completion
      and six 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.  No additional wells
      were brought online during the year ended November 30,
    2007.





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 that we are participating in through a
      joint venture group.   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.  The joint venture is evaluating its options on the
      leasehold.





·
            Jiu Valley of
      Romania.  This is a 21,500-acre CBM project in
      Romania.  Our partner in this play is Falcon Oil & Gas Ltd
      (“Falcon”), a related party. The initial well, located in south western
      Romania, approximately 300 kilometers west of Bucharest, failed to
      encounter economic hydrocarbons. The well was tested in mid-December 2006
      and the well failed to generate a meaningful flow rate. The well has been
      plugged and abandoned and Falcon has asked for government approval to
      return the concession to the Romanian acreage inventory.  Falcon
      and our subsidiary, Pannonian, are currently assessing a long term plan
      with respect to other prospects in
Romania.





We
currently are limited in our activities due to capital
constraints.  Operations for the past year have been funded through
borrowings from the Bruner Family Trust UTD March 28, 2005 (the “Bruner Trust”),
a related party.  One of the trustees of
the Bruner Trust is Marc E. Bruner, the President and a director of our
Company.





Proceedings under Chapter 11





On March
14, 2008, we and Dolphin filed voluntary petitions for relief under Chapter 11
of Title 11 of the United States Code (the “Bankruptcy Code”) in the United
States Bankruptcy Court for the District of Colorado (the “Court”) (Jointly
Administered Under Case Numbers 08-13164 for Galaxy and 08-13166 for
Dolphin).  We and Dolphin will continue to operate our businesses as
“debtors-in-possession” under the jurisdiction of the Court and in






5
 
  accordance
with the applicable provisions of the Bankruptcy Code and the order of the
Court, as we devote renewed efforts to resolve our liquidity problems and
develop a reorganization plan.





Pursuant
to the provisions of the Bankruptcy Code, we are not permitted to pay any claims
or obligations which arose prior to the filing date (prepetition claims) unless
specifically authorized by the Court.  Similarly, claimants may not
enforce any claims against us that arose prior to the date of the
filing.  In addition, as a debtor-in-possession, we have the right,
subject to the Court’s approval, to assume or reject any executory contracts and
unexpired leases in existence at the date of the filing.  Parties
having claims as a result of any such rejection may file claims with the Court
which will be dealt with as part of the Chapter 11 cases.





It is our
intention to address all of our prepetition claims in a plan of reorganization
in our Chapter 11 cases.  At this juncture, it is impossible to
predict with any degree of certainty how such a plan will treat such claims and
the impact our Chapter 11 cases and any reorganization plan will have on the
trading market for our stock.  Generally, under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan which permits holders of
equity interests to participate.  The formulation and implementation
of a plan of reorganization in the Chapter 11 cases could take a significant
period of time.





It is likely that at least a portion of our oil
and gas assets will be offered for sale to potential buyers as part of our
bankruptcy reorganization; however there is no assurance a sale will be
completed or that we will realize the full carrying value of the assets in such
a sale.  If that were to occur, we may be required to write off a
portion of the carrying value of such properties and such write-off could be
material.





For the
years ended November 30, 2007 and 2006, the report on our financial statements
of our independent registered public accounting firm included an explanatory
paragraph indicating that there is substantial doubt as to our ability to
continue as a going concern.





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.  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 to 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 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, a related party, which is our partner in the project, as of March 1, 2008
we controlled approximately 6,000 net acres (1,500 net to Galaxy) in the
Piceance Basin.  Under our agreement with Exxel, we hold 25% of the
available working interest in the wells that






6
 
  we drill
in the basin, and Exxel holds the remaining 75% of available working
interest.  We currently have gas production and sales from 6 wells
operated by other operators, with our working interest being less than 10% in
each of the 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 CBM exploration and production.  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, CBM is attractive because it usually has very high percentage of methane
- up to 96%.  Coal bed methane in the Powder River Basin was generated
not by heat and pressure, but by bacterial activity within the coal
itself.  These anaerobic bacteria are classified as methanogens for
their ability to generate large quantities of methane.  As methane is
generated it is trapped (adsorbed) onto microscopic surfaces within the coal by
water pressure.





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





The extraction of CBM 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 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 CBM 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 CBM
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.





Germany





We, through our wholly-owned
subsidiary, Pannonian, 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






7


further
drilling. Our interest in this project could drop to 24%, depending upon the
outcome of the future drilling program.   We did not incur any
capital costs on this project during the year ended November 30,
2007.





Romania





We, through our wholly-owned
subsidiary, Pannonian, 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.  Our partner in the project is
Falcon Oil & Gas Ltd., a related party.The initial well was
located in south western Romania, approximately 300 kilometers west of
Bucharest, failed to encounter economic hydrocarbons. The well was tested in
mid-December 2006 and the well failed to generate a meaningful flow rate. The
well has been plugged and abandoned and Falcon has begun the process to return
the concession to the Romanian acreage inventory.  We did not incur
any capital costs on this project during the year ended November 30,
2007.





Falcon
and Pannonian are currently assessing a long term plan with respect to other
prospects in Romania.





Exploration
and Acquisition Capital Expenditures





During the fiscal years ended November
30, 2007, 2006, and 2005, we incurred $2,129,026, $4,145,611 and $18,164,329,
respectively, in identifying and acquiring petroleum and natural gas leases and
prospect rights, and for exploration costs.





Principal
Products





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





Competition





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





Compliance
with Governmental Regulations





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





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




8




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





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





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





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





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






9


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, 2007, we had a total of five full time employees.  None
of our employees is covered by a collective bargaining agreement.





ITEM
1A.           RISK FACTORS.





We
have filed for protection under Chapter 11 of the Bankruptcy
Code.  The outcome for our company and our stockholders is
uncertain.





We
recently filed for protection under Chapter 11 of the Bankruptcy
Code.  We have not yet formulated a plan of
reorganization.  At this juncture, it is impossible to predict with
any degree of certainty how such a plan will treat such claims and the impact
our Chapter 11 cases and any reorganization plan will have on the trading market
for our stock.  Generally, under the provisions of the Bankruptcy
Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan which permits holders of
equity interests to participate.  The formulation and implementation
of a plan of reorganization in the Chapter 11 cases could take a significant
period of time.





We have a limited operating history and have generated
only very limited revenues.  We have incurred significant losses and
willcontinue to incur losses for the
foreseeable future.The report
on our financial statements contains a paragraphexpressing substantial doubt aboutour 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 andevaluating
potential oil and gas properties.





The
report of our independent registered public accounting firm on the financial
statements for the year ended November 30, 2007, includes an explanatory
paragraph indicating that there is substantial doubt as to our ability to
continue as a going concern.  From
inception toNovember 30, 2007, we have an accumulated deficit of approximately $86.7
million.  For the 2008 fiscal year, we do not expect our operations to
generate sufficient cash flows to provide working capital for our ongoing overhead, the funding of
our lease acquisitions, and the exploration and development of our
properties.  Without adequate financing, we may not be able to
successfully develop any prospects that we have or acquire and we may
not
achieve profitability from operations in the near future or at
all.





Our payment commitments under various debt instruments
will likely require us to sell a significant portion of our assets, whichleaves us with fewer assets to develop for
our future growth.





AtNovember 30,
2007, our working capital deficit was
approximately $49.4 million.  AtNovember 30, 2007,
we had contractual obligations due byNovember 30, 2008of approximately $48.1 million.Included within this amount is $12 million we
currently owe under convertible notes we
issued in May 2005.  We were required to






10
 
  make monthly principal payments of $500,000 as well as
quarterly payments of accrued interest under the terms of such
notes.  We were required to pay an additional $6 million on
thisdebt byMarch 1, 2008, however no amount was paid.  Any remaining
balance is due byOctober 1,
2008.  These cash commitments
were among the principal factors  which led to the decision to file
for bankruptcy protection.It is
likely that at least a portion of
our oil and gas assets will be offered for sale to potential buyers as
part of our bankruptcy reorganization; however there is no assurance a sale will
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 of the assets and such a write-off could be
material.





We are currently dependent upon loans from related
parties to provide working capital.





ThroughNovember 30, 2007, we have borrowed
$13,600,000 from Bruner Trust.  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 seniorindebtedness 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 Trust is Marc E.
Bruner, the president and a director ofthe
company.





In
connection with the acquisition of oil and gas properties from DAR LLC, (“DAR”)
we issued a promissory note to DAR in the amount of $2,600,000.  At
November 30, 2007, 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. The note accrues interest at the rate of 12%
per annum and was due on December 1, 2006.  The Bruner Trust has
entered into various Forbearance Agreements 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.  As of November
30, 2007, we and the Bruner Trust executed a Forbearance Agreement whereby the
Bruner Trust agreed to forbear until May 31, 2008 from enforcing its rights that
arise as a result of our not making payment on the note by the due
date.





We have borrowed an additional $3,000,000 through March
31, 2008 from the Bruner Trust to fund operations and required debt payments.





On April
11, 2008, the United States Bankruptcy Court for the District of Colorado
approved interim post-petition financing to us and Dolphin of $308,000 by Bruner
Trust, pursuant to the terms of a Loan Agreement dated as of April 14,
2008.  We requested this amount to avoid immediate and irreparable
harm.  At a hearing held April 28, 2008, the Bankruptcy Court entered
a final order authorizing us to borrow up to $4,485,250 pursuant to the terms of
the Loan Agreement.  The Loan Agreement provides for interest at the rate
of 10% per annum and maturity of the loan on the earlier of (i) the closing of
any transaction pursuant to which any third party acquires substantially all of
our or Dolphin’s assets; (ii) the conversion of our or Dolphin’s bankruptcy case
to a case under chapter 7 of the Bankruptcy Code; (iii) the dismissal of either
of the bankruptcy cases; (iv) the date on which any chapter 11 plan of
reorganization becomes effective; (v) the occurrence of an Event of Default (as
defined in the Loan Agreement) or (vi) November 15, 2008.  The Loan is
secured by a lien on all of our and Dolphin’s assets.





The lack of production and established reserves forour properties impairs our ability to raise
capital.





As ofNovember 30,
2007, we had established very limited
production of natural gas from a limited number of wells, and limited proved
reserves.  Until significant production actually occurs it will bedifficult 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 prices could have a
material adverse effect on our business.





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





11




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, andlimitations 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 investorsmay negotiate
terms at least as, and possibly more, favorable than the terms of your
investment.  In addition, any shares of common stock that we sell
could be sold into the market and subsequent sales could adversely affect the
market price of our stock.





As an example of the foregoing, the purchasers of
convertible notes issued in May 2005 negotiated a perpetual overriding royalty
interest with respect to our existing domestic acreage averaging from 1% to 3%,
depending upon the nature and location of the property.  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 existenceof 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 loss of the listing of our stock on theAmerican Stock Exchange could impair our ability to
obtain future financing.





On February 7, 2008, we received a
notice from the American Stock Exchange (“AMEX”) staff indicating that we no
longer comply with the exchange’s continued listing standards of the AMEX
Company Guide, and that our common stock is subject to being delisted from the
exchange.  On April 14, 2008, we received a notice from the AMEX staff
indicating its determination to prohibit the continued listing of our common
stock and to initiate delisting proceedings.  At a hearing held on
April 8, 2008, a Listing Qualifications Panel of the Amex Committee on
Securities found that our financial condition and operating results are below
the applicable quantitative standards set forth in Sections 1002 and 1003(a) of
the Amex Company Guide.  In addition, AMEX cited the fact that we are
in violation of other sections of the Amex Company Guide.  AMEX has
indicated that it will continue its current suspension of trading in our common
stock and file an application with the Securities and Exchange Commission to
strike our common stock from listing and registration when and if
authorized.





Our ability to obtain future financing
may be impacted, as prospective investors may desire the visibility of an
exchange-listed stock.





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,
othertechnologies, 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 ofdrilling fluids or other conditions may substantially
delay or prevent completion of any well.  Adverse weather conditions
can also hinder drilling operations.





12


To
address our liquidity problem, our oil and gas assets, or portions thereof, are
being offered for sale to potential buyers. If a sale is completed there is no
assurance that the Company will realize the full carrying value of the assets
sold.  In such event, the Company may be required to write off a
portion of the carrying value and such write-off could be material. In addition,
a sale leaves us with fewer assets to develop for our future
growth.





Delays in obtaining permits for methane wells could
impair our business.





Drilling CBM 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 arenot 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 nocontrol 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
well isabout 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 personwho 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 areunable to predict
the ultimate cost of compliance.





13
 
 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 andregulations
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, affectsour 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 wouldnot 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, whichhave
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 todiscover 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 industryand 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 14.0% of our stock as ofMarch 10, 2008.  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 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.





As ofMarch 31,
2008,including the balance of the DAR
note,we have borrowed a total of
$18,649,728 from Bruner Trust.  If we were to convert that debt into
equity, the percentage of our stock controlled directly or indirectly by Marc A.
Bruner and Marc E. Bruner would increase
significantly.





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 reservereports 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
ouroperating 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;




14




·
            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 ourbusiness.





Our issuance of the convertible notes and warrants could
substantially dilute the interests of shareholders.





We issued $7.695 million in notes in March
2005.   Additional notes issued in May 2005 had an outstanding
principal balance of $12 million atNovember 30, 2007.  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 issuanceof 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.





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 notes issued in May 2005 provide for the issuance of additional warrants
under certain circumstances.





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.





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.  However, the reduction in the conversion price is under our
control as we will decide if we issue securities that would reduce the
conversion price of the outstanding warrants.





15


Accordingly, our issuanceof 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 warrantscould 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, untilthe
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 tovarious
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.





Future equitytransactions, 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
ata 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, if any, will result in dilution to existing
stockholders.  The amount of dilution will depend on the spread
between themarket and exercise price, and the number of shares
involved.





The issuance of shares upon exercise of outstanding
warrants may cause immediate and substantial dilution to our existing
stockholders.





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





Our officers, directors, and advisors are engaged in
other businesses, which may result in conflicts of interest.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., aNevadacorporation whose stock is traded on the
American Stock Exchange, and chairman of the board, president and chief
executive officer of Falcon Oil & Gas Ltd., aBritish Columbiacorporation whose stock is traded on the TSX Venture Exchange.  He is
also the controlling shareholder of PetroHunter Energy
Corporation, aMarylandcorporation whose stock is traded on the OTC Bulletin
Board (“PetroHunter”), and a significant shareholder of Exxel Energy Corp.,
aBritish Columbiacorporation, 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 Senior Vice
President, Special Projects 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.





16


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 thePiceanceBasininColorado.  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.  Mr. Bruner’s original 18.5%
of the outstanding common stock of Exxel has been substantially diluted by
subsequent stock offerings by Exxel.  Our participationagreement with
Exxel Energy, as amended, establishes our working interest at 25%, with Exxel
having a 75% interest.This gave us an
interest in 1,513 net acres in thePiceanceBasinas ofNovember 30, 2007.





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 theJiuValleyCoalBasininRomania, which was issued to Pannonian by the Romanian
government in October 2002.  The terms of the farmout agreement were
essentially thesame as those that had been negotiated with aU.K.company, which is unaffiliated with and unrelated to either us, Falcon or any of
the officers or principal shareholders thereof.  After theU.K.company declined to proceed with the farmout, Falcon offered to accept the
farmout on essentially the same terms.  The members of our board of
directors who did not have a conflict of interest unanimously approved the
farmout agreement with Falcon.








ITEM
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 and Romania.





Piceance Basin–Colorado
On March 2, 2005, we entered into a Lease Acquisition and Development Agreement
(the “Agreement”) with Apollo Energy LLC and ATEC
Energy Ventures, LLC (the “Sellers”) to
acquire an initial 58-1/3% working interest in unevaluated oil and gas
properties in the Piceance Basin in Colorado, by depositing $7,000,000 in
escrow.  Subsequently, including interest earned on the escrow account
and a small additional deposit we made into the account, we paid from escrow a
total $7,022,088 to acquire undeveloped leases in the area.  Because the Sellers were not willing to enter into the
Agreement with us without having some agreement regarding the remaining 41-2/3%
working interest in the subject
properties, we entered into a Participation Agreement with Marc A.
Bruner, a related party (see Item 13), to acquire all or a portion of the
remaining 41-2/3% working interest in the subject properties.  Mr.
Bruner subsequently assigned his rights under the Agreement to an unrelated
third party, Exxel Energy Corp.  Mr. Bruner became a significant
shareholder of Exxel by assigning his rights under the Agreement.  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.





17


We
commenced drilling operations on our first operated well on December 5,
2005.  We own a 25% working interest in a well that 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 described in
the preceding paragraph).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 21.2% 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 was $325,000,
which was paid during the year ended November 30, 2007.





As of
November 30, 2007we had an interest in 1,513 net acres in the
Piceance Basin. During the year ending November 30, 2008, the leases
covering 392 net acres of this total will expire and cannot be extended. As a
result, we haverecognized impairment
expense of $1,863,000 as of November 30, 2007.





PowderRiver
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
Basin.  As of November 30, 2007, a total of 43 wells have been drilled
on the acreage, 37 of which have been completed.  Of these wells, 22
produced gas at various levels during the year ended November 30, 2007 in 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 November 30, 2007, gas production from the West
Recluse area wells was approximately 390,000 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 November 30, 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 November 30,
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. We have arranged for managed irrigation with landowners in the
area.  In addition, the Company is using other dewatering
methods.  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, we believe our dewatering program will be greatly enhanced,
which we believe will accelerate the time to gas sales.





18


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
November 30, 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 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 reaching 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.  Mud logging services were
used on several initial wells in this field, and confirmed that the Cook, Wall,
and Pawnee coals had the highest gas contents.  A total of 29 wells were
drilled.  All of the wells have been perforated and stimulated and
continue to dewater.




19


Offsetting
wells operated by an unrelated oil and gas company have begun producing small
amounts of gas and we believe 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 has been developing plans to include these 22 wells in expanded
production pilot projects.  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 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 four
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 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 wrote off the entire $2,070,547
carrying value of the Castle Rock prospect as impairment expense in the year
ending November 30, 2005.





East
Texas.  The leases covering approximately 1,560 undeveloped net
acres in the vicinity of the Trawick Field, located in Rusk and Nacogdoches
counties, Texas have expired.





Jiu
Valley.Our wholly-owned subsidiary, Pannonian, 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 CBM 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, 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 would 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.





20


The initial well was located in south
western Romania, approximately 300 kilometers west of Bucharest, failed to
encounter economic hydrocarbons. The well was tested in mid-December 2006 and
the well failed to generate a meaningful flow rate. The well has been plugged
and abandoned and Falcon has begun the process to return the Concession to the
Romanian acreage inventory.  Falcon and Pannonian are currently
assessing a long term plan with respect to other prospects in Romania.We did not incur any
capital costs on this project during the year ended November 30,
2007.





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 31, 2008.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, an unaffiliated public oil and gas company
traded on the London AIM exchange.  Terms of the agreement called for
Empyrean to initially earn a 40% working interest in the permit, which could
rise to 52% depending upon results of the project.  Empyrean earned
the 40% interest after paying $750,000 to Pannonian and the two co-permittees
and providing evidence of deposits totaling 1.3 million euros which were set
aside for drilling obligations on the project.  As a result, our
interest in the project has been reduced to 30%.  Our interest in the
project may drop to 24%, depending upon the outcome of the future drilling
program.





Drilling
on the first test well on the property reached total depth in late January
2006.  Based upon the initial review of open hole logs from the well,
several zones of interest 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, 2007, 2006 and 2005.





For
      the fiscal year ended
              November
      30, 2007
            For
      the fiscal yearended
              November
      30, 2006
            For
      the fiscal year ended
              November
      30, 2005Production
      Data:Natural
      gas (Mcf)
            113,832
            210,439
            211,481Oil
      (Bbls)
            --
            --
            --Average
      Prices:Natural
      gas (per Mcf)
            $4.17
            $5.68
            $6.13Oil
      (per Bbl)
            --
            --
            --Production
      Costs:Natural
      gas (per Mcf)
            $8.71
            $3.71
            $4.56Oil
      (per Bbl)
            -
            -
            -





21


Productive
Gas Wells





The following summarizes our productive
and shut-in gas wells as of November 30, 2007.  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
              2007
            
            
            Producing Gas Wells
              2006
            
            
            Producing Gas Wells
              2005Gross
            
            
            Net
            
            
            Gross
            
            
            Net
            
            
            Gross
            
            
            NetProducing
      gas wells
            
            
            105
            
            
            
            100.80
            
            
            
            71
            
            
            
            53.58
            
            
            
            71
            
            
            
            53.58Shut-in
      gas wells
            
            
            78
            
            
            
            58.00
            
            
            
            99
            
            
            
            91.18
            
            
            
            99
            
            
            
            91.18Wells
      in various stages of completion and water disposal wells
            
            
            67
            
            
            
            52.30
            
            
            
            75
            
            
            
            64.05
            
            
            
            75
            
            
            
            64.05Total
            
            
            250
            
            
            
            210.11
            
            
            
            245
            
            
            
            208.81
            
            
            
            245
            
            
            
            208.81





Estimated
Proved Oil and Gas Reserves





Our
proved reserves are located in the Glasgow and West Recluse Prospects on the
eastern side of the Powder River Basin and 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, 2007 of $6.17/Mcf
and $89.00/bbl., compared with $6.86/Mcf and $59.36/bbl in November 30,
2006.  Due to the Company’s current liquidity issues, proved
undeveloped reserves identified in the Gustavson Associates report are excluded
from the disclosures below.





Estimated
proved reserves as on November 30:


Year
            Oil
      (bbls)
            Gas
      (Mcf)
            Estimated
      Future Net Revenues
            Estimated
      Future Net Revenues Discounted at 10%2007
            291
            755,013
            $1,728,000
            $1,257,0002006
            320
            1,005,421
            $3,475,680
            $2,743,0722005
            353
            959,944
            $3,947,594
            $2,942,274





Oil
and Gas Acreage





The
following table sets forth the undeveloped and developed leasehold acreage, by
area, held by us as of November 30, 2007.  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 AcresGross
            
            
            Net
            
            
            Gross
            
            
            NetWyoming
            
            
            83,289
            
            
            
            35,228
            
            
            
            7,920
            
            
            
            7,570Montana
            
            
            153,557
            
            
            
            21,168
            
            
            
            720
            
            
            
            90Colorado
            
            
            11,437
            
            
            
            1,322
            
            
            
            1,840
            
            
            
            191Romania
            
            
            21,538
            
            
            
            5,385
            
            
            
            0
            
            
            
            0Germany
            
            
            149,000
            
            
            
            44,700
            
            
            
            0
            
            
            
            0Total
            
            
            418,821
            
            
            
            107,803
            
            
            
            10,480
            
            
            
            7,851





22


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 11/30/08
            
            
            Expiring
      through 11/30/09Gross
            
            
            Net
            
            
            Gross
            
            
            NetWyoming
            
            
            1,980
            
            
            
            322
            
            
            
            1,762
            
            
            
            1,522Montana
            
            
            45,985
            
            
            
            5,748
            
            
            
            6,163
            
            
            
            770Colorado
            
            
            6,269
            
            
            
            841
            
            
            
            5,248
            
            
            
            452Romania
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Germany
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Total
            
            
            54,234
            
            
            
            6,911
            
            
            
            13,173
            
            
            
            2,744





Drilling
Activity





The
following table sets forth our drilling activity during the years ended November
30, 2007, 2006 and 2005.




2007
            2006
            2005Gross
            Net
            Gross
            Net
            Gross
            NetExploratory
      wells:Productive
            2
            .14
            5
            0.8
            23
            6.2Dry
            -
            -
            1
            0.2
            -
            -Development
      wells:Productive
            8
            1.5
            3
            3
            -
            -Dry
            -
            -
            -
            -
            -
            -Total
      wells
            10
            1.64
            9
            4
            23
            6.2





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.





On July 3, 2007, Windsor Energy
Resources, Inc. ("Windsor") commenced a lawsuit against Dolphin in the District
Court, Fourth Judicial District, Sheridan County, Wyoming, asserting claims for
breach of an Operating Agreement and to foreclose statutory and/or contractual
liens in the total claimed principal amount of $433,716.35, plus interest and
attorney fees and costs. Windsor claims it is due the amounts for work it
performed in drilling, completing and operating wells under the terms of the
Operating Agreement. Dolphin disputes Windsor's claims and has asserted that
Windsor failed to properly submit AFEs to Dolphin in compliance with the terms
of the Operating Agreement, that Windsor on many occasions submitted AFEs for
work that had already been completed, and that Windsor has submitted a number of
joint interest billings that are erroneous and inaccurate. Dolphin has asserted
a counterclaim for an accounting and a counterclaim for an offset for sums it
claims Windsor owes Dolphin relating to wells operated by Dolphin.  No
discovery has taken place and the parties have been engaged in settlement
discussions in an attempt to resolve the claims and counterclaims asserted in
this action.





The Vernon S. and Rowena W. Griffith
Foundation ("Griffith Foundation") has commenced a lawsuit against Windsor
Beaver Creek, LLC and Dolphin in the District Court, Fourth Judicial District,
Sheridan County, Wyoming, seeking a determination that an oil and gas lease
dated January 19, 1999 covering approximately






23


14,456.88
acres in Townships 55 and 56 North, Ranges 80 and. 81 West, Sheridan County,
Wyoming has terminated. The Griffith Foundation claims that, as of the
expiration of the primary term of the lease on January 19, 2007, there had been
no production of oil or gas on the lands covered by the lease. The Griffith
Foundation seeks an order declaring the lease has terminated and for damages in
an unspecified amount.  Windsor and Dolphin dispute the claims
asserted by the Griffith Foundation and intend to defend this
litigation.  No discovery has taken place and the Griffith Foundation
has only recently filed a motion to set a scheduling conference and a trial
date.





In August 2007, Dolphin (and Galaxy)
filed complaints against the Wyoming Office of State Lands and Investments,
Board of Land Commissioners ("Respondents") in the District Court, Laramie
County, Wyoming. These actions seek relief from, and judicial review of,
administrative actions taken by Respondents establishing excessive and unlawful
bond requirements that were simultaneously disclosed and imposed on Dolphin and
the Company on July 16, 2007, involving certain mineral leases administered by
Respondents.  The two cases have been consolidated and briefs are to
be filed by Galaxy and Dolphin by May 12, 2008.  The Wyoming Attorney
General's Office has expressed a desire to further stay these cases, which
Dolphin is considering.








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





None.


24


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.  From
November 23, 2005 to March 14, 2008, our common stock has traded on the American
Stock Exchange (“AMEX”) under the symbol GAX.  Since April 21, 2008,
the common stock has been trading on the OTCBB under the symbol: "GAXI". 
The following tables set forth the range of high and low sales prices for each
fiscal quarter for the last two fiscal years.





AMEX


Fiscal Quarter
      Ending
            High
            LowFebruary 28, 2006
              May 31, 2006
              August 31, 2006
              November 30, 2006
            $1.07
              $1.24
              $0.90
              $0.43
            $1.01
              $0.85
              $0.36
              $0.26February 28, 2007
              May 31, 2007
              August 31, 2007
              November 30, 2007
            $0.27
              $0.23
              $0.17
              $0.11
            $0.19
              $0.14
              $0.08
              $0.05





On March
10, 2008, the closing price for the common stock was $0.051.





As of
March 10, 2008, 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.





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, 2007, invested
in: (1) Galaxy Energy Corporation; (2) the NASDAQ Market Index; and (3) a peer
group consisting of the 28 publicly-held companies in the S&P Small Cap
Energy Index.  The year-end value of each investment is based on share
price appreciation and assumes that $100 was invested on November 30, 2002 and
that all dividends were reinvested.  Calculations exclude trading
commissions and taxes.  The comparison of past performance in the
graph is required by the SEC and is not intended to forecast or be indicative of
possible future performance of our common stock.





25









Total
      Return Analysis11/30/2002
            11/30/2003
            11/30/2004
            11/30/2005
            11/30/2006
            11/30/2007Galaxy
      Energy Corporation
            $100.00
            $199.14
            $122.61
            $107.20
            $22.48
            $4.41S&P
      SC Energy Index
            $100.00
            $131.91
            $234.56
            $337.67
            $424.40
            $473.69AMEX
      Composite
            $100.00
            $135.12
            $173.01
            $249.06
            $304.97
            $347.82


Source:  CTA
Integrated Communications www.ctaintegrated.com (303) 665-4200.  Data
from ReutersBRIDGE Data Networks








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.





Year ended November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Summary
      of Operations:Revenue
            
            $
            480,755
            
            
            $
            1,274,116
            
            
            $
            1,538,342
            
            
            $
            122,455
            
            
            $
            -Lease
      operating costs
            
            
            991,342
            
            
            
            781,136
            
            
            
            965,069
            
            
            
            59,247
            
            
            
            -General
      & administrativeexpense
            
            
            3,693,994
            
            
            
            5,016,534
            
            
            
            5,316,588
            
            
            
            3,517,218
            
            
            
            2,095,495Depreciation,
      depletion andamortization
            
            
            586,125
            
            
            
            779,446
            
            
            
            1,887,074
            
            
            
            77,390
            
            
            
            -Impairment
      of oil and gasproperties
            
            
            3,866,195
            
            
            
            1,328,432
            
            
            
            5,273,795
            
            
            
            -
            
            
            
            -Net
      (loss)
            
            
            (20,020,143
            )
            
            
            (26,163,107
            )
            
            
            (24,876,200
            )
            
            
            (9,831,104
            )
            
            
            (2,579,595
            )Net
      (loss) per share
            
            
            (0.24
            )
            
            
            (0.36
            )
            
            
            (0.37
            )
            
            
            (0.18
            )
            
            
            (0.08
            )





26





As of November
      30,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
      Sheet:Working
      capital (deficiency)
            
            $
            (49,352,427
            )
            
            $
            (19,868,880
            )
            
            $
            (7,085,181
            )
            
            $
            (626,108
            )
            
            $
            1,756,776Cash
      and cash equivalents
            
            
            12,542
            
            
            
            608,180
            
            
            
            1,328,469
            
            
            
            10,513,847
            
            
            
            2,239,520Oil
      and gas properties, net
            
            
            43,118,752
            
            
            
            44,793,140
            
            
            
            44,358,725
            
            
            
            37,491,529
            
            
            
            2,799,720Total
      assets
            
            
            43,797,124
            
            
            
            47,760,258
            
            
            
            48,459,378
            
            
            
            49,648,165
            
            
            
            5,655,433Long-term
      debt
            
            
            2,971,654
            
            
            
            16,881,267
            
            
            
            11,188,252
            
            
            
            10,915,928
            
            
            
            2,483,557Stockholders’
      equity (deficit)
            
            
            (10,581,200
            )
            
            
            7,919,911
            
            
            
            25,418,378
            
            
            
            26,681,207
            
            
            
            2,634,559








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





Overview
and Plan of Operation





We have
spent our time since inception 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 31, 2008, approximately 30 wells were
delivering natural gas into sales pipelines from the West Recluse field and the
Piceance Basin wells.  We currently are producing about 160,000 cubic
feet per day.  The production is not sufficient to fund our planned
operations, debt repayment and commitments.





AtNovember 30,
2007, our working capital deficit was
approximately $49.4 million.  We
have contractual obligations due byNovember 30, 2008of approximately $48.1million, as explained more fully below.  To meet
these obligations and working capital needs, we have been attempting to sell
assets and to raise additional capital.





Proceedings under Chapter 11





On March
14, 2008, we and Dolphin filed voluntary petitions for relief under Chapter 11
of Title 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Colorado (the “Court”).  We and Dolphin will continue to
operate our businesses as “debtors-in-possession” under the jurisdiction of the
Court and in accordance with the applicable provisions of the Bankruptcy Code
and the order of the Court, as we devote renewed efforts to resolve our
liquidity problems and develop a reorganization plan..





Pursuant
to the provisions of the Bankruptcy Code, we are not permitted to pay any claims
or obligations which arose prior to the filing date (prepetition claims) unless
specifically authorized by the Court.  Similarly, claimants may not
enforce any claims against us that arose prior to the date of the
filing.  In addition, as a debtor-in-possession, we have the right,
subject to the Court’s approval, to assume or reject any executory contracts and
unexpired leases in existence at the date of the filing.  Parties
having claims as a result of any such rejection may file claims with the Court
which will be dealt with as part of the Chapter 11 cases.





It is our
intention to address all of our prepetition claims in a plan of reorganization
in our Chapter 11 cases.  At this juncture, it is impossible to
predict with any degree of certainty how such a plan will treat such claims and
the impact our Chapter 11 cases and any reorganization plan will have on the
trading market for our stock.  Generally, under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan which permits holders of
equity interests to participate.  The formulation and implementation
of a plan of reorganization in the Chapter 11 cases could take a significant
period of time.





It is likely that at least a portion of our oil
and gas assets will be offered for sale to potential buyers as part of our
bankruptcy reorganization; however there is no assurance a sale will be
completed or that we will realize the full




27
 
  carrying
value of the assets in such a sale.  If that were to occur, we may be
required to write off a portion of the carrying value of such properties and
such write-off could be material.





Going
Concern





The
report of our independent registered public accounting firm on the financial
statements for the year ended November 30, 2007, includes an explanatory
paragraph indicating substantial doubt as to our ability to continue as a going
concern.  We have incurred a cumulative net loss $86,686,660 for the
period from inception to November 30, 2007.  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 2007 fiscal year, we used $4,309,208 for
operating activities, as compared to $6,077,479 for fiscal
2006.  Among the larger adjustments to reconcile the net loss of
$20,020,143 to net cash used by operating activities for fiscal 2007 was
$5,331,895 for amortization of discount and deferred financing costs on
convertible debt and impairment of oil and gas properties of
$3,866,195.  In contrast, the adjustments for fiscal 2006 to the net
loss of $26,163,107 included $10,611,349 for amortization of discount and
deferred financing costs on convertible debt, $3,457,101 for financing costs,
and $1,328,432 for impairment of oil and gas properties.





Investing
Activities.We used $2,044,702 for net investing activities,
after recoveries, in fiscal 2007, as compared to $2,431,777 and $19,141,078 in
fiscal 2006 and 2005, respectively.  We used substantially less cash
for additions to oil and gas properties in 2007, $2,129,026 compared to
$4,145,612 and $18,873,239 in 2006 and 2005, respectively.  The
significant decrease in cash expenditures 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.





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 approximately $80,597,814 through the period ended November 30,
2007.  Financing activities provided cash of $5,758,272 in fiscal
2007, as compared to $7,788,967 and $15,742,472 in fiscal 2006 and 2005,
respectively.





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.





28


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 paid interest at the prime rate plus 7.25% per annum, originally
matured two years from the date of issue, were 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.  The 2004 notes were paid in full during the year ended
November 30, 2007. 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
were originally 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.  The April 30, 2007
maturity date has since been extended to May 31, 2008.





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





On
December 1, 2005, we entered into a Waiver and Amendment Agreement (the “2005
Waiver and Amendment”) with the holders of the 2004 Notes and the holders of the
May 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;





29


·
            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.





In
October 2006, Bruner 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 Trust has stated that it will not enforce its rights
under the note until June 30, 2007.





On November 29, 2006, the Company and
the holders of the 2004 Notes and May 2005 Notes entered into a Waiver and
Amendment Agreement.  The Company 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 the Notes
as of August 31, 2006.  Among other things, this would have enabled
the holders of the Notes to require the Company to redeem all or any portion of
the outstanding principal amount of the Notes at a price equal to the greater of
(i) 125% of such principal plus accrued and unpaid interest and (ii) the product
of the current conversion rate in effect under the Notes multiplied by the
volume-weighted average price of Galaxy’s common stock.  The holders
agreed to waive the Triggering Event in consideration for an amendment to the
May 2005 Notes that reset the principal amounts of the Notes to 125% of the
amounts outstanding as of October 31, 2006.  The increased principal
in the amount of $2,500,000 was included in interest expense during the year
ended November 30, 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.





On
December 29, 2006, we entered into a Purchase and Sale Agreement (“PSA”) with
PetroHunter Energy Corporation (“PetroHunter”), a related party, 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 the Powder River
Basin Assets was $45 million, with $20 million to be paid in cash and $25
million to be paid in shares of the purchaser’s common stock.  The
sale was not completed.





As part
of the PSA, PetroHunter was required and did make an earnest money deposit of
$2.0 million in January 2007.  In the event the closing did not occur
for any reason other than a material breach by PetroHunter, the deposit was to
convert into a promissory note, payable to PetroHunter, as an unsecured
subordinated debt, which was to be 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 were to be credited toward the purchase price, or if
closing did not occur, would be added to the principal amount of the promissory
note.  When the PSA expired by its terms on August 31, 2007, we issued
a promissory note to PetroHunter in the amount of $2,493,777, which accrues
interest at 8.5% per annum.





We
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
Energy Corporation.  Such consent was required as the






30


holders
have a security interest covering these assets.  As a condition to the
note holders’ consent, the PRB Sale was to be completed by March 31, 2007 and we
had to be in compliance with the November 2006 Waiver and Amendment Agreement
and all of our obligations under the various agreements with the note
holders.





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 Waiver and Amendment
Agreement.  We agreed to register these shares, and as we have not as
of November 30, 2007, the costs classified as deferred selling costs ($410,175)
were expensed to interest expense during the year ended November 30,
2007.





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 Trust, a related
party.  One of the trustees of the
Bruner 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 16, 2007, the Company and the holders of the May 2005 Notes entered
into an Amendment Agreement.  The Amendment Agreement amended the May
2005 Notes and the related Securities Purchase Agreement to effect the
following:




·
              Monthly
      principal payments of $500,000;
 ·
              A
      $6,000,000 principal payment by March 1, 2008;
  and
 ·
              A
      final balloon payment of any remaining amounts owed under the May 2005
      Notes by October 1, 2008.
  In
addition, cash proceeds from any sales of Galaxy’s assets are to be used to
repay the May 2005 Notes.





During
the year ended November 30, 2007, Galaxy entered into subordinated unsecured
promissory notes with the Bruner Trust totaling $8.1 million with interest
accruing at 8% per annum and matures at the later of 120 days from issue or the
time at which our senior indebtedness has been paid in
full.  Subsequent to November 30, 2007, the Company has continued to
receive advances from the Bruner Family Trust.  Subordinated unsecured
promissory notes totaling $3,000,000 were issued in December, 2007, and January,
February and March, 2008.





Working
Capital Deficiency.As of November 30, 2007, we had a
working capital deficiency of approximately $49.4 millioncompared to a working capital
deficiency of approximately $19.9 million at November 30, 2006.  Included in current
liabilities at November 30, 2007 is the current portion of debt and related
party debt of approximately $42.2 million, compared to approximately $17.8
million at November 30, 2006.





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.





31


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,
2007.





Payments
      due by periodContractual
      obligations (1)
            Total
            Less than 1 year
            1-3 years
            3-5 years
            More than 5 yearsConvertible
      Notes Payable (2)Principal
            $26,695,000
            $24,195,000
            $2,500,000
            $          -
            $               -Interest
            5,016,797
            4,473,304
            543,493
            -
            -Notes
      Payable – related partyPrincipal
            18,143,505
            18,143,505
            -
            -
            -Interest
            1,330,174
            1,330,174
            -
            -
            -Asset
      retirement obligations (3)
            1,924,883
            -
            -
            -
            1,924,883Office
      and equipment leases
            289,384
            107,834
            135,438
            46,112
            --TOTAL
            $53,185,370
            $48,107,283
            $3,107,092
            $46,112
            $1,924,883




(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.





(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%.





(3)
            Neither
      the ultimate settlement amounts nor the timing of our asset retirement
      obligations can be precisely determined in
  advance.





Results
of Operations





Year Ended
November 30, 2007 Compared to Year Ended November 30,
2006.  During the year ended November 30, 2007, revenues from
natural gas sales decreased to $480,755 from $1,194,642 the year
before.  A total of 113,832 Mcf of natural gas in 2007 was sold,
compared to 40 wells that sold 210,439 Mcf in 2006. The decrease is due to the
Company shutting down some of its production during the summer months of 2007
due to the realized gas prices of less than $1 per mcf.  Certain of
the wells had mechanical issues that were not repaired also due to the low gas
prices. Average prices received for gas sold decreased to $4.17 in 2007 from
$5.68 in 2006.  Lease operating and production tax expenses increased
in 2007 to $991,342 or $8.71/Mcf, compared to $781,136 or $3.71/Mcf the year
before.  This increase reflects the effect of our dewatering
efforts.  Depreciation, depletion and amortization expense
(“DD&A”) of $586,125 in 2007 is a decrease from the 2006 amount of
$779,446.  The decrease was caused by the decrease in production
volumes and a decrease in the amortization base following the impairment
write-downs of $6,051,195 and $1,328,432 in fiscal 2007 and 2006,
respectively.  The impairment write-downs represented the excess of
capitalized costs over the ceiling as calculated in accordance with the full
cost rules.





32


For the
year ended November 30, 2007 and 2006, we incurred general and administrative
expenses of $3,693,994 and $5,016,534, respectively, as summarized
below:





2007
            
            
            2006Stock
      based compensation
            
            $
            1,109,032
            
            
            $
            1,525,752Salaries
      and benefits
            
            
            823,082
            
            
            
            940,803Professional
      and consulting fees
            
            
            115,346
            
            
            
            281,707Investor
      relations
            
            
            436,398
            
            
            
            814,745Legal
            
            
            411,399
            
            
            
            480,607Travel
      and entertainment
            
            
            57,920
            
            
            
            99,960Office
      lease and expenses
            
            
            145,351
            
            
            
            213,008Audit
      and accounting
            
            
            230,388
            
            
            
            275,287Directors
      fees
            
            
            189,000
            
            
            
            198,774Prospect
      generation, maintenance and presentation
            
            
            25,451
            
            
            
            29,716Insurance
      and other
            
            
            150,627
            
            
            
            156,174Total
            
            $
            3,693,994
            
            
            $
            5,016,534





Significant
year-to-year variances include:


·
            a
      decrease in stock based compensations expenses due to forfeitures by
      individuals who have left the
Company.


·
            a
      decrease in salary and benefits expenses due to individuals who have left
      the Company.


·
            a
      decrease in professional/consulting fees and investor relations fees due
      to lower activity.


·
            a
      decrease in travel and entertainment expenses due to a reduction in new
      venture and investor relations
activity.


·
            a
      decrease in office expenses due to lower
  activity.





Interest
income for the year ended November 30, 2007 includes interest income earned on
cash deposits in commercial banks of $25,998 compared to $15,614 of interest
income during the same period in 2006.  The increase in interest
income reflects the balances of cash on deposit in 2007, as a result of the
reduced activity of the Company.





Interest
and financing costs decreased to $11,389,240 in 2007 from $19,547,289 in 2006
primarily reflecting the reduction in amortization of discount to $2,848,556 in
2007 from $10,300,875 in 2006.  The table below summarizes interest
and financing costs for the years ended November 30, 2007 and 2006.





2007
            
            
            2006Interest
      on outstanding debt
            
            $
            5,762,347
            
            
            $
            4,858,276Amortization
      of discount
            
            
            2,848,556
            
            
            
            10,300,875Amortization
      of deferred finance costs
            
            
            190,146
            
            
            
            310,474Discount
      on shares issued upon conversion of principal and interest at below market
      rates
            
            
            -
            
            
            
            545,563Write-off
      of unamortized discount and deferred financing costs upon issuance of new
      debt
            
            
            2,293,191
            
            
            
            3,457,101Other
            
            
            295,000
            
            
            
            75,000Total
            
            $
            11,389,240
            
            
            $
            19,547,289





Significant
year-to-year variances include:


·
                an
      increase in interest expense due to full year interest on the April 2006
      Notes and June 2006 Notes and additional borrowings from the Bruner Family
      Trust.
 ·
                a
      decrease in amortization of discount due to the repayment of the March
      2004 Notes and the restructure of the May 2005
  Notes.
 ·
                a
      decrease in the write-off of unamortized discount and deferred financing
      costs upon issuance of new debt due to the restructure of the 2004 Notes
      during 2006 and the amendment to the 2005 Notes during
      2006.
  
 33


·
            an
      increase in other expenses due to the amounts due to the senior
      lenders in accordance with the registration rights
    agreement.








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 specific 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.  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’s termination of the consulting agreement
      with the founder of the Company effective March 1, 2006 reduced 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).






34


·
            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.





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.






35




·
            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.





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,
2007, 2006 and 2005, we






36


recognized
impairment expense of $3,866,195, $1,328,432 and $5,273,795, respectively,
representing the excess of capitalized costs over the ceiling
amount.




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 or 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.





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






37


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, 2007, the
off-balance sheet arrangements and transactions that we have entered into
include operating lease agreements.  We do not believe that these
arrangements are reasonably likely to materially affect our liquidity or
availability of, or requirements for, capital resources.








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





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





38





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.


39


PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Our executive officers and directors
are:





Name
            Age
            PositionMarc
      E. Bruner
            34
            President
      and DirectorChristopher
      Hardesty
            63
            Senior
      Vice President, Chief Financial Officer, Secretary and
      TreasurerCecil
      D. Gritz
            64
            Chief
      Operating Officer and DirectorNathan
      C. Collins
            73
            DirectorDr.
      James M. Edwards
            63
            DirectorRobert
      Thomas Fetters, Jr.
            68
            DirectorRonald
      P. Trout
            68
            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, Inc., Denver, Colorado, from
July 1977 to September 1982, and the drilling and production manager for Trend




40
 
  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.





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 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






41
 
  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.





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






42


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,
2007, there was compliance with all Section 16(a) filing requirements applicable
to our officers, directors and greater than 10% beneficial owners.








ITEM
11.              EXECUTIVE
COMPENSATION.





Compensation
Discussion and Analysis





We
believe that the skill and dedication of our executive officers and other
management personnel are critical factors affecting our long-term success in
meeting our objectives and fostering growth and profitability. In support of
this, compensation programs have been designed to attract and retain a high
level of talented leadership, to reward performance in accordance with results,
to provide an incentive for future performance and to align PetroHunter
executives’ long-term interests with those of the shareholders.





Our
executive and key management compensation is comprised of three major
components: (i) base salary adjusted annually by the Compensation Committee,
(ii) cash bonuses awards based on individual performance and the performance of
our Company, and (ii) stock option grants awarded based on individual
performance and the performance of our Company.  The compensation mix
of cash and stock options grants for the CEO is similar to that of other
executive officers.





The
Compensation Committee was established by the Board of Directors for the
following purposes:


·
            to
      assist the Board in its responsibility relating to fair and competitive
      compensation of key employees;


·
            to
      assure that key employees, which includes all officers, are compensated in
      a manner consistent with the compensation philosophy and strategy of the
      Board and in compliance with the requirements of appropriated regulatory
      bodies and any exchange rules to which we may be
  subject;


·
            to
      review and approve our compensation philosophy and our compensation
      programs, plans and awards;


·
            to
      administer our long and short term incentive plans and stock option
      plans;






43




·
            to
      review the compensation of our President and recommendations of the
      President as to appropriate compensation for the other executive officers
      and key personnel; and


·
            to
      review and approve our general employee benefit plans as
      needed.





The
Compensation Committee is composed of three members, Mr. Edwards, Mr. Fetters
and Mr. Collins, all of whom are “independent” under the rules and regulations
of the American Stock Exchange (“AMEX”).  For a director to be
considered independent under the Listing Standards of 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
Compensation Committee makes all decisions concerning the compensation of
executive officers, determines the total amount of bonuses, if any, to be paid
and grants all awards of stock options.  The Compensation Committee
compares all compensation components for executive officers, at least annually,
with data on similar positions at other organizations that are similar in number
of employees, level of operations, gross revenue and total assets with which we
compete for talent.  The Compensation Committee seeks the input of our
President in evaluating the performance of all of our executive officers,
excluding himself.  By recognizing individual contributions and the
overall performance of our Company, the Compensation Committee practices are
designed to attract, motivate, retain, and align the financial interests of key
personnel with those of the shareholders.





The
Compensation Committee used the analysis set forth below in its determination of
the level of compensation for each of the following components of our 2007
compensation program.  The 2008 compensation program may change in
light of the Company’s cash resources and other factors.





Base
Salaries.  The base salaries of the named executive officers
are reviewed annually by the Committee and future salary adjustments are
reviewed by the Committee on an annual basis and recommended to the Board for
final approval.  The Committee and the Board consider various factors
for each executive officer, including, their position, the compensation of
executive officers of comparable companies within the oil and natural gas
industry, their performance, their industry experience, any increases in
responsibilities and the recommendations of the President with respect to base
salaries of the other executive officers.  Salaries for the named
executive officers in fiscal 2007 are set forth in the “Summary Compensation
Table” below and were determined by the Board based on the considerations
described above.





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 will consider the achievements of the Company and the employee’s
relationship thereto to determine the level of the cash bonus, if any, to be
awarded.  The Compensation Committee will also consider 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 cash bonus awards, if any.





Stock Option
Awards.  The Compensation Committee utilizes stock option
awards to align the executives’ interests with those of the stockholders by
giving each individual direct ownership in the Company.  The
Compensation Committee also believes that these awards serve as a retention
incentive since unvested stock grants and options may be forfeited if the
executive leaves.  The Compensation Committee focuses on services
rendered, our earnings, the return on stockholders’ equity, the growth in proved
oil and gas reserves and the successful completion of specific projects to
determine the level of stock option awards, if any.





During
the fiscal year ended November 30, 2007, options to purchase 60,000 shares of
our common stock were granted to each of our four non-employee directors,
pursuant to the policy that has been in place since March 1,
2004.  The Committee considered the grants made to directors to be
appropriate in order to compensate such individuals for the responsibility and
risk exposure assumed when serving in such positions, especially in light of the
current financial condition of the Company.





44


Summary
Compensation Information





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 year ended November 30, 2007.





SUMMARY
      COMPENSATION TABLEName
      and principal position
            Year
            Salary
              ($)
            Bonus
              ($)
            Option
      Awards
              ($)
            Non-Equity
      Incentive Plan Compensation
              ($)
            Nonqualified
      Deferred Compensation Earnings
              ($)
            All
      Other Compensation
              ($)
            Total
              ($)Marc
      E. Bruner, President
            2007
            120,000
            -0-
            -0-
            -0-
            -0-
            -0-
            120,000Cecil
      Gritz, Chief Operating Officer
            2007
            110,000
            -0-
            -0-
            -0-
            -0-
            57,383(1)
            167,383Christopher
      Hardesty, Chief Financial Officer
            2007
            100,000
            -0-
            -0-
            -0-
            -0-
            -0-
            100,000




(1)
            All
      other compensation consists of:  $21,878 for commuting expenses,
      $22,100 for housing expenses and $13,405 for meals and other
      expenses.





We reimburse our officers and directors
for reasonable expenses incurred during the performance of their duties for
Galaxy Energy.  We do not have any pension benefits for any of our
officers or employees.





Equity
Compensation Plans and Plan-Based Awards





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 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




45
 
  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, 2007, options to purchase 4,230,000 shares were outstanding at a
weighted average exercise price of $1.99 per share and 2,270,000 options were
available for future grant.





At
November 30, 2007, stock options outstanding and available pursuant to 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 issuanceEquity
      compensation plans approved by security holders
            4,230,000
            $1.99
            2,270,000Equity
      compensation plans not approved by security holders
            -0-
            -0-
            -0-Total
            4,230,000
            $1.99
            2,270,000





No stock
options were granted during the years ended November 30, 2007 and 2006 to our
named Executive Officers.  No options have been exercised by any of
our executive officers.





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDName
            OPTION
      AWARDSNumber
      of Securities Underlying Unexercised Options (#)
    Exercisable
            Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
            Option
      Exercise Price ($)
            Option
      Expiration DateMarc
      E. Bruner
            562,500
            187,500
      (1)
            --
            2.64
            4/6/201455,000
            45,000
      (2)
            --
            1.34
            12/2/2014Cecil
      Gritz
            468,750
            156,250
      (3)
            --
            2.64
            4/6/201455,000
            45,000
      (2)
            --
            1.34
            12/2/2014Christopher
      Hardesty
            165,000
            135,000(4)
            --
            1.34
            12/2/2014






46





(1)
            These
      options vest at the rate of 37,500 per quarter beginning April 6,
      2004.


(2)
            These
      options vest at the rate of 5,000 per quarter beginning March 2,
      2005.


(3)
            These
      options vest at the rate of 31,250 per quarter beginning April 6,
      2004.


(4)
            These
      options vest at the rate of 15,000 per quarter beginning March 2,
      2005.





Compensation
of Directors





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.  We have also granted 60,000 options to
each of the directors in January 2008 that vest immediately and are exercisable
through January 1, 2018 at $0.0325 per share.





The
following table sets forth the compensation paid to our non-employee Directors
for services rendered during the year ended November 30, 2007.





DIRECTOR
      COMPENSATIONName
            Fees
      Earned or Paid in Cash ($)
            Option
      Awards ($)
            All
      Other Compensation ($)
            Total
      ($)Nathan
      C. Collins
            45,500(1)
            60,000(2)
            7,000
            52,500James
      M. Edwards
            52,500(3)
            60,000
            7,000
            59,500Robert
      Thomas Fetters, Jr.
            52,000(4)
            60,000
            7,000
            59,000Ronald
      P. Trout
            39,000(5)
            60,000
            7,000
            46,000




(1)
            At
      November 30, 2007, we owed Mr. Collins $10,500 in directors’
      fees.


(2)
            Options
      to purchase 60,000 shares granted on January 1, 2007 were valued at $0.12
      per share which represents the FAS 123(R) value of the option on that
      date.  Under FAS 123(R), the grant date fair value of each stock
      option award is calculated on the date of grant using the Black-Scholes
      option valuation model.  The Black-Scholes model was used with
      the following assumptions: volatility rate of 70%; risk-free interest rate
      of 4.25% based on a U.S. Treasury rate of five years; and a 5-year
      expected option life.  The options vested fully upon the January
      1, 2007 grant date, are exercisable at $0.19 per share, and expire January
      1, 2017.


(3)
            At
      November 30, 2007, we owed Dr. Edwards $12,000 in directors’
      fees.


(4)
            At
      November 30, 2007, we owed Mr. Fetters $12,000 in directors’
      fees.


(5)
            At
      November 30, 2007, we owed Mr. Trout $9,000 in directors’
      fees.





Report
of the Compensation Committee of Galaxy Energy





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, 2007 was composed of Dr.. Edwards, Mr. Fetters
and Mr. Collins.  None of these directors is or was an officer of our
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 our Company.  The
Compensation Committee has reviewed and discussed the information included in
the “Compensation Discussion and Analysis” above.  Based upon this
review and discussion, the Compensation Committee has recommended to the Board
of Directors that this information be included in the Galaxy Energy’s annual
report.  The foregoing report is made by the Compensation Committee of
our Board of Directors.





47





The
      Compensation CommitteeDr.
      James M. EdwardsRobert
      Thomas Fetters, Jr.Nathan
      C. Collins





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 March 10, 2008:





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)
            14.0%Resource
      Venture Management
              29
      Blauenweg
              Metzerlen,
      Switzerland 4116
            4,899,525
            5.9%Bruner
      Group, LLP
              1775
      Sherman Street #1375
              Denver,
      Colorado 80203
            4,500,000
            5.4%Marc
      E. Bruner
            2,202,500
      (4)
            2.6%Cecil
      D. Gritz
            596,250
      (5)
            0.7%Dr.
      James Edwards
            360,000
      (6)
            0.4%Robert
      Thomas Fetters, Jr.
            300,000
      (7)
            0.4%Nathan
      C. Collins
            300,000
      (7)
            0.4%Christopher
      S. Hardesty
            211,000
      (8)
            0.3%Ronald
      P. Trout
            120,000
      (9)
            0.1%All
      officers and directors as a group (7 persons)
            4,089,750
      (10)
            4.9%




(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 83,661,968 shares of Common Stock outstanding as of
      March 10, 2008.  If a person listed on this table has the right
      to obtain additional shares of Common Stock within sixty (60) days from
      March 10, 2008, 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
      702,500 shares issuable upon exercise of vested stock
    options.


(5)
            Includes
      596,250 shares issuable upon exercise of vested stock
    options.


(6)
            Includes
      360,000 shares issuable upon exercise of vested stock
    options.


(7)
            Includes
      300,000 shares issuable upon exercise of vested stock
    options.


(8)
            Includes
      195,000 shares issuable upon exercise of vested stock
    options.


(9)
            Includes
      120,000 shares issuable upon exercise of vested stock
    options.


(10)
            Includes
      2,573,750 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.




48


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, 2007, 2006
and 2005, we paid management fees of $-0-, $30,000 and $120,000, respectively,
to Resource Venture Management.  We also incurred other costs and
expenses of $-0-, $-0- and $30,000 with Resource Venture Management for those
same periods, of which $-0-, $-0-, and $12,079 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, 2007, 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.





During the year ended November 30,
2005, we incurred costs and expenses with Harbor of $41,681.  Of those
amounts, compensation expenses paid to Harbor for services provided by the COO
and other Harbor staff, were $27,500.  Reimbursement of costs advanced
by Harbor on behalf of us of $14,181 was paid during the year ended November 30,
2005.  We did not make any payments to Harbor during the years ended
November 30, 2007 and 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, 2007, 2006 and 2005,
we owed Mr. Fails approximately $3,000, $10,000 and $37,400 for office and
personnel expenses advanced by him.  These amounts are included in
accounts payable, related as of the respective dates.





49




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 year ended November 30, 2005, we
paid Mr. Hughes $21,250 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 years ended November 30, 2007 or
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.  As of November 30, 2006, Exxel owed us $923,172 for our share
of joint venture costs and management fees.  This amount was paid by
Exxel in December 2006 and February 2007.  The amount due from Exxel
at November 30, 2007 was not significant.  In addition, we recorded
$56,000 and $1,696,000 in fees from Exxel as compensation for management of the
drilling program during the years ended November 30, 2007 and
2006.  These amounts were recorded as a reduction to related
exploration costs incurred by us.





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 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 completed the drilling of an initial well, which was
later plugged and abandoned.  Falcon has asked for government approval
to return the concession to the Romanian acreage inventory.  We and
Falcon are currently assessing a long term plan with respect to other prospects
in Romania





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.  Marc A. Bruner is the largest 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,






50
 
  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”).  This transaction was not
completed.





As part
of the PSA, PetroHunter was required and did make an initial earnest money
payment of $2,000,000.  In the event the closing did not occur for any
reason other than a material breach by PetroHunter, the deposit was to convert
into a promissory note, payable to PetroHunter, as an unsecured subordinated
debt, which was to be 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 were to be credited toward the purchase price, or if
closing did not occur, would be added to the principal amount of the promissory
note.





When the
PSA expired by its terms on August 31, 2007, we issued a promissory note to
PetroHunter in the amount of $2,493,777, which accrues interest at 8.5% per
annum.





Bruner
Family Trust





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 Trust, a related
party.  One of the trustees of the
Bruner Trust is Marc E. Bruner, thepresident 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.





During
the year ended November 30, 2007, we entered into subordinated unsecured
promissory notes with the Bruner Trust totaling $8.1 million with interest
accruing at 8% per annum and matures at the later of 120 days from issue or the
time at which our senior indebtedness has been paid in
full.  Subsequent to November 30, 2007, we have continued to receive
advances from the Bruner Trust.  Subordinated unsecured promissory
notes totaling $3,000,000 were issued in December, 2007, and January, February
and March 2008.





In
October 2006, the Bruner Trust acquired a promissory note that we originally
issued to DAR LLC in consideration for certain oil and gas properties in the
amount of $2,600,000.  As of November 30, 2007, the remaining balance
of the note payable was $2,049,728.  The note accrues interest at the
rate of 12% per annum and was due on December 1, 2006.   The
Bruner Trust has entered into various forbearance agreements, agreeing to
forbear for enforcing its rights arising from our failure to make payment on the
note by the due date.  As of November 30, 2007, the Bruner Trust
agreed to forbear from enforcing its rights until May 31, 2008.





On April 11, 2008, the United States
Bankruptcy Court for the District of Colorado approved interim post-petition
financing to us and Dolphin of $308,000 by Bruner Trust, pursuant to the terms
of a Loan Agreement dated as of April 14, 2008.  We requested this
amount to avoid immediate and irreparable harm.  At a hearing held
April 28, 2008, the Bankruptcy Court entered a final order authorizing us to
borrow up to $4,485,250 pursuant to the terms of the Loan Agreement.  The
Loan Agreement provides for interest at the rate of 10% per annum and maturity
of the loan on the earlier of (i) the closing of any transaction pursuant to
which any third party acquires substantially all of our or Dolphin’s assets;
(ii) the conversion of our or Dolphin’s bankruptcy case to a case under chapter
7 of the Bankruptcy Code; (iii) the dismissal of either of the bankruptcy cases;
(iv) the date on which any chapter 11 plan of reorganization becomes effective;
(v) the occurrence of an Event of Default (as defined in the Loan Agreement) or
(vi) November 15, 2008.  The Loan is secured by a lien on all of our
and Dolphin’s assets.





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.





51


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.





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, 2007, Hein & Associates LLP (“Hein”) is
expected to bill approximately $117,000 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, 2006, Hein & Associates LLP (“Hein”) billed
$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.





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 2007 and 2006.





Tax
Fees





For the
fiscal years ended November 30, 2007 and 2006, Hein billed $-0- and $263,
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 2007 and
2006.





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.








52


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, 2007 and 2006 and for each of the three years in
the period ended November 30, 2007, and the Report of Independent Registered
Public Accounting Firm thereon, are included herein as shown in the “Index to
the Consolidated Financial Statements” set forth in Item 8.





Financial Statement
Schedules:





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





Exhibits:





Regulation
              S-K
      Number
            Exhibit2.1
            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)2.3
            Third
      Amendment to Purchase and Sale Agreement dated March 30, 2007
      (3)2.4
            Fourth
      Amendment to Purchase and Sale Agreement dated April 30, 2007
      (4)2.5
            Fifth
      Amendment to Purchase and Sale Agreement dated May 31, 2007
      (5)2.6
            Sixth
      Amendment to Purchase and Sale Agreement dated June 30, 2007
      (6)2.7
            Seventh
      Amendment to Purchase and Sale Agreement dated July 31, 2007
      (7)3.1
            Articles
      of Incorporation (8)3.2
            Articles
      of Amendment to Articles of Incorporation (9)(10)3.3
            Bylaws
      (8)10.1
            2003
      Stock Option Plan (9)10.2
            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 (11)10.3
            Participation
      Agreement between Dolphin Energy Corporation and Marc A. Bruner dated
      February 23, 2005 (11)10.4
            Securities
      Purchase Agreement dated March 1, 2005 between Galaxy Energy Corporation
      and the Buyers named therein (11)10.5
            Form
      of Note (11)10.6
            Form
      of Common Stock Purchase Warrant (11)10.7
            Registration
      Rights Agreement dated March 1, 2005 between Galaxy Energy Corporation and
      the Buyers named therein (11)10.8
            Subordination
      Agreement (11)10.9
            Amended
      Participation Agreement between Marc A. Bruner and Dolphin Energy
      Corporation dated March 16, 2005 (12)10.10
            Second
      Amendment to Participation Agreement dated May 24, 2005
    (13)10.11
            Securities
      Purchase Agreement dated May 31, 2005 between Galaxy Energy Corporation
      and the Buyers named therein (14)10.12
            Form
      of Note (14)






53


Regulation
              S-K
      Number
            Exhibit


10.13
            Form
      of Qualifying Issuance Warrants (14)10.14
            Form
      of Repurchase Warrants (14)10.15
            Form
      of Registration Rights Agreement (14)10.16
            Form
      of First Amendment to Security Agreement, Pledge Agreement and Guaranty
      (14)10.17
            Form
      of Mortgage Amendment (14)10.18
            Form
      of Waiver and Amendment to 2004 Notes and Warrants (15)10.19
            Form
      of Waiver and Amendment to March 2005 Notes and Warrants
    (14)10.20
            Form
      of Conveyances of Overriding Royalty Interests (14)10.21
            Form
      of March 2005 Subordination Agreement (14)10.22
            Second
      Amendment to Lease Acquisition and Development Agreement
    (16)10.23
            Third
      Amendment to Participation Agreement dated October 4, 2005
      (17)10.24
            Waiver
      and Amendment dated December 1, 2005 between Galaxy Energy Corporation and
      the investors named therein (18)10.25
            Securities
      Purchase Agreement dated April 25, 2006 between Galaxy Energy Corporation
      and the Buyers named therein (19)10.26
            Form
      of Debenture (19)10.27
            Form
      of Warrant (19)10.28
            Form
      of Subordination Agreement (19)10.29
            Securities
      Purchase Agreement dated June 20, 2006 between Galaxy Energy Corporation
      and the Buyers named therein (20)10.30
            Waiver
      and Agreement dated July 7, 2006 between Galaxy Energy Corporation and the
      investors named therein (21)10.31
            Subordinated
      Unsecured Promissory Note dated September 28, 2006 to Bruner Family Trust
      UTD March 28, 2005 (22)10.32
            Subordination
      Agreement dated September 28, 2006 (22)10.33
            Subordinated
      Unsecured Promissory Note dated November 1, 2006 to Bruner Family Trust
      UTD March 28, 2005 (23)10.34
            Subordination
      Agreement dated November 1, 2006 (23)10.35
            Subordinated
      Unsecured Promissory Note dated November 13, 2006 to Bruner Family Trust
      UTD March 28, 2005 (24)10.36
            Subordination
      Agreement dated November 13, 2006 (24)10.37
            November
      2006 Waiver and Amendment Agreement dated November 29, 2006 among Galaxy
      Energy Corporation, its subsidiaries and the investors named therein
      (25)10.38
            Registration
      Rights Agreement dated November 29, 2006 (25)10.39
            Subordinated
      Unsecured Promissory Note dated November 30, 2006 to Bruner Family Trust
      UTD March 28, 2005 (26)10.40
            Subordination
      Agreement dated November 30, 2006 (26)10.41
            Subordinated
      Unsecured Promissory Note dated February 1, 2007 to Bruner Family Trust
      UTD March 28, 2005 (27)10.42
            Subordination
      Agreement dated February 1, 2007 (27)10.43
            Subordinated
      Unsecured Promissory Note dated February 26, 2007 to Bruner Family Trust
      UTD March 28, 2005 (28)10.44
            Subordination
      Agreement dated February 26, 2007 (28)10.45
            Combined
      Amendment to Lease Acquisition and Development Agreements and to
      Participation Agreement (29)10.46
            Forbearance
      Agreement between Galaxy Energy Corporation and Bruner Family Trust UTD
      March 28, 2005 dated effective December 1, 2006 (30)10.47
            Subordinated
      Unsecured Promissory Note dated March 30, 2007 to Bruner Family Trust UTD
      March 28, 2005 (31)10.48
            Subordination
      Agreement dated March 30, 2007 (31)10.49
            Subordinated
      Unsecured Promissory Note dated April 25, 2007 to Bruner Family Trust UTD
      March 28, 2005 (32)




54


Regulation
              S-K
      Number
            Exhibit


10.50
            Subordination
      Agreement dated April 25, 2007 (32)10.51
            Subordinated
      Unsecured Promissory Note dated May 4, 2007 to Bruner Family Trust UTD
      March 28, 2005 (33)10.52
            Subordination
      Agreement dated May 4, 2007 (33)10.53
            Subordinated
      Unsecured Promissory Note dated August 31, 2007 to Bruner Family Trust UTD
      March 28, 2005 (34)10.54
            Subordination
      Agreement dated August 31, 2007 (34)10.55
            Subordinated
      Unsecured Promissory Note dated June 29, 2007 to Bruner Family Trust UTD
      March 28, 2005 (35)10.56
            Subordination
      Agreement dated June 29, 2007 (35)10.57
            Amended
      Forbearance Agreement between Galaxy Energy Corporation and Bruner Family
      Trust UTD March 28, 2005 dated effective June 30, 2007
  (36)10.58
            Subordinated
      Unsecured Promissory Note dated August 22, 2007 to Bruner Family Trust UTD
      March 28, 2005 (37)10.59
            Subordination
      Agreement dated August 22, 2007 (37)10.60
            Subordinated
      Unsecured Promissory Note dated August 29, 2007 to Bruner Family Trust UTD
      March 28, 2005 (38)10.61
            Subordination
      Agreement dated August 29, 2007 (38)10.62
            Subordinated
      Unsecured Promissory Note dated September 28, 2007 to Bruner Family Trust
      UTD March 28, 2005 (39)10.63
            Subordination
      Agreement dated September 28, 2007 (39)10.64
            Subordinated
      Unsecured Promissory Note dated October 11, 2007 to Bruner Family Trust
      UTD March 28, 2005 (40)10.65
            Subordination
      Agreement dated October 11, 2007 (40)10.66
            October
      2007 Amendment and Agreement as to 2005 Subordinated Notes
      (41)10.67
            Subordinated
      Unsecured Promissory Note dated November 2, 2007 to Bruner Family Trust
      UTD March 28, 2005 (42)10.68
            Subordination
      Agreement dated November 2, 2007 (42)10.69
            Subordinated
      Unsecured Promissory Note dated November 2, 2007 to Bruner Family Trust
      UTD March 28, 2005 (43)10.70
            Subordination
      Agreement dated November 2, 2007 (43)10.71
            November
      2007 Amendment Agreement dated November 16, 2007 among Galaxy Energy
      Corporation, its subsidiaries and the investors named therein
      (44)10.72
            Subordinated
      Unsecured Promissory Note dated December 3, 2007 to Bruner Family Trust
      UTD March 28, 2005 (45)10.73
            Subordination
      Agreement dated December 3, 2007 (45)10.74
            Subordinated
      Unsecured Promissory Note dated December 3, 2007 to Bruner Family Trust
      UTD March 28, 2005 (46)10.75
            Subordination
      Agreement dated December 3, 2007 (46)10.76
            Subordinated
      Unsecured Promissory Note dated December 28, 2007 to Partner Marketing AG
      (47)10.77
            Subordination
      Agreement dated December 28, 2007 (47)10.78
            Subordinated
      Unsecured Promissory Note dated December 31, 2007 to Bruner Family Trust
      UTD March 28, 2005 (48)10.79
            Subordination
      Agreement dated December 31, 2007 (48)10.80
            Subordinated
      Unsecured Promissory Note dated January 15, 2008 to Bruner Family Trust
      UTD March 28, 2005 (49)10.81
            Subordination
      Agreement dated January 15, 2008 (49)10.82
            Subordinated
      Unsecured Promissory Note dated January 30, 2008 to Bruner Family Trust
      UTD March 28, 2005 (50)10.83
            Subordination
      Agreement dated January 30, 2008
(50)




55


Regulation
              S-K
      Number
            Exhibit


10.84
            Subordinated
      Unsecured Promissory Note dated February 14, 2008 to Bruner Family Trust
      UTD March 28, 2005 (51)10.85
            Subordination
      Agreement dated February 14, 2008 (51)10.86
            Subordinated
      Unsecured Promissory Note dated March 3, 2008 to Bruner Family Trust UTD
      March 28, 2005 (52)10.87
            Subordination
      Agreement dated March 3, 2008 (52)10.88
            Unsecured
      Promissory Note dated March 13, 2008 to Bruner Family Trust UTD March 28,
      2005 (53)10.89
            Loan
      Agreement dated as of April 14, 2008 among Galaxy Energy Corporation and
      Dolphin Energy Corporation, Borrowers, and Bruner Family Trust, Lender
      (54)21
            Subsidiaries
      of the registrant23.1
            Consent
      of Independent Registered Public Accounting Firm – Hein & Associates
      LLP dated March __, 200831.1
            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
      1-32682.(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,
      file number 1-32682.(3)
            Incorporated
      by reference to the exhibits to amendment no. 2 to the registrant’s
      current report on Form 8-K dated December 29, 2006, filed April 2, 2007,
      file number 1-32682.(4)
            Incorporated
      by reference to the exhibits to amendment no. 3 to the registrant’s
      current report on Form 8-K dated December 29, 2006, filed May 1, 2007,
      file number 1-32682.(5)
            Incorporated
      by reference to the exhibits to amendment no. 4 to the registrant’s
      current report on Form 8-K dated December 29, 2006, filed June 1, 2007 ,
      file number 1-32682.(6)
            Incorporated
      by reference to the exhibits to amendment no. 5 to the registrant’s
      current report on Form 8-K dated December 29, 2006, filed July 2, 2007,
      file number 1-32682.(7)
            Incorporated
      by reference to the exhibits to amendment no. 6 to the registrant’s
      current report on Form 8-K dated December 29, 2006, filed August 1, 2007,
      file number 1-32682.














(8)
            Incorporated
      by reference to the exhibits to the registrant’s registration statement on
      Form 10-SB, file number 0-32237.


(9)
            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.(10)
            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.(11)
            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.(12)
            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, file
      number 0-32237.(13)
            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, file
      number 0-32237.(14)
            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.(15)
            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.(16)
            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.




56


(17)
            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.(18)
            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
      1-32682.




















(19)
            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
      1-32682.


(20)
            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
    1-32682.


(21)
            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
    1-32682.


(22)
            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
      1-32682.


(23)
            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
      1-32682.


(24)
            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
      1-32682.


(25)
            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
      1-32682.


(26)
            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
      1-32682.


(27)
            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
      1-32682.


(28)
            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
      1-32682.


(29)
            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
      1-32682.


(30)
            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 1-32682.


(31)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated March 30, 2007, filed April 2, 2007, file number
      1-32682.


(32)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated April 25, 2007, filed April 27, 2007, file number
      1-32682.


(33)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated May 4, 2007, filed May 8, 2007, file number
  1-32682.


(34)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated August 31, 2007, filed June 29, 2007, file number
      1-32682.


(35)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated June 29, 2007, filed July 2, 2007, file number
    1-32682.


(36)
            Incorporated
      by reference to the exhibit to the registrant’s quarterly report on Form
      10-Q for the quarter ended May 31, 2007, filed July 16, 2007, file number
      1-32682.


(37)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated August 22, 2007, filed August 23, 2007, file number
      1-32682.


(38)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated August 29, 2007, filed August 29, 2007, file number
      1-32682.


(39)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated September 28, 2007, filed October 2, 2007, file number
      1-32682.


(40)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated October 11, 2007, filed October 15, 2007, file number
      1-32682.


(41)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated October 31, 2007, filed November 6, 2007, file number
      1-32682.


(42)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated November 2, 2007, filed November 8, 2007, file number
      1-32682.


(43)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated November 9, 2007, filed November 15, 2007, file number
      1-32682.


(44)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated November 16, 2007, filed November 19, 2007, file number
      1-32682.




57




(45)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated December 3, 2007, filed December 4, 2007, file number
      1-32682.


(46)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated December 14, 2007, filed December 18, 2007, file number
      1-32682.


(47)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated December 28, 2007, filed January 3, 2008, file number
      1-32682.


(48)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated December 31, 2007, filed January 3, 2008, file number
      1-32682.


(49)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated January 15, 2008, filed January 18, 2008, file number
      1-32682.


(50)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated January 30, 2008, filed February 4, 2008, file number
      1-32682.


(51)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated February 14, 2008, filed February 14, 2008, file number
      1-32682.


(52)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated March 3, 2008, filed March 4, 2008, file number
    1-32682.


(53)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated March 13, 2008, filed March 17, 2008, file number
      1-32682.


(54)
            Incorporated
      by reference to the exhibit to the registrant’s current report on Form 8-K
      dated April 14, 2008, filed April 16, 2008, file number
      1-32682.





























58


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
      CORPORATIONDate: 
      April 28, 2008
              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
      Officer)
              
              April
      28, 2008Marc
      E. Bruner/s/
      Cecil D. Gritz
              
              Chief
      Operating Officer and
                Director
              
              April
      28, 2008Cecil
      D. Gritz/s/ 
      Christopher S. Hardesty
              
              Senior
      Vice President, Chief Financial Officer, Treasurer and Secretary
      (Principal Financial and Accounting Officer)
              
              April
      28, 2008Christopher
      S. Hardesty


/s/
      Nathan C. Collins
              
              Director
              
              April
      28, 2008Nathan
      C. CollinsDirectorDr.
      James M. Edwards/s/
      Robert Thomas Fetters, Jr.
              
              Director
              
              April
      28, 2008Robert
      Thomas Fetters, Jr./s/
      Ronald P. Trout
              
              Director
              
              April
      28, 2008Ronald
      P. Trout













GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


Index
to Consolidated Financial Statements


























Reports of Independent Registered
Public Accounting Firm





Consolidated Balance
Sheets


November 30, 2007 and 2006





Consolidated Statements of
Operations


Years ended November 30, 2007, 2006 and
2005, and Cumulative Amounts from Inception to


November 30, 2007





Consolidated Statement of Stockholders’
Equity


Period from Inception (June 18, 2002)
to November 30, 2007, and


Years ended November 30, 2007, 2006 and
2005





Consolidated Statements of Cash
Flows


Years ended November 30, 2007, 2006 and
2005, and Cumulative Amounts from Inception to


November 30, 2007





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,
2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period
ended November 30, 2007 and for the period from inception (June 18, 2002) to
November 30, 2007.  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, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended November 30, 2007 and for the period
from inception (June 18, 2002) to November 30, 2007, in conformity with U.S.
generally accepted accounting principles.
 
 As
discussed in Note 2, on March 14, 2008, the Company filed for voluntary relief
under Chapter 11 of Title 11, of the United States Bankruptcy Code.  The
financial statements do not include any adjustments that might result from the
sale of assets, restructure of debt, or any other consequence, which may be part
of the Company’s bankruptcy proceedings.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplate the realization of assets
and liquidation of liabilities in the normal course of business.  As
discussed in Note 2 to the financial statements, the Company has suffered
significant recurring losses from operations, has a significant working capital
deficiency and its total liabilities exceed its total assets.  These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern.  The Company’s ability to continue
operations as a going concern is dependent upon many factors, including its
ability to successfully emerge from bankruptcy proceedings as an operating
Company, obtain additional capital, successfully restructure its current debt
outstanding and ultimately achieve profitable
operations.  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 should the Company be unable to continue
operations as a going concern.
 
 
 
 
 /s/
HEIN& ASSOCIATES LLP
 
 Denver,
Colorado
 April 30,
2008


F-2





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
BALANCE SHEETS


NOVEMBER
30, 2007 AND 2006









2007
            
            
            2006ASSETSCurrent
      assetsCash and cash
      equivalents
            
            $
            12,542
            
            
            $
            608,180Accounts receivable, joint
      interest
            
            
            1,464
            
            
            
            60,475Accounts receivable, joint
      interest, related party
            
            
            14,975
            
            
            
            923,172Accounts receivable,
      other
            
            
            22,711
            
            
            
            102,800Prepaid and
    other
            
            
            77,668
            
            
            
            107,236Total Current
    Assets
            
            
            129,360
            
            
            
            1,801,863Oil
      and gas properties, at cost, full cost method of
accountingEvaluated oil and gas
      properties
            
            
            15,247,793
            
            
            
            10,991,945Unevaluated oil and gas
      properties
            
            
            41,271,752
            
            
            
            42,767,330Less accumulated depletion,
      amortization and impairment
            
            
            (13,400,793
            )
            
            
            (8,966,135
            )Total
      Oil and gas properties
            
            
            43,118,752
            
            
            
            44,793,140Furniture
      and equipment
              Furniture and
      equipment
            
            
            282,719
            
            
            
            280,429Less accumulated
      depreciation
            
            
            (227,147
            )
            
            
            (158,484
            )Furniture and equipment,
      net
            
            
            55,572
            
            
            
            121,945Other
      assetsDeferred financing costs,
      net
            
            
            45,965
            
            
            
            565,524Restricted
      investments
            
            
            429,473
            
            
            
            459,783Other
            
            
            18,003
            
            
            
            18,003493,440
            
            
            
            1,043,310Total
      Assets
            
            $
            43,797,124
            
            
            $
            47,760,258


LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)


Current
      liabilities Cash and cash equivalentsAccounts payable and accrued
      expenses
            
            $
            1,435,517
            
            
            $
            1,548,168Accounts payable – related
      party
            
            
            46,818
            
            
            
            64,400Notes payable – related
      party
            
            
            18,143,506
            
            
            
            7,549,728Interest payable – related
      party
            
            
            1,330,174
            
            
            
            -Current portion convertible
      notes payable, net
            
            
            24,052,467
            
            
            
            10,019,996Interest
payable
            
            
            4,473,305
            
            
            
            2,488,451Total Current
      Liabilities
            
            
            49,481,787
            
            
            
            21,670,743Non-current
      obligationsConvertible notes payable,
      net
            
            
            2,428,161
            
            
            
            16,308,801Interest
payable
            
            
            543,493
            
            
            
            572,466Asset retirement
      obligation
            
            
            1,924,883
            
            
            
            1,288,337Total Non-Current
      Obligations
            
            
            4,896,537
            
            
            
            18,169,604Commitments
      and contingencies (Notes 2 and 10)Stockholders’
      equity (deficit)Preferred stock, $001 par
      valueAuthorized – 25,000,000
      sharesIssued – none
            
            
            0
            
            
            
            0Common stock, $.001 par
      valueAuthorized – 400,000,000
      sharesIssued and outstanding –
      83,661,968 shares
            
            
            83,662
            
            
            
            81,662Capital in excess of par
      value
            
            
            73,054,798
            
            
            
            71,537,766Deficit accumulated during the
      development stage
            
            
            (83,719,660
            )
            
            
            (63,699,517
            )Total Stockholders’ Equity
      (Deficit)
            
            
            (10,581,200
            )
            
            
            7,919,911Total
      Liabilities and Stockholders’ Equity (Deficit)
            
            $
            43,797,124
            
            
            $
            47,760,258





F-3





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS








Year
      Ended
              November
      30,
              2007
            
            
            Year
      Ended
              November
      30,
              2006
            
            
            Year
      Ended
              November
      30,
              2005
            
            
            Cumulative
              From
      Inception
              (June
      18, 2002 to
              November
      30, 2007)RevenueNatural gas
    sales
            
            $
            480,755
            
            
            $
            1,194,642
            
            
            $
            1,297,194
            
            
            $
            3,095,046Gain 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
            
            
            
            122,946480,755
            
            
            
            1,274,116
            
            
            
            1,538,342
            
            
            
            3,415,668Costs
      and expensesLease operating
      expense
            
            
            991,342
            
            
            
            781,136
            
            
            
            965,069
            
            
            
            2,796,793General and
      administrative
            
            
            3,693,994
            
            
            
            5,016,534
            
            
            
            5,316,588
            
            
            
            20,779,896Impairment of oil and gas
      properties
            
            
            3,866,195
            
            
            
            1,328,432
            
            
            
            5,273,795
            
            
            
            10,534,191Depreciation, depletion and
      amortization
            
            
            586,125
            
            
            
            779,446
            
            
            
            1,887,074
            
            
            
            3,329,7209,137,656
            
            
            
            7,905,548
            
            
            
            13,442,526
            
            
            
            37,440,600Other
      income (expense)Interest and other
      income
            
            
            25,998
            
            
            
            15,614
            
            
            
            163,291
            
            
            
            256,300Interest expense and financing
      costs
            
            
            (11,389,240
            )
            
            
            (19,547,289
            )
            
            
            (12,244,752
            )
            
            
            (49,951,027
            )(11,363,242
            )
            
            
            (19,531,675
            )
            
            
            (12,081,461
            )
            
            
            (49,694,727
            )Net
      Loss
            
            $
            (20,020,143
            )
            
            $
            (26,163,107
            )
            
            $
            (23,985,645
            )
            
            $
            (83,719,660
            )Net
      loss per common share – basic and diluted
            
            $
            (0.24
            )
            
            $
            (0.36
            )
            
            $
            (0.37
            )Weighed
      average number of common shares
              Outstanding – basic and
      diluted
            
            
            83,406,474
            
            
            
            72,094,609
            
            
            
            64,698,889





F-4





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)


PERIOD
FROM INCEPTION (June 18, 2002) TO NOVEMBER 30, 2002 AND YEARS ENDED


NOVEMBER
30, 2003, 2004, 2005, 2006 AND 2007





Common
      Stock
            
            
            Capital
              In
      Excess
            
            
            Deficit
              Accumulated
              During
      the
              DevelopmentShares
            
            
            Amount
            
            
            Par
      Value
            
            
            StageBalance,
      June 18, 2002 (Inception)
            
            
            -
            
            
            
            
            
            $
            -
            
            
            $
            -Issuance of common stock for
      services
              at $0.05 per
    share
            
            
            4,000,000
            
            
            
            4,000
            
            
            
            196,000
            
            
            
            -Sales of common stock for cash
      at:$0.001 per
    share
            
            
            11,500,000
            
            
            
            11,500
            
            
            
            -
            
            
            
            -$0.02 per
share
            
            
            500,000
            
            
            
            500
            
            
            
            9,500
            
            
            
            -$0.05 per
share
            
            
            3,000,000
            
            
            
            3,000
            
            
            
            147,000
            
            
            
            -$0.34 per
share
            
            
            1,997,058
            
            
            
            1,997
            
            
            
            677,003
            
            
            
            -Recapitalization of shares
      issued prior to
              Merger
            
            
            9,028,000
            
            
            
            9,028
            
            
            
            (69,359
            )
            
            
            -Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,140,066
            )Balance,
      November 30, 2002
            
            
            30,025,058
            
            
            
            30,025
            
            
            
            960,144
            
            
            
            (1,140,066
            )Issuance of common stock for
      cash at $1.00 per
              Share
            
            
            1,602,000
            
            
            
            1,602
            
            
            
            1,598,228
            
            
            
            -Issuance of common stock for
      services at:$1.00 per
share
            
            
            10,000
            
            
            
            10
            
            
            
            9,990
            
            
            
            -$.91 per share
            
            
            60,000
            
            
            
            60
            
            
            
            54,540
            
            
            
            -Issuance of common stock to
      related party upon
              conversion of outstanding debt
      at $1.00 per share
            
            
            233,204
            
            
            
            233
            
            
            
            232,971
            
            
            
            -Issuance of common stock to
      related party for
              services at $1.00 per
      share
            
            
            90,000
            
            
            
            90
            
            
            
            89,910
            
            
            
            -Common stock issued to acquire
      subsidiary
            
            
            1,951,241
            
            
            
            1,952
            
            
            
            (204,184
            )
            
            
            -Warrants to acquire common
      stock in conjunction
              with convertible debenture
      issuance
            
            
            -
            
            
            
            -
            
            
            
            1,285,995
            
            
            
            -Intrinsic value of debentures
      beneficial conversion feature
            
            
            -
            
            
            
            -
            
            
            
            2,292,654
            
            
            
            -Net loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,579,595
            )Balance,
      November 30, 2003
            
            
            33,971,503
            
            
            
            33,972
            
            
            
            6,320,248
            
            
            
            (3,719,661
            )Issuance of common stock upon
      warrant conversion
            
            
            45,763
            
            
            
            46
            
            
            
            26,954
            
            
            
            -Issuance of common stock for
      cash at $1.40 per share
            
            
            2,503,571
            
            
            
            2,504
            
            
            
            3,502,496
            
            
            
            -Warrants issue to placement
      agents in connection with
              common stock
            
            
            -
            
            
            
            -
            
            
            
            157,599
            
            
            
            -Costs of
    offering
            
            
            -
            
            
            
            -
            
            
            
            (1,784,448
            )
            
            
            -Issuance of common stock for
      oil and gas properties at
              $1.40 per
share
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            2,798,000
            
            
            
            -Issuance of common stock for
      oil and gas properties at
              $1.80 per
share
            
            
            3,000,000
            
            
            
            3,000
            
            
            
            5,397,000
            
            
            
            -Issuance of common stock for
      cash at $1.80 per share
            
            
            6,637,671
            
            
            
            6,638
            
            
            
            11,941,161
            
            
            
            -Warrants issued to placement
      agents in connection with
              common stock
            
            
            -
            
            
            
            -
            
            
            
            900,504
            
            
            
            -Costs of
    offering
            
            
            -
            
            
            
            -
            
            
            
            (449,439
            )
            
            
            -Issuance of common stock upon
      conversion of
              convertible
      debenture
            
            
            1,525,424
            
            
            
            1,525
            
            
            
            898,475
            
            
            
            -Issuance of common stock for
      oil and gas properties at
              $2.63 per
share
            
            
            360,000
            
            
            
            360
            
            
            
            946,440
            
            
            
            -Issuance of common stock upon
      conversion of
              convertible debenture and
      accrued interest
            
            
            8,054,364
            
            
            
            8,054
            
            
            
            4,744,021
            
            
            
            -





F-5





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)


PERIOD
FROM INCEPTION (June 18, 2002) TO NOVEMBER 30, 2002 AND YEARS ENDED


NOVEMBER
30, 2003, 2004, 2005, 2006 AND 2007





Common
      Stock
            
            
            Capital
              In
      Excess
            
            
            Deficit
              Accumulated
              During
      the
              DevelopmentShares
            
            
            Amount
            
            
            Par
      Value
            
            
            StageIssuance of common stock for
      cashless exercise of
              placement agent
      warrants
            
            
            719,213
            
            
            
            719
            
            
            
            (719
            )
            
            
            -Discount on convertible notes
      payable due to issuance
              of detachable
      warrants
            
            
            -
            
            
            
            -
            
            
            
            4,336,316
            
            
            
            -Warrants issued to placement
      agents in connection with
              convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            404,021
            
            
            
            -Stock based compensation costs
      for stock options
              granted to
      non-employees
            
            
            -
            
            
            
            -
            
            
            
            34,525
            
            
            
            -Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,831,104
            )Balance,
      November 30, 2004
            
            
            58,817,509
            
            
            
            58,818
            
            
            
            40,173,154
            
            
            
            (13,550,765
            )Issuance of common stock upon
      warrant conversion
            
            
            1,332,676
            
            
            
            1,332
            
            
            
            990,970
            
            
            
            -Issuance of common stock for
      cashless exercise of
              warrants
            
            
            577,033
            
            
            
            577
            
            
            
            (577
            )
            
            
            -Issuance of common stock upon
      conversion of
              convertible notes and accrued
      interest
            
            
            7,940,811
            
            
            
            7,941
            
            
            
            8,677,068
            
            
            
            -Discount on convertible notes
      payable due to
              issuance of detachable
      warrants
            
            
            -
            
            
            
            -
            
            
            
            12,902,328
            
            
            
            -Discount on issuance of common
      stock below market
              value
            
            
            -
            
            
            
            -
            
            
            
            1,074,428
            
            
            
            -Warrants issued to placement
      agents in connection
              with convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            88,874
            
            
            
            -Stock based compensation costs
      for stock options
              granted to
      non-employees
            
            
            -
            
            
            
            -
            
            
            
            167,137
            
            
            
            -Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (23,985,645
            )Balance,
      November 30, 2005
            
            
            68,668,029
            
            
            
            68,668
            
            
            
            64,073,382
            
            
            
            (37,536,410
            )Warrants issued to placement
      agents in connection
              with convertible notes
      payable
            
            
            -
            
            
            
            -
            
            
            
            27,274
            
            
            
            -Discount on convertible notes
      payable due to
              issuance of detachable
      warrants
            
            
            -
            
            
            
            -
            
            
            
            395,986
            
            
            
            -Stock based compensation costs
      for stock options
              granted to employees &
      non-employees
            
            
            -
            
            
            
            -
            
            
            
            1,525,751
            
            
            
            -Discount on convertible notes
      payable due to
              issuance of detachable
      warrants
            
            
            -
            
            
            
            -
            
            
            
            170,555
            
            
            
            -Issuance of common stock upon
      conversion of
              convertible notes and accrued
      interest
            
            
            12,993,939
            
            
            
            12,994
            
            
            
            4,799,255
            
            
            
            -Discount on issuance of common
      stock below market
              Value
            
            
            -
            
            
            
            -
            
            
            
            545,563Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (26,163,107
            )Balance,
      November 30, 2006
            
            
            81,661,968
            
            
            
            81,662
            
            
            
            71,537,766
            
            
            
            (63,699,517
            )Issuance of common stock to
      obtain consent to
              sale from senior secured
      lender
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            408,000
            
            
            
            -Stock based compensation costs
      for stock options
              granted to employees &
      non-employees
            
            
            -
            
            
            
            -
            
            
            
            1,109,032
            
            
            
            -Net loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (22,020,143
            )Balance,
      November 30, 2007
            
            
            83,661,968
            
            
            
            83,662
            
            
            
            73,054,798
            
            
            
            (83,719,660
            )





F-6





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended
              November
      30,
              2007
            
            
            Year
      Ended
              November
      30,
              2006
            
            
            Year
      Ended
              November
      30,
              2005
            
            
            Cumulative
              From
      Inception
              (June
      18, 2002 to
              November
      30, 2007)Cash
      flows from operating activities:Net loss
            
            $
            (20,020,143
            )
            
            $
            (26,163,107
            )
            
            $
            (23,985,645
            )
            
            $
            (83,719,660
            )Adjustments to reconcile net
      loss to net cash
              (used) by operating
      activities:Stock for
    interest
            
            
            410,000
            
            
            
            644,549
            
            
            
            3,695,884
            
            
            
            4,762,508Stock 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
              costs on convertible
      debt
            
            
            3,663,121
            
            
            
            10,611,349
            
            
            
            4,870,043
            
            
            
            21,571,683Finance costs incurred for
      waiver of triggering
              Event
            
            
            -
            
            
            
            3,457,101
            
            
            
            -
            
            
            
            3,457,101Write-off of discount and
      deferred financing
              costs upon conversion of
      convertible debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,979,404Write-off
      of discount and deferred financing
              costs upon extinguishment or
      restructure of
              convertible debt
            
            
            1,963,774
            
            
            
            -
            
            
            
            2,162,597
            
            
            
            4,126,371Compensation expense on vested
      stock options
            
            
            1,109,032
            
            
            
            1,525,752
            
            
            
            167,137
            
            
            
            2,836,442Depreciation, depletion and
      amortization and
              accretion of ARO
      expense
            
            
            586,125
            
            
            
            779,446
            
            
            
            1,887,074
            
            
            
            3,324,719Gain on disposition of oil and
      gas assets
            
            
            -
            
            
            
            (72,713
            )
            
            
            (197,676
            )
            
            
            (270,389
            )Impairment of oil and gas
      properties
            
            
            3,866,195
            
            
            
            1,328,432
            
            
            
            5,273,795
            
            
            
            10,534,191Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            11,178Changes in assets and
      liabilities:Accounts receivable, prepaids
      and other
              current assets
            
            
            1,047,297
            
            
            
            260,908
            
            
            
            (1,256,589
            )
            
            
            (140,479
            )Other
            
            
            29,568
            
            
            
            4,405
            
            
            
            (17,861
            )
            
            
            11,126Accounts payable and accrued
      expenses
            
            
            (232,651
            )
            
            
            (332,121
            )
            
            
            454,463
            
            
            
            322,274Accounts payable –
      related
            
            
            (17,582
            )
            
            
            (34,679
            )
            
            
            (14,679
            )
            
            
            46,818Interest
payable
            
            
            3,286,055
            
            
            
            1,913,199
            
            
            
            441,998
            
            
            
            6,346,972Net
      cash used by operating activities
            
            
            (4,309,208
            )
            
            
            (6,077,479
            )
            
            
            (5,786,772
            )
            
            
            (22,479,250
            )Cash
      flows from investing activities:Additions to oil and gas
      properties
            
            
            (2,129,026
            )
            
            
            (4,145,612
            )
            
            
            (18,873,239
            )
            
            
            (48,069,320
            )Management fees earned on
      operated properties
            
            
            56,303
            
            
            
            1,695,830
            
            
            
            -
            
            
            
            1,752,133Purchase of furniture and
      equipment
            
            
            (2,289
            )
            
            
            (1,995
            )
            
            
            (128,056
            )
            
            
            (283,461
            )Cash designated as
      restricted
            
            
            (43,300
            )
            
            
            (80,000
            )
            
            
            (379,783
            )
            
            
            (503,083
            )Cash undesignated as
      restricted
            
            
            73,610
            
            
            
            -
            
            
            
            -
            
            
            
            73,610Proceeds 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
            
            
            (2,044,702
            )
            
            
            (2,431,777
            )
            
            
            (19,141,078
            )
            
            
            (46,745,887
            )











F-7





GALAXY
ENERGY CORPORATION


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended
              November
      30,
              2007
            
            
            Year
      Ended
              November
      30,
              2006
            
            
            Year
      Ended
              November
      30,
              2005
            
            
            Cumulative
              From
      Inception
              (June
      18, 2002 to
              November
      30, 2007)Cash
      flows from financing activities:Proceeds from sale of common
      stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17,905,300Proceeds from sale of
      convertible notes payable
            
            
            -
            
            
            
            7,000,000
            
            
            
            17,695,000
            
            
            
            44,695,000Proceeds from sale of
      convertible debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,040,000Proceeds from  notes
      payable – related party
            
            
            10,418,777
            
            
            
            5,500,000
            
            
            
            -
            
            
            
            15,918,777Proceeds from exercise of
      warrants
            
            
            -
            
            
            
            -
            
            
            
            992,306
            
            
            
            1,019,306Debt and stock offering
      costs
            
            
            -
            
            
            
            (127,700
            )
            
            
            (942,169
            )
            
            
            (3,980,569
            )Payment of convertible notes
      payable
            
            
            (4,660,505
            )
            
            
            (4,583,333
            )
            
            
            (1,436,447
            )
            
            
            (10,680,285
            )Payment of note payable –
      related party
            
            
            -
            
            
            
            -
            
            
            
            (15,946
            )
            
            
            (129,578
            )Payment of note
      payable
            
            
            -
            
            
            
            -
            
            
            
            (550,272
            )
            
            
            (550,272
            )Net
      cash provided by financing activities
            
            
            5,758,272
            
            
            
            7,788,967
            
            
            
            15,742,472
            
            
            
            69,237,679Net
      (decrease) increase in cash
            
            
            (595,638
            )
            
            
            (720,289
            )
            
            
            (9,185,378
            )
            
            
            12,542Cash
      and cash equivalents, beginning of period
            
            
            608,180
            
            
            
            1,328,469
            
            
            
            10,513,847
            
            
            
            -Cash
      and cash equivalents, end of period
            
            $
            12,542
            
            
            $
            608,180
            
            
            $
            1,328,469
            
            
            $
            12,542Supplemental
      schedule of cash flow information:Cash paid for
      interest
            
            $
            2,066,115
            
            
            $
            2,846,091
            
            
            $
            1,065,442
            
            
            $
            6,625,399Supplemental
      disclosures of non-cash investing and
              financing
      activities:Debt incurred for oil and gas
      properties
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            3,646,000Debt incurred for finance
      costs
            
            $
            -
            
            
            $
            3,547,101
            
            
            $
            -
            
            
            $
            3,547,101Stock issued for
      services
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            354,600Stock issue for interest and
      debt
            
            $
            410,000
            
            
            $
            4,812,249
            
            
            $
            8,685,009
            
            
            $
            14,152,538Stock issued for convertible
      debentures
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,640,000Warrants issued for offering
      and financing costs
            
            $
            -
            
            
            $
            27,274
            
            
            $
            88,874
            
            
            $
            1,685,850Discount on convertible debt
      issued
            
            $
            -
            
            
            $
            566,541
            
            
            $
            16,538,498
            
            
            $
            14,883,630Conversion of interest to
      debt
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            11,178Stock issued for subsidiary –
      related
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (202,232
            )Stock issued for oil and gas
      properties
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            9,146,800Accounts payable settled
      through issuance of
              related party
    notes
            
            $
            175,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            175,000Recognition of asset retirement
      obligation
            
            $
            525,704
            
            
            $
            (119,245
            )
            
            $
            481,193
            
            
            $
            1,760,000






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, 2007, and its wholly owned subsidiaries,
Dolphin, for the period from June 18, 2002 to November 30, 2007, and Pannonian
from June 2, 2003, to November 30, 2007.  Galaxy, Dolphin, and
Pannonian are referred to herein as 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, 2007 the Company incurred operating losses of approximately
$20,020,000 and used cash in operating activities of approximately
$4,309,000.  During the year ended November 30, 2007 the Company’s
working capital deficit increased to approximately $49,400,000 from $19,900,000,
while its cash balance decreased to $12,542 from the November 30, 2006 balance
of $608,180.  Included within liabilities is $12 million we currently
owe under convertible notes we issued in May 2005.  We are required to
make monthly principal payments of $500,000 as well as quarterly payments of
accrued interest under the terms of such notes.  We were required to
pay an additional $6 million on this debt by March 1, 2008, however this payment
was not made.  Any remaining balance is due by October 1,
2008.





On March
14, 2008, we and Dolphin filed voluntary petitions for relief under Chapter 11
of Title 11 of the United States Code (the “Bankruptcy Code”) in the United
States Bankruptcy Court for the District of Colorado (the
“Court”).  We and Dolphin will continue to operate our businesses as
“debtors-in-possession” under the jurisdiction of the Court and in accordance
with the applicable provisions of the Bankruptcy Code and the order of the
Court, as we devote renewed efforts to resolve our liquidity problems and
develop a reorganization plan.





Pursuant
to the provisions of the Bankruptcy Code, we are not permitted to pay any claims
or obligations which arose prior to the filing date (prepetition claims) unless
specifically authorized by the Court.  Similarly, claimants may not
enforce any claims against us that arose prior to the date of the
filing.  In addition, as a debtor-in-possession, we have the right,
subject to the Court’s approval, to assume or reject any executory contracts and
unexpired leases in existence at the date of the filing.  Parties
having claims as a result of any such rejection may file claims with the Court
which will be dealt with as part of the Chapter 11 cases.





It is our
intention to address all of our prepetition claims in a plan of reorganization
in our Chapter 11 cases.  At this juncture, it is impossible to
predict with any degree of certainty how such a plan will treat such claims and
the impact our Chapter 11 cases and any reorganization plan will have on the
trading market for our stock.  Generally, under the provisions of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan which permits holders of
equity interests to participate.  The formulation and implementation
of a plan of reorganization in the Chapter 11 cases could take a significant
period of time.





F-10


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





It is likely that at least a portion of
our oil and gas assets will be offered for sale to potential buyers as
part of our bankruptcy reorganization; however there is no assurance a sale will
be completed or that we will realize the full carrying value of the assets in
such a sale.  If that were to occur, we may be required to write off a
portion of the carrying value of such properties and such write-off could be
material.





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 successfully emerge as an operating company from its Chapter 11
bankruptcy proceedings, to raise additional capital through debt or equity
placements or sell assets and ultimately attaining profitability from its oil
and gas operations.





In
addition to the sale of its oil and gas properties, the Company is considering
other options for raising additional capital to fund its 2007 operational budget
such as debt and equity offerings, the farm-out of some of its acreage and other
similar type transactions, all of which measures would have to be approved by
the Bankruptcy Court.  There is no assurance that such approvals will
be received from the Bankruptcy Court, or 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.





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, 2007.





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 include to the
Company’s ability to continue as a going concern and realize assets and
liquidate liabilities in an orderly manner. Other 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 especially as a result of the Company’s bankruptcy
proceedings and such differences could be material.







F-11


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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, at times,  may have cash in banks in
excess of federally insured amounts.





ACCOUNTS
RECEIVABLE AND CREDIT POLICIES





The
Company has certain trade receivables consisting of oil and gas sales
obligations due under normal trade terms.  Management regularly
reviews trade receivables and reduces the carrying amount by a valuation
allowance that reflects management’s best estimate of the amount that may not be
collectible.  At November 30, 2007 and 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.





Under the
full cost method of accounting, capitalized oil and gas property costs less
accumulated depletion and net of deferred income taxes (full cost pool) may not
exceed an amount equal to the present value, discounted at 10%, of estimated
future net revenues from proved oil and gas reserves less the future cash
outflows associated with the asset retirement obligations that have been accrued
in the balance sheet plus the cost, or estimated fair value, if lower of
unproved properties and the costs of any properties not being amortized, if any.
Should the full cost pool exceed this ceiling, an impairment is recognized. The
present value of estimated future net revenues is computed by applying current
oil and gas prices to estimated future production of proved oil and gas reserves
as of period-end, less estimated future expenditures to be incurred in
developing and producing the proved reserves assuming the continuation of
existing economic conditions. However, subsequent commodity price increases may
be utilized to calculate the ceiling value.






F-12


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
Company performs an impairment test at each balance sheet date.  As of
November 30, 2007, based on natural gas prices of $5.11 per mcf, the full cost
pool exceeded the above described ceiling by approximately
$1,012,000.  However, subsequent to year end, the prices increased to
$7.30 per mcf and using these prices, the Company's full cost pool did not
exceed the ceiling limitation.  As of August 31, 2007, based upon natural
gas prices of $2.32 per mcf, the full cost pool exceeded the above-described
ceiling by approximately $2,371,000. The Company had previously recorded
approximately $1,495,000 in impairment expense in quarter ended May 31,
2007.  At August 31, 2007, the Company’s net full cost pool after
these impairments was zero. The total impairment expense recognized for the year
ended November 30, 2007 was $3,866,195.





As of
November 30, 2006, based on natural gas prices of $ $6.74 per mcf, the full cost
pool exceeded the above-described ceiling by approximately $297,000 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 gas prices
of $5.27 per mcf and the Company recognized impairment expense of approximately
$1,031,000 during the quarter ended August 31, 2006. The total impairment
expense recognized for the year ended November 30, 2006 was
$1,328,000.




As of
November 30, 2005, based upon natural gas prices of $6.79 per mcf, the Company
recorded an impairment expense of $5,274,000 representing the excess of
capitalized costs over the ceiling amount for the year ended November 30,
2005.





The
Company has identified certain oil and gas properties which it is attempting to
sell.  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.





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.





The
Company’s unproved properties are evaluated quarterly for the possibility of
potential impairment. During the fourth quarter of 2007 approximately $1,863,000
of unproved lease costs related to our Colorado acreage was reclassified to
proved property.  Additionally, $15,000 of unproved costs related to
our Wyoming acreage was reclassified to proved
property.   Reclassifications of $4,248,880 were included in the
ceiling test and depletion calculations for the year ended November 30, 2007.
During the year ended November 30, 2006 and 2005, no acreage was reclassed to
proved property based on impairment. Other than oil and gas properties, the
Company has no other long-lived assets and to date has not recognized any
impairment losses.







F-13


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





PROPERTY
AND EQUIPMENT





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





Depreciation
expense of $68,662, $74,428 and $63,263 was recorded for the years ended
November 30, 2007, 2006 and 2005, 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 was $519,560, $310,474 and $495,475 for the years ended
November 30, 2007, 2006 and 2005, respectively.





DEFERRED
SELLING COSTS





In
connection with the proposed sale of the Powder River Basin Assets to
PetroHunter Energy Corporation, a related party, the Company had incurred
certain costs, which totaled $461,895, and were recorded as Deferred Selling
Costs.  These costs were expensed as the sale to the related party was
not completed.





DEBT
RESTRUCTURING





In
accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange
of Debt Instruments, we evaluate any changes in debt to determine if a
modification or exchange has occurred.  A debt instrument is considered
substantially different than the agreement it replaces if the present value of
the cash flows is at least 10% different than the cash flows from the in place
agreement or if certain other defined changes occur.  If a Modification or
Exchange has occurred, the Company will recognize the transaction as an
extinguishment of the existing debt and the issuance of new debt.





If it is
determined that the replaced agreement and new debt instruments are substantially different,then
the calculation of the cash flows related to the new debt instrument at the
effective interest rate of the in place debt instrument is notused to determine the
initial amount recorded for the new debt instrument or to determine the debt
extinguishment gain or loss to be recognized. The new debt instrument should be
initially recorded at fair value and that amount should be used to determine the
debt extinguishment gain or loss to be recognized and the effective rate of the
new instrument.





Please
see Note 5 for further discussion.





F-14


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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, 2007, the Company had, through acquisition and drilling, acquired
working interests in 259 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,
2007.  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.





The
information below reflects the change in the ARO during the years ended November
30, 2007, 2006 and 2005:




2007
            
            
            2006
            
            
            2005Balance
      beginning of period
            
            $
            1,288,335
            
            
            $
            1,242,967
            
            
            $
            713,073Change
      in estimate
            
            
            544,995
            
            
            
            (161,483
            )
            
            
            -Liabilities
      incurred
            
            
            671
            
            
            
            42,238
            
            
            
            481,193Liabilities
      settled
            
            
            (19,960
            )
            
            
            -
            
            
            
            -Accretion
            
            
            110,842
            
            
            
            164,613
            
            
            
            48,701Balance
      end of period
            
            $
            1,924,883
            
            
            $
            1,288,335
            
            
            $
            1,242,967





The
Company evaluated the liability associated with its asset retirement obligations
and determined that due to its inability to place certain of these assets into
service that the liability at August 31, 2007 for approximately 145 wells should
equal its estimated plugging and abandonment cost.  The Company
recorded approximately $545,000 in additional liability and ARO asset. The
changes during the year ending November 30, 2006 reflects updated plugging and
restoration costs and the effect of an increase of the Company’s credit-adjusted
risk-free interest rate used to calculate the ARO.







F-15


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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, 2007 and 2006 were not
significant.





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.





F-16


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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, 2007, options to purchase an aggregate of 4,230,000 shares of the
Company’s common stock were outstanding.  These options were granted
during 2007, 2006, and 2005, to the Company’s employees, directors and
consultants at exercise prices ranging from $0.19 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 $1,109,032 and $1,525,752 before tax for the years ended
November 30, 2007 and 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, 2007.





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 year ended November 30, 2005as if the Company had
applied the fair value recognition provisions of FAS No. 123(R) to stock based
employee awards.





Year
      EndedNet
      loss:
            
            November
      30, 2005As
      reported
            
            $
            (23,985,645
            )Add:
      Stock-based compensation included in net loss
            
            
            167,132Less:
      Stock-based compensation determined under the fair value based
      method
            
            
            (1,253,350
            )Pro
      forma
            
            $
            (25,071,863
            )Net
      loss per common share:As
      reported
            
            $
            (0.37
            )Pro
      forma
            
            $
            (0.40
            )





F-17


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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, 240,000 and 975,000 options to purchase common stock during the years
ended November 30, 2007, 2006 and 2005, respectively.  The fair values
of options granted and vested during 2007, 2006, and 2005 were calculated using
the following weighted-average assumptions:





Year
      ended November 30,2007
            
            
            2006
            
            
            2005Expected
      dividend yield
            
            
            --
            
            
            
            --
            
            
            
            --Expected
      price volatility
            
            
            70
            %
            
            
            75.51-64.34
            %
            
            
            80.33-75.51
            %Risk
      free interest rate
            
            
            4.25
            %
            
            
            4.25
            %
            
            3.5%
      to 4.5
            %Expected
      term of  options (in years)
            
            5
      years
            
            
            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
43,058,742 and 46,872,146 for the fiscal years ending November 30, 2007 and
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.





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, 2007, 2006 and 2005,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company:





2007
            
            
            2006
            
            
            2005Enserco
      Energy Inc.
            
            
            94
            %
            
            
            94
            %
            
            
            82
            %Western
      Gas Resources
            
            
            -
            
            
            
            -
            
            
            
            13
            %






F-18


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





OFF
BALANCE SHEET ARRANGEMENTS





From
time-to-time, we may enter into off-balance sheet arrangements and transactions
that can give rise to off-balance sheet obligations.  As of November
30, 2007, 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.





RECLASSIFICATION





Certain
amounts in the 2006 and 2005 and inception to date financial statements have
been reclassified to conform to the 2007 financial statement
presentation.





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.





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.





F-19


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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 February 2007, the SFAS
issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits an entity to
irrevocably elect fair value on a contract-by-contract basis as the initial and
subsequent measurement attribute for many financial assets and liabilities and
certain other items including insurance contracts. Entities electing the fair
value option would be required to recognize changes in fair value in earnings
and to expense upfront cost and fees associated with the item for which the fair
value option is elected. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted as of the beginning of
a fiscal year that begins on or before November 15, 2007, provided the
entity also elects to apply the provisions of SFAS No. 157, Fair Value
Measurements. The Company is currently evaluating the impact, if any, of
adopting SFAS 159 on its financial condition or results
of operations.





In
November 2007, the FASB issued SFAS No. 141  (revised 2007),
Business Combination (FAS 141(R)) and SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51
(FAS 160).  FAS 141(R) will change how business acquisitions
are accounted for and will impact financial statements both on the acquisition
date and in subsequent periods.  FAS 160 will change the accounting
and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. 
FAS 141(R) and FAS 160 are effective for both public and private
companies for fiscal years beginning on or after December 15, 2008. 
FAS 141(R) will be applied prospectively.  FAS 160 requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests.  All other requirements of FAS 160 will
be applied prospectively.  Early adoption is prohibited for both
standards.  Management is currently evaluating the requirements of
FAS 141(R) and FAS 160 and has not yet determined the impact on
its financial statements.








F-20


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 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 2007 and 2006
the Company continued limited drilling operations in the Powder River Basin and
conducted extended de-watering operations on certain prospects in the
basin.





In
connection with the acquisition of unevaluated oil and gas properties in the
Piceance Basin, the Company entered into a Participation Agreement with Marc A.
Bruner, a related party, to acquire part of the 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, Marc A. Bruner received a significant ownership percentage of the
Assignee, thereby establishing the Assignee, Exxel Energy Corp. (Exxel), as a
related party.  The terms of the Participation Agreement as amended,
required the Company to initially invest $7 million and 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.  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.  The amount due from Exxel at
November 30, 2007 was not significant.





During
the years ended November 30, 2007 and 2006, the Company recorded $56,000 and
$1,696,000 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.  In
October 2007, the Company and Exxel agreed to suspend the management fee given
the low level of activity underway in the Piceance project. Under the terms of
the Third Amendment to Participation Agreement entered into by the Company and
Exxel in September 2005, the Company’s role as operator of the Piceance project
terminated on March 15, 2008 and Exxel became the sole operator of the project
on that date.





F-21


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
3 – PROPERTY AND EQUIPMENT (continued)





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.





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.   Following the
recognition of the gain on the farmout, the Company’s balance sheet reflects no
capitalized oil and gas costs for the Romanian cost center.





The
initial well,
located in south western Romania, approximately 300 kilometers west of
Bucharest,
failed to encounter hydrocarbons. The well has been plugged and abandoned and
Falcon has asked for government approval to return the Concession to the
Romanian acreage inventory.  Falcon and Pannonian are currently
assessing a long term plan with respect to other prospects in
Romania.





F-22
 
 GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
3 – PROPERTY AND EQUIPMENT (continued)





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 30,2007
            
            
            2006
            
            
            2005Acquisition
      of unevaluated properties
            
            $
            52,280
            
            
            $
            374,756
            
            
            $
            8,051,122Exploration
      costsUnited
      States
            
            
            1,901,984
            
            
            
            3,607,563
            
            
            
            9,613,262Europe
            
            
            -
            
            
            
            -
            
            
            
            -Development
      costs
            
            
            174,762
            
            
            
            163,292
            
            
            
            499,945Oil
      and gas expenditures
            
            
            2,129,026
            
            
            
            4,145,611
            
            
            
            18,164,329Asset
      retirement obligations
            
            
            525,704
            
            
            
            42,238
            
            
            
            481,193$
            2,654,730
            
            
            $
            4,187,849
            
            
            $
            18,645,522





During
the years ended November 30, 2007 and 2006, the Company recorded approximately
$56,000 and $1,696,000 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.





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, 2007 and 2006,
depreciation, depletion and amortization expense recorded for the United States
cost center was $1.79 and $2.19 per MCF, respectively.  The Company
recognized impairment expense of $3,866,195, $1,328,432 and $5,273,795 in each
of the three years ended November 30, 2007, representing the excess of
capitalized costs over the ceiling as calculated in accordance with the full
cost rules.





The
Company is currently marketing its oil and gas assets to other oil & gas
operators.  Any sales that might result from such marketing efforts
would need to be approved by the Bankruptcy Court.  There is no assurance
that an asset sale will be completed or allowed by the court, or, if it is
allowed and completed, 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.





F-23


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
3 – PROPERTY AND EQUIPMENT (continued)





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, 2007, 2006 and
2005:





2007
            
            
            2006
            
            
            2005Full
      Cost Pool - Evaluated PropertiesBalance
      beginning of period
            
            $
            10,991,945
            
            
            $
            9,991,629
            
            
            
            -Properties
      with proved reserves
            
            
            6,968
            
            
            
            204,525
            
            
            
            4,640,738Reclassification
      of impaired, unevaluated properties
            
            
            4,248,880
            
            
            
            473,265
            
            
            
            5,055,320Asset
      retirement obligation
            
            
            -
            
            
            
            322,526
            
            
            
            295,571Balance
      end of period
            
            $
            15,247,793
            
            
            $
            10,991,945
            
            
            $
            9,991,629






Depreciation,
      Depletion, Amortizationand
      ImpairmentBalance
      beginning of period
            
            $
            8,966,135
            
            
            $
            7,097,299
            
            
            $
            48,394Depreciation,
      depletion andAmortization
            
            
            568,463
            
            
            
            540,404
            
            
            
            1,775,110Impairment
      of oil and gas properties
            
            
            3,866,195
            
            
            
            1,328,432
            
            
            
            5,273,795Balance
      end of period
            
            $
            13,400,793
            
            
            $
            8,966,135
            
            
            $
            7,097,299





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, 2007, 2006
and 2005, as part of its assessment of unevaluated properties for impairment,
the Company identified certain unevaluated properties as either partially or
wholly impaired.  The costs related to those impaired properties,
$4,248,880, $473,265 and $5,055,320, respectively were reclassified from
unevaluated to evaluated properties and added to the full cost pool amortization
base.




F-24


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
3 – PROPERTY AND EQUIPMENT (continued)





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:





2007
            
            
            2006
            
            
            2005United
      States Cost CenterPowder
      River  BasinWyoming
            
            $
            31,735,179
            
            
            $
            33,225,926
            
            
            $
            31,071,223Montana
            
            
            2,163,094
            
            
            
            2,064,659
            
            
            
            1,974,470Piceance
      BasinColorado
            
            
            5,613,553
            
            
            
            7,022,463
            
            
            
            7,022,099OtherTexas
            
            
            -
            
            
            
            -
            
            
            
            473,265ARO
      Asset and other
            
            
            1,759,926
            
            
            
            454,282
            
            
            
            896,05241,271,752
            
            
            
            42,767,330
            
            
            
            41,437,109German
      Cost Center
            
            
            -
            
            
            
            -
            
            
            
            -Romania
      Cost Center
            
            
            -
            
            
            
            -
            
            
            
            27,286Total
      Unevaluated Properties
            
            $
            41,271,752
            
            
            $
            42,767,330
            
            
            $
            41,464,395





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.”





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, 2007
            
            $
            2,129,026November
      30, 2006
            
            
            2,095,726November
      30, 2005
            
            
            19,881,476November
      30, 2004
            
            
            16,099,033November
      30, 2003
            
            
            603,991November
      30, 2002
            
            
            462,500$
            41,271,752







F-25


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
4 - NOTES PAYABLE – Related Parties





During
the year ended November 30, 2007, the Company entered into subordinated
unsecured promissory notes totaling $8,100,000 with the Bruner Family Trust UTD
March 28, 2005, (the “Bruner Trust”) a related party. During the year ended
November 30, 2006 the Company issued four separate subordinated unsecured
promissory notes for a total of $5,500,000 with the Bruner Trust.One of the trustees of the Bruner
Family Trust UTDMarch 28,
2005is Marc E. Bruner,
thePresident and a director of theCompany.  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
November 2007, the Company settled approximately $175,000 of past due invoices
that had been recorded in accounts payable and accrued expenses by transferring
the obligation to the Bruner Family Trust.  The outstanding debt was
with Charles B. Crowell, the CEO of PetroHunter Energy Corporation – a related
party, for consulting services performed for Galaxy prior to Mr. Crowell being
named CEO of PetroHunter.  The $175,000 is included in the Bruner
Trust notes described above.





Subsequent
to November 30, 2007, the Company has continued to receive advances from the
Bruner Family Trust.   Subordinated unsecured promissory notes
totaling $3,000,000 were issued in December 2007 and January, February and March
2008.





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, 2007, 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. The note accrues interest at the
rate of 12% per annum and was due on December 1, 2006.  The Bruner
Family Trust has entered into various Forbearance Agreements 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.  As
of November 30, 2007, the Company and the Bruner Family 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 May 31, 2008.





F-26


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
4 - NOTES PAYABLE – Related Parties (continued)





At
November 30, 2007 notes payable to the Bruner Trust are as follows:





Issue Date
            Due Date
            
            AmountJanuary
      14, 2004
            June
      30, 2007
            
            $
            2,049,728September
      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
            
            
            1,500,000February
      1, 2007
            June
      1, 2007
            
            
            500,000February
      26, 2007
            June
      26, 2007
            
            
            900,000March
      30, 2007
            July
      28, 2007
            
            
            1,350,000April
      25, 2007
            August
      23, 2007
            
            
            1,200,000May
      4, 2007
            September
      1, 2007
            
            
            450,000May
      31, 2007
            September
      28, 2007
            
            
            600,000June
      29, 2007
            October
      29, 2007
            
            
            750,000August
      22, 2007
            December
      20, 2007
            
            
            125,000August
      29, 2007
            December
      27, 2007
            
            
            250,000September
      12,  2007
            January
      10, 2008
            
            
            125,000September
      28, 2007
            January
      26, 2008
            
            
            600,000October
      11, 2007
            February
      8, 2008
            
            
            250,000November
      1, 2007
            February
      29, 2008
            
            
            75,000November
      13, 2007
            March
      12, 2008
            
            
            175,000November
      16, 2007
            March
      15, 2008
            
            
            750,000$
            15,649,728





All of
the related party debt with the Bruner Trust is due during the year ended
November 30, 2008.





PETROHUNTER
ENERGY CORPORATION





On
December 29, 2006, the Company entered into a Purchase and Sale Agreement (PSA)
with a related party (PetroHunter Energy Corporation) 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 was to be $45 million, with $20 million to be paid in cash
and $25 million to be paid in shares of the purchaser’s common
stock.  The sale was not completed.





As part
of the PSA, PetroHunter was required and did make an interest earnest money
payment of $1.4 million.  PetroHunter made an additional earnest money
payment of $600,000 in January 2007.  These deposits and certain other
payments totaling $2,493,777 were converted into a promissory note, payable to
PetroHunter, and is unsecured subordinated debt of the Company, which is payable
only after repayment of our senior indebtedness.  The note to
PetroHunter accrues interest at 8% per annum.




F-27


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
5 – CONVERTIBLE NOTES PAYABLE





2004
NOTES





In August
and October 2004, the Company completed two tranches of a private offering of
Senior Secured Convertible Notes and Warrants (the 2004 Notes).  Gross
proceeds from the initial tranche of the offering were
$15,000,000.  Gross proceeds from the second tranche of the offering
were $5,000,000.  The 2004 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 were 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 was able to pay the
monthly installments in cash or through a partial conversion of the 2004 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.  Purchasers of the 2004 Notes 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 2004
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 2004 Notes aggregating $7,675,920 as a
discount to the 2004 Notes and as additional paid in capital.  During
the year ended November 30, 2007 and 2006, the Company recorded amortization of
the discount in the amount of $663,002 and $7,012,918 as interest
expense.





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





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





·
            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;






F-28
 
 GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 – CONVERTIBLE NOTES PAYABLE (continued)





·
            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 Notes or May
      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
2004 Notes had occurred as of August 31, 2006.  Among other things,
this would have enabled the holders of the 2004 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
2004 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 2004 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, which is
included in interest expense for the year ended November 30, 2006.  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 2004 Notes aggregating $663,002 as a discount to the 2004
Notes.  The Company paid in cash the full balance due on the 2004
Notes during 2007.





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 (the March
2005 Notes).  Gross proceeds from the offering were
$7,695,000.  The March 2005 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.  Purchasers of the March 2005 Notes 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.




F-29


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 – CONVERTIBLE NOTES PAYABLE (continued)





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, 2007 and 2006, the Company recorded amortization of
the discount in the amount of $1,172,506 and $2,370,925 as interest
expense.





On April
27, 2007 the Company and the Holders of the March 2005 Notes entered into an
Waiver and Amendment Agreement, which, among other things, extended the term of
the March 2005 notes to the earliest of (A) the date of consummation of the Sale
of the Powder River Basin oil & gas assets (PRB sale), (B) October 31, 2007,
and (C) such date as all amounts due under the Notes have been fully
paid.  In addition each of the Holders agreed and confirmed the 2005
Subordinated Notes continue to be subordinate to the senior secured
indebtedness. As the PRB Sale was not consummated and the Company is prohibited
from paying the March 2005 Notes until the senior secured indebtedness is paid
in full.





MAY 2005
NOTES





In May
2005, the Company completed a private offering of Senior Secured Convertible
Notes to a group of accredited investors (the May 2005 notes).  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.  The May 2005 notes 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 $786,803, $791,114 and $394,479 is included in interest expense for
the years ended November 30, 2007, 2006 and 2005
respectively.  Deferred financing costs associated with the notes in
the amount of $639,888 were capitalized and were being amortized over the life
of the notes.  For the years ended November 30, 2007, 2006 and 2005
amortization of deferred financing costs was $458,365, $127,907 and
$64,129.




F-30


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 – CONVERTIBLE NOTES PAYABLE (continued)





On
November 29, 2006, the Company and the holders of the May 2005 Notes entered
into a Waiver and Amendment Agreement.  The Company had notified the
holders of the May 2005 Notes of the fact that a Triggering Event under the
terms of the Notes had occurred as of August 31, 2006.  Among other
things, this would have enabled the holders of the Notes to require the Company
to redeem all or any portion of the outstanding principal amount of the Notes at
a price equal to the greater of (i) 125% of such principal plus accrued and
unpaid interest and (ii) the product of the current conversion rate in effect
under the Notes multiplied by the volume-weighted average price of Galaxy’s
common stock.  The holders agreed to waive the Triggering Event in
consideration for an amendment to the May 2005 Notes that reset the principal
amounts of the Notes to 125% of the amounts outstanding as of October 31,
2006.  The increased principal in the amount of $2,500,000 was
included in interest expense during the year ended November 30,
2006.  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.





On
November 16, 2007, the Company and the holders of the May 2005 Notes entered
into an Amendment Agreement.  The Amendment Agreement amended the 2005
Notes and the related Securities Purchase Agreement to affect the
following:




·
              Monthly
      principal payments of $500,000;
  ·
              A
      $6,000,000 principal payment by March 1, 2008;
  and
  ·
              A
      final balloon payment of any remaining amounts owed under the 2005 Notes
      by October 1, 2008.





In
addition, cash proceeds from any sales of Galaxy’s assets are to be used to
repay the 2005 Notes.





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
note was initially recorded at its fair value of $12,500,000 and then reduced by
a $500,000 payment made by the Company on November 16, 2007.  The
Company wrote off unamortized discount and deferred financing associated with
the May 2005 debt in the amount of $1,963,776 and $330,107.





The total
amount charged to interest and financing costs for this note were $2,399,658 in
interest expense, $2,750,579 through the amortization of the discount, and
$458,365 in deferred financing costs.




F-31


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 – CONVERTIBLE NOTES PAYABLE (continued)





APRIL
2006 DEBENTURES





In April
2006, the Company completed a private offering of Subordinated Convertible
Debentures and Warrants to a group of accredited investors (the April 2006
Debentures).  Gross proceeds from the offering were
$4,500,000.  The April 2006 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 April 2006
Debentures are convertible into 2,884,615 shares of common stock based on a
conversion price of $1.56 per share.  The purchasers of the April 2006
Debentures 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 April 2006 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 April 2006
Debentures and is being amortized over the term of the April 2006
Debentures.  Amortization of the discount of $158,134 and $95,315 is
included in interest expense for the year ended November 30, 2007 and
2006.  Amortization of deferred financing costs of $61,888 and $37,302
has been recognized for the years ended November 30, 2007 and 2006.





JUNE 2006
DEBENTURES





In June
2006, the Company completed a private offering of Subordinated Convertible
Debentures and Warrants to an accredited investor (the June 2006
Debentures).  Gross proceeds from the offering were
$2,500,000.  The June 2006 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 June 2006
Debentures are convertible into 1,602,564 shares of common stock based on a
conversion price of $1.56 per share.  The  purchaser of the
June 2006 Debentures 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 June 2006 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 June 2006
Debentures and is being amortized over the term of the June 2006
Debentures.  Amortization of the discount of $68,110 and $30,603 is
included in interest expense for the year ended November 30, 2007 and
2006.





F-32


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
5 – CONVERTIBLE NOTES PAYABLE (continued)





The
Company has evaluated the embedded conversion feature in the 2004 Notes, the
March 2005 Notes, and the May 2005 Notes, the April 2006 Debentures 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 Notes, the March 2005 Notes, the April 2006 Debentures 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.





At
November 30, 2007 and 2006 convertible notes consist of the
following:





As
      of November 30,2007
            
            
            20062004
      Notes
            
            $
            -
            
            
            $
            4,160,505Less
      unamortized discount
            
            
            -
            
            
            
            (663,002
            )March
      2005 Notes
            
            
            7,695,000
            
            
            
            7,695,000Less
      unamortized discount
            
            
            -
            
            
            
            (1,172,506
            )May
      2005 Notes
            
            
            12,000,000
            
            
            
            12,500,000Less
      unamortized discount
            
            
            -
            
            
            
            (2,750,577
            )April
      2006 Notes
            
            
            4,500,000
            
            
            
            4,500,000Less
      unamortized discount
            
            
            (142,535
            )
            
            
            (300,671
            )June
      2006 Notes
            
            
            2,500,000
            
            
            
            2,500,000Less
      unamortized discount
            
            
            (71,839
            )
            
            
            (139,951
            )26,480,626
            
            
            
            26,328,798Less
      current portion, net
            
            
            (24,052,467
            )
            
            
            (10,019,996
            )Long
      term portion, net
            
            $
            2,428,161
            
            
            $
            16,308,801





Total
principal payments due in the next twelve months for the notes listed above are
$24,195,000.  If the Company’s common stock meets certain conditions
of trading volume and price, all principal payments may be paid by issuing
shares of common stock.





At
November 30, 2007 the Company’s debt maturity schedule, including related party
debt is as follows:





2008
            
            $
            42,338,5052009
            
            
            2,500,000$
            44,838,505








F-33


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
6 – STOCKHOLDERS’ EQUITY





COMMON
STOCK





During
the year ended November 30, 2007, the Company issued 2,000,000 shares of its
common stock to its Senior Secured Creditors in exchange for the creditors’
consent to the Powder River Basin Asset Sale.  The creditors’ consent
was required because they have a security interest covering the assets to be
sold.  The Company issued the shares at the closing market price per
share on the dates of issuance, and the value associated with these shares,
$410,000, was originally classified as deferred selling costs on the Company’s
Balance Sheet. However, such amounts were charged to interest expense as the
Powder River Basin Asset sale to a related party was not completed.





During
the year ended November 30, 2006, the Company issued 12,993,939 shares of its
common stock to the 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.





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







F-34


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




NOTE
6 – STOCKHOLDERS’ EQUITY (continued)





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).





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.





F-35


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
6 – STOCKHOLDERS’ EQUITY (continued)





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.





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.





F-36


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
6 – STOCKHOLDERS’ EQUITY (continued)





As of
November 30, 2007, 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
            5,194,805
            
            $1.25
            
            December
      16, 2007August
      19, 2004
            300,000
            
            $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
            
            December
      16, 2007April
      26, 2006
            868,383
            
            $1.60
            
            April
      26, 2011June
      20, 2006
            480,769
            
            $1.60
            
            June
      20, 201114,832,341





At
November 30, 2007 and 2006 the weighted average exercise price for warrants
outstanding is $1.20 and $1.20, respectively, and the weighted average remaining
contractual life is .71 and 1.6 years, respectively.  In December 2007
approximately 7,005,881 warrants expired and an additional 1,637,234 expired in
March 2008.





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, 2007, and November 30, 2006, options to purchase 2,270,000 and 1,785,000
shares, respectively, were available to be granted pursuant to the stock option
plan.





In
January 2007 and 2006, the Company granted options to purchase 240,000 and
240,000 shares, respectively of the Company’s common stock to the Company’s
outside directors for a term of 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.





F-37


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
7 - STOCK OPTION PLAN (continued)





A summary
of option activity under the Plan as of November 30, 2007 and 2006 and changes
during the years then ended is presented below:





Number
      of Shares
            
            
            Weighted
      Avg. Exercise
              Price
            
            
            Weighted
      Avg. Remaining
              Contractual
              TermOptions
      outstanding - December 1, 2004
            
            
            3,500,000
            
            
            $
            2.37Granted
            
            
            975,000
            
            
            $
            1.32Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -Options
      outstanding -November 30, 2005
            
            
            4,475,000
            
            
            $
            2.15Options
      outstanding - December 1, 2005
            
            
            4,475,000
            
            
            $
            2.15Granted
            
            
            240,000
            
            
            
            1.19Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -Options
      outstanding -November 30, 2006
            
            
            4,715,000
            
            
            $
            2.10
            
            
            
            7.61Granted
            
            
            240,000
            
            
            
            0.19Exercised
            
            
            -Forfeited
            
            
            (725,000
            )
            
            
            2.07Expired
            
            
            -Exercisable
      at November 30, 2007
            
            
            4,230,000
            
            
            $
            1.99
            
            
            
            6.77





The
weighted average grant date fair value of options granted during the years ended
November 30, 2007, 2006 and 2005 was $0.12, $ 0.69 and $0.97 per
share.  There have been no options exercised under the terms of the
Plan.





Based on
the $0.0575 closing price of the Company’s common stock at November 30, 2007,
none of the above options have any intrinsic value.





F-38


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
7 - STOCK OPTION PLAN (continued)





The
following table presents additional information related to the options
outstanding at November 30, 2007:





Weighted
      averageExercise
      price
            
            
            Number
      of options
            
            
            Number
      of options
            
            
            Remaining
      contractualper
      share
            
            
            outstanding
            
            
            Exercisable
            
            
            life
      (Years)$
            0.19
            
            
            
            240,000
            
            
            
            240,000
            
            
            
            9.11.00
            
            
            
            60,000
            
            
            
            60,000
            
            
            
            5.51.07
            
            
            
            50,000
            
            
            
            30,000
            
            
            
            8.01.19
            
            
            
            240,000
            
            
            
            240,000
            
            
            
            8.11.26
            
            
            
            50,000
            
            
            
            50,000
            
            
            
            7.11.30
            
            
            
            200,000
            
            
            
            200,000
            
            
            
            6.71.34
            
            
            
            775,000
            
            
            
            471,250
            
            
            
            7.01.50
            
            
            
            50,000
            
            
            
            50,000
            
            
            
            6.41.55
            
            
            
            325,000
            
            
            
            237,500
            
            
            
            6.62.24
            
            
            
            60,000
            
            
            
            60,000
            
            
            
            6.42.64
            
            
            
            2,000,000
            
            
            
            1,500,000
            
            
            
            6.43.51
            
            
            
            180,000
            
            
            
            180,000
            
            
            
            6.34,230,000
            
            
            
            3,318,750
            
            
            
            6.8





In
January 2008, the Company granted options to purchase 240,000 shares of the
Company’s common stock to the Company’s outside directors for a term of 10 years
at the closing price of the common stock on the date of grant.




F-39


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
8 – INCOME TAXES




Income tax expense (benefit) for the years ended November 30 consists of
the following:




2007
            
            
            2006
            
            
            2005Current
      taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -Deferred
      taxes
            
            
            4,736,000
            
            
            
            1,572,000
            
            
            
            7,627,000Less:  valuation
      allowance
            
            
            (4,736,000
            )
            
            
            (1,572,000
            )
            
            
            (7,627,000
            )Net
      income tax provision (benefit)
            
            $
            -
            
            
            $
            -
            
            
            $
            -





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




Years
      Ended November 30,2007
            
            
            2006
            
            
            2005Federal
      statutory income tax rate
            
            
            (35.0
            %)
            
            
            (35.0
            %)
            
            
            (35.0
            %)State
      income taxes
            
            
            (1.4
            %)
            
            
            (3.3
            %)
            
            
            (3.3
            %)Permanent
      differences - interest on convertibleDebt
            
            
            9.7
            %
            
            
            16.3
            %
            
            
            6.5
            %Other
            
            
            3.0
            %
            
            
            -
            
            
            
            -Increase
      in valuation allowance
            
            
            23.7
            %
            
            
            22.0
            %
            
            
            31.8
            %Net
      income tax provision (benefit)
            
            
            -
            
            
            
            -
            
            
            
            -





The principal sources of temporary differences resulting in deferred tax
assets and tax liabilities at November 30, 2007 are as follows:




2007
            
            
            2006
            
            
            2005Deferred
      tax assetsFederal and state net operating
      loss carryovers
            
            $
            16,070,000
            
            
            $
            13,700,000
            
            
            $
            13,155,000Asset retirement
      obligation
            
            
            701,000
            
            
            
            712,000
            
            
            
            472,000Oil
      and gas property
            
            
            -
            
            
            
            -
            
            
            
            657,000Accrued
      related party interest and interest on
              convertible
debt
            
            
            2,380,000
            
            
            
            952,000
            
            
            
            -Stock based
      compensation
            
            
            1,033,000
            
            
            
            661,000
            
            
            
            -Other
            
            
            1,000
            
            
            
            -
            
            
            
            10,000Total deferred
      taxes
            
            $
            20,185,000
            
            
            $
            16,025,000
            
            
            $
            14,294,000Deferred
      tax liabilitiesIntangible
      drilling costs and other exploration costs capitalized for financial
      reporting purposes, net of impairment
            
            $
            (2,710,000
            )
            
            $
            (3,085,000
            )
            
            $
            -Deferred financing
      costs
            
            
            (17,000
            )
            
            
            (216,000
            )
            
            
            -Property and
      equipment
            
            
            -
            
            
            
            (2,000
            )
            
            
            -Other
            
            
            -
            
            
            
            -
            
            
            
            -Total deferred
      liabilities
            
            
            (2,727,000
            )
            
            
            (3,303,000
            )
            
            
            -Net deferred tax
      asset
            
            
            17,458,000
            
            
            
            12,722,000
            
            
            
            14,294,000Less:  valuation
      allowance
            
            
            (17,458,000
            )
            
            
            (12,722,000
            )
            
            
            (14,294,000
            )Deferred tax
      liability
            
            $
            -
            
            
            $
            -
            
            
            $
            -








F-40


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
8 – INCOME TAXES (continued)





The Company has a $44,127,000 net operating loss carryover as of November
30, 2007.  The net operating losses may offset against taxable income
through the year ended November 2027.  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, 2007 and 2006, as the likelihood of the realization of the tax
benefit of the net operating loss carryforward cannot be
determined.  The valuation allowance increased by approximately
$4,736,000 and by $1,572,000 for the years ended November 30, 2007 and
2006.





NOTE
9 - RELATED PARTY TRANSACTIONS





The
Company incurred consulting fees related to services provided by RVM in the
amounts of $-0-, $30,000, and $120,000 for the years ended November 30, 2007,
2006 and 2005, 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.





At
November 30, 2007, 2006 and 2005, the Company included amounts due to RVM of
$-0-, $-0-, and $12,079, respectively, in accounts payable related
parties.





In
connection with the acquisition of unevaluated oil and gas properties in the
Piceance Basin, the Company entered into a Participation Agreement with Marc A.
Bruner, a related party, to acquire part of the 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, Marc A. Bruner received a significant ownership percentage of the
Assignee, thereby establishing the Assignee, Exxel Energy Corp. (Exxel), as a
related party.  The terms of the Participation Agreement as amended,
required the Company to invest $7 million and 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.  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.  The amount due from Exxel at November 30, 2007 was not
significant.





During
the years ended 2007, and 2006, the Company recorded $56,000 and $1,696,000 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-41


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 a 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.  Falcon and
the Company are currently assessing a long term plan with respect to other
prospects in Romania.





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, the Company incurred costs and expenses with Harbor of
$41,681.  Of those amounts, compensation expenses paid to Harbor for
services provided by the COO and other Harbor staff, were
$27,500.  Reimbursement of costs advanced by Harbor on behalf of the
Company of $14,181was paid during the year ended November 30,
2005.  The Company paid made no payments to Harbor during the year
ended November 30, 2007 and 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 $189,000, $198,775 and $193,500 during
the years ended November 30, 2007, 2006 and 2005.  As of November 30,
2007 and 2006, $43,500 and $27,000 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 year ended November 30,
2005, the Company paid the individual $21,250 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 years ended
November 30, 2007 and 2006.





F-42


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, 2007, 2006 and 2005, the Company owed the President of Pannonian
approximately $3,000, $10,000 and $37,400 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 and there are no amounts
included in the year ending November 30, 2007.





See Note
4 – Notes Payable – Related Parties for the discussion of notes payable 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:





2008
            $107,8342009
            $135,4382010
            $
      46,113





Rent
expense was approximately $107,000, $114,000 and $126,000 for the years ended
November 30, 2007, 2006 and 2005, respectively.





F-43


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
10 - COMMITMENTS AND CONTINGENCIES (continued)





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





Litigation





On July
3, 2007, Windsor Energy Resources, Inc. ("Windsor") commenced a lawsuit against
Dolphin in the District Court, Fourth Judicial District, Sheridan County,
Wyoming, asserting claims for breach of an Operating Agreement and to foreclose
statutory and/or contractual liens in the total claimed principal amount of
$433,716, plus interest and attorney fees and costs. Windsor claims it is due
the amounts for work it performed in drilling, completing and operating wells
under the terms of the Operating Agreement. Dolphin disputes Windsor's claims
and has asserted that Windsor failed to properly submit AFEs to Dolphin in
compliance with the terms of the Operating Agreement, that Windsor on many
occasions submitted AFEs for work that had already been completed, and that
Windsor has submitted a number of joint interest billings that are erroneous and
inaccurate. Dolphin has asserted a counterclaim for an accounting and a
counterclaim for an offset for sums it claims Windsor owes Dolphin relating to
wells operated by Dolphin.  No discovery has taken place and the
parties have been engaged in settlement discussions in an attempt to resolve the
claims and counterclaims asserted in this action.





The Vernon S. and Rowena W. Griffith
Foundation ("Griffith Foundation") has commenced a lawsuit against Windsor
Beaver Creek, LLC and Dolphin in the District Court, Fourth Judicial District,
Sheridan County, Wyoming, seeking a determination that an oil and gas lease
dated January 19, 1999 covering approximately 14,456 acres in Townships 55 and
56 North, Ranges 80 and. 81 West, Sheridan County, Wyoming has terminated. The
Griffith Foundation claims that, as of the expiration of the primary term of the
lease on January 19, 2007, there had been no production of oil or gas on the
lands covered by the lease. The Griffith Foundation seeks an order declaring the
lease has terminated and for damages in an unspecified
amount.  Windsor and Dolphin dispute the claims asserted by the
Griffith Foundation and intend to vigorously defend this
litigation.  No discovery has taken place and the Griffith Foundation
has only recently filed a motion to set a scheduling conference and a trial
date.





F-44


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
10 - COMMITMENTS AND CONTINGENCIES (continued)





In August
2007, Dolphin (and Galaxy) filed complaints against the Wyoming Office of State
Lands and Investments, Board of Land Commissioners ("Respondents") in the
District Court, Laramie County, Wyoming. These actions seek relief from, and
judicial review of, administrative actions taken by Respondents establishing
excessive and unlawful bond requirements that were simultaneously disclosed and
imposed on Dolphin and the Company on July 16, 2007, involving certain mineral
leases administered by Respondents.  The two cases have been
consolidated and briefs are to be filed by Galaxy and Dolphin by May 12,
2008.  The Wyoming Attorney General's Office has expressed a desire to
further stay these cases, which Dolphin is considering.





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.  Other than
the above, 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.





Bankruptcy
– See footnote 2





NOTE
11 - SUBSEQUENT EVENTS





Subsequent
to November 30, 2007, the Company has continued to receive advances from the
Bruner Family Trust.   Subordinated unsecured promissory notes
totaling $3,000,000 were issued in December 2007 and January, February and March
2008.  The notes are due 120 days from issuance or the time at which
the registrant’s senior indebtedness has been paid in full. Interest accrues at
the rate of 8% per annum.





The
Company borrowed $600,000 from an unrelated entity in December
2007.  The notes are due 120 days from issuance or the time at which
the registrant’s senior indebtedness has been paid in full. Interest accrues at
the rate of 8% per annum.





On
February 7, 2008, the Company received a notice from the American Stock Exchange
(Amex) staff indicating that Galaxy no longer complies with the exchange’s
continued listing standards, namely Sections 1003(a)(i), 1003(a)(ii),
1003(a)(iii), and 1003(a)(iv) of the Amex Company Guide, and that Galaxy’s
common stock is subject to being delisted from the exchange.  On
February 13, 2008, the Company filed an appeal requesting a hearing before an
American Stock Exchange (Amex) panel regarding the continued listing of the
company’s common stock on the exchange. The appeal automatically
stayed  the delisting of Galaxy's common stock pending a hearing on
the Company’s appeal and Amex's decision. The hearing was held on April 8,
2008.





F-45


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
11 - SUBSEQUENT EVENTS (continued)





On April
14, 2008, the Company received a notice from the American Stock Exchange
(“AMEX”) staff indicating its determination to prohibit the continued listing of
Galaxy’s common stock and to initiate delisting proceedings.  At the
hearing held on April 8, 2008, a Listing Qualifications Panel of the Amex
Committee on Securities found that Galaxy’s financial condition and operating
results are below the applicable quantitative standards set forth in Sections
1002 and 1003(a) of the Amex Company Guide.  In addition, AMEX cited
the fact that Galaxy is in violation of other sections of the Amex Company
Guide:  Section 1003(a)(iv) due to being financially impaired, Section
1003(a)(f)(v) based on its failure to execute the reverse stock split deemed
appropriate by the staff, Section 704 based on its failure to hold an annual
meeting of its stockholders during fiscal year 2007, and Sections 134 and 1101
due to its failure to file its Form 10-K for the fiscal year ended November 30,
2007 by the required deadline.





AMEX has
indicated that it would file an application with the Securities and Exchange
Commission to strike Galaxy’s common stock from listing and registration on the
AMEX when and if authorized.





On April
21, 2008, the Company began trading on the Pink Sheets, a daily publication
compiled by the National Quotation Bureau with bid and ask prices of
over-the-counter (OTC) stocks, including the market makers who trade
them.





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, 2007 and 2006:




Three
      months ended02/28/07
            
            
            05/31/07
            
            
            08/31/07
            
            
            11/30/07RevenuesNatural gas
    sales
            
            $
            217,189
            
            
            $
            153,740
            
            
            $
            76,303
            
            
            $
            33,523Operating
      expensesLease operating
      expenses
            
            
            163,291
            
            
            
            95,043
            
            
            
            445,817
            
            
            
            287,191General and
      administrative
            
            
            1,059,402
            
            
            
            980,598
            
            
            
            761,617
            
            
            
            892,377Impairment
      oil and gas properties
            
            
            -
            
            
            
            1,495,315
            
            
            
            2,370,880
            
            
            
            -Depreciation
      and
              Amortization
            
            
            143,277
            
            
            
            135,835
            
            
            
            232,056
            
            
            
            74,9571,365,970
            
            
            
            2,706,791
            
            
            
            3,810,370
            
            
            
            1,254,525Other
      income (expense)Interest and
    other
            
            
            5,220
            
            
            
            4,074
            
            
            
            4,749
            
            
            
            11,955Interest and financing
      costs
            
            
            (2,680,329
            )
            
            
            (2,394,832
            )
            
            
            (2,044,630
            )
            
            
            (4,269,449
            )(2,675,109
            )
            
            
            (2,390,758
            )
            
            
            (2,039,881
            )
            
            
            (4,257,494
            )Net
      (loss)
            
            $
            (3,823,890
            )
            
            $
            (4,943,809
            )
            
            $
            (5,773,948
            )
            
            $
            (5,748,496
            )Net
      (loss) per common shareBasic and
    diluted
            
            $
            (.05
            )
            
            $
            (.06
            )
            
            $
            (.07
            )
            
            $
            (.06
            )




F-46


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





NOTE
12 – QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)





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
            
            
            
            98,7391,625,370
            
            
            
            1,614,917
            
            
            
            2,711,333
            
            
            
            1,948,928Other
      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
            )
            
            
            (6,628,468
            )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-47


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, 2007, 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, 2007 and 2006
are $49.50 per bbl of oil and $6.74 per mcf of gas, and
­­­­­­­­$59.37 per 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
            
            
            
            320Revisions to previous
      estimates
            
            
            (150,549
            )
            
            
            (125
            )Extensions and
      discoveries
            
            
            13,737
            
            
            
            96Production
            
            
            (113,596
            )Balance, November 30,
      2007
            
            
            755,013
            
            
            
            291




F-48


GALAXY
ENERGY CORPORATION
 (A
Development Stage Company)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





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





Proved
      Developed Reserves as of November
            
            2007
            
            
            2006
            
            
            2005Gas (Mcf)
            
            
            755,013
            
            
            
            1,005,421
            
            
            
            959,944Oil (Bbls)
            
            
            291
            
            
            
            320
            
            
            
            353




Standardized
      Measure of Discounted
              Future cash
flows
            
            November
      30
              2007
            
            
            November
      30
              2006
            
            
            November
      30
              2005Future cash
    inflows
            
            $
            3,829,000
            
            
            $
            6,769,792
            
            
            $
            6,529,934Future cash
    outflowsProduction
    costs
            
            
            (1,753,00
            )
            
            
            (2,954,112
            )
            
            
            (2,498,340
            )Development
    costs
            
            
            (348,000
            )
            
            
            (340,000
            )
            
            
            (84,000
            )Future income
    taxes
            
            
            -
            
            
            
            -
            
            
            
            -Future net cash
      flows
            
            
            1,728,000
            
            
            
            3,475,680
            
            
            
            3,947,594Adjustment to discount future
      annual net
              cash flows at
    10%)
            
            
            (471,000
            )
            
            
            (732,608
            )
            
            
            (1,005,320
            )Standardized measure of
      discounted
              future net cash
      flows
            
            $
            1,257,000
            
            
            $
            2,743,072
            
            
            $
            2,942,274




Change
      in the Standardized Measure of discounted future net cash
      flowsStandardized measure, beginning
      of period
            
            $
            2,743,072
            
            
            $
            2,942,274
            
            
            $
            -Sale of oil and gas, net of
      production costs
              and taxes (1)
            
            
            (80,000
            )
            
            
            (414,000
            )
            
            
            (332,125
            )Net change in sales prices, net
      of production
              Costs
            
            
            (1,028,000
            )
            
            
            (242,000
            )
            
            
            -Discoveries, extensions and
      improved
              Recoveries, net of future
      development cost
            
            
            29,000
            
            
            
            2,000
            
            
            
            -Change in future development
      costs
            
            
            (6,000
            )
            
            
            (276,000
            )
            
            
            -Revisions of quantity
      estimates
            
            
            (302,000
            )
            
            
            449,000
            
            
            
            -Accretion
            
            
            219,000
            
            
            
            294,000
            
            
            
            -Changes in timing
            
            
            (215,000
            )
            
            
            -
            
            
            
            -Other
            
            
            (103,072
            )
            
            
            (12,202
            )
            
            
            -Standardized
      measure, end of period
            
            $
            1,257,000
            
            
            $
            2,743,072
            
            
            $
            2,942,274





(1) The
Company has excluded certain dewatering costs of $591,000 that are not
production costs during 2007 as they relate to wells that have yet to be
classified as proved reserves and were not included in future development costs
in prior years’ reserve reports.