FORM
10-Q-SB

SECURITIES
AND EXCHANGE COMMISSION

Washington D.C.
20549

MARK ONE

|[X] |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

For the
quarterly period ended March 31, 2006

OR

|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
|----- |  | -----------------------------------------------------------------------------------------

For the
transition period from ________ to ________

Commission
File Number 0-9494

ASPEN
EXPLORATION CORPORATION(Exact Name of Aspen as Specified in its Charter)

|Delaware                        | 84-0811316
|------------------------------- | ----------
|(State or other jurisdiction of |           
|incorporation or organization)  |           
|                                |           

|                                         | 
|---------------------------------------- | 
|                                         | 
|Suite 208, 2050 S. Oneida St.,           | 
|Denver, Colorado                         | 
|(Address of Principal Executive Offices) | 
|                                         | 

Issuers
telephone number: (303) 639-9860

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

Yes  [    ]    No
[ X ]

Indicate  the
number of shares outstanding of each of the Issuers classes of common  stock as of
the latest practicable date.

|                                               |  |                            
|---------------------------------------------- |  | ---------------------------
|Class                                          |  | Outstanding at May 15, 2006
|                                               |  |                            
|Common stock, $.005 par value                  |  | 7,094,641                  
|                                               |  |                            
|Transitional small business disclosure format: |  | [    ] Yes        [X] No   
|                                               |  |                            
|                                               |  |                            



---

Part One.   
FINANCIAL INFORMATION

Item
1.   Financial Statements

ASPEN
EXPLORATION CORPORATION AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                    | March 31,2006 | June 30,2005 
|--------------------------------------------------- | ------------- | -------------
|
|Current Assets:                                     |               |              
|                                                    |               |              
|Cash and cash equivalents                           |               | $   7,116,151
|                                                    |               |              
|Accounts receivables                                |               | 4,065,006    
|                                                    |               |              
|Receivable, related party                           |               | 1,273        
|                                                    |               |              
|Prepaid expenses                                    |               | 10,283       
|                                                    |               |              
|Precious metals                                     |               | 18,823       
|                                                    |               |              
|                                                    |               |              
|Total Current Assets                                |               | 11,211,536   
|                                                    |               |              
|                                                    |               |              
|Investment in oil and gas properties, at cost       |               |              
|(full cost method of accounting)                    |               | 12,931,202   
|                                                    |               |              
|Less: accumulated depletion and valuation allowance |               | (5,737,090   
|                                                    |               |              
|                                                    |               |              
|                                                    |               | 7,194,112    
|                                                    |               |              
|                                                    |               |              
|Property and equipment, at cost:                    |               |              
|                                                    |               |              
|Furniture, fixtures and vehicles                    |               | 122,576      
|                                                    |               |              
|Less: accumulated depreciation                      |               | (44,341      
|                                                    |               |              
|                                                    |               |              
|                                                    |               | 78,235       
|                                                    |               |              
|                                                    |               |              
|TOTAL ASSETS                                        |               | $ 18,483,883 
|                                                    |               |              
|                                                    |               |              

(Statement
Continues)See notes to Consolidated Financial Statements

2



---

ASPEN
EXPLORATION CORPORATION AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

LIABILITIES
AND STOCKHOLDERS' EQUITY

|                                                                                               | March 31,2006 | June 30,2005 
|---------------------------------------------------------------------------------------------- | ------------- | -------------
|
|Current Liabilities:                                                                           |               |              
|                                                                                               |               |              
|Accounts payable and accrued expenses                                                          |               | $   2,720,824
|                                                                                               |               |              
|Accounts payable - related party (Note 2)                                                      |               |             
|                                                                                               |               |              
|Income taxes payable (Note 7)                                                                  |               | 223,259      
|                                                                                               |               |              
|Advances from joint interest owners                                                            |               | 5,510,855    
|                                                                                               |               |              
|Asset retirement obligation (Note 3)                                                           |               | 13,826       
|                                                                                               |               |              
|                                                                                               |               |              
|Total Current Liabilities                                                                      |               | 8,468,764    
|                                                                                               |               |              
|                                                                                               |               |              
|                                                                                               |               |              
|Asset retirement obligation, net of current portion (Note 3)                                   |               | 108,384      
|                                                                                               |               |              
|Deferred income taxes (Note 7)                                                                 |               | 1,353,830    
|                                                                                               |               |              
|                                                                                               |               |              
|Total long term liabilities                                                                    |               | 1,462,214    
|                                                                                               |               |              
|                                                                                               |               |              
|Total Liabilities                                                                              |               | 9,930,978    
|                                                                                               |               |              
|                                                                                               |               |              
|Stockholders' Equity:                                                                          |               |              
|(Notes 1 and 5):                                                                               |               |              
|Common stock, $.005 par value:                                                                 |               |              
|Authorized: 50,000,000 shares                                                                  |               |              
|Issued and outstanding: At March 31, 2006,      
6,777,641 shares and June 30, 2005, 6,733,308 |               | 33,883       
|                                                                                               |               |              
|Capital in excess of par value                                                                 |               | 6,828,603    
|                                                                                               |               |              
|Retained earnings (deficit)                                                                    |               | 1,727,752    
|                                                                                               |               |              
|Deferred compensation and consulting fees                                                      |               | (37,333      
|                                                                                               |               |              
|                                                                                               |               |              
|Total Stockholders' Equity                                                                     |               | 8,952,905    
|                                                                                               |               |              
|                                                                                               |               |              
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                     |               | $ 18,483,883 
|                                                                                               |               |              
|                                                                                               |               |              
|                                                                                               |               |              

See Notes to
Consolidated Financial Statements

3



---

---

ASPEN
EXPLORATION CORPORATION AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                         | Three MonthsEnded March 31, | Nine MonthsEnded March 31, |   |             
|---------------------------------------- | --------------------------- | -------------------------- | - | ------------
|
|Revenues:                                |                             |                            |   |             
|                                         |                             |                            |   |             
|Oil and gas                              |                             | $ 1,496,427                |   | $ 1,103,687 
|                                         |                             |                            |   |             
|Management fees                          |                             | 92,682                     |   | 59,616      
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Total Revenues                           |                             | 1,589,109                  |   | 1,163,303   
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Costs and Expenses:                      |                             |                            |   |             
|                                         |                             |                            |   |             
|Oil and gas production                   |                             | 164,796                    |   | 107,035     
|                                         |                             |                            |   |             
|Depreciation, depletion and amortization |                             | 450,000                    |   | 159,895     
|                                         |                             |                            |   |             
|Selling, general and administrative      |                             | 205,592                    |   | 192,025     
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Total Costs and Expenses                 |                             | 820,388                    |   | 458,955     
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Operating Income                         |                             | 768,721                    |   | 704,348     
|                                         |                             |                            |   |             
|Other Income (Expense)                   |                             |                            |   |             
|                                         |                             |                            |   |             
|Interest and other, net                  |                             | 23,612                     |   | 443         
|                                         |                             |                            |   |             
|Interest (expense)                       |                             | (22                        | ) | (1,053      
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Income Before Taxes                      |                             | 792,311                    |   | 703,738     
|                                         |                             |                            |   |             
|Provision for Income Taxes               |                             | 361,955                    |   | 1,273       
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Net Income                               |                             | $    430,356               |   | $    702,465
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Basic Income per Common Share            |                             | 0.06                       |   | 0.11        
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Diluted Income per Common Share          |                             | 0.06                       |   | 0.11        
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Basic Weighted Average Number of         |                             |                            |   |             
|Common Shares Outstanding                |                             | 6,775,715                  |   | 6,406,510   
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             
|Diluted Weighted Average Number of       |                             |                            |   |             
|Common Shares Outstanding                |                             | 7,360,966                  |   | 6,640,818   
|                                         |                             |                            |   |             
|                                         |                             |                            |   |             

See notes to
these consolidated financial statements

4



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ASPEN
EXPLORATION CORPORATION AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                      | Nine Months Ended March 31, |                
|----------------------------------------------------- | --------------------------- | ---------------
|
|Cash Flows from Operating Activities:                 |                             |                
|                                                      |                             |                
|Net income                                            |                             | $ 1,796,921    
|                                                      |                             |                
|Adjustments to reconcile net income to net cash       |                             |                
|provided by operating activities:                     |                             |                
|                                                      |                             |                
|Depreciation, depletion and amortization              |                             | 1,159,040      
|Stock issued for interest expense and consulting fees |                             | 43,904         
|Deferred income tax provision                         |                             | 338,342        
|                                                      |                             |                
|Changes in assets and liabilities:                    |                             |                
|                                                      |                             |                
|(Increase) Decrease in receivable                     |                             | (3,438,559     
|(Increase) Decrease in prepaid expense                |                             | 5,139          
|Increase (Decrease) in accounts payable and           |                             |                
|accrued expense                                       |                             | 6,986,038      
|                                                      |                             |                
|                                                      |                             |                
|Net cash provided by operating activities             |                             | 6,890,825      
|                                                      |                             |                
|                                                      |                             |                
|Cash Flows from Investing Activities:                 |                             |                
|                                                      |                             |                
|Equipment inventory sale                              |                             | 2,000          
|Additions to oil and gas properties                   |                             | (3,234,819     
|Purchase of producing properties                      |                             |               
|Purchase of furniture and fixtures                    |                             | (8,500         
|                                                      |                             |                
|                                                      |                             |                
|Net cash used by investing activities                 |                             | (3,241,319     
|                                                      |                             |                
|                                                      |                             |                
|Cash Flows from Financing Activities                  |                             |                
|                                                      |                             |                
|Proceeds from the issuance of common stock            |                             | 36,499         
|                                                      |                             |                
|Payment of notes payable                              |                             |               
|                                                      |                             |                
|                                                      |                             |                
|Net cash provided by financing activities             |                             | 36,499         
|                                                      |                             |                
|                                                      |                             |                
|Net increase (decrease) in cash and cash equivalents  |                             | 3,686,005      
|                                                      |                             |                
|Cash and cash equivalents, beginning of year          |                             | 3,430,146      
|                                                      |                             |                
|                                                      |                             |                
|Cash and cash equivalents, end of year                |                             | $ 7,116,151    
|                                                      |                             |                
|                                                      |                             |                
|Other information:                                    |                             |                
|                                                      |                             |                
|Interest paid                                         |                             | $             
|                                                      |                             |                
|                                                      |                             |                
|Income taxes paid                                     |                             | $    372,408   
|                                                      |                             |                
|                                                      |                             |                
|Non-cash investing and financing activities           |                             |                
|Asset retirement obligation additions                 |                             | $      26,000  
|                                                      |                             |                
|                                                      |                             |                
|                                                      |                             |                
|Stock issued for deferred consulting services         |                             | $      64,000  
|                                                      |                             |                
|                                                      |                             |                

The
accompanying notes are an integral part of these statements.

5



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ASPEN
EXPLORATION CORPORATION

Notes to
Condensed Consolidated Financial Statements

(Unaudited)

March  31,
2006

Note 1   BASIS
OF PRESENTATION

| | The
accompanying financial statements are unaudited. However, in our opinion, the
accompanying financial statements reflect all adjustments, consisting of only  normal
recurring adjustments, necessary for fair presentation. Interim results  of operations
are not necessarily indicative of results for subsequent interim  periods or the
remainder of the year. These financial statements should be read  in conjunction with our
Annual Report on Form 10-KSB for the year ended June 30,  2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Except
for the historical information contained in this Form 10-QSB, this Form contains
forward-looking statements that involve risks and uncertainties. Our actual  results
could differ materially from those discussed in this Report. Factors  that could cause or
contribute to such differences include, but are not limited  to, those discussed in this
Report and any documents incorporated herein by  reference, as well as the Annual Report
on Form 10-KSB for the year ended June  30, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2   
RECEIVABLE  RELATED PARTIES, PAYABLE  RELATED PARTIES

| | The
receivable from related parties constitutes amounts due from officers and  consultants
for joint operating costs of wells operated by us. The transactions  are in the normal
course of business with the same terms as other joint owners  and are repaid in a normal
business cycle. The payable to related parties at  June 30, 2006, represents unexpended
prepayments made by officers and  consultants on wells operated by us as well as unpaid
business expenses due  officers. There is no payable to related parties as of March 31,
2006. These  transactions are in the normal course of business.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3   ASSET
RETIREMENT OBLIGATION

| | We
have adopted the provisions of Statement of Financial Accounting Standards  (SFAS)
No. 143, Accounting for Asset Retirement  Obligations. SFAS No. 143 generally
applies to legal obligations  associated with the retirement of long-lived assets that
result from the  acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires us to recognize an estimated liability  for the
plugging and abandonment of our gas wells. We have recognized the future  cost to plug
and abandon the gas wells over the estimated useful lives of the  wells in accordance
with SFAS No. 143. A liability for the fair value of an  asset retirement obligation with
a corresponding increase in the carrying value  of the related long-lived asset is
recorded at the time a producing well is  purchased or a drilled well is completed and
ready for production. We will  amortize the amount added to the oil and gas properties
and recognize accretion  expense in connection with the discounted liability over the
remaining life of  the respective well. The estimated liability is based on historical
experience  in plugging and abandoning wells, estimated useful lives based on engineering
studies, external estimates as to the cost to plug and abandon wells in the  future and
federal and state regulatory requirements. The liability is a  discounted liability using
a credit adjusted risk-free rate of 6%. Revisions to  the liability could occur due to
changes in plugging and abandonment costs,  useful well lives or if federal or state
regulators enact new regulations on the  plugging and abandonment of wells.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6



---

---

| | A
reconciliation of our liability for the three months ended March 31, 2006 is as  follows:
| | -------------------------------------------------------------------------------------------

|                                                 |  |             
|------------------------------------------------ |  | ------------
|
|                                                 |  |             
|Asset retirement obligations as of June 30, 2005 |  | $     96,210
|                                                 |  |             
|ARO additions                                    |  | 26,000      
|                                                 |  |             
|Liabilities settled                              |  |            
|                                                 |  |             
|Accretion expense                                |  |   *        
|                                                 |  |             
|Revision of estimate                             |  |            
|                                                 |  |             
|                                                 |  |             
|Asset retirement obligation as of March 31, 2006 |  | $   122,210 
|                                                 |  |             

| |  | *          Accretion
not material
| |  | ---------------------------------

Note 4   
EARNINGS PER SHARE

| | We
follow Statement of Financial Accounting Standards (SFAS) No. 128,
addressing earnings per share. SFAS No. 128 established the methodology of  calculating
basic earnings per share and diluted earnings per share. The  calculations differ by
adding any instruments convertible to common stock (such  as stock options, warrants, and
convertible preferred stock) to weighted average  shares outstanding when computing
diluted earnings per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



---

---

Note 4   
EARNINGS PER SHARE (CONTINUED)

| | The
following is a reconciliation of the numerators and denominators used in the
calculations of basic and diluted earnings per share. We had a net income of  $1,796,921
and $1,386,157 for the nine months ended March 31, 2006 and 2005,  respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Nine Months Ended March 31, |                  
|---------------------------------------------------- | --------------------------- | -----------------
|
|
|
|Basic earning per share:                             |                             |                  
|                                                     |                             |                  
|Net income                                           |                             | $   1,796,921    
|Weighted average common shares outstanding           |                             | 6,762,712        
|                                                     |                             |                  
|Basic Earnings per share                             |                             | $            0.27
|                                                     |                             |                  
|Diluted earnings per share                           |                             |                  
|Net Income:                                          |                             | $   1,796,921    
|Weighted average common shares outstanding           |                             | 6,762,712        
|                                                     |                             |                  
|Dilutive effect of outstanding options               |                             | 584,578          
|Weighted average common shares outstanding - Diluted |                             | 7,347,290        
|                                                     |                             |                  
|Diluted earnings per share                           |                             | $            0.24
|                                                     |                             |                  

Note 5    STOCKHOLDERS
EQUITY

Stock
Options

| | On
January 10, 2006, a consultant exercised options for 8,333 shares of our common  stock
granted April 27, 2005 at an average price of $2.67 per share. The  consultant paid us
$22,249 to exercise his options on the 8,333 shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of  March 31, 2006, we had an aggregate of 502,000 common shares reserved for  issuance
under our stock option plans. These plans provide for the issuance of  common shares
pursuant to stock option exercises, restricted stock awards and  other equity based
awards.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
account  for  stock  options  using  APB No.  25 for  directors  and  employees  and SFAS
No.  123 for  consultants.
| | -----------------------------------------------------------------------------------------------------------------------

8



---

Note 5   
STOCKHOLDERS' EQUITY (CONTINUED)

| | We
have adopted SFAS Standards No. 148, Accounting for Stock-Based  Compensation  Transition
and Disclosure  an amendment of FASB  Statement No. 123. SFAS No. 148 amends
No. SFAS 123, Accounting for  Stock-Based Compensation to provide alternative
methods of transition for  a voluntary change to the fair value based method of
accounting for stock-based  employee compensation. In addition, SFAS No. 148 amends the
disclosure  requirements of SFAS No. 123 to require prominent disclosures in both annual
and  interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We  will
continue to account for stock based compensation using SFAS 123 detailed in  the
stock-based compensation accounting standard.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
were 260,000 options granted in 2005. Directors and employees were granted  235,000 and
consultants were granted 25,000. The consultant options were valued  using the fair value
method of SFAS No. 123 as calculated by the Black-Scholes  option-pricing model. The fair
value of each option grant, as opposed to its  exercise price, is estimated on the date
of grant using the Black-Scholes  option-pricing model with the following weighted
average assumptions: no  dividend yield, expected volatility of 159.54%, risk free
interest rates of  3.92% and expected lives of 4.5 years. The options vest one-third in
each of  January 2006, 2007 and 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 123, Accounting for Stock-Based Compensation, requires us to  provide pro
forma information regarding net income as if compensation cost for  the Companys
stock option plans had been determined in accordance with the  fair value based method
prescribed in SFAS No. 123. To provide the required pro  forma information, we estimate
the fair value of each stock option at the grant  date by using the Black-Scholes
option-pricing model.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



---

Note 5   
STOCKHOLDERS' EQUITY (CONTINUED)

| | A
summary of the pro forma effects to reported net income and earning per share,  as if the
company had elected to recognize compensation cost based on the fair  value of the
options granted at grant date as prescribed by SFAS No. 123:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | 3 Months EndedMarch 31, | 9 Months EndedMarch 31, |   |                       
|------------------------------------- | ----------------------- | ----------------------- | - | ----------------------
|
|
|Net income, as reported               |                         | $           430,356     |   | $           702,465   
|Add: Stock based employee             |                         |                         |   |                       
|compensation expense included in      |                         |                         |   |                       
|reported net income, net of related   |                         |                         |   |                       
|tax effects                           |                         |                        |   |                      
|Deduct: Total stock based employee    |                         |                         |   |                       
|compensation expense determined       |                         |                         |   |                       
|under fair value based method for all |                         |                         |   |                       
|awards, net of related tax effects    |                         | (81,532                 | ) | (27,857               
|                                      |                         |                         |   |                       
|                                      |                         |                         |   |                       
|Proforma net income                   |                         | 348,824                 |   | 674,608               
|                                      |                         |                         |   |                       
|Earnings per share:                   |                         |                         |   |                       
|Basic - as reported                   |                         | $                 0.06  |   | $                 0.11
|Basic - pro forma                     |                         | $                 0.05  |   | $                 0.11
|                                      |                         |                         |   |                       
|Diluted - as reported                 |                         | $                 0.06  |   | $                 0.11
|Diluted - pro forma                   |                         | $                 0.05  |   | $                 0.11
|                                      |                         |                         |   |                       
|                                      |                         |                         |   |                       

Note 6   
INCOME TAXES

| | We
have recorded a deferred income tax liability of $1,353,830 and an estimated  current
income tax liability of $223,259. During the first six months of fiscal  2006, we used
all of our net operating loss carryforwards.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---

---

Note 6    INCOME
TAXES (CONTINUED)

| | A
reconciliation between the statutory federal income tax rate (34%) and the  effective
rate of income tax expense for the two nine month periods ended March  31 is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | 2006 | 2005    
|--------------------------------- | ---- | --------
|                                  |      |         
|Statutory federal income tax rate |      | 34%     
|                                  |      |         
|Other                             |      | -6%     
|                                  |      |         
|                                  |      |         
|Net federal income tax rate       |      | 28%     
|                                  |      |         
|Statutory state income tax        |      |         
|rate, net of federal benefit      |      | 2%      
|                                  |      |         
|                                  |      |         
|Effective rate                    |      | 30%     
|                                  |      |         
|                                  |      |         
|
|                                  |      |         
|Current tax expense               |      | $595,667
|                                  |      |         
|Deferred tax expense              |      | 338,342 
|                                  |      |         
|                                  |      |         
|Total income tax provision        |      | $934,009
|                                  |      |         
|                                  |      |         

11



---

---

Note 7   
CONTINGENCIES AND DRILLING COMMITMENTS

| | On
December 20, 2005 Calpine Corporation, one of our major purchasers of natural  gas
(currently purchases about 25% of our gas), filed for Chapter 11 bankruptcy  protection
in New York. At the time of the filing, Calpine Corporation owed us,  exclusive of
outside owner participation, approximately $193,000. We believe  that the amount due to
us at the filing will be collectible, but because of  issues associated with all
bankruptcies, we cannot offer any assurance that it  will be collected. We will continue
to monitor the situation with respect to  collectibility and take further actions as we
determine to be appropriate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have a proposed drilling budget for the period April through June 2006. The  budget
includes drilling three wells in the Sacramento gas province of northern  California and
one well in Kern County, California. Our share of the estimated  costs to complete this
program is set forth in the following table:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Area              | Wells | DrillingCosts | Completion &EquippingCosts | Total       
|----------------- | ----- | ------------- | -------------------------- | ------------
|
|
|                  |       |               |                            |             
|West Grimes Field |       |               |                            |             
|Colusa County, CA |       | 3             |                            | $    393,000
|                  |       |               |                            |             
|San Emidio Field, |       |               |                            |             
|Kern County, CA   |       | 1             |                            | 203,000     
|                  |       |               |                            |             
|                  |       |               |                            |             
|Total Expenditure |       | 4             |                            | $    596,000
|                  |       |               |                            |             
|                  |       |               |                            |             

Note 8    NEW
ACCOUNTING PRONOUNCEMENTS

| | FASB
123  (revised 2004)  Share-Based Payments
| | -----------------------------------------------

| | In
December 2004, the FASB issued a revision to FASB Statement No. 123,  Accounting
for Stock Based Compensation.This Statement  supersedes APB Opinion No. 25,
Accounting for Stock Issued to  Employees, and its related implementation
guidance. This Statement  establishes standards for the accounting for transactions in
which an entity  exchanges its equity instruments for goods or services. It also
addresses  transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys equity  instruments or
that may be settled by the issuance of those equity instruments.  This Statement focuses
primarily on accounting for transactions in which an  entity obtains employee services in
share-based payment transactions. This  Statement does not change the accounting guidance
for share-based payment  transactions with parties other than employees provided in
Statement 123 as  originally issued and EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in  Conjunction
with Selling, Goods or Services. This Statement does not  address the accounting
for employee share ownership plans, which are subject to  AICPA Statement of Position
93-6, Employers Accounting for Employee Stock  Ownership Plans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---

---

Note 8   NEW
ACCOUNTING PRONOUNCEMENTS (CONTINUED)

| | A
nonpublic entity will measure the cost of employee services received in exchange  for an
award of equity instruments based on the grant-date fair value of those  instruments,
except in certain circumstances.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
public entity will initially measure the cost of employee services received in  exchange
for an award of liability instruments based on its current fair value;  the fair value of
that award will be re-measured subsequently at each reporting  date through the
settlement date. Changes in fair value during the requisite  service period will be
recognized as compensation cost over that period. A  nonpublic entity may elect to
measure its liability awards at their intrinsic  value through the date of settlement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
grant-date fair value of employee share options and similar instruments will be
estimated using the option-pricing models adjusted for the unique  characteristics of
those instruments (unless observable market prices for the  same or similar instruments
are available).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Excess
tax benefits, as defined by this Statement, will be recognized as an addition to
paid-in-capital. Cash retained as a result of those excess tax benefits will be
presented in the statement of cash flows as financing cash inflows. The  write-off of
deferred tax assets relating to unrealized tax benefits associated  with recognized
compensation cost will be recognized as income tax expense  unless there are excess tax
benefits from previous awards remaining in paid-in  capital to which it can be offset.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
notes to the financial statements of both public and nonpublic entities will  disclose
information to assist users of financial information to understand the  nature of
share-based payment transactions and the effects of those transactions  on the financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effective date for public entities that do not file as small business issuers  will be as
of the beginning of the first interim or annual reporting period of  the registrants
first fiscal year that begins after June 15, 2005. For  public entities that file as
small business issuers and nonpublic entities the  effective date will be as of the
beginning of the first interim or annual  reporting period of the registrants first
fiscal year that begins after  December 15, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2006, SFAS No. 155, Accounting for Certain Hybrid Financial  Instrumentsan
amendment of FASB  Statements  No. 133 and 140 was  issued.  This  Statement  resolves
issues  addressed  in  Statement  133  Implementation  Issue No.  D1,  Application  of
Statement  133 to  Beneficial  Interests  in  Securitized  Financial  Assets.  SFAS No.
155 will become  effective for the Companys  fiscal year after September 15,  2006.
Adoption of this  statement is expected to have no impact on the  Companys
financial  position or  results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



---

Note 8   NEW
ACCOUNTING PRONOUNCEMENTS (CONTINUED)

| | In
March 2006, SFAS No. 156,  Accounting for Servicing of Financial  Assetsan
amendment of FASB Statement  No. 140 was  issued.  This  Statement  amends  FASB
Statement  No.  140,  Accounting  for  Transfers  and  Servicing of Financial  Assets and
Extinguishments  of  Liabilities,  with respect to the  accounting for  separately
recognized  servicing  assets and servicing  liabilities.  SFAS No. 156 will become
effective  for the  Companys  fiscal  year  beginning  after  September  15,  2006.
Adoption of this  statement  is  expected to have no impact on the Companys
financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 9   
SUBSEQUENT EVENTS

| | Aspen
re-entered the previously abandoned Cygnus #1RD well located in the Denverton  Creek
Field, Solano County, California. An attempt was made to re-establish  production from
the partially depleted Petersen Formation at a depth of  approximately 11,000 feet,
through the application of underbalanced drilling  techniques. The data gathered to date
indicates that commercial production will  probably not be obtained from this well. Aspen
is operator and has a 19.775%  working interest in this well.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aspen
also attempted to increase production from the Merrill #31-2 well located in the  Malton
Black Butte Field, Tehama County, California through the application of  underbalanced
drilling techniques. The well was returned to production at  essentially the same flow
rate as prior to the workover. Aspen is operator and  has a 31% working interest in this
well.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aspen
also participated in the drilling of four gas wells which are operated by other
companies. One of these wells is located in the Malton Black Butte Field, Tehama  County,
California, two are located in the Grimes Gas Field, Colusa County,  California, and one
is located in the Lindsey Slough Field, Solano County,  California. All four of these
wells were successful; one is currently producing,  two have been tested and are awaiting
a pipeline connection, and the other has  been logged and is waiting on a completion rig.
Aspen operates numerous  producing gas wells in the Grimes and Malton Black Butte Fields.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



---

---

Item 2.   
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                 CONDITION AND RESULTS OF OPERATIONS

This
segment should be read in conjunction with the managements discussion and  analysis
of financial condition and results of operations contained in our  Annual Report on Form
10-KSB for the year ended June 30, 2005, which has been  filed with the Securities and
Exchange Commission. The management discussion and  analysis and other portions of this
report contain forward-looking statements  (as such term is defined in Section 21E of the
Securities Exchange Act of 1934,  as amended). These statements reflect our current
expectations regarding our  possible future results of operations, performance, and
achievements. These  forward-looking statements are made pursuant to the safe harbor
provisions of  the Private Securities Litigation Reform Act of 1995.

Wherever
possible, we have tried to identify these forward-looking statements by using
words such as anticipate, believe, estimate,
expect, plan, intend, and similar
expressions. These statements reflect our current beliefs and are based on
information currently available to us. Accordingly, these statements are subject
to certain risks, uncertainties, and contingencies, which could cause our actual
results, performance, or achievements to differ materially from those expressed
in, or implied by, such statements. These risks, uncertainties and contingencies
include, without limitation, the factors set forth in our Form 10-KSB under
Item 6. Managements Discussion and Analysis of Financial Conditions
or Plan of Operation  Factors that may affect future operating
results. We have no obligation to update or revise any such
forward-looking statements that may be made to reflect events or circumstances
after the date of this Form 10-QSB.

Overview

Aspen
Exploration Corporation was organized in 1980 for the purpose of acquiring,
exploring and developing oil and gas and other mineral properties. Since 1996,
we have focused our efforts on the exploration, development and operation of
natural gas properties in the Sacramento Valley of northern California. We are
currently the operator of 52 gas wells and have a non-operated interest in 20
additional gas wells.

We
currently have offices in Bakersfield, California and Denver, Colorado and have
2 full time employees as well as the Chairman of the Board who allocates a
portion of his time to the Company. We also make extensive use of consultants
for the conduct of our business, ranging from financial, engineering, land,
legal, and geological and geophysical specialists.

Where
possible, we attempt to be the operator of each property in which we invest. We believe our
knowledge of drilling and operating wells in the Sacramento Valley allows us to
maximize the potential return of each property. Administrative charges to the
properties help cover approximately 44% of our selling, general and
administrative expenses.

15



---

Outlook and
Trends

We
expect our natural gas production to increase during fiscal 2006 due to recent
drilling successes. Total production for the year will depend on the number of
wells successfully completed, the date they commence gas sales, their initial
rate of production, and their production decline rates. We also anticipate that
the average price for our product will be in the range of $5.00 to $9.00 per
MMBTU for the fiscal year ended June 30, 2006 as compared to the average gas
price of $6.20 received during our 2005 fiscal year.

Over
the past five years we have been able to replace the majority of our produced
reserves and increase our yearly natural gas production. We have also benefited
from a general increase in natural gas prices over the past three years, from a
low of $3.76 per MMBTU average during the second quarter of fiscal 2003 to
$10.14 per MMBTU during the second quarter of fiscal 2006 (with an average of
$8.62 per MMBTU for the nine months ended March 31, 2006).

Quantitative
and Qualitative Disclosure About Risk

Our
ability to replace reserves, dissipated through production or recalculation,
will depend largely on how successful our drilling and acquisition efforts will
be in the future. While we cannot predict the future, our historic success ratio
over the past five years has been 89%. With the use of 3-D seismic and well
control data, interpreted by our geological and geophysical consultants, we feel
we can manage our dry hole risk as well as anyone in the industry.

The
prices that we receive for the oil and natural gas (including natural gas
liquids) produced are impacted by many factors that are outside of our control.
Historically, these commodity prices have been volatile and we expect them to
remain volatile. Prices for oil and natural gas are affected by changes in
market demands, overall economic activity, weather, pipeline capacity
constraints, inventory storage levels, the world political situation, basis
differentials and other factors. As a result, we cannot accurately predict
future natural gas and NGL (natural gas liquids) prices, and therefore, we
cannot determine what effect increases or decreases in production volumes will
have on future revenues.

On
regulatory and operational matters, we actively manage our exploration and
production activities. We value sound stewardship and strong relationships with
all stakeholders in conducting our business. We attempt to stay abreast of
emerging issues to effectively anticipate and manage potential impacts to our
operations.

To
manage commercial risk, we may use financial tools to hedge the price we will
receive for our product. The primary purpose of hedging is to provide adequate
return on our investments, grow our reserves while leaving as much commodity
price upside as possible. During the period November 1, 2005 through March 31,
2006, we were contractually obligated to deliver 3,750 MMBTU per day to two of
our natural gas purchasers as follows:

|                | 
|--------------- | 
|1,000 MMBTU/Day | 
|1,000 MMBTU/Day | 
|500 MMBTU/Day   | 
|500 MMBTU/Day   | 
|750 MMBTU/Day   | 
|                | 

16



---

The
average price received during the first nine months of fiscal 2006 for our
natural gas was approximately $8.62 per MMBTU as compared to $6.12 per MMBTU
during the first nine months of fiscal 2005. All contractual obligations expired
on March 31, 2006.

Liquidity
and Capital Resources

We
have historically financed our operations with internally generated funds and
limited borrowings from banks and third parties, and farmout arrangements, which
permit third parties (including some related parties) to participate in our
drilling prospects. Our principal uses of cash are for operating expenses, the
acquisition, drilling, completion and production of prospects, the acquisition
of producing properties, working capital, servicing debt and the payment of
income taxes.

Cash
of $6,890,825 and $833,251 was provided by our operations for the nine months
ended March 31, 2006 and 2005. The 2006 period generated net income of
$1,796,921, and we were able to generate increased positive cash flow from
operations during the first nine months of fiscal 2006 as compared to the 2005
period (when we generated net income of $1,386,157) because of:

| | For
the nine months ended March 31, 2006, the increase in cash flow from operations  of
$6,890,825, or 727%, was due primarily to:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | An
increase in net income of  approximately  $410,764  ($1,796,921  in 2006 as compared to
$1,386,157 in 2005);  and
| | --------------------------------------------------------------------------------------------------------------------

| | A
$6,390,371 increase in accounts payable and accrued expenses in 2006 (which  conserved
cash during the 2006 period) compared to an decrease in accounts  payable and accrued
expenses in 2005 of $1,411,291; and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
increase in receivables of $3,438,559 in 2006 (which reduced cash flow from  operations)
compared to an increase in receivables of $87,116 during 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Investing
activities used cash to increase capitalized oil and gas costs and office
equipment of $3,241,319 and $1,270,499 in the nine months ended March 31, 2006
and 2005. Cash in the current nine month period ended March 31, 2006 was used
for lease acquisition, seismic work, intangible drilling and well workovers
($3,234,819), and office equipment of ($8,500). These expenditures are net of
the sale of interests in wells to be drilled charged to third party investors.

We
have a proposed drilling budget for the period April through June 2006. The
budget includes drilling three wells in the Sacramento gas province of northern
California and one well in Kern County, California. Our share of the estimated
costs to complete this program is set forth in the following table:

17



---

|Area              | Wells | DrillingCosts | Completion &EquippingCosts | Total       
|----------------- | ----- | ------------- | -------------------------- | ------------
|
|
|                  |       |               |                            |             
|West Grimes Field |       |               |                            |             
|Colusa County, CA |       | 3             |                            | $    393,000
|                  |       |               |                            |             
|San Emidio Field, |       |               |                            |             
|Kern County, CA   |       | 1             |                            | 203,000     
|                  |       |               |                            |             
|                  |       |               |                            |             
|Total Expenditure |       | 4             |                            | $    596,000
|                  |       |               |                            |             
|                  |       |               |                            |             

Our
working capital (current assets less current liabilities) at March 31, 2006, was
$2,742,772, which reflects an approximate $133,387 increase from our working
capital at June 30, 2005. Our working capital increased by 5% during the first
nine months of our 2006 fiscal year because of

| | an
increase in accounts receivable ($4,065,006 at March 31, 2006 as compared to  $614,720 at
June 30, 2005) due to larger production volumes and greater prices  received during the
period and the Calpine Corporation bankruptcy (leaving a  receivable of approximately
$193,000 net of etal participation that (at this  time) we believe is collectible);
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | an
increase in advances from joint owners of $4,800,378 that were not expended for  drilling
projects at March 31, 2006,
| | ------------------------------------------------------------------------------------------------------------------------

which
were partially offset by an increase in accounts payable of $2,065,634, an
increase in taxes payable of $223,259 and an increase during the period in cash
of approximately $3,686,005.

We
anticipate that our working capital and anticipated cash flow from operations
and future successful drilling will be sufficient to pay our obligations. Based
on national and international concerns, we anticipate that our gas production
will continue to provide us with sufficient cash flow through our current fiscal
year and beyond. As discussed herein, this is dependent, in part, on maintaining
or increasing our level of production and the national and world market
maintaining its current prices for our gas production.

We
believe that internally generated funds will be sufficient to finance our
drilling and operating expenses for the next twelve months. If our drilling
efforts are successful, the anticipated increased cash flow from the new gas
discoveries, in addition to our existing cash flow, should be sufficient to fund
our share of planned future completion and pipeline costs.

18



---

Results of
Operations

March 31,
2006 Compared to March 31, 2005

For
the nine months ended March 31, 2006, our operations continued to be focused on
the production of oil and gas, and the investigation for possible acquisition of
producing oil and gas properties in California. During the nine months ended
March 31, 2006, our revenues increased by approximately $1,736,931 as compared
to the comparable period of our 2005 fiscal year because of:

| | Increased
production (530,803 MMBTU sold as compared to 476,500 MMBTU sold during the  first nine
months of our 2005 fiscal year);
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Increased
price received for our production (an average of $8.62 per MMBTU during the  first nine
months of our 2006 fiscal year as compared to $6.16 per MMBTU  received during that
period in 2005); and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Increased
management fees received ($295,768 during fiscal 2006 as compared to $201,441  during
fiscal 2005) because we were operators of more wells during 2006 (52  wells compared to
47 wells in 2005).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For
the three months ended March 31, 2006, our revenues increased by approximately
$425,806 as compared to the comparable period of 2005 because of:

Increased
production (182,987 MMBTU sold as compared to 169,150 during the three months
ended March 31, 2005);

| | Increased
price received for our production (an average of $8.18 per MMBTU during the  three months
ended March 31, 2006 compared to $6.52 per MMBTU received for the  three months ended
March 31, 2005); and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
revenues during the nine months ended March 31, 2006 include revenues accrued  from (but
not paid by) Calpine Corporation because of its bankruptcy proceeding.  We believe that
such revenues are collectible and will be collected. If those  revenues are ultimately
not collected, then our revenues for the nine months  ended March 31, 2006, will decrease
by approximately $193,000 of pre-petition  receivables and any unpaid post-petition
receivables. (See further discussion in  Note 8 to the financial statements and Accounts
Receivable, below.)
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Oil
and gas production costs increased $86,075, or 32%, for the nine months ended
March 31, 2006 and increased $57,761, or 54%, for the three months ended March
31, 2006. The increase in operating costs can be attributed to the addition of
10 gross wells, from 62 wells to 72 wells and our percentage working interests
in these wells were somewhat higher than the average of wells owned at March 31,
2005. Equipment rental and water disposal fees increased due to the addition of
compressors and increased water production in our more mature wells.

19



---

Depletion,
depreciation and amortization expense increased $689,144 and $290,105 for the
nine and three months ended March 31, 2006. These increases of 147% and 181%,
respectively, were the result of using the approximate same depletion rate as
fiscal 2005, but applying it to a larger full cost pool which resulted in the
higher total depletion taken.

The
following table sets forth certain items from our Condensed Consolidated
Statements of Operations as expressed as a percentage of total revenues, shown
for the nine months of fiscal 2006, 2005 and 2004:

|                                    | For the Nine Months Ended |        | 
|----------------------------------- | ------------------------- | ------ | 
|
|Total revenues                      |                           | 100.0% | 
|                                    |                           |        | 
|Oil & gas production costs          |                           | 7.3%   | 
|                                    |                           |        | 
|                                    |                           |        | 
|Income from operations              |                           | 92.7%  | 
|                                    |                           |        | 
|                                    |                           |        | 
|Cost and expenses                   |                           |        | 
|Depreciation and depletion          |                           | 23.8%  | 
|Selling, general and administrative |                           | 13.7%  | 
|Interest Expense                    |                           | 0.0%   | 
|                                    |                           |        | 
|                                    |                           |        | 
|Total costs and expenses            |                           | 32.5%  | 
|                                    |                           |        | 
|                                    |                           |        | 
|Income before income taxes          |                           | 55.2%  | 
|                                    |                           |        | 
|Other income                        |                           | -0.9%  | 
|                                    |                           |        | 
|Provision for income taxes          |                           | 22.8%  | 
|                                    |                           |        | 
|                                    |                           |        | 
|Net income                          |                           | 31.5%  | 
|                                    |                           |        | 

20



---

To
facilitate discussion of our operating results for the nine months ended March
31, 2006 and 2005, we have included the following selected data from our
Condensed Consolidated Statements of Operations:

|                           | Comparison of the FiscalNine Months Ended March 31, | Increase (Decrease) |  |           
|-------------------------- | --------------------------------------------------- | ------------------- |  | ----------
|
|Revenues:                  |                                                     |                     |  |           
|Oil and gas sales          |                                                     | $4,576,203          |  | $2,933,599
|Management fees            |                                                     | 295,768             |  | 201,441   
|Interest and other         |                                                     | 43,641              |  | 3,338     
|                           |                                                     |                     |  |           
|Total revenues             |                                                     | 4,915,612           |  | 3,138,378 
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           
|Cost and expenses:         |                                                     |                     |  |           
|Oil and gas production     |                                                     | 356,966             |  | 270,891   
|Depreciation and depletion |                                                     | 1,159,040           |  | 469,896   
|General and administrative |                                                     | 668,654             |  | 568,493   
|Interest expense           |                                                     | 22                  |  | 5,831     
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           
|Total costs and expenses   |                                                     | 2,184,682           |  | 1,315,111 
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           
|Income before taxes        |                                                     | 3,130,930           |  | 1,823,267 
|Provision for income taxes |                                                     | 934,009             |  | 437,110   
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           
|Net income                 |                                                     | $1,796,921          |  | $1,386,157
|                           |                                                     |                     |  |           
|                           |                                                     |                     |  |           

Total
revenue increased $1,777,234, or 57% when comparing the two periods, while
operating and production costs increased $86,075, or 32%. Our results during the
current period were favorable in part because we were able to keep increases in
our production costs significantly less than the increases in prices received
for natural gas.

A
significant ratio presented is the percentage of management fees charged to
operated wells versus our general and administrative costs. This coverage of
general and administrative costs improved from approximately 35% for the nine
months ended March 31, 2005 to approximately 44% at March 31, 2006.

When
comparing general and administrative expense for 2006 and 2005, costs increased
by $100,161, or 18% due to increased audit and accounting fees, officers
salaries and the initiation of an investor relations service.

21



---

Central
to the issue of success of the nine months operations ended March 31, 2006 is
the discussion of changes in oil and gas sales, volumes of natural gas sold and
the price received for those sales. We present them here in tabular form:

|                     | Oil & GasSales | MMBTUSold   | (1)Price/MMBTU
|-------------------- | -------------- | ----------- | --------------
|
|1st Quarter          |                | $1,062,543  |               
|2nd Quarter          |                | 2,017,233   |               
|3rd Quarter          |                | 1,496,427   |               
|                     |                |             |               
|                     |                |             |               
|Year to date         |                | 4,576,203   |               
|                     |                |             |               
|                     |                |             |               
|                     |                |             |               
|                     |                |             |               
|
|1st Quarter          |                | 697,553     |               
|2nd Quarter          |                | 1,132,359   |               
|3rd Quarter          |                | 1,103,687   |               
|4th Quarter          |                | 919,578     |               
|                     |                |             |               
|                     |                |             |               
|Year to date         |                | 3,853,177   |               
|                     |                |             |               
|                     |                |             |               
|                     |                |             |               
|                     |                |             |               
|
|1st Quarter          |                | 341,926     |               
|2nd Quarter          |                | 362,942     |               
|3rd Quarter          |                | 401,941     |               
|4th Quarter          |                | 481,441     |               
|                     |                |             |               
|                     |                |             |               
|Year to date         |                | 1,588,250   |               
|                     |                |             |               
|                     |                |             |               
|Third Quarter Change |                |             |               
|
|                     |                |             |               
|                     |                |             |               
|Amount               |                | $   392,740 |               
|Percentage           |                | 36%         |               
|                     |                |             |               
|                     |                |             |               
|                     |                |             |               
|
|Amount               |                | $   701,746 |               
|Percentage           |                | 175%        |               
|                     |                |             |               

| |  | (1)
Price per MMBTU may not agree with oil and gas sales because of the inclusion of oil and
NGL sales.
| |  | -------------------------------------------------------------------------------------------------------

Oil and gas
revenue,  volumes sold and price  received  for our product  have shown a steady
improvement  over the  first nine months of fiscal  2006 and the twelve  months of fiscal
2005.  As the table  above  notes,  revenue has  increased  approximately  36% when
comparing the two three month  periods  ended March 31, 2006 and 2005.  Volumes  sold
increased approximately 8%, while the price received for our product increased 25%.

22



---

---

Contractual
Obligations:

We had five
contractual  obligations as of March 31, 2006. The following table lists our  significant
liabilities  at March 31, 2006:

|                       | Payments Due By Period |          |  |          | 
|---------------------- | ---------------------- | -------- |  | -------- | 
|
|Employment Obligations |                        | $226,000 |  | $512,000 | 
|                       |                        |          |  |          | 
|Contract Services      |                        |          |  |          | 
|Obligations            |                        | 15,000   |  |         | 
|                       |                        |          |  |          | 
|                       |                        |          |  |          | 
|Total Contractual      |                        |          |  |          | 
|Cash Obligations       |                        | $241,000 |  | $512,000 | 
|                       |                        |          |  |          | 
|                       |                        |          |  |          | 

We  maintain
office space in Denver,  Colorado,  our principal  office,  and  Bakersfield,
California.  The Denver  office  consists of  approximately  1,108 square feet with an
additional  750 square feet of basement  storage.  We  entered into a one-year lease
agreement on the Denver office  through  December 31, 2004 at a lease rate of $1,261  per
month.  We are  currently  leasing this space on a month to month basis.  The
Bakersfield,  California  office  has 546  square  feet and had a monthly  rental  fee of
$730 to $770  over the term of the  lease.  The three  year  lease  expired  February  8,
2006 and is  currently  on a month to month  basis.  Rent  expense for the nine months
ended March 31, 2006 and 2005 was $24,372 and $18,921, respectively.

Critical
Accounting Policies and Estimates:

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

Reserve
Estimates:

Our estimates
of oil and natural gas reserves,  by necessity,  are  projections  based on geologic and
engineering  data, and there are uncertainties  inherent in the  interpretation of such
data as well as the projection of future  rates of production  and the timing of
development  expenditures.  Reserve  engineering is a subjective  process of  estimating
underground  accumulations  of oil and natural gas that are  difficult to measure.  The
accuracy of any  reserve  estimate is a function of the quality of available  data,
engineering and geological  interpretation  and  judgment.  Estimates  of  economically
recoverable  oil and  natural  gas  reserves  and  future  net  cash  flows  necessarily
depend upon a number of variable factors and assumptions,  such as historical  production
from the area  compared with production from other producing  areas,  the assumed effects
of regulations by governmental  agencies  and assumptions  governing future oil and
natural gas prices,  future operating costs,  severance and excise taxes,  development
costs  and  workover  and  remedial  costs,  all of which may in fact vary  considerably
from  actual  results.  For  these  reasons,  estimates  of the  economically
recoverable  quantities  of oil  and  natural  gas  attributable  to any particular
group of properties,  classifications  of such reserves based on risk of recovery,  and
estimates of the future net cash flows expected  therefrom may vary  substantially.  Any
significant  variance  in the assumptions  could materially  affect the estimated
quantity and value of the reserves,  which could affect  the  carrying  value of our oil
and gas  properties  and/or the rate of  depletion  of the oil and gas  properties.
Actual  production,  revenues and  expenditures  with respect to our reserves will likely
vary from estimates,  and  such variances may be material.

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| | Many
factors will affect actual future net cash flows, including:
| | -----------------------------------------------------------------

|- |  | The
amount and timing of actual production;
|- |  | -------------------------------------------

|- |  | Supply
and demand for natural gas;
|- |  | ----------------------------------

|- |  | Curtailments
or increases in consumption by natural gas purchasers; and
|- |  | -----------------------------------------------------------------------

|- |  | Changes
in governmental regulations or taxation.
|- |  | ------------------------------------------------

Accounts
Receivable:

Accounts
receivable  balances  are  evaluated on a continual  basis and  allowances  are provided
for  potentially  uncollectible  accounts  based  on  managements  estimate  of the
collectibility  of  customer  accounts.  If the  financial  condition  of a  customer
were to  deteriorate,  resulting  in an  impairment  of its  ability  to make  payments,
an additional allowance may be required.  Allowance  adjustments are charged to
operations in the period  in which the facts that give rise to the  adjustments  become
known.  At the present time, we believe that we will  collect  the  full  amount  of  the
pre-petition  and  post-petition  receivables  from  Calpine  Corporation
(notwithstanding  its  bankruptcy  petition).  We will continue to monitor this
situation and revise our estimates  as appropriate.

Property,
Equipment, Depreciation and Depletion:

We follow the
full-cost  method of accounting  for oil and gas  properties.  Under this method,  all
productive and  nonproductive  costs incurred in connection  with the  exploration  for
and development of oil and gas reserves are  capitalized.  Such capitalized  costs
include lease  acquisition,  geological and geophysical  work, delay rentals,  drilling,
completing  and equipping oil and gas wells,  including  salaries,  benefits and other
internal  salary  related costs directly  attributable to these  activities.  Costs
associated with production and general  corporate  activities  are expensed in the period
incurred.  Interest  costs related to unproved  properties  and  properties  under
development  are  also  capitalized  to oil  and  gas  properties.  If the  net
investment  in oil  and gas  properties  exceeds an amount equal to the sum of (1) the
standardized  measure of discounted future net cash flows  from proved  reserves,  and
(2) the lower of cost or fair market value of properties in process of development  and
unexplored acreage,  the excess is charged to expense as additional  depletion.  Normal
dispositions of oil and gas  properties are accounted for as adjustments of capitalized
costs, with no gain or loss recognized.

We apply SFAS
No. 144,  Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets. Under
SFAS No. 144,  long-lived  assets and certain  intangibles  are  reported at the lower of
the carrying  amount or their  estimated  recoverable  amounts.  Long-lived  assets
subject to the  requirements  of SFAS No. 144 are evaluated for possible  impairment
through review of undiscounted  expected future cash flows. If the sum of undiscounted
expected future  cash flows is less than the  carrying  amount of the asset or if changes
in facts and  circumstances  indicate,  an  impairment loss is recognized.

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Asset
Retirement Obligations:

We  recognize
the  future  cost to plug and  abandon  gas wells  over the  estimated  useful  life of
the wells in  accordance  with the  provision of SFAS No. 143.  SFAS No. 143 requires
that we record a liability for the present  value of the asset  retirement  obligation
with a  corresponding  increase  to the  carrying  value of the related  long-lived
asset.  We amortize the amount added to the oil and gas properties and recognize
accretion  expense in  connection  with the  discounted  liability over the remaining
lives of the  respective  gas wells.  Our liability  estimate is based on our historical
experience in plugging and  abandoning  gas wells,  estimated well lives based  on
engineering  studies,  external estimates as to the cost to plug and abandon wells in the
future and federal and  state  regulatory  requirements.  The  liability  is  discounted
using  a  credit-adjusted  risk-free  rate of 6%.  Revisions to the liability could occur
due to changes in well lives, or if federal and state  regulators  enact new
requirements on the plugging and abandonment of gas wells.

Off Balance
Sheet Arrangements:

We have no off
balance sheet arrangements and thus no disclosure is required.

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Item 3.   
CONTROLS AND PROCEDURES

As
required by Rule  13a-15(b)  under the  Securities  Exchange Act of 1934, as of the
filing date of this  report,  we carried out an evaluation of the  effectiveness of the
design and operation of our disclosure  controls  and  procedures.  This  evaluation  was
carried  out  under  the  supervision  and with the  participation  of our  principal
executive  officer (who is also our principal  financial  officer),  who concluded  that
our  disclosure  controls and  procedures  are  effective.  There have been no
significant  changes in our internal  controls or in  other  factors,  which could
significantly  affect  internal  controls  subsequent  to the date we carried out our
evaluation.

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

PART II

Item 1.   Legal
Proceedings.

There
are no material pending legal or regulatory proceedings against Aspen Exploration
Corporation,  and  it is not aware of any that are known to be contemplated.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

The
following  sets forth the  information  required by Item 701 of  Regulation  S-B with
respect to the  unregistered sale of equity securities:

On
January 10, 2006, a consultant  exercised  options for 8,333 shares of our common stock
granted  April  27, 2005, at an average  price of $2.67 per share.  The  consultant  paid
us $22,249 to exercise his options on the  8,333 shares.

(a)  The
options were exercised on January 10, 2006, for 8,333 shares of our common stock.

(b) No
underwriter,  placement  agent, or finder was involved in the  transaction.  The
consultant is an accredited  investor.

(c) The total
exercise  price for the options was $22,249,  which was paid in cash. No  underwriting
discounts or  commissions were paid.

(d) We relied
on the exemption  from  registration  provided by Sections 4(2) and 4(6) under the
Securities Act of  1933 for this  transaction  and  Regulation  D for the  issuance.  We
did not engage in any public  advertising  or  general  solicitation in connection with
this transaction,  and we provided the accredited investor with disclosure  of all
aspects of our  business,  including  providing  the  accredited  investor  with our
reports  filed with the  Securities and Exchange  Commission,  our press releases,
access to our auditors,  and other financial,  business,  and  corporate  information.
Based on our  investigation,  we believe that the  accredited  investor  obtained all
information  regarding  Aspen  Exploration  it requested,  received  answers to all
questions it (and its advisors)  posed, and otherwise understood the risks of accepting
our securities for investment purposes.

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---

(e)  The common
stock issued in this transaction is not convertible or exchangeable.

(f) We will use
the proceeds for working  capital,  as well as expenses of drilling and (if  warranted)
completing  oil and gas wells.

(a) The
Warrants  were  exercised on April 21,  2006,  and the  transaction  was  completed on
April 21, 2006.  Two  accredited  investors,  John and Susan  Gibbs,  exercised  warrants
(the  Warrants)  for the purchase of 300,000  shares of our common stock at
an exercise  price of $1.25 per share for a total  offering  price of  $375,000.  The
Warrants were issued on March 8, 2005 as a result of an accredited investor,  Tripower
Resources,  Inc., exercising  a  warrant  issued in June 2004 (the  Initial
Warrants).  The  Initial  Warrants  provided  that if the  Initial  Warrants were
exercised by March 31, 2005, we would issue to Tripower  Resources,  Inc. additional
warrants for the  purchase of 300,000  shares of common stock at the exercise  price of
$1.25 per share that would expire on June 30,  2006. The exercise price of the Warrants
was set in June 2004,  when our stock was trading at  approximately  $0.93  per share
and,  therefore,  we considered the transaction to be "above market."  Tripower
assigned the Warrants to  John and Susan Gibbs.

(b) No
underwriter,  placement  agent,  or  finder  was  involved  in the  transaction.  There
were  only the two  accredited investors named in paragraph (a), above.

(c) The total
offering price was $375,000 which was paid in cash. No  underwriting  discounts or
commissions  were  paid.  There was no placement agent or underwriter for the current
transaction or the prior  transactions  related  to the Initial Warrants, and we did not
publicly offer any securities.

(d) We relied
on the exemption  from  registration  provided by Sections 4(2) and 4(6) under the
Securities Act of  1933 for this  transaction  and  Regulation D for the  issuances.  We
did not engage in any public  advertising  or  general  solicitation  in  connection
with  this  transaction,  and we  provided  the  accredited  investors  with  disclosure
of all aspects of our business,  including  providing the  accredited  investors  with
our reports filed  with the Securities and Exchange  Commission,  our press  releases,
access to our auditors,  and other  financial,  business,  and  corporate  information.
Based on our  investigation,  we  believe  that the  accredited  investors  obtained all
information  regarding Aspen  Exploration it requested,  received answers to all
questions it (and its  advisors) posed, and otherwise understood the risks of accepting
our securities for investment purposes.

(e) The common
stock issued to the accredited  investors is not convertible or exchangeable  for other
securities.  There are no  registration rights associated with the securities issued to
the accredited investor.

(f) We will use
the proceeds for working  capital,  as well as expenses of drilling and (if  warranted)
completing  oil and gas wells.

27



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On
April 13, 2006,  the board of directors  approved the issuance of 18,000  shares of
restricted  common  stock to CEOcast,  Inc.  as partial  consideration  for  consulting
services to be provided  over a six month term  being  performed  pursuant  to a
consulting  agreement  dated  April  13,  2006.  The  following  sets  forth  the
information required by Item 701 in connection with that transaction:

(a)  The
issuance was completed on May 8, 2006 for 18,000 shares of our restricted common stock.

(b)  There was
no placement agent or underwriter for the transaction.

(c)  The
shares  were not sold for cash.  The shares of common  stock were  issued in  exchange
for  services  pursuant to a consulting agreement.

(d)  We relied
on the exemption from  registration  provided by Sections 4(2) and 4(6) under the
Securities Act  of  1933  and  Regulation  D for  the  issuance  of the  shares.  In
addition,  we did not  engage  in any  public  advertising  or general  solicitation  in
connection  with this  transaction;  and we provided the  investor  with  disclosure  of
all aspects of our  business,  including  providing  the  investor  with our reports
filed with the  Securities and Exchange  Commission,  our press releases,  access to our
auditors,  and other financial,  business,  and  corporate  information.  Based on our
investigation,  we believe that the investor  obtained all  information  regarding Aspen
Exploration it requested,  received  answers to all questions it posed,  and otherwise
understood  the risks of accepting our securities for investment purposes.

(e)  The common
stock  issued in this  transaction  is not  convertible  or  exchangeable.  Aspen
Exploration  granted piggyback registration rights to CEOcast, Inc.

(f)  We
received no cash proceeds from the issuance of the shares of common stock.

Item 3.   Defaults Upon Senior Securities.

None.

Item 4.   Submission of Matters to a Vote of Security Holders.

No
matter was  submitted  during the first  quarter of the fiscal year covered by this
report to a vote of  security holders, through the solicitation of proxies or otherwise.

Item 5.   Other
Information.

None.

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Item 6.   
Exhibits.

|31. |  | Rule
13a-14(a) Certification
|--- |  | ----------------------------

|32. |  | Section
1350 Certification
|--- |  | --------------------------

In
accordance  with the  requirements  of the  Securities  Exchange Act of 1934, we have
duly caused this  report to be signed on our behalf by the undersigned, thereunto duly
authorized.

May 15, 2006

| | ASPEN
EXPLORATION CORPORATION
| | -----------------------------

| | /s/   
Robert A. Cohan By:  Robert A. Cohan,Chief Executive Officer,Principal Financial Officer
| | -----------------------------------------------------------------------------------------------

29