**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended September 30, 2008





OR





**oTRANSITION
      REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**




For
      the
      transition period from _____________ to ___________________.






Commission
      file number: 000-51425




**Rancher
      Energy Corp.**


(Exact
      name of registrant as specified in its charter)





Nevada
            
            98-0422451(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)





999
      -
      18 th Street,
      Suite 3400


Denver,
      CO 80202


(Address
      of principal executive offices)





(303)
      629-1125


(Registrant’s
      telephone number, including area code)




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


Yes x No
o
  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.
  Large accelerated filer
              o
              
              Accelerated filer
              oNon-accelerated filer
              o
              (Do not check if a smaller reporting company)
              Small reporting company
              x
  Indicate by
        check mark whether the registrant is a shell company (as defined in Rule
        12b-2
        of the Exchange Act).
  Yes
o No
x
  As
        of
        November 10, 2008, 116,112,878 shares of Rancher Energy Corp. common stock,
        $.00001 par value, were outstanding.
  
  **Rancher
        Energy Corp.**
  **Table
        of Contents**
 **PART
                    I - FINANCIAL INFORMATION**Item
                    1.
                Financial
                    StatementsUnaudited
                    Consolidated Balance Sheets as of September 30, 2008 and March
                    31,
                    2008
                03Unaudited
                    Consolidated Statements of Operations for the Three Months ended
                    September
                    30, 2008 and 2007
                05Unaudited
                    Consolidated Statements of Operations for the Six Months ended
                    September
                    30, 2008 and 2007
                06Unaudited
                    Consolidated Statement of Changes in Stockholders’ Equity as of September
                    30, 2008
                07Unaudited
                    Consolidated Statements of Cash Flows for the Six Months ended
                    September
                    30, 2008 and 2007
                08Notes
                    to Consolidated Financial Statements
                09Item
                    2.
                Management's
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                19Item
                    3.
                Quantitative
                    and Qualitative Disclosures About Market Risk
                26Item
                    4.
                Controls
                    and Procedures
                26**PART
                    II - OTHER INFORMATION**Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                27Item
                    6.
                Exhibits
                28**SIGNATURES**
                31
  2
  **PART
        I. FINANCIAL INFORMATION.**
 
 **Item
        1. Financial Statements**
 
 Rancher
        Energy Corp.
 Consolidated
        Balance Sheets
 (Unaudited)
 
 **ASSETS**
 
 September 30, 2008
              
              March 31, 2008Current
                  assets:Cash
                  and cash equivalents
              
              $
              5,141,371
              
              $
              6,842,365Accounts
                  receivable and prepaid expenses
              
              
              1,000,029
              
              
              1,170,641Total
                  current assets
              
              
              6,141,400
              
              
              8,013,006Oil
                  and gas properties at cost (successful efforts method):Unproved
              
              
              54,054,852
              
              
              54,058,073Proved
              
              
              20,920,412
              
              
              20,734,143Less:
                  Accumulated depletion, depreciation, amortization and
                  impairment
              
              
              (8,810,672
              )
              
              (1,531,619
              )Net
                  oil and gas properties
              
              
              66,164,592
              
              
              73,260,597Other
                  assets:Furniture
                  and equipment net of accumulated depreciation of $288,107 and $204,420,
                  respectively
              
              
              863,643
              
              
              997,196Other
                  assets
              
              
              903,630
              
              
              1,300,382Total
                  other assets
              
              
              1,767,273
              
              
              2,297,578Total
                  assets
              
              $
              74,073,265
              
              $
              83,571,181
 
 The
        accompanying notes are an integral part of these financial
        statements.
  3
 
 Rancher
        Energy Corp.
 Consolidated
        Balance Sheets
 
 (Unaudited)
 
 **LIABILITIES
        AND STOCKHOLDERS’ EQUITY**
 
 September 30, 2008
              
              March 31, 2008Current
                  liabilities:Accounts
                  payable and accrued liabilities
              
              $
              1,229,472
              
              $
              2,114,204Accrued
                  oil and gas property costs
              
              
              250,000
              
              
              250,000Asset
                  retirement obligation
              
              
              360,638
              
              
              337,685Note
                  payable, net of unamortized discount of $366,123 and $2,527,550,
                  respectively
              
              
              11,873,877
              
              
              9,712,450Derivative
                  liability
              
              
              713,063
              
              
              590,480Total
                  current liabilities
              
              
              14,427,050
              
              
              13,004,819Long-term
                  liabilities:Derivative
                  liability
              
              
              55,158
              
              
              246,553Asset
                  retirement obligation
              
              
              974,311
              
              
              922,166Total
                  long-term liabilities
              
              
              1,029,469
              
              
              1,168,719Commitments
                  and contingenciesStockholders’
                  equity:Common
                  stock, $0.00001 par value, 275,000,000 shares authorized at September
                  30
                  and June 30, 2008; 116,112,855 and 114,878,341 shares issued
                  and outstanding at September 30 and March 31, 2008,
                  respectively
              
              
              1,162
              
              
              1,150Additional
                  paid-in capital
              
              
              92,226,152
              
              
              91,790,181Accumulated
                  deficit
              
              
              (33,610,568
              )
              
              (22,393,688
              )Total
                  stockholders’ equity
              
              
              58,616,746
              
              
              69,397,643Total
                  liabilities and stockholders’ equity
              
              $
              74,073,265
              
              $
              83,571,181
  The
        accompanying notes are an integral part of these financial
        statements.
  4
  Rancher
        Energy Corp.
 Consolidated
        Statements of Operations
 (Unaudited)
 
 Three Months Ended September 30,Revenues:
              
              2008
              
              2007Oil
                  and gas sales
              
              $
              1,995,901
              
              $
              1,650,628Gains
                  on derivative activities, net
              
              
              1,305,551
              
              
              -Total
                  revenues
              
              
              3,301,452
              
              
              1,650,628Operating
                  expenses:Production
                  taxes
              
              
              243,366
              
              
              201,182Lease
                  operating expenses
              
              
              549,441
              
              
              691,429Depreciation,
                  depletion, and amortization
              
              
              301,708
              
              
              368,724Accretion
                  expense
              
              
              30,835
              
              
              31,618Impairment
                  of unproved properties
              
              
              6,800,000
              
              
              -Exploration
                  expense
              
              
              -
              
              
              89,668General
                  and administrative
              
              
              959,777
              
              
              1,513,100Total
                  operating expenses
              
              
              8,885,127
              
              
              2,895,721Loss
                  from operations
              
              
              (5,583,675
              )
              
              (1,245,093
              )Other
                  income (expense):Liquidated
                  damages pursuant to registration rights arrangement
              
              
              -
              
              
              (1,268,283
              )Amortization
                  of deferred financing costs and discount on note payable
              
              
              (1,366,527
              )
              
              (99,254
              )Interest
                  expense
              
              
              (375,399
              )
              
              (41,941
              )Interest
                  and other income
              
              
              8,737
              
              
              25,541Total other expense
              
              
              (1,733,189
              )
              
              (1,383,937
              )Net
                  loss
              
              $
              (7,316,864
              )
              $
              (2,629,030
              )Basic
                  and diluted net loss per share
              
              $
              (0.06
              )
              $
              (0.02
              )Basic
                  and diluted weighted average shares outstanding
              
              
              115,457,475
              
              
              108,018,888
  The
        accompanying notes are an integral part of these financial
        statements
  5
  Rancher
        Energy Corp.
 Consolidated
        Statements of Operations
 (Unaudited)
 
 Six Months Ended September 30,Revenues:
              
              2008
              
              2007Oil
                  and gas sales
              
              $
              3,894,869
              
              $
              2,981,107Losses
                  on derivative activities, net
              
              
              (589,743
              )
              
              -Total
                  revenues
              
              
              3,305,126
              
              
              2,981,107Operating
                  expenses:Production
                  taxes
              
              
              473,649
              
              
              362,651Lease
                  operating expenses
              
              
              1,172,863
              
              
              1,279,661Depreciation,
                  depletion, and amortization
              
              
              577,549
              
              
              700,256Accretion
                  expense
              
              
              77,111
              
              
              77,608Impairment
                  of unproved properties
              
              
              6,800,000
              
              
              -Exploration
                  expense
              
              
              9,602
              
              
              130,829General
                  and administrative
              
              
              2,008,154
              
              
              4,053,091Total
                  operating expenses
              
              
              11,118,928
              
              
              6,604,096Loss
                  from operations
              
              
              (7,813,802
              )
              
              (3,622,989
              )Other
                  income (expense):Liquidated
                  damages pursuant to registration rights arrangement
              
              
              -
              
              
              (2,645,393
              )Amortization
                  of deferred financing costs and discount on note payable
              
              
              (2,675,702
              )
              
              (99,254
              )Interest
                  expense
              
              
              (746,694
              )
              
              (113,180
              )Interest
                  and other income
              
              
              19,318
              
              
              73,865Total other expense
              
              
              (3,403,078
              )
              
              (2,783,962
              )Net
                  loss
              
              $
              (11,216,880
              )
              $
              (6,406,951
              )Basic
                  and diluted net loss per share
              
              $
              (0.
                  10
              )
              $
              (0.06
              )Basic
                  and diluted weighted average shares outstanding
              
              
              115,213,149
              
              
              105,888,646
  The
        accompanying notes are an integral part of these financial
        statements
  6
  Rancher
        Energy Corp.
 Consolidated
        Statement of Changes in Stockholders’ Equity
 (Unaudited)
 
 Shares
              
              Amount
              
              Additional Paid-In Capital
              
              Accumulated Deficit
              
              Total Stockholders’
                EquityBalance,
                  March 31, 2008
              
              
              114,878,341
              
              $
              1,150
              
              $
              91,790,181
              
              $
              (22,393,688
              )
              $
              69,397,643Stock
                  issued upon exercise of stock options
              
              
              500,000
              
              
              5
              
              
              -
              
              
              -
              
              
              5Restricted
                  stock awards
              
              
              -
              
              
              -
              
              
              51,700
              
              
              -
              
              
              51,700Common
                  stock exchanged for services–non-employee directors
              
              
              734,514
              
              
              7
              
              
              148,493
              
              
              -
              
              
              148,500Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              235,778
              
              
              -
              
              
              235,778Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (11,216,880
              )
              
              (11,216,880
              )Balance,
                  September 30, 2008
              
              
              116,112,855
              
              $
              1,162
              
              $
              92,226,152
              
              $
              (33,610,568
              )
              $
              58,616,746
  The
        accompanying notes are an integral part of these financial
        statements.
  7
  Rancher
        Energy Corp.
 Consolidated
        Statements of Cash Flows
 (Unaudited)
 
 Six Months Ended September 30,2008
              
              2007Cash
                  flows from operating activities:Net
                  loss
              
              $
              (11,216,880
              )
              $
              (6,406,951
              )Adjustments
                  to reconcile net loss to cash used for operating
                  activities:Depreciation,
                  depletion, and amortization
              
              
              577,549
              
              
              700,256Impairment
                  of unproved properties
              
              
              6,800,000
              
              
              -Accretion
                  expense
              
              
              77,111
              
              
              77,608Asset
                  retirement obligation settlements
              
              
              (32,657
              )
              
              (46,665
              )Liquidated
                  damages pursuant to registration rights arrangement
              
              
              -
              
              
              2,645,393Imputed
                  interest expense
              
              
              -
              
              
              112,488Amortization
                  of deferred financing costs and discount on note payable
              
              
              2,675,703
              
              
              -Unrealized
                  gains on derivative activities
              
              
              (60,165
              )
              
              -Stock-based
                  compensation expense
              
              
              235,778
              
              
              570,034Services
                  exchanged for common stock - directors
              
              
              200,200
              
              
              303,592Services
                  exchanged for common stock – non-employee
              
              
              -
              
              
              112,500Loss
                  on asset sale
              
              
              35,797
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (30,909
              )
              
              (179,320
              )Prepaid
                  expenses
              
              
              201,520
              
              
              (49,857
              )Other
                  assets
              
              
              -
              
              
              6,416Accounts
                  payable and accrued liabilities
              
              
              (630,323
              )
              
              298,929Net
                  cash used for operating activities
              
              
              (1,167,276
              )
              
              (1,855,577
              )Cash
                  flows from investing activities:Capital
                  expenditures for oil and gas properties
              
              
              (199,882
              )
              
              (1,466,291
              )Proceeds
                  from conveyance of unproved oil and gas properties
              
              
              -
              
              
              491,500Increase
                  in other assets
              
              
              (232,363
              )
              
              (619,144
              )Net
                  cash used for investing activities
              
              
              (432,245
              )
              
              (1,593,935
              )Cash
                  flows from financing activities:Payment
                  of deferred financing costs
              
              
              (101,478
              )
              
              (1,951
              )Proceeds
                  from issuance of common stock upon exercise of stock
                  options
              
              
              5
              
              
              12Payment
                  of offering costs
              
              
              -
              
              
              (234,012
              )Net
                  cash used for financing activities
              
              
              (101,473
              )
              
              (235,951
              )Decrease
                  in cash and cash equivalents
              
              
              (1,700,994
              )
              
              (3,685,463
              )Cash
                  and cash equivalents, beginning of period
              
              
              6,842,365
              
              
              5,129,883Cash
                  and cash equivalents, end of period
              
              $
              5,141,371
              
              $
              1,444,420Supplemental
                  schedule of additional cash flow information and non-cash investing
                  and
                  financing activities:Cash
                  paid for interest
              
              $
              746,640
              
              $
              -Payables
                  settled for oil and gas properties
              
              $
              47,478
              
              $
              41,867Asset
                  retirement asset and obligation
              
              $
              30,644
              
              $
              18,473Common
                  stock issued on payment of liquidated damages pursuant to registration
                  rights arrangement
              
              $
              -
              
              $
              4,235,787
  8
  Rancher
        Energy Corp.
 Notes
        to
        Consolidated Financial Statements
 (Unaudited)
  **Note
        1 – Organization and Summary of Significant Accounting
        Policies**
  Organization
  Rancher
        Energy Corp. (“Rancher Energy” or the “Company”) was incorporated in Nevada on
        February 4, 2004. The Company acquires, explores for, develops and produces
        oil
        and natural gas, concentrating on applying secondary and tertiary recovery
        technology to older, historically productive fields in North America.
  Basis
        of Presentation
  The
        accompanying unaudited consolidated financial statements include the accounts
        of
        the Company’s wholly owned subsidiary, Rancher Energy Wyoming, LLC, a Wyoming
        limited liability company that was formed on April 24, 2007. In management’s
        opinion, the Company has made all adjustments, consisting of only normal
        recurring adjustments, necessary for a fair presentation of financial position,
        results of operations, and cash flows. The consolidated financial statements
        should be read in conjunction with financial statements included in the
        Company’s Annual Report on Form 10-K for the year ended March 31, 2008. The
        accompanying consolidated financial statements have been prepared in accordance
        with accounting principles generally accepted in the United States for interim
        financial information. They do not include all information and notes required
        by
        generally accepted accounting principles for complete financial statements.
        However, except as disclosed herein, there has been no material change in
        the
        information disclosed in the notes to financial statements included in the
        Company’s Annual Report on Form 10-K for the year ended March 31, 2008.
        Operating results for the periods presented are not necessarily indicative
        of
        the results that may be expected for the full year.
  The
        accompanying financial statements have been prepared on the basis of accounting
        principles applicable to a going concern, which contemplates the realization
        of
        assets and extinguishment of liabilities in the normal course of business.
        As
        shown in the accompanying financial statements, the Company has incurred
        a
        cumulative net loss of $33.6 million for the period from inception (February
        4,
        2004) to September 30, 2008, and it has a working capital deficit of
        approximately $8.3 million as of September 30, 2008. Subsequent to September
        30,
        2008, the Company made a principal payment on its short term debt, scheduled
        to
        mature on October 31, 2008, and extended the maturity of the remaining
        $10,000,000 balance until April 30, 2009. The Company will require significant
        additional funding to repay this debt on the new maturity date, and for its
        planned oil and gas development operations. The Company’s ability to continue
        the Company as a going concern is dependent upon its ability to obtain
        additional funding in order to finance its planned operations.
  Use
        of
        Estimates in the Preparation of Financial Statements
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of oil and gas reserves,
        assets
        and liabilities, disclosure of contingent assets and liabilities at the date
        of
        the financial statements, and the reported amounts of revenues and expenses
        during the reporting periods. Actual results could differ from those estimates.
        Significant estimates include oil and gas reserve quantities that provide
        the
        basis for calculations of depletion, depreciation, and amortization (DD&A),
        and impairment, timing and costs associated with asset retirement obligations,
        and estimates of the fair value of derivative instruments, each of which
        represents a significant component of the financial statements.
  9
  Oil
        and Gas Producing Activities
  The
        Company uses the successful efforts method of accounting for its oil and
        gas
        properties. Under this method of accounting, all property acquisition costs
        and
        costs of exploratory and development wells are capitalized when incurred,
        pending determination of whether the well has found proved reserves. If an
        exploratory well does not find proved reserves, the costs of drilling the
        well
        are charged to expense. Exploratory dry hole costs are included in cash flows
        from investing activities as part of capital expenditures within the
        consolidated statements of cash flows. The costs of development wells are
        capitalized whether or not proved reserves are found. Costs of unproved leases,
        which may become productive, are reclassified to proved properties when proved
        reserves are discovered on the property. Unproved oil and gas interests are
        carried at the lower of cost or estimated fair value and are not subject
        to
        amortization.
  Geological
        and geophysical costs and the costs of carrying and retaining unproved
        properties are expensed as incurred. DD&A of capitalized costs related to
        proved oil and gas properties is calculated on a property-by-property basis
        using the units-of-production method based upon proved reserves. The computation
        of DD&A takes into consideration restoration, dismantlement, and abandonment
        costs and the anticipated proceeds from salvaging equipment.
  The
        Company complies with Statement of Financial Accounting Standards Staff Position
        No. FAS 19-1, “ Accounting
        for Suspended Well Costs” (FSP
        FAS
        19-1). The Company currently does not have any existing capitalized exploratory
        well costs, and has therefore determined that no suspended well costs should
        be
        impaired.
  The
        Company reviews its long-lived assets for impairments when events or changes
        in
        circumstances indicate that impairment may have occurred. The impairment
        test
        for proved properties compares the expected undiscounted future net cash
        flows
        on a property-by-property basis with the related net capitalized costs,
        including costs associated with asset retirement obligations, at the end
        of each
        reporting period. Expected future cash flows are calculated on all proved
        reserves using a discount rate and price forecasts selected by the Company’s
        management. The discount rate is a rate that management believes is
        representative of current market conditions. The price forecast is based
        on
        NYMEX strip pricing, adjusted for basis and quality differentials, for the
        first
        three to five years and is held constant thereafter. Operating costs are
        also
        adjusted as deemed appropriate for these estimates. When the net capitalized
        costs exceed the undiscounted future net revenues of a field, the cost of
        the
        field is reduced to fair value, which is determined using discounted future
        net
        revenues. An impairment allowance is provided on unproved property when the
        Company determines the property will not be developed or the carrying value
        is
        not realizable. For the six months ended September 30, 2008 the Company
        recognized impairment of unproved properties of $6,800,000, representing
        the
        excess of the carrying value over the estimated realizable value of such
        property.
  Capitalized
        Interest
  The
        Company’s policy is to capitalize interest costs to oil and gas properties on
        expenditures made in connection with exploration, development and construction
        projects that are not subject to current DD&A and that require greater than
        six months to be readied for their intended use (“qualifying projects”).
        Interest is capitalized only for the period that such activities are in
        progress. To date, the Company has had no such qualifying projects during
        periods when interest expense has been incurred. Accordingly, the Company
        has
        recorded no capitalized interest.
  Commodity
        Derivatives
  The
        Company accounts for derivative instruments or hedging activities under the
        provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133,
“Accounting for Derivative Instruments and Hedging Activities.”
SFAS No. 133 requires the Company to record derivative instruments at
        their fair value. The Company’s risk management strategy is to enter into
        commodity derivatives that set “price floors” and “price ceilings” for its crude
        oil production. The objective is to reduce the Company’s exposure to commodity
        price risk associated with expected crude oil production.
  The
        Company has elected not to designate the commodity derivatives to which they
        are
        a party as cash flow hedges, and accordingly, such contracts are recorded
        at
        fair value on its balance sheets and changes in such fair value are recognized
        in current earnings as income or expense as they occur.
  10
   The
        Company does not hold or issue commodity derivatives for speculative or trading
        purposes. The Company is exposed to credit losses in the event of nonperformance
        by the counterparty to its commodity derivatives. It is anticipated, however,
        that its counterparty will be able to fully satisfy its obligations under
        the
        commodity derivatives contracts. The Company does not obtain collateral or
        other
        security to support its commodity derivatives contracts subject to credit
        risk
        but does monitor the credit standing of the counterparty. The
        price
        the Company receives for production in its three fields is indexed to Wyoming
        Sweet crude oil posted price. The
        Company has not hedged the basis differential between the NYMEX price and
        the
        Wyoming Sweet price. Under the terms of the Company’s Term Credit Agreement
        entered into during October 2007 it was required to hedge a portion of its
        expected future production, and it entered into a costless collar agreement
        for
        a portion of its anticipated future crude oil production. The costless collar
        contains a fixed floor price (put) and ceiling price (call). If the index
        price exceeds the call strike price or falls below the put strike price,
        the
        Company receives the fixed price and pays the market price. If the market
        price
        is between the call and the put strike price, no payments are due from either
        party.
  The
        table
        below summarizes the realized and unrealized losses related to the Company’s
        derivative instruments for the three and six months ended September 30, 2008.
  Three Months Ended
                September 30, 2008
              
              Six Months Ended
                September 30, 2008Realized losses on
                  derivative instruments
              
              $
              (299,428
              )
              $
              (649,908
              )Unrealized
                  gains (losses) on derivative instruments
              
              
              1,604,979
              
              
              60,165Total
                  realized and unrealized gains (losses) recorded
              
              $
              1,305,551
              
              $
              (589,743
              )
  The
        Company had no derivative transactions during the same period in
        2007.
  The
        table
        below summarizes the terms of the Company’s costless collar:
  Contract
                Feature
              
              Contract Term
              
              Total Volume
                Hedged(Bbls)
              
              Remaining
                Volume Hedged
                (Bbls)
              
              Index
              
              Fixed Price
                ($/Bbl)
              
              Position at
                September 30,
                2008 Due To
                (From)
                CompanyPut
              
              
              Nov
                  07—Oct 09
              
              
              113,220
              
              
              59,804
              
              
              WTI NYMEX
              
              $
              65.00
              
              
              -Call
              
              
              Nov
                  07—Oct 09
              
              
              67,935
              
              
              35,884
              
              
              WTI
                  NYMEX
              
              $
              83.50
              
              $
              (768,221
              )
  The
        Company established the fair value of its derivative instruments using estimates
        of fair value reported by the counterparty and subsequently evaluated internally
        using a published index price, the Black-Scholes option-pricing model and
        other
        factors including volatility and time value. The actual contribution to the
        Company’s future results of operations will be based on the market prices at the
        time of settlement and may be more or less than the value estimates used
        at
        September 30, 2008.
  Other
        Significant Accounting Policies
  Other
        accounting policies followed by the Company are set forth in Note 1 to the
        Consolidated Financial Statements included in its Annual Report on Form 10-K
        for
        the year ended March 31, 2008, and are supplemented in the Notes to Consolidated
        Financial Statements in this Quarterly Report on Form 10-Q for the six months
        ended September 30, 2008. These unaudited consolidated financial statements
        and
        notes should be read in conjunction with the consolidated financial statements
        and notes included in the Annual Report on Form 10-K for the year ended March
        31, 2008.
 
 Net
        Loss Per Share
  Basic
        net
        (loss) per common share of stock is calculated by dividing net loss available
        to
        common stockholders by the weighted-average of common shares outstanding
        during
        each period.
  11
  Diluted
        net income per common share is calculated by dividing adjusted net loss by
        the
        weighted-average of common shares outstanding, including the effect of other
        dilutive securities. The Company’s potentially dilutive securities consist of
        in-the-money outstanding options and warrants to purchase the Company’s common
        stock. Diluted net loss per common share does not give effect to dilutive
        securities as their effect would be anti-dilutive.
  The
        treasury stock method is used to measure the dilutive impact of stock options
        and warrants. For the six months ended September 30, 2008 and 2007,
        anti-dilutive stock options and warrants of 75,216,895 and 80,523,550,
        respectively have been omitted from the earnings per share
        computation.
 
 Reclassification
  Certain
        amounts in the 2007 financial statements have been reclassified to conform
        to
        the 2008 financial statement presentation. Such reclassification had no effect
        on net loss.
  Recent
        Accounting Pronouncements
  In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 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. In February 2008,
        the
        FASB issued FASB Staff Position (FSP) FAS 157-1, “Application of FASB Statement
        No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
        That Address Fair Value Measurements for Purposes of Lease Classification
        or
        Measurement under Statement 13,” which removes certain leasing transactions from
        the scope of SFAS No. 157, and FSP FAS 157-2, “Effective Date of FASB
        Statement No. 157,” which defers the effective date of SFAS No. 157
        for one year for certain nonfinancial assets and nonfinancial liabilities,
        except those that are recognized or disclosed at fair value in the financial
        statements on a recurring basis.   In October 2008, the FASB
        issued FSPFAS 157-3, “Determining the Fair Value of a Financial Asset When the
        Market for that Asset is Not Active”, which clarified the application of SFAS
        No. 157 as it relates to the valuation of financial assets in a market that
        is not active for those financial assets. On April
        1 ,
        2008, the
        Company adopted
        without material impact on the Company’s consolidated financial statements the
        provisions of SFAS No. 157 related to financial assets and liabilities and
        to nonfinancial assets and liabilities measured at fair value on a recurring
        basis. Beginning April
        1 ,
        2009, the
        Company plans to adopt
        the
        provisions for nonfinancial assets and nonfinancial liabilities that are
        not
        required or permitted to be measured at fair value on a recurring basis,
        which
        will include, among others, those nonfinancial long-lived assets measured
        at
        fair value for impairment assessment and asset retirement obligations initially
        measured at fair value. The
        Company does not
        expect the provisions of SFAS No. 157 related to these items to have a
        material impact on its financial statements .
  On
        February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value
        Option for Financial Assets and Financial Liabilities.” This Statement
        establishes presentation and disclosure requirements designed to facilitate
        comparisons between companies that choose different measurement attributes
        for
        similar types of assets and liabilities. SFAS No. 159 was effective for the
        Company’s financial statements on April 1, 2008 and the adoption had no material
        effect on its financial position or results of operations.
  In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
        Combinations” (“SFAS No. 141R”), which replaces FASB Statement No. 141.
        SFAS No. 141R establishes principles and requirements for how an acquirer
        recognizes and measures in its financial statements the identifiable assets
        acquired, the liabilities assumed, any non controlling interest in the acquiree
        and the goodwill acquired, and establishes that acquisition costs will be
        generally expensed as incurred. This statement also establishes disclosure
        requirements which will enable users to evaluate the nature and financial
        effects of the business combination. SFAS No. 141R is effective as of the
        beginning of an entity’s fiscal year that begins after December 15, 2008,
        which will be the Company’s year beginning April 1, 2009. The Company is
        currently evaluating the potential impact, if any, of the adoption of SFAS
        No. 141R on its future financial reporting.
  12
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
        in Consolidated Financial Statements—Amendments of ARB No. 51.” SFAS
        No. 160 states that accounting and reporting for minority interests will be
        recharacterized as noncontrolling interests and classified as a component
        of
        equity. SFAS No. 160 also establishes reporting requirements that provide
        sufficient disclosures that clearly identify and distinguish between the
        interests of the parent and the interests of the noncontrolling owners. This
        statement is effective as of the beginning of an entity’s first fiscal year
        beginning after December 15, 2008, which corresponds to the Company’s year
        beginning January 1, 2009. The Company is currently evaluating the
        potential impact, if any, of the adoption of SFAS No. 160 on its future
        financial reporting.
  On
        March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about
        Derivative Instruments and Hedging Activities” which amends SFAS No. 133 by
        requiring expanded disclosures about an entity’s derivative instruments and
        hedging activities, but does not change SFAS No. 133’s scope or accounting.
        This statement is effective for financial statements issued for fiscal years
        and
        interim periods beginning after November 15, 2008, with early adoption
        permitted. The Company is currently evaluating the potential impact, if any,
        of
        the adoption of SFAS No. 161 on its future financial
        reporting.
  **Note
        2—Oil and Gas Properties**
  Acquisitions
  In
        December 2006 and January 2007 the Company purchased oil and gas properties
        in
        Wyoming’s Powder River Basin area, consisting of the Cole Creek South Field, the
        South Glenrock B Field and the Big Muddy Field. The total purchase price
        for the
        three fields was $71.8 million plus acquisition and closing costs of $1.6
        million. The
        Company’s business plan includes the injection of CO 2 into its
        three oil fields and the Company has entered into two separate CO 2 agreements
        as more fully described in the Company’s Annual Report on Form 10-K for the year
        ended March 31, 2008.
  The
        Company’s oil and gas properties are summarized in the following
        table:
  **September 30,**
              
              **March
                  31,****2008**
              
              **2008**Proved
                  properties
              
              $
              20,920,412
              
              $
              20,734,143Unproved
                  properties excluded from DD&A
              
              
              53,684,216
              
              
              53,655,471Equipment
                  and other
              
              
              370,636
              
              
              402,602Subtotal
                  Unevaluated Properties
              
              
              54,054,852
              
              
              54,058,073Total
                  oil and gas properties
              
              
              74,975,264
              
              
              74,792,216Less
                  accumulated depletion, depreciation, amortization and impairment
              
              
              (8,810,672
              )
              
              (1,531,619
              )$
              66,164,592
              
              $
              73,260,597
  Impairment
        of Unproved Properties
  In
        conjunction with the periodic assessment of impairment of unproved properties,
        the Company re-evaluated the carrying value of its unproved properties giving
        consideration to lower crude oil prices and the difficulties encountered
        in
        raising capital to develop the properties. Accordingly, during the six months
        ended September 30, 2008 the Company recorded $6,800,000 of impairment expense
        on unproved properties, reflecting the excess of the carrying value over
        estimated realizable value of the assets.
  Exploration
        of Strategic Alternatives
  In
        August
        2008, the Company retained Growth Capital Partners, L.P. as its financial
        advisor to assist in exploring financing and other strategic alternatives,
        including the possible sale of the Company. This process is expected to take
        several months, and there is no assurance that any transaction will be
        completed.
  13
  **Note
        3 – Asset Retirement Obligations**
  The
        Company recognizes an estimated liability for future costs associated with
        the
        abandonment of its oil and gas properties. A liability for the fair value
        of an
        asset retirement obligation and a corresponding increase to the carrying
        value
        of the related long-lived asset are recorded at the time a well is completed
        or
        acquired. The increase in carrying value is included in proved oil and gas
        properties in the balance sheets. The Company depletes the amount added to
        proved oil and gas property costs and recognizes accretion expense in connection
        with the discounted liability over the remaining estimated economic lives
        of the
        respective oil and gas properties. Cash paid to settle asset retirement
        obligations are included in the operating section of the Company’s statements of
        cash flows.
  The
        Company’s estimated asset retirement obligation liability is based on historical
        experience in abandoning wells, estimated economic lives, estimates as to
        the
        cost to abandon the wells in the future, and federal and state regulatory
        requirements. The liability is discounted using a credit-adjusted risk-free
        rate
        estimated at the time the liability is incurred or revised, as appropriate.
        Revisions to the liability result from changes in estimated abandonment costs,
        changes in well economic lives, or if federal or state regulators enact new
        requirements regarding the abandonment of wells.
  A
        reconciliation of the Company’s asset retirement obligation liability during the
        six months ended September
        30 is as
        follows:
  2008
              
              2007Balance,
                  April 1
              
              $
              1,259,851
              
              $
              1,221,567Liabilities
                  incurred
              
              
              -
              
              
              18,473Liabilities
                  settled
              
              
              (32,657
              )
              
              (46,665
              )Changes
                  in estimates
              
              
              30,644
              
              
              -Accretion
                  expense
              
              
              77,111
              
              
              77,608Balance,
                  September 30
              
              
              1,334,949
              
              $
              1,270,983Current
              
              $
              360,638
              
              $
              180,260Long-term
              
              
              974,311
              
              
              1,090,723$
              1,334,949
              
              $
              1,270,983
  **Note
        4 — Fair Value Measurements**
  On
        April
        1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” which
        defines fair value, establishes a framework for using fair value to measure
        assets and liabilities, and expands disclosures about fair value measurements.
        The Statement establishes a hierarchy for inputs used in measuring fair value
        that maximizes the use of observable inputs and minimizes the use of
        unobservable inputs by requiring that the most observable inputs be used
        when
        available. Observable inputs are inputs that market participants would use
        in
        pricing the asset or liability developed based on market data obtained from
        sources independent of the Company. Unobservable inputs are inputs that reflect
        the Company’s assumptions of what market participants would use in pricing the
        asset or liability developed based on the best information available in the
        circumstances. The hierarchy is broken down into three levels based on the
        reliability of the inputs as follows:
  ·
              Level
                  1: Quoted prices are available in active markets for identical
                  assets or
                  liabilities;
  ·
              Level
                  2: Quoted prices in active markets for similar assets and liabilities
                  that
                  are observable for the asset or liability;
                  or
  ·
              Level
                  3: Unobservable pricing inputs that are generally less observable
                  from
                  objective sources, such as discounted cash flow models or
                  valuations.
  14
  SFAS
        No. 157 requires financial assets and liabilities to be classified based on
        the lowest level of input that is significant to the fair value measurement.
        The
        Company’s assessment of the significance of a particular input to the fair value
        measurement requires judgment, and may affect the valuation of the fair value
        of
        assets and liabilities and their placement within the fair value hierarchy
        levels. The following table presents the company’s financial assets and
        liabilities that were accounted for at fair value on a recurring basis as
        of
        September 30, 2008 by level within the fair value hierarchy:
 Fair Value Measurements UsingLevel 1
                
                Level 2
                
                Level 3Assets
                
                $
                —
                
                $
                —
                
                $
                —Liabilities:Derivative
                    instrument
                
                $
                —
                
                $
                —
                
                $
                768,221
  The
        Company’s sole derivative financial instrument is a participating cap costless
        collar agreement. The fair value of the costless collar agreement is determined
        based on both observable and unobservable pricing inputs and therefore, the
        data
        sources utilized in these valuation models are considered level 3 inputs
        in the
        fair value hierarchy. Because the Company has net derivative liabilities
        as of
        September 30, 2008, the evaluation of the nonperformance risk of the Company
        resulted in a reduction of the net payable derivative contract position of
        approximately $52,000 as of that date.
  The
        following table sets forth a reconciliation of changes in the fair value
        of
        financial liabilities classified as level 3 in the fair value
        hierarchy:
  Derivatives
              
              TotalBalance
                  as of April 1, 2008
              
              $
              (836,907
              )
              $
              (836,907
              )Total
                  losses (realized or unrealized):Included
                  in earnings
              
              
              (589,743
              )
              
              (589,743
              )Included
                  in other comprehensive income
              
              
              -
              
              
              -Purchases,
                  issuances and settlements
              
              
              658,429
              
              
              658,429Transfers
                  in and out of Level 3
              
              
              -
              
              
              -Balance
                  as of September 30, 2008
              
              $
              (768,221
              )
              $
              (768,221
              )Change
                  in unrealized losses included in earnings relating to derivatives
                  still
                  held as of September 30, 2008
              
              $
              (68,686
              )
              
              (68,686
              )
 
 **Note
        5 – Short-term Note Payable**
 
 On
        October 16, 2007, the Company borrowed $12,240,000 pursuant to a Term Credit
        Agreement (the “Credit
        Agreement”)
        with a financial institution (the “Lender”), which was subsequently amended on
        October 22, 2008 as more fully described in Note 9, Subsequent Events (“First
        Amendment”), resulting in net proceeds of $11,622,800 after the deduction of the
        Lender’s fees, expenses, and three months of interest to be held in escrow. In
        addition, the Company incurred approximately $390,000 in investment banking,
        legal, and other fees and expenses in connection with the transaction. The
        Company capitalized costs associated with the issuance of the note payable
        as
        deferred financing costs. Amortization of the deferred financing costs in
        the
        amounts of $279,908 and $514,275 is included in the Company’s statements of
        operations as amortization of deferred financing costs and discount on note
        payable for the three and six months ended September 30, 2008,
        respectively.
  Prior
        to
        the First Amendment, all amounts outstanding under the Credit Agreement were
        due
        and payable on October 31, 2008 with interest at a rate equal to the greater
        of
        (a) 12% per annum and (b) the one-month LIBOR rate plus 6% per annum. The
        Company is required to make monthly interest payments on the amounts outstanding
        under the Credit Agreement, but is not required to make any principal payments
        until the maturity date. The Company may prepay the amounts outstanding under
        the Credit Agreement at any time without penalty.
  15
  The
        Company’s obligations under the Credit Agreement are collateralized by a first
        priority security interest in its properties and assets, including all rights
        under oil and gas leases in its three producing oil fields in the Powder
        River
        Basin of Wyoming and all of its equipment on those properties. The Company
        also
        granted the Lender a 2% Overriding Royalty Interest (ORRI), proportionally
        reduced when the Company’s working interest is less than 100%, in all crude oil
        and natural gas produced from its three Powder River Basin fields. The Company
        estimated that the fair value of the ORRI granted to the Lender was
        approximately $4,500,000 and has recorded this amount as a discount to the
        Note
        Payable and as a decrease of oil and gas properties. Amortization of the
        discount based upon the effective interest method in the amount of $1,086,619
        and $2,161,427 is included in the Company’s statements of operations as
        amortization of deferred financing costs and discount on note payable for
        the
        three and six months ended September 30, 2008, respectively. As long as any
        of
        its obligations remain outstanding under the Credit Agreement, the Company
        will
        be required to grant the same ORRI to the Lender on any new working interests
        acquired after closing. Prior to the maturity date, the Company may re-acquire
        50% of the ORRI granted to the Lender at a repurchase price calculated to
        ensure
        that total payments by the Company to the Lender of principal, interest,
        ORRI
        revenues, and ORRI repurchase price will equal 120% of the loan amount.
  The
        Credit Agreement contains several events of default, including if, at any
        time
        after closing, the Company’s most recent reserve report indicates that its
        projected net revenue attributable to proved reserves is insufficient to
        fully
        amortize the amounts outstanding under the Credit Agreement within a 48-month
        period and it is unable to demonstrate to the Lender’s reasonable satisfaction
        that it would be able to satisfy such outstanding amounts through a sale
        of its
        assets or an sale of equity. Upon the occurrence of an event of default under
        the Credit Agreement, the Lender may accelerate the Company’s obligations under
        the Credit Agreement. Upon certain events of bankruptcy, obligations under
        the
        Credit Agreement would automatically accelerate. In addition, at any time
        that
        an event of default exists under the Credit Agreement, the Company will be
        required to pay interest on all amounts outstanding under the Credit Agreement
        at a default rate, which is equal to the then-prevailing interest rate under
        the
        Credit Agreement plus four percent per annum.
  The
        Company is subject to various restrictive covenants under the Credit Agreement,
        including limitations on its ability to sell properties and assets, pay
        dividends, extend credit, amend material contracts, incur indebtedness, provide
        guarantees, effect mergers or acquisitions (other than to change its state
        of
        incorporation), cancel claims, create liens, create subsidiaries, amend its
        formation documents, make investments, enter into transactions with its
        affiliates, and enter into swap agreements. The Company must maintain (a)
        a
        current ratio of at least 1.0 (excluding from the calculation of current
        liabilities any loans outstanding under the Credit Agreement) and (b) a
        loan-to-value ratio greater than 1.0 to 1.0 for the term of the loan. As
        of
        September 30, 2008 the Company is in compliance with all covenants under
        the
        Credit Agreement.
  See
        Note
        9, Subsequent Events, for a discussion of the First Amendment to the Credit
        Agreement entered into after September 30, 2008.
  **Note
        6 – Income Taxes**
 
 As
        of
        September 30, 2008, because the Company believes that it is more likely than
        not
        that its net deferred tax assets, consisting primarily of net operating losses,
        will not be utilized in the future, the Company has fully provided for a
        valuation of its net deferred tax assets.
 
 The
        Company is subject to United States federal income tax and income tax from
        multiple state jurisdictions. Currently, the Internal Revenue Service is
        not
        reviewing any of the Company’s federal income tax returns, and agencies in
        states where the Company conducts business are not reviewing any of the
        Company’s state income tax returns. All tax years remain subject to examination
        by tax authorities, including for the period from February 4, 2004 through
        March
        31, 2008.
 
 **Note
        7—Common Stock**
 
 The
        Company’s capital stock as of September 30, 2008 and 2007 consists of
        275,000,000 authorized shares of common stock, par value $0.00001 per
        share.
  16
  Issuance
        of Common Stock
  *For
        the Six Months Ended September 30, 2008*
  During
        the six months ended September 30, 2008, the Company issued common stock
        as
        follows:
  -
              500,000
                  shares to an officer of the Company upon the exercise of stock
                  options;-
              734,514
                  shares to directors of the Company in exchange for
                  services;
  **Note
        8—Share-Based Compensation**
  Chief
        Executive Officer (CEO) Options
  During
        the six months ended September 30, 2008, the Company’s CEO exercised options to
        acquire 500,000 shares of common stock, for a cumulative exercise price of
        $5.00
        ($0.00001/share).
  2006
        Stock Incentive Plan
  There
        were no options to purchase shares of common stock granted during the six
        months
        ended September 30, 2008. During the six months ended September 30, 2008,
        options to purchase 850,000 shares of common stock granted to employees expired.
        The options had exercise prices of $1.18 to $1.75.
  Total
        estimated unrecognized compensation cost from unvested stock options as of
        September 30, 2008 was approximately $108,000 which the Company expects to
        recognize over 3.5 years. As of September 30, 2008 there were 581,000 options
        outstanding under the 2006 Stock Incentive Plan and 9,419,000 options are
        available for issuance.
  Restricted
        Stock Award
  On
        April
        20, 2007, four new members were appointed to the Company’s Board of Directors.
        Each newly appointed director received a stock grant of 100,000 shares of
        the
        Company’s common stock that vests 20% (20,000 shares) on the date of grant with
        vesting 20% per year thereafter. On May 31, 2007, the remaining independent
        Board member not covered by the April 20, 2007 award received a stock grant
        of
        100,000 shares of the Company’s common stock that vests 20% (20,000 shares) on
        the date of grant with vesting 20% per year thereafter.
  On
        May
        22, 2007, the Company issued 400,000 shares of common stock to the four new
        board members, and on June 26, 2007, the Company issued 100,000 shares of
        common
        stock to the remaining independent Board member. Pursuant to the vesting
        discussed above, for the six months ended September 30, 2008, $51,700 has
        been
        reflected as a charge to general and administrative expense in the statement
        of
        operations, with a corresponding credit to additional paid-in
        capital.
  Board
        of Director Fees
  On
        April
        20, 2007, the Board of Directors approved a resolution whereby members may
        receive stock in lieu of cash for Board meeting fees, Committee meeting fees
        and
        Committee Chairman fees.
  For
        the
        six months ended September 30, 2008, board members elected to receive 734,514
        shares of common stock, respectively, in lieu of cash, ranging in value from
        $0.15 to $0.31 per share, representing the closing price of the Company’s stock
        on the date of grant. Total compensation for the six months ended September
        30,
        2008 of $148,500 has been reflected as a charge to general and administrative
        expense in the statement of operations, with a corresponding credit to common
        stock and additional paid-in capital.
  17
  **Note
        9—Subsequent Events**
  On
        October 22, 2008 the Company entered into a First Amendment to Term Credit
        Agreement (“First Amendment”) that amends certain provisions of the Term Credit
        Agreement dated as of October 16, 2007 pursuant to which the Company borrowed
        $12,240,000. The First Amendment extends for six months the maturity date
        under
        the Term Credit Agreement of October 31, 2008 to April 30, 2009. In
        consideration of the six month extension and other terms included in First
        Amendment, the Company made a principal payment to the Lender in the amount
        of
        $2,240,000, resulting in a new loan balance of $10,000,000, and granted an
        increase in the proportionate overriding royalty interests (“ORRI”) assigned to
        the Lender from 2% to 3%. Under the terms of the First Amendment, the Company
        has the right to buy back one-third (1/3) of the ORRI at a repurchase price
        calculated to ensure that total payments by the Company to the Lender of
        principal, interest, ORRI revenues, and ORRI repurchase price will equal
        140% of
        the original loan amount. The Company also has the right to apply the three
        months interest held in escrow under the terms of the original Term Credit
        Agreement, against the final three months interest payments due in February,
        March and April, 2009.
  18
  **Item
        2. Management's Discussion and Analysis of Financial Conditions and Results
        of
        Operations**
  **Forward-Looking
        Statements**
  The
        statements contained in this Quarterly Report on Form 10-Q that are not
        historical are “forward-looking statements”, as that term is defined in Section
        21E of the Securities Exchange Act of 1934, as amended (the Exchange Act),
        that
        involve a number of risks and uncertainties. These forward-looking statements
        include, among others, the following:
 
 ·
              business
                  strategy;
  ·
              ability
                  to complete a sale of the Company, all or a significant portion
                  of its
                  assets or financing or other strategic
                  alternatives;
  ·
              ability
                  to obtain the financial resources to repay secured debt and to
                  conduct the
                  EOR projects;
  ·
              water
                  availability and waterflood production targets;
  ·
              carbon
                  dioxide (CO2)
                  availability, deliverability, and tertiary production targets;
  ·
              construction
                  of surface facilities for waterflood and CO2operations
                  and a CO2pipeline;
  ·
              inventories,
                  projects, and programs;
  ·
              other
                  anticipated capital expenditures and budgets;
  ·
              future
                  cash flows and borrowings;
  ·
              the
                  availability and terms of financing;
  ·
              oil
                  reserves;
  ·
              reservoir
                  response to water and CO2injection;
  ·
              ability
                  to obtain permits and governmental approvals;
  ·
              technology;
  ·
              financial
                  strategy;
  ·
              realized
                  oil prices;
  ·
              production;
  ·
              lease
                  operating expenses, general and administrative costs, and finding
                  and
                  development costs;
  ·
              availability
                  and costs of drilling rigs and field services;
  ·
              future
                  operating results;
  ·
              plans,
                  objectives, expectations, and intentions; and
  These
        statements may be found under “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations”, and other sections of this Quarterly
        Report on Form 10-Q. Forward-looking statements are typically identified
        by use
        of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”,
“intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”,
“target” or “continue”, the negative of such terms or other comparable
        terminology, although some forward-looking statements may be expressed
        differently.
  The
        forward-looking statements contained in this Quarterly Report are largely
        based
        on our expectations, which reflect estimates and assumptions made by our
        management. These estimates and assumptions reflect our best judgment based
        on
        currently known market conditions and other factors. Although we believe
        such
        estimates and assumptions to be reasonable, they are inherently uncertain
        and
        involve a number of risks and uncertainties that are beyond our control.
        In
        addition, management’s assumptions about future events may prove to be
        inaccurate. Management cautions all readers that the forward-looking statements
        contained in this Quarterly Report on Form 10-Q are not guarantees of future
        performance, and we cannot assure any reader that such statements will be
        realized or the forward-looking events and circumstances will occur. Actual
        results may differ materially from those anticipated or implied in the
        forward-looking statements due to the factors listed in the “Risk Factors”
section and elsewhere in our Annual Report on Form 10-K for the year ended
        March
        31, 2008. All forward-looking statements speak only as of the date of this
        Quarterly Report on Form 10-Q. We do not intend to publicly update or revise
        any
        forward-looking statements as a result of new information, future events
        or
        otherwise. These cautionary statements qualify all forward-looking statements
        attributable to us or persons acting on our behalf.
  19
  **Organization**
  Rancher
        Energy is an independent energy company which explores for and develops,
        produces, and markets oil and gas in North America. Prior to April 2006,
        Rancher
        Energy, formerly known as Metalex Resources, Inc. (“Metalex”), was engaged in
        the exploration of a gold prospect in British Columbia, Canada. Metalex found
        no
        commercially exploitable deposits or reserves of gold. During April 2006,
        stockholders voted to change the name to Rancher Energy Corp. We operate
        three
        fields in the Powder River Basin, Wyoming, which is located in the Rocky
        Mountain region of the United States. The fields were acquired in December
        2006
        and January 2007 and are known as the South Glenrock B Field, the Big Muddy
        Field, and the Cole Creek South Field. Our business plan in acquiring the
        three
        fields was to substantially increase production by using waterflood,
        CO 2 injection
        and other enhanced oil recovery (EOR) techniques. All three fields currently
        produce some oil and we believe that, subject to financing, they are good
        candidates for EOR techniques, waterflood or CO 2 tertiary
        recovery.
  To
        fund
        the acquisition of the three fields and our operating expenses, from June
        2006
        through January 2007, we sold $89.3 million of our securities in two private
        placements. In December 2006, we also entered into an agreement with Anadarko
        Petroleum Corporation to supply us with CO 2 needed
        to
        conduct CO 2 tertiary
        recovery operations in our three fields. In February 2008, we entered into
        a
        Carbon Dioxide Sale and Purchase Agreement with ExxonMobil Gas and Power
        Marketing (ExxonMobil), a division of ExxonMobil Corporation, to supply
        additional CO 2 to
        the
        three fields. We are seeking financing or strategic joint venture partners
        to
        enable us to construct a pipeline to deliver CO 2 to our
        fields and to drill additional wells and construct necessary infrastructure
        improvements in order to implement EOR techniques.
  **Outlook
        for the Coming Year**
  The
        following summarizes our goals and objectives for the next twelve
        months:
 
 ●
              Explore
                  various strategic financing alternatives to provide funding for
                  a
                  CO2pipeline and EOR development for our three fields, or sale of the
                  Company;●
              Maintain
                  and enhance crude oil production from our existing
                  wells;●
              Initiate
                  development activities in our
                  fields.
  Our
        plans
        for EOR development of our oil fields are dependent on our obtaining substantial
        additional funding. In October 2007 we raised approximately $12.2 million
        in
        short-term debt financing to enhance production and provide cash reserves.
        While
        we had intended to raise a long-term debt financing in 2007 to further our
        waterflood and CO 2 EOR
        plans, weakness in the capital market conditions contributed to our change
        in
        strategy to raise the short-term financing first. The raising of future funding
        is dependent on many factors, some of which are outside our control and are
        not
        assured. One major factor is the level of and projected trends in oil prices,
        which we cannot protect against by using hedging at this time . Our
        short
        term debt was scheduled to mature on October 31, 2008. On October 22, 2008,
        we
        and the Lender entered into an amendment to the credit agreement to extend
        the
        maturity for six months until April 30, 2009.
  We
        entered into a letter of intent in April 2008 with two experienced industry
        operators for an investment of up to $83.5 million in our EOR program. On
        July
        25, 2008, we entered into an amendment to the letter of intent that waived
        the
        provisions restricting us from entering into negotiations with other parties
        for
        the disposition or financing of all or part of the properties covered by
        the
        letter of intent. The letter of intent was terminated effective September
        20,
        2008.
  20
  On
        August
        7, 2008, we retained Growth Capital Partners, L.P. as the Company’s financial
        advisor to consider financing and other strategic alternatives, including
        the
        possible sale of the Company. We anticipate that the six month extension
        of our
        debt should enable our financial advisor to evaluate relevant strategic
        alternatives, This process is expected to take several months, and there
        is no
        assurance that any transaction will be completed.
 
 **Results
        of Operations**
  *Three
        Months Ended September 30, 2008 Compared to Three Months September 30,
        2007.*
  The
        following is a comparative summary of our results of operations:
 
 Three Months Ended September 30,2008
              
              2007Revenues:Oil
                  production (in barrels)
              
              
              18,179
              
              
              23,622Net
                  oil price (per barrel)
              
              $
              109.79
              
              $
              69.88Oil
                  sales
              
              $
              1,995,901
              
              $
              1,650,628Gain
                  on derivative activities, net
              
              
              1,305,551
              
              
              -Total
                  revenues
              
              
              3,301,452
              
              
              1,650,628Operating
                  expenses:Production
                  taxes
              
              
              243,366
              
              
              201,182Lease
                  operating expenses
              
              
              549,441
              
              
              691,429Depreciation,
                  depletion and amortization
              
              
              301,708
              
              
              368,724Impairment
                  of proved properties
              
              
              6,800,000
              
              
              -Accretion
                  expense
              
              
              30,835
              
              
              31,618Exploration
                  expense
              
              
              -
              
              
              89,668General
                  and administrative expense
              
              
              959,777
              
              
              1,513,100Total
                  operating expenses
              
              
              8,885,127
              
              
              2,895,721Loss
                  from operations
              
              
              (5,583,675
              )
              
              (1,245,093
              )Other
                  income (expense):Liquidated
                  damages pursuant to registration rights arrangement
              
              
              -
              
              
              (1,268,283
              )Interest
                  expense and financing costs
              
              
              (1,741,926
              )
              
              (141,195
              )Interest
                  and other income
              
              
              8,737
              
              
              25,541Total
                  other expense
              
              
              (1,733,189
              )
              
              (1,383,937
              )Net
                  loss
              
              $
              (7,316,864
              )
              $
              (2,629,030
              )
  *Overview* .
        For the
        three months ended September 30, 2008, we reported a net loss of $7,316,864,
        or
        $0.06 per basic and fully-diluted share, compared to a net loss of $2,629,030,
        or $(0.02) per basic and fully-diluted share, for the corresponding three
        months
        of 2007. Discussions of individually significant period to period variances
        follow.
  *Revenue,
        production taxes, and lease operating expenses* .
        For the
        three months ended September 30, 2008, we recorded crude oil sales of $1,995,901
        on 18,179 barrels of oil at an average price of $109.79, as compared to revenues
        of $1,650,628 on 23,622 barrels of oil at an average price of $69.88 per
        barrel
        in 2007. The period-to period variance reflects a volume variance of $(597,596)
        and a price variance of $942,869. The decreased volume in 2008 reflects
        mechanical production problems resulting in a reduction in the number of
        producing wells and curtailed production from other wells while flowline
        and
        other well repairs were carried out, coupled with overall production decline
        from year to year. Production taxes (including ad valorem taxes) of $243,366
        in
        2008 as compared to $201,182 in 2007 remained constant at 12% of crude oil
        sales
        revenues. Lease operating expenses on a per barrel basis of $549,441
        ($30.22/bbl) in 2008 remained relatively constant as compared to $691,429
        ($29.27/bbl) in 2007.
  21
  *Losses
        on risk management activities.* In
        connection with short term debt financing entered into in October 2007 we
        entered into a crude oil derivative contract with an unrelated counterparty
        to
        set a price floor of $63 per barrel for 75% of our estimated crude oil
        production for the next two years, and a price ceiling of $83.50 for 45%
        of the
        same level of production. During the three months ended September 30, 2008
        we
        recorded total gains on the derivative activities of $1,305,551, comprised
        of
        $299,428 of realized losses and unrealized gains of $1,604,979 reflecting
        the
        reversal of previously recorded unrealized losses. We had no derivative
        contracts in place for the corresponding quarter of 2007.
  *Depreciation,
        depletion and amortization* .
        For the
        three months ended September 30, 2008, we reflected depreciation, depletion,
        and
        amortization of $301,708 ($253,269, $13.93/bbl, related to oil and gas
        properties, and $48,439 related to other assets) as compared to $368,724
        ($318,624, $13.49/bbl, related to oil and gas properties, and $50,100 related
        to
        other assets) for the corresponding three months ended September 30, 2007.
        The
        period-to period increase in dollars per barrel primarily reflects the increased
        base of proved property costs being amortized in 2008 as compared to 2007.
  *Impairment
        of unproved properties* .
        As of
        September 30, 2008 and in conjunction with the periodic assessment of impairment
        of unproved properties, we re-evaluated the carrying value of our unproved
        properties giving consideration to lower crude oil prices and the difficulties
        encountered in securing capital to develop the properties. Accordingly, during
        the three months ended September 30, 2008 we recorded $6,800,000 of impairment
        expense of unproved properties, reflecting the excess of the carrying value
        over
        estimated realizable value of the assets. No such impairment was recognized
        during the three months ended September 30, 2007.
  *General
        and administrative expense* .
        For the
        three months ended September 30, 2008, we reflected general and administrative
        expenses of $959,777 as compared to $1,513,100 for the corresponding three
        months ended September 30, 2007. The decrease reflects a general lower level
        of
        activity in 2008 compared to 2007 and staff reductions carried out in March
        and
        April of 2008. As of September 30, 2008 we had six employees in the corporate
        office and three in the field office in Wyoming as compared to seventeen
        and
        six, respectively, as of September 30, 2007. Salaries and benefit costs for
        the
        three months ended September 30, 2008 were $298,000 as compared to $691,000
        for
        the same period in 2007. Stock-based compensation expense was reduced to
        $144,000 in 2008 as compared to $253,000 in 2007 reflecting the expiration
        of
        stock options previously held by terminated employees. In addition to personnel
        related cost reductions we implemented cost saving measures in several other
        cost categories including: 1) lower accounting and financial reporting
        contractor fees of $39,000 in 2008 compared to $166,000 in 2007 ; 2) lower
        IT
        consulting and systems costs of $39,000 in 2008 compared to $107,000 in 2007;
        3)
        lower investor relations fees of $18,000 in 2008 compared to $61,000 in 2007;
        4)
        lower recruiting fees of zero in 2008 compared to $40,000 in 2007. These
        cost
        savings were partially offset by higher legal fees of $131,000 in 2008 compared
        to $26,000 in 2007, reflecting costs associated with the filing of the Post
        Effective Amendment to Form S-1 Registration Statement, and costs associated
        with negotiations and contract review of the recently terminated financing
        letter of intent and the ongoing evaluation of strategic alternatives with
        our
        financial advisor. Office rent expense also increase to $90,000 in 2008 from
        $60,000 in 2007 reflecting a full quarter of higher rent on the larger office
        space we occupied in mid-quarter 2007. We continue to initiate efforts to
        minimize general and administrative expenses including the recent engagement
        a
        commercial real estate broker to sublease or otherwise market the excess
        office
        space we have following our staff reductions earlier this year.
  *Liquidated
        damages pursuant to registration rights arrangement* .
        Our
        Registration Statement on Form S-1 was declared effective by the SEC on October
        31, 2007 and has been maintained effective since that date. Accordingly,
        we
        recorded no liquidated damages pursuant to the registration rights arrangement
        in the three months ended September 30, 2008, as compared to $1,268,284 in
        the
        comparable period in 2007.
  *Interest
        expense and financing costs.* For
        the
        three months ended September 30, 2008, we reflected interest expense and
        financing costs of $1,741,926 as compared to $141,195 for the corresponding
        three months ended September 30, 2007. The 2008 amount is comprised of interest
        paid on the Note Payable issued in October 2007 of $375,399, the 2007 amount
        represents imputed interest on the liquidated damages pursuant to the
        registration rights arrangement discussed above , and amortization of deferred
        financing costs and discount on Note Payable of $1,366,527, compared to $99,254
        in 2007.
  22
  *Six
        Months Ended September 30, 2008 Compared to Six Months September 30,
        2007.*
  The
        following is a comparative summary of our results of operations:
 
 Six Months Ended September 30,2008
              
              2007Revenues:Oil
                  production (in barrels)
              
              
              34,262
              
              
              46,056Net
                  oil price (per barrel)
              
              $
              113.68
              
              $
              64.73Oil
                  sales
              
              $
              3,894,869
              
              $
              2,981,107Losses
                  on derivative activities, net
              
              
              (589,743
              )
              
              -Total
                  revenues
              
              
              3,305,126
              
              
              2,981,107Operating
                  expenses:Production
                  taxes
              
              
              473,649
              
              
              362,651Lease
                  operating expenses
              
              
              1,172,863
              
              
              1,279,661Depreciation,
                  depletion and amortization
              
              
              577,549
              
              
              700,256Impairment
                  of unproved properties
              
              
              6,800,000
              
              
              -Accretion
                  expense
              
              
              77,111
              
              
              77,608Exploration
                  expense
              
              
              9,602
              
              
              130,829General
                  and administrative expense
              
              
              2,008,154
              
              
              4,053,091Total
                  operating expenses
              
              
              11,118,928
              
              
              6,604,096Loss
                  from operations
              
              
              (7,813,802
              )
              
              (3,622,989
              )Other
                  income (expense):Liquidated
                  damages pursuant to registration rights arrangement
              
              
              -
              
              
              (2,645,393
              )Interest
                  expense and financing costs
              
              
              (3,422,396
              )
              
              (212,434
              )Interest
                  and other income
              
              
              19,318
              
              
              73,865Total
                  other expense
              
              
              (3,403,078
              )
              
              (2,783,962
              )Net
                  loss
              
              $
              (11,216,880
              )
              $
              (6,406,951
              )
  *Overview* .
        For the
        six months ended September 30, 2008, we reported a net loss of $11,216,880,
        or
        $0.10 per basic and fully-diluted share, compared to a net loss of $6,406,951
        or
        $(0.06) per basic and fully-diluted share, for the corresponding six months
        of
        2007. Discussions of individually significant period to period variances
        follow.
  *Revenue,
        production taxes, and lease operating expenses* .
        For the
        six months ended September 30, 2008, we recorded crude oil sales of $3,894,869
        on 34,262 barrels of oil at an average price of $113.68, as compared to revenues
        of $2,981,107 on 46,056 barrels of oil at an average price of $64.73 per
        barrel
        in 2007. The period-to period variance reflects a volume variance of
        $(1,340,730) and a price variance of $2,254,492. The decreased volume in
        2008
        reflects mechanical production problems resulting in a reduction in the number
        of producing wells and curtailed production from other wells while flowline
        and
        other well repairs were carried out, coupled with overall production decline
        from period-to-period. Production taxes (including ad valorem taxes) of $423.649
        in 2008 as compared to $362,651 in 2007 remained constant at 12% of crude
        oil
        sales revenues. Lease operating expenses decreased to $1,172,863 ($34.23/bbl)
        in
        2008 compared to $1,279,661 ($27.78/bbl) in 2007. The period to period variance
        is comprised of volume variance of $403,734 and a cost variance of $(295,936).
        The higher per barrel costs in 2008 reflect significant repair work carried
        out
        in the early part of the period to slow and eventually reverse the production
        decline experienced during the winter and spring months.
  *Losses
        on risk management activities.* In
        connection with short term debt financing entered into in October 2007 we
        entered into a crude oil derivative contract with an unrelated counterparty
        to
        set a price floor of $63 per barrel for 75% of our estimated crude oil
        production for the next two years, and a price ceiling of $83.50 for 45%
        of the
        same level of production. During the six months ended September 30, 2008
        we
        recorded total losses on the derivative activities of $589,743, comprised
        of
        $649,908 of realized losses and $60,165 of unrealized gains reflecting the
        reversal of previously recorded unrealized losses We had no derivative contracts
        in place for the corresponding period of 2007.
  23
  *Depreciation,
        depletion and, amortization* .
        For the
        six months ended September 30, 2008, we reflected depreciation, depletion,
        and
        amortization of $577,549 ($479,053, $13.98/bbl, related to oil and gas
        properties, and $98,496 related to other assets) as compared to $700,256
        ($619,130, $13.44/bbl, related to oil and gas properties, and $81,126 related
        to
        other assets) for the corresponding six months ended September 30, 2007.
  *Impairment
        of unproved properties* .
        As of
        September 30, 2008 and in conjunction with the periodic assessment of impairment
        of unproved properties, we-evaluated the carrying value of our unproved
        properties giving consideration to lower crude oil prices and the difficulties
        encountered in securing capital to develop the properties. Accordingly, during
        the six months ended September 30, 2008 we recorded $6,800,000 of impairment
        expense of unproved properties, reflecting the excess of the carrying value
        over
        estimated realizable value of the assets. No such impairment was recognized
        during the six months ended September 30, 2007.
  *General
        and administrative expense* .
        For the
        six months ended September 30, 2008, we reflected general and administrative
        expenses of $2,008,154 as compared to $4,053,091 for the corresponding six
        months ended September 30, 2007. The decrease reflects a general lower level
        of
        activity in 2008 compared to 2007 and staff reductions carried out in March
        and
        April of 2008. As of September 30, 2008 we had six employees in the corporate
        office and three in the field office in Wyoming as compared to seventeen
        and
        six, respectively, as of September 30, 2007. Salaries and benefit costs for
        the
        six months ended September 30, 2008 were $702,000 as compared to $1,411,000
        for
        the same period in 2007. Stock-based compensation expense was reduced to
        $287,000 in 2008 as compared to $725,000 in 2007 reflecting the expiration
        of
        stock options previously held by terminated employees. In addition to personnel
        related cost reductions we implemented cost saving measures in several other
        cost categories including: 1) lower accounting and financial reporting
        contractor fees of $98,000 in 2008 compared to $345,000 in 2007; 2) lower
        IT
        consulting and systems costs of $71,000 in 2008 compared to $142,000 in 2007;
        3)
        lower investor relations fees of $51,000 in 2008 compared to $92,000 in 2007;
        4)
        lower recruiting fees of zero in 2008 compared to $261,000 in 2007; and 5)
        lower
        travel and entertainment expenses of $57,000 in 2008 compared to $133,000
        in
        2007. In addition audit, tax compliance and Sarbanes Oxley fees were reduced
        to
        $165,000 in 2008 from $446,000 in 2007. These cost savings were partially
        offset
        by higher office rent expense of $181,000 in 2008 compared to $98,000 in
        2007
        reflecting a full six months of higher rent on the larger office space we
        occupied in August 2007. We continue to initiate efforts to minimize general
        and
        administrative expenses including the recent engagement a commercial real
        estate
        broker to sublease or otherwise market the excess office space we have following
        our staff reductions earlier this year.
  *Liquidated
        damages pursuant to registration rights arrangement* .
        Our
        Registration Statement on Form S-1 was declared effective by the SEC on October
        31, 2007 and has been maintained effective since that date. Accordingly,
        we
        recorded no liquidated damages pursuant to the registration rights arrangement
        in the six months ended September 30, 2008, as compared to $2,645,393 in
        the
        comparable period in 2007.
  *Interest
        expense and financing costs.* For
        the
        six months ended September 30, 2008, we reflected interest expense and financing
        costs of $3,422,396 as compared to $212,934 for the corresponding six months
        ended September 30, 2007. The 2008 amount is comprised of interest paid on
        the
        Note Payable issued in October 2007 of $746,694; the 2007 amount represents
        imputed interest on the liquidated damages pursuant to the registration rights
        arrangement discussed above, and amortization of deferred financing costs
        and
        discount on the Note Payable of $2,675,702 in 2008, compared to $99,254 in
        2007.
  **Liquidity
        and Capital Resources**
  *Going
        Concern*
  The
        report of our independent registered public accounting firm on the financial
        statements for the year ended March 31, 2008 includes an explanatory paragraph
        relating to the uncertainty of our ability to continue as a going concern.
        We
        have incurred a cumulative net loss of $33.6 million for the period from
        inception (February 4, 2004) to September 30, 2008 and have a working capital
        deficit of approximately $8.3 million as of September 30, 2008 and have short
        term debt in the amount of $10 million. The debt is currently scheduled to
        mature on April 30, 2009. We require significant additional funding to repay
        the
        short term debt and sustain our operations. Our ability to continue the Company
        as a going concern is dependent upon our ability to obtain additional funding
        in
        order to pay our short term debt and finance our planned
        operations.
  24
   Our
        primary source of liquidity to meet operating expenses and fund capital
        expenditures is our access to debt and equity markets. The debt and equity
        markets, public, private, and institutional, have been our principal source
        of
        capital used to finance a significant amount of growth, including acquisitions.
        We will need substantial additional funding to pursue our business
        plan.
  In
        October 2007, we issued $12,240,000 of short term debt the proceeds of which
        were intended to enhance our existing production and to provide cash reserves
        for operations. The debt was scheduled to mature on October 31, 2008. We
        had
        planned to secure longer term fixed rate financing to repay the short term
        debt
        and to commence our EOR development activities in the three fields of the
        Powder
        River Basin; however, due to difficulties in the capital debt markets, we
        have
        been unable to secure such financing. On October 22, 2008 we and the lender
        entered into an amendment to the credit agreement to, among other terms,
        extend
        the maturity date by six months, until April 30, 2009. In consideration for
        the
        extension and other terms, we made a principal payment of $2,240,000 reducing
        the outstanding balance to $10,000,000. We do not have cash available to
        repay
        this loan. If we are not successful in repaying this debt within the term
        of the
        loan, or default under the terms of the loan, the lender will be able to
        foreclose one or more of our three properties and other assets and we could
        lose
        the properties. A foreclosure could significantly reduce or eliminate our
        property interests or force us to alter our business strategy, which could
        involve the sale of properties or working interests in the properties and
        adversely affect our results of operations and financial
        condition.
  Beginning
        in March 2008, we began to reduce our level of staffing by laying off several
        employees whose positions were considered to be redundant based upon the
        anticipated closing of a farmout transaction with experienced industry
        operators. Following these staff reductions and other cost-cutting measures
        in
        both the field and in our corporate headquarters, our monthly oil and gas
        production revenue should be adequate to cover expected monthly field operating
        costs, production taxes and general and administrative expenses; however,
        the
        monthly interest payments required on the short term debt and payments relating
        to our crude oil hedging position currently result in negative cash flow
        each
        month .
  We
        have
        executed two agreements to purchase CO 2 for use
        in EOR operations in our fields. These supply agreements are discussed in
        more
        detail in our From 10K for the year ended Marche 31, 2008, filed with the
        Securities and Exchange Commission on June 30, 2008 .
  On
        August
        7, 2008, we retained Growth Capital Partners, L.P. as the Company’s financial
        advisor to consider financing and other strategic alternatives, including
        the
        possible sale of the Company. We anticipate that the six month extension
        of our
        debt should enable our financial advisor to evaluate relevant strategic
        alternatives, This process is expected to take several months, and there
        is no
        assurance that any transaction will be completed.
  *Cash
        Flows*
  The
        following is a summary of Rancher Energy’s comparative cash flows:
  For the Six Months Ended
                September 30,2008
              
              2007Cash
                  flows from:Operating
                  activities
              
              $
              (1,167,276
              )
              $
              (1,855,577
              )Investing
                  activities
              
              
              (432,245
              )
              
              (1,593,935
              )Financing
                  activities
              
              
              (101,473
              )
              
              (235,951
              )
  Cash
        flows used for operating activities decreased as a result of lower general
        and
        administrative expenses as discussed above, partially offset by payments
        to
        settle derivative activity losses and interest expense incurred in connection
        with the October 2007 short term financing.
  Cash
        flows used for investing activities decreased in the 2008 period compared
        to the
        2007 period as we expended significantly less on oil and gas properties,
        $200,000 in 2008 compared to $1,466,000 in 2007. In response to our lack
        of
        success in securing additional financing during the period, we have curtailed
        capital spending to the minimum required to maintain current levels of crude
        oil
        production.
  25
  Cash
        flows used for financing activities for both years represent financing costs
        incurred to complete requirements of the short term debt agreement (2008)
        and
        the private placement of common stock and warrants (2007).
  *Off-Balance
        Sheet Arrangements* **
  Under
        the
        terms of the Term Credit Agreement entered into in October 2007 we were required
        to hedge a portion of our expected production and we entered into a costless
        collar agreement for a portion of our anticipated future crude oil production.
        The costless collar contains a fixed floor price (put) and ceiling price
        (call). If the index price exceeds the call strike price or falls below the
        put
        strike price, we receive the fixed price and pay the market price. If the
        market
        price is between the call and the put strike price, no payments are due from
        either party. During the six months ended September 30, 2008 we reflected
        realized losses of $649,908 and unrealized gains of $60,165 from the hedging
        activity.
  We
        have
        no other off-balance sheet financing nor do we have any unconsolidated
        subsidiaries.
  *Critical
        Accounting Policies and Estimates*
  Critical
        accounting policies and estimates are provided in Part II, Item 7, Management’s
        Discussion and Analysis of Financial Condition and Results of Operations,
        to the
        Annual Report on Form 10-K for the year ended March 31, 2008. Additional
        footnote disclosures are provided in Notes to Consolidated Financial Statements
        in Part I, Financial Information, Item 1, Financial Statements to this Quarterly
        Report on Form 10-Q for the three months ended September 30, 2008.
  **Item
        3. Quantitative and Qualitative Disclosure About Market Risk.**
  *Commodity
        Price Risk*
  Our
        revenues could be subject to significant fluctuation based on pricing applicable
        to our oil production. However, because of our relatively low level of current
        oil and gas production, we have not been exposed to a great degree of market
        risk. Our ability to raise additional capital at attractive pricing, our
        future
        revenues from oil and gas operations, our future profitability and future
        rate
        of growth depend substantially upon the market prices of oil and natural
        gas,
        which fluctuate widely. With increases to our production, exposure to this
        risk
        will become more significant. We expect commodity price volatility to continue.
        In connection with our short term financing in October 2007, we entered into
        an
        oil hedge agreement covering approximately 75% of our proved developed producing
        reserves scheduled to be produced during a two-year period. Terms of future
        debt
        facilities may also require that we hedge a portion of our expected future
        production.
  *Financial
        Market Risk*
  The
        debt
        and equity markets have recently exhibited adverse conditions. The unprecedented
        volatility and upheaval in the capital markets may impact our ability to
        refinance or extend our existing short term debt when it matures on April
        30,
        2009. Alternatively, market conditions may affect the availability of capital
        for prospective purchasers of our assets or equity as contemplated under
        our
        arrangement with Growth Capital.
  **Item
        4. Controls and Procedures.**
  *Disclosure
        Controls and Procedures*
  We
        conducted an evaluation under the supervision and with the participation
        of our
        management, including our Chief Executive Officer and Chief Accounting Officer,
        of the effectiveness of the design and operation of our disclosure controls
        and
        procedures. The term “disclosure controls and procedures,” as defined in Rules
        13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
        (Exchange Act), means controls and other procedures of a company that are
        designed to ensure that information required to be disclosed by the company
        in
        the reports it files or submits under the Exchange Act is recorded, processed,
        summarized and reported, within the time periods specified in the Securities
        and
        Exchange Commission’s rules and forms. Disclosure controls and procedures also
        include, without limitation, controls and procedures designed to ensure that
        information required to be disclosed by a company in the reports that it
        files
        or submits under the Exchange Act is accumulated and communicated to the
        company’s management, including its principal executive and principal financial
        officers, or persons performing similar functions, as appropriate to allow
        timely decisions regarding required disclosure. We identified a material
        weakness in our internal control over financial reporting and, as a result
        of
        this material weakness, we concluded as of March 31, 2008 and as of the end
        of
        the period covered by this Quarterly Report on Form 10-Q, that our disclosure
        controls and procedures were not effective.
  26
  **Changes
        in Internal Control over Financial Reporting**
  There
        have been no changes in our internal control over financial reporting during
        the
        most recently completed fiscal quarter that have materially affected, or
        are
        reasonably likely to materially affect, our internal control over financial
        reporting.
  **PART
        II. OTHER INFORMATION.**
  **Item
        1A. Risk Factors.**
  Not
        applicable.
  **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds.**
  On
        September 30, 2008, pursuant to our compensation arrangement with our
        non-employee directors, we issued 495,000 shares of our common stock in the
        aggregate under our 2006 Stock Incentive Plan to our non-employee directors
        for
        their service on our Board of Directors and for attending board and committee
        meetings, as the case may be. More specifically, we issued to the following
        directors the shares specified: (i) William A. Anderson 110,000 shares; (ii)
        Joseph P. McCoy, 125,000 shares; (iii) Patrick M. Murray, 75,000 shares;
        (iv)
        Myron M. Sheinfeld, 75,000 shares, and (v) Mark Worthey, 110,000 shares.
 
 The
        foregoing issuances were made pursuant to Section 4(2) of the Securities
        Act.
  27
  **Item
        6. EXHIBITS.**
  **Exhibit**
              
              **Description**3.1
              
              Amended
                  and Restated Articles of Incorporation(17)3.2
              
              Articles
                  of Correction(22)3.3
              
              Amended
                  and Restated Bylaws(2)4.1
              
              Form
                  of Stock Certificate for Fully Paid, Non-Assessable Common Stock
                  of the
                  Company(1)4.2
              
              Form
                  of Unit Purchase Agreement(2)4.3
              
              Form
                  of Warrant Certificate(2)4.4
              
              Form
                  of Registration Rights Agreement, dated December 21, 2006(3)4.5
              
              Form
                  of Warrant to Purchase Common Stock(3)10.1
              
              Burke
                  Ranch Unit Purchase and Participation Agreement between Hot Springs
                  Resources Ltd. and PIN Petroleum Partners Ltd., dated February
                  6,
                  2006(4)10.2
              
              Employment
                  Agreement between John Works and Rancher Energy Corp., dated June
                  1, 2006(5)10.3
              
              Assignment
                  Agreement between PIN Petroleum Partners Ltd. and Rancher Energy
                  Corp.,
                  dated June 6, 2006(5)10.4
              
              Loan
                  Agreement between Enerex Capital, Corp. and Rancher Energy Corp.,
                  dated
                  June 6, 2006(5)10.5
              
              Letter
                  Agreement between NITEC LLC and Rancher Energy Corp., dated June
                  7, 2006(5)10.6
              
              Loan
                  Agreement between Venture Capital First LLC and Rancher Energy
                  Corp.,
                  dated June 9, 2006(6)10.7
              
              Exploration
                  and Development Agreement between Big Snowy Resources, LP and Rancher
                  Energy Corp., dated June 15, 2006(5)10.8
              
              Assignment
                  Agreement between PIN Petroleum Partners Ltd. and Rancher Energy
                  Corp.,
                  dated June 21, 2006(5)10.9
              
              Purchase
                  and Sale Agreement between Wyoming Mineral Exploration, LLC and
                  Rancher
                  Energy Corp., dated August 10, 2006(4)10.10
              
              South
                  Glenrock and South Cole Creek Purchase and Sale Agreement by and
                  between
                  Nielson and Associates, Inc. and Rancher Energy Corp., dated October
                  1,
                  2006(7)10.11
              
              Rancher
                  Energy Corp. 2006 Stock Incentive Plan(7)10.12
              
              Rancher
                  Energy Corp. 2006 Stock Incentive Plan Form of Option Agreement(7)10.13
              
              Denver
                  Place Office Lease between Rancher Energy Corp. and Denver Place
                  Associates Limited Partnership, dated October 30, 2006(8)10.14
              
              Finder’s
                  Fee Agreement between Falcon Capital and Rancher Energy Corp.(10)10.15
              
              Amendment
                  to Purchase and Sale Agreement between Wyoming Mineral Exploration,
                  LLC
                  and Rancher Energy Corp.(11)10.16
              
              Letter
                  Agreement between Certain Unit Holders and Rancher Energy Corp., dated
                  December 8, 2006(2)10.17
              
              Letter
                  Agreement between Certain Option Holders and Rancher Energy Corp.,
                  dated
                  December 13, 2006(2)10.18
              
              Product
                  Sale and Purchase Contract by and between Rancher Energy Corp.
                  and the
                  Anadarko Petroleum Corporation, dated December 15, 2006(12)10.19
              
              Amendment
                  to Purchase and Sale Agreement between Nielson and Associates,
                  Inc. and
                  Rancher Energy Corp.(13)10.20
              
              Securities
                  Purchase Agreement by and among Rancher Energy Corp. and the Buyers
                  identified therein, dated December 21, 2006(3)10.21
              
              Lock-Up
                  Agreement between Rancher Energy Corp. and Stockholders identified
                  therein, dated December 21, 2006(3)10.22
              
              Voting
                  Agreement between Rancher Energy Corp. and Stockholders identified
                  therein, dated as of December 13, 2006(3)10.23
              
              Form
                  of Convertible Note(14)
  28
  **Exhibit**
              
              **Description**10.24
              
              First
                  Amendment to Securities Purchase Agreement by and among Rancher
                  Energy
                  Corp. and the Buyers identified therein, dated as of January 18,
                  2007(16)10.25
              
              Rancher
                  Energy Corp. 2006 Stock Incentive Plan Form of Restricted Stock
                  Agreement(17)10.26
              
              First
                  Amendment to Employment Agreement by and between John Works and
                  Rancher
                  Energy Corp., dated March 14, 2007(18)10.27
              
              Employment
                  Agreement between Richard Kurtenbach and Rancher Energy Corp.,
                  dated
                  August 3, 2007(19)10.28
              
              Term
                  Credit Agreement between Rancher Energy Corp. and GasRock Capital
                  LLC,
                  dated as of October 16, 2007(20)10.29
              
              Term
                  Note made by Rancher Energy Corp. in favor of GasRock Capital LLC,
                  dated
                  October 16, 2007(20)10.30
              
              Mortgage,
                  Security Agreement, Financing Statement and Assignment of Production
                  and
                  Revenues from Rancher Energy Corp. to GasRock Capital LLC, dated
                  as of
                  October 16, 2007(20)10.31
              
              Security
                  Agreement between Rancher Energy Corp. and GasRock Capital LLC,
                  dated as
                  of October 16, 2007(20)10.32
              
              Conveyance
                  of Overriding Royalty Interest by Rancher Energy Corp. in favor
                  of GasRock
                  Capital LLC, dated as of October 16, 2007(20)10.33
              
              ISDA
                  Master Agreement between Rancher Energy Corp. and BP Corporation
                  North
                  America Inc., dated as of October 16, 2007(20)10.34
              
              Restricted
                  Account and Securities Account Control Agreement by and among Rancher
                  Energy Corp., GasRock Capital LLC, and Wells Fargo Bank, National
                  Association, dated as of October 16, 2007(20)10.35
              
              Intercreditor
                  Agreement by and among Rancher Energy Corp., GasRock Capital LLC,
                  and BP
                  Corporation North America Inc., dated as of October 16, 2007(21)10.36
              
              First
                  Amendment to Denver Place Office lease between Rancher Energy Corp.
                  and
                  Denver Place Associates Limited Partnership, dated March 6, 2007.(18)10.37
              
              Carbon
                  Dioxide Sale & Purchase Agreement between Rancher Energy corp. and
                  ExxonMobil Gas & Power Marketing Company, dated February 14, 2008
                  (Certain portions of this agreement have been redacted and have
                  been filed
                  separately with the Securities and Exchange Commission pursuant
                  to a
                  Confidential Treatment Request).(21)10.38
              
              Letter
                  Agreement between Rancher Energy Corp. and Growth Capital Partners,
                  LP(22)10.39
              
              First
                  Amendment to Term Credit Agreement, dated October 22, 2008(23)31.1
              
              Certification
                  Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)31.2
              
              Certification
                  Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Accounting Officer)32.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 200232.2
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
  (1)
        Incorporated by reference from our Current Report on Form 8-K filed on April
        3,
        2007.
  (2)
        Incorporated by reference from our Form 10-Q for the quarterly period ended
        September 30, 2007.
  (3)
        Incorporated by reference from our Current Report on Form 8-K filed on December
        18, 2006.
  (4)
        Incorporated by reference from our Form SB-2 Registration Statement filed
        on
        June 9, 2004.
  (5)
        Incorporated by reference from our Current Report on Form 8-K filed on December
        27, 2006.
  (6)
        Incorporated by reference from our Quarterly Report on Form 10-Q/A filed
        on
        August 28, 2006.
  (7)
        Incorporated by reference from our Annual Report on Form 10-K filed on June
        30,
        2006.
  (8)
        Incorporated by reference from our Current Report on Form 8-K filed on June
        21,
        2006.
  29
  (9)
        Incorporated by reference from our Current Report on Form 8-K filed on October
        6, 2006.
  (10)
        Incorporated by reference from our Current Report on Form 8-K filed on November
        9, 2006.
  (11)
        Incorporated by reference from our Current Report on Form 8-K/A filed on
        November 14, 2006.
  (12)
        Incorporated by reference from our Current Report on Form 8-K filed on December
        4, 2006.
  (13)
        Incorporated by reference from our Current Report on Form 8-K filed on December
        22, 2006.
  (14)
        Incorporated by reference from our Current Report on Form 8-K filed on December
        27, 2006.
  (15)
        Incorporated by reference from our Current Report on Form 8-K filed on January
        8, 2007.
  (16)
        Incorporated by reference from our Current Report on Form 8-K filed on January
        25, 2007.
  (17)
        Incorporated by reference from our Annual Report on Form 10-K filed on June
        29,
        2007.
  (18)
        Incorporated by reference from our Current Report on Form 8-K filed on March
        20,
        2007.
  (19)
        Incorporated by reference from our Current Report on Form 8-K filed on August
        7,
        2007.
  (20)
        Incorporated by reference from our Current Report on Form 8-K filed on October
        17, 2007.
  (21)
        Incorporated by reference from our Current Report on Form 8-K filed on February
        14, 2008.
  (22)
        Incorporated by reference from our Current Report on Form 8-K filed on August
        7,
        2008.
  (23)
        Incorporated by reference from our Current Report on Form 8-K filed on October
        23, 2008.
  30
  **SIGNATURES**
  Pursuant
        to the requirements 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.
  **RANCHER
                ENERGY CORP.**(Registrant)Dated:
                  November 13, 2008
              By:
              /s/
                John WorksJohn
                  Works
                President,
                  Chief Executive Officer, ChiefFinancial
                  Officer, Secretary and Treasurer (PrincipalExecutive
                  Officer)Dated:
                  November 13, 2008
              By:
              Richard
                  E. KurtenbachRichard
                  E. KurtenbachChief
                  Accounting Officer (Principal AccountingOfficer)
  31