The rules state that the current player has the choice of damaging Pegasus instead of Galactica whenever said Battlestar would take a hit.

Now couple this with the cylon loyalty card that says "draw 5 galactica damage tokens and apply 2 of them" and you suddenly have a dangerous cocktail.

Technically the Cylon using this card is the current player (unless he has been excecutive ordered) so wouldn´t that mean he can just pick up all 4 pegasus tokens and apply his damage to areas completely at his own discretion (on galactica he will not usually be able to draw all the tokens). Also this course of action might be taken when Pegasus has already taken 2 hits to ensure it´s utter destruction which some might see as a tad too powerful an ability.

Or is it that this specific card can only draw Galactica tokens?

Yup, that's how it works.

Ehmmm?! Which way again?

I set up 2 scenarios for how it might work (although the 2nd one was alot shorter).

Im assuming you mean the 1st more complicated explanation but basically I say "is this A or is this B" and you answer "yes"

He means yes, take a total of 5 tokens from either ship and choose which to use.