UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended December 31, 2009

                                       OR

 [ ] TRANSITION 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
----------                                              ----------

                          999 - 18th 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 [ ]

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this Chapter)  during the  preceding 12 months (or for such shorter  period that
the registrant was required to submit and post such files). Yes [ ] No [ ]

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 [ ]                             Accelerated filer [ ]
Non-accelerated  filer [ ] (Do not check if a smaller reporting company)
Small reporting company [X]

                                       1
<PAGE>

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

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.
                                                                  Yes [ ] No [X]

As of February  13, 2010,  119,316,723  shares of Rancher  Energy  Corp.  common
stock, $.00001 par value, were outstanding.

























                                       2
<PAGE>

<TABLE>
<CAPTION>

                              Rancher Energy Corp.

                                Table of Contents

                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
<S>                                                                                                              <C>

              Unaudited Balance Sheets as of December 31, 2009 and March 31, 2009..................................4

               Unaudited Statements of Operations for the Three and Nine Months ended
               December 31, 2009 and 2008..........................................................................6

               Unaudited Statement of Changes in Stockholders' Equity for the Nine Months ended
               December 31, 2009...................................................................................8

               Unaudited Statements of Cash Flows for the Nine Months ended
               December 31, 2009 and 2008..........................................................................9

               Notes to Financial Statements......................................................................10

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations....................25

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...............................................35

Item 4.  Controls and Procedures..................................................................................36

Item 4T. Controls and Procedures..................................................................................36

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings........................................................................................38

Item 1A. Risk Factors.............................................................................................38

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds..............................................38

Item 3.  Defaults Upon Senior Securities..........................................................................38

Item 4.  Submission of Matters to a Vote of Security Holders......................................................38

Item 5.  Other Information .......................................................................................38


Item 6.  Exhibits.................................................................................................38

SIGNATURES........................................................................................................40
</TABLE>





                                       3
<PAGE>

                         Part I. Financial Information.


Item 1.   Financial Statements

<TABLE>
<CAPTION>

                              Rancher Energy Corp.
                              Debtor in Possession
                                 Balance Sheets



                                     ASSETS

                                                                                              December 31,
                                                                                                 2009             March 31, 2009
                                                                                               Unaudited              Audited
<S>                                                                                          <C>               <C>

Current assets:
  Cash and cash equivalents                                                                        $172,855            $917,160
  Accounts receivable and prepaid expenses                                                          783,514             584,139
  Derivative receivable                                                                                   -             455,960
                                                                                             ----------------- -------------------
    Total current assets                                                                            956,369           1,957,259
                                                                                             ----------------- -------------------

Oil and gas properties at cost (successful efforts method):
  Unproved                                                                                       53,077,682          53,328,147
  Proved                                                                                         19,374,998          20,631,487
  Less:  Accumulated depletion, depreciation, amortization and impairment                      (56,088,911)        (41,840,978)
                                                                                             ----------------- -------------------
    Net oil and gas properties                                                                   16,363,769          32,118,656
                                                                                             ----------------- -------------------

Other assets:
  Furniture and equipment net of accumulated depreciation of $524,119 and  $381,396,
respectively                                                                                        619,348             770,354
 Deferred finance costs                                                                                   -             387,414
 Other assets                                                                                       919,420             546,178
                                                                                             ----------------- -------------------
    Total other assets                                                                            1,538,768           1,703,946
                                                                                             ----------------- -------------------
    Total assets                                                                                $18,858,906         $35,779,861
                                                                                             ================= ===================
</TABLE>


                                   (Continued)


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





                                       4
<PAGE>

<TABLE>
<CAPTION>

                              Rancher Energy Corp.
                              Debtor in Possession
                                 Balance Sheets
                                   (Continued)


                                                     LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                                          December 31, 2009         March 31, 2009
                                                                                          -----------------         --------------
                                                                                               Unaudited                Audited
<S>                                                                                     <C>                     <C>

Current liabilities:

  Accounts payable and accrued liabilities - post petition                                         $930,569              $185,972

  Asset retirement obligation                                                                       122,269               108,884

  Note payable, net of unamortized discount of $-0- and $165,790, respectively                   10,089,987             9,834,210
                                                                                        ---------------------- ---------------------

Total current liabilities                                                                        11,142,825            10,129,066

Long-term liabilities:

  Asset retirement obligation                                                                     1,277,891             1,171,796
                                                                                        ---------------------- ---------------------

Total long-term liabilities                                                                       1,277,891             1,171,796

                                                                                        ---------------------- ---------------------

Total liabilities not subject to compromise                                                      12,420,716            11,300,862

Liabilities subject to compromise                                                                 1,282,836               630,836
                                                                                        ---------------------- ---------------------

Total liabilities                                                                                13,703,552            11,931,698




                                                                                                      1,194                 1,191

    Additional paid-in capital                                                                   92,949,532            92,582,001

    Accumulated deficit                                                                        (87,795,372)          (68,735,029)
                                                                                        ---------------------- ---------------------

Total stockholders' equity                                                                        5,155,354            23,848,163

                                                                                        ---------------------- ---------------------

Total liabilities and stockholders' equity                                                      $18,858,906           $35,779,861
                                                                                        ====================== =====================
</TABLE>

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








                                       5
<PAGE>

<TABLE>
<CAPTION>
                              Rancher Energy Corp.
                              Debtor In Possession
                            Statements of Operations
                                   (Unaudited)



                                                                      Three Months Ended December 31,

Revenues:                                                             2009                        2008
<S>                                                         <C>                         <C>

 Oil & gas sales                                                            $970,502                    $746,967
 Derivative gains (losses)                                                   (6,809)                   1,586,911
                                                            --------------------------- ---------------------------
                                                                             963,693                   2,333,878
                                                            --------------------------- ---------------------------
Operating expenses:
 Production taxes                                                            143,769                      90,940
 Lease operating expenses                                                    411,150                     831,559
 Depreciation, depletion and amortization                                    299,184                     350,847
 Accretion expense                                                            38,821                      40,661
 Impairment of unproved properties                                        13,525,642                  32,500,000
 Exploration expense                                                           3,340                       4,293
 General and administrative                                                  568,717                     780,261
                                                            --------------------------- ---------------------------
  Total operating expenses                                                14,990,623                  34,598,561

                                                            --------------------------- ---------------------------
 Loss from operations                                                   (14,026,930)                (32,264,683)
                                                            --------------------------- ---------------------------

Other income (expense):
 Amortization of deferred finance costs
      and discount on note payable                                         (239,106)                   (848,696)
  Interest expense                                                         (460,165)                   (323,190)
  Interest and other income                                                        7                       6,811
                                                            --------------------------- ---------------------------
  Total other income (expense)                                             (699,264)                 (1,165,075)
                                                            --------------------------- ---------------------------
 Loss before reorganization items                                       (14,726,194)                (33,429,758)
                                                            --------------------------- ---------------------------
Reorganization Items
  Professional and legal fees                                                158,727                           -

                                                            --------------------------- ---------------------------
Net loss                                                               $(14,884,921)               $(33,429,758)
                                                            =========================== ===========================

Basic and diluted net loss per share                                         $(0.12)                     $(0.29)
                                                            =========================== ===========================

Basic and diluted weighted average shares outstanding                    119,316,700                 116,196,049
                                                            =========================== ===========================
</TABLE>



    The accompanying notes are an integral part of these financial statements



                                       6
<PAGE>

<TABLE>
<CAPTION>

                              Rancher Energy Corp.
                              Debtor In Possession
                            Statements of Operations
                                   (Unaudited)

                                                                            Nine Months Ended December 31,

Revenues:                                                                 2009                        2008
<S>                                                              <C>                        <C>

 Oil & gas sales                                                              $2,498,376                   $4,641,836
 Derivative gains (losses)                                                     (357,582)                      997,169
                                                                 -------------------------- ----------------------------
                                                                               2,140,794                    5,639,005
                                                                 -------------------------- ----------------------------
Operating expenses:
 Production taxes                                                                338,547                      564,590
 Lease operating expenses                                                      1,088,163                   2,004,422,
 Depreciation, depletion and amortization                                        868,263                      928,395
 Accretion expense                                                               119,480                      117,771
 Impairment of unproved properties                                            13,525,642                   39,300,000
 Exploration expense                                                              15,172                       13,896
 General and administrative                                                    2,066,226                    2,788,415
                                                                 -------------------------- ----------------------------
  Total operating expenses                                                    18,021,493                   45,717,489
                                                                 -------------------------- ----------------------------
 Loss from operations                                                       (15,880,699)                 (40,078,484)
                                                                 -------------------------- ----------------------------

Other income (expense):
 Amortization of deferred finance costs and
        discount on note payable                                             (1,770,789)                  (3,524,399)
 Interest expense                                                            (1,250,859)                  (1,069,884)
  Interest and other income                                                          731                       26,129
                                                                 -------------------------- ----------------------------
  Total other income (expense)                                               (3,020,917)                  (4,568,154)
                                                                 -------------------------- ----------------------------
 Loss before reorganization items                                           (18,901,616)                 (44,646,638)
Reorganization Items
  Professional and legal fees                                                    158,727                            -
Net loss                                                                   $(19,060,343)                $(44,646,638)
                                                                 ========================== ============================

Basic and diluted net loss per share                                             $(0.16)                      $(0.39)
                                                                 ========================== ============================

Basic and diluted weighted average shares outstanding                        119,357,245                  115,541,973
                                                                 ========================== ============================
</TABLE>


    The accompanying notes are an integral part of these financial statements











                                       7
<PAGE>


<TABLE>
<CAPTION>


                              Rancher Energy Corp.
                              Debtor In Possession
                  Statement of Changes in Stockholders' Equity
                   For the Nine Months Ended December 31, 2009
                                   (Unaudited)


                                                                                 Additional                           Total
                                                                                  Paid-In        Accumulated      Stockholders'
                                                                                                 ------------
                                                       Shares        Amount       Capital          Deficit            Equity
                                                       ------        ------       -------          -------            ------

<S>                                                 <C>              <C>        <C>             <C>               <C>

Balance, April 1, 2009                                119,016,700     $1,191     $92,582,001     $(68,735,029)       $23,848,163


Common stock issued on exercise of options                500,000          5               -                 -                 5


Cancelation of non-vested restricted stock              (200,000)        (2)               2                                   -

Stock-based compensation                                       -           -         262,529                 -           262,529


Financing cost associated with beneficial
conversion feature of convertible debt                                               105,000                             105,000

Net loss                                                       -           -               -      (19,060,343)       (19,060,343)

                                                    ---------------- ---------- --------------- ----------------- -----------------

Balance, December 31, 2009                            119,316,700     $1,194     $92,949,532     $(87,795,372)        $5,155,354
                                                    ================ ========== =============== ================= =================
</TABLE>


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














                                       8
<PAGE>
<TABLE>
<CAPTION>

                              Rancher Energy Corp.
                              Debtor In Possession
                            Statements of Cash Flows
                                   (unaudited)

                                                                                    Nine Months Ended December 31,
                                                                                  2009                           2008
<S>                                                                <C>                        <C>

Cash flows from operating activities:

Net loss                                                                     $(19,060,343)                $(44,646,638)

Adjustments to reconcile net loss to cash used for
    operating activities:

Depreciation, depletion, and amortization                                          868,263                      928,395

  Impairment of unproved properties                                             13,525,642                   39,300,000

  Reorganization items, net                                                        158,727                            -

  Accretion expense                                                                119,480                      117,771

  Asset retirement obligation settlements                                                -                    (146.401)

  Interest expense beneficial conversion feature,
        convertible notes payable                                                  105,000                            -

  Interest expense converted to short-term debt                                    188,112                            -

  Amortization of deferred financing costs and discount
        on note payable                                                          1,665,789                    3,524,398

  Unrealized (gains) losses on derivative activities                               455,960                    (836,907)

  Stock-based compensation expense                                                 210,829                      353,481

  Services exchanged for common stock - directors                                   51,700                      295,050

   Loss on asset sale                                                                    -                       35,797

Changes in operating assets and liabilities:
  Accounts receivable and prepaid expenses                                       (199,375)                    (181,616)

  Other assets                                                                      19,205                            -

  Accounts payable and accrued liabilities                                       1,154,390                  (1,142,448)
                                                                   -------------------------- ----------------------------
Net cash used for operating activities, before
        reorganization                                                           (736,621)                  (2,399,118)

  Cash effect of reorganization items                                             (56,519)                            -
                                                                   -------------------------- ----------------------------

Net cash used for operating activities                                           (793,140)                  (2,399,118)
                                                                   -------------------------- ----------------------------
Cash flows from investing activities:
  Capital expenditures for oil and gas properties                                  (3,805)                    (230,087)

  Proceeds from sale of other assets                                                10,760                            -

Increase in other assets                                                                 -                    (440,101)
                                                                   -------------------------- ----------------------------

Net cash used for investing activities                                               6,955                    (670,188)
                                                                   -------------------------- ----------------------------
Cash flows from financing activities:
  Payment of deferred financing costs                                                    -                    (101,478)

  Repayment of debt                                                               (98,125)                  (2,240,000)

  Proceeds from issuance of convertible notes payable                              140,000                            -

  Proceeds from issuance of common stock upon exercise
        of stock options                                                                 5                            8
                                                                   -------------------------- ----------------------------
    Net cash used for financing activities                                          41,880                  (2,341,470)
                                                                   -------------------------- ----------------------------
Decrease in cash and cash equivalents                                            (744,305)                  (5,410,776)

Cash and cash equivalents, beginning of period                                     917,160                    6,842,365
                                                                   -------------------------- ----------------------------

Cash and cash equivalents, end of period                                          $172,855                   $1,431,589
                                                                   ========================== ============================
Non-cash investing and financing activities:
  Cash paid for interest                                                          $613,479                  $ 1,069,733
                                                                   ========================== ============================

  Payables settled for oil and gas properties                                          $ -                     $ 53,799
                                                                   ========================== ============================

  Asset retirement asset and obligation                                                 $-                    $  43,493
                                                                   ========================== ============================
  Deferred finance costs, conveyance of overriding
        royalty and net profits interest                                        $1,500,000              $     1,050,000
                                                                   ========================== ============================
</TABLE>

                                       9
<PAGE>


                              Rancher Energy Corp.
                              Debtor in Pos session
                          Notes to Financial Statements
                   For the Nine Months Ended December 31, 2009
                                   (Unaudited)

Note 1 - Organization and Summary of Significant Accounting Policies

Organization
------------

         Rancher   Energy  Corp.   ("Rancher   Energy"  or  the  "Company")  was
incorporated  in the state of 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 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 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,  2009.  The  accompanying  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,  2009.  Operating  results  for the  periods
presented are not necessarily indicative of the results that may be expected for
the full year.

Bankruptcy Filing
-----------------

            On October 28, 2009,  the Company  filed a voluntary  petition  (the
"petition")  for relief in the  United  States  Bankruptcy  Court,  District  of
Colorado  under  Chapter  11 of  Title  11 of  the  U.S.  Bankruptcy  Code  (the
"Bankruptcy  Court").  The Company  will  continue  to operate  its  business as
"debtor-in-possession"  under the  jurisdiction  of the Bankruptcy  Court and in
accordance  with  the  applicable  provisions  of the  Code  and  orders  of the
Bankruptcy  Court.  See Note 2  "Proceedings  Under Chapter 11 of the Bankruptcy
Code" for details regarding the Bankruptcy filing and the Chapter 11 case.

         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.  However,  the petition raises  substantial  doubt about the Company's
ability to remain a going concern. The Company's continuation as a going concern
may  be  contingent  upon,  among  other  things,  its  ability  (i)  to  obtain
Debtor-in-Possession  financing;  (ii) to reduce  administrative,  operating and
interest costs and liabilities through the bankruptcy process; (iii) to generate
sufficient cash flow from operations;  (iv) to obtain  confirmation of a plan of
reorganization  under  the  Bankruptcy  Code;  and (v) to  obtain  financing  to
facilitate an exit from bankruptcy.  We are currently evaluating various courses
of action to address the operational and liquidity  issues the Company is facing
and are in the process of formulating plans for improving operations.  There can
be no assurance that any of these efforts will be successful.  The  accompanying
financial  statements do not include any adjustments that might result should we
be  unable  to  continue  as  a  going  concern.  In  the  event  the  Company's
restructuring  activities  are not  successful  and it is required to liquidate,
additional  significant   adjustments  in  the  carrying  value  of  assets  and
liabilities,   the  revenues  and  expenses   reported  and  the  balance  sheet
classifications used may be necessary.

                                       10
<PAGE>

         Financial   Accounting  Standards  Board  (FASB)  Accounting  Standards
Codification  (FASB  ASC)  852-10  "Financial  Reporting  During  Reorganization
Proceedings," which is applicable to companies in Chapter 11, generally does not
change the manner in which financial  statements are prepared.  However, it does
require that the financial  statements for periods subsequent to the filing of a
Chapter 11 case distinguish transactions and events that are directly associated
with the reorganization  from the ongoing operations of the business.  Revenues,
expenses,  realized  gains and  losses,  and  provisions  for losses that can be
directly  associated with the  reorganization  and restructuring of the business
must be  reported  separately  as  reorganization  items  in the  statements  of
operations  beginning in the period ending  December 31, 2009. The balance sheet
must distinguish  pre-petition liabilities subject to compromise from both those
pre-petition   liabilities   that  are  not  subject  to  compromise   and  from
post-petition  liabilities.  Liabilities  that  may be  affected  by a  plan  of
reorganization  must be reported at the amounts expected to be allowed,  even if
they  may  settled  for  lesser   amounts.   In  addition,   cash   provided  by
reorganization  items, if any, must be disclosed  separately in the statement of
cash flows.  The Company  adopted FASB ASC 852-10  effective on October 28, 2009
and will  segregate  those items as  outlined  above for all  reporting  periods
subsequent to such date.

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.  Estimates of oil and gas reserve  quantities  provide the
basis for calculations of depletion,  depreciation,  and amortization (DD&A) and
impairment,  each of which  represents a significant  component of the financial
statements.

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  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 FASB ASC 932-360 "Extractive Activities - Oil
and  Gas".  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

                                       11
<PAGE>

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.  The Company  recognized  $13.5  million  and $39.3  million of
impairment of on unproved  properties  during the nine months ended December 31,
2009 and 2008, respectively.

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 FASB ASC 815-10  "Derivatives  and  Hedging"  FASB ASC
815-10  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.

         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 our Term Credit  Agreement issued in October 2007 the Company
was required 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 terms of
the Company's costless collar:

         Derivative losses are included in cash flows from operating  activities
in the  accompanying  Statements of Cash Flows.  The table below  summarizes the
realized and unrealized  losses related to our  derivative  instruments  for the
three and nine months ended December 31, 2009 and 2008.

<TABLE>
<CAPTION>

                                                         Three Months Ended December 31,     Nine Months Ended December 31,
                                                              2009             2008             2009             2008
                                                              ----             ----             ----             ----
<S>                                                      <C>              <C>              <C>             <C>

   Realized gains (losses) on derivative instruments                  $-         $144,285         $98,378        $(505,623)
   Unrealized gains (losses) on derivative instruments           (6,809)        1,442,626       (455,960)         1,505,792
                                                         ---------------- ---------------- --------------- -----------------
   Total   realized  and   unrealized   gains  (losses)
   recorded                                                     $(6,809)       $1,586,911      $(357,582)          $997,169
                                                         ================ ================ =============== =================
</TABLE>

                                       12
<PAGE>

The  Company's  hedge  expired  under its own terms on October 31,  2009.  As of
December 31, 2009 the Company has no hedges in place.

Net Profits Interest
--------------------

         The Company  assigned a 10% Net Profits  Interest  (NPI) to its Lender,
under the terms of the Eighth Amendment to the Term Credit Agreement (see NOTE 5
- Short-term  Note  Payable).  Net profit is defined as the excess of the sum of
crude oil  proceeds  plus hedge  settlements,  over the sum of lease  operating,
marketing,  transportation and production tax expenses. The Company is obligated
to pay to the Lender 10% of such excess,  if any, on a monthly basis, so long as
the NPI  remains in effect.  The  Company  records  amounts due under the NPI as
operating  expense.  For the nine months ended  December  31, 2009,  the Company
recognized  $107,681 as NPI expense,  including  such amount as lease  operating
expense in its Statement of Operations.

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.  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.  The  following  table details the  weighted-average
dilutive and anti-dilutive  securities related to stock options and warrants for
the periods presented:

                                         For the Nine Months Ended December 31,
                                         --------------------------------------
                                          2009                           2008
                                          ----                           ----

        Dilutive                            -                             -
        Anti-dilutive                  57,961,019                     70,314,465


Reclassification
----------------

         Certain  amounts  in the fiscal  2009  financial  statements  have been
reclassified  to conform to the fiscal 2010  financial  statement  presentation.
Such reclassifications had no effect on net loss.

Other Significant Accounting Policies
-------------------------------------

         Other accounting policies followed by the Company are set forth in Note
1 to the Financial Statements included in its Annual Report on Form 10-K for the
year  ended  March 31,  2009,  and are  supplemented  in the Notes to  Financial
Statements  in this  Quarterly  Report  on Form 10-Q for the nine  months  ended
December 31, 2009. These unaudited financial statements and notes should be read
in  conjunction  with the financial  statements and notes included in the Annual
Report on Form 10-K for the year ended March 31, 2009.

                                       13
<PAGE>

Recent Accounting Pronouncements
--------------------------------

         In June 2009, the Financial  Accounting Standards Board ("FASB") issued
"FASB Accounting Standards Codification  ("Codification"),  as the single source
of authoritative US GAAP" for all non-governmental  entities, with the exception
of the SEC and its staff. The Codification, which became effective July 1, 2009,
changes the referencing and organization of accounting guidance and is effective
for interim and annual  periods  ending after  September  15, 2009.  The Company
adopted  the  Codification  on  July 1,  2009  which  provides  for  changes  in
references to technical accounting literature (if used) in this Quarterly Report
on Form 10-Q and subsequent  reports,  but did not have a material impact on the
Company's financial position, results of operations or cash flows.

         In September 2006, the FASB issued accounting  guidance related to fair
value  measurements  and related  disclosures.  This new  guidance  defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value  measurements.  The Company  adopted this  guidance on April 1,
2008, as required for its financial assets and financial  liabilities.  However,
the FASB deferred the effective date of this guidance for one year as it relates
to fair value measurement  requirements for nonfinancial assets and nonfinancial
liabilities  that are not  recognized  or disclosed at fair value on a recurring
basis,  which  include,  among  others,  those  nonfinancial  long-lived  assets
measured  at  fair  value  for  impairment   assessment  and  asset   retirement
obligations  initially  measured at fair  value.  Fair value used in the initial
recognition of asset  retirement  obligations is determined based on the present
value of expected  future  dismantlement  costs  incorporating  our  estimate of
inputs  used  by  industry   participants  when  valuing  similar   liabilities.
Accordingly,  the  fair  value  is  based on  unobservable  pricing  inputs  and
therefore,  is considered a level 3 value input in the fair value hierarchy (See
Note 5 "Fair  Value  Measurements"  herein).  The  adoption  of this  accounting
guidance  related to these items did not have a material impact on the Company's
financial position or results of operations.

         In April 2009, the FASB issued additional guidance regarding fair value
measurements and impairments of securities  which makes fair value  measurements
more consistent with fair value  principles,  enhances  consistency in financial
reporting by increasing  the frequency of fair value  disclosures,  and provides
greater  clarity and  consistency in accounting  for and  presenting  impairment
losses on  securities.  The  additional  guidance is  effective  for interim and
annual  periods ending after June 15, 2009,  with early  adoption  permitted for
periods ending after March 15, 2009. The Company  adopted the provisions for the
period ending June 30, 2009. The adoption did not have a material  impact on its
financial position or results of operations.

         In April  2009,  the FASB  issued new  accounting  guidance  related to
interim  disclosures  about  the fair  values  of  financial  instruments.  This
guidance  requires  disclosures  about the fair value of  financial  instruments
whenever a public company issues  financial  information  for interim  reporting
periods.  This guidance is effective for interim  reporting periods ending after
June 15,  2009.  The Company  adopted this  guidance  upon its  issuance,  which
requires   additional   disclosures   regarding  the  fair  value  of  financial
instruments in this Quarterly  Report on Form 10-Q and subsequent  reports,  but
had no material impact on the Company's financial  statements.  See Note 5 "Fair
Value Measurements" herein for the required disclosures.

         In June 2009,  the FASB issued new accounting  guidance  related to the
accounting and disclosures of subsequent events. This guidance  incorporates the
subsequent events guidance contained in the auditing  standards  literature into
authoritative  accounting literature.  It also requires entities to disclose the
date through which they have  evaluated  subsequent  events and whether the date
corresponds  with the release of their  financial  statements.  This guidance is
effective  for all interim and annual  periods  ending after June 15, 2009.  The
Company adopted this guidance upon its issuance and it had no material impact on
the Company's financial  statements.  The Company evaluates subsequent events up
to  immediately  prior to the  issuance  of its  financial  statements,  and for
purposes of the  accompanying  financial  statements,  the Company has evaluated
subsequent events through February 19, 2010 the filing date of this 10-Q.

         In August  2009,  the FASB  issued new  accounting  guidance to provide
clarification  on measuring  liabilities at fair value when a quoted price in an
active market is not available. This guidance became effective for us on October
1, 2009.  The Company  adopted this  guidance on October 1, 2009,  and it had no
material impact on its financial statements.

                                       14
<PAGE>

         On December 31, 2008,  the SEC adopted a final rule that amends its oil
and gas  reporting  requirements.  The revised  rules change the way oil and gas
companies  report their reserves in their  financial  statements.  The rules are
intended  to reflect  changes  in the oil and gas  industry  since the  original
disclosures were adopted in 1978. Definitions were updated to be consistent with
Petroleum Resource  Management  System.  Other key revisions include a change in
pricing used to prepare  reserve  estimates,  the  inclusion of  non-traditional
resources in reserves,  the allowance for use of new technologies in determining
reserves,  optional disclosure of probable and possible reserves and significant
new  disclosures.  The revised rules will be effective for the Company's  Annual
Report on Form 10-K for the  fiscal  year  ending  March  31,  2010.  The SEC is
precluding  application of the new rules in quarterly reports prior to the first
annual report in which the revised  disclosures  are required and early adoption
is not permitted.

         In January 2010, the FASB issued an Accounting  Standards  Update (ASU)
entitled Oil and Gas Reserve  Estimation  and  Disclosures.  This ASU amends the
FASB  accounting  standards  to align the  reserve  calculation  and  disclosure
requirements with the requirements in the new SEC Rule, Modernization of Oil and
Gas  Reporting  Requirements.  The ASU will be  effective  for annual  reporting
periods ending on or after December 31, 2009.

In January 2010,  the FASB issued  guidance which requires an entity to disclose
the following:

     o    Separately disclose the amounts of significant transfers in and out of
          Level 1 and Level 2 fair value  measurements  and describe reasons for
          the transfers.
     o    Present separately  information about purchases,  sales, issuances and
          settlements,  on a gross basis,  rather than on one net number, in the
          reconciliation   for  fair  value   measurements   using   significant
          unobservable inputs (Level 3).
     o    Provide fair value  measurement  disclosures  for each class of assets
          and liabilities.
     o    Provide disclosures about the valuation  techniques and inputs used to
          measure  fair value for both  recurring  and  nonrecurring  fair value
          measurements for fair value  measurements  that fall in either Level 2
          or Level 3.

This guidance is effective for interim and annual  reporting  periods  beginning
after December 15, 2009,  except for the  disclosures  about  purchases,  sales,
issuance  and  settlement  on the  forward  of  activity  in Level 3 fair  value
measurements.  Those  disclosures are effective for fiscal years beginning after
December 15, 2010. The Company is currently in the process of evaluating the new
requirements.

         In September 2009, the FASB issued its proposed  updates to oil and gas
accounting  rules to align the oil and gas  reserve  estimation  and  disclosure
requirements  of  Extractive  Industries--Oil  and  Gas  (Topic  932)  with  the
requirements in the SEC's final rule discussed  above. The public comment period
for the FASB's  proposed  updates  ended  October 15,  2009;  however,  no final
guidance has been issued by the FASB.  The Company is  evaluating  the potential
impact of any updates to the oil and gas  accounting  rules and will comply with
any new accounting and disclosure  requirements once they become effective.  The
Company  anticipates  that the  following  rule changes could have a significant
impact on its results of operations as follows:

    o         The  price  used  in  calculating  reserves  will  change  from  a
              single-day closing price measured on the last day of the company's
              fiscal  year to a  12-month  average  price,  and will  affect the
              Company's depletion and ceiling test calculations.

    o         Several  reserve  definitions  have  changed that could revise the
              types of reserves that will be included in the Company's  year-end
              reserve report.

Many of the Company's financial  reporting  disclosures could change as a result
of the new rules.

Note 2 - Proceedings Under Chapter 11 of the Bankruptcy Code

         As  discussed  in Note 1 above,  on  October  28,  2009 (the  "Petition
Date"),  the Company  filed a voluntary  petition for relief under Chapter 11 of
the Bankruptcy Code with the Bankruptcy  Court.  The petition was filed in order

                                       15
<PAGE>

to enable the Company to pursue  reorganization  efforts under Chapter 11 of the
Bankruptcy   Code.   The  Company   continues   to  operate   its   business  as
debtor-in-possession  under  the  jurisdiction  of the  Bankruptcy  Court and in
accordance  with the applicable  provisions of the Bankruptcy Code and orders of
the  Bankruptcy  Court.  In  general,  as  debtor-in-possession,  the Company is
authorized under Chapter 11 to continue to operate as an ongoing  business,  but
may not  engage in  transactions  outside  of the  ordinary  course of  business
without the prior approval of the Bankruptcy Court.

         No  assurance  can be  provided  as to what  values,  if  any,  will be
ascribed  in  the   bankruptcy   proceedings   to  the  Company's   pre-petition
liabilities,  common  stock and other  securities.  Based upon the status of the
Company's  plan of  reorganization,  we  currently  believe that it is uncertain
whether  holders of our  securities  will receive any payment in respect of such
securities.  Accordingly,  extreme  caution  should be exercised with respect to
existing and future investments in any of these liabilities or securities.

         Subject to certain exceptions under the Bankruptcy Code, the Bankruptcy
Filing  automatically  enjoins,  or stays,  the  continuation of any judicial or
administrative  proceedings or other actions against the Company or its property
to recover on,  collect or secure a claim  arising  prior to the Petition  Date.
Thus, for example,  creditor  actions to obtain  possession of property from the
Company,  or to create,  perfect or enforce any lien against the property of the
Company,  or to collect on or otherwise exercise rights or remedies with respect
to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts
the automatic stay with respect thereto.

         In order to successfully  exit Chapter 11 bankruptcy,  the Company will
need  to  propose  and  obtain  Bankruptcy  Court  confirmation  of  a  plan  of
reorganization that satisfies the requirements of the Bankruptcy Code. A plan of
reorganization  would,  among other  things,  resolve the Debtors'  pre-petition
obligations,  set forth the revised capital  structure of the newly  reorganized
entity and provide for corporate governance  subsequent to exit from bankruptcy.
The Company has the exclusive right for 120 days after the Petition Date to file
a plan of reorganization and 60 additional days to obtain necessary acceptances.
Such  periods  may be  extended  by the  Bankruptcy  Court for cause to up to 18
months and 20 months,  respectively,  after the Petition  Date. If the Company's
exclusivity   period  lapses,   any  party  in  interest  may  file  a  plan  of
reorganization  for the Company.  In addition to the need for  Bankruptcy  Court
confirmation  and  satisfaction  of  Bankruptcy  Code  requirements,  a plan  of
reorganization  must be  accepted  as  described  below by at least one class of
holders of impaired  claims in order to be confirmed.  A class of impaired claim
holders against or a class of equity  interests in the Company is deemed to have
accepted  the plan of  reorganization  if (i) at least  one-half  in number  and
two-thirds in dollar amount of claims (exclusive of claims held by "insiders" as
that term is defined  in the  Bankruptcy  Code)  actually  voting  have voted to
accept  the plan;  and (ii) at least  two-thirds  in amount of equity  interests
(exclusive  of  interests  held by  "insiders"  as that term is  defined  in the
Bankruptcy  Code) actually voting in each impaired class of equity interests has
voted to  accept  the  plan.  Under  circumstances  specified  in the  so-called
"cramdown"  provisions of section 1129(b) of the Bankruptcy Code, the Bankruptcy
Court may confirm a plan even if such plan has not been accepted by all impaired
classes of claims and equity  interests.  A class of claims or equity  interests
that does not receive or retain any  property  under the plan on account of such
claims or  interests  is deemed to have  voted to reject the plan.  The  precise
requirements and evidentiary  showing for confirming a plan  notwithstanding its
rejection by one or more impaired classes of claims or equity interests  depends
upon a number of factors,  including  the status and  seniority of the claims or
equity  interests in the rejecting  class -- i.e.,  secured  claims or unsecured
claims, subordinated or senior claims, preferred or common stock.

         Under  section  365 of the  Bankruptcy  Code,  the  Company may assume,
assume and assign, or reject executory contracts and unexpired leases, including
real property and equipment  leases,  subject to the approval of the  Bankruptcy
Court and certain other  conditions.  Rejection  constitutes a  court-authorized
breach of the lease or contract in question and, subject to certain  exceptions,
relieves the Company of its future  obligations under such lease or contract but
creates  a deemed  pre-petition  claim  for  damages  caused  by such  breach or
rejection.  Parties  whose  contracts  or leases are  rejected  may file  claims
against the Company for  damages.  Generally,  the  assumption  of an  executory

                                       16
<PAGE>

contract or  unexpired  lease  requires  the Company to cure all prior  defaults
under such executory  contract or unexpired  lease,  including all  pre-petition
arrearages,  and to provide adequate  assurance of future  performance.  In this
regard,  the  Company  expects  that  liabilities   subject  to  compromise  and
resolution in the Chapter 11 case will arise in the future as a result of damage
claims  created by the Company's  rejection of various  executory  contracts and
unexpired  leases.  Conversely,  the Company would expect that the assumption of
certain executory  contracts and unexpired leases may convert  liabilities shown
in  our  financial   statements  as  subject  to  compromise  to   post-petition
liabilities.  Due to the uncertain nature of many of the potential  claims,  the
Company is unable to project  the  magnitude  of such  claims with any degree of
certainty at this time.

         The  Bankruptcy  Court has  established  a  deadline  for the filing of
proofs of claim  under  the  Bankruptcy  Code of March 5,  2010,  requiring  the
Company's  creditors to submit claims for  liabilities  not paid and for damages
incurred.  There  may be  differences  between  the  amounts  at which  any such
liabilities  are recorded in the Company's  financial  statements and the amount
claimed by the Company's  creditors.  Litigation  may be required to resolve any
such disputes or discrepancies.

         There can be no assurance that a  reorganization  plan will be proposed
by the Company or confirmed by the Bankruptcy  Court, or that any such plan will
be consummated.

         The ability of the  Company to  continue as a going  concern may depend
upon, among other things, (i) the Company's ability to comply with the terms and
conditions of the cash  collateral  orders  entered by the  Bankruptcy  Court in
connection  with the  Bankruptcy  Case;  (ii) ) the  ability  of the  Company to
generate  cash from  operations;  (iii) the  ability of the  Company to maintain
adequate cash on hand; (iv) the ability of the Company to obtain confirmation of
and to consummate a plan of  reorganization  under the Bankruptcy Code; and, (v)
the cost, duration and outcome of the reorganization process.  Uncertainty as to
the  outcome of these  factors  raises  substantial  doubt  about the  Company's
ability to continue as a going  concern.  We are  currently  evaluating  various
courses of action to address the operational and liquidity issues the Company is
facing.  There can be no assurance that any of these efforts will be successful.
The accompanying  unaudited financial  statements do not include any adjustments
that might result  should the Company be unable to continue as a going  concern.
Preparing the  accompanying  unaudited  financial  statements on a going concern
basis contemplates the realization of assets and the discharge of liabilities in
the normal course of business for the foreseeable future.

         As a  result  of the  Bankruptcy  Filing,  realization  of  assets  and
liquidation  of liabilities  are subject to  uncertainty.  While  operating as a
debtor-in-possession  under  the  protection  of  Chapter  11,  and  subject  to
Bankruptcy  Court  approval or otherwise  as  permitted in the normal  course of
business,  the Company may sell or otherwise  dispose of assets and liquidate or
settle  liabilities  for amounts  other than those  reflected  in the  condensed
financial statements.  Further, a plan of reorganization could materially change
the  amounts  and  classifications  reported in our  financial  statements.  Our
historical  financial  statements do not give effect to any  adjustments  to the
carrying value of assets or amounts of liabilities  that might be necessary as a
consequence of confirmation of a plan of reorganization.

         The  uncertainty  resulting  from the  Chapter 11 filing may hinder the
Company's  ongoing  business  activities  and its ability to  operate,  fund and
execute its  business  plan by  impairing  relations  with  property  owners and
potential lessees, vendors and service providers;  negatively impact the ability
of the Company to attract,  retain and  compensate  key executives and employees
and to retain employees  generally;  limit the Company's ability to obtain trade
credit;  and limit the  Company's  ability  to  maintain  and  exploit  existing
properties and acquire and develop new properties.

         Under the priority scheme  established by the Bankruptcy  Code,  unless
creditors  agree   otherwise,   post-petition   liabilities   and   pre-petition
liabilities  must be  satisfied in full before  shareholders  of the Company are
entitled  to receive any  distribution  or retain any  property  under a plan of
reorganization.  The ultimate recovery, if any, to creditors and shareholders of
the Company will not be determined until confirmation and consummation of a plan
of reorganization.  No assurance can be given as to what values, if any, will be
ascribed in the Chapter 11 case to each of these constituencies or what types or
amounts of distributions,  if any, they would receive.  Accordingly, the Company
urges that  extreme  caution be  exercised  with  respect to existing and future
investments in any of the Company's liabilities and/or securities.

                                       17
<PAGE>

Reorganization Items
--------------------

         Reorganization items represent the direct and incremental costs related
to the Company's  Chapter 11 case,  such as professional  fees incurred,  net of
interest income earned on accumulated cash during the Chapter 11 process.  These
restructuring  activities may result in additional charges and other adjustments
for  expected  allowed  claims  (including  claims that have been allowed by the
Court) and other  reorganization  items that could be material to the  Company's
financial position or results of operations in any given period.

Liabilities Subject to Compromise

         Liabilities  subject to  compromise at December 31,  2009 and March 31,
2009 include the following pre-petition liabilities:

<TABLE>
<CAPTION>

                                                          December 31, 2009       March 31, 2009
 ------------------------------------------------------------------------------------------------
<S>                                                       <C>                   <C>

      Accounts payable, trade                                        $165,781           $    -
      Other payables and accrued liabilities                          305,566          105,985
      Property and ad valorem taxes payable                           671,489          524,851
      Convertible notes payable                                       140,000                -
                                                          ---------------------------------------

           Total liabilities subject to compromise                 $1,282,836         $630,836
                                                          =======================================
</TABLE>



Note 3--Oil and Gas Properties
 The Company's oil and gas properties are summarized in the following table:

<TABLE>
<CAPTION>

                                                    December 31,         March 31,
                                                   -------------       --------------
                                                       2009                2009
<S>                                               <C>                 <C>


Proved properties                                      $19,374,998         $20,631,487

Unproved properties exclueded from DD&A                 52,713,480          52,953,185

Equipment and other                                        364,202             374,962
                                                  ------------------- -------------------

Subtotal Unevaluated Properties                         53,077,682          53,328,147
                                                  ------------------- -------------------

Total oil and gas properties                            72,452,680          73,959,634

Less accumulated depletion, depreciation,
        amortization and impairment                   (56,088,911)        (41,840,978)
                                                  ------------------- -------------------

                                                       $16,363,769         $32,118,656
                                                  =================== ===================
</TABLE>

Assignment of Overriding Royalty Interest and Net Profits Interest
------------------------------------------------------------------

         In  conjunction  with the  issuance of short term debt in October  2007
(See Note 5), the Company assigned 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 to be  approximately  $4,500,000  and recorded  this amount as a debt
discount and a decrease of oil and gas  properties.  In October 2008 the Company
extended  the  maturity  date of the short term debt by six  months.  As partial
consideration  for  the  extension,  the  Company  granted  an  increase  in the
proportionate  ORRI from 2% to 3%. The Company  estimated that the fair value of

                                       18
<PAGE>

the incremental  ORRI granted to the Lender to be  approximately  $1,050,000 and
has  recorded  this  amount as a debt  discount  and a  decrease  of oil and gas
properties.  In June 2009 the Company  extended the  maturity  date of the short
term debt until October 15, 2009. As partial  consideration  for the  extension,
the Company  assigned the Lender a 10% Net Profits  Interest  (the "NPI") in all
crude oil and natural gas produced from its three Powder River Basin fields. The
Company  estimated the fair value of the NPI to be approximately  $1,500,000 and
recorded  this  amount as deferred  finance  costs and a decrease of oil and gas
properties.

Impairment of Unproved Properties
---------------------------------

         In conjunction  with its periodic  assessment of impairment of unproved
properties,   the  Company  reevaluated  the  carrying  value  of  its  unproved
properties giving consideration to the Company's financial condition,  commodity
price  volatility,  difficulties in the global financial markets and the related
difficulties  the  Company  has  encountered  in raising  capital to develop the
properties.  Accordingly,  Company management determined to recognize impairment
during  the nine  months  ended  December  31,  2009 in an  amount  equal to the
remaining carrying value of its unproved properties,  $13,525,642.  For the same
period in 2008 the Company recognized  impairment of unproved  properties in the
amount of $39,300,000.

Note 4 - 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 nine months ended December 31, 2009 and 2008 is as follows:

                                                2009                 2008
                                                ----                 ----

Beginning asset retirement obligations          $1,280,680        $1,259,851
Liabilities incurred                                     -
Liabilities settled                                      -         (147,661)
Changes in estimates                                     -            43,493
Accretion expense                                  119,480           117,771
                                         -------------------- -----------------
Ending asset retirement obligation              $1,400,160        $1,273,454
                                         -------------------- -----------------

Current                                           $122,269          $320,768
Long-term                                        1,277,891           952,686
                                         -------------------- -----------------
                                                $1,400,160        $1,273,454
                                         ==================== =================

                                       19
<PAGE>

Note 5 -- Fair Value Measurements

         The Company complies with FASB ASC 820-10 "Fair Value  Measurements and
Disclosures"  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:

     o    Level 1: Quoted prices are  available in active  markets for identical
          assets or liabilities;
     o    Level 2:  Quoted  prices in active  markets  for  similar  assets  and
          liabilities that are observable for the asset or liability; or
     o    Level  3:   Unobservable   pricing  inputs  that  are  generally  less
          observable from objective sources, such as discounted cash flow models
          or valuations.

         FASB  ASC  820-10  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  December  31,  2009 by  level  within  the  fair  value
hierarchy:

<TABLE>
<CAPTION>
                                                       Fair Value Measurements Using
                                                       -----------------------------
                                          Level 1              Level 2                  Level 3
                                          -------              -------                  -------
<S>                                       <C>                  <C>                   <C>

Assets:                                     $-                    $-                      $-
Liabilities                                 $-                    $-                      $ -
  Asset retirement obligation               $-                    $-                 $  1,400,160
</TABLE>

         The Company's sole derivative financial instrument, a participating cap
costless  collar  agreement  expired  during the three months ended December 31,
2009. The fair value of the costless  collar  agreement was determined  based on
both observable and unobservable pricing inputs and therefore,  the data sources
utilized in these valuation  models were  considered  level 3 inputs in the fair
value hierarchy.  In the Company's adoption of FASB ASC 820-10-05, it considered
the impact of  counterparty  credit risk in the  valuation of its assets and its
own credit risk in the valuation of its  liabilities  that are presented at fair
value.  The Company  established  the fair value of its  derivative  instruments
using a published index price, the Black-Scholes  option-pricing model and other
factors including volatility,  time value and the counterparty's credit adjusted
risk free interest  rate.  The following  table sets forth a  reconciliation  of
changes in the fair value of  financial  assets and  liabilities  classified  as
level 3 in the fair value hierarchy:


                                                      2009          2008

Balance as of April 1                                  $455,960     $(836,907)
  Total gains (losses) (realized or unrealized):
    Included in earnings                              (357,582)        997,169
    Included in other comprehensive income                    -              -
  Purchased, issuances and settlements                 (98,378)        680,223
  Transfers in and out of Level 3                                            -

                                                     ------------- -------------
Balance as of December 31                                    $-       $840,485
                                                     ============= =============

                                       20
<PAGE>

Change in unrealized gains (losses) included
in earnings relating to derivatives still held
as of December 31                                            $-    $ 1,677,392
                                                     ============= =============

Note 6- Short-term Note Payable

         On October 16, 2007,  the Company issued a Note Payable (the "Note") in
the amount of $12,240,000  pursuant to a Term Credit  Agreement with a financial
institution  (the  "Lender").  All  amounts  outstanding  under  the  Note  were
originally  due and payable on October 31, 2008 (the  "Maturity  Date") and bore
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 Note was  amended on October  22,
2008,  (the "First  Amendment"),  to extend the Maturity Date by six months from
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. The Note was amended six times between April 30, and May
27, 2009 to extend the Maturity  Date for short periods of time while the Lender
and the Company finalized the terms of a longer extension.

         On June 3, 2009 the Note was again amended (the "Eighth  Amendment") to
among other things extend the maturity  date until  October 15, 2009.  Under the
provisions  of the Eighth  Amendment,  the  Company  executed  and  delivered  a
Conveyance of Net Profits,  granting to the Lender a net profits interest in and
to the Company's  properties equal to 10% of the net profit  attributable to the
Company's  interest  in and to all  hydrocarbons  produced  or  saved  from  its
properties.  Under the terms of the Eighth Amendment,  the Company had the right
to purchase  from the Lender:  (a)  two-thirds  (2/3),  but not less, of the net
profits  interest for the period  beginning on June 3, 2009 and ending on August
7, 2009 for the sum of $2,000,000 in cash or (b) for the period beginning August
8, 2009 and ending on October 15, 2009,  one-third  (1/3), but not less, for the
sum of $1,333,333  in cash (the Company did not exercise  either of the purchase
options). The Company did not make payment of the principal and accrued interest
on the maturity date, October 15, 2009.

          Under the terms of the Eighth Amendment, all amounts outstanding under
the Term  Credit  Agreement,  as amended,  bear  interest at a rate equal to the
greater  of (a)  16%  per  annum  and (b) the  LIBOR  rate,  plus 6% per  annum.
Furthermore,  the Eighth Amendment  specifies that 4% of the interest rate shall
be capitalized so that it is added to and becomes a part of the Principal Amount
in lieu of payment in cash.  Under the terms of the Term  Credit  Agreement,  as
amended,  the  Company is  required  to make  monthly  interest  payments on the
amounts outstanding but is not required to make any principal payments until the
Maturity  Date.  The Company may prepay the amounts  outstanding  under the Term
Credit Agreement at any time without penalty.

         The Company's obligations under the Term Credit Agreement,  as amended,
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.  Under the terms of the original Term Credit Agreement,  the Company
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 First
Amendment granted an increase in the proportionate  overriding royalty interests
("ORRI")  assigned to the Lender from 2% to 3%. The Company  estimated  the fair
value of the 2% ORRI granted to the Lender to be  approximately  $4,500,000  and
the value of the increase  ORRI to be  approximately  $1,050,000.  These amounts
were  recorded as  discounts to the Note Payable and as decreases of oil and gas
properties.  The Eighth  Amendment  granted a  Conveyance  of Net Profits to the
Lender.  The Company estimated the fair value of the 10% NPI to be approximately
$1,500,000. This amount was recorded as deferred finance costs and was amortized
over the term of the Note, as amended.  The Company recorded total  amortization
of discounts and deferred  finance costs of $1,770,789  and  $2,914,392  for the
nine months ended December 31, 2009 and 2008 respectively.

                                       21
<PAGE>

         As noted above,  the Note Payable  issued by the Company on October 16,
2007,  matured  on  October  15,  2009.  Payment  of the  principal  balance  of
approximately  $10,188,000,  plus accrued interest, was not made on the maturity
date,  and  therefore,  an event  of  default  occurred  under  the Term  Credit
Agreement, as amended. On November 16, 2009, the Lender presented to the Company
a Notice of Event of  Default,  a Demand for  Payment  and a Notice of Intent to
Foreclose,   collectively  "the  Notice").   The  Notice  declared  all  of  the
obligations  immediately  due and payable and demands that the Company  promptly
pay to Lender all of the  obligations  within ten days of receipt of the Notice,
and states that if the Company fails to pay the obligations in full as demanded,
the Lender intends to foreclose on the secured properties under the terms of the
Term Credit Agreement and other agreements. Effective as the date of the Notice,
interest  under the Credit  agreement  will accrue at the default rate,  and the
percentage  of net revenue to be applied for debt service and other  obligations
shall be 100%.
         On October 16, 2009 the Lender gave  instructions to the Company's bank
(the  "Instruction")  that  under  the  terms  of  the  Restricted  Account  and
Securities  Control  Agreement  executed  in  conjunction  with the Term  Credit
Agreement,  that as of the date of the Instruction,  the Company shall no longer
have  access to any funds held in  identified  accounts,  and the Lender now had
exclusive right to direct the disposition of such funds. On October 21, 2009 the
Company's bank transferred the all remaining funds,  $98,415, from the Company's
account to the Lender.
         As  discussed  in Note 1 and Note 2 above,  On October  28,  2009,  the
Company  filed a voluntary  petition (the  "petition")  for relief in the United
States  Bankruptcy  Court,  District of Colorado under Chapter 11 of Title 11 of
the  U.S.  Bankruptcy  Code.  (the  "Bankruptcy  Court").   Subject  to  certain
exceptions  under the  Bankruptcy  Code,  the  Bankruptcy  Filing  automatically
enjoins,   or  stays,  the  continuation  of  any  judicial  or   administrative
proceedings or other actions  against the Company or its property to recover on,
collect or secure a claim arising prior to the Petition Date. Thus, for example,
creditor  actions to obtain  possession  of  property  from the  Company,  or to
create,  perfect or enforce any lien against the property of the Company,  or to
collect  on  or  otherwise  exercise  rights  or  remedies  with  respect  to  a
pre-petition  claim are enjoined unless and until the Bankruptcy Court lifts the
automatic stay.

Note 7- Convertible Promissory Notes Payable

            On October 27, 2009, the Company issued Convertible Promissory Notes
(the "Promissory  Notes") totaling $140,000 in consideration for money loaned to
the Company of equal  amount.  One hundred  thousand  dollars of the  Promissory
Notes  were  issued  to four  officers  and/or  directors  ($25,000  each).  The
remainder  of the  Promissory  Notes were issued to existing  shareholders.  The
Promissory  Notes bear  interest  at an annual  rate equal to the greater of (i)
12%, or (ii) the prime rate (as  published in the Wall Street  Journal) plus 3%.
The  Promissory  Notes  mature on  November  1, 2010,  and all  obligations  and
payments due under the Promissory  Notes are subordinate to the Company's senior
debt.  Principal  and  accrued  interest  are  due on  the  maturity  date.  The
Promissory  Notes are convertible,  at the holder's  option,  into shares of the
Company's  common  stock at a conversion  price of $0.02 per share,  at any time
during the term of the Promissory Notes.

            In  accordance  with ASC  470.20  "Debt  with  Conversion  and Other
Options" the Company  recognized  the  advantageous  value of conversion  rights
attached to the Promissory  Notes.  Such rights give the note holder the ability
to convert the  Promissory  Note into common  stock at a price per share that is
less than the trading price to the public on the day of issuance. The beneficial
value in an amount of $105,000, is calculated as the intrinsic value (the market
price of the stock at the commitment date in excess of the conversion  price) of
the beneficial  conversion  feature of the  Promissory  Notes and is recorded as
interest expense in the accompanying  Statements of Operations and as additional
paid in capital in the accompanying Balance Sheet.

                                       22
<PAGE>

Note 8 - Contingencies

Threatened Litigation
---------------------

         In a letter  dated  February  18,  2009  sent to each of the  Company's
Directors, attorneys representing a group of persons who purchased approximately
$1,800,000 of securities (in the aggregate) in the Company's  private  placement
offering  commenced in late 2006,  alleged that securities laws were violated in
that offering.  In April 2009, the Company entered into tolling  agreements with
the  purchasers  to toll the statutes of  limitations  applicable  to any claims
related to the private placement.  The Company's Board of Directors directed the
Special  Committee to  investigate  these  allegations.  The Company  denies the
allegations and believes they are without merit.  The Company cannot predict the
likelihood of a lawsuit being filed, its possible  outcome,  or estimate a range
of possible losses, if any, that could result in the event of an adverse verdict
in any such  lawsuit.  Any suit  against the Company is stayed by the Chapter 11
case, and,  insofar as these claims are asserted  against the Company,  they are
subject to the claim  process  imposed by the  Bankruptcy  Code and the possible
imposition of section 510 of the Bankruptcy Code.

         See also Note 12 - Subsequent Events for discussion of litigation filed
by the Company after December 31, 2009.


Note 9 - Income Taxes

         As of December 31, 2009,  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, 2009.

Note 10--Common Stock

         The  Company's  capital stock as of December 31, 2009 and 2008 consists
of 275,000,000 authorized shares of common stock, par
value $0.00001 per share.

Issuance of Common Stock
------------------------

         During the nine months  ended December 31,  2009,  the  Company  issued
500,000  shares to a former  officer of the Company  upon the  exercise of stock
options. No other shares of stock were issued during the period.

Note 11--Share-Based Compensation

Chief Executive Officer (CEO) Options
-------------------------------------

         During the nine months ended  December 31, 2009,  the Company's  former
CEO  exercised  options  to  acquire  500,000  shares  of  common  stock,  for a
cumulative exercise price of $5.00 ($0.00001/share).

Restricted Stock Cancellation
-----------------------------

         During the nine months  ended  December  31,  2009,  200,000  shares of
restricted stock that had been issued to former directors,  but not vested, were
cancelled.  Such  cancellation has been reflected as a reduction of common stock
and an increase in additional paid in capital in the accompanying  Balance Sheet
and Statement of Changes in Stockholders' Equity.

                                       23
<PAGE>

Grant of Options to Directors
-----------------------------

         On October 27, 2009 in  conjunction  with the  execution of  Management
Retention  Agreements  (the "Retention  Agreement"),  each of the Company's four
directors  was granted  options to  purchase  2,500,000  share of the  Company's
common  stock at an exercise  price of $0.035 per share.  The options  expire on
December  31,  2019 and are  exercisable  10% on the date of grant and 90% on or
after the earliest to occur of: i) November 1, 2010; ii) the confirmation by the
court of a  Reorganization  Plan for the  company  filed with the Unites  States
Bankruptcy  Court;  iii) the dismissal of the Company from Chapter 11 Bankruptcy
with  approval  of the  court;  iv) an event of merger,  consolidation,  sale of
assets or other transaction which results in the holders of the Company's common
stock  immediately  before  such  transaction  owning  less the 50% of the stock
outstanding  immediately after the transactions:  v) any other change of Control
as described in the Retention Agreement, or vi) a Voluntary Termination for Good
Reason, as set forth in the Retention Agreement.

         The Company  determined the fair value of the options to be $0.0255 per
underlying  common share.  The value was  determined by using the  Black-Scholes
valuation model using the following assumptions:

         Volatility                         125.14%
         Expected option term               3 years
         Risk-free interest rate            1.375%
         Expected dividend yield            0.000%

         The Company recognized stock based compensation expense relating to the
Director's  options of $63,600 for the nine months  ended  December 31, 2009 and
expects to recognize the remaining  compensation expense of $229,075 relating to
the unvested options over the next 10 months.

2006 Stock Incentive Plan
-------------------------

         On  October 27 2009 the  Company's  Board of  Directors  granted to two
employees and one  non-employee  options to purchase  1,700,000 shares of common
stock at an exercise price of $0.035 per share, under the provisions of the 2006
Stock  Incentive  Plan (the "Plan").  The options expire on October 27, 2014 and
are  exercisable  10% on the date of grant and 90% on or after the  earliest  to
occur  of:  i)  November  1,  2010;  ii)  the  confirmation  by the  court  of a
Reorganization  Plan for the  company  filed with the Unites  States  Bankruptcy
Court;  iii) the  dismissal  of the  Company  from  Chapter 11  Bankruptcy  with
approval of the court; iv) an event of merger, consolidation,  sale of assets or
other  transaction  which results in the holders of the  Company's  common stock
immediately before such transaction owning less the 50% of the stock outstanding
immediately  after  the  transactions,  or: v) any other  change of  Control  as
described in the Plan

         The Company  determined the fair value of the options to be $0.0255 per
underlying  common share.  The value was  determined by using the  Black-Scholes
valuation model using the following assumptions:

         Volatility                         125.14%
         Expected option term               3 years
         Risk-free interest rate            1.375%
         Expected dividend yield            0.000%

         During the nine months ended  December  31,  2009,  options to purchase
70,000  shares of common  stock  granted to employees  expired.  The options had
exercise  prices ranging from of $0.18 to $1.18.

                                       24
<PAGE>

Total  estimated  unrecognized  compensation  cost from  unvested  stock options
issues under the Plan as of December 31, 2009 was approximately  $77,000,  which
the Company  expects to recognize  over the next ten months.  As of December 31,
2009, there were 2,206,000  options  outstanding  under the 2006 Stock Incentive
Plan and 7,794,000  options are  available  for  issuance.  Note 12 - Subsequent
Events

Litigation
----------

         On February 12, 2010, the Company filed an adversary  proceeding in the
Bankruptcy  Court  against  GasRock  Capital  LLC , Case No.  10-01173-MER.  The
complaint  seeks to avoid the  interest  of GasRock in the 10% NPI  conveyed  to
GasRock in connection with the Eighth Amendment to the Term Credit Agreement and
the additional 1% ORRI conveyed to the Lender in October 2008 in connection with
an extension of the short term note.  The primary basis of the complaint is that
the Lender gave less than fair  equivalent  value for the  conveyances at a time
when the Company was insolvent,  or when the  conveyances  left the Company with
insufficient  capital. In other words, the Company has claimed that the value of
the conveyances was in excess of a reasonable fee for the extensions,  and, as a
result, the conveyances were  "constructively  fraudulent" under both applicable
Bankruptcy law and the Uniform Fraudulent Transfers Act.

         In addition,  the Company has  challenged the conveyance of the NPI and
the 1% ORRI, together with the original 2% ORRI conveyed to Lender when its loan
was first made, on the grounds that they should be  recharacterized  as security
interests and not outright transfers of title. The Company has also claimed that
the conveyances rendered the Loan usurious under Texas law. Further, the Company
has sought to have the NPI and 1% ORRI avoided as  preferences  under ss. 547 of
the Bankruptcy Code and to equitably subordinate the Lender's claim.

         Although the Company  believes its claims are  well-taken,  the Company
expects the Lender to vigorously defend against the complaint,  and no assurance
can be given that the Company will be successful in whole or in part.


Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations

Proceedings under Chapter 11
----------------------------

          On October 28,  2009,  we filed a voluntary  petition for relief under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy  Code") in the
United States  Bankruptcy Court for the District of Colorado (the "Court") (Case
number    09-32943)   We   will    continue   to   operate   our   business   as
"debtor-in-possession"  under the  jurisdiction  of the Court and in  accordance
with the  applicable  provisions  of the  Bankruptcy  Code and the  order of the
Court,  as we devote  renewed  efforts to resolve  our  liquidity  problems  and
develop a reorganization plan.

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

         It is our intention to address all of our prepetition  claims in a plan
of reorganization in our Chapter 11 case. At this juncture,  it is impossible to
predict with any degree of certainty  how such a plan will treat such claims and
the impact  that our Chapter 11 cases and any  reorganization  plan will have on

                                       25
<PAGE>

the  trading  market  for our  stock.  Generally,  under the  provisions  of the
Bankruptcy Code, holders of equity interests may not participate under a plan of
reorganization  unless the claims of creditors  are  satisfied in full under the
plan or unless creditors  accept a reorganization  plan which permits holders of
equity interests to participate. The formulation and implementation of a plan of
reorganization in the Chapter 11 cases could take a significant period of time.

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:

     o    business strategy;

     o    ability to raise debtor in possession financing and the terms thereof;

     o    ability  to  develop  a  plan  of  reorganization  acceptable  to  the
          Bankruptcy Court and to emerge from bankruptcy;

     o    ability  to  complete  a sale  of the  Company,  all or a  significant
          portion of its assets or financing or other strategic alternatives;

     o    ability to obtain the financial resources to continue  operations,  to
          repay secured debt, to enhance  current  production and to conduct the
          EOR projects;

     o    water availability and waterflood production targets;

     o    carbon  dioxide  (CO2)  availability,   deliverability,  and  tertiary
          production targets;

     o    construction  of surface  facilities for waterflood and CO2 operations
          and a CO2 pipeline;

     o    inventories, projects, and programs;

     o    other anticipated capital expenditures and budgets;

     o    future cash flows and borrowings;

     o    the availability and terms of financing;

     o    oil reserves;

     o    reservoir response to water and CO2 injection;

     o    ability to obtain permits and governmental approvals;

     o    technology;

     o    financial strategy;

     o    realized oil prices;

     o    production;

     o    lease  operating  expenses,  general  and  administrative  costs,  and
          finding and development costs;

     o    availability and costs of drilling rigs and field services;

     o    future operating results; and

                                       26
<PAGE>

     o    plans, objectives, expectations, and intentions.

         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,  2009.  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.

Organization
------------

         We are an  independent  energy  company that  explores for and develops
produces,  and markets oil and gas in North America. We operate three oil fields
in the Powder River Basin, Wyoming. Our business plan is to use CO2 injection to
increase oil production in these oil fields.

         Since  August  2008 we have  been  exploring  alternatives  to  improve
liquidity, including raising capital, refinancing outstanding debt, applying for
a Department of Energy Grant under the American  Recovery and Reinvestment  Act,
or the potential sale of the Company or a significant portion of its assets. Due
to  volatile  commodity  prices and the global  financial  crisis,  we have been
unsuccessful to date.

         On September 30, 2009, at a meeting of the Company's shareholders,  the
following individual were elected to replace the six standing directors:  Andrei
Stytsenko, Silvia Soltan, Vladimir Vaskevich, Mathijs van Houweninge, A.L. "Sid"
Overton  and  Jeffrey B.  Bennett.  On October 1, 2009,  the Board of  Directors
terminated  the  employment  of  John  Works,  the  Company's  President,  Chief
Executive Officer, Chief Financial Officer,  Secretary and Treasurer. On October
2. 2009 the Board of Directors  appointed Jon C. Nicolaysen  President and Chief
Executive  Officer and Mathijs van  Houweninge as Secretary and Treasurer of the
Company,  each to serve  until the Board's  next  annual  meeting or until their
successors are appointed. On October 21, 2009, Mr. Stytsenko,  Mr. Vaskevich and
Ms. Soltan, resigned their positions as Directors of the Company. On October 27,
2009, Jon C. Nicolaysen was appointed to the Board of Directors

         We did not repay our short term debt on its maturity date,  October 15,
2009  resulting  in an event of  default  and the  commencement  of  foreclosure
proceedings  by GasRock  Capital,  the Lender.  On October 28, 2009,  we filed a
voluntary petition for relief in the United States Bankruptcy Court, District of
Colorado under Chapter 11 of Title 11 of the U.S.  Bankruptcy Code (the "Code").
We have reached a Bankruptcy Court approved agreement with the Lender for use of
cash  collateral  and we  intend  to  continue  to  operate  our  business  as a
"debtor-in-possession"  in accordance with the applicable provisions of the Code
and orders of the Bankruptcy  Court. We are actively engaged in discussions with
potential DIP finance providers that, if successful, would enable us to submit a
plan  of  reorganization  and,  with  Bankruptcy  Court  approval,  emerge  from
bankruptcy and pursue our business plan.

                                       27
<PAGE>

         The following  summarizes  our goals and objectives for the next twelve
months:

     o    Reduce operating and administrative expenses to ensure that within the
          short term we are able to operate within the constraints of the use of
          cash collateral agreement;
     o    Secure  DIP  financing  that  would  enable  us to  enhance  crude oil
          production from our existing wells;
     o    Emerge from Chapter 11 Bankruptcy under the provisions of a Bankruptcy
          Court  approved  plan of  reorganization,  or  otherwise  achieve  the
          dismissal from Chapter 11 with the approval of the Bankruptcy Court.



Results of Operations
---------------------

Three months ended December 31, 2009 Compared to Three Months December 31, 2008.

         The following is a comparative summary of our results of operations:
<TABLE>
<CAPTION>

                                                                        Three Months Ended December 31,
                                                                         2009                      2008
                                                                         ----                      ----
<S>                                                             <C>                       <C>

Revenues:
Oil production (in barrels)                                                      14,484                    16,997

Net oil price (per barrel)                                     $                  67.01   $                 43.95
Oil sales                                                      $                970,502   $               746,967
Derivative gains (losses)                                                        (6,809)                1,586,911
                                                                  ------------------------------------------------
Total revenues                                                                  963,693                 2,333,878

Operating expenses:
Production taxes                                                                143,769                    90,940
Lease operating expenses                                                        411,150                   831,559
Depreciation, depletion, amortization and accretion                             338,005                   391,508
Impairment of unproved properties                                            13,525,642                32,500,000
Exploration expense                                                               3,341                     4,293
General and administrative expense                                              568,716                   780,261

                                                                  ------------------------------------------------
Total operating expenses                                                     14,990,623                34,598,561
                                                                  ------------------------------------------------

Loss from operations                                                        (14,026,930)             (32,264,683)
                                                                  ------------------------------------------------

Other income (expense):
Interest expense and financing costs                                           (699,271)              (1,171,886)
Interest and other income                                                             7                     6,811
                                                                  ------------------------------------------------
Total other income (expense)                                                   (699,264)              (1,165,075)
                                                                  ------------------------------------------------

Loss before  reorganization items                                          (14,726,194)              (33,429,758)

                                                                  ------------------------------------------------
Reorganization items                                                            158,727                         -
                                                                  ------------------------------------------------
Net loss                                                       $            (14,884,921)  $          (33,429,758)
                                                               ===================================================
</TABLE>

                                       28
<PAGE>

         Overview.  For the three months ended  December 31, 2009, we reported a
net loss of $14,884,921, or $0.12 per basic and fully-diluted share, compared to
a net loss of $33,429,758 or $0.29 per basic and  fully-diluted  share,  for the
corresponding  three months of 2008.  Discussions  of  individually  significant
period to period variances follow.

         Revenue,  production taxes, and lease operating expenses. For the three
months  ended  December  31,  2009,  we recorded  crude oil sales of $970,502 on
14,484 barrels of oil at an average price of $67.01,  as compared to revenues of
$746,967  on 16,997  barrels of oil at an average  price of $43.95 per barrel in
2008. The year-to-year  variance  reflects a volume variance of $(110,439) and a
price  variance of $333,973.  The decreased  volume in 2009 reflects the loss of
several producing wells due to mechanical  problems in late 2008 and early 2009,
coupled  with  routine  production  decline  from  year to year.  Following  the
bankruptcy filing and reaching  agreement with our secured lender for the use of
cash  collateral  we have  begun  efforts  to stop  the  production  decline  by
repairing  wells and  surface  facilities  that had been  offline due to lack of
available capital. Production taxes (including ad valorem and property taxes) of
$143,769  in  2009  as  compared  to  $90,940  in  2008  remained   constant  at
approximately  12.5% of crude  oil  sales  revenues.  Lease  operating  expenses
decreased to $411,150  ($28.39/bbl) in 2009 as compared to $831,559 ($48.92/bbl)
in 2008. The year to year variance  reflects a volume variance of $122,946 and a
cost  variance of  $297,463.  The per barrel  decrease in 2009  compared to 2008
reflects costs saving  efforts  undertaken to preserve  capital,  coupled with a
lack of significant  well or surface facility repair work in the 2009 quarter as
compared to the 2008 quarter.  As mentioned above, late in the current period we
have  begun a  program  to repair  wells  and  surface  facilities  to  increase
production.  These  efforts will likely result in higher  operating  expenses in
future periods.

         Derivative losses. 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
December  31, 2009 we recorded  total  losses on the  derivative  activities  of
$6,890 compared to derivative  gains of $1,586,911 in 2008. The 2009 losses were
comprised  completely  of  unrealized  losses,  compared to $144,285 of realized
losses and $1,442,627 of unrealized gains for the comparable 2008 quarter.

         Depreciation,  depletion,  amortization  and  accretion.  For the three
months ended  December 31, 2009,  we reflected  total  depreciation,  depletion,
amortization  and  accretion  of $338,005  comprised  of  $252,368  ($17.42/bbl)
related to oil and gas properties, $46,816 related to other assets and accretion
of the asset retirement  obligation of $38,821.  The comparable  amounts for the
2008 period were $350,847 comprised of $305,210 ($17.96/bbl), related to oil and
gas  properties,  $45,637  related  to  other  assets  and  accretion  of  asset
retirement obligation of $40,661

         Impairment of unproved properties. In consideration of the difficulties
in the global financial  markets,  volatile  commodity prices and reflecting the
lack of success in securing  financing  to conduct our CO2 enhanced oil recovery
projects,  we  determined  during the three  months  ended  December 31, 2009 to
recognize full impairment of the carrying value of our unproved properties. This
decision reflects management's current plans to stabilize and gradually increase
production  from  existing  wells  and  facilities  before  commencing  the more
comprehensive  CO2  projects.  In the three  months  ended  December 31, 2008 we
recognized  a  partial  impairment  of  unproved  properties  in the  amount  of
$32,500,000.

         Reorganization items. The $158,727 of costs reflected as reorganization
items in the three  months  ended  December  31,  2009,  include  those items of
expense  specifically  related  our  reorganization  following  the  filing of a
voluntary  petition for relief under Chapter 11 of the Bankruptcy  Code with the
Bankruptcy  Court  on  October  28,  2009.  These  costs  consist  primarily  of
professional  fees to legal counsel for  assistance  with the filing process and
the development of a  reorganization  plan. We expect these expenses to continue
to be significant as we progress through the bankruptcy process.


                                       29
<PAGE>

         General and administrative expense. For the three months ended December
31,  2009,  we  reflected  general  and  administrative  expenses of $568,716 as
compared to $780,261 for the corresponding three months ended December 31, 2008.
Period to period comparisons and explanations of significant variances follow:

<TABLE>
<CAPTION>

                                        Three Months Ended
                                           December 31,

Expense Category                        2009          2008       Discussion
<S>                                     <C>           <C>        <C>

Salaries, payroll taxes and                                      Decrease reflects staff cuts and salary renegotiations following
benefits                                $242,081       $306,838  appointment of new management

Consultants                               36,015         52,090  Decrease primarily reflects lower accounting and administrative
                                                                 fees as more responsibilities assumed by employees.

Travel & entertainment                    14,307          7,710  Increase reflects travel costs for new Board members to corporate
                                                                 offices in Denver, Colorado as they assumed control of Company.
                                                                 Prior year Board meetings were held telephonically.

IT                                        17,970         24,240  Decrease reflects cost cutting measures enacted following appoint-
                                                                 ment of new management, primarily IT consultant fees.

Legal fees                               103,822         46,741  Increase reflects pre bankruptcy debtor counsel fees ($37K) and
                                                                 general counsel fees upon establishing new Board of Directors.

Audit, SOX and tax compliance             12,000         26,886  Decrease reflects cost cutting measures and efficiencies in
                                                                 quarterly review process.

Investor relations, shareholders           6,856         18,885  Decrease reflects cancellation of contract with outside investor
meeting                                                          relations consultant.

Office rent, communication  &            117,624        150,595  Decrease reflects timing of expense recognition (4 months of office
other office expenses                                            rent expense in prior year period vs. 3 months in current year
                                                                 period)

Insurance                                 32,988         37,096  -

Stock based compensation                  84,066        143,563  Decrease reflects fact that former CEO's stock options fully vested
                                                                 in first quarter of current year, partially offset by stock option
                                                                 grants to new directors and management.

Director fees                             15,000         80,500  Decrease reflects termination of previous Board's compensation
                                                                 arrangement upon election of new Board of Directors.

Field overhead recoveries              (114,013)      (114,883)  -

                         TOTAL G&A      $568,716       $780,261
</TABLE>


         Interest  expense  and  financing  costs.  For the three  months  ended
December 31, 2009, we reflected interest expense and financing costs of $699,271
as compared to $1,171,886 for the corresponding  three months ended December 31,
2008.  The 2009 amount is  comprised  of  interest  paid and payable on the Note
Payable issued in October 2007, as amended,  of $460,165,  and  amortization  of
deferred  financing  costs and discount on Note Payable of $239,106.  Comparable
amounts for the 2008 period  were  $323,190 of interest on the Note  Payable and
$323,190 of deferred finance and discount  amortization.  The higher interest on
Note Payable  reflects a 4% increase in the interest  rate  occurring as part of
the  amendment  to the Term Credit  Agreement  in June 2009 for the entire three
month period,  coupled with the default interest rate in effect  (additional 2%)
since the event of default occurred on October 15, 2009.


                                       30
<PAGE>

Nine months ended December 31, 2009 Compared to Nine Months December 31, 2008.

<TABLE>
<CAPTION>

         The following is a comparative summary of our results of operations:

                                                    Nine Months Ended December 31,
                                                    2009                    2008
                                                    ----                    ----
<S>                                        <C>                    <C>

Revenues:
Oil production (in barrels)                                41,447                    51,239
Net oil price (per barrel)                 $                60.24 $                   90.59
Oil sales                                  $            2,498,376 $               4,641,836
Derivative gains (losses)                                (357,582)                  997,169
                                            ------------------------------------------------
Total revenues                                          2,140,794                 5,639,005

Operating expenses:
Production taxes                                          338,547                   564,590
Lease operating expenses                                1,088,163                 2,004,422
Depreciation, depletion, amortization,
     and accretion                                        987,742                 1,046,166
Impairment of unproved properties                      13,525,642                39,300,000
Exploration expense                                        15,173                    13,896
General and administrative expense                      2,066,226                 2,788,415
Total operating expenses                               18,021,493                45,717,489

Loss from operations                                  (15,880,699)             (40,078,484)

Other income (expense):
Interest expense and financing costs                   (3,021,648)              (4,594,283)
Interest and other income                                     731                    26,129
Total other income (expense)                           (3,020,917)              (4,568,154)
 Loss before reorganization items                    (18,901,616)              (44,646,638)
Reorganization items                                      158,727
Net loss                                   $          (19,060,343)$            (44,646,638)
                                           =================================================
</TABLE>

         Overview.  For the nine months ended  December 31, 2009,  we reported a
net loss of $19,060,343, or $0.16 per basic and fully-diluted share, compared to
a net loss of $44,646,638 or $0.29 per basic and  fully-diluted  share,  for the
corresponding  nine  months of 2008.  Discussions  of  individually  significant
period to period variances follow.

         Revenue,  production taxes, and lease operating expenses.  For the nine
months ended  December 31, 2009,  we recorded  crude oil sales of  $2,498,376 on
41,477 barrels of oil at an average price of $60.24,  as compared to revenues of
$4,641,836 on 51,239  barrels of oil at an average price of $90.59 per barrel in
2008. The year-to-year  variance  reflects a volume variance of $(884,358) and a
price variance of  $(1,259,102).  The decreased volume in 2009 reflects the loss
of several  producing  wells due to  mechanical  problems in late 2008 and early
2009, coupled with routine  production decline from year to year.  Following the
bankruptcy  filing and after reaching  agreement with our secured lender for the
use of cash  collateral we have begun efforts to stop the production  decline by
repairing  wells and  surface  facilities  that had been  offline due to lack of
available capital. Production taxes (including ad valorem and property taxes) of
$338,547  in  2009 as  compared  to  $564,590  in  2008,  remained  constant  at
approximately  12.5% of crude  oil  sales  revenues.  Lease  operating  expenses

                                       31
<PAGE>

decreased  to  $1,088,163   ($23.37/bbl)  in  2009  as  compared  to  $2,004,422
($39.12/bbl)  in 2008. The year to year variance  reflects a volume  variance of
$381,880  and a cost  variance  of  $534,378.  The per barrel  decrease  in 2009
compared to 2008 reflects costs saving efforts  undertaken to preserve  capital,
coupled with a lack of significant  well or surface  facility repair work in the
2009 period as compared to the 2008  period.  As  mentioned  above,  late in the
current period we have begun a program to repair wells and surface facilities to
increase  production.  These  efforts  will  likely  result in higher  operating
expenses in future periods.

         Derivative losses. 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 nine  months  ended
December  31, 2009 we recorded  total  losses on the  derivative  activities  of
$357,582  compared to gains of $997,169 in 2008.  The 2009 losses were comprised
of $98,378 of realized  gains and  $455,960 of  unrealized  losses,  compared to
$505,623  of  realized  losses  and  $1,502,792  of  unrealized  gains  for  the
comparable 2008 quarter.

         Depreciation,  depletion,  amortization.  For  the  nine  months  ended
December 31, 2009, we reflected total depreciation,  depletion, amortization and
accretion of $987,742 comprised of $722,290  ($17.41/bbl) related to oil and gas
properties,  $145,973  related to other assets and accretion of asset retirement
obligation  of  $119,480.  The  comparable  amounts  for the  2008  period  were
$1,046,166  comprised  of  $784,283   ($15.31/bbl),   related  to  oil  and  gas
properties,  $144,132 related to other assets, and accretion of asset retirement
obligation of $117,771.  The increase in per barrel DD&A  reflects  decreases in
the crude oil reserve base used to calculate such DD&A in 2009 compared to 2008.

         Impairment of unproved properties.  In consideration of difficulties in
the global financial markets,  volatile commodity prices and reflecting the lack
of success in  securing  financing  to conduct  our CO2  enhanced  oil  recovery
projects,  we  determined  during the nine  months  ended  December  31, 2009 to
recognize full impairment of the carrying value of our unproved properties. This
decision reflects management's current plans to stabilize and gradually increase
production  from  existing  wells  and  facilities  before  commencing  the more
comprehensive  CO2  projects.  In the nine  months  ended  December  31, 2008 we
recognized  a  partial  impairment  of  unproved  properties  in the  amount  of
$39,300,000.

         Reorganization items. The $158,727 of costs reflected as reorganization
items in the nine months ended December 31, 2009, include those items of expense
specifically  related  our  reorganization  following  the filing of a voluntary
petition for relief under Chapter 11 of the Bankruptcy  Code with the Bankruptcy
Court on October 28, 2009. These costs consist primarily of professional fees to
legal counsel for assistance  with the filing  process and the  development of a
reorganization plan. All professional fees are subject to review and approval by
the Bankruptcy  Court. We expect these expenses to continue to be significant as
we progress through the bankruptcy process.

         General and administrative  expense. For the nine months ended December
31, 2009,  we reflected  general and  administrative  expenses of  $2,066,266 as
compared to  $2,788,415  for the  corresponding  nine months ended  December 31,
2008.  Period to period  comparisons and  explanations of significant  variances
follow:

<TABLE>
<CAPTION>

                                      Nine Months Ended December 31,
-------------------------------- ------------------------- --------------- ---------------------------------------------------------
Expense Category                           2009                 2008       Discussion
-------------------------------- ------------------------- --------------- ---------------------------------------------------------
<S>                              <C>                       <C>             <C>

                                                                           Decrease reflects staff cuts (currently 4 full time
                                                                           employees in corporate office vs. 7 in prior year) and
Salaries, payroll taxes and                                                salary renegotiations following appointment of new
benefits                                         $825,239      $1,008,880  management

Consultants                                        98,983         245,368  Decrease reflects lower fees paid to accounting
                                                                           consultants $98K, land administration and operations
                                                                           consultants $27K and engineering consultants $23K as more
                                                                           responsibilities were assumed by employees, as opposed to
                                                                           consultants



                                       32
<PAGE>

Travel & entertainment                             21,525          78,429  Decrease reflects cost cutting measures enacted late in
                                                                           2008 period.

IT                                                 55,619          96,299  Decrease  reflects lower staff count and reduced need for
                                                                           IT coupled with cost cutting measures enacted following
                                                                           appointment of new management


                                                                           Increase reflects fees associated with renegotiation of
                                                                           senior secured debt (7 extensions), proxy preparation,
                                                                           issues surrounding the annual meeting, debtor counseling
Legal fees                                        398,308         233,999  fees prior to filing of bankruptcy

                                                                           Decrease primarily reflects efficiencies achieved in
                                                                           audit and quarterly review process in the third year of
Audit, SOX and tax compliance                      96,430         191,773  such  process.

Investor relations,                                18,919          71,776  Decrease reflects termination of  contract  with  outside
shareholders meeting                                                       investor relations professional.

Office rent, communication  &                     346,538         450,595  Decrease reflects timing of expense recognition (10
other office expenses                                                      months of office rent expense in prior year period vs. 9
                                                                           months in current year period ($30K), lower communication
                                                                           costs, $10K, lower office supply, postage and profession-
                                                                           al dues $27K, and termination of maintenance agreement on
                                                                           accounting software $20K and other general cost cutting
                                                                           measures

Insurance                                         130,364         112,311  Increase reflects higher director and officer liability
                                                                           insurance costs in current year

Stock based compensation                          262,529         431,031  Decrease reflects fact that former CEO's stock options
                                                                           fully vested in first quarter of current year, partially
                                                                           offset by stock option grants to new directors and
                                                                           management.

Director fees                                     164,500         245,000  Decrease reflects termination of previous Board's
                                                                           compensation arrangement upon election of new Board of
                                                                           Directors.

Field overhead recoveries                       (352,728)       (377,046)  -

                      TOTAL G&A                $2,066,226      $2,788,415
</TABLE>


         Interest  expense  and  financing  costs.  For the  nine  months  ended
December  31,  2009,  we  reflected  interest  expense  and  financing  costs of
$3,021,648 as compared to  $4,594,283  for the  corresponding  nine months ended
December  31, 2008.  The 2009 amount is  comprised of interest  paid on the Note
Payable issued in October 2007, as amended,  of $1,244,804,  interest penalty on
non-timely  filed Wyoming  severance tax reports of $6,055,  and amortization of
deferred financing costs and discount on Note Payable of $1,770,789.  Comparable
amounts for the 2008 period  were$1,069,884  of interest on the Note Payable and
$3,524,399 of deferred finance and discount amortization. The higher interest on
Note Payable  reflects a 4% increase in the interest  rate  occurring as part of
the amendment to the Term Credit Agreement in June 2009.


                                       33
<PAGE>

Liquidity and Capital Resources
-------------------------------

         On October  15,  2009,  short term debt in the amount of  approximately
$10,188,000  matured.  We were  unable  to repay  the  short  term  debt,  which
constituted an Event of Default under the terms of the Term Credit Agreement. On
October  16, 2009 we  received  notice of the Event of Default  from the Lender,
GasRock  Capital LLC  (GasRock),  and notice of their intent to foreclose on the
properties  securing the debt.  On October 21, 2009 GasRock  swept the remaining
$98,000 from our operating bank account,  leaving us without the ability to meet
operating expense obligations, or pay staff or other administrative expenses.

            On October 27, 2009 we raised  $140,000 in cash through the issuance
of  convertible  promissory  notes to certain  of our  officers,  directors  and
shareholders  and used the funds to retain  counsel to provide debtor advice and
to provide working capital.  The promissory notes mature on November 1, 2010 and
bear  interest  at an annual  rate equal to the  greater of (i) 12%, or (ii) the
prime rate (as published in the Wall Street  Journal)  plus 3%. All  obligations
and payments due under the  promissory  notes are  subordinate  to the Company's
senior debt.  Principal and accrued  interest are due on the maturity  date. The
promissory  notes are convertible,  at the holder's  option,  into shares of the
Company's  common  stock at a conversion  price of $0.02 per share,  at any time
during the term of the promissory notes.

         On October  28, 2009 we filed a  voluntary  petition  for relief in the
United States Bankruptcy  Court,  District of Colorado under Chapter 11 of Title
11 of the U.S.  Bankruptcy  Code.  (the  "Bankruptcy  Court").  We have  reached
agreement with GasRock, and the Bankruptcy Court has approved,  an order for use
of cash  collateral.  Under the terms of the order we receive the proceeds  from
crude oil  sales  and are able to pay  operating,  and  administrative  costs in
accordance  with the approved  cash  collateral  budget.  This  arrangement  has
enabled us to meet all allowable operating and administrative obligations and to
build an  operating  cash  reserve  totaling  $172,000 as of December  31, 2009,
increasing to $430,000 as of January 31, 2010.

            We   intend   to    continue    to   operate    our    business   as
"debtor-in-possession"  under the  jurisdiction  of the Bankruptcy  Court and in
accordance  with  the  applicable  provisions  of the  Code  and  orders  of the
Bankruptcy Court. The Company is currently holding  discussions with a number of
potential DIP financing sources and is developing its restructuring plans should
such  financing be successful.  In addition,  the Company has prepared and filed
with the  Bankruptcy  Court  certain  financial,  operating  reports  and  other
required  documents.  There is no  assurance  the  Company  efforts to raise DIP
financing  will be  successful or that the  restructuring  plans will enable the
Company to emerge from bankruptcy.

Going Concern
-------------

         The report of our independent  registered public accounting firm on the
financial  statements  for the year ended  March 31,  2009 and 2008  includes an
explanatory  paragraph relating to the uncertainty of our ability to continue as
a going  concern.  As of December  31, 2009 we have cash  reserves of  $172,000,
negative  working capital of $10.2 million and we have incurred a cumulative net
loss of $87.8  million  for the  period  from  inception  (February  4, 2004) to
December  31, 2009.  Our ability to continue as a going  concern is dependent on
our success in restructuring under Chapter 11 of the Bankruptcy Code.

         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
property  acquisitions.  We will need substantial  additional  funding to emerge
from bankruptcy, continue operations and to pursue our business plan. The recent
unprecedented  events in global financial  markets have had a profound impact on
the global economy. Many industries, including the oil and natural gas industry,
are impacted by these market conditions.  Some of the key impacts of the current
financial  market turmoil include  contraction in credit markets  resulting in a

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<PAGE>

widening of credit risk,  devaluations  and high  volatility  in global  equity,
commodity,  natural resources and foreign exchange markets, and a lack of market
liquidity.  A continued or worsened  slowdown in the financial  markets or other
economic  conditions,  including but not limited to, employment rates,  business
conditions,  lack of available  credit,  the state of the financial  markets and
interest  rates may  adversely  affect our ability to emerge  successfully  from
bankruptcy and to pursue future opportunities.

         The following is a summary of Rancher Energy's comparative cash flows:

                                             For the Nine Months Ended
                                                    December 31,
                                        ----------------------------------------
                                                     2009                2008
                                        -------------------- -------------------

   Cash flows from (used for):
                                               $(793,140)        $(2,399,118)
      Operating activities

      Investing activities                          6,955           (670,188)

      Financing activities                         41,880         (2,341,470)

         Cash flows used for operating  activities  decreased  substantially  in
2009 as a  result  of lower  general  and  administrative  and  lease  operating
expenses as discussed  above,  coupled  with  realized  derivative  gains in the
period, as compared to realized losses in the 2008 period.

         Investing  activities  in 2009  reflect  a modest  positive  cash  flow
resulting  from the sale of surplus field  equipment in the period,  compared to
oil and gas capital  expenditures of $230,000 and expenditures to increase bonds
and other assets of $440,000 in the 2008 period.

         Cash flows from financing  activities in 2009 reflect proceeds from the
issuance of promissory notes to directors and shareholders  ($140,000) offset by
the pay down of $98,000 of the principal balance of our senior secured debt. The
comparable  figures for 2008 reflect the pay down of the senior  secured debt of
$2,240,000 and the payment of deferred  finance costs of $101,000.

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 nine months ended  December 31, 2009, we
reflected  realized gains of $98,378 and  unrealized  gains of $455,960 from the
hedging  activity,  as compared to realized  losses of $505,623  and  unrealized
gains of $1,502,792 for the comparable 2008 period.  Our hedge contract  expired
on October 31, 2009.

         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 fiscal year ended March
31, 2009.  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, 2009.

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<PAGE>

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Commodity Price Risk
--------------------

         Because of our relatively low level of current oil and gas  production,
we are not  exposed to a great  degree of market  risk  relating  to the pricing
applicable  to our oil  production.  However,  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.  Under the terms of our Term  Credit
Agreement we entered into in October 2007,  we were required  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  impacted our
ability to refinance  or extend our existing  short term debt when it matured on
October 15, 2009.  Alternatively,  market conditions may affect the availability
of capital for prospective  purchasers of our assets or equity.  Item 4 and Item

4T. 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  the  following  material  weakness in our  internal
control over financial reporting and, as a result of this material weakness,  we
concluded  as of March 31, 2009 and as of the end of the period  covered by this
Quarterly Report that our disclosure controls and procedures were not effective.

          We did not  adequately  segregate  the duties of  different  personnel
within our Accounting Department due to an insufficient  complement of staff and
inadequate management oversight.

         We have  limited  accounting  personnel  with  sufficient  expertise in
generally  accepted  accounting  principles to enable  effective  segregation of
duties with respect to recording  journal  entries and to allow for  appropriate
monitoring of financial  reporting  matters and internal  control over financial
reporting.  Specifically,  the Chief  Accounting  Officer has involvement in the
creation and review of journal  entries and note  disclosures  without  adequate
independent  review and  authorization.  This control deficiency is pervasive in
nature and  impacts all  significant  accounts.  This  control  deficiency  also
affects  the  financial   reporting   process  including   financial   statement
preparation and the related note disclosures.

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.

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<PAGE>

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings

         On October  28, 2009 we filed a  voluntary  petition  for relief in the
United States Bankruptcy Court for the district of Colorado.

         On February 12, 2010 we filed an adversary proceeding in the Bankruptcy
Court  against  GasRock  Capital LLC , Case No.  10-01173-MER,  seeding to avoid
certain  interests  assigned to GasRock in  connection  with the  original  Term
Credit  Agreement and subsequent  amendments  thereto.  See Note 12 - Subsequent
Events, of Part 1 - Financial Information,  of this quarterly filing for further
information regarding this proceeding

         See also Note 6 - Contingencies,  of Part 1 - Financial Information, of
this quarterly  filing for a description of threatened  litigation.

Item 1A. RISK FACTORS

Not applicable to smaller reporting companies.

ITEM 2.  CHANGES IN SECURITIES

            NONE.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

            NONE.

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

            NONE.

ITEM 5.  OTHER INFORMATION

            NONE.

ITEM 6.  EXHIBITS

Exhibits.  The  following is a complete  list of exhibits  filed as part of this
Form 10-Q.  Exhibit  numbers  correspond  to the numbers in the Exhibit Table of
Item 601 of Regulation S-K.

     Exhibit 31.1  Certification of Chief Executive  Officer pursuant to Section
                   302 of the Sarbanes-Oxley Act


     Exhibit 31.2  Certification of Chief Accounting Officer pursuant to Section
                   302 of the Sarbanes-Oxley Act

     Exhibit 32.1  Certification  of  Principal  Executive  Officer  pursuant to
                   Section 906 of the Sarbanes-Oxley Act

     Exhibit 32.2  Certification  of  Principal  Financial  Officer  pursuant to
                   Section 906 of the Sarbanes-Oxley Act







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<PAGE>


                                   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:  February 19, 2010                     By: /s/ Jon C. Nicolaysen
                                                 ------------------------------
                                                  Jon C. Nicolaysen, President,
                                                  Chief Executive Officer,
                                                 (Principal Executive Officer)

Dated:  February 19, 2010                     By: /s/ Richard E. Kurtenbach
                                                  -----------------------------
                                                   Richard E. Kurtenbach, Chief
                                                   Accounting Officer
                                                  (Principal Accounting Officer)






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