Galaxy Energy Corp - Amended Annual Report (10-K/A)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

:	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended November 30, 2006

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

For the transition period from _______________ to ________________

Commission file number: 1-32682

GALAXY ENERGY CORPORATION

(Name of registrant as specified in its charter)

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

1331 – 17th Street, Suite 730, Denver, Colorado 80202

(Address of principal executive offices) (Zip Code)

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

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 9 Yes : No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 9 Yes : No

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

: Yes 9 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 9

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

Large accelerated filer 9 Accelerated filer 9 Non-accelerated filer :

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 9 Yes : No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $48,095,185.60 as of May 31, 2006

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 83,661,968 as of January 31, 2007

Documents incorporated by reference: None

EXPLANATORY NOTE

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

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

GLOSSARY

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

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

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

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

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

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

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

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

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

Farm-in or farm-out. An agreement under which the owner of a working interest in a natural gas and oil lease assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the

acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “farm-in” while the interest transferred by the assignor is a “farm-out.”

Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.

Mcf . Thousand cubic feet.

Mmcf . Million cubic feet

Net acres or net wells. The sum of the fractional working interest owned in gross acres or wells, as the case may be.

Operator . The individual or company responsible for the exploration, development, and production of an oil or gas well or lease.

Overriding royalty. A revenue interest in oil and gas, created out of a working interest which entitles the owner to a share of the proceeds from gross production, free of any operating or production costs.

Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the production exceed production expenses and taxes.

Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and also preliminary economic analysis using reasonably anticipated prices and costs, is deemed to have potential for the discovery of commercial hydrocarbons.

Reservoir . A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

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

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

Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties.

PART I

ITEM 1. BUSINESS.

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

The Piceance Basin of western Colorado . We are in the process of drilling our first wells in the basin. Our leasehold locations are located in close proximity to natural gas pipelines and the roads needed for efficient development. As of March 1, 2007 we had interests in three producing wells and five wells in various stages of completion in the basin. During 2006 we drilled, as operator, four wells in the basin, one of which has been completed and is awaiting a pipeline connection, one of which has been partially completed, one on which completion work has not been commenced, and one of which was abandoned after encountering technical difficulties during the drilling phase. Each of the four operated wells was drilled in accordance with a participation agreement with our partner, Exxel Energy Corp.(“Exxel”), a related party, under which Exxel paid the first $14 million of operational expenditures and paid us a management fee for operating the project. In August 2006 Exxel reached the $14 million expenditure point and we began to pay our proportionate 25% share of costs incurred thereafter.

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

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

Neues Bergland Exploration Permit in Germany . This is a 149,000-acre leaseholding near Kusel, in southwest Germany. Drilling on the first test well on the property reached total depth in late January 2006. Production casing was set, and testing operations were conducted from several zones of interest in the well. Based on results obtained, the joint venture group decided to plug and abandon this first well and undertake a seismic program to help identify priority areas on the prospect for further drilling. Our interest in this project could drop to 24%, depending upon the outcome of the future drilling program.

Jiu Valley of Romania . This is a 21,500-acre coal bed methane project. The initial test well in this project finished drilling in September 2005. The core analyses and preliminary desorption measurements in the field indicated the potential presence of coal bed methane in multiple horizons, but gave no indication at the time of the potential gas production rates or recoverable reserves to be expected. Based on gas shows during the drilling of the well and the core information, the partners in the project determined to commence completion and testing operations. A fracture stimulation treatment has been completed in the lower zones penetrated, and testing for potential gas production is underway. Our partner in this play is Falcon Oil & Gas Ltd., a related party.

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

Corporate Background

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

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

Piceance Basin

The Piceance Basin is located in northwestern Colorado. This 6,000-square mile, basin straddles Interstate 70 in Garfield and Mesa counties and extends northward into Rio Blanco county and south into Gunnison and Delta counties. The Piceance is a basin-centered gas play that may contain as much as 200 to 300-plus trillion cubic feet of gas resource in place according to a report published in Oil and Gas Investor in August 2005. It should be noted, however, that these volume estimates are much less reliable than if they were proved reserves. The primary focus of the companies drilling in the basin is a 1,700 to 2,400-foot thick, gas-bearing section in the Williams Fork section of the Mesaverde formation. This section usually occurs at depths ranging from 4,500 to 8,500 feet in the basin. There are also other Mesaverde sandstone layers below the Williams Fork, which range down to about 9,000 feet that are productive in the basin.

We entered the Piceance Basin in March of 2005. In conjunction with Exxel Energy Corp., a related party, which is our partner in the project, as of March 1, 2007 we controlled approximately 6,000 net acres (1,500 net to Galaxy) in the Piceance Basin. Under our agreement with Exxel, we will hold 25% of the available working interest in the wells that we drill in the basin, and Exxel will hold the remaining 75% of available working interest. We currently have gas production and sales from the Clough RWF 14-13, a well drilled and operated by an unrelated oil and gas company, in which we acquired a 5.66% working interest after the well was drilled and completed, and from two additional wells in which we participated for a 0.33203% working interest, Trant 32A & 42A, drilled and operated by another unrelated oil and gas company. We also participated for an 8.33% working interest in a well, operated by a third unrelated oil and gas company, which has been completed and is pending further operations and availability of a gas sales pipeline. In addition, we have completed, along with our partner Exxel, drilling four new wells and commencing four more as part of a planned continuous drilling program in the basin. We own a 25% working interest in each of these new wells.

Powder River Basin and Coal Bed Methane

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

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

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

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

Our Wyoming properties in the Powder River Basin consist of about 43,600 net acres in four project areas in Sheridan, Johnson and Campbell counties, plus working interests in a total of 212 coal bed methane wells in various stages of completion and production and 8 water disposal wells. All leases were acquired and all wells were either acquired or drilled by us in the period from December 2003 through November 2006.

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

Proposed Sale to PetroHunter Energy Corporation

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

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

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

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

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

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

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

Germany

We, through our wholly-owned subsidiary, Pannonian International, hold a 30% working interest in the 149,000-acre Neues Bergland Exploration Permit near Kusel, Germany. Pannonian is the operator of a four-company joint venture group and will act as the operator for the first three wells in phases 1 and 2. Drilling on the first test well on the property reached total depth in late January 2006. Production casing was set, and testing operations were conducted from several zones of interest in the well. Based on results obtained, the joint venture group decided to plug and abandon this first well and undertake a seismic program to help identify priority areas on the prospect for further drilling. Our interest in this project could drop to 24%, depending upon the outcome of the future drilling program.

Romania

We, through our wholly-owned subsidiary, Pannonian International, hold a 25% working interest in a concession in the Jiu Valley Coal Basin in Romania, which was obtained by Pannonian prior to our acquisition of that company in 2003. Of the total concession area, 13,715 acres are underlain by total coal bed thicknesses greater than 5 meters and are currently considered to be prospective for coal bed methane. The prospective acreage contains up to 18 coal seams with a cumulative thickness up to 50 meters at depths of 300 to 1,000 meters and the main target seam averages 22 meters in thickness. The first test well on the property has been completed. The core analyses and preliminary desorption measurements in the field indicated the potential presence of coal bed methane in multiple horizons, but gave no indication at the time of the potential gas production rates or recoverable reserves to be expected. Based on gas shows during the drilling of the well and the core information, the partners in the project determined to commence completion and testing operations. A fracture stimulation treatment has been completed in the lower zones penetrated, and testing for potential gas production is underway. Our partner in the project is Falcon Oil & Gas Ltd., a related party.

Exploration and Acquisition Capital Expenditures

During the fiscal years ended November 30, 2006, 2005 and 2004, we incurred $4,145,611, $18,164,329, and $34,029,772, respectively, in identifying and acquiring petroleum and natural gas leases and prospect rights, and for exploration costs.

Principal Product s

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

Competition

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

Compliance with Governmental Regulations

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

United States Regulation. In the United States, legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, numerous federal, state and local departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Such laws and regulations have a significant impact on oil and gas drilling, gas processing plants and production activities, increase the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws and regulations.

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

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

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

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

International Regulation. The oil and gas industry is subject to various types of regulation throughout the world. Legislation affecting the oil and gas industry has been pervasive and is under constant review for amendment or expansion. Pursuant to such legislation, government agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to

comply. Such laws and regulations have a significant impact on oil and gas drilling and production activities, increase the cost of doing business and, consequently, affect profitability. Inasmuch as new legislation affecting the oil and gas industry is commonplace and existing laws and regulations are frequently amended or reinterpreted, we are unable to predict the future cost or impact of complying with such laws and regulations. The following are significant areas of regulation.

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

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

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

Employees

As of November 30, 2006, we had a total of seven full time employees and one part-time employee. None of our employees is covered by a collective bargaining agreement.

ITEM 1A. RISK FACTORS.

We have a limited operating history and have generated only very limited revenues. We have incurred significant losses and will continue to incur losses for the foreseeable future. The report on our financial statements contains a paragraph relating to our ability to continue as a going concern.

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

The report of our independent registered public accounting firm on the financial statements for the year ended November 30, 2006, includes an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern. From inception to November 30, 2006, we have an accumulated deficit of $63,699,517. For the 2007 fiscal year, while we do expect increasing operating cash flow, we do not expect our operations to generate sufficient cash flows to provide working capital for our ongoing overhead, the funding of our lease acquisitions, and the exploration and development of our properties. Without adequate financing, we may not be able to successfully develop any prospects that we have or acquire and we may not achieve profitability from operations in the near future or at all.

Our short-term cash commitments require us to sell a significant portion of our assets, which leaves us with fewer assets to develop for our future growth.

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

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

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

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

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

As of November 30, 2006, we had established very limited production of natural gas from a limited number of wells, and limited proved reserves. We propose to sell most of these wells to PetroHunter, a related party. While we expect production to commence from our Piceance basin wells during 2007, until that actually occurs it will be difficult for us to raise the amount of capital needed to fully exploit the production potential of our properties. Therefore, we may have to raise capital on terms less favorable than we would desire. This may result in increased dilution to existing stockholders.

The volatility of natural gas and oil prices could have a material adverse effect on our business.

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

Terms of subsequent financings may adversely impact your investment.

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

As an example of the foregoing, the purchasers of convertible notes issued in May 2005 negotiated a perpetual overriding royalty interest with respect to our existing domestic acreage averaging from 1% to 3%,

depending upon the nature and location of the property. This overriding royalty interest continues after the repayment of the notes. The note holders also retain, a right of first refusal with respect to future debt and/or equity financings, and a right to participate in any farm-out financing transactions that do not have operating obligations by the financing party as a material component. The grant of the overriding royalty interest reduces somewhat the value of the properties to us, thereby negatively impacting your investment. The existence of a right of first refusal to participate in future financings may place some limitation on our ability to negotiate the best possible terms for such financings or may deter others from offering financing to us.

The development of oil and gas properties involves substantial risks that may result in a total loss of investment.

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

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

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

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

If we are not the operator of our wells, we will have little or no control over the project.

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

·	the timing of the drilling and recompleting of wells;

·	the timing and amounts of production; and

·	the development and operating costs.

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

We may incur losses as a result of title deficiencies in the properties in which we invest.

It is our practice in acquiring oil and gas leases or undivided interests in oil and gas leases not to undergo the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease. Rather, we will rely upon the judgment of oil and gas lease brokers or landsmen who perform the field work in examining records in the appropriate governmental office before attempting to place under lease a specific mineral interest. This practice is widely followed in the oil and gas industry. Prior to the drilling of an oil and gas well, however, it is the normal practice in the oil and gas industry for the person or company acting as the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed oil and gas well is to be drilled to ensure there are no obvious deficiencies in title to the well; however, neither we nor the person or company acting as operator of the well will obtain counsel to examine title to such spacing unit until the

well is about to go into production. It frequently happens, as a result of such examinations, that certain curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense. The work might include obtaining affidavits of heirship or causing an estate to be administered. It does happen, from time to time, that the examination made by the title lawyers reveals that the oil and gas lease or leases are worthless, having been purchased in error from a person who is not the owner of the mineral interest desired. In such instances, the amount paid for such oil and gas lease or leases is generally lost.

We are subject to environmental regulations that can adversely affect the timing and cost of our operations.

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

We are subject to governmental regulations that may adversely affect the cost of our operations.

Oil and gas exploration, development and production are subject to various types of regulation by local, state and federal agencies. Legislation affecting the oil and gas industry is under constant review for amendment and expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. The regulatory burden on the oil and gas industry increases our cost of doing business and, consequently, affects our profitability. The possibility exists that laws and regulations enacted in the future will adversely affect the oil and gas industry. Such new legislation or regulations could drive up the cost of doing business to the point where our projects would not be economically feasible.

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

Our competitors may have greater resources that could enable them to pay a higher price for properties.

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

Marc A. Bruner and his affiliates control a significant percentage of our outstanding common stock, which will enable them to control many significant corporate actions and may prevent a change in control that would otherwise be beneficial to our stockholders.

Through shares owned individually and by Resource Venture Management and Bruner Group, LLP, Marc A. Bruner beneficially owned approximately 14.1% of our stock as of January 19, 2007. In addition, he is the father of our president, Marc E. Bruner. This control by Marc A. Bruner could have a substantial impact on matters requiring the vote of the stockholders, including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our

control, even if these actions would benefit our stockholders and us. This control could adversely affect the voting and other rights of our other stockholders and could depress the market price of our common stock.

Our future operating results may fluctuate and cause the price of our common stock to decline, which could result in substantial losses for investors.

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

·	worldwide or regional demand for energy;

·	domestic and foreign supply of natural gas and oil;

·	weather conditions;

·	domestic and foreign governmental regulations;

·	political conditions in natural gas or oil producing regions;

·	price and availability of alternative fuels;

·	availability and cost of drilling equipment;

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

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

·	general economic conditions and economic conditions specific to the energy sector.

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

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

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

We issued convertible notes in 2004 that have an outstanding principal balance of $4.2 million at November 30, 2006. We also issued $7.695 million in notes in March 2005 and $10.0 million in notes in May 2005. These notes are convertible into shares of our common stock at any time prior to their respective maturity dates at a current conversion price of $1.25, subject to adjustments for stock splits, stock dividends, stock combinations, and other similar transactions. The initial conversion prices of these notes were $1.87 and $1.88. The conversion prices of the convertible notes could be further lowered, perhaps substantially, in a variety of circumstances, including:

·	our issuance of common stock below the convertible notes’ conversion prices, either directly or in connection with the issuance of securities that are convertible into, or exercisable for, shares of our common stock;

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

·	our breaching other obligations to the holders of the convertible notes.

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

In addition to the convertible debt, we issued to the holders of convertible notes in August 2004 three-year warrants that currently entitle the warrant holders to purchase an aggregate of 6,400,001 shares of our common stock at an exercise price of $1.25 per share. As originally issued, these warrants were exercisable at $1.54 per share to purchase a total of 5,194,806 shares. We also issued three-year warrants to the holders of convertible notes in March 2005 to purchase an aggregate of 1,637,235 shares of our common stock at an exercise price of $1.88 per share. The exercise price of these warrants has been lowered to $1.25 per share. Lastly, we issued five-year warrants to the holders of convertible debentures in April and June 2006 to purchase an aggregate of 1,346,152 shares of our common stock at an exercise price of $1.60 per share. Both the number of warrants and the exercise price are subject to adjustments that could make them further dilutive to our shareholders. In addition, the warrants issued in August 2004 and the notes issued in May 2005 provide for the issuance of additional warrants under certain circumstances.

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

Our failure to satisfy our registration, listing, and other obligations with respect to the common stock underlying the convertible notes and the warrants could result in adverse consequences, including acceleration of the convertible notes.

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

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

·	the number of shares of our common stock issuable upon conversion, multiplied by the weighted average price of our common stock on the trading day immediately preceding our registration or listing default.

We are obligated to make significant periodic payments of principal and interest under our convertible notes.

We have a material amount of indebtedness outstanding under the convertible notes. We are required to make monthly principal payments of $625,000 and accrued interest under the terms of the August 2004 financing, as well as quarterly payments of accrued interest under the terms of the May 2005 financing. We may make the payments in stock, subject to meeting certain conditions. If we at any time default on our payment obligations the creditors will have all rights available under the instrument, including acceleration, termination, and enforcement of security interests. Such security interests cover all of our assets and those of our subsidiaries.

Future equity transactions, including exercise of options or warrants, could result in dilution.

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

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

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

Our officers, directors, and advisors are engaged in other businesses, which may result in conflicts of interest. Further, we have engaged in several related party transactions.

Certain of our officers, directors, and advisors also serve as directors of other companies or have significant shareholdings in other companies. For example, Marc A. Bruner, our largest shareholder, serves as the chairman of the board of Gasco Energy, Inc., a Nevada corporation whose stock is traded on the American Stock Exchange, and chairman of the board, president and chief executive officer of Falcon Oil & Gas Ltd., a British Columbia corporation whose stock is traded on the TSX Venture Exchange (“Falcon”). He is also the controlling shareholder of PetroHunter Energy Corporation, a Maryland corporation whose stock is traded on the OTC Bulletin Board (“PetroHunter”), and a significant shareholder of Exxel Energy Corp., a British Columbia corporation (“Exxel”), whose stock is traded on the TSX Venture Exchange. Marc A. Bruner is the father of our President, Marc E. Bruner. James Edwards, one of our directors, is the chief operating officer of Falcon.

To the extent that such other companies participate in ventures in which we may participate, or compete for prospects or financial resources with us, these officers and directors will have a conflict of interest in negotiating and concluding terms relating to the extent of such participation. In the event that such a conflict of interest arises at a meeting of the board of directors, a director who has such a conflict must disclose the nature and extent of his interest to the board of directors and abstain from voting for or against the approval of such participation or such terms.

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

In March 2005, Mr. Bruner assigned all of his rights and obligations under our participation agreement to Exxel. As of August 2, 2006, Mr. Bruner owned approximately 18.5% of the outstanding common stock of Exxel Energy. Our participation agreement with Exxel Energy, as amended, establishes our working interest at 25%, with Exxel having a 75% interest.

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

Oil and Gas Assets

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

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

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

Jointly, we and Exxel had an obligation under the agreement with the Sellers to commence drilling one well by December 31, 2005, which obligation was met, and we were required to commence nine additional wells by August 22, 2006. As of this date, all of these requirements have been satisfactorily met.

Sellers have reserved in the assignments of the leases either a reserved production payment or a reserved overriding royalty interest, each equal to the difference between 20% and existing burdens, but never less than 2%. At project payout, Sellers were to be vested with an undivided 12½% of our interest in the leases. Exxel and Galaxy have agreed to purchase a portion of this back-in working interest from Sellers so that it will be reduced from 12 1/2% to 10%. Our share of the purchase price will be $325,000, which will be paid, in four monthly installments of $81,250 on the first business day of each month commencing April 2, 2007.

Powder River Basin – Wyoming (Glasgow and West Recluse) . This project consists of approximately 4,250 net acres of oil and gas leases in Campbell and Converse counties on the eastern side of the Powder River

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

Powder River Basin – Wyoming (Buffalo Run, Pipeline Ridge, Horse Hill and Dutch Creek) . This property is located approximately 12 miles southeast of Sheridan, Wyoming, and is divided into four CBM exploration projects: Buffalo Run, Pipeline Ridge, Horse Hill, and Dutch Creek. The project area contains up to eight separate coals, ranging in depth from 150 feet to 1,800 feet. Coal thickness ranges from 20 feet to 70 feet, generally thinning with depth. We estimate that full development of this project area would include the drilling of up to 250 wells, with up to four coal zone completions per well.

The four projects are in the early implementation stages with 104 wells drilled to various depths as of March 1, 2007. Of these 67 have been completed and approximately three-fourths of those have gas pressures at the wellhead while the remaining wells all had significant gas shows during drilling and completion operations. While these outcomes indicate that these wells may become productive, only a portion of these wells has been stimulated and placed on production. Contracts for electrical power supply were executed and construction is complete in the Pipeline Ridge area. As of March 1, 2007, 32 production wells and 6 water disposal wells have been drilled and completed in the Pipeline Ridge area. Five additional wells have been started with only surface casing in place. Installation of a compressor station to handle gas sales into the adjacent Bighorn pipeline has been completed. The production wells are continuing to dewater. At the current stage of dewatering, minor amounts of gas are being produced by every well; but the gas production is insufficient for sales into the pipeline. Additional water handling facilities are being developed to handle the water that is currently being produced in this field. Managed irrigation on 40 acres was implemented on September 12, 2006. In addition, the cost of dewatering the production wells is approximately $87,000 per month. An unrelated oil and gas company has drilled and completed over 200 wells in the vicinity of Pipeline Ridge and is finalizing a water management program to enable full-scale production. Once it begins pumping from its wells, our effective dewatering program will be greatly enhanced, which we believe will accelerate the time to gas sales.

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

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

As of March 1, 2007, these two areas contained 42 completed wells, 5 wells that are partly completed and 2 water disposal wells. Construction of gathering systems for both areas, together with field facilities for the Leiter wells, were completed during 2005 and dewatering of a number of the Leiter wells was begun. However, the amount of water produced from the wells was sufficient to overwhelm the installed water handling capabilities, and the wells were taken off production until additional water handling facilities that are being developed allow dewatering to recommence. We estimate that the cost to add the new water handling facilities at the Leiter Field

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

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

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

Ucross Field . No existing wells were present on this property. As such, we ran mudlogs on several initial wells in this field, and confirmed that the Cook, Wall, and Pawnee coals had the highest gas contents. Based on these initial wells, we drilled a total of 29 wells through the Pawnee coal at Ucross and completed eight wells as perforated completions in the Cook coal and eight wells as co-mingled perforated completions in the Cook and Wall coals, and eight wells as perforated completions in the Wall coal. Five wells remain to be perforated, and these operations are underway with completion schedule before April 1, 2007.

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

Water management at Ucross has delayed the start of production. The Wyoming Department of Environmental Quality put a hold on issuing any discharge permits pending completion of a hydrologic basin watershed study. The study has been completed, but no ruling has been issued, and we have drafted a comprehensive water management plan that includes surface and subsurface storage, evaporation, managed irrigation, and treatment/discharge.

Powder River Basin – Wyoming (Beaver Creek) . This project consists of various non-operated working interests in approximately 24,400 net acres adjacent to, and in the vicinity of, the Leiter Buffalo Run, Pipeline Ridge, Horse Hill, and Dutch Creek acreage. This project is also in the early implementation stage with 22 wells in which we have participation drilled to various depths as of March 1, 2007. Of these, seven have been completed, but are not yet connected to a gathering system. The operator is developing plans to include these 22 wells in expanded production pilot projects, which are then expected to be followed by full development of the related areas. We do not currently have the financial resources to develop this property.

Powder River Basin – Montana This project consists of 12.5% and 25% non-operated working interests in certain oil and gas leases covering approximately 173,600 gross acres in the Powder River Basin area of Montana

The primary geologic target associated in the acreage is natural gas from shallow coal beds located at depths of 200 feet to 2,500 feet. Multiple coal seams are present in this prospect area, with a total coal thickness of approximately 100 feet. There are several surface structures and faults in the prospect area that were mapped by the U.S. Geological Survey and the Montana Bureau of Mines. We expect these structural features to enhance the CBM

gas production. Data used in defining the prospect area was taken from these agencies, as well as information from abandoned deeper oil and gas wells drilled in the area. CBM gas production has been established approximately six miles south of the area where cumulative production to date is about 20 billion cubic feet of natural gas.

This acreage is divided into two projects: the Kirby prospect and the Castle Rock prospect. We are currently participating in the first phase of a planned development for the Kirby Area. Operations are underway for dewatering an initial 16-well pilot, and field facilities for these operations are in place and working. We also have interests in two test wells in the Castle Rock area. A decision concerning the further development of this area is being analyzed by the partners involved in the project. However, based upon the somewhat discouraging results of the initial test wells, a recent decision by two of the other non-operators to not pay delay rentals, and our lack of commitment to further development of this area without an improvement in its outlook, we have decided to impair the entire $2,070,547 carrying value of the Castle Rock prospect in the attached financial statements.

East Texas . We have paid-up leases covering approximately 1,560 undeveloped net acres in the vicinity of the Trawick Field, located in Rusk and Nacogdoches counties, Texas. Leases covering this acreage expire from June 2007 through December 2007. Discussions have been underway to farm out or sell these leases.

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

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

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

Pannonian has applied for a concession on an additional 120,000 acres in Romania known as the Anina Block. Such application is still pending as of March 15, 2007. If the concession is granted, Pannonian will have a 25% interest and Falcon will have a 75% interest. All of the costs related to the concession application are being borne by Falcon.

Neues Bergland - Germany . In December 2003, the 149,435-acre Neues Bergland Exploration Permit was granted for a three-year term to Pannonian International (50%) and two co-permittees (each with 25%). Both of the co-permittees are privately-held oil and gas companies that are not affiliated with us. In December 2006, we were granted a three-year extension on the Permit due to satisfactory completion of the 2005-2006 work program and based on future work commitments for subsequent years.

On March 15, 2005, Pannonian, together with its partners in the Glantal project in Germany, executed a farmout agreement covering the Neues Bergland Exploration Permit area with Empyrean Energy PLC, a publicly-traded, unaffiliated oil and gas company. Terms of the agreement called for Empyrean to initially earn a 40%

working interest in the permit, which could rise to 52% depending upon results of the project. Empyrean earned the 40% interest after paying $750,000 to Pannonian and the two co-permittees and providing evidence of deposits totaling 1.3 million euros which were set aside for drilling obligations on the project. As a result, our interest in the project has been reduced to 30%. Our interest in the project may drop to 24%, depending upon the outcome of the future drilling program.

Drilling on the first test well on the property reached total depth in late January 2006. Based upon the initial review of open hole logs from the well, several zones of interest existed and were subsequently tested through casing. Due to results obtained, the joint venture group decided to abandon this first well and undertake a seismic program to help identify priority areas on the Permit for further drilling.

Production and Prices

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

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

Productive Gas Wells

The following summarizes our productive and shut-in gas wells as of November 30, 2006. Producing wells are wells producing natural gas or water, a pre-cursor to natural gas production. Shut-in wells are completed wells that are capable of production but are currently not producing. Gross wells are the total number of wells in which we have a working interest. Net wells are the sum of our fractional working interests owned in the gross wells.

	Producing Gas Wells
	Gross	Net
Producing gas wells	71	53.58
Shut-in gas wells	99	91.18
Wells in various stages of completion and water disposal wells	75	64.05
Total	245	208.81

Estimated Proved Oil and Gas Reserves

We recognized our first proved reserves during the year ended November 30, 2005. The proved reserves are located in the Glasgow and West Recluse Prospects on the eastern side of the Powder River Basin and in one well in the Piceance Basin in northwestern Colorado. Gustavson Associates, LLC, an independent petroleum engineering firm, estimated proved reserves as summarized in the table below, in accordance with definitions and pricing requirements as prescribed by the Securities and Exchange Commission. Estimated values of proved reserves were computed using prices in effect at November 30, 2006 of $6.86/Mcf and $59.36/bbl. Due to the Company’s current liquidity issues, proved undeveloped reserves identified in the Gustavson Associates report have been excluded from the disclosures below.

Estimated proved reserves as on November 30, 2006:

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

Oil and Gas Acreage

The following table sets forth the undeveloped and developed leasehold acreage, by area, held by us as of November 30, 2006. Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. Developed acres are acres, which are spaced or assignable to productive wells. Gross acres are the total number of acres in which we have a working interest. Net acreage is obtained by multiplying gross acreage by our working interest percentage in the properties. The table does not include acreage in which we have a contractual right to acquire or to earn through drilling projects, or any other acreage for which we have not yet received leasehold assignments.

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

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

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

Drilling Activity

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

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

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

Total wells	9	4	23	6.2	135	119.4

Office Space

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

ITEM 3. LEGAL PROCEEDINGS.

None.

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

None.

PART II

ITEM 5.

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

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

AMEX

Fiscal Quarter Ending	High Bid	Low Bid
November 30, 2005 February 28, 2006 May 31, 2006 August 31, 2006 November 30, 2006	$1.30 $1.07 $0.90 $0.40 $0.28	$1.22 $1.01 $0.86 $0.36 $0.26

OTCBB

Fiscal Quarter Ending	High Bid	Low Bid
February 28, 2005 May 31, 2005 August 31, 2005	$1.79 $1.16 $1.06	$1.22 $1.13 $0.98

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

As of January 19, 2007, there were approximately 100 record holders of our common stock.

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

ITEM 6. SELECTED FINANCIAL DATA.

The table sets forth selected financial data, derived from the consolidated financial statements, regarding our financial position and results of operations as of the dates indicated.

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

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

ITEM 7.

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

Overview and Plan of Operation

We spent fiscal years 2003, 2004 and 2005 obtaining oil and gas properties in the Piceance Basin of Colorado and the Powder River Basin of Wyoming and Montana and obtaining the funding to pay for those properties, commence drilling operations and complete the infrastructure necessary to deliver natural gas to nearby pipelines. Most of this funding has been high-interest debt financing.

Our tasks now are to establish reserves on our properties and to place our properties into production. As of March 1, 2007, we had interests in 175 completed wells (22 of which were delivering natural gas into sales pipelines), 60 wells in various stages of completion and 8 water disposal wells. We recorded our first revenues from natural gas sales during the fiscal year ended November 30, 2004 and we currently are producing about 700 thousand cubic feet per day. As our first wells come online in the Piceance Basin over the next few months and as our coal bed methane wells continue to dewater and increase their production of natural gas, we expect to generate significantly more revenues during the current fiscal year. We anticipate that these revenues, while significantly larger than in fiscal 2005 and 2006, will not be sufficient to fund completely our planned operations, debt repayment and commitments.

At November 30, 2006, our working capital deficit was $19,868,880. As of December 1, 2006, we had contractual obligations due by November 30, 2007 totaling $24,328,706, as explained more fully below. To meet these obligations and working capital needs, we have entered into a Purchase and Sale Agreement (“PSA”) with PetroHunter a related party. Pursuant to the PSA, we agreed to sell all of our Powder River Basin Assets. The purchase price for the Powder River Basin Assets is $45 million, with $20 million to be paid in cash and $25 million to be paid in shares of PetroHunter common stock at the rate of $1.50 per share. If this sale is completed, we would pay off all of our convertible debt, leaving as our only outstanding debt the notes due to Bruner Family Trust, totaling $6,900,000 as of March 1, 2007 and a note purchased by Bruner Family Trust in the principal amount of $2,049,728 at November 30, 2006. We believe that we would then be able to continue to pursue funding and industry participation alternatives to ensure our ability to continue to acquire additional acreage and complete additional drilling activity in the Piceance Basin.

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

Going Concern

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

Liquidity and Capital Resources

Operating Activities. For the 2006 fiscal year, we used $6,077,480 for operating activities, as compared to $5,786,772 for fiscal 2005 and $4,259,586 for fiscal 2004. Among the larger adjustments to reconcile the net loss of $26,163,107 to net cash used by operating activities for fiscal 2006 was $10,611,349 for amortization of discount and deferred financing costs on convertible debt and $3,457,101 for finance costs incurred for the waiver of triggering event described below. In contrast, the adjustments for fiscal 2005 to the net loss of $23,985,645 included $3,695,884 for stock issued for interest, $4,870,043 for amortization of discount and deferred financing costs on convertible debt, $2,162,597 for write-off of discount and deferred financing costs upon conversion of convertible debt, and $5,273,795 for impairment of oil and gas properties. For fiscal 2004, we incurred a smaller net loss of $9,831,104, but also had smaller adjustments, the more significant of which included $2,085,491 for amortization of discount and deferred financing costs on convertible debt and $2,979,404 for write-off of discount and deferred financing costs upon extinguishment of convertible debt.

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

Financing Activities. Since inception, we have funded our operating and investing activities through the sale of our debt and equity securities, raising net proceeds of $70,179,037 through the period ended November 30, 2006. Financing activities provided cash of $7,788,967 in fiscal 2006, as compared to $15,742,472 and $32,946,190 in fiscal 2005 and 2004, respectively.

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

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

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

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

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

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

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

In addition, the 2005 Waiver and Amendment, among other things, effected the following changes:

·	Lowered the conversion price to $1.25 for conversions by the holders of the 2004 Notes, the May 2005 Notes, and the March 2005 Notes;

·	Lowered the exercise price of the 2004 Warrants and the 2005 Warrants to $1.25 per share and increased the aggregate number of shares purchasable under the 2004 Warrants from 5,194,806 to 6,400,002;

·	Caused the exercise price of warrants issued in December 2003 and January 2004 being lowered to $1.25 under the anti-dilution provisions of such warrants;

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

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

·	Extended any redemption or conversion of the 2004 Notes by Galaxy until June 22, 2006.

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

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

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

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

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

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

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

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

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

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

Schedule of Contractual Obligations

The following table summarizes our obligations and commitments to make future payments under our notes payable, operating leases, employment contracts and consulting agreement for the periods specified as of November 30, 2006.

Contractual obligations (1)	Payments due by period
Contractual obligations (1)	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Convertible Notes Payable (2) Principal Interest Notes payable and accrued interest	$31,355,505 12,224,215 7,932,158	$11,855,505 4,437,161 7,932,158	$7,000,000 6,502,466 --	12,500,000 1,284,589 --	-- -- --
Office and equipment leases	366,587	103,882	217,251	45,454	--
TOTAL	$51,878,465	$24,328,706	$13,719,717	$13,830,043

___________

(1)

This table excludes the costs of drilling obligations in our European permits. Together with our partners we have met certain of the preliminary obligations; however we have not determined that we will conduct those operations. In the event we do not fulfill those drilling obligations, we will forfeit a portion of the permit. We have excluded asset retirement obligations because we are not able to precisely predict the timing for these amounts.

(2)	Under certain conditions, as described elsewhere in this report, we have the option to pay the principal and interest with shares of common stock instead of cash. Interest payments were calculated using interest rates ranging from 15% to 15.5%.

Results of Operations

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

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

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

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

Stock based compensation expenses in 2006 include the effect of grant date fair value accounting of vested employee stock options in accordance with SFAS 123R adopted by us on December 1, 2005. The 2005 expense was calculated in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.

Salaries in 2006 showed a net decrease of $80,000 reflecting staff reductions in 2005 ($150,000) partially offset by the reclassification of an employee from consultant to full time employee ($70,000). In addition, relocation and temporary housing expenses decrease by approximately $30,000 in 2006 compared to 2005.

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

Professional and consulting fees in 2005 included $732,687 recorded as consulting fees representing the fair value of the overriding royalty interest assigned to a consultant. No such amount was recorded in 2006. The Company termination of the consulting agreement with the founder of the Company effective March 1, 2006 reducing consulting fees by $90,000 in 2006 compared to 2005 and lower. We also recorded lower consulting fees for professional engineering ($70,000) following the reclassification of a former consultant to employee, and geological consulting expenses ($40,000).

Increased investor relations costs reflect the utilization of additional shareholder relations professionals ($20,000) in 2006, the costs of the February 2006 special shareholders meeting ($25,000) and the higher costs of costs of preparing and distributing the 2006 annual report to shareholders (5,000) and increased stock exchange listing fees reflecting a greater number of shares issued in 2006 compared to 2005 ($20,000).

Lower legal fees in 2006 reflects our effort to reduce G&A overall ($30,000) less new venture activity in 2006 requiring legal advice, as compared to the 2005 period when we were negotiating new contracts and entering into new ventures in the Piceance Basin ($35,000), and Germany and Romania ($60,000).

·	Lower travel and entertainment costs in 2006 also reflect the reduction of new venture activity and less travel associated with new financing arrangements as compared to 2005 when we were in negotiations for two debt financings.

·	Lower office expenses in 2006 reflect the full year effect the closing of our Miami, Florida office in fiscal 2005 ($60,000), the closing of our Casper, Wyoming office in mid 2006 ($3,000) and reduced costs in our Denver office as a result of reduced staffing ($18,000).

·	Increased audit and accounting expenses in 2006 primarily reflect additional fees paid for outsourced accounting services ($50,000) necessary to accommodate the increase in oil and gas operational activity, together with higher audit fees required to review such activity.

·	Lower prospect generation, maintenance and presentation fees in 2006 reflect the fact we successfully marketed our German and Romanian projects in 2005 and had no such activity in 2006.

During the year ended November 30, 2006, we recorded a gain on the sale of oil and gas properties of $79,474, reflecting the excess of proceeds received on the farm-out of the Jiu Valley concession in Romania. In 2005, we recorded a gain on the sale of oil and gas properties of $197,676, reflecting the excess of proceeds to be received on the farm-out of the Neues Bergland Exploration Permit in Germany. Late in the year ended November 30, 2005, we began to record operating revenues associated with fees charged to joint venture partners for operating drilling programs. In 2005 we recorded a total of $43,472 of fees charged to a joint venture partner for operating the Neues Bergland drilling programs in Germany. No such operating revenues were recorded in 2006.

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

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

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

Significant year-to-year variances include:

·	Higher interest on outstanding debt in 2006 compared to 2005 reflects the full year effect of the March 2005 and May 2005 convertible notes issuances, coupled with higher interest rates on all debt in 2006.

Higher amortization of discount in 2006 reflects (I) the shorter amortization period for the 2004 Notes and March 2005 Notes following the extinguishment of existing debt and write-off of existing discount and the reissue of new debt and recording of new discount effective November 30, 2005; (ii) the full year effect of amortization of discount on the May 2005 Notes; and (iii) amortization of discount on the newly issued April 2006 and June 2006 Notes.

·	Lower amortization of discount in 2006 reflects reduced deferred finance cost balance to be amortized following the extinguishment of existing debt and write-off of existing deferred finance costs effective November 30, 2005.

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

·	Liquidated damages and extension - in 2005 we incurred $226,680 of liquidated damages for failure to timely register shares for resale. No such damages were incurred in 2006.

·	The write-off of unamortized discount and deferred finance costs as a result of the extinguishment of existing debt and the reissue of new debt was not was recorded in 2005. No such expense was incurred in 2006.

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

Year Ended November 30, 2005 Compared to Year Ended November 30, 2004 . During the year ended November 30, 2005, revenues from natural gas sales increased to $1,297,194 from $122,455 the year before. A total of 38 wells produced and sold 211,481 Mcf of natural gas in 2005, compared to 15 wells that sold 26,247 Mcf in 2004. Average prices received for gas sold increased to $6.13 in 2005 from $4.67 in 2004. Lease operating and production tax expenses also increased in 2005 to $965,069 or $4.56/Mcf, compared to $59,247 or $2.26/Mcf the year before. This increase reflects both an overall escalation of operating costs throughout the oilfield and the costs associated with remedial work undertaken in our producing fields to maintain and boost production. Depreciation, depletion and amortization expense (“DD&A”) of $1,887,074 in 2005 reflects a significant increase from the 2004 amount, $76,390. The increase is attributable primarily to DD&A on oil and gas properties increasing to $1,753,798 or $8.29/Mcf in 2005 compared to $47,944 or$1.83/Mcf in 2004. Our increased DD&A reflects a much higher amortization base in 2005 including over $5 million of costs associated with impaired properties transferred into the amortization base in 2005. We also recognized impairment of oil and gas properties of $5,273,795 representing the excess of capitalized costs over the ceiling as calculated in accordance with the full cost rules.

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

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

Significant year-to-year variances include:

·	Salaries and wages – Increase reflects the full year effect of staff and salary increases effective in mid-2004. Full time equivalent employee months increased from 67 in 2004 to 115 in 2005,

·	Professional and consulting fees - 2005 expense includes $732,687 recorded as consulting fees representing the fair value of the overriding royalty interest assigned to a consultant in 2005. We had no such costs in 2004.

·	Investor relations – Increase in 2005 compared to 2004 reflects the Company’s increasing efforts to attract and retain investor interest in the Company’s equity. The efforts included numerous presentations to the investment community and consulting contracts with investor relations specialists.

·	Office lease and expenses - 2005 increase reflects higher office rent expense for a portion of the year following the relocation to a larger space in mid 2005 and increased supply, communications and IT costs associated with the expansion of the operation during the year,

Audit and accounting expense - Increase in 2005 reflects increased audit requirements associated with higher level of operational activity, consulting costs associated with our Sarbanes-Oxley compliance readiness program and other technical accounting issues, and costs associated with accountants review of registration statements related to convertible notes offerings during the year

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

·	Prospect generation, maintenance and presentation – Increase in 2005 compared to 2004 primarily reflects additional efforts spend on preparing and marketing the Germany and Romania projects to industry partners.

·	Insurance and other – 2005 increase reflects higher director and officer insurance compared to 2004.

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

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

Interest and financing costs increased in 2005 to $10,082,155 from $6,352,100 in 2004 reflecting the full year effect of the 2004 Notes and the incremental effect of the March 2005 and May 2005 Notes including the amortization of related discount and deferred financing costs and the writeoff of unamortized discount and deferred financing costs upon issuance of new debt. The table below summarizes interest and financing costs for the years ended November 30, 2005 and 2004:

	2005	2004
Interest on outstanding debt	$ 3,811,005	$ 848,107
Amortization of discount	3,811,970	4,180,240
Amortization of deferred finance costs	1,058,072	884,703
Discount on shares issued upon conversion of principal and interest at below market rates	1,074,428	-
Liquidated damages on failure to timely register shares and fees paid to extend note	326,680	439,050
Writeoff of unamortized discount and deferred financing costs upon issuance of new debt	3,053,152
Total	$ 13,135,307	$ 6,352,100

Critical Accounting Policies and Estimates

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

Oil and Gas Properties

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

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

In applying the full cost method, we perform a ceiling test whereby the carrying value of oil and gas properties and production equipment, net of recorded future income taxes and the accumulated provision for site restoration and abandonment costs, is compared annually to an estimate of future net cash flow from the production of proven reserves. Costs related to undeveloped oil and gas properties are excluded from the ceiling tests. Discounted net cash flow, utilizing a 10% discount rate, is estimated using year end prices, less estimated future general and administrative expenses, financing costs and income taxes. Should this comparison indicate an excess carrying value, the excess is charged against earnings. For the years ended November 30, 2006 and 2005, we recognized impairment expense of $1,328,432 and $5,273,795, respectively, representing the excess of capitalized costs over the ceiling amount.

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

Asset Retirement Obligation

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

As of November 30, 2006, we had, through acquisition and drilling, acquired working interests in 249 natural gas wells. A limited number of these wells had initial gas production during the period, and the others were in various stages of completion and hook up at November 30, 2006. We adopted the provisions of SFAS 143 to record the ARO associated with all wells in which we own an interest on the date such obligation arose. Depreciation of the related asset, and accretion of the ARO on wells from which production has commenced, has been calculated using our estimate of the life of the wells, based upon the lives of comparable wells in the area. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.

Impairment of long-lived assets

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

Stock based compensation

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

Recent Accounting Pronouncements

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

Recent Accounting Pronouncements

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

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

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

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

Off Balance Sheet Arrangements

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See pages beginning with page F-1.

ITEM 9.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES.

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

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

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Our executive officers and directors are:

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

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

Marc E. Bruner, President and Director

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

Christopher Hardesty, Senior Vice President, Chief Financial Officer, Secretary and Treasurer

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

Cecil D. Gritz, Chief Operating Officer and Director

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

Inc., Denver, Colorado, from July 1977 to September 1982, and the drilling and production manager for Trend Exploration Limited, Denver, Colorado, from September 1982 to September 1986. As an in-house full-time consultant, he provided services as a petroleum engineer and project manager for David Schlachter Oil & Gas, an independent oil and gas company based in Dallas, Texas, from September 1986 to March 1988. He was vice president of operations for Dantex Oil & Gas, Inc., Dallas, Texas, from March 1988 to August 1993. Mr. Gritz has been a manager and consulting petroleum engineer for Harbor Petroleum, LLC in Granbury, Texas, since August 1993. He was also a 50% owner of that company, which is no longer active. Mr. Gritz devotes all of his working time to the business of Galaxy.

Richard E. Kurtenbach, Vice President – Administration and Controller

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

Nathan C. Collins, Director

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

Dr. James M. Edwards, Director

Dr. James M. Edwards became a director upon the acquisition of Dolphin in November 2002. He has been actively involved in international oil and gas exploration and exploitation for more than 27 years. He has participated in oil and gas discoveries in Australia, Columbia, Equatorial Guinea, France, Norway, Trinidad, Thailand, the United Kingdom, and the United States. Dr. Edwards previously worked as chief geologist for Triton Energy Corporation. While with Triton, he participated in the discovery efforts of the Cusiana/Cupiagua Field Complex, Columbia. Since June 1991, he has been the president of Equinox Energy Corp., an oil and gas consulting company located in Dallas, Texas. Dr. Edwards holds advanced degrees in geology, including a Master of Science from the University of Georgia and a Ph.D. from Rice University. Dr. Edwards has been the chief operating officer of Falcon Oil & Gas Ltd., a related party, since June 2006.

Robert Thomas Fetters, Jr., Director

Robert Thomas Fetters, Jr. became a director in March 2004. He began his career in the oil and gas industry in 1966 when he joined Exxon, USA (then known as Humble Oil and Refining). He served in various capacities including exploration, production, and research management and as exploration planning manager. Internationally, he held positions as chief geologist for Esso Production Malaysia and exploration manager for Esso Australia. In 1983, Mr. Fetters joined Consolidated Natural Gas, serving as the president and CEO of its subsidiary, CNG Producing Company, from 1984 to 1989. From 1990 to 1995, he was the president of exploration and production for the Exploration Company of Louisiana, and from 1995 to 1997, he was the senior vice president of

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

Ronald P. Trout, Director

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

Conflicts of Interest

Members of our management are associated with other firms involved in a range of business activities. Consequently, there are potential inherent conflicts of interest in their acting as officers and directors of our company. While the officers and directors are engaged in other business activities, we anticipate that such activities will not interfere in any significant fashion with the affairs of our business.

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

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

Committees of the Board of Directors

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

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

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

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

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

Director Nomination Process

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

Code of Ethics

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

Section 16(a) Beneficial Ownership Reporting Compliance.

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

Based solely upon a review of the copies of such forms furnished to us, or written representations that no Form 5 filings were required, we believe that during the fiscal year ended November 30, 2006, there was compliance with all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth information about the remuneration of our chief executive officers and each of our next highly compensated executive officers whose total annual salary and bonus exceeded $100,000, for services rendered during the years ended November 30, 2006, 2005 and 2004.

SUMMARY COMPENSATION TABLE

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

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

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

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

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

Name	Shares Acquired on Exercise ($)	Value Realized ($)	Number of Securities Underlying Unexercised Options/SARs at FY-End (#) Exercisable/Unexercisable	Value of Unexercised In- the-Money Options/SARs at FY-End ($) Exercisable/Unexercisable
Marc E. Bruner	-0-	-0-	452,500/397,500	-0-/-0-
Cecil Gritz	-0-	-0-	383,750/341,250	-0-/-0-
Christopher Hardesty	-0-	-0-	120,000/180,000	-0-/-0-
Richard Kurtenbach	-0-	-0-	236,250/213,750	-0-/-0-

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

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

Compensation Committee Interlocks and Insider Participation

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

Report of the Compensation Committee of the Company

The Compensation Committee of the board of directors is responsible for setting and administering the policies that govern the annual compensation and the long-term compensation for our executive officers. The Compensation Committee for the year ended November 30, 2006 was composed of Messrs. Edwards, Fetters, Collins, and Trout none of whom is employed by the company or any of its subsidiaries. The Compensation Committee makes all decisions concerning the compensation of executive officers who receive annual compensation in excess of $100,000, determines the total amount of bonuses, if any, to be paid and grants all awards of stock options. The Compensation Committee’s compensation practices are designed to attract, motivate and retain key personnel by recognizing individual contributions, as well as the overall performance of the company. The current executive compensation consists of base salary, potential cash bonus awards and long-term incentive opportunities in the form of stock options. Although the Compensation Committee has not adopted a formal compensation plan, executive compensation is reviewed by the Compensation Committee and is set for individual executive officers based on subjective evaluations of each individual’s performance, the company’s performance, and a comparison to salary ranges for similar positions in other companies within the oil and gas industry. The goal of the Compensation Committee is to ensure that the company retains qualified executives and whose financial interests are aligned with those of the shareholders.

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

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

Stock Options . The Compensation Committee utilizes stock option awards as a method of aligning the executives’ interests with those of the stockholders by giving the key employees a direct stake in the performance of the company. The Compensation Committee uses the same criteria described above to determine the level of stock option awards. During fiscal 2006, 2005 and 2004, the Company granted common stock options to the Company’s employees, consultants and directors in the amounts of 240,000, 975,000 and 3,500,000, respectively. In April 2004, 60,000 of the 2004 options were relinquished.

Compensation of the Chief Executive Officer. During the year ended November 30, 2006, Marc E. Bruner, President and Chief Executive Officer received total compensation of $120,000 in salary and no cash bonus. The Compensation Committee considered the factors described above to determine that the compensation paid to Mr. Bruner during 2006 was appropriate. The foregoing report is made by the Compensation Committee of the company’s board of directors.

Performance Chart

The following chart shows the changes in the value of $100, over the period of November 2002, when the company began trading, until November 30, 2006, invested in: (1) Galaxy Energy Corporation; (2) the NASDAQ Market Index; and (3) a peer group consisting of the 28 publicly-held companies in the S&P Small Cap Energy Index. The year-end value of each investment is based on share price appreciation and assumes that $100 was invested on November 30, 2002 and that all dividends were reinvested. Calculations exclude trading commissions

and taxes. The comparison of past performance in the graph is required by the SEC and is not intended to forecast or be indicative of possible future performance of our common stock.

Total Return Analysis
	11/13/2002	11/30/2002	11/30/2003	11/30/2004	11/30/2005	11/30/2006
Galaxy Energy Corporation	$ 100.00	$ 85.82	$ 170.90	$ 105.22	$ 92.00	$ 19.29
S&P SC Energy Index	$ 100.00	$ 115.39	$ 152.21	$ 270.66	$ 389.64	$ 489.72
AMEX Composite	$ 100.00	$ 99.71	$ 134.73	$ 172.51	$ 248.34	$ 304.09
Source: CTA Integrated Communications www.ctaintegrated.com (303) 665-4200. Data from ReutersBRIDGE Data Networks

Stock Option Plan

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

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

Unless otherwise expressly provided in any option agreement, the unexercised portion of any option granted to an optionee shall automatically terminate one year after the date on which the optionee’s employment or service is terminated for any reason, other than by reason of cause, voluntary termination of employment or service by the optionee, or the optionee’s death. Options shall terminate immediately upon the termination of an optionee’s employment for cause or 30 days after the voluntary termination of employment or service by the optionee. If an

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

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

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

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

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

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

As of November 30, 2006, options to purchase 4,715,000 shares were outstanding at an average exercise price of $2.10 per share and 1,785,000 shares were available for future grant.

ITEM 12.

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

The following table provides certain information as to the officers and directors individually and as a group, and the holders of more than 5% of our common stock, as of January 19, 2007:

Name and Address of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership	Percent of Class (2)

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

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

Name and Address of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership	Percent of Class (2)

Bruner Group, LLP 1775 Sherman Street #1375 Denver, Colorado 80203	4,500,000	5.4%

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

Cecil D. Gritz	425,000 (5)	*

Dr. James Edwards	300,000 (6)	*

Richard E. Kurtenbach	262,500 (7)	*

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

Nathan C. Collins	240,000 (8)	*

Christopher S. Hardesty	166,000 (9)	*

Ronald P. Trout	60,000 (10)	*

All officers and directors as a group (9 persons)	3,693,500 (11)	4.4%

*less than one percent (1%)

_________________

(1)	To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person’s name.

(2)

This table is based on 82,661,968 shares of Common Stock outstanding as of January 19, 2007. If a person listed on this table has the right to obtain additional shares of Common Stock within sixty (60) days from January 19, 2007, the additional shares are deemed to be outstanding for the purpose of computing the percentage of class owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of any other person.

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

(4) Includes 500,000 shares issuable upon exercise of stock options.

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

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

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

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

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

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

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

Changes in Control

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

Equity Compensation Plans

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

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

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

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

Marc A. Bruner/Resource Venture Management

Marc A. Bruner is one of our principal shareholders, one of the founders of Dolphin, and the father of Marc E. Bruner, who serves as our president, chief executive officer and a director. We utilize the services of Marc A. Bruner as a consultant and pay for his services through his company, Resource Venture Management. Resource Venture Management currently has only one employee, Marc A. Bruner. During years ended November 30, 2006, 2005 and 2004, we paid management fees of $30,000, $120,000, and $120,000, respectively, to Resource Venture Management. We also incurred other costs and expenses of $-0-, $30,000 and $79,929 with Resource Venture Management for those same periods, of which $-0-, $12,079 and $37,826 remained outstanding as of the respective period ends.

Harbor Petroleum, LLC and Florida Energy, Inc .

We used the services of Harbor Petroleum, LLC to acquire oil, gas and mineral interest leases in Rusk and Nacogdoches counties, Texas. Harbor Petroleum is 50%-owned and managed by Cecil Gritz, our chief operating officer and one of our directors. As of November 30, 2006, we held leases covering approximately 1,955 net acres. While the leases are in the names of Harbor Petroleum or Florida Energy, Inc., such leases have been assigned to Dolphin. Florida Energy is owned and controlled by Stephen E. Bruner, the brother of Marc A. Bruner, our controlling shareholder, and the uncle of Marc E. Bruner, our president.

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

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

Thomas Fails/ Pannonian International

In connection with the acquisition of Pannonian, we assumed liabilities due from Pannonian to related parties, including advances from Marc A. Bruner of $39,500; notes payable and accrued interest due to the Thomas G. Fails, President of Pannonian, of $37,508; notes payable and accrued interest to a company wholly owned by Mr. Fails of $44,400; and accounts payable to directors of the company for services rendered and costs advanced of $63,346. As of November 30, 2005, all amounts due to related parties resulting from the acquisition of Pannonian were paid in full. As of November 30, 2005 and 2006, we owed Mr. Fails $37,400 and $50,999 for office and personnel expenses advanced by him. These amounts are included in accounts payable, related as of the respective dates.

Brian Hughes

In April 2004, we executed a strategic consulting agreement with Brian Hughes, who was a member of our Advisory Committee. Under the terms of the agreement, the individual was to be paid a consulting fee of $95 per hour for all services in excess of 40 hours per calendar month and a location fee of $5,000 per well for each well drilled on our acreage in the Powder River Basin in Wyoming and Montana. In addition, we agreed to pay an overriding royalty interest in oil and gas production from all of our properties in the Powder River Basin not to exceed 2%. During the years ended November 30, 2005 and 2004, we paid Mr. Hughes $21,250 and $590,000 in location fees. During the year ended November 30, 2005, we assigned overriding royalty interests with a fair value of $732,687 to Mr. Hughes. We did not pay any location or consulting fees to Mr. Hughes during the year ended November 30, 2006.

Exxel Energy Corp.

On March 2, 2005, we entered into a Lease Acquisition and Development Agreement (the “Agreement”) with Apollo Energy LLC and ATEC Energy Ventures, LLC (the “Sellers”) to acquire an initial 58-1/3% working interest in unevaluated oil and gas properties in the Piceance Basin in Colorado, by depositing $7,000,000 in escrow. During the six months ended August 31, 2005 we paid from escrow a total $7,022,088 to acquire undeveloped leases in the area. Because the Sellers were not willing to enter into the Agreement with us without having some agreement regarding the remaining 41-2/3% working interest in the subject properties, we entered into a Participation Agreement with Marc A. Bruner to acquire all or a portion of the remaining 41-2/3% working interest in the subject properties. Mr. Bruner subsequently assigned his rights under the Agreement to an unrelated third party, Exxel Energy Corp. (“Exxel”) In exchange for the assignment of his rights and obligations to Exxel, he received a significant ownership percentage of Exxel, thereby establishing Exxel as a related party to Galaxy.

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

Falcon Oil & Gas Ltd.

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

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

PetroHunter Energy Corporation

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

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

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

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

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

Future Transactions

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

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

Director Independence

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

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

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit Fees

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

For the fiscal year ended November 30, 2005, Hein billed $135,313 for the audit of our annual financial statements and its review of our Form 10-Q filings and registration statements.

Audit-Related Fees

There were no fees billed for services reasonably related to the performance of the audit or review of our financial statements outside of those fees disclosed above under “Audit Fees” for fiscal years 2006 and 2005.

Tax Fees

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

All Other Fees

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

Pre-Approval Policies and Procedures

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

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

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Financial Statements :

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

The audited consolidated financial statements of Galaxy Energy Corporation and subsidiaries as of November 30, 2006 and 2005 and for each of the three years in the period ended November 30, 2006, and the Report of Independent Registered Public Accounting Firm thereon, are included herein as shown in the “Index to the Consolidated Financial Statements” set forth in Item 8.

Financial Statement Schedules :

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

Exhibi ts :

Regulation S-K Number	Exhibit
2.1	Purchase and Sale Agreement Between Dolphin Energy Corporation, and Galaxy Energy Corporation and PetroHunter Operating Company, and PetroHunter Energy Corporation Dated December 29, 2006 (1)
2.2	Second Amendment to Purchase and Sale Agreement dated February 28, 2007 (2)
3.1	Articles of Incorporation (3)
3.2	Articles of Amendment to Articles of Incorporation (4)(5)
3.3	Bylaws (3)
10.1	2003 Stock Option Plan (4)
10.2	Securities Purchase Agreement dated August 19, 2004 between Galaxy Energy Corporation and the Buyers named therein (6)
10.3	Form of Initial Note (6)
10.4	Form of Conditional Note (6)
10.5	Form of Common Stock Purchase Warrant (6)
10.6	Registration Rights Agreement dated August 19, 2004 between Galaxy Energy Corporation and the Buyers named therein (6)
10.7	Security Agreement dated August 19, 2004 among Galaxy Energy Corporation, Dolphin Energy Corporation, and Pannonian International, Ltd. and Promethean Asset Management L.L.C. a Delaware limited liability company, in its capacity as collateral agent for the Lender (6)

Regulation S-K Number	Exhibit
10.8	Guaranty dated August 19, 2004 by Dolphin Energy Corporation and Pannonian International, Ltd. in favor of Promethean Asset Management L.L.C. in its own behalf and in its capacity as agent for the benefit of the Buyers (6)
10.9	Form of Mortgage (6)
10.10	Lease Acquisition and Development Agreement between Dolphin Energy Corporation (Buyer/Operator) and Apollo Energy LLC and ATEC Energy Ventures, LLC (Seller/Non-Operator) dated February 22, 2005 (7)
10.11	Participation Agreement between Dolphin Energy Corporation and Marc A. Bruner dated February 23, 2005 (7)
10.12	Securities Purchase Agreement dated March 1, 2005 between Galaxy Energy Corporation and the Buyers named therein (7)
10.13	Form of Note (7)
10.14	Form of Common Stock Purchase Warrant (7)
10.15	Registration Rights Agreement dated March 1, 2005 between Galaxy Energy Corporation and the Buyers named therein (7)
10.16	Subordination Agreement (7)
10.17	Amended Participation Agreement between Marc A. Bruner and Dolphin Energy Corporation dated March 16, 2005 (8)
10.18	Second Amendment to Participation Agreement dated May 24, 2005 (9)
10.19	Securities Purchase Agreement dated May 31, 2005 between Galaxy Energy Corporation and the Buyers named therein (10)
10.20	Form of Note (10)
10.21	Form of Qualifying Issuance Warrants (10)
10.22	Form of Repurchase Warrants (10)
10.23	Form of Registration Rights Agreement (10)
10.24	Form of First Amendment to Security Agreement, Pledge Agreement and Guaranty (10)
10.25	Form of Mortgage Amendment (10)
10.26	Form of Waiver and Amendment to 2004 Notes and Warrants (11)
10.27	Form of Waiver and Amendment to March 2005 Notes and Warrants (10)
10.28	Form of Conveyances of Overriding Royalty Interests (10)
10.29	Form of March 2005 Subordination Agreement (10)
10.30	Second Amendment to Lease Acquisition and Development Agreement (12)

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

Regulation S-K Number	Exhibit
10.53	Combined Amendment to Lease Acquisition and Development Agreements and to Participation Agreement (25)
10.54	Forbearance Agreement between Galaxy Energy Corporation and Bruner Family Trust UTD March 28, 2005 dated effective December 1, 2006 (26)
10.55	April 2007 Waiver, Amendment and Agreement as to 2005 Subordinated Notes
21	Subsidiaries of the registrant (4)
23.1	Consent of Independent Registered Public Accounting Firm, Hein & Associates LLP dated March 14, 2007
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer

______________

(1)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 29, 2006, filed January 4, 2007, file number 0-32237.

(2)	Incorporated by reference to the exhibits to amendment no. 1 to the registrant’s current report on Form 8-K dated December 29, 2006, filed March 1, 2007.

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

(4)	Incorporated by reference to the exhibits to the registrant’s quarterly report on Form 10-QSB for the quarter ended May 31, 2003, file number 0-32237.

(5)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated October 22, 2004, filed October 26, 2004, file number 0-32237.

(6)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated August 19, 2004, filed August 20, 2004, file number 0-32237.

(7)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated March 1, 2005, filed March 4, 2005, file number 0-32237.

(8)	Incorporated by reference to the exhibits to amendment no. 1 to the registrant’s current report on Form 8-K dated March 1, 2005, filed March 21, 2005.

(9)	Incorporated by reference to the exhibits to amendment no. 2 to the registrant’s current report on Form 8-K dated March 1, 2005, filed May 26, 2005.

(10)	Incorporated by reference to the exhibits to the registrant’s current report on Form 8-K dated May 31, 2005, filed June 1, 2005, file number 0-32237.

(11)	Incorporated by reference to the exhibits to amendment no. 1 to the registrant’s current report on Form 8-K dated May 31, 2005, filed June 2, 2005, file number 0-32237.

(12)	Incorporated by reference to the exhibits to amendment no. 3 to the registrant’s current report on Form 8-K dated March 1, 2005, filed June 2, 2005, file number 0-32237.

(13)	Incorporated by reference to the exhibits to amendment no. 4 to the registrant’s current report on Form 8-K dated March 1, 2005, filed October 6, 2005, file number 0-32237.

(14)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated December 1, 2005, filed December 2, 2005, file number 0-32237.

(15)	Incorporated by reference to the exhibit to the registrant's current report on form 8-K dated april 25, 2006, filed april 26, 2006, file number 0-32237.

(16)	Incorporated by reference to the exhibit to the registrant's current report on Form 8-K dated June 20, 2006, filed June 26, 2006, file number 0-32237.

(17)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated July 7, 2006, filed July 11, 2006, file number 0-32237.

(18)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated September 28, 2006, filed October 3, 2006, file number 0-32237.

(19)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 1, 2006, filed November 2, 2006, file number 0-32237.

(20)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 13, 2006, filed November 16, 2006, file number 0-32237.

(21)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 29, 2006, filed November 30, 2006, file number 0-32237.

(22)	Incorporated by reference to the exhibit to the registrant’s current report on Form 8-K dated November 30, 2006, filed December 1, 2006, file number 0-32237.

(23)	Incorporated by reference to the exhibit to the registrant's current report on Form 8-K dated February 1, 2007, filed February 1, 2007, file number 0-32237.

(24)	Incorporated by reference to the exhibit to the registrant's current report on Form 8-K dated February 26, 2007, filed February 27, 2007, file number 0-32237.

(25)	Incorporated by reference to the exhibit to the registrant's current report on Form 8-K dated March 12, 2007, filed March 14, 2007, file number 0-32237.

(26)	Incorporated by reference to the exhibit to the registrant's annual report on Form 10-K for the fiscal year ended November 30, 2006, filed March 15, 2007, file number 0-32237.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GALAXY ENERGY CORPORATION

Date: November 29, 2007	By:	/s/ Marc E. Bruner
		Marc E. Bruner, President

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

Signature	Title	Date

/s/ Marc E. Bruner	President and Director (Principal Executive Oficer)	November 29, 2007
Marc E. Bruner

/s/ Cecil D. Gritz	Chief Operating Officer and Director	November 29, 2007
Cecil D. Gritz

/s/ Christopher S. Hardesty	Senior Vice President, Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)	November 29, 2007
Christopher S. Hardesty

/s/ Nathan C. Collins	Director	November 29, 2007
Nathan C. Collins

	Director
Dr. James M. Edwards

	Director
Robert Thomas Fetters, Jr.

/s/ Ronald P. Trout	Director	November 29, 2007
Ronald P. Trout

GALAXY ENERGY CORPORATION

(A Development Stage Company)

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

November 30, 2006 and 2005

Consolidated Statements of Operations

Years ended November 30, 2006, 2005 and 2004, and Cumulative Amounts from Inception to

November 30, 2006

Consolidated Statement of Stockholders’ Equity

Period from Inception (June 18, 2002) to November 30, 2003, and

Years ended November 30, 2006, 2005 and 2004

Consolidated Statements of Cash Flows

Years ended November 30, 2006, 2005 and 2004, and Cumulative Amounts from Inception to

November 30, 2006

Notes to Consolidated Financial Statements

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Galaxy Energy Corporation

Denver, Colorado

We have audited the consolidated balance sheets of Galaxy Energy Corporation and subsidiaries (the “Company”), a development stage company, as of November 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended November 30, 2006 and for the period from inception (June 18, 2002) to November 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2006 and for the period from inception (June 18, 2002) to November 30, 2006, in conformity with U.S. generally accepted accounting principles.

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

/s/ HEIN & ASSOCIATES LLP

HEIN & ASSOCIATES LLP

Denver, Colorado

March 14, 2007, except for the period from inception (June 18, 2002) to November 30, 2006, as included on F-4 through F-8, for which the date is November 12, 2007.

F-2

GALAXY ENERGY CORPORATION

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2006 and 2005

	2006			2005

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

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

Furniture and equipment, net		121,945			194,877

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

Total Assets	$	47,760,258		$	48,459,378

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

Commitments and contingencies ( Notes 2 and 10)		-			-

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

Total Liabilities and Stockholders' Equity	$	47,760,258		$	48,459,378

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

F-3

GALAXY ENERGY CORPORATION

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

										Cumulative
	Year Ended			Year Ended			Year Ended			From Inception
	November 30,			November 30,			November 30,			(June 18, 2002) to
	2006			2005			2004			November 30, 2006
Revenue
Natural gas sales	$	1,194,642		$	1,297,194		$	122,455		$	2,614,291
Gain on disposition of oil and gas property		-			197,676			-			197,676
Gain on disposition of oil and gas property,
and other income, related party		79,474			43,472						122,946
		1,274,116			1,538,342			122,455			2,934,913


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

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


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

Net loss per common share - basic and diluted	$	(0.36	)	$	(0.37	)	$	(0.18	)	$	(1.21	)

Weighed average number of common
shares outstanding - basic and diluted		72,094,609			64,698,889			53,488,853			52,553,620

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

F-4

GALAXY ENERGY CORPORATION

(A Development Stage Company)

STATEMENT OF STOCKHOLDER'S EQUITY

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

NOVEMBER 30, 2003, 2004, 2005 AND 2006

								Deficit
								Accumulated
					Capital			During the
	Common Stock				In Excess			Development
	Shares		Amount		Par Value			Stage

Balance, June 18, 2002 (Inception)		-	$	-	$	-		$	-

Issuance of common stock for services
at $0.05 per share		4,000,000		4,000		196,000
Sale of common stock for cash at:
$0.001 per share		11,500,000		11,500		-
$0.02 per share		500,000		500		9,500
$0.05 per share		3,000,000		3,000		147,000
$0.34 per share		1,997,058		1,997		677,003
Recapitalization of shares issued
prior to merger		9,028,000		9,028		(69,359	)
Net loss									(1,140,066	)

Balance, November 30, 2002		30,025,058		30,025		960,144			(1,140,066	)

Issuance of common stock for cash
at $1.00 per share		1,602,000		1,602		1,598,228
Issuance of common stock for services at:
$1.00 per share		10,000		10		9,990
$ .91 per share		60,000		60		54,540
Issuance of common stock to related party
upon conversion of outstanding debt at $1.00 per share		233,204		233		232,971
Issuance of common stock to related party
for services at $1.00 per share		90,000		90		89,910
Common stock issued to acquire subsidiary		1,951,241		1,952		(204,184	)
Warrants to acquire common stock in conjunction with
convertible debenture issuance						1,285,995
Intrinsic value of debentures beneficial conversion feature						2,292,654
Net Loss									(2,579,595	)

Balance, November 30, 2003		33,971,503		33,972		6,320,248			(3,719,661	)

Issuance of common stock upon warrant conversion		45,763		46		26,954
Issuance of common stock for cash at $1.40 per share		2,503,571		2,504		3,502,496
Warrants issued to placement agents in connection with						157,599
common stock
Costs of offering						(1,784,448	)
Issuance of common stock for oil and gas properties
at $1.40 per share		2,000,000		2,000		2,798,000
Issuance of common stock for oil and gas properties
at $1.80 per share		3,000,000		3,000		5,397,000
Issuance of common stock for cash at $1.80 per share		6,637,671		6,638		11,941,161
Warrants issued to placement agents in connection with
common stock						900,504
Costs of offering						(449,439	)
Issuance of common stock upon conversion of
convertible debenture		1,525,424		1,525		898,475
Issuance of common stock for oil and gas properties
at $2.63 per share		360,000		360		946,440
Issuance of common stock upon conversion of
convertible debenture and accrued interest		8,054,364		8,054		4,744,021

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

F-5

GALAXY ENERGY CORPORATION

(A Development Stage Company)

STATEMENT OF STOCKHOLDER'S EQUITY

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

NOVEMBER 30, 2003, 2004, 2005 AND 2006

									Deficit
									Accumulated
						Capital			During the
	Common Stock					In Excess			Development
	Shares			Amount		Par Value			Stage

Issuance of common stock for cashless exercise of
placement agent warrants		719,213		719		(719	)
Discount on convertible notes payable due to issuance
of detachable warrants						4,336,316
Warrants issued to placement agents in connection with
convertible notes payable						404,021
Stock based compensation costs for stock options granted
to non-employees						34,525


Net Loss						-			(9,831,104	)

Balance, November 30, 2004		58,817,509		58,818		40,173,154			(13,550,765	)


Issuance of common stock upon warrant
conversion		1,332,676		1,332		990,970
Issuance of common stock for cashless
exercise of warrants		577,033		577		(577	)
Issuance of common stock upon conversion of
convertible notes and accrued interest		7,940,811		7,941		8,677,068
Discount on convertible notes payable due to
issuance of detachable warrants						12,902,328
Discount on issuance of common stock
below market value						1,074,428
Warrants issued to placement agents in
connection with convertible notes payable						88,874
Stock based compensation costs for stock
options granted to non-employees						167,137
Net loss									(23,985,645	)

Balance, November 30, 2005		68,668,029		68,668		64,073,382			(37,536,410	)
Warrants issued to placement agents in
connection with convertible notes payable						27,274
Discount on convertible notes payable due to
issuance of detachable warrants						395,986
Stock based compensation costs for stock
options granted to employees & non-employees						1,525,751
Discount on convertible notes payable due to
issuance of detachable warrants						170,555
Issuance of common stock upon conversion of
convertible notes and accrued interest		12,993,939		12,994		4,799,255
Discount on issuance of common stock
below market value						545,563
Net loss									(26,163,107	)

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

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

F-6

GALAXY ENERGY CORPORATION

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

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


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

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

F-7

GALAXY ENERGY CORPORATION

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

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



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

Supplemental disclosures of non-cash investing and
financing activities
Debt incurred for oil and gas properties	$	-		$	-		$	2,600,000			$	3,646,000
Debt incurred for finance costs	$	3,547,101		$	-		$	-			$	3,547,101
Stock issued for services	$	-		$	-		$	-			$	354,600
Stock issued for interest and debt	$	4,812,249		$	8,685,009		$	12,075			$	13,742,538
Stock issued for convertible debentures	$	-		$	-		$	5,640,000			$	5,640,000
Warrants issued for offering and financing costs	$	27,274		$	88,874		$	1,462,124			$	1,685,850
Discount on convertible debt issued	$	566,541		$	16,538,498		$	4,336,316			$	14,883,630
Conversion of interest to debt	$	-		$	-		$	-			$	11,178
Stock issued for subsidiary - related	$	-		$	-		$	-			$	(202,232	)
Stock issued for oil and gas properties	$	-		$	-		$	9,146,800			$	9,146,800

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

F-8

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BUSINESS COMBINATIONS

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

As a result of this transaction, Dolphin became a wholly owned subsidiary of the Galaxy. Since this transaction resulted in the former shareholders of Dolphin acquiring control of Galaxy, for financial reporting purposes the business combination was accounted for as an additional capitalization of Galaxy (a reverse acquisition with Dolphin as the accounting acquirer). Dolphin was deemed to be the purchaser and parent company for financial reporting purposes. Accordingly, its net assets were included in the consolidated balance sheet at their historical book value.

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

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

Net liabilities assumed	$	(60,331	)

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

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

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

Net liabilities assumed	$	(202,233	)

F-9

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include Galaxy for the period from November 13, 2002 to November 30, 2002, and its wholly owned subsidiary, Dolphin, for the period from June 18, 2002 to November 30, 2002. For the year ended November 30, 2003, the consolidated financial statements include Galaxy and Dolphin for the entire year and Pannonian from the effective date of the acquisition, June 2, 2003, to November 30, 2003. For the years ended November 30, 2004, 2005 and 2006, the consolidated financial statements include Galaxy, Dolphin, and Pannonian (the “Company”). All significant intercompany transactions have been eliminated upon consolidation.

LIQUIDITY AND GOING CONCERN

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

The Company’s continued operation is contingent upon its ability to raise additional capital and ultimately attaining profitability from its oil and gas operations. In addition to the sale of Powder River Basin Assets, the Company is considering other options for raising additional capital to fund its 2007 operational budget such as debt and equity offerings, other asset sales, the farm-out of some of its acreage and other similar type transactions. There is no assurance that financing will be available to the Company on favorable terms or at all or that any asset sale transaction will close. Any financing obtained through the sale of Company equity will likely result in substantial dilution to the Company’s stockholders. If the Company is forced to sell additional assets to meet its current liquidity needs, it may not realize the full market value of the asset and the sales price could be less than the Company’s carrying value of the asset.

F-10

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

DEVELOPMENT STAGE

The Company is considered a development stage company as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, and its principal activities since inception have been raising capital through the sale of common stock and convertible notes and the acquisition of oil and gas properties in the Western United States, Germany and Romania. The Company has recorded limited production from wells in the Powder River Basin of Wyoming and the Piceance Basin of Colorado; however, management does not consider that the Company has commenced principal operations as of November 30, 2006.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Significant estimates are required for proved oil and gas reserves which, as described in Note 3 – Property and Equipment, have a material impact on the carrying value of oil and gas property. In addition, significant estimates are required in the valuation of undeveloped oil and gas properties. Actual results could differ from those estimates and such differences could be material. The Company has negotiated a purchase and sale agreement with a related party to sell certain of its evaluated and unevaluated oil and gas properties. The value at which such assets are carried on the balance sheet is supported by an independent third party appraisal of an amount approximately equal to such carrying value, and the negotiated sales price for the assets is in excess of the carrying value. If the Company is unable to close the asset sale to the related party, those assets will be offered for sale to other potential buyers; however there is no assurance such a sale would be completed or that the Company will realize the full carrying value of the assets. In such an event the Company may be required to write off in the near term a portion of the carrying value and such write-off could be material.

The oil and gas industry is subject, by its nature, to environmental hazards and clean-up costs. At this time, management knows of no substantial costs from environmental accidents or events for which the Company may be currently liable. In addition, the Company’s oil and gas business makes it vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have been volatile in the past and can be expected to be volatile in the future. By definition, proved reserves are based on current oil and gas prices and estimated reserves. Price declines reduce the estimated quantity of proved reserves and increase annual amortization expense (which is based on proved reserves).

CASH EQUIVALENTS

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

F-11

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

ACCOUNTS RECEIVABLE AND CREDIT POLICIES

The Company has certain trade receivables consisting of oil and gas sales obligations due under normal trade terms. Management regularly reviews trade receivables and reduces the carrying amount by a valuation allowance that reflects management’s best estimate of the amount that may not be collectible. At November 30, 2006, the Company has determined no allowance for uncollectible receivables is necessary.

OIL AND GAS PROPERTIES

The Company utilizes the full cost method of accounting for oil and gas activities. Under this method, subject to a limitation based on estimated value, all costs associated with property acquisition, exploration and development, including costs of unsuccessful exploration, are capitalized within a cost center. No gain or loss is recognized upon the sale or abandonment of undeveloped or producing oil and gas properties unless the sale represents a significant portion of oil and gas properties and the gain significantly alters the relationship between capitalized costs and proved oil and gas reserves of the cost center. Depreciation, depletion and amortization of oil and gas properties is computed on the units of production method based on proved reserves. Amortizable costs include estimates of future development costs of proved undeveloped reserves.

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

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

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

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

F-12

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

OIL AND GAS PROPERTIES (Continued)

The Company applies SFAS 144, “Accounting for the Impairment and Disposal of Long-Lived Assets,” which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Oil and gas properties accounted for using the full cost method of accounting, the method utilized by the Company, are excluded from this requirement, but will continue to be subject to the ceiling test limitations as described above.

PROPERTY AND EQUIPMENT

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

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

DEFERRED FINANCING COSTS

The Company capitalizes costs associated with the issuance of debt instruments. These costs are amortized utilizing the interest method over the term of the debt agreements. Amortization expense of deferred financing costs were $310,474, $495,475 and $442,816 for the years ended November 30, 2006, 2005 and 2004, respectively.

ASSET RETIREMENT OBLIGATION

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

As of November 30, 2006, the Company had, through acquisition and drilling, acquired working interests in 249 natural gas and water disposal wells. A limited number of these wells have recorded gas production, and the others are in various stages of completion and hook up at, November 30, 2006. The Company records ARO associated with all wells in which the Company owns an interest on the date such obligation arose. Depreciation of the related asset, and accretion of the ARO on wells from which production has commenced, has been calculated using the Company’s estimate of the life of the wells, based upon the lives of comparable wells in the area. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.

F-13

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

ASSET RETIREMENT OBLIGATION (Continued)

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

	2006			2005
Balance beginning of period	$	1,242,967		$	713,073
Change in estimate		(161,483	)		-
Liabilities incurred		42,238			481,193
Liabilities settled		-			-
Accretion		164,613			48,701
Balance end of period	$	1,288,335		$	1,242,967

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

FAIR VALUE

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

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

INCOME TAXES

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

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

REVENUE RECOGNITION

We record revenues from the sales of natural gas and oil when delivery to the customer has occurred and title has transferred. This occurs when oil or gas has been delivered to a pipeline or a tank lifting has occurred. We may have an interest with other producers in certain properties, in which case we use the sales method to account for gas imbalances. Under this method, revenue is recorded on the basis of natural gas actually sold by the Company. In addition, we record revenue for our share of natural gas sold by other owners that cannot be volumetrically balanced in the future due to insufficient remaining reserves. We also reduce revenue for other owners’ gas sold by the Company that cannot be volumetrically balanced in the future due to insufficient remaining reserves. Our remaining over-and under-produced gas balancing positions are considered in our proved reserves. Gas imbalances as of November 30, 2006 and 2005 were not significant.

F-14

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SHARE BASED COMPENSATION

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

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

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

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

F-15

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

	Year ended November 30,
	2006			2005			2004
Expected dividend yield		--			--			--
Expected price volatility		75.51—64.34	%		80.33-75.51	%		84.19-80.50	%
Risk free interest rate		4.25	%	3.5% to 4.5%				3.5	%
Expected term of options (in years)	5 years			5—6.5 years			5—6.5 years

(LOSS) PER COMMON SHARE

Basic (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Convertible equity instruments such as stock options, warrants, convertible debentures and notes payable are excluded from the computation of diluted loss per share, as the effect of the assumed exercises would be antidilutive. The dilutive weighted average number of common shares outstanding excluded potential common shares from the conversion of convertible debt and the exercise of stock options and warrants of approximately 10,748,000 for the fiscal year ending November 30, 2006.

CONCENTRATIONS

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

F-16

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

SIGNIFICANT CUSTOMERS

Although the Company sells its production to only three purchasers, there are other purchasers in the areas in which the Company produces natural gas; therefore, the loss of its significant customers would not adversely affect the Company’s operations. For the years ended November 30, 2006, 2005 and 2004, purchases by the following companies exceeded 10% of the total oil and gas revenues of the Company:

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

RECLASSIFICATION

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

OFF BALANCE SHEET ARRANGEMENTS

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

F-17

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

F-18

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT

OIL AND GAS PROPERTIES

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

United States Cost Center

In 2003 the Company began the acquisition of unevaluated oil and gas properties primarily in the Powder River Basin region of the Rocky Mountain area. In 2004 the Company acquired additional unevaluated properties, began its exploration program by drilling 135 wells and commenced limited production of natural gas in the Powder River Basin. During 2005 exploratory drilling activities continued in the Powder River Basin, development of certain areas commenced and natural gas production reached a level that allowed the Company to recognize proved reserves on those producing properties. During 2006 the Company continued limited drilling operations in the Powder River Basin and conducted extended de-watering operations on certain prospects in the basin. As further discussed in Note 9, subsequent to November 30, 2006, the Company entered into a Purchase and Sale Agreement with a related party to sell all of the Company’s oil and gas interests in the Powder River Basin of Wyoming and Montana (the “Powder River Basin Assets”).

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

Germany Cost Center

In March 2005 the Company, through its wholly owned subsidiary, Pannonian, entered into a farmout agreement with an unrelated party (the “Farmee”) to conduct exploration activities on its Neues Bergland Exploration Permit in Germany. Prior to the farmout Pannonian owned a 50% interest in the permit. Under the terms of the agreement the Farmee made an initial payment of $750,000 to Pannonian and its partners to acquire a 40% interest in the permit, thereby reducing Pannonian’s ownership interest to 30%. The Company recognized a gain of $197,676 on the transaction, representing the excess of the proceeds over the original cost of the property. In December 2005, the Company commenced drilling the initial test well on the permit. The well, in which the Company had a carried interest, was completed in January 2006. In July 2006, the Company completed the testing of the four primary zones of interest in the Glantal-1 well and no significant natural gas flows were encountered. The wellbore was plugged and abandoned in August 2006. The Company and its joint venture partners are evaluating further operations on the permit, which could include a seismic program and additional exploratory drilling. The Company’s balance sheet reflects no capitalized oil and gas costs related to the Germany cost center.

F-19

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT (continued)

Romania Cost Center

In May 2005 the Company, through its wholly owned subsidiary, Pannonian, entered into a farmout agreement with a related party whose President is a significant shareholder of the Company (Falcon Oil &Gas or “Falcon”) to evaluate the concession held by Pannonian in the Jiu Valley Coal Basin in Romania. This concession had been assigned to Pannonian by the Romanian government, in October 2002, under the terms of a Concession Agreement (the “Concession”). The farmout agreement call for the assignment of the Concession to Falcon; the assignment of a 75% working interest in the Concession area; and for the drilling of one test well and an additional, optional, test well, the cost of which will be paid 100% by Falcon. In addition Falcon paid Pannonian $100,000 upon approval by the Romanian government of the assignment of the Concession, and will pay the first $250,000 of Pannonian’s proportionate share of drilling and operating costs subsequent to the drilling of the first two wells. The Company recognized a gain of $72,713 on the transaction, representing the excess of the proceeds over the original cost of the property. The first test well on the property, in which the Company has a carried interest, has been completed. Based upon results of the drilling operations, the partners in the project have determined to commence completion and testing operations. As of November 30 2006, the Company and Falcon are planning the completion program for the first well and the drilling of a second well to be carried out in 2007. Following the recognition of the gain on farmout, the Company’s balance sheet reflects no capitalized oil and gas costs for the Romanian cost center.

ACQUISITION, EXPLORATION AND DEVELOPMENT COSTS INCURRED

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

	For the Years Ended November 30,
	2006		2005		2004
Acquisition of unevaluated properties	$	374,756	$	8,051,122	$	19,365,549
Exploration costs
United States		3,607,563		9,613,262		14,645,548
Europe		-		-		18,675
Development costs		163,292		499,945		-
Oil and gas expenditures		4,145,611		18,164,329		34,029,772

Asset retirement obligations		42,238		481,193		710,731
	$	4,187,849	$	18,645,522	$	34,740,503

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

F-20

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT (continued)

EVALUATED PROPERTIES

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

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

	2006		2005		2004
Full Cost Pool - Evaluated Properties
Balance beginning of period	$	9,991,629	$	-	$	-
Properties with proved reserves		204,525		4,640,738		-
Reclassification of impaired, unevaluated
properties		473,265		5,055,320		-
Asset retirement obligation		322,526		295,571		-
Balance end of period	$	10,991,945	$	9,991,629	$	-


Depreciation, Depletion, Amortization
and Impairment
Balance beginning of period	$	7,097,299	$	48,394.00	$	-
Depreciation, depletion and amortization		540,404		1,775,110		48,394
Impairment of oil and gas properties		1,328,432		5,273,795		-
Balance end of period	$	8,966,135	$	7,097,299	$	48,394

F-21

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT (continued)

UNEVALUATED PROPERTIES

Costs directly associated with the acquisition, exploration and development of unevaluated properties are excluded from the full cost amortization pool, until they are evaluated. During the years ended November 30, 2006 and 2005, as part of its assessment of unevaluated properties for impairment, the Company identified three unevaluated properties as either partially or wholly impaired. The costs related to those impaired properties, $473,265 in 2006, and $5,055,320, were reclassified from unevaluated to evaluated properties and added to the full cost pool amortization base.

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

At November 30, the Company’s unevaluated properties in the United States and European costs centers properties consist of acquisition costs, exploration and development costs in the following areas:

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

German Cost Center		-		-		42,234

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

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

F-22

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – PROPERTY AND EQUIPMENT (continued)

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

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

ASSETS IDENTIFIED FOR SALE

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

FURNITURE AND EQUIPMENT

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

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

NOTE 4 - NOTES PAYABLE

RELATED PARTIES

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

F-23

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - NOTES PAYABLE (continued)

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

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

OTHER

In connection with the acquisition of oil and gas properties from DAR LLC, (“DAR”) the Company issued a promissory note to DAR in the amount of $2,600,000. At November 30, 2005, the remaining balance of the note payable was $2,049,728. The note together with accrued interest was acquired by the Bruner Trust in October 2006.

NOTE 5 – CONVERTIBLE NOTES PAYABLE

2004 NOTES

In August and October 2004, the Company completed two tranches of a private offering of Senior Secured Convertible Notes and Warrants. Gross proceeds from the initial tranche of the offering were $15,000,000. Gross proceeds from the second tranche of the offering were $5,000,000. The Notes pay interest at the prime rate plus 7.25% per annum, mature two years from the date of issue, are collateralized by substantially all the Company’s assets, and are convertible into 10,695,187 shares of the Company’s common stock based on a conversion price of $1.87 per share. Monthly principal repayments of $833,333, plus accrued interest commenced on March 1, 2005. At the Company’s option, and assuming the satisfaction of certain conditions, the Company may pay the monthly installments in cash or through a partial conversion of the Notes into shares of the Company’s common stock at a conversion rate equal to the lesser of $1.87 (as may be adjusted to prevent dilution), or 93% of the weighted average trading price of the Company’s common stock on the trading day preceding the conversion. Note purchasers received warrants to purchase 5,194,806 shares of the Company’s common stock at an exercise price of $1.54 per share, for a period of three years.

On December 1, 2005, the Company and the holders of the 2004 Notes entered into an agreement, that among other things, lowered the conversion price of the Notes to $1.25 per share, granted additional warrants to purchase shares of common stock and lowered the exercise price of existing and newly issued warrants to $1.25 per share. In accordance with SFAS 5, Accounting for Contingencies, the Company recorded the effect of this agreement in the financial statements as of November 30, 2005. In accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, the Company recognized this transaction as an extinguishment of the existing debt and the issuance of new debt. The Company wrote off unamortized discount and deferred financing associated with the original debt in the amount of $773,564, including the amount in interest and financing expense In addition, in accordance with EITF 98-5 and EITF 00-27, the Company recognized the fair value of the warrants and the beneficial conversion feature associated with the Notes aggregating $7,375,920 as a discount to the Notes and as additional paid in capital. During the year ended November 30, 2006, the Company recorded amortization of the discount in the amount of $7,012,918 as interest expense.

F-24

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

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

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

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

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

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

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

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

On November 29, 2006, the Company and the holders of the 2004 Notes entered into a Waiver and Amendment Agreement. The Company had notified the holders of the 2004 Notes of the fact that a Triggering Event under the terms of the Notes had occurred as of August 31, 2006. Among other things, this would have enabled the holders of the Notes to require the Company to redeem all or any portion of the outstanding principal amount of the Notes at a price equal to the greater of (i) 125% of such principal plus accrued and unpaid interest and (ii) the product of the current conversion rate in effect under the Notes multiplied by the volume-weighted average price of Galaxy’s common stock. The holders agreed to waive the Triggering Event in consideration for an amendment to the 2004 Notes that reset the principal amounts of the Notes to 125% of the amounts outstanding as of October 31, 2006. In accordance with EITF 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, ” the Company recognized this transaction as an extinguishment of the existing debt and the issuance of new debt. The Company wrote off unamortized discount and deferred financing associated with the original debt in the amount of $957,101 including the amount in interest and financing cost. In addition, in accordance with EITF 98-5 and EITF 00-27, the Company recognized the fair value of the warrants and the beneficial conversion feature associated with the Notes aggregating $663,002 as a discount to the Notes.

F-25

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

MARCH 2005 NOTES

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

In connection with the December 1, 2005 agreement entered into with the holders of the 2004 Notes, as discussed above, the terms of the March 2005 Notes were also amended to lower the conversion price to $1.25 per share, and lower the exercise price of existing warrants to $1.25 per share. In accordance with SFAS 5, Accounting for Contingencies, the Company recorded the effect of this agreement in the financial statements as of November 30, 2005. In accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, the Company recognized this transaction as an extinguishment of the existing debt and the issuance of new debt. The Company wrote off unamortized discount and deferred financing associated with the original debt in the amount of $1,389,033 including the amount in interest and financing cost. In addition, in accordance with EITF 98-5 and EITF 00-27, the Company recognized the fair value of the warrants and the beneficial conversion feature associated with the Notes aggregating $2,802,876 as a discount to the Notes and as additional paid in capital. During the year ended November 30, 2006, the Company recorded amortization of the discount in the amount of $2,370,925 as interest expense.

MAY 2005 NOTES

In May 2005, the Company completed a private offering of Senior Secured Convertible Notes to a group of accredited investors. Gross proceeds from the offering were $10,000,000. The notes are secured by a security interest in all of the assets of Galaxy and the domestic properties of its subsidiaries. Such security interest ranks equally with that of the 2004 Notes, and senior to the March 2005 Notes. The notes pay interest at the prime rate plus 7.25% adjusted and payable quarterly. They mature May 31, 2010, and are convertible into 5,319,149 shares of common stock at any time, based on a conversion price of $1.88 per share. In addition, the Investors received a perpetual overriding royalty interest (“ORRI”) in Galaxy’s domestic acreage averaging from 1% to 3%, depending upon the nature and location of the property, a right of first refusal with respect to future debt and/or equity financings, and a right to participate in any farm-out financing transactions that do not have operating obligations by the financing party as a material component. The fair value of the ORRI has been calculated to be the difference between the market price per share at the date of issue ($1.14) and the conversion price ($1.88), times the number of shares into which the notes are convertible (5,319,149) or $3,936,170. This value has been recorded as a charge to the Company’s undeveloped oil and gas properties full cost pool and as a discount to the notes. The discount will be amortized over the five-year term of the notes. Amortization of the discount of $791,114 and $394,479 is included in interest expense for the years ended November 30, 2006 and 2005 respectively.

F-26

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

MAY 2005 NOTES (Continued)

Deferred financing costs associated with the notes in the amount of $639,888 have been capitalized and are being amortized over the life of the notes. For the years ended November 30, 2006 and 2005 amortization of deferred financing costs of $127,907 and $64,129, respectively is included in interest expense.

On November 29, 2006, the Company and the holders of the May 2005 Notes entered into a Waiver and Amendment Agreement. The Company had notified the holders of the May 2005 Notes of the fact that a Triggering Event under the terms of the Notes had occurred as of August 31, 2006. Among other things, this would have enabled the holders of the Notes to require the Company to redeem all or any portion of the outstanding principal amount of the Notes at a price equal to the greater of (i) 125% of such principal plus accrued and unpaid interest and (ii) the product of the current conversion rate in effect under the Notes multiplied by the volume-weighted average price of Galaxy’s common stock. The holders agreed to waive the Triggering Event in consideration for an amendment to the May 2005 Notes that reset the principal amounts of the Notes to 125% of the amounts outstanding as of October 31, 2006. In accordance with EITF 96-19, the Company recognized this transaction as an extinguishment of the existing debt and the issuance of new debt. The Company wrote off unamortized discount and deferred financing associated with the original debt in the amount of $2,500,000 including the amount in interest and financing cost. In addition, in accordance with EITF 98-5 and EITF 00-27, the Company recognized the fair value of the warrants and the beneficial conversion feature associated with the Notes aggregating $2,750,577 as a discount to the Notes.

APRIL 2006 DEBENTURES

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

The fair value of the warrants was estimated as of the issue date under the Black-Scholes pricing model, with the following assumptions: common stock based on a market price of $1.06 per share, zero dividends, expected volatility of 67.46%, risk free interest rate of 4.875% and expected life of 2.5 years. The fair value of the warrants of $295,029 resulted in a discount of $395,986 which has been recorded as additional paid in capital and as a discount to the Debentures and is being amortized over the term of the Debentures. Amortization of the discount of $95,315 is included in interest expense for the year ended November 30, 2006.

F-27

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

JUNE 2006 DEBENTURES

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

The fair value of the warrants was estimated as of the issue date under the Black-Scholes pricing model, with the following assumptions: common stock based on a market price of $0.79 per share, zero dividends, expected volatility of 67.36%, risk free interest rate of 5.125% and expected life of 2.5 years. The fair value of the warrants of $92,695 resulted in a discount of $170,555 which has been recorded as additional paid in capital and as a discount to the Debentures and is being amortized over the term of the Debentures. Amortization of the discount of $30,603 is included in interest expense for the year ended November 30, 2006

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

F-28

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – CONVERTIBLE NOTES PAYABLE (continued)

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

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

Total principal payments due in the next twelve months for the notes listed above are $11,855,505. If the Company’s common stock meets certain conditions of trading volume and price, all principal payments may be paid by issuing shares of common stock.

At November 30, 2006 the Company’s debt maturity schedule, including related party debt is as follows:


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

NOTE 6 – STOCKHOLDERS’ EQUITY

COMMON STOCK

During the year ended November 30, 2006, the Company issued shares of its common stock as follows:

·	12,993,939 shares issued Holders of Senior Secured Convertible Notes in connection with the conversion of $4,812,248 of principal and accrued interest at various conversion rates, ranging from $0.28 to $0.60 per share.

F-29

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – STOCKHOLDERS’ EQUITY (Continued)

COMMON STOCK (Continued)

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

·	305,656 shares issued in conjunction with the cashless exercise of 508,475 Series “A” warrants associated with the convertible debentures dated September 24, 2003.

·	271,377 shares issued in conjunction with the cashless exercise of 508,475 Series “B” warrants associated with the convertible debentures dated October 3, 2003

·	1,332,676 shares for $992,302 cash for the exercise of 1,332,676 of warrants at exercise prices ranging from $0.71 to $1.54 per share.

·	7,940,811 shares issued to Holders of Senior Secured Convertible Notes in connection with the conversion of $8,685,009 of principal and accrued interest at various conversion rates, ranging from $0.90 to $1.55 per share.

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

·	45,763 shares for $27,000 cash for the exercise 45,763 warrants at an exercise price of $0.59 per share

·	2,503,571 shares for cash at $1.40 per share

·	2,000,000 shares for partial consideration of acquired oil and gas properties at $1.40 per share

·	6,637,671 shares for cash of $1.80 per share

·	3,000,000 shares for partial consideration of acquired oil and gas properties at $1.80 per share

·	360,000 shares for partial consideration of acquired oil and gas properties at $2.63 share

·	1,525,424 shares upon conversion of $900,000 of convertible debentures at a conversion price of $.59 per share

·	8,033,898 shares upon conversion of $4,740,000 of convertible debentures at a conversion price of $.59 per share

·	20,466 shares upon conversion of $12,075 of accrued interest on convertible debentures at a conversion price of $.59 per share

·	371,206 shares issued in conjunction with the cashless exercise of 508,475 Series “A” warrants associated with the convertible debentures dated September 24, 2003

·	348,005 shares issued in conjunction with the cashless exercise of 508,475 Series “B” warrants associated with the convertible debentures dated October 3, 2003

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

·	1,602,000 shares for cash at $1.00 per share

·	10,000 shares for services at $1.00 per share

·	60,000 shares for services at $.91 per share

·	233,204 shares to Resource Venture Management (RVM), a related party, an entity owned by a founder of the Company, as payment of an outstanding debt, at $1.00 per share

·	90,000 shares to RVM for services rendered, valued at $90,000 ($1.00 per share)

·	1,951,241 shares to the shareholders of Pannonian in accordance with the Share Exchange Agreement to acquire all the outstanding shares of Pannonian (Note 1).

F-30

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

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

·	11,500,000 shares at inception to officers/directors/founders for cash at $.001 per share

·	500,000 shares for cash at $.02 per share

·	4,000,000 shares to RVM, for services rendered, valued at $200,000 ($.05 per share)

·	3,000,000 shares for cash at $.05 per share

·	1,997,058 shares for cash at $.34 per share

Effective November 13, 2002, the Company completed the acquisition of Dolphin (Note 1). In conjunction with the acquisition, the Company exchanged 20,997,058 shares of its common stock for 100% of the outstanding common shares of Dolphin. The 9,028,000 shares of common stock of the Company outstanding at the date of acquisition were recapitalized at the net asset value of the Company at that date of $(60,331). For financial statement reporting purposes this transaction was treated as a reverse acquisition whereby Dolphin was considered the surviving and reporting entity. For legal purposes, the Company remained as the surviving entity; therefore, the capital structure of the Company was accordingly restated.

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

WARRANTS

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

In connection with sales of common stock in December 2003 and January 2004, the Company issued warrants to purchase 500,715 shares of common stock at $2.71 per share, and 1,327,535 shares of common stock at $4.05 per share to purchasers of the stock, and issued warrants to purchase 105,166 and 358,435 shares of common stock at $1.40 and $1.80 per share, respectively, to placement agents for the issue. The fair value of the placement agent warrants, estimated as of the issue dates under the Black-Scholes pricing model was $157,599 and $900,504 for the December 2003 and January 2004 common stock offerings, respectively. These amounts were recorded as issue costs for the respective common stock offering. In accordance with the antidilutive rights provisions, the exercise prices of those warrants with original exercise prices in excess of $1.54 have been reset to $1.54 per share, in connection with the issuance of the 2004 notes. In December 2005 the exercise price was reset to $1.25 per share in connection with the Waiver and Amendment entered into with the holders of the 2004 and May 2005 Notes.

F-31

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – STOCKHOLDERS’ EQUITY (continued)

In August 2004, in connection with the private placement of convertible notes, the Company issued warrants to purchase 5,194,806 shares of common stock at $1.54 per share for a period of three years. In December 2005 in connection with the Waiver and Amendment entered into with the holders of the 2004 and May 2005 Notes the number or warrants was increased to 6,400,001 and the exercise price was reset to $1.25 per share. Placement agents for the convertible notes received warrants to purchase 400,000 shares of common stock at $1.54 per share for a period of five years. In December 2005 the exercise price was reset to $1.25 per share in connection with the Waiver and Amendment entered into with the holders of the 2004 and May 2005 Notes.

In March 2005, in connection with the private placement of convertible notes, the Company issued warrants to purchase 1,637,234 shares of common stock at $1.88 per share for a period of three years. In December 2005 the exercise price was reset to $1.25 per share in connection with the Waiver and Amendment entered into with the holders of the 2004 and May 2005 Notes.

In May 2005, in connection with the private placement of convertible notes, placement agents received warrants to purchase 200,000 shares of common stock at $1.88 per share for a period of five years. In December 2005 the exercise price was reset to $1.25 per share in connection with the Waiver and Amendment entered into with the holders of the 2004 and May 2005 Notes.

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

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

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

Issue Date	Shares Exercisable		Exercise Price		Expiration Date

September 24, 2003		2,008,474	$	.59 - $ .83	September 24, 2008
October 3, 2003		551,186	$	.59 - $ .83	October 3, 2008
December 18, 2003		605,880	$	$1.25	December 18, 2007
January 15, 2004		1,680,414	$	1.25	January 15, 2009
August 19, 2004		5,494,805	$	1.25	August 19, 2009
October 27, 2004		100,000	$	1.25	October 27, 2009
March 1, 2005		1,637,234	$	1.25	March 1, 2008
May 31, 2005		200,000	$	1.25	May 31, 2010
December 1, 2005		1,205,196	$	1.25	August 19, 2009
April 26, 2006		868,383	$	1.60	April 26, 2011
June 20, 2006		480,769	$	1.60	June 20, 2011

		14,832,341

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

F-32

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK OPTION PLAN

The Company adopted the 2003 Stock Option Plan (the “Plan”), as amended. Under the Plan, stock options may be granted at an exercise price not less than the fair market value of the Company’s common stock at the date of grant. Options may be granted to key employees and other persons who contribute to the success of the Company. The Company has reserved 6,500,000 shares of common stock for the plan. At November 30, 2006, and November 30, 2005, options to purchase 1,785,000 and 2,025,000 shares, respectively, were available to be granted pursuant to the stock option plan.

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

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

					Weighted Avg
	Number of		Weighted Avg		Remaining	Aggregate
	Shares		Exercise Price		Contractual Term	Intrinsic Value
Options outstanding - December 1, 2004		3,500,000	$	2.37
Granted during period		975,000	$	1.32
Exercised during period		-		-
Forfeited during period		-		-
Expired during period		-		-
Options outstanding -November 30, 2005		4,475,000	$	2.15

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

Exercisable at November 30, 2006		2,825,000	$	2.10	7.63	$ 5,919,800

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

F-33

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - STOCK OPTION PLAN (continued)

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

	Number of Shares			Weighted Average Fair Value

Non-Vested Options - December 1, 2004		2,566,250		$	1.77
Granted during period		975,000		$	0.97
Exercised during period		-		$	-
Vested during period		(841,250	)	$	1.49
Forfeited during period		-		$	-
Non-Vested Options - November 30, 2005		2,700,000		$	1.55
Granted during period		240,000		$	0.69
Exercised during period		-		$	-
Vested during period		(1,050,000	)	$	1.29
Forfeited during period		-		$	-
Non-Vested Options - November 30, 2006		1,890,000		$	1.47

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

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

						Weighted average
Exercise price		Number of options		Number of options		remaining contractual
per share		outstanding		Exercisable		life (Years)

$	1.00		60,000		40,000		6.5
	1.07		50,000		10,000		9.0
	1.19		240,000		240,000		9.1
	1.26		50,000		50,000		8.1
	1.30		200,000		200,000		7.7
	1.34		875,000		153,750		8.0
	1.50		300,000		112,500		7.4
	1.55		325,000		137,500		7.6
	2.24		60,000		60,000		7.4
	2.64		2,375,000		831,250		7.4
	3.51		180,000		180,000		7.3

			4,475,000		1,775,000		7.6

F-34

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – INCOME TAXES

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

	Years Ended November 30,
	2006			2005			2004

Federal statutory income tax rate		(35.0	%)		(35.0	%)		(34.0	%)
State income taxes		(3.25	%)		(3.3	%)		(3.3	%)
Permanent differences – interest on convertible Debt Other		16.25	%		6.5	%		15.1	%
Increase in valuation allowance		22.0	%		31.8	%		22.2	%

Net income tax provision (benefit)		-			-			-

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

	2006			2005			2004
Deferred tax assets
Federal and state net operating loss Carryovers	$	13,700,000		$	13,155,000		$	3,671,000
Asset retirement obligation		712,000			472,000			265,000
Oil and gas property					657,000			-
Accrued related party interest and interest on convertible debt		952,000			-			-
Deferred compensation		661,000			-			-
Other		-			10,000			-
Total deferred taxes	$	16,025,000		$	14,294,000		$	3,936,000

Deferred tax liabilities
Intangible drilling costs and other exploration costs capitalized for financial reporting purposes	$	(3,085,000	)		-			(319,000	)
Deferred financing costs		(216,000	)
Property and equipment		(2,000	)
Other	___________			____________				(15,000	)
Total deferred liabilities		(3,303,000	)		-			(334,000	)

Net deferred tax asset		12,722,000			14,294,000			3,602,000
Less: valuation allowance		(12,722,000	)		(14,294,000	)		(3,602,000	)

Deferred tax liability	$	-		$	-		$	-

F-35

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – INCOME TAXES (continued)

The Company has a $38,800,000 net operating loss carryover as of November 30, 2006. The net operating losses may offset against taxable income through the year ended November 2026. A portion of the net operating loss carryovers begin expiring in 2020 and may be subject to U.S. Internal Revenue code Section 382 limitations.

The Company has provided a valuation allowance for the deferred tax asset at November 30, 2006, as the likelihood of the realization of the tax benefit of the net operating loss carryforward cannot be determined. The valuation allowance decreased by approximately $1,572,000 and increased by $10,692,000 for the years ended November 30, 2006 and 2005, respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

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

All amounts paid in 2006, 2005 and 2004 were paid in cash. At November 30, 2006, 2005 and 2004 the Company included amounts due to RVM of $-0-, $12,079 and $37,826, respectively, in accounts payable related parties.

During the year ended November 30, 2005, in connection with a Lease Acquisition and Development Agreement to acquire a 58-1/3%working interest in unevaluated oil and gas properties in the Piceance Basin in Colorado, the Company entered into a Participation Agreement with Marc A. Bruner to acquire all or a portion of the remaining 41-2/3% working interest in the subject properties. Marc A. Bruner subsequently assigned his rights and obligations under the Agreement to a third party company (the “Assignee”), unrelated at the time of assignment. In exchange for the assignment of his rights and obligations, the founder received a significant ownership percentage of the Assignee, thereby establishing the Assignee as a related party. The terms of the Participation Agreement as amended, required the Assignee to pay the next $14,000,000 of lease acquisition, drilling, completion, and facilities costs to be incurred on the project. During the year ended November 30, 2006 the Company, as operator of the Piceance Basin project, acquired additional acreage and drilled four wells on acreage jointly owned by the Assignee and the Company. In accordance with the terms of the Participation Agreement the Assignee paid the first $14,000,000 of lease acquisition, drilling, completion, and facilities costs. In addition, the Assignee paid the Company $1,695,830 as compensation for management of the drilling program during the year. As of November 30, 2006, the Assignee owed the Company $923,172 for its share of joint venture costs and management fees. This amount, included in accounts receivable, joint interest at November 30, 2006 was paid by the Assignee in December 2006 and February 2007.

F-36

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - RELATED PARTY TRANSACTIONS (continued)

During the year ended November 30, 2005, the Company entered into a farmout agreement with Falcon Oil and Gas Ltd., (“Falcon”). Marc A. Bruner is President and CEO of Falcon and is the founder of the Company. The farmout agreement called for Falcon and the Company to evaluate the concession held by the Company in the Jiu Valley Coal Basin in Romania. The farmout agreement required Falcon to pay 100 % of the costs to drill an initial test well and an second, optional, well on the concession, and to pay the Company $100,000 upon approval by the Romanian government of the assignment of the concession to Falcon to earn a 75% interest in the concession. The Company recognized a gain of $72,713 on the transaction, representing the excess of the proceeds over the original cost of the property. The Company has completed the drilling of the first test well on the concession and is evaluating completion and testing operations to be undertaken

Harbor Petroleum LLC, (“Harbor”) is a company owned 50% and managed by the Company’s Chief Operating Officer (“COO”). During the years ended November 30, 2005 and, 2004 the Company incurred costs and expenses with Harbor of $41,681and $271,588, respectively. Of those amounts, compensation expenses paid to Harbor for services provided by the COO and other Harbor staff, were $27,500 and $163,737 for the corresponding years. Reimbursement of costs advanced by Harbor on behalf of the Company of $14,181 and $132,197 were paid during the years ended November 30, 2005 and, 2004, respectively. The Company paid made no payments to Harbor during the year ended November 30, 2006

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

The Company incurred Directors’ fees totaling $198,775, $193,500and $180,000 during the years ended November 30, 2006, 2005 and 2004. As of November 30, 2006 and 2005, $27,000 and $36,000 of Directors’ fees are included in accounts payable, related.

In April 2004, the Company executed a strategic consulting agreement with a member of the Company’s Advisory Committee. Under the terms of the Agreement, the individual is to be paid a consulting fee of $95 per hour for all services in excess of 40 hours per calendar month and a location fee of $5,000 per well for each well drilled on the Company’s acreage in the Powder River Basin in Wyoming and Montana. In addition, we have agreed to pay an overriding royalty interest in oil and gas production from all of our properties in the Powder River Basin not to exceed 2%. During the years ended November 30, 2005 and 2004, the Company paid the individual $21,250 and $590,000 in location fees. In the year ended November 30, 2005, the Company assigned overriding royalty interests with a fair value of $732,687 to the individual. The Company paid no location or consulting fees to the individual in the year ended November 30, 2006.

F-37

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - RELATED PARTY TRANSACTIONS (continued)

In connection with the acquisition of Pannonian, the Company assumed liabilities due from Pannonian to related parties including advances from the founder of the Company of $39,500; notes payable and accrued interest due to the President of Pannonian of $37,508; notes payable and accrued interest to a company wholly owned by the President of Pannonian of $44,400; and accounts payable to Directors of the Company for services rendered and costs advanced of $63,346. As of November 30, 2005, all amounts due to related parties resulting from the acquisition of Pannonian have been paid in full.As of November 30, 2005 and 2006 the Company owed the President of Pannonian $37,400 and $50,999 for office and personnel expenses advanced by the President. These amounts are included in accounts payable, related as of the respective dates.

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

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

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES

OFFICE LEASES

The Company currently leases space in Denver, Colorado. In addition the Company pays a portion of the office rental for Pannonian’s office, also in Denver. Total minimum rental payments for non-cancelable operating leases for the years ending November 30 are as follows:

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

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

F-38

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)

DELAY RENTALS

In conjunction with the Company’s working interests in undeveloped oil and gas prospects, the Company must pay approximately $104,000 in delay rentals and other costs during the fiscal year ending November 30, 2007 to maintain the right to explore these prospects. The Company continually evaluates its leasehold interests, therefore certain leases may be abandoned by the Company in the normal course of business.

ENVIRONMENTAL

Oil and gas producing activities are subject to extensive Federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated.

CONTINGENCIES

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

NOTE 11 - SUBSEQUENT EVENTS

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

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

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

F-39

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - SUBSEQUENT EVENTS (continued)

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

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

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

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

F-40

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the unaudited financial data for each quarter for the years ended November 30, 2006, 2005, and 2004:

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


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


Other income (expense)
Interest and other		4,199			7,390			3,283			742
Interest and financing costs		(4,582,103	)		(4,365,863	)		(3,970,113	)		(6,629,210	)
		(4,577,904			(4,358,473	)		(3,966,830	)		(6,628468	)

Net (loss)	$	(5,777,599	)	$	(5,729,729	)	$	(6,396,604	)	$	(8,259,175	)

Net (loss) per common share
Basic and diluted	$	(0.08	)	$	(0.08	)	$	(0.09	)	$	(0.11	)

F-41

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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


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

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

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

Net (loss) per common share
Basic and diluted	$	(0.06	)	$	(0.06	)	$	(0.02	)	$	(0.17	)

During the fourth quarter of the year ended November 30, 2005, the Company recorded its first proved reserves and transferred capitalized costs of the prospects with reserves to the full cost pool amortization base. Also in the fourth quarter, the Company determined that three of its oil and gas prospects were either partially or wholly impaired and transferred a total of $5,055,320 to the full cost pool amortization base. Following these transfers the amortization rate increased from $1.83 per MCF recognized in the first three quarters of the year to $8.29 per MCF for the fourth quarter. After recording amortization for the year, the Company recognized impairment expense of its evaluated properties in the amount of $5,273,795 during the fourth quarter, representing the excess of the full cost pool over the full cost ceiling as computed in accordance with the full cost rules.

F-42

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Three months ended
	02/28/04			05/31/04			08/31/04			11/30/04
Revenues
Natural gas sales	$	-		$	-		$	23,780		$	98,675

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

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

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

Net (loss) per common share
Basic and diluted	$	(0.03	)	$	(0.06	)	$	(0.02	)	$	(0.07	)

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

F-43

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following reserve quantity and future net cash flow information for the Company represents proved reserves located in the United States. The reserves as of November 30, 2006 and 2005 have been estimated by Gustavson Associates, Inc., independent petroleum engineers. The determination of oil and gas reserves is based on estimates, which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available.

The standardized measure of discounted future net cash flows is prepared under the guidelines set forth by the Securities and Exchange Commission (SEC) that require the calculation to be performed using year-end oil and gas prices. The oil and gas prices used as of November 30, 2006 and 2005 are$49.50per bbl of oil and $6.74 per mcf of gas, and $59.37per bbl of oil and $ 6.76 per mcf of gas, respectively. Future production costs are based on year-end costs and include severance taxes. Each property that is operated by the Company is also charged with field-level overhead in the reserve calculation. The present value of future cash inflows is based on a 10% discount rate. Due to the Company’s current liquidity issues, proved undeveloped reserves identified in the Gustavson Associates report have been excluded from the disclosures below and have been excluded from the Company’s DD&A and ceiling test calculations.

Proved Reserves	Gas (Mcf)			Oil (Bbls)
Balance, November 30, 2004		-			-
Extensions and Discoveries		1,171,425			353
Production		(211,481	)		-
Balance, November 30, 2005		959,944			353
Revisions to previous estimates		254,143			(8	)
Extensions and discoveries		1,773			20
Production		(210,439	)		(45	)
Balance, November 30, 2006		1,005,421			320

Proved Developed Reserves as of November 30
	2006			2005
Gas (Mcf)		1,005,421			648,302
Oil ( Bbls)		320			353

Standardized Measure of Discounted Future Cash Flows
	November 30			November 30
	2006			2005
Future cash inflows	$	6,769,792		$	6,529,934
Future cash outflows
Production costs		(2,954,112	)		(2,498,340	)
Development costs		(340,000	)		(84,000	)

Future income taxes		-			-
Future net cash flows		3,475,680			3,947,594
Adjustment to discount future annual net cash flows at 10%		(732,608	)		(1,005,320	)
Standardized measure of discounted future net cash flows	$	2,743,072		$	2,942,274

F-44

GALAXY ENERGY CORPORATION

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


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

F-45

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