UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended March 31, 2010


or




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




For the
transition period from __________ to __________





Commission
file number: 000-51425





RANCHER
ENERGY CORP.


(Exact
name of registrant as specified in its charter)




Nevada
            98-0422451(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification Number)





999-18th
Street, Suite 3400


Denver,
Colorado 80202


(Address
of principal executive offices, including zip code)





(303)
629-1125


(Telephone
number, including area code)





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


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





Title of each class
            Name of Each Exchange
              On Which RegisteredCommon
      Stock, par value $0.00001 per share
            N/A





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes oNo x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes oNo x





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 xNo o





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 during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). YesoNoo





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





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer," “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one).




Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            (Do
      not check if a smaller reporting company)
            Smaller
      reporting company
            x





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





APPLICABLE ONLY TO REGISTRANTS INVOLVED
IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:





Indicate by check mark whether the
registrant has filed all documents and reports required to be filed by Section
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 oNo x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter ended September 30, 2009 was $7,755,587.





The
number of shares outstanding of the registrant’s common stock as of July
12, 2010 was 119,316,720.





DOCUMENTS
INCORPORATED BY REFERENCE





None.





TABLE
OF CONTENTS





PAGE NO.PART
      I
              
              3ITEM
      1.
              BUSINESS
              4ITEM
      1A.
              RISK
      FACTORS
              10ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
              16ITEM
      2.
              PROPERTIES
              16ITEM
      3.
              LEGAL
      PROCEEDINGS
              19ITEM
      4.
              (REMOVED
      AND RESERVED)
              19PART
      II
              
              19ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
              19ITEM
      6.
              SELECTED
      FINANCIAL DATA
              22ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              22ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              29ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              30ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              30ITEM
      9A(T).
              CONTROLS
      AND PROCEDURES
              30ITEM
      9B.
              OTHER
      INFORMATION
              31PART
      III
              
              31ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              31ITEM
      11.
              EXECUTIVE
      COMPENSATION
              35ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              38ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
              39ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
              40PART
      IV
              
              40ITEM
      15.
              EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
              40





For
abbreviations on definitions of certain terms used in the oil and gas industry
and in this Annual Report, please refer to the section entitled “Glossary of
Abbreviations and Terms” in Item 1 Business.





As used
in this document, references to “Rancher Energy," “our company," “the Company,"
“we," “us," and “our” refer to Rancher Energy Corp. and its wholly-owned
subsidiary. In this Annual Report, the “Cole Creek South Field” also is referred
to as the “South Cole Creek Field."


2


PART
I





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





This annual report on Form 10-K contains
forward-looking statements within the meaning of the federal securities laws.These forward-looking statements 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 Annual Report 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 this Annual Report. All
forward-looking statements speak only as of the date of this Annual Report.
We undertake no obligation to
update forward-looking statements to reflect events or circumstances occurring
after the date of this annual report on Form 10-K. These cautionary statements
qualify all forward-looking statements attributable to us or persons acting on
our behalf.





These
statements may be found under “Risk Factors," “Management’s Discussion and
Analysis of Financial Condition and Results of Operations," “Business,"
“Properties” and other sections of this Annual Report. 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.





As used in this annual report on Form
10-K, unless the context otherwise requires, the terms “we,” “us,” “the
Company,” “Rancher” and “Rancher Energy”refer toRancher Energy Corp,  aNevadacorporation, and its
subsidiary.The statements
contained in this Annual Report on Form 10-K that are not historical are
“forward-looking statements," as that term is defined in Section 27A of the
Securities Act of 1933, as amended (the Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act), that involve a
number of risks and uncertainties.





These
forward-looking statements include, among others, the following:


·
              business
      strategy;


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


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




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




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




·
            water
      availability and waterflood production
targets;




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




·
            construction
      of surface facilities for waterflood and  CO2operations
      and a CO2pipeline;




·
            inventories,
      projects, and programs;




·
            other
      anticipated capital expenditures and
budgets;




·
            future
      cash flows and borrowings;




·
            the
      availability and terms of
financing;




·
            oil
      reserves;




·
            reservoir
      response to water and CO2
      injection;




·
            ability
      to obtain permits and governmental
approvals;




·
            technology;




·
            financial
      strategy;




·
            realized
      oil prices;




3




·
            production;




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




·
            availability
      and costs of drilling rigs and field
services;




·
            future
      operating results, and;




·
            plans,
      objectives, expectations, and
intentions.




ITEM
1.  BUSINESS





The
Company





General





We are an
independent energy company engaged in the development, production, and marketing
of oil and gas in North America. Our business strategy is to use modern tertiary
recovery techniques on older, historically productive fields with proven
in-place oil and gas. Higher oil and gas prices and advances in technology such
as improved fracture technology, 3-D seismic acquisition and evaluation and
carbon dioxide (CO2) injection
and sequestration, should position us to capitalize on attractive sources of
potentially recoverable oil and gas.





We
operate four fields in the Powder River Basin, Wyoming, which is located in the
Rocky Mountain region of the United States. The fields, acquired in December
2006 and January 2007, are the South Glenrock B Field, the Big Muddy Field, the
Cole Creek South Field and the South Glenrock A Field,. All four fields
currently produce some oil and reservoir engineering studies indicate
significant volumes of crude oil could be recovered through the use of secondary
and  tertiary recovery techniques..





Our
headquarters office is located in Denver, Colorado where we employ 4 persons,
including 2 executive officers, and our field office is located in Glenrock,
Wyoming, where we employ 3 persons.





Incorporation,  Organization
and Management





We were
incorporated on February 4, 2004, as Metalex Resources, Inc., in the State of
Nevada. Prior to April 2006, we were engaged in the exploration of a gold
prospect in British Columbia, Canada. Metalex found no commercially exploitable
deposits or reserves of gold. During April 2006, our stockholders voted to
change our name to Rancher Energy Corp.





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.





Chapter 11
Reorganization





On
October 15, 2009 a Note Payable (the “Note”) issued by the Company to GasRock
Capital LLC (“GasRock” or the “Lender”) in October 2007 became due and
payable.  We were unable to pay the amount due of approximately $10.2
million, and we were unsuccessful in reaching agreement with GasRock to extend
the term or otherwise modify the terms of the Note. On October 16, 2009 GasRock
notified us of the existence of an event of default and of their intention to
foreclose on the assets that secured the Note.  On October 21, 2009
GasRock gave instructions the our bank to transfer all funds held in our
operating account to GasRock, leaving us without funds to conduct operations,
pay staff or generally operate our business.  On October 28, 2009, the
Company filed a voluntary petition (the “petition”) for relief in the United
States Bankruptcy Court (the “Court”), District of Colorado under Chapter 11 of
Title 11 of the U.S. Bankruptcy Code. (the “Bankruptcy Code”).





As a
result of the Chapter 11 filing we 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.  In November 2009 the Court approved an
interim order for our Use of Cash Collateral through December 8,
2009.  The interim order for continued use of cash collateral has
since been extended by the Court on several occasions.   As of
the date of filing this annual report we continue to use cash collateral under
the authority of the Court, until such time as the Court rules on our Motion to
Use Cash Collateral.


4


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.  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 cases.




The Bankruptcy Code gives us the
exclusive right to file a plan of reorganization, originally for a period of 120
days after the petition date.  We have filed a motion with the Court
to extend the exclusive period through August 24, 2010, and are awaiting a
decision on the motion.  In March 2010, with Court authorization, we
retained a financial advisor to identify potential sources of capital including
strategic and industry participants and to assist us in the development of a
plan of reorganization.   That process is ongoing as of the date
of filing of this annual report.It is our intention to address all of
our prepetition claims in a plan of reorganization in our Chapter 11
cases.  At this juncture, it is impossible to predict with any degree
of certainty how such a plan will treat such claims and the impact our Chapter
11 cases and any reorganization plan will have on 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.If
we are not successful in presenting a plan of reorganization within the
prescribed time or if any such plan or reorganization is not confirmed by the
court, any party in interest may file a plan of reorganization for us, which
could result in the forced sale of our assets to satisfy our pre-petition
obligations.




Business
Strategy





Emergence From
Bankruptcy





As noted
above, we are evaluating various strategic alternatives in an effort to develop
a plan of reorganization that will satisfy the requirements of the Court and
enable us to meet our pre-petition obligations and ultimately to emerge from
Bankruptcy.  These alternatives include the raising of capital through
the issuance of debt or equity, the sale of some or all of our assets or farming
out certain interests in our oil fields in an effort to prove up additional
crude oil reserves in the fields and attract capital and partners for further
field development.  There is no certainty that we will be successful
in completing a plan of reorganization that will be confirmed by the Court, or
if we do complete such a plan there is no assurance we will complete the sale of
assets or the raising of capital in amounts sufficient to enable us to meet our
prepetition obligations or to successfully emerge from Bankruptcy.  If
we are not successful in presenting a plan of reorganization within the
prescribed time or if any such plan or reorganization is not confirmed by the
court, any party in interest may file a plan of reorganization for us, which
could result in the forced sale of our assets to satisfy our pre petition
obligations.





Oil and Gas
Operations





Since
filing the bankruptcy petition in late October 2009 and subject to the
constraints during the bankruptcy process, our new management modified the short
term business strategy from focusing on the active pursuit of an enhanced oil
recovery project, to a more traditional crude oil development and production
strategy.  Commencing in December 2009 we have carried out repair and
remediation work on a number of non-productive wells, bringing them back on
production and increasing daily production from the fields by approximately 50
barrels or 25% compared to the pre-petition production levels.  We
continue to evaluate the productive capabilities of the fields with the primary
objective of identifying additional low cost projects to enhance production and
a secondary objective to identify additional productive formations on our
existing leasehold position.   In March 2010, with Court
authorization, we retained a professional geologist with extensive experience in
the Powder River Basin, to conduct an evaluation and analysis of the Niobrara
Shale potential for hydrocarbon production in and around our
fields.  That evaluation and analysis has since been completed and as
of the date of filing this annual report, we are reviewing the geologist’s
report and developing a strategy to ensure the potential identified in the
geologist’s report is fully evaluated and exploited.





Subject
to our successful emergence from bankruptcy, our longer term business strategy
remains the same, to employ modern Enhanced Oil Recovery (EOR) technology to
recover hydrocarbons that remain behind in mature reservoirs.  CO2 injection
is one of the most prevalent tertiary recovery mechanisms for producing light
oil. The CO2, at
sufficient pressure, acts as a solvent for the oil causing the oil to be
physically washed from the reservoir rock and produced. The CO2 is then
separated from the oil, compressed and re-injected into the reservoir. This
recycling process allows the reuse of the purchased CO2 several
times during the life of the tertiary operation. In a typical oil field, much of
the original oil in place (OOIP) is left behind after primary production and
waterflood operations. In many cases this is in the range of 50% to 75% of the
OOIP. This oil, in mature reservoirs with extensive data and historic
production, is the target of miscible EOR technology.


5


To carry
out this strategy, and subject to successfully emerging from the bankruptcy
process, we will need to raise significant capital to drill additional producing
and injection wells, to construct surface facilities and otherwise prepare the
fields for CO2
injection.





In
addition we will need to secure a long term reliable source of CO2.  As
discussed elsewhere in this annual report, in prior years we had executed two
CO2
supply agreements, one with Anadarko Petroleum Corporation (Anadarko) and one
with ExxonMobil Corporation (ExxonMobil).  In April 2009, ExxonMobil
notified us they were terminating the supply agreement based upon our failure to
provide performance assurances in the form of a letter of credit.  In
conjunction with our bankruptcy petition, we filed a motion with the Court to
reject the Anadarko supply agreement. The motion was granted by the Court in
April 2010.  We currently have no CO2 supply
agreements and there is no assurance we will be successful in securing any such
contracts.





Property
Acquisitions




On
December 22, 2006, we purchased certain oil and gas properties for $46,750,000,
before adjustments for the period from the effective date to the closing date,
plus costs of $323,657 and warrants to purchase 250,000 shares of our common
stock. The oil and gas properties consisted of (i) a 100% working interest
(79.3% net revenue interest) in the Cole Creek South Field, and (ii) a 93.6%
working interest (74.5% net revenue interest) in the South Glenrock B
Field.  Both fields are  located in Converse County Wyoming
in the Southern Powder River Basin.





On
January 4, 2007, we acquired the Big Muddy and South Glenrock A Fields, also
located in the Southern Powder River Basin. The total purchase price was
$25,000,000 and closing costs were $672,638.




Federal
and State Regulations





Numerous
Federal and State laws and regulations govern the oil and gas industry. These
laws and regulations are often changed in response to changes in the political
or economic environment. Compliance with this evolving regulatory burden is
often difficult and costly and substantial penalties may be incurred for
noncompliance. The following section describes some specific laws and
regulations that may affect us. We cannot predict the impact of these or future
legislative or regulatory initiatives.





Based on
current laws and regulations, management believes that we are and will be in
substantial compliance with all laws and regulations applicable to our current
and proposed operations and that continued compliance with existing requirements
will not have a material adverse impact on us. The future annual capital costs
of complying with the regulations applicable to our operations are uncertain and
will be governed by several factors, including future changes to regulatory
requirements. However, management does not currently anticipate that future
compliance will have a material adverse effect on our consolidated financial
position or results of operations.





Bankruptcy
Proceedings





Since
filing a voluntary petition for relief in the United States Bankruptcy Court on
October 28, 2009, we have operated as a debtor-in-possession under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the U.S. Bankruptcy Code and orders of the Bankruptcy
Court.





Regulation of Oil
Exploration and Production





Our
operations are subject to various types of regulation at the Federal, state, and
local levels. Such regulation includes requiring permits for drilling wells,
maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells, and the disposal of fluids used in connection
with operations. Our operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells that may be drilled in
those units and the unitization or pooling of oil and gas properties. In
addition, state conservation laws establish maximum rates of production from oil
and gas wells and generally prohibit the venting or flaring of gas. The effect
of these regulations may limit the amount of oil and gas we can produce from our
wells and may limit the number of wells or the locations at which we can drill.
The regulatory burden on the oil and gas industry increases our costs of doing
business and, consequently, affects our profitability.


6


Federal Regulation of Sales
Prices and Transportation





The
transportation and certain sales of oil in interstate commerce are heavily
regulated by agencies of the U.S. Federal Government and are affected by the
availability, terms, and cost of transportation. In particular, the price and
terms of access to pipeline transportation are subject to extensive U.S. Federal
and state regulation. The Federal Energy Regulatory Commission (FERC) is
continually proposing and implementing new rules and regulations affecting the
oil industry. The stated purpose of many of these regulatory changes is to
promote competition among the various sectors of the oil and gas industry. The
ultimate impact of the complex rules and regulations issued by FERC cannot be
predicted. Some of FERC’s proposals may, however, adversely affect the
availability and reliability of interruptible transportation service on
interstate pipelines. While our sales of crude oil are not currently subject to
FERC regulation, our ability to transport and sell such products is dependent on
certain pipelines whose rates, terms, and conditions of service are subject to
FERC regulation. Additional proposals and proceedings that might affect the oil
and gas industry are considered from time to time by Congress, FERC, state
regulatory bodies, and the courts. We cannot predict when or if any such
proposals might become effective and their effect, if any, on our operations.
Historically, the oil and gas industry has been heavily regulated; therefore,
there is no assurance that the less stringent regulatory approach recently
pursued by FERC, Congress and the states will continue indefinitely into the
future.





Federal or State
Leases





Our
operations on Federal or state oil and gas leases are subject to numerous
restrictions, including nondiscrimination statutes. Such operations must be
conducted pursuant to certain on-site security regulations and other permits and
authorizations issued by the Bureau of Land Management, Minerals Management
Service (MMS), and other agencies.





Regulation of Proposed
CO2Pipeline





Numerous
Federal and state regulations govern pipeline construction and operations. The
primary pipeline construction permits may include environmental assessments for
Federal lands, right of way permits for fee and state lands, and oversight of
ongoing pipeline operations by the U.S. Department of
Transportation.





Environmental
Regulations





Public
interest in the protection of the environment has increased dramatically in
recent years. Our oil production and CO2 injection
operations and our processing, handling, and disposal of hazardous materials
such as hydrocarbons and naturally occurring radioactive materials (NORM) are
subject to stringent regulation. We could incur significant costs, including
cleanup costs resulting from a release of hazardous material, third-party claims
for property damage and personal injuries, fines and sanctions, as a result of
any violations or liabilities under environmental or other laws. Changes in or
more stringent enforcement of environmental laws could also result in additional
operating costs and capital expenditures.





Various
Federal, state, and local laws regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
directly impact oil and gas exploration, development, and production operations
and consequently may impact our operations and costs. These regulations include,
among others (i) regulations by the EPA and various state agencies regarding
approved methods of disposal for certain hazardous and nonhazardous wastes; (ii)
the Comprehensive Environmental Response, Compensation and Liability Act,
Federal Resource Conservation and Recovery Act, and analogous state laws that
regulate the removal or remediation of previously disposed wastes (including
wastes disposed of or released by prior owners or operators), property
contamination (including groundwater contamination), and remedial plugging
operations to prevent future contamination; (iii) the Clean Air Act and
comparable state and local requirements, which may result in the gradual
imposition of certain pollution control requirements with respect to air
emissions from our operations; (iv) the Oil Pollution Act of 1990, which
contains numerous requirements relating to the prevention of and response to oil
spills into waters of the United States; (v) the Resource Conservation and
Recovery Act, which is the principal Federal statute governing the treatment,
storage, and disposal of hazardous wastes; and (vi) state regulations and
statutes governing the handling, treatment, storage, and disposal of naturally
occurring radioactive material.





Management
believes that we are in substantial compliance with applicable environmental
laws and regulations and intend to remain in compliance in the future. To date,
we have not expended any material amounts to comply with such regulations and
management does not currently anticipate that future compliance will have a
material adverse effect on our consolidated financial position, results of
operations, or cash flows.


7


Climate
Change Legislation and Greenhouse Gas Regulation





Studies over recent years have indicated
that emissions of certain gases may be contributing to warming of the Earth’s
atmosphere. In response to these studies, many nations have agreed to limit
emissions of “greenhouse gases” or “GHGs” pursuant to the United Nations
Framework Convention on Climate Change, and the “Kyoto Protocol.” Methane, a
primary component of natural gas, and carbon dioxide, a byproduct of the burning
of oil, natural gas, and refined petroleum products, are considered “greenhouse
gases” regulated by the Kyoto Protocol. Although the United States is not
participating in the Kyoto Protocol, several states have adopted legislation and
regulations to reduce emissions of greenhouse gases. Restrictions on emissions
of methane or carbon dioxide that may be imposed in various states could
adversely affect our operations and demand for our products. Additionally, the
United States Supreme Court has ruled, inMassachusetts,
et al. v. EPA, that the
EPA abused its discretion under the Clean Air Act by refusing to regulate carbon
dioxide emissions from mobile sources. As a result of the Supreme Court decision
and the change in presidential administrations, on December 7, 2009, the
EPA issued a finding that serves as the foundation under the Clean Air Act to
issue other rules that would result in federal greenhouse gas regulations and
emissions limits under the Clean Air Act, even without Congressional action. As
part of this array of new regulations, on September 22, 2009, the EPA also
issued a GHG monitoring and reporting rule that requires certain parties,
including participants in the oil and natural gas industry, to monitor and
report their GHG emissions, including methane and carbon dioxide, to the EPA.
The emissions will be published on a register to be made available on the
Internet. These regulations may apply to our operations. The EPA has proposed
two other rules that would regulate GHGs, one of which would regulate GHGs from
stationary sources, and may affect sources in the oil and natural gas
exploration and production industry and the pipeline industry. The EPA’s
finding, the greenhouse gas reporting rule, and the proposed rules to regulate
the emissions of greenhouse gases would result in federal regulation of carbon
dioxide emissions and other greenhouse gases, and may affect the outcome of
other climate change lawsuits pending in United States federal courts in a
manner unfavorable to our industry.





On June 26, 2009, the United States
House of Representatives approved adoption of the “American Clean Energy and
Security Act of 2009,” also known as the “Waxman-Markey cap-and-trade
legislation” or ACESA. On November 5, 2009 the Senate Committee on
Environment and Public Works approved the “Clean Energy Jobs and American Power
Act of 2009,” authored by John Kerry and Barbara Boxer, that is similar in many
ways to ACESA. One of the purposes of these bills is to control and reduce
emissions of greenhouse gases in the United States. These bills would establish
an economy-wide cap on emissions of GHGs in the United States and would require
an overall reduction in GHG emissions of 17% to 20% (from 2005 levels) by 2020,
and by over 80% by 2050. Under these bills, most sources of GHG emissions would
be required to obtain GHG emission “allowances” corresponding to their annual
emissions of GHGs. The number of emission allowances issued each year would
decline as necessary to meet the overall emission reduction goals of the bills.
As the number of GHG emission allowances declines each year, the cost or value
of allowances is expected to escalate significantly. The net effect of these
bills would be to impose increasing costs on the combustion of carbon-based
fuels such as oil, refined petroleum products, and natural gas. President Obama
has indicated that he is in support of the adoption of legislation such as the
two bills discussed above, and the White House is expending significant efforts
to push for the legislation.





Two recent court decisions, one before
the United States Second Circuit Court of Appeals and one before the United
States Fifth Circuit Court of Appeals (The Fifth Circuit) have allowed cases to
proceed. In the first case,Connecticut
v. American Electric Power, the Second Circuit ruled that several states and other plaintiffs could
continue a suit to impose GHG reductions on several utility defendants,
concluding that a political question and standing objections of the defendants
did not prohibit the suit from going forward. The Fifth Circuit, inComer v.
Murphy Oil, ruled that
plaintiffs could similarly pursue a damage suit and the political question did
not prohibit the suit. This case involves claims by plaintiffs who suffered
damages from Hurricane Katrina that are seeking to recover damages from certain
GHG emitters asserting their emissions contributed to their increased damages.
In another case filed in the Texas District Court in Austin on October 6,
2009, a citizens group sued the Texas Commission on Environmental Quality (TCEQ)
asserting that the agency was required to regulate carbon dioxide emissions from
parties applying for permits under the Texas Clean Air Act. The result of this
lawsuit could impose additional regulations on oil and gas operations in Texas,
if the Texas courts require the TCEQ to regulate carbon dioxide and perhaps
other GHGs such as methane. We may be subject to the EPA GHG monitoring and
reporting rule, and potentially new EPA permitting rules if adopted to apply GHG
permitting obligations and emissions limitations under the federal Clean Air
Act. Even if no federal greenhouse gas regulations are enacted, or if the EPA
issues regulations, more than one-third of the states have begun taking action
on their own to control and/or reduce emissions of greenhouse gases. Several
multi-state programs have been developed or are in the process of being
developed: the Regional Greenhouse Gas Initiative involving 10 Northeastern
states, the Western Climate Initiative involving seven western states, and the
Midwestern Greenhouse Gas Reduction Accord involving seven states. The latter
two programs have several other states acting as observers and they may join one
of the programs at a later date. Any of the climate change regulatory and
legislative initiatives described above could have a material adverse effect on
our business, financial condition, and results of
operations.





Competition
and Markets





We face
competition from other oil companies in all aspects of our business, including
acquisition of producing properties and oil and gas leases, marketing of oil and
gas, obtaining goods, services, and labor. Many of our competitors have
substantially larger financial and other resources. Factors that affect our
ability to acquire producing properties include available funds, available
information about prospective properties, and our standards established for
minimum projected return on investment. Competition is also presented by
alternative fuel sources, including ethanol and other fossil fuels. Because of
our use of EOR techniques and management’s experience and expertise in the oil
and gas industry, we believe that we are effective in competing in the
market.


8


The
demand for qualified and experienced field personnel to operate drill wells, and
conduct field operations, such as geologists, geophysicists, engineers, and
other professionals in the oil industry, can fluctuate significantly often in
correlation with oil prices, causing periodic shortages. There have also been
shortages of drilling rigs and other equipment, as demand for rigs and equipment
has increased along with the number of wells being drilled. These factors also
cause significant increases in costs for equipment, services, and personnel.
Higher oil prices generally stimulate increased demand and result in increased
prices for drilling rigs, crews and associated supplies, equipment, and
services. We cannot be certain when we will experience these issues and these
types of shortages or price increases, which could significantly decrease
our profit margin, cash flow, and operating results, or restrict our ability to
drill those wells and conduct those operations that we currently have planned
and budgeted.





Available
Information





We make
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and amendments to reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act available free of charge under the Investors
Relations page on our website, www.rancherenergy.com, as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC. Information on our website or any other website is not incorporated by
reference in this Annual Report. Our SEC filings are also available through the
SEC’s website, www.sec.gov and
may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.





Glossary
of Abbreviations and Terms




Anadarko
            
            The
      Anadarko Petroleum Corporation.Bcf
            
            One
      billion cubic feet of natural gas at standard atmospheric
      conditions.CO2
            
            Carbon
      Dioxide.ExxonMobil
            
            ExxonMobil
      Gas & Power Marketing Company, a division of ExxonMobil
      Corporation.EOR
            
            Enhanced
      oil recovery.Farmout
            
            The
      transfer of all or part of the working interest in a property, in exchange
      for the transferee assuming all or part of the cost of developing the
      property.Field
            
            An
      area consisting of either a single reservoir or multiple reservoirs all
      grouped on or related to the same individual geological structural feature
      and/or stratigraphic condition.Metalex
            
            Metalex
      Resources, Inc.Proved
      reserves
            
            The
      estimated quantities of oil, natural gas, and natural gas liquids which
      geological and engineering data demonstrate with reasonable certainty to
      be commercially recoverable in future years from known reservoirs under
      existing economic and operating conditions.Tertiary
      recovery
            
            The
      third process used for oil recovery. Usually primary recovery is the
      result of depletion drive, secondary recovery is from a waterflood, and
      tertiary recovery is an enhanced oil recovery process such as CO2
      flooding.Working
      interest
            
            An
      interest in an oil and gas lease that gives the owner of the interest the
      right to drill and produce oil and gas on the leased acreage and requires
      the owner to pay a share of the costs of drilling and production
      operations. The share of production to which a working interest owner is
      entitled will always be smaller than the share of costs that the working
      interest owner is required to bear, with the balance of the production
      accruing to the owners of
royalties.


9


ITEM
1A.     RISK FACTORS





You
should carefully consider the risks described below, as well as the other
information included or incorporated by reference in this Annual Report, before
making an investment in our common stock. The risks described below are not the
only ones we face in our business. Additional risks and uncertainties not
presently known or that we currently believe to be immaterial may also impair
our business operations. If any of the following risks occur, our business,
financial condition, or operating results could be materially harmed. In such an
event, our common stock could decline in price and you may lose all or part of
your investment.





Risks
Related to our Industry, Business and Strategy





Our pending bankruptcy raise questions
as to our ability to continue as a going concern and may limit our ability to
borrow additional funds,issue equityor capitalize on acquisition or other
business opportunities and preserve the value of our equity


.


On October 28, 2009, we filed for
protection under Chapter 11 of the U.S. Bankruptcy Code.  Our bankruptcy
filing was made after defaulting on the terms of our senior secured debt and
being notified by the lender of their intention to foreclose on the assets held
as collateral for the debt.





As of March 31, 2010, and as of the
filing of this annual report, we continued to operate asadebtor-in-possession in the Chapter 11
case.  We are in the process of developing a plan of reorganization to
resolve pre-petition obligations; however, there is no assurance that any such
plan of reorganization will ultimately be confirmed and become effective, nor is
there any assurance that the ultimate terms of our exit from bankruptcy will
preserve the rights of our existing equity holders in whole or at all.
 Accordingly, our equity holders continue to be subject to a risk that we
will not be able to successfully emerge from bankruptcy or that rights of the
equity holders will be diminished substantially or eliminated
entirely.





Our continued use of cash collateral is
subject to Court authorization which could be terminated by Court
order.





Presently our only source of cash to pay
for operating activities and overhead is proceeds from the sale of crude oil
under the provisions of the Court’s interim order for use of cash collateral.
Our lender has filed an objection to the continued use of cash
collateral.  If the Court does not extend the interim order or issue a
final order for use of cash collateral our ability to continue operations would
be limited to a period of 30 -45 days after which the oilfields would need to be
shut in.  There is no certainty that the fields could be returned to
production at the same level of production, or at all, if they are shut in for
an extended period of time





Our status as debtor-in-possession may
adversely affect ourability to raise capital to conduct
oilfield operations andourability to find and develop
reserves.





If we are unable to obtain financing on
satisfactory terms, we may be unable to support our existingrepair and remediationprogram, or to develop new reservesduring the pendency of the Chapter 11
case or following exit from bankruptcy. Further, if we are unable to
successfully restructure or refinance our debt in the Chapter 11 case, we may be
required to liquidate some or all of our properties.  In either of such
events, we and our shareholders could suffer substantial impairment in the value
of our holdings, including the potential complete loss of such holdings.
 There is no assurance that we will be able to secure financing on
acceptable terms, or at all, that we will be able to restructure or refinance
our existing debt on acceptable terms, or at all, or that we will be able to
successfully operate during the pendency of the Chapter 11 case or following the
Chapter 11 case, any of which could result in a total loss to our company and
our shareholders.





If
we do not develop and plan of reorganization or a plan of reorganization is not
approved by the Court we could be forced to sell our assets.





If we are not successful
in presenting a plan of reorganization within the prescribed time or if any such
plan or reorganization is not confirmed by the court, any party in interest may
file a plan of reorganization for us, which could result in the forced sale of
our assets to satisfy our pre-petition obligations





We
have incurred losses from operations in the past and expect to do so in the
future.





We have
never been profitable. We incurred net losses of $20,261,262 and $46,341,341 for
the fiscal years ended March 31, 2010 and 2009, respectively. We do not
expect to be profitable during the fiscal year ending March 31,
2011.  Our development of prospects will require substantial
additional capital expenditures in the future. The uncertainty and factors
described throughout this section may impede our ability to economically
acquire, develop, and exploit oil reserves. As a result, we may not be able to
achieve or sustain profitability or positive cash flows from operating
activities in the future.


10


We
may not be able to develop our Powder River Basin properties as we
anticipate.





Our short
term plans are to increase crude oil production by carrying our repair and
remediation efforts on existing well bores, and, if it is determined feasible,
by exploiting additional formations within our existing
leasehold.  While we have had some success in the past six months in
repairing and restoring old wells to production, there is no certainty we will
continue to have such success.  Furthermore, there is no certainty
that we will be successful in the exploitation of additional formations or
reservoirs within our existing leasehold.  Ifwe are not successfulthese efforts,it could have a material adverse effect
on our financial condition and results of operations and cash
flows.





Our
long term plans to develop the properties are dependent on the construction of a
CO2
pipeline and securing a sufficient supply of CO2. We must
arrange for the construction of a CO2 pipeline
on acceptable terms and build related infrastructure. The achievement of these
objectives is subject to numerous uncertainties, including the raising of
sufficient funding for the construction of key infrastructure and working
capital and our ability to secure a reliable long term source for the requisite
CO2,
the supply of which is beyond our control.  We may not be able to
achieve these objectives on the schedule we anticipate, or at all.





Our tertiary recovery project is
dependent upon sufficient amounts of CO2and will decline if our access to
sufficient amounts of CO2is limited.





Assuming
we are successful in raising sufficient financing, our long-term growth strategy
is focused on our CO2 tertiary
recovery operations.  The crude oil production from our tertiary
recovery projects depends on having access to sufficient amounts of CO2.  Our
ability to produce this oil would be hindered if our supply of CO2 were
limited due to problems with the supply, delivery, quality of the supplied
CO2,problems with our facilities, including compression equipment, or
catastrophic pipeline failure.  We have received no CO2to
date.  We do not currently have a CO2 supply
agreement. Ifwe are not successful in obtaining the
required amount of CO2to achieve crude oil production or the
crude oil production in the future were to decline as a result if a decrease in
delivered CO2supply, it could have a
material adverse effect on our financial condition and results of operations and
cash flows.





Our
development and tertiary recovery operations require substantial capital and we
may be unable to obtain needed capital or financing on satisfactory terms, which
could lead to a loss of properties and a decline in our oil
reserves.





The oil
industry is capital intensive. We have made and are required to make substantial
capital expenditures in our business and operations for the development,
production, and acquisition of oil and gas reserves. To date, we have financed
capital expenditures primarily with sales of our equity securities and we have
financed operating activities through the issuance of short term
debt.   Our access to capital is subject to a number of
variables, including:





·
            our proved
      reserves;


·
            the amount of oil we are able to
      produce from existing wells;


·
            the prices at which the oil is
      sold; and


·
            our ability to acquire, locate
      and produce new reserves.





We may,
from time to time, need to seek additional financing, either in the form of
increased bank borrowings, sales of debt or equity securities or other forms of
financing and there can be no assurance as to the availability or terms of any
additional financing. Additionally, we may not be able to obtain debt or equity
financing on terms favorable to us, or at all. A failure to obtain additional
financing to meet our capital requirements could result in a curtailment of our
operations relating to our tertiary recovery operations and development of our
fields, which in turn could lead to a possible loss of properties, through
foreclosure, if we are unable to meet the terms of our anticipated debt
financing and/or forfeiture of the properties pursuant to the terms of their
respective leases and a decline in our oil reserves.





We
plan to conduct our secondary and tertiary recovery operations on older fields
that may be significantly depleted of oil, which could lead to an adverse impact
on our future results.





We
operate four fields in the Powder River Basin, Wyoming. Oil
in  these  fields was discovered over fifty years ago and
production has been ongoing. Our strategy is to substantially increase
production and reserves in these fields by using waterflood and CO2EOR
techniques. However, there is a risk that the properties may be significantly
depleted of oil, and if so, our future results could be impacted
negatively.


11


We
have a limited operating history in the oil business and we cannot predict our
future operations with any certainty.





We were
organized in 2004 to explore a gold prospect and in 2006 changed our business
focus to oil and gas development using CO2 injection
technology. Our future financial results depend primarily on (i) our ability to
finance and complete development of the required infrastructure associated with
our properties in the Powder River Basin, including having a pipeline built to
deliver CO2 to our
fields and the construction of surface facilities on our fields; (ii) the
success of our CO2 injection
program; and (iii) the market price for oil. We cannot predict that our future
operations will be profitable. In addition, our operating results may vary
significantly during any financial period.





Oil
prices are volatile and a decline in oil prices can significantly affect our
financial results and impede our growth.





Our
revenues, profitability, and liquidity are substantially dependent upon prices
for oil, which can be extremely volatile; and, even relatively modest drops in
prices can significantly affect our financial results and impede our growth.
Prices for oil may fluctuate widely in response to relatively minor changes in
the supply of and demand for oil, market uncertainty, and a wide variety of
additional factors that are beyond our control, such as the domestic and foreign
supply of oil, the price of foreign imports, the ability of members of the
Organization of Petroleum Exporting Countries to agree to and maintain oil price
and production controls, technological advances affecting energy consumption,
domestic and foreign governmental regulations, and the variations between
product prices at sales points and applicable index prices.





We
could be adversely impacted by changes in the oil market.





The
marketability of our oil production will depend in part upon the availability,
proximity, capacity of pipelines, and surface and processing facilities. Federal
and state regulation of oil production and transportation, general economic
conditions, changes in supply and changes in demand all could adversely affect
our ability to produce and market oil. If market factors were to change
dramatically, the financial impact could be substantial because we would incur
expenses without receiving revenues from the sale of production. The
availability of markets is beyond our control.





We
may be unable to develop additional reserves.





Our
ability to develop future revenues will depend on whether we can successfully
implement our planned CO2 injection
program. We have no experience using CO2
technology. The Company's properties have not been injected with CO2 in the
past and recovery factors cannot be estimated with precision. Our planned
projects may not result in significant proved reserves or in the production
levels we anticipate.





We depend on key personnel, the loss of
any of whom could materially adversely affect future
operations.





Our success will depend to a large
extent upon the efforts and abilities of our executive officers, board of directorsand key operations personnel. The loss
of the services of one or more of these keyindividualscould have a material adverse effect on
us. Our business will also be dependent upon our ability to attract and retain
qualified personnel. Acquiring and keeping these personnel could prove more
difficult or cost substantially more than estimated. This could cause us to
incur greater costs, or prevent us from pursuing our exploitation strategy as
quickly as we would otherwise wish to do.





Oil
operations are inherently risky.





The
nature of the oil business involves a variety of risks, including the risks of
operating hazards such as fires, explosions, cratering, blow-outs, encountering
formations with abnormal pressure, pipeline ruptures, and
spills, releases of toxic gas and other environmental hazards and
pollution. The occurrence of any of these risks could result in losses. The
occurrence of any one of these significant events, if it is not fully insured
against, could have a material adverse effect on our financial position and
results of operations.





We
are subject to extensive government regulations.





Our
business is affected by numerous Federal, state, and local laws and regulations,
including energy, environmental, conservation, tax and other laws and
regulations relating to the oil industry. These include, but are not limited
to:




·
            the prevention of
      waste;


·
            the discharge of materials into
      the environment;


·
            the conservation of
      oil;


·
            pollution;


·
            permits for drilling
      operations;


·
            underground gas injection
      permits;


12


·
            drilling bonds;
      and


·
            reports concerning operations,
      the spacing of wells, and the unitization and pooling of
      properties.





Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of injunctive
relief or both. Moreover, changes in any of these laws and regulations could
have a material adverse effect on our business. In view of the many
uncertainties with respect to current and future laws and regulations, including
their applicability to us, we cannot predict the overall effect of such laws and
regulations on our future operations.





Government
regulation and environmental risks could increase our costs.





Many
jurisdictions have at various times imposed limitations on the production of oil
by restricting the rate of flow for oil wells below their actual capacity to
produce. Our operations will be subject to stringent laws and regulations
relating to environmental issues. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities, and concentration of materials that can be released into the
environment in connection with drilling and production activities, limit or
prohibit drilling activities in protected areas and impose substantial
liabilities for pollution resulting from our operations. Changes in
environmental laws and regulations occur frequently and changes could result in
substantially increased costs. Because current regulations covering our
operations are subject to change at any time, we may incur significant costs for
compliance in the future.





The
properties we have acquired are located in the Powder River Basin in the Rocky
Mountains, making us vulnerable to risks associated with operating in one major
geographic area.





Our
activities are focused on the Powder River Basin in the Rocky Mountain Region of
the United States, which means our properties are geographically concentrated in
that area. As a result, we may in the future be disproportionately exposed to
the impact of delays or interruptions of production from these wells caused by
significant governmental regulation, transportation capacity constraints,
curtailment of production, or interruption of transportation of oil produced
from the wells in this basin.


Seasonal
weather conditions adversely affect our ability to conduct drilling activities
and tertiary recovery operations in some of the areas where we
operate.





Oil and
gas operations in the Rocky Mountains are adversely affected by seasonal weather
conditions. In certain areas, drilling and other oil and gas activities can only
be conducted during the spring and summer months. This limits our ability to
operate in those areas and can intensify competition during those months for
drilling rigs, oil field equipment, services, supplies, and qualified personnel,
which may lead to periodic shortages. Resulting shortages or high costs could
delay our operations and materially increase our operating and capital
costs.





Competition
in the oil and gas industry is intense, which may adversely affect our ability
to succeed.





The oil
and gas industry is intensely competitive and we compete with companies that are
significantly larger and have greater resources. Many of these companies not
only explore for and produce oil, but also carry on refining operations and
market petroleum and other products on a regional, national, or worldwide basis.
These companies may be able to pay more for oil properties and prospects or
define, evaluate, bid for, and purchase a greater number of properties and
prospects than our financial or human resources permit. Our larger competitors
may be able to absorb the burden of present and future Federal, state, local,
and other laws and regulations more easily than we can, which would adversely
affect our competitive position. Our ability to acquire additional properties
and to increase reserves in the future will be dependent upon our ability to
evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.





Oil
prices may be impacted adversely by new taxes.





The
Federal, state, and local governments in which we operate impose taxes on the
oil products we plan to sell. In the past, there has been a significant amount
of discussion by legislators and presidential administrations concerning a
variety of energy tax proposals. In addition, many states have raised state
taxes on energy sources and additional increases may occur. We cannot predict
whether any of these measures would have an adverse impact on oil
prices.


13


Shortages of equipment, supplies,
personnel, and delays in construction of the CO2pipeline, construction of surface
facilities, and delivery of CO2could delay or otherwise adversely
affect our cost of operations or our ability to operate according to our
business plans.





We may
experience shortages of field equipment and qualified personnel and delays in
the construction of the CO2 pipeline,
construction of surface facilities, and delivery of CO2, which may
cause delays in our ability to conduct tertiary recovery operations and drill,
complete, test, and connect wells to processing facilities. Additionally, these
costs have sharply increased in various areas. The demand for and wage rates of
qualified crews generally rise in response to the increased number of active
rigs in service and could increase sharply in the event of a shortage. Shortages
of field equipment or qualified personnel, delays in the construction of
the CO2 pipeline,
construction of surface facilities, and delivery of CO2 could
delay, restrict, or curtail our exploration and development operations, which
may materially adversely affect our business, financial condition, and results
of operations.





Shortages
of transportation services and processing facilities may result in our receiving
a discount in the price we receive for oil sales or may adversely affect our
ability to sell our oil.





We may
experience limited access to transportation lines, trucks or rail cars in order
to transport our oil to processing facilities. We may also experience limited
processing capacity at our facilities. If either or both of these situations
arise, we may not be able to sell our oil at prevailing market prices or we may
be completely unable to sell our oil, which may materially adversely affect our
business, financial condition, and results of operations.





Estimating
our reserves, production and future net cash flow is difficult to do with any
certainty.





Estimating
quantities of proved oil and gas reserves is a complex process. It requires
interpretations of available technical data and various assumptions, including
assumptions relating to economic factors, such as future commodity prices,
production costs, severance and excise taxes, capital expenditures, workover and
remedial costs, and the assumed effect of governmental regulation. There are
numerous uncertainties about when a property may have proved reserves as
compared to potential or probable reserves, particularly relating to our
tertiary recovery operations. Actual results most likely will vary from our
estimates. Also, the use of a 10% discount factor for reporting purposes, as
prescribed by the SEC, may not necessarily represent the most appropriate
discount factor, given actual interest rates and risks to which our business or
the oil and gas industry in general is subject. Any significant inaccuracies in
these interpretations or assumptions or changes of conditions could result in a
reduction of the quantities and net present value of our reserves.





Quantities
of proved reserves are estimated based on economic conditions, including average
oil and gas prices in existence on the first day of the twelve months prior to
the date of assessment. Our reserves and future cash flows may be subject to
revisions based upon changes in economic conditions, including oil and gas
prices, as well as due to production results, results of future development,
operating and development costs, and other factors. Downward revisions of our
reserves could have an adverse affect on our financial condition, operating
results, and cash flows.





Risks
Related to our Common Stock





We
are operating as a debtor-in possession under the authorization of the US
Bankruptcy Court and provisions of the U.S. Bankruptcy Code.





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 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 bankruptcy case to
shareholders 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.




Sales
of a substantial number of shares in the future may result in significant
downward pressure on the price of our common stock and could affect the ability
of our stockholders to realize the current trading price of our common
stock.





If our
stockholders and new investors sell significant amounts of our stock, our stock
price could drop. Even a perception by the market that the stockholders will
sell in large amounts could place significant downward pressure on our stock
price. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock.





Our
stock price and trading volume may be volatile, which could result in losses for
our stockholders.





The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity securities. The market of
our common stock could change in ways that may or may not be related to our
business, our industry, or our operating performance and financial condition. In
addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. Some of the factors that could negatively
affect our share price or result in fluctuations in the price or trading volume
of our common stock include:


14


·
            Actual or anticipated quarterly
      variations in our operating
results;


·
            Changes in expectations as to our
      future financial performance or changes in financial estimates, if
      any;


·
            Announcements relating to our
      business or the business of our
  competitors;


·
            Conditions generally affecting
      the oil and gas industry;


·
            The success of our operating
      strategy; and


·
            The operating and stock
      performance of other comparable
  companies.





Many of
these factors are beyond our control, and we cannot predict their potential
effects on the price of our common stock. If the market price of our common
stock declines significantly, you may be unable to resell your shares of common
stock at or above the price you acquired those shares. We cannot assure you that
the market price of our common stock will not fluctuate or decline
significantly.





There
are risks associated with forward-looking statements made by us and actual
results may differ.





Some of
the information in this Annual Report contains forward-looking statements that
involve substantial risks and uncertainties. These statements can be identified
by the use of forward-looking words such as “may," “will," “expect,"
“anticipate," “believe," “estimate," and “continue," or similar words.
Statements that contain these words should be read carefully because
they:





·      discuss our future
expectations;


·      contain projections of our future
results of operations or of our financial condition; and


·      state other “forward-looking”
information.





We
believe it is important to communicate our expectations. However, there may be
events in the future that we are not able to accurately predict and/or over
which we have no control. The risk factors listed in this section, other risk
factors about which we may not be aware, as well as any cautionary language in
this Annual Report, provide examples of risks, uncertainties, and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. The occurrence of the events
described in these risk factors could have an adverse affect on our business,
results of operations, and financial condition.





Our
failure to maintain effective internal control over financial reporting may not
allow us to accurately report our financial results, which could cause our
financial statements to become materially misleading and adversely affect the
trading price of our stock.





In our
annual reports on Form 10-K for the fiscal years ended March 31, 2010 and 2009,
we reported the determination of our management that we had a material weakness
in our internal control over financial reporting. The determination was made by
management that we did not adequately segregate duties of different personnel in
our accounting department due to an insufficient complement of staff and
inadequate management oversight. While we have made progress in remediating the
weakness, we have not completely remediated it, primarily due to limited
resources to add experienced staff.  Until we obtain sufficient
financing we will not be able to correct the material weakness in our
internal control over financial reporting, and our business could be harmed and
the stock price of our common stock could be adversely affected.





FINRA
sales practice requirements limit a stockholders' ability to buy and sell our
stock.





The
Financial Industry Regulatory Authority, Inc. (FINRA) has adopted rules which
require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives, and other information. Under interpretations of these rules, the
FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which has the effect of reducing the level of
trading activity and liquidity of our common stock. Further, many brokers charge
higher transactional fees for penny stock transactions. As a result, fewer
broker-dealers are willing to make a market in our common stock, reducing a
stockholders' ability to resell shares of our common stock.


15


We
do not expect to pay dividends in the foreseeable future. As a result, holders
of our common stock must rely on stock appreciation for any return on their
investment.





We do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Any payment of cash dividends will also depend on our financial condition,
results of operations, capital requirements, and other factors and will be at
the discretion of our Board of Directors. We also expect that if we obtain debt
financing, there will be contractual restrictions on, or prohibitions against,
the payment of dividends. Accordingly, holders of our common stock will have to
rely on capital appreciation, if any, to earn a return on their investment in
our common stock.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





None.





ITEM
2.  PROPERTIES





Field
Summaries





We
currently operate four fields in the Powder River Basin: the South Glenrock B
Field, the Big Muddy Field, the Cole Creek South Field, and the South Glenrock A
Field. The concentration of value in a relatively small number of fields should
allow us to benefit substantially from any operating cost reductions or
production enhancements we achieve and allows us to effectively manage the
properties from our field office located in Glenrock, Wyoming.





South
Glenrock B Field





The South
Glenrock B Field, located in Converse County, Wyoming, is  about 20
miles east of Casper in the east-central region of the state. The field was
discovered by Conoco, Inc.





The South
Glenrock B Field produces primarily from the Lower and Upper Muddy formations as
well as the Dakota formation. All the formations are Cretaceous fluvial deltaic
sands with extensive high reservoir quality channels. The structure dips from
west to east with approximately 2,000 feet of relief.





The South
Glenrock B Field is an active waterflood that currently produces approximately
128 BOPD of sweet 35 degree API crude oil. There are 14 active producing wells
and 13 injector wells servicing the field. This waterflood unit was developed
with a fairly regular 40 acre well spacing and drilled with modern rotary
equipment.





In
February 2010 we engaged a geologist to conduct an evaluation and analysis of
Niobrara Shale potential for hydrocarbon production in the South Glenrock B
Field.  The results of that evaluation and analysis are currently
under review by management and, if appropriate, will be incorporated into our
plan of reorganization.





Subject
to obtaining financing, and securing a CO2 supply,
the South Glenrock B Field is slated to be the first of our fields for CO2
development because the waterflood has maintained the reservoir pressure high
enough for CO2 operations
and the relative condition of the facilities, regular well spacing, and
reservoir size make the field a good candidate for CO2
operations.





Big Muddy
Field





The Big
Muddy Field is located 17 miles east of Casper, in Converse County,
Wyoming.  The field was discovered in 1916 and has produced
approximately 52 million barrels of oil from several producing zones including
the First Frontier, Stray, Shannon, Dakota, Lakota, Muddy and Niobrara
formations. The Big Muddy Field was waterflooded starting in 1957.





The Big
Muddy Field is currently producing about 38 BOPD of 36 degree API sweet crude
oil, from five producing wells with two water injection wells servicing the
field. The field was developed with an irregular well spacing and drilled mostly
with cable tools. There are no facilities of any significance at the
field.





In
February 2010 we engaged a geologist to conduct an evaluation and analysis of
Niobrara Shale potential for hydrocarbon production in the Big Muddy
Field.  The results of that evaluation and analysis are currently
under review by management and, if appropriate, will be incorporated into our
plan of reorganization.


16


The
current reservoir pressure is very low and not sufficient for effective CO2 flooding.
Pending financing, our near-term plans for the Big Muddy Field are to build
facilities and reactivate or drill new injection wells in order to inject
disposal water produced as a result of CO2 operations
in the South Glenrock B Field. The injection of this water should have the
effect of raising the Big Muddy reservoir pressure for the planned CO2 flood. We
also hope to drill or reactivate additional production wells in order to produce
more oil from this reactivated waterflood. The Big Muddy Field required
unitization prior to a waterflood or a CO2 flood. The
State of Wyoming required us to form two separate units, one for the Wall
Creek/2nd
Frontier formation and one for the Dakota formation, due to the different sizes
of the productive horizons. The unitization 2nd
Frontier was completed in calendar year 2008 and subject to obtaining financing
and securing a CO2 supply; we would start CO2 injection
in the Big Muddy Field within one to two years after commencing CO2injection
in the South Glenrock B Field.





Cole Creek South
Field





The Cole
Creek South Field, also in the Powder River Basin and is located in Converse and
Natrona counties, about 15 miles northeast of Casper in the east-central region
of the state. The Cole Creek South Field was discovered in 1948 by the Phillips
Petroleum Company.





Production
at Cole Creek South was originally discovered on structure in the Lakota
sandstone. After drilling a number of wells along the crest of the structure
that had high water cuts, the Lakota zone was not developed in favor of the
Dakota sandstone. Injection into the Dakota formation began in December 1968 and
reached peak production in April 1972.





Production
comes from two units at Cole Creek South. One unit is the Dakota Sand Unit which
is under active waterflood. The other unit is the Cole Creek South Unit which is
a primary production unit. Cole Creek South Field produces, in total,
approximately 73 BOPD of 34 degree API sweet crude oil from 10 producing wells.
There are 9 active injector wells in the field. Production is from the Dakota,
Lakota and First and Second Frontier formations.





In
February 2010 we engaged a geologist to conduct an evaluation and analysis of
Niobrara Shale potential for hydrocarbon production in the Cole Creek South
Field.  The results of that evaluation and analysis are currently
under review by management and, if appropriate, will be incorporated into our
plan of reorganization.





The Cole
Creek South Field is presently at reservoir pressure sufficient for miscible
CO2
flooding and the wells are generally in good working condition. Due to the small
size, in comparison to the South Glenrock B Field and the Big Muddy Field, the
Cole Creek South Field would be the third field to undergo CO2 flooding.
Subject to obtaining financing and securing a CO2 supply, we
would start CO2 injection
in the Cole Creek South Field in within four to five years after commencing
CO2injection in the South Glenrock B Field.





South Glenrock A
Field





The South Glenrock A Field, also
located in Converse County Wyoming about 18 miles east of Casper, produces
approximately 26 BOPD from 2 wells in the Muddy, Dakota and Shannon
formations.  Due to the relatively small reservoir, this field is not
included in our plans for CO2
flooding.  Sinclair Oil & Gas Company was the initial Operator and
started waterflooding activities late 1966.





In
February 2010 we engaged a geologist to conduct an evaluation and analysis of
Niobrara Shale potential for hydrocarbon production in the South Glenrock A
Field.  The results of that evaluation and analysis are currently
under review by management and, if appropriate, will be incorporated into our
plan of reorganization





The
following table summarizes reserves, ownership interests and daily production of
our properties as of March 31, 2010:





Field
                      
                      Proved
                        Reserves
                        (Barrels) (A)
                      
                      
                      Proved
                        Developed
                        Producing %
                      
                      
                      PV – 10
                        ($000) (A)
                      
                      
                      Net Revenue
                        Interest
                      
                      
                      Daily
                        Production
                        (Bbls) - Gross
                      
                      
                      Daily
                        Production
                        (Bbls) - NetSouth
      Glenrock B
                      
                      
                      399,302
                      
                      
                      
                      100
                      %
                      
                      $
                      3,832
                      
                      
                      
                      73.4%
      - 77.7
                      %
                      
                      
                      128
                      
                      
                      
                      96Big
      Muddy
                      
                      
                      40,229
                      
                      
                      
                      100
                      %
                      
                      
                      579
                      
                      
                      
                      77.9
                      %
                      
                      
                      38
                      
                      
                      
                      30Cole
      Creek South
                      
                      
                      344,442
                      
                      
                      
                      90
                      %
                      
                      
                      4.321
                      
                      
                      
                      75%
      - 78.3
                      %
                      
                      
                      73
                      
                      
                      
                      56South
      Glenrock A
                      
                      
                      67,206
                      
                      
                      
                      100
                      %
                      
                      
                      1,018
                      
                      
                      
                      75% - 77.6
                      %
                      
                      
                      26
                      
                      
                      
                      20TOTAL
                      
                      
                      851,179
                      
                      
                      
                      -
                      
                      
                      $
                      9,750
                      
                      
                      
                      
                      
                      
                      
                      265
                      
                      
                      
                      202





(A)
            Proved
      reserve volumes and PV – 10 based upon SEC reserve
      parameters.  See further discussion in Note 12 -Disclosures
      About Oil and Gas Producing Activities in Part IV of this annual
      report.


17


The
following table summarizes acreage holdings and well counts as or March 3,
2010:





Developed Acres
                      
                      
                      Undeveloped Acres
                      
                      
                      Total Acres
                      
                      
                      Producing Well CountField
                      
                      Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      NetSouth
      Glenrock B
                      
                      
                      10,873
                      
                      
                      
                      10,177
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      10,873
                      
                      
                      
                      10,177
                      
                      
                      
                      14
                      
                      
                      
                      13.2Big
      Muddy
                      
                      
                      522
                      
                      
                      
                      522
                      
                      
                      
                      8,435
                      
                      
                      
                      7,755
                      
                      
                      
                      8,957
                      
                      
                      
                      8,277
                      
                      
                      
                      5
                      
                      
                      
                      5Cole
      Creek South
                      
                      
                      3,782
                      
                      
                      
                      3,782
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,782
                      
                      
                      
                      3,782
                      
                      
                      
                      10
                      
                      
                      
                      10South
      Glenrock A
                      
                      
                      1,283
                      
                      
                      
                      1,283
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,283
                      
                      
                      
                      1,283
                      
                      
                      
                      2
                      
                      
                      
                      2TOTAL
                      
                      
                      16,460
                      
                      
                      
                      15,764
                      
                      
                      
                      8,435
                      
                      
                      
                      7,755
                      
                      
                      
                      24,895
                      
                      
                      
                      23,519
                      
                      
                      
                      31
                      
                      
                      
                      30.2




Production





The
following table summarizes average volumes and realized prices of oil sold from
our properties and our production costs per barrel of oil.




For the Year Ended March 31,2010
                  
                  
                  2009Net
      oil sales (barrels)
                  
                  
                  56,818
                  
                  
                  
                  65,308Average
      realized oil sales price per barrel
                  
                  $
                  63.11
                  
                  
                  $
                  78.71Production
      costs per barrel:Production
      taxes
                  
                  $
                  10.10
                  
                  
                  $
                  9.92Lease
      operating expenses
                  
                  $
                  30.33
                  
                  
                  $
                  37.10




Title
to Properties





As
customary in the oil and gas industry, during acquisitions, substantive title
reviews and curative work are performed on all properties. Generally, only a
perfunctory title examination is conducted at the time properties believed to be
suitable for drilling operations are first acquired. Prior to commencement of
drilling operations, a thorough drill site title examination is normally
conducted and curative work is performed with respect to significant defects. We
believe that we have good title to our oil and gas properties, some of which are
subject to minor encumbrances, easements, and restrictions.





Environmental
Assessments





We are
cognizant of our environmental responsibilities to the communities in which we
operate and to our shareholders. Prior to the closing of our acquisitions, we
obtained a Phase I environmental review of our properties from
industry-recognized environmental consulting firms. These environmental reviews
were commissioned and received prior to our acquisition of our three Wyoming
fields, which revealed no material environmental problems. As part of our plans
to construct a pipeline to transport CO2 to our
fields we will be required to perform either an environmental assessment or a
more comprehensive environmental impact study of the proposed
pipeline.





Geographic
Segments





All of
our operations are in the continental United States.





Significant
Oil and Gas Purchasers and Product Marketing





Due to
the close proximity of our fields to one another, oil production from our
properties is sold to one purchaser under a month-to-month contract at the
current area market price. The oil is currently transported by truck to pipeline
connections in the area. The loss of that purchaser is not expected to have a
material adverse effect upon our oil sales due to the ready availability of
other purchasers in the area. We currently produce a nominal amount of natural
gas, which is used in field operations and not sold to third
parties.





Our
ability to market oil depends on many factors beyond our control, including the
extent of domestic production and imports of oil, the proximity of our oil
production to pipelines, the available capacity in such pipelines, refinery
capacity, the demand for oil, the effects of weather, and the effects of state
and Federal regulation. Our production is from fields close to major pipelines
and established infrastructure. As a result, we have not experienced any
difficulty to date in finding a market for all of our production as it becomes
available or in transporting our production to those markets; however, there is
no assurance that we will always be able to market all of our production or
obtain favorable prices.


18


Oil
Marketing





The oil
production from our properties is relatively high quality, ranging in gravity
from 34 to 36 degrees, and is low in sulfur. We sell our oil to a crude
aggregator on a month-to-month term. The oil is transported by truck, with loads
picked up daily. The prices we currently receive are based on posted prices for
Wyoming Sweet crude oil, adjusted for gravity, plus approximately $2.12 to $2.35
per barrel.





Our
long-term strategy is to find a dependable future transportation option to
transport our high-quality oil to market at the highest price possible and to
protect ourselves from downward pricing volatility. Options being explored
include building a new crude oil pipeline to connect to a pipeline being
considered by others for construction that is anticipated to run from Northern
Colorado to Cushing, Oklahoma to transport Wyoming Sweet crude oil.





ITEM
3.  LEGAL PROCEEDINGS





On
October 28, 2009, the Company filed a voluntary petition (the “petition”) for
relief in the United States Bankruptcy Court (the “Court”), District of Colorado
under Chapter 11 of Title 11 of the U.S. Bankruptcy Code. (the “Bankruptcy
Code”).  The Bankruptcy proceedings are discussed in further detail in
Item 1 of this filing.





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 torecoverthe 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 thatthe 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 theextensions,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 andthe 1% ORRI, together with the original
2% ORRI conveyed to Lender when its loanwas first made, on the grounds that they
should be recharacterized as securityinterests and not outright transfers of
title. The Company has also claimed thatthe conveyances rendered the Loan
usurious under Texas law. Further, the Companyhas sought to have the NPI and 1% ORRI
avoided aspreferencesunder ss. 547
ofthe Bankruptcy Code and to equitably
subordinate the Lender's claim.Although the Company believes its claims
are well-taken, the Companyexpects the Lender to vigorously defend
against the complaint,  and no assurancecan be given that the Company will be
successful in whole or in part.





In a
letter dated February 18, 2009 sent to each of our Directors, attorneys
representing a group of persons who purchased approximately $1,800,000 of
securities (in the aggregate) in our private placement offering commenced in
late 2006 alleged that securities laws were violated in that
offering.  In April 2009, we entered into tolling agreements with the
purchasers to toll the statutes of limitations applicable to any claims related
to the private placement.  In February 2009, our Board of Directors
established a Special Committee of the Board (the “Special Committee”) to
investigate the allegations.  Following the completion of the
investigation, the Special Committee recommended no action be
taken.  We deny the allegations and believe they are without
merit.  Wecannot
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.   The claimants have filed a Proof of
Claim with the Bankruptcy Court in the amount of $2,001,050 purported to be
damages attributable to the alleged securities violations.





ITEM
4.  (REMOVED AND RESERVED.)





PART
II




ITEM 5.
            MARKET FOR REGISTRANT’S COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES





Our
Common Stock has been quoted on the OTC Bulletin Board under the symbol “RNCH”
since January 10, 2006. As a result of our filing for protection under the U.S.
Bankruptcy Code, our stock has been trading under the symbol “RNCHQ” since
October 28, 2009For the periods indicated, the following table sets forth the
high and low bid prices per share of our common stock as reported by the OTC
Bulletin Board. These prices represent inter-dealer quotations without retail
markup, markdown, or commission and may not necessarily represent actual
transactions.


19





Fiscal Year 2010
                  
                  High Bid
                  
                  
                  Low BidFirst
      Quarter
                  
                  $
                  0.044
                  
                  
                  $
                  0.012Second
      Quarter
                  
                  $
                  0.065
                  
                  
                  $
                  0.023Third
      Quarter
                  
                  $
                  0.09
                  
                  
                  $
                  0.01Fourth
      Quarter
                  
                  $
                  0.04
                  
                  
                  $
                  0.006Fiscal Year
      2009First
      Quarter
                  
                  $
                  0.53
                  
                  
                  $
                  0.31Second
      Quarter
                  
                  $
                  0.30
                  
                  
                  $
                  0.11Third
      Quarter
                  
                  $
                  0.16
                  
                  
                  $
                  0.02Fourth
      Quarter
                  
                  $
                  0.04
                  
                  
                  $
                  0.02





Holders





As of
March 31, 20010, there were approximately 190 record owners of our Common Stock.
This does not include any beneficial owners for whom shares may be held in
“nominee” or “street name."





Dividends





We have
not paid any cash dividends on our Common Stock since inception and we do not
anticipate declaring or paying any dividends at any time in the foreseeable
future. In January 2006, we conducted a 14-for-1 forward stock
split.





Recent
Sales of Unregistered Securities





On
May 15, 2006, in conjunction with his employment, we granted John Works,
our former President, Chief Executive Officer, and a member of our Board of
Directors, an option to purchase 4,000,000 shares of our common stock at a price
of $0.00001 per share. These options vested over time through May 31, 2009.
The table that follows summarizes the exercise of Mr. Works’ options during the
year ended March 31, 2010:




Exercise Date
                  
                  Number of
                    Options Exercised
                  
                  
                  Exercise Price
                  
                  
                  Aggregate
                    Purchase PriceMay
      12, 2009
                  
                  
                  250,000
                  
                  
                  $
                  0.00001
                  
                  
                  $
                  2.50May
      31, 2009
                  
                  
                  250,000
                  
                  
                  $
                  0.00001
                  
                  
                  $
                  2.50





Mr. Works is an accredited investor.
The foregoing transaction was made pursuant to Section 4(2) of the
Securities Act.





On
October 27, 2009, under the provisions Management Retention Agreements with each
of our four directors, we granted each director an option to purchase 2,500,000
shares of our common stock at a price of $0.035 per share. These options vest
10% on the date of grant and 90% upon the earliest to occur of the
following:


1.
            November
      1, 2010;


2.
            the
      confirmation by the Bankruptcy Court of a plan of
      reorganization;


3.
            the
      dismissal from Chapter 11 Bankruptcy with the approval of the
      Court;


4.
            an
      event of a 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 that 50% of the stock outstanding
      immediately after the transaction;


5.
            any
      other forms of change of control;


6.
            a
      voluntary termination for good
reason.





The
foregoing transaction was made pursuant to Section 4(2) of the Securities
Act.


Pursuant
to our 2006 Stock Incentive Plan (the 2006 Stock Incentive Plan), we granted
options to purchase shares of common stock to officers employees, directors and
consultants.  Options outstanding as of March 31, 2010  are
summarized below:


20





Date
                      
                      Granted To
                      
                      Number of
                        Options
                      
                      
                      Exercise
                        Price
                      
                      Vesting
                      
                      TermApril
      10, 2007
                      
                      Employees
                      
                      
                      31,000
                      
                      
                      $
                      1.18
                      
                      33.3%
      on 1st ,
      2nd
      and 3rd
      anniversaries of grant
                      
                      
                      “April
      10, 2007
                      
                      Consultant
                      
                      
                      25,000
                      
                      
                      $
                      1.64
                      
                      50%
      at 8/31/07 and 50% at 2/29/08
                      
                      
                      “August
      27, 2007
                      
                      Officer
                      
                      
                      450,000
                      
                      
                      $
                      0.45
                      
                      33.3%
      on 1st,
      2nd
      and 3rd
      anniversaries of grant
                      
                      5
      yearsOctober
      27, 2009
                      
                      Employees
                      
                      
                      700,000
                      
                      
                      $
                      0.035
                      
                      10%
      at date of grant, 90 % upon the earliest of November 1, 2010 or change of
      control or emergence from bankruptcy
                      
                      5yearsOctober
      27, 2009
                      
                      Consultant
                      
                      
                      1,000,000
                      
                      
                      $
                      0.035
                      
                      10%
      at date of grant, 90 % upon the earliest of November 1, 2010, emergence
      from bankruptcy, of change of control
                      
                      5years





The options granted to officers and
employees are subject to early termination of the individual’s employment with
us. The foregoing transactions were made pursuant to Section 4(2) of the
Securities Act. As of March 31, 2010, 7,794,000 options remain available for
issuance under the 2006 Stock Incentive Plan.





On
December 21, 2006, we entered into a Securities Purchase Agreement, as amended,
with institutional and individual accredited investors to effect a $79,500,000
private placement of shares of our common stock and other securities in multiple
closings. As part of this private placement, we raised an aggregate of
$79,405,418 and issued (i) 45,940,510 shares of common stock, (ii) promissory
notes that were convertible into 6,996,342 shares of common stock, and (iii)
warrants to purchase 52,936,832 shares of common stock. The warrants issued to
investors in the private placement are exercisable during the five year period
beginning on the date we amended and restated our Articles of Incorporation to
increase our authorized shares of common stock, which was March 30, 2007. The
notes issued in the private placement automatically converted into shares of
common stock on March 30, 2007. In conjunction with the private placement, we
also used services of placement agents and have issued warrants to purchase
3,633,313 shares of common stock to these agents or their designees. The
warrants issued to the placement agents or their designees are exercisable
during the two year period (warrants to purchase 2,187,580 shares of common
stock) or the five year period (warrants to purchase 1,445,733 shares of common
stock) beginning on the date we amended and restated our Articles of
Incorporation to increase our authorized shares of common stock, which was March
30, 2007. All of the warrants issued in conjunction with the private placement
have an exercise price of $1.50 per share. The securities issued in the private
placement bear a standard restrictive legend generally used in accredited
investor transactions. The foregoing transactions were made pursuant to Section
4(2) of the Securities Act.


In
partial consideration for the extension of the closing date of our acquisition
of the Cole Creek South Field and the South Glenrock B Field, we issued in
December 2006 to the seller of the oil and gas properties a warrant to purchase
up to 250,000 shares of our common stock at an exercise price of $1.50 per
share. The seller may exercise the warrant at any time beginning June 22, 2007
and ending December 22, 2011. The foregoing transaction was made pursuant to
Section 4(2) of the Securities Act.





On April
20, 2007, our Board of Directors appointed William A. Anderson, Joseph P. McCoy,
Patrick M. Murray, and Myron M. Sheinfeld as members of the Board to serve until
the next annual meeting of stockholders or their successors are duly elected and
qualified. We had no special arrangements, related party transactions or
understandings with the foregoing appointed directors in connection with their
appointment to the Board, except for compensation arrangements. On April 20,
2007, each newly appointed director was granted an option to purchase 10,000
shares of our common stock pursuant to our 2006 Stock Incentive Plan, as
summarized in the table above. Each newly appointed director will be entitled to
receive annual grants of options to purchase 10,000 shares that will be priced
at the future grant dates. Each newly appointed director also received a stock
grant of 100,000 shares of our common stock that vests 20% (20,000 shares) on
the date of grant with vesting 20% per year thereafter. The foregoing
transactions were made pursuant to Section 4(2) of the Securities
Act.  At a meeting of shareholders on September 30, 2009, the Board of
Directors was not retained.   A total of 200,000 shares that were
not vested were cancelled as of that date.





Under the
terms of the registration rights agreement, we were obligated to pay the holders
of the registrable securities issued in December 21, 2006 private placement
liquidated damages if the registration statement filed in conjunction with the
private placement was not declared effective by the SEC within 150 days of
the closing of the private placement and every 30 days thereafter until the
registration statement is declared effective. The closing occurred on December
21, 2006. The amount due on each applicable date is 1% of the aggregate purchase
price or $794,000. Pursuant to the terms of the registration rights agreement,
the number of shares issued on each payment date is based on the payment amount
of $794,000 divided by an amount that equals 90% of the volume weighted average
price of our common stock for the 10 days immediately preceding the payment
date. The table below summarize the shares issued pursuant to the terms of the
registration rights agreement:


21





Payment Date
                                      
                                      90% of Volume
                                        Weighted
                                        Average Price for
                                        10 Days
                                        Preceding
                                        Payment
                                      
                                      
                                      Shares Issued
                                      
                                      
                                      Closing Price at
                                        Payment Date
                                      
                                      
                                      Value of Shares IssuedMay
      18, 2007
                                      
                                      $
                                      0.85
                                      
                                      
                                      
                                      933,458
                                      
                                      
                                      $
                                      1.04
                                      
                                      
                                      $
                                      970,797June
      19, 2007
                                      
                                      $
                                      0.84
                                      
                                      
                                      
                                      946,819
                                      
                                      
                                      $
                                      0.88
                                      
                                      
                                      $
                                      833,201July
      19, 2007
                                      
                                      $
                                      0.60
                                      
                                      
                                      
                                      1,321,799
                                      
                                      
                                      $
                                      0.66
                                      
                                      
                                      $
                                      872,387August
      17, 2007
                                      
                                      $
                                      0.45
                                      
                                      
                                      
                                      1,757,212
                                      
                                      
                                      $
                                      0.41
                                      
                                      
                                      $
                                      720,457September
      17, 2007
                                      
                                      $
                                      0.32
                                      
                                      
                                      
                                      2,467,484
                                      
                                      
                                      $
                                      0.34
                                      
                                      
                                      $
                                      838,945October
      17, 2007
                                      
                                      $
                                      0.55
                                      
                                      
                                      
                                      1,443,712
                                      
                                      
                                      $
                                      0.57
                                      
                                      
                                      $
                                      822,915October
      31, 2007
                                      
                                      $
                                      0.43
                                      
                                      
                                      
                                      861,085
                                      
                                      
                                      $
                                      0.47
                                      
                                      
                                      $
                                      404,7109,731,569
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      5,463,412





The
foregoing transaction was made pursuant to Section 4(2) of the Securities
Act.





On May
31, 2007, we granted 100,000 shares of our common stock to Mark Worthey, a
director, which vests 20% (20,000 shares) on the date of grant with vesting 20%
per year thereafter. The foregoing transaction was made to align his stock
ownership interests with our other directors and pursuant to Section 4(2) of the
Securities Act.





Pursuant
to the terms of a consulting agreement that we previously entered into with an
executive search consulting firm, on June 27, 2007 we granted 107,143 shares of
our common stock in the aggregate, pursuant to our 2006 Stock Incentive Plan, to
the principals of the consulting firm as partial consideration for the services
provided to us by the consulting firm. The foregoing transaction was made
pursuant to Section 4(2) of the Securities Act.





Pursuant
to a Board of Directors resolution adopted April 20, 2007, Directors may receive
common stock in lieu of cash for Board Meeting Fees, Committee Fees and
Committee Chairman Fees. The number of shares granted under the terms of the
resolution were computed based upon the amount of fees due to the directors and
the fair market value of our common stock on the date of issuance. The following
table summarizes issuances of common stock pursuant to such
resolution:




Date
      of Issue
                            
                            Number of Shares Issued
                            
                            
                            Fair Market Value Per
                              Share at Issue DateJun
      30, 2007
                            
                            
                            101,713
                            
                            
                            $
                            .0.73Sep
      30, 2007
                            
                            
                            181,098
                            
                            
                            $
                            0.41Dec
      31, 2007
                            
                            
                            275,001
                            
                            
                            $
                            0.27Mar
      31, 2008
                            
                            
                            190,.385
                            
                            
                            $
                            0.39Jun
      30, 2008
                            
                            
                            239,514
                            
                            
                            $
                            0.31Sep
      30, 2008
                            
                            
                            495,000
                            
                            
                            $
                            0.15Dec
      31, 2008
                            
                            
                            2,653,845
                            
                            
                            $
                            0.026Mar
      31, 2009
                            
                            
                            0
                            *
                            
                            $
                            N/AJun
      30, 2009
                            
                            
                            0
                            *
                            
                            $
                            N/ASep
      30, 2009
                            
                            
                            0
                            *
                            
                            $
                            N/A





The
foregoing transactions were made pursuant to Section 4(2) of the Securities
Act.





*All of
the non-employee directors elected to forego stock compensation for the quarters
ended March 31, June 30 and September 2009.  The practice of granting
stock in lieu of cash for service on the Board of Directors was terminated in
October 2009.





ITEM
6.  SELECTED FINANCIAL DATA





Not
applicable.





ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.





Organization





We are an
independent energy company that explores for and develops, produces, and markets
oil and gas in North America. We were known as Metalex Resources, Inc. until
April 2006 when our name was changed to Rancher Energy Corp. We operate four oil
fields in the Powder River Basin, Wyoming.  Since October 28, 2009 we
have been operating as debtor-in-possession under Chapter 11 of the U.S.
Bankruptcy Code.  See “Proceedings Under Chapter 11”
below.


22




Proceedings
Under Chapter
11




We
acquired our oilfields in late 2006 and early 2007 with the intention of
significantly increasing crude oil production through an enhanced oil recovery
(EOR) project utilizing modern CO2 injection
techniques.    The planned EOR project required a
significant amount of capital to carry out.  In October 2007 we
borrowed $12.24 million from GasRock Capital LLC (GasRock), an investment bank,
to serve as a “bridge loan” to enable us to complete plans for the EOR project
while we sought a larger, longer-term source of capital to conduct the
project.   At least partially due to the severe disruptions in
credit and financial markets, coupled with extreme volatility in crude oil
prices in the period, we were not successful in raising the capital to repay the
bridge loan and commence the project.    Following a series
of amendments to the GasRock loan agreement and extensions of the maturity date,
we were unable to repay the loan on the amended due date of October 15,
2009.  On October 16, 2009 GasRock notified us the failure to repay
the loan constituted an event of default and notified us of their intention to
foreclose on the assets pledged as collateral for the loan.  GasRock
instructed our bank to transfer all cash we had on deposit to GasRock, leaving
us without funds to operate the oilfields or pay overhead.





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 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.





In
November 2009, the Court granted our motion for interim use of cash
collateral.  We immediately took steps to reduce operating costs and
overhead, including salary cuts of 10% - 20% for employees and the rejection of
the office lease for our corporate headquarters.  In addition we
carried out a program of repair and remediation on a number wells that had
become non-producing , resulting in a 25% increase in daily crude oil production
as compared to pre-petition production levels.





With the
Court’s consent, we have engaged professionals and consultants including an
engineering consultant to conduct a market valuation of our oil and gas
properties; a geologist to conduct an evaluation and analysis of Niobrara Shale
potential for hydrocarbon production in our oilfields and a financial advisor to
assist us in the development of a plan of reorganization.  We have
filed a motion with the Court to extend the exclusive period through August 24,
2010, and are awaiting a decision on the motion.  We intend to file a
plan of reorganization prior to the expiration of the exclusivity
period,





On February 12, 2010, the Company filed
an adversary proceeding in the Bankruptcy Court against GasRock.  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
thatthe 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 theextensions,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 andthe 1% ORRI, together with the original
2% ORRI conveyed to Lender when its loanwas first made, on the grounds that they
should be recharacterized as securityinterests and not outright transfers of
title. The Company has also claimed thatthe conveyances rendered the Loan
usurious under Texas law. Further, the Companyhas sought to have the NPI and 1% ORRI
avoided aspreferencesunder ss. 547
ofthe Bankruptcy Code and to equitably
subordinate the Lender's claim.Although the Company believes its claims
are well-taken, the Companyexpects the Lender to vigorously defend
against the complaint, and no assurancecan be given that the Company will be
successful in whole or in part.


23


Results
of Operations





Rancher
Energy Corp.


Results
of Operations


Years
Ended March 31,




2010
                    
                    
                    2009Revenue:Oil
      production (in barrels)
                    
                    
                    56,818
                    
                    
                    
                    65,308Oil
      price (per barrel)
                    
                    $
                    63.11
                    
                    
                    $
                    78.71Oil
      and gas sales
                    
                    $
                    3,585,738
                    
                    
                    $
                    5,140,660Derivative
      gains (losses)
                    
                    
                    (357,582
                    )
                    
                    
                    1,020,672
                    )3,228,156
                    
                    
                    
                    6,161,332Operating
      expenses:Production
      taxes
                    
                    
                    573,992
                    
                    
                    
                    647,755Lease
      operating expenses
                    
                    
                    1,723,015
                    
                    
                    
                    2,423,015Depreciation,
      depletion, and amortization
                    
                    
                    1,178,986
                    
                    
                    
                    1,196,970Impairment
      of unproved properties
                    
                    
                    13,525,642
                    
                    
                    
                    39,050,000Accretion
      expense
                    
                    
                    167,896
                    
                    
                    
                    158,009Exploration
      expense
                    
                    
                    19,181
                    
                    
                    
                    20,108General
      and administrative
                    
                    
                    2,490,453
                    
                    
                    
                    3,631,580Total
      operating expenses
                    
                    
                    19,679,165
                    
                    
                    
                    47,127,437Loss
      from operations
                    
                    
                    (16,451,009
                    )
                    
                    
                    (40,966,105
                    )Other
      income (expense):Interest
      expense
                    
                    
                    (1,732,360
                    )
                    
                    
                    (1,369,957
                    )Amortization
      of deferred financing costs
                    
                    
                    (1,770,789
                    )
                    
                    
                    (4,021,767
                    )Interest
      and other income
                    
                    
                    3,487
                    
                    
                    
                    16,488Total
      other income (expense)
                    
                    
                    (3,499,662
                    )
                    
                    
                    (5,375,236
                    )Loss
      before reorganization items
                    
                    
                    (19,950,671
                    )
                    
                    
                    46,341,341Reorganization
      itemsProfessional
      and legal fees
                    
                    
                    310,591
                    
                    
                    
                    —Net
      loss
                    
                    $
                    (20,261,262
                    )
                    
                    $
                    (46,341,341
                    )





Year Ended March 31, 2010
Compared to Year Ended March 31, 2009





Overview. For the year ended
March 31, 2010, we reported a net loss of $20,261,262, or $0.17 per basic and
fully-diluted share, compared to a net loss of $46,341,341 or $0.40 per basic
and fully-diluted share, for year ended March 31, 2009. Discussions of
individually significant period to period variances follow.





Revenue, production taxes, and lease
operating expenses. For the year ended March 31, 2010, we recorded crude
oil sales of $3,585,738 on 56,818 barrels of oil at an average price of $63.11,
as compared to revenues of $5,140,660 on 65,308 barrels of oil at an average
price of $78.71 per barrel in 2009. The year-to-year variance reflects a volume
variance of $(668,283) and a price variance of $(886,639). The decreased
volume in 2010 reflects the loss of several producing wells due to mechanical
problems in early 2010, 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) were $573,992 (16% of crude oil sales revenue) in 2010 as
compared to $647,755 (12.6% of crude oil sales revenue) in 2009.  The
increase as a percentage of crude oil sales revenue reflects additional accruals
for ad valorem taxes reflecting higher mil levy rates. Lease operating expenses
decreased to $1,723,015 ($30.33/bbl) in 2010 as compared to $2,423,015
($37.10/bbl) in 2009. The year to year variance reflects a volume variance of
$314,990 and a cost variance of $385,010. The per barrel decrease in 2010
compared to 2009 reflects costs saving efforts undertaken to preserve capital,
coupled with a lack of significant well or surface facility repair work for most
of the 2010 period as compared to the 2009 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 year ended March 31, 2010 we recorded total
losses on the derivative activities of $357,582 compared to gains
of  $1,020,670 in 2009.  The 2010 losses were comprised of
$98,378 of realized gains and $455,960 of unrealized losses, compared to
$206,895 of realized losses and $1,227,567 of unrealized gains in
2009.


24


Depreciation, depletion,
amortization. For the year ended March 31, 2010, we reflected total
depreciation, depletion,  amortization and accretion of $1,346,881
comprised of $988,603 ($17.40/bbl) related to oil and gas properties, $190,382
related to other assets and accretion of asset retirement obligation of
$167,896. The comparable amounts for the 2009 period were $1,354,979 comprised
of $1,009,359 ($15.46/bbl), related to oil and gas
properties,  $187,610 related to other assets, and accretion of asset
retirement obligation of $158,009.  The increase in per barrel
DD&A reflects decreases in the crude oil reserve base used to calculate such
DD&A in 2010 compared to 2009.





Impairment
of unproved properties.  In consideration of the global credit crisis,
volatile commodity prices and reflecting the lack of success in securing
financing to conduct our CO2 enhanced
oil recovery projects, we determined during the year ended March 31, 2010 to
recognize full impairment of the carrying value of our unproved properties in an
amount of approximately $13,525,000.  This decision reflects
management’s current plans to gradually increase and stabilize production from
existing wells and facilities before commencing the more comprehensive CO2projects.  In
the year ended March 31, 2009 we recognized a partial impairment of unproved
properties in the amount of $39,300,000.





Reorganization
items.  The $310,591 of costs reflected as reorganization items
in the year ended March 31, 2010, include those items of expense specifically
related to 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 representation before the Bankruptcy Court, financial
advisor fees for assistance in the development of a reorganization plan and
engineering and geological consulting fees.  We expect these expenses
to continue to be significant as we progress through the bankruptcy
process.





General and administrative
expense. For the year ended March 31, 2010 we reflected general and
administrative expenses of $2,490,453 as compared to $3,631,581  for
the corresponding year ended March 31, 2009. Significant components of the
2010-2009 year-to-year variance include:





Year ended March 31,Expense Category
                
                2010
                
                
                2009
                
                DiscussionSalaries,
      payroll taxes and benefits
                
                $
                1,033,939
                
                
                $
                1,329,030
                
                Decrease
      reflects staff cuts (4 full time employees in corporate office vs. 7 in
      prior year) coupled with salary cuts following election of new board and
      filing of bankruptcy proceedings.Consultants
                
                
                136,010
                
                
                
                355,614
                
                Decrease
      reflects lower usage of consulting  staff including: accounting
      $96K; land $13K and financial advisors $95KTravel
      & entertainment
                
                
                29,826
                
                
                
                91,747
                
                Decrease
      reflects cost cutting measures enacted late in fiscal
  2009IT
                
                
                75,692
                
                
                
                105,125
                
                Decrease
      reflects  reduced need for IT services due to lower staff count
      and cost cutting measures enacted by managementLegal
      fees
                
                
                406,767
                
                
                
                386,476
                
                Increase
      reflects costs associated with renegotiation of senior secured debt (7
      amendments), proxy preparation, issues surrounding annual meeting and
      proxy battle, plus debtor counseling fees incurred prior to filing of
      bankruptcyAudit,
      SOX and tax compliance
                
                
                118,244
                
                
                
                220,334
                
                Decrease
      reflects efficiencies achieved in audit and quarterly review process based
      upon experience gained in first three years of the
  processInvestor
      relations, shareholders meeting
                
                
                19,197
                
                
                
                75,678
                
                Decrease
      reflects termination of contract with outside investor relations
      professional in the middle of FY 2009, partially offset by cost of proxy
      preparation and annual meeting in 2010.Office
      rent, communication  & other office expenses
                
                
                456,807
                
                
                
                503,958
                
                Office
      rent expense remained stable in 2020 vs. 2010 at $365K.  Other
      office expenses reflect decrease due to lower staff count and reduced
      level of activity.Insurance
                
                
                168,865
                
                
                
                157,228
                
                Slight
      increase reflects increase cost of Director and Officer insurance premium
      in 2010 vs. 2009.Stock
      based compensation
                
                
                338,873
                
                
                
                574,353
                
                Decreased
      stock based compensation reflects expenses associated with former CEO
      options that were fully vested in mid year of 2010
      plus,  ($212K) plus expense associated with stock options to
      terminated directors and employees not recognized in
  2010.Director
      fees
                
                
                179,500
                
                
                
                321,250
                
                Decrease
      reflects half year effect of revised compensation scheme following
      election of new board.  Current fees are paid at rate of
      $5K/quarter for each of 3 non-executive directors compared with prior fee
      base approximately $15K /quarter for 5 non-executive
      directors.Field
      overhead recoveries
                
                
                (473,266
                )
                
                
                (489,213
                )
                Slightly
      lower field overhead recoveries reflect lower producing well count in 2010
      vs. 2009.TOTAL
      G&A
                
                $
                2,490,453
                
                
                $
                3,631,580


25


Interest expense and financing
costs.For the year ended March 31, 2010, we reflected interest expense
and financing costs of $3,503,150 as compared to $5,391,725 for the year ended
March 31, 2009. The 2010 amount is comprised of interest paid on the Note
Payable issued in October 2007, as amended, of $1,702,719, interest penalty on
non-timely filed Wyoming severance and ad valorem taxes of $29,641, and
amortization of deferred financing costs and discount on Note Payable of
$1,770,789.  Comparable amounts for the 2009 period were $1,369,733 of
interest on the Note Payable and $4,021,991 of deferred finance 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, plus the effect of an additional 2% increase
reflecting the default rate after October 15, 2009.





Liquidity
and Capital Resources




The
report of our independent registered public accounting firm on the financial
statements for the years ended March 31, 2010 and 2009 includes an explanatory
paragraph relating to the uncertainty of our ability to continue as a going
concern. We have incurred a cumulative net loss of $89 million for the period
from inception (February 4, 2004) to March  31, 2010, have a working
capital deficit of $11 million and have defaulted on our senior secured
debt.





On
October 15, 2009, short term debt in the amount of approximately $10.2 million
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.    See Note 7 -  Convertible Promissory
Notes Payable in the Notes to Financial Statements of our audited financial
statements for the fiscal year ended March 31, 2010 in Part IV, Item 15, of this
Annual Report.





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 limited use of
cash collateral.  Under the terms of the order we receive the proceeds
from crude oil sales from our fields 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 $372,000 as of March 31, 2010, increasing to $480,000 as of June 20,
2010.





Our
primary source of liquidity to meet operating expenses and fund capital
expenditures has been our access to debt and equity markets. The debt and equity
markets, public, private, and institutional, have also been the principal source
of capital used to finance our 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 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.





We believe that our cash flows from
operations and cash on hand are sufficient to support our liquidity needs during
the pendency of our bankruptcy. We do not, however, believe that our cash flows
from operations and cash on hand will be adequate to fully satisfy our pre
petition obligations or to pursue drilling and development activities.  We
are reviewing strategic alternatives for raising sufficient capital to support
our plan of reorganization, including the issuance of debt, the sale of some or
all of our assets or the sale of equity; however at the present time we have no
commitments to provide additional capital or financing and, given the current
condition of the capital and credit markets, there is no assurance that any such
capital or financing will be available on acceptable terms, or at
all.


26


Cash
Flows





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





FortheYearEndedMarch31,2010
                  
                  
                  2009Cash flows from(used for)::Operating activities,  including
      reorganization items of $110,154 in 2010
                  
                  $
                  (562,009
                  )
                  
                  $
                  (2,964,942
                  )Investing
      activities
                  
                  $
                  (24,745
                  )
                  
                  $
                  (618,791
                  )Financing
      activities
                  
                  $
                  41,880
                  
                  
                  $
                  (2,341,470
                  )





Analysis of cash flow
changes between 2009 and 2008




Cash flows used for operating activities
decreasedin 2010as a result of lower
general and administrative expenses as discussed above,the capitalization of a portion of
interest expense under the terms of the amended Term Credit Agreement with our
senior secured lender, and realized gains on derivative activity as compared to
realized losses in 2009.




Cash
flows used for investing activities decreased in the 2009 period compared to the
2008 period as we expended significantly less on oil and gas properties, $33,000
in 2010 compared to $260,000 in 2009.  In response to our lack of
success in securing additional financing during the period, we have curtailed
capital spending to the minimum required to maintain current levels of crude oil
production.





Cash
flows from financing activities in 2010 reflects the proceeds from the sale of
convertible notes payable ($140,000 off set by the repayment of a portion of the
debt incurred in 2007 ($98,000).  Cash flows used for financing
activities in 2009 includes the repayment of a portion of the debt incurred in
2007 ($2,240,000) and payments of deferred financing costs to complete
requirements of the short term debt agreement.





Capital
Expenditures





The
following table sets forth certain historical information regarding costs
incurred in oil and gas property acquisition, exploration and development
activities, whether capitalized or expensed.





For the Years Ended March 31,2010
                  
                  
                  2009Exploration
                  
                  $
                  19,181
                  
                  
                  $
                  20,108Development
                  
                  
                  82,963
                  
                  
                  
                  245,102Acquisitions:Unproved
                  
                  
                  -
                  
                  
                  
                  -Proved
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  102,144
                  
                  
                  $
                  265,280Capitalized
      costs associates with asset retirement obligations.
                  
                  $
                  (18,747
                  )
                  
                  $
                  10,481





Off-Balance
Sheet Arrangements





Under the
terms of the Term Credit Agreement entered into in October 2007 we were required
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 year ended March 31, 2009 we reflected realized
gains  of $98,377 and unrealized losses of $455,960 from the hedging
activity, as compared to realized losses of $206,895 and unrealized gains of
$1,227,567 for the comparable 2009 period.


27


We have
no other off-balance sheet financing nor do we have any unconsolidated
subsidiaries.





Critical
Accounting Policies and Estimates





We are
engaged in the exploration, exploitation, development, acquisition, and
production of natural gas and crude oil. Our discussion of financial condition
and results of operations is based upon the information reported in our
financial statements. The preparation of these financial statements requires us
to make assumptions and estimates that affect the reported amounts of assets,
liabilities, revenues, and expenses as well as the disclosure of contingent
assets and liabilities as of the date of our financial statements. We base our
decisions, which affect the estimates we use, on historical experience and
various other sources that are believed to be reasonable under the
circumstances. Actual results may differ from the estimates we calculate due to
changing business conditions or unexpected circumstances. Policies we believe
are critical to understanding our business operations and results of operations
are detailed below. For additional information on our significant accounting
policies see Note 1—Organization and Summary of Significant Accounting Policies,
Note 3—Asset Retirement Obligations, and Note 9—Disclosures About Oil and Gas
Producing Activities in the Notes to Financial Statements of our audited
financial statements for the fiscal year ended March 31, 2010 in Part IV, Item
15, of this Annual Report.





Oil and Gas reserve
quantities. Estimated reserve quantities and the related estimates of
future net cash flows are the most important estimates for an exploration and
production company because they affect our perceived value, are used in
comparative financial analysis ratios and are used as the basis for the most
significant accounting estimates in our financial statements. This includes the
periodic calculations of depletion, depreciation, and impairment for our proved
oil and gas assets. Proved oil and gas reserves are the estimated quantities of
crude oil, natural gas, and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future periods
from known reservoirs under existing economic and operating conditions. Future
cash inflows and future production and development costs are determined by
applying average beginning of month prices and benchmark costs, including
transportation, quality, and basis differentials to the estimated quantities of
oil and gas remaining to be produced as of the end of that period. Expected cash
flows are reduced to present value using a discount rate that depends upon the
purpose for which the reserve estimates will be used. For example, the
standardized measure calculation required by Financial Accounting Standards
Board Accounting Standards Codification  (FASB ASC) 932, “Disclosures
About Oil and Gas Producing Activities," requires a 10% discount rate to be
applied. Although reserve estimates are inherently imprecise and estimates of
new discoveries and undeveloped locations are more imprecise than those of
established producing oil and gas properties, we make a considerable effort in
estimating our reserves, which are prepared by independent reserve engineering
consultants. We expect that periodic reserve estimates will change in the future
as additional information becomes available or as oil and gas prices and
operating and capital costs change. We evaluate and estimate our oil and gas
reserves at March 31 of each year. For purposes of depletion, depreciation, and
impairment, reserve quantities are adjusted at all interim periods for the
estimated impact of additions and dispositions. Changes in depletion,
depreciation, or impairment calculations caused by changes in reserve quantities
or net cash flows are recorded in the period that the reserve estimates
change.





Successful efforts method of
accounting. Generally accepted accounting principles provide for two
alternative methods for the oil and gas industry to use in accounting for oil
and gas producing activities. These two methods are generally known in our
industry as the full cost method and the successful efforts method. Both methods
are widely used. The methods are different enough that in many circumstances the
same set of facts will provide materially different financial statement results
within a given year. We have chosen the successful efforts method of accounting
for our oil and gas producing activities and a detailed description is included
in Note 1– Organization and Summary of Significant Accounting Policies to the
Notes to Financial Statements of our audited financial statements for the fiscal
year ended March 31, 2009 in Part IV, Item 15, of this Annual
Report.





Revenue recognition. Our
revenue recognition policy is significant because revenue is a key component of
our results of operations and our forward-looking statements contained in our
analysis of liquidity and capital resources. We derive our revenue primarily
from the sale of produced crude oil. We report revenue as the gross amounts we
receive for our net revenue interest before taking into account production taxes
and transportation costs, which are reported as separate expenses. Revenue is
recorded in the month our production is delivered to the purchaser, but payment
is generally received between 30 and 90 days after the date of production. No
revenue is recognized unless it is determined that title to the product has
transferred to a purchaser. At the end of each month we make estimates of the
amount of production delivered to the purchaser and the price we will receive.
We use our knowledge of our properties, their historical performance, NYMEX and
local spot market prices, and other factors as the basis for these estimates.
Variances between our estimates and the actual amounts received are recorded in
the month payment is received.


28


Asset retirement obligations.
We are required to recognize an estimated liability for future costs associated
with the abandonment of our oil and gas properties. We base our estimate of the
liability on our historical experience in abandoning oil and gas wells projected
into the future based on our current understanding of Federal and state
regulatory requirements. Our present value calculations require us to estimate
the economic lives of our properties, assume what future inflation rates apply
to external estimates and determine what credit adjusted risk-free rate to use.
The statement of operations impact of these estimates is reflected in our
depreciation, depletion, and amortization and accretion calculations and occurs
over the remaining life of our oil and gas properties.





Valuation of long-lived and
intangible assets. Our property and equipment is recorded at cost. An
impairment allowance is provided on unproved property when we determine that the
property will not be developed or the carrying value will not be realized. We
evaluate the realizability of our proved properties and other long-lived assets
whenever events or changes in circumstances indicate that impairment may be
appropriate. Our impairment test compares the expected undiscounted future net
revenues from a property, using escalated pricing, with the related net
capitalized costs of the property at the end of each period. When the net
capitalized costs exceed the undiscounted future net revenue of a property, the
cost of the property is written down to our estimate of fair value, which is
determined by applying a discount rate that we believe is indicative of the
current market. Our criteria for an acceptable internal rate of return are
subject to change over time. Different pricing assumptions or discount rates
could result in a different calculated impairment.


Income taxes. We provide for
deferred income taxes on the difference between the tax basis of an asset or
liability and its carrying amount in our financial statements in accordance with
FASB ASC 740 “Income Taxes." This difference will result in taxable income or
deductions in future years when the reported amount of the asset or liability is
recovered or settled, respectively. Considerable judgment is required in
determining when these events may occur and whether recovery of an asset is more
likely than not. Additionally, our Federal and state income tax returns are
generally not filed before the financial statements are prepared, therefore we
estimate the tax basis of our assets and liabilities at the end of each period
as well as the effects of tax rate changes, tax credits, and net operating and
capital loss carryforwards and carrybacks. Adjustments related to differences
between the estimates we used and actual amounts we reported are recorded in the
period in which we file our income tax returns. These adjustments and changes in
our estimates of asset recovery could have an impact on our results of
operations. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. To date, we have not recorded
any deferred tax assets because of the historical losses that we have
incurred.





Stock-based compensation. As
of April 1, 2006, we adopted the provisions of FASB ASC 718, “Share- Based
Payments." This statement requires us to record expense associated with the fair
value of stock-based compensation.





Commodity
Derivatives.  The Company accounts for derivative instruments
or hedging activities under the provisions of FASB ASC 815, “Derivative and
Hedging." FASB ASC 815 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 consolidated 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 we receive
for production in our 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.





ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.


29


ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Our
Consolidated Financial Statements and Supplementary Data required by this Item 8
are set forth following the signature page and exhibit index of this Annual
Report and are incorporated herein by reference.





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





None.





ITEM
9A(T).  CONTROLS AND PROCEDURES





Controls
and Procedures.





We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Accounting Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(Exchange Act), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. We identified a material
weakness in our internal control over financial reporting and, as a result of
this material weakness, we concluded as of March 31, 2010 that our disclosure
controls and procedures were not effective.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) is defined as a process
designed by, or under the supervision of, a company’s principal executive and
financial officers, or persons performing similar functions, and effected by a
company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with generally acceptable accounting principles and includes those
policies and procedures that:





a)
            pertain to the maintenance of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the
      company;


b)
            provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of financial
      statements in accordance with generally accepted accounting principles,
      and that receipts and expenditures of the company are being made only in
      accordance with authorizations of management and directors of the company;
      and


c)
            provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of the company’s assets that could have a material effect
      on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2010. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control-Integrated Framework.





A
material weakness is a control deficiency, or combination of control
deficiencies, that result in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected. As of March 31, 2010, the Company identified the following material
weakness:


30


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.





As a
result of the aforementioned material weakness, management concluded that the
Company’s internal control over financial reporting as of March 31, 2010 was not
effective.





Management’s
Planned Corrective Actions





In
relation to the material weakness identified above, and subject to emerging from
bankruptcy and securing permanent financing, our management and the board of
directors intend to work to remediate the risk of a material misstatement in
financial reporting. Subject to obtaining permanent financing, we intend to
implement the following plan to address the risk of a material misstatement in
the financial statements:





·
            Engage
      qualified accounting staff to prepare  journal entries and note
      disclosures thereby enabling our Chief Accounting Officer the opportunity
      to independently review and authorize such entries and disclosures prior
      to entering the information into the accounts and financial statement
      disclosures,





·
            Engage qualified third-party
      accountants and consultants to assist us in the preparation and review of
      our financial information,





·
            Ensure employees, third-party
      accountants and consultants who are performing controls understand
      responsibilities and how to perform said responsibilities,
      and





·
            Consult with qualified
      third-party accountants and consultants on the appropriate application of
      generally accepted accounting principles for complex and non-routine
      transactions.





Auditors
Attestation





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





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.





ITEM
9B.  OTHER INFORMATION





None.





PART
III





ITEM
10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Our
current directors and executive officers, their respective positions and ages,
and the year in which each director was first elected, are set forth in the
following table.


31





Name
              
              Age
              
              Positions Held
              
              Beginning of Term of
                  ServiceJon
      C. Nicolaysen
              
              63
              
              Director,
      President, Chief Executive Officer
              
              President
      and CEO Oct 2, 2009;  Director Oct 27, 2009;A.L.
      Sid Overton
              
              69
              
              Director,
      Chairman of the Board
              
              Sep
      30, 2009Mathijs
      van Houweninge
              
              44
              
              Director
              
              Sep
      30, 2009Jeffrey
      B. Bennett
              
              55
              
              Director
              
              Sep
      30, 2009Richard
      Kurtenbach
              
              55
              
              Chief
      Accounting Officer
              
              August
      27, 2007





Rancher’s directors hold office until
their successors are duly elected and qualified under Rancher’s
bylaws.The directors named above will serve until the next
annual meeting of Rancher’s stockholders. Thereafter, directors will be elected
for one-year terms at the annual stockholders' meeting. Officers will hold their
positions at the pleasure of the board of directors absent any employment
agreement.





Prior to
October 1, 2009 the following individuals served as officers and directors of
the Company.





Name
              
              Age
              
              Positions Held
              
              Date of Termination of
                  ServiceJohn
      Works
              
              55
              
              Director,
      President, Chief Executive Officer
              
              Director
      Sept 30, 2009; President and CEO Oct 2, 2009;William
      A. Anderson
              
              69
              
              Director
              
              Sep
      30, 2009Joseph
      P McCoy
              
              57
              
              Director
              
              Sep
      30, 2009Patrick
      M. Murray
              
              65
              
              Director
              
              Sep
      30, 2009Myron
      (Mickey) M. Sheinfeld
              
              78
              
              Director
              
              Sep
      30, 2009Mark
      Worthey
              
              50
              
              Director
              
              Sep
      30, 2009





Biographical
Information





Jon Nicolaysen, President, CEO and
Director


In 1985, Mr. Nicolaysen completed theAtlanticBusinessman's  Exchange
Program. In 1986, he completed the W.K. Kellogg Foundations Fellowship Wyoming
Agriculture Leadership Program. In 1970, he received an MS in Business
Administration from the University of Wyoming, and in 1968, he earned his BS in
Business Administration from Colorado College.





From 1970 to the present, Mr. Nicolaysen
has been Vice President and President of Cole Creek Sheep Company, Inc., a
cattle and sheep ranching and farming operation. From 1989 to June of 2009, he
was president of Parkerton Ranch, Inc., a cattle and sheep ranching and farming
operation. From 1988 to the present, he's been president of JK Minerals, Inc.,
an oil production and mineral leasing company. From 1995 to June 2009, he was
the President of Cole Creek Outfitters, Inc., a guiding and hunting operation.
From 1998 to the present he has been President, and was a founding member of,
Seven Cross Ranches, LLC; Wcamp, FLLC; Sagebrush Land Management, FLLC, all of
which are real estate development companies.





From 2001 to 2008, Mr. Nicolaysen was a
unit operator for JK Minerals, Inc. From 2004 - 2007 Mr. Nicolaysen was
an operator of Big Muddy Field for Wyoming Mineral
Exploration, LLC., of which he was a founding member. From 2007 - 2008, he
was a founding member of Muddy Mineral Exploration, LLC in Wyoming. From 2008 to
May 1, 2009, he was a board member of Ameriwest Energy Corp.





Mr.  Nicolaysen,
and A.L. Sid Overton, Director and Chairman of the Board, are
brothers-in-law.





A.L. Sid Overton, Director and Chairman of the Board of
Directors


In 1964, Mr. Overton  received
his B.A. from the University of North Dakota.  In 1966,  he
earned his L.L.B.  from the  University of North Dakota
School of Law, and in 1969,  he earned his J.D.  from
the  University of North Dakota School of Law.  Since
1998,  Mr.  Overton has worked as a lawyer for Overton &
Associates, LLC.  Mr Overton is the brother-in-law of Mr.
Nicolaysen.





Mathijs van Houweninge, Director


Mr. van Houweninge studied
Cognitive  Artificial  Intelligence at the University of
Utrecht,  The Netherlands.  In 1998, he attended the Young
Managers Programme at Insead  Business School in Paris.  In
addition to being  self-employed  since
1992,  Mr.  van  Houweninge  was
the  founder  and CEO
of  "Effective,"  a Dutch software
and  consultancy  firm,  from 1992 - 2002. From
September 2007 to April 2008,  Mr. van  Houweninge was an
associate at Advisor Falcon Capital in London. From May 2008 to December 2008,
he was a Partner at Falcon Capital in London.


32


He currently serves as a Director of the
following companies and organizations: Nieuwe Regentesseschool, a Dutch
primary school (Utrecht, November 2004, non-profit); Blackwater Midstream Corp.,
a midstream gas storage facility (New Orleans,  May
2008,  listed);  Cybercity 3D, a 3D modeling and marketing
company (El
Segundo,  February  2008,  non-listed);  SkyPostal  Networks,  Inc.,  an
air courier services company (Miami,  April
2008,  listed);  IonIP bv, a network and business
intelligence technology firm (Amsterdam,  June
2008,  non-listed);  and Skillcity, an ICT support
organization (Utrecht, August 2008, non-profit).





Jeffrey B. Bennett, Director


Mr. Bennett obtained a Bachelor's of
Arts from Western State College of Colorado in 1979,  majoring in
Biology.  Mr. Bennett has been a co-owner/partner  in TCF
Services, Inc. from 2005 to present and a co-owner/partner in Flame Energy, Inc.
from May 2005 to present.  He was
Vice  President  of  Operations  of NQL
Energy Services in Alberta,  Canada from June
2003  through  2005.  He was employed by Black Max
Downhole Tools,  Inc. from May 2001 through 2003, as a Region Manager.
From 2000 to 2001, Mr.  Bennett was operations  manager for
the western United States for Sharewell





Richard
Kurtenbach – Chief Accounting Officer


Mr.
Kurtenbach, became our Chief Accounting Officer on August 27, 2007. From April
2004 to August 2007, Mr. Kurtenbach was Vice President—Administration and
Controller with publicly-traded Galaxy Energy Corporation where he was
responsible for all administrative and accounting functions, including
preparation of financial statements for SEC filings, internal controls and
Sarbanes-Oxley compliance, financial modeling and management of joint interest
activities for domestic and international drilling programs. From May 2003 to
March 2004, Mr. Kurtenbach was Accounting Supervisor— Financial Reporting for
Marathon Oil Company’s Powder River Business Unit, where he was responsible for
the preparation and analysis of the Unit’s monthly and quarterly financial
statements. From 2002 to 2003, Mr. Kurtenbach was self employed as a consultant
to small energy companies advising management on financial, accounting auditing
and taxation matters. From 1998 to 2001, Mr. Kurtenbach was the Finance and
Administrative Manager for Hilton Petroleum, where he was responsible for the
management of all financial, accounting and administrative matters for the
Canadian publicly traded company. From 1985 to 1997, Mr. Kurtenbach was
Manager—Commercial Services, American Region (1995-1997), Manager—Finance and
Administration (1987-1995), and Financial Controller (1985-1987) at Ampolex
(USA), Denver, Colorado, where he managed all financial accounting and
administrative matters for the domestic and South American operations for the
Australian publicly traded company. From 1983 to 1985, Mr. Kurtenbach was
Controller of Phelps Dodge Fuel Development Corporation. From 1980 to 1983, Mr.
Kurtenbach was Controller for Calvin Exploration Inc. in Denver, Colorado. From
1978 to 1980, Mr. Kurtenbach worked as a staff auditor at Price Waterhouse. Mr.
Kurtenbach received a B.S. in Accounting from Illinois State University in
Normal, Illinois (1978) and was licensed as a Certified Public Accountant in
Illinois in 1978 and Colorado in 1981.





Former
Officers and Directors





Andrei
Stytsenko, 44, Director (From October 1, 2009 through October 21,
2009)





In 1996,
Mr. Stytsenko received a degree in Petroleum Engineering from Ivano-Frankivsk
(Ukraine) Technical Oil & Gas University. From March 2008 to present, he's
been retired. From May 2006 - March 2008, Mr. Stytsenko was with Ensign Drilling
in Calgary, Alberta. From February 2004 until mid-May 2006, Mr. Stytsenko served
as founder, President, Principal Executive Officer, Treasurer, Principal
Financial Officer, and Director of Metalex Resources, Inc., which changed its
name to Rancher Energy Corp. in May 2006. From January 2000 until February 2004,
Mr. Stytsenko was the secretary and a Director of Aberdene Mines Limited. From
1985 to 1996, Mr. Stytsenko was the managing supervisor for Ivano Frankovski
Drilling Company, located in North Russia. Mr. Stytsenko's responsibilities
included drilling holes up to 13,000 feet in depth for the exploration of oil
and gas. From 1997 until 1998, Mr. Stytsenko was field supervisor for Booker
Gold Exploration located in Vancouver, British Columbia. Mr. Stytsenko's
responsibilities included core loding, assaying and mapping.





Silvia
Soltan, 30, Director (From October 1, 2009 through October 21,
2009)





In 2001,
Ms. Soltan received her BS of Arts and Science from the University of Toronto.
From January 2002 until February 2005, Ms. Soltan has worked in Executive
Customer Relations at IBM Canada Ltd. From December 2007 to the present, she has
been President of Aden Solutions, Inc.  Mr. Vaskevich, a director of
the Company is Ms. Soltan’s husband.





Vladimir
Vaskevich, 31, Director (From October 1, 2009 through October 21,
2009)


33


In 2005,
Mr. Vaskevich received a diploma from the Sauder School of Business, UBC in
Canada. From 2001 - 2006, Mr. Vaskevich was the President of Operations and a
director of Centre City Health Recovery, Inc. From 2007 to the present, he has
been President of Riverdale Mining, Inc.  Ms. Soltan, a director of
the Company, is Mr. Vaskevich’s wife.





We are managed under the direction of
our Board of Directors.  During the year ended March 19, 2010, the
Board of Directors held 19 meetings.  Each director
attended  greater than 75% of the meetings held for the period each
was a director.





Committees
of the Board of Directors





Audit
Committee





The
Company does not have an audit committee at this time.





Nominating
Committee





The Company does not have a nominating
committee at this time.





Compensation
Committee.





The
Company does not have a compensation committee at this time.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our
directors, executive officers and persons who own more than 10% of the Common
Stock to file initial reports of ownership (Forms 3) and reports of changes in
ownership of Common Stock (Forms 4 and Forms 5) with the Securities and Exchange
Commission.





Based
solely on a review of copies of such reports furnished to us and written
representation that no other reports were required during the fiscal year ended
March 31, 2010, we believe that all persons subject to the reporting
requirements pursuant to Section 16(a) filed the required reports on a timely
basis with the Securities and Exchange Commission (“SEC”).





Conflicts
of Interest – General.





The
Company’s directors and officers are, or may become, in their individual
capacities, officers, directors, controlling shareholder and/or partners of
other entities engaged in a variety of businesses.  Thus, there exist
potential conflicts of interest including, among other things, time, efforts and
corporation opportunity, involved in participation with such other business
entities.





Conflicts
of Interest – Corporate Opportunities




Presently
no requirement contained in the Company’s Articles of Incorporation, Bylaws, or
minutes which requires officers and directors of the Company’s business to
disclose to the Company business opportunities which come to their attention.
The Company’s officers and directors do, however, have a fiduciary duty of
loyalty to the Company to disclose to it any business opportunities which come
to their attention, in their capacity as an officer and/or director or
otherwise. Excluded from this duty would be opportunities which the person
learns about through his involvement as an officer and director of another
company. The Company has no intention of merging with or acquiring an affiliate,
associate person or business opportunity from any affiliate or any client of any
such person.




Code
of Business Conduct and Ethics




We have
adopted a Code of Business Conduct and Ethics for our directors, officers, and
employees. The Board expects all directors, as well as officers and employees,
to act ethically at all times and to adhere to the policies outlined in our Code
of Business Conduct and Ethics. Copies of our Code of Business Conduct and
Ethics are available by contacting the Chief Accounting Officer at the address
or phone number contained in this annual report.


34


ITEM
11.     EXECUTIVE COMPENSATION.





Summary
Compensation Table





The
following table sets forth in summary form the compensation received by our
named executive officers who consist of the President and  Chief
Executive Officer, Chief Accounting Officer, and former President and Chief
Executive  Officer during the last two fiscal years.





Name &
                                      Position
                                    
                                    Year
                                    
                                    
                                    Salary
                                      ($)
                                    
                                    
                                    Bonus
                                      ($)
                                    
                                    
                                    Stock
                                      awards
                                      ($)
                                    
                                    
                                    Option
                                      awards
                                      ($)
                                    
                                    
                                    Non-
                                      equity
                                      incentive
                                      plan
                                      compensation
                                      ($) (A)
                                    
                                    
                                    Non-
                                      qualified
                                      deferred
                                      compensation
                                      earnings
                                      ($)
                                    
                                    
                                    All other
                                      compensation
                                      ($)
                                    
                                    
                                    Total
                                      ($)John
      Nicolayson, CEO & President (B)
                                    
                                    
                                    2010
      2009
                                    
                                    
                                    $
                                    60,423
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    $
                                    63,363
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    $
                                    3,000
      0
                                    
                                    
                                    $
                                    129,073
      0John
      H. Works (D)
                                    
                                    
                                    2010
      2009
                                    
                                    
                                    
                                    116,827
      225,000
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    29,939
      13,800
                                    
                                    
                                    
                                    148,776
      238,000Richard
      E. Kurtenbach, Chief Accounting Officer (C)
                                    
                                    
                                    2010
      2009
                                    
                                    
                                    
                                    170,569
      175,000
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    8,909
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    0
      0
                                    
                                    
                                    
                                    4,780
      11,800
                                    
                                    
                                    
                                    186,268
      186,800





(A)           The
amount in this column reflects the total grant date fair value for financial
statement reporting purposes for awards granted in the fiscal year ended March
31, 2010, in accordance with FASB ASC 718 “Share Based
Payments."  Please refer to Note 10 of the Notes to Financial
Statements of our audited financial statements for the fiscal year ended March
31, 2010, for a discussion of the assumptions made in the valuation of the stock
option awards.





(B)           For Mr. Nicolaysen, Other Compensation
represents auto allowances.  Mr. Nicolaysen was appointed as Chief
Executive Officer and President on October 2, 2009, and as a Director on October
27, 2009.  He serves as a Director for no additional
compensation.





(C)           For
Mr. Kurtenbach, Other Compensation represents auto allowances and contributions
to his 401(k) accounts.





(D)           For
Mr. Works Other Compensation represents auto allowances, contributions to his
401(k) accounts, and payment for accrued but unused vacation as of his
termination.  Mr. Works also served as a member of our Board of
Directors for no additional compensation.  Mr. Works’ employment with
the Company was terminated on October 2, 2009.





Employment
Agreements; Potential Payments Upon Termination or
Change-in-Control





Employment
Agreements





On October 27, 2009, we entered into
an Executive Employment Agreement with Jon C. Nicolaysen to become our President
and Chief Executive Officer.  Pursuant to the agreement, Mr.
Nicolaysen will receive a base salary of $120,000 per year.  The base
salary shall thereafter be increased annually at the greater of five percent or
such other increase as may be approved by the Board of Directors. In addition Mr
Nicolaysen: i) shall be eligible to receive incentive compensation or a bonus,
payable solely in the discretion of the Board of Directors; ii) he shall be
entitled to participate in all benefit programs established by the Company, and;
iii) he shall be entitled to a Company-provided vehicle or a monthly allowance
of $500. The Agreement may be terminated by either party upon fifteen days
written notice.  Also on October 27, 2009 we entered into a Management
Retention Agreement with Mr. Nicolaysen, under which Mr. Nicolaysen was granted
options to purchase 2,500,000 shares of the Company’s common stock at $0.035 per
share.  The Management Retention Agreement shall terminate the earlier
of (i) one year; (ii) thirty days after the consummation of a Change in Control;
(iii) thirty days following the confirmation of a Reorganization Plan, or: (iv)
the ate that all obligations of the parties have been
satisfied.   See the table below for a description of the vesting
provisions and term of the stock options.


35


On August
3, 2007, we entered into an employment agreement with Richard E. Kurtenbach to
become our Chief Accounting Officer. Pursuant to the employment agreement, Mr.
Kurtenbach received a base salary of $175,000 and a year end bonus to be
determined by our Board of Directors. Mr. Kurtenbach began his employment with
us on August 27, 2007 and he was granted on that date an option to purchase
450,000 shares of our common stock at an exercise price of $0.45 per share. The
options vests annually over a three-year period from the date of grant, and are
exercisable for a term of five years, subject to early termination of Mr.
Kurtenbach’s employment with us. In addition, Mr. Kurtenbach was entitled to the
coverage or benefits under any and all employee benefit plans maintained by
us.  The Employment Agreement with Mr. Kurtenbach expired on December
31, 2009.  Effective January 1, 2010 Mr. Kurtenbach’s annual base
salary was adjusted to $140,000.





We
entered into an employment agreement with John H. Works, dated June 1,
2006, pursuant to which he agreed to become our President, Chief Executive
Officer, and a member of our Board of Directors.  The term of Mr.
Works’ agreement was two years, beginning May 1, 2006.  The
agreement automatically renewed for two year terms unless prior to the
commencement of the additional term: (i) either party gives thirty-days’ written
notice of such party’s desire to terminate the agreement or (ii) the parties
cannot agree to mutually acceptable terms for the additional term.  We
amended Mr. Works’ employment agreement on March 14, 2007 pursuant to which we
paid him an annual salary of $225,000 per year.  Under Mr. Works’
agreement as amended, we reimbursed him for out-of-pocket expenses incurred by
him up to $10,000 per month and paid him an automobile allowance of $400 per
month.  In conjunction with his employment and as an incentive to
become our President and Chief Executive Officer, we granted to Mr. Works, under
his employment agreement, an option to purchase 4,000,000 shares of our common
stock at a price of $0.00001 per share.  The options vested 1,000,000
shares upon grant and vested 250,000 shares quarterly thereafter, beginning June
1, 2006 through May 31, 2009.  Prior to his termination on
October 2, 2009, all Mr. Works options had vested and had been
exercised.  Upon termination Mr. Works was paid $22,773
representing  accrued but untaken vacation time.  He
received no additional termination pay.





Outstanding
Equity Awards at Fiscal Year-end Table





The
following table sets forth certain information regarding stock options held by
the named executive officers as of March 31, 2009.





Name
                              
                              Option AwardsNumber of
                                Securities
                                Underlying
                                Unexercised
                                Options(#)
                                Exercisable
                              
                              
                              Number of
                                Securities
                                Underlying
                                Unexercised
                                Options (#)
                                Non-exercisable
                              
                              
                              Option Exercise
                                Price
                              
                              Option Expiration
                                DateJon
      C Nicolaysen (A)
                              
                              
                              250,000
                              
                              
                              
                              2,250,000
                              
                              
                              $
                              0.035
                              
                              10/27/19Richard
      E. Kurtenbach
                              
                              
                              300,000
                              (B)
                              
                              
                              150,000
                              
                              
                              $
                              0.45
                              
                              8/27/1235,000
                              (C)
                              
                              
                              315,000
                              
                              
                              $
                              0.035
                              
                              10/27/14





(A)
            Mr.
      Nicolaysen’s options vested 10% on the date of grant, October 27, 2009 and
      90% on the earlier to occur of:


i)
            November
      1, 2010;


ii)
            The
      confirmation by the Bankruptcy Court of a Plan of
      Reorganization;


iii)
            The
      dismissal from Chapter 11 Bankruptcy with the approval of the
      Court


iv)
            An
      event of a 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 than 50% of the common stock
      outstanding immediately after the
transaction;


v)
            Any
      other form of change of control,
or;


vi)
            Voluntary
      termination for good reason.





(B)
            Mr.
      Kurtenbach’s options vest 150,000 shares annually from August 27, 2008
      through August 27, 2010.


(C)
            Mr.
      Kurtenbach’s options vested 10% on the date of grant, October 27, 2009 and
      90% on the earlier to occur of:


36




vii)
            November
      1, 2010;


viii)
            The
      confirmation by the Bankruptcy Court of a Plan of
      Reorganization;


ix)
            The
      dismissal from Chapter 11 Bankruptcy with the approval of the
      Court


x)
            An
      event of a 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 than 50% of the common stock
      outstanding immediately after the
transaction;


xi)
            Any
      other form of change of control,
or;


xii)
            Voluntary
      termination for good reason.




Director
Compensation





During
the year ended March 31, 2010, we compensated our non-employee Directors under
two different compensation schemes.  The first scheme was approved by
the Board of Directors in April 2007.  At a meeting of our
shareholders on September 30, 2009 all six sitting Directors were replaced by a
non-management slate of Directors.  The new Board of Directors revised
the compensation scheme for non-employee Directors. The two compensation schemes
are discussed below.





Cash
Compensation and Equity Compensation





Original Non-Employee
Director Compensation Scheme All non-employee Directors received $45,000
annual compensation, which was paid quarterly in shares of our common stock and
was priced at the fair market value at the end of each fiscal quarter
represented by the closing price on the last trading day of the quarter. Each
non-employee Director also received $6,000 per year, plus reasonable out of
pocket expenses, to attend Board of Directors meetings. If a non-employee
Director was a member of a committee, he received $4,000 per year for committee
meetings. A committee chairman received $6,000 per year, except the audit
committee chairman received $10,000 per year. Meeting payments were made
quarterly and a Director could elect to receive stock in lieu of cash under the
2006 Stock Incentive Plan, which would be computed using the ratio of $1.50 of
our common stock for each $1.00 to be paid in cash to the Director.
Notwithstanding the existing non-employee Director compensation scheme, all
non-employee directors voluntarily elected to forgo compensation for their
service during the year ended March 31, 2009.





In
addition to the above compensation, each non-employee director received in
conjunction with his joining the Board of Directors a stock grant of 100,000
shares of our common stock that vested 20% (20,000 shares) on the date of grant
and 20% per year thereafter, so long as the individuals continued to serve as
Directors.  Following the meeting of shareholders on September 30,
2009, at which all six sitting directors were not re-elected, the non-vested
shares, 40,000 per prior director or 200,000 shares in total were
cancelled.





Revised Non-Employee
Director Compensation Scheme


The new
Board of Directors elected at the meeting of shareholders on September 30, 2009
immediately rejected the existing non-employee director compensation scheme and
implemented a new scheme under which non-employee each director would receive a
cash payment of $5,000 per fiscal quarter.  In addition under the
terms of Management Retention Agreements entered into with each non-employee
Director and the President and CEO, each member of the Board of Directors would
be granted options to purchase 2,500,000 shares of the Company’s common stock at
$0.035 per share.





The
following table contains information pertaining to the compensation of our
non-employee Directors during the fiscal year ended March 31, 2010.





Name
                    
                    Fees Earned
                      Or Paid In
                      Cash
                    
                    
                    Stock Awards
                    
                    
                    Option
                      Awards(A)
                    
                    
                    All Other
                      Compensation
                    
                    
                    TotalA.L.
      Sid Overton
                    
                    $
                    10,000
                    
                    
                    $
                    —
                    
                    
                    $
                    63,632
                    
                    
                    $
                    —
                    
                    
                    $
                    73,632Mathijs
      van Houweninge
                    
                    $
                    10,000
                    
                    
                    $
                    —
                    
                    
                    $
                    63,632
                    
                    
                    $
                    —
                    
                    
                    $
                    73,632Jeffrey
      B. Bennett
                    
                    $
                    10,000
                    
                    
                    $
                    —
                    
                    
                    $
                    63,632
                    
                    
                    $
                    —
                    
                    
                    $
                    73,632William
      A. Anderson
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Joseph
      P. McCoy
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Patrick
      M. Murray
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Myron
      M. Sheinfeld
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Mark
      A. Worthey
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —


37




(A)
            Stock
      Awards compensation reflects the grant date fair value as measured in
      accordance with FASB ASC 718 “Share Based Payments."  Please
      refer to Note 8 of the Notes to Financial Statements of our audited
      financial statements for the fiscal year ended March 31, 2010, for a
      discussion of the assumptions made in the valuation of the stock option
      awards.





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





As of
June 25, 2010 there were 119,316,700 shares of common stock outstanding. The
following sets forth, as of June 25, 2010, the ownership of our common stock
held by each person who beneficially owns more than 5% of our common stock, each
of our directors, each executive officer, and all of our directors and executive
officers as a group. Except as otherwise indicated, all shares are owned
directly and the named person possesses sole voting and sole investment power
with respect to all such shares. Shares not outstanding but deemed beneficially
owned because a person or a member of a group has a right to acquire them within
sixty (60) days after June 25, 2010 are treated as outstanding only when
determining the amount and percentage owned by such person or such
group.




Name and Address of Beneficial Owner
                          
                          Number of Shares
                            Beneficially Owned (1)
                            (2)
                          
                          
                          Percent of Common
                            Stock Outstanding
                            (3)Jon C. Nicolaysen Director, President, Chief Executive Officer (4)
                            999-18th
      Street, Suite 3400
                            Denver,
      Colorado 80202
                          
                          
                          4,450,000
                          
                          
                          
                          3.73
                          %A.L.
      Sid Overton (5)
                            999-18th
      Street, Suite 3400
                            Denver,
      Colorado 80202
                          
                          
                          3,750,000
                          
                          
                          
                          3.14
                          %Mathijs
      van Houweninge (6)
                            999-18th
      Street, Suite 3400
                            Denver,
      Colorado 80202
                          
                          
                          3,750,000
                          
                          
                          
                          3.14
                          %Jeffrey
      B. Bennett (7)
                            999-18th
      Street, Suite 3400
                            Denver,
      Colorado 80202
                          
                          
                          3,753,000
                          
                          
                          
                          3.15
                          %Richard
      E. Kurtenbach, Chief Accounting Officer 999-18th Street, Suite
      3400
                            Denver,
      Colorado 80202 (8)
                          
                          
                          335,000
                          
                          
                          
                          *All
      Executive Officers and Directors as a Group (5 persons)
                          
                          
                          16,038,000
                          
                          
                          
                          13.44
                          %All
      5% or Greater ShareholdersSergei
      Stetsenko
                            Paradeplatz
      4
                            Zurich
      8001 Switzerland
                          
                          
                          8,896,000
                          
                          
                          
                          7.45
                          %





*Less than 1%





(1)  Under
SEC Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes the
power to vote, or to direct the voting of shares; and (ii) investment power,
which includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if, for
example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of an
option) within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by such
person (and only such person) by reason of these acquisition rights. As a
result, the percentage of outstanding shares of any person as shown in this
table does not necessarily reflect the person’s actual ownership or voting power
with respect to the number of shares of common stock actually outstanding on the
date of this Annual Report.


38




(2)  Except
as indicated in the footnotes below, each person has sole voting and dispositive
power over the shares indicated.





(3)  Percentages
are based on an aggregate 119,316,700 shares issued and outstanding as of June
25, 2010.





(4) Mr.
Nicolayson holds 700,000 shares of common stock.  In addition Mr.
Nicolayson holds a $25,000 convertible promissory note, convertible into
1,250,000 shares of common stock at $0.02 per share and is convertible in whole
or in part.  Mr. Nicolayson also holds an option exercisable into
2,500,000 shares of common stock at $0.035 per share.





(5)  Mr.
Overton holds a $25,000 convertible promissory note, convertible into 1,250,000
shares of common stock at $0.02 per share and is convertible in whole or in
part.  Mr. Overton also holds an option exercisable into 2,500,000
shares of common stock at $0.035 per share.





(5)  Mr.
van Houweninge holds a $25,000 convertible promissory note, convertible into
1,250,000 shares of common stock at $0.02 per share and is convertible in whole
or in part.  Mr. van Houweninge also holds an option exercisable into
2,500,000 shares of common stock at $0.035 per share.





(7)  Mr.
Bennett holds 3,000 shares of common stock.  In addition Mr. Bennett
holds a $25,000 convertible promissory note, convertible into 1,250,000 shares
of common stock at $0.02 per share and is convertible in whole or in
part.  Mr. Nicolayson also holds an option exercisable into 2,500,000
shares of common stock at $0.035 per share.





(8) Mr.
Kurtenbach has options to purchase 450,000 and 300,000 shares of common stock at
exercise prices of $0.45 and $0.035 per share, respectively.  Of the
total options issued to Mr. Kurtenbach, 300,000 of the $0.45 per share and
35,000 of the $0.035 per share options are exercisable within the next 60
days.





Equity
Compensation Plan Information





The
following table sets forth information as of March 31, 2010, with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of the Company that are authorized for issuance, aggregated as
follows:


Plan
      Category
                            
                            Number of securities to be
      issued upon exercise of outstanding options,
                              warrants
      and rights
                              (a)
                            
                            
                            Weighted-
                              average
                              exercise
                              price
      of
                              outstanding
                              options,
                              warrants and
                              rights
                              (b)
                            
                            
                            Number of securities
                              remaining available for
                              future
      issuance under
                              equity compensation plans
                              (excluding
      securities
                              reflected
      in column (a))
                              (c)Equity
      compensation plans approved by security holders
                            
                            
                            2,206,000
                            
                            
                            $
                            0.15
                            
                            
                            
                            7,794,000Equity
      compensation plans not approved by security holders
                            
                            
                            10,000,000
                            
                            
                            $
                            0.035
                            
                            
                            
                            -Total
                            
                            
                            12,206,000
                            
                            
                            $
                            0.06
                            
                            
                            
                            7,794,000




ITEM
13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.





Certain
Related Transactions





On
October 27, 2009, each of the four members of our Board of Directors loaned
$25,000 for a total of $100,000 to the Company, under the terms of Convertible
Promissory Notes (the “Notes”).  The Notes as fully described in Note
7 - Convertible Promissory Notes Payable, of the Notes to Financial Statements
of our audited financial statements for the fiscal year ended March 31, 2010,
interest at the greater of 12% or prime plus 4%, mature on November 1, 2010and
are convertible, at the holder’s option, into shares of the Company’s common
stock at a conversion price of $0.02 per share.





During
the year ended March 31, 2010, the Company incurred legal fees totaling $72,768
with Overton and Associates, LLC, a law firm in which Mr. Overton is a
principal.  The employment of Overton and Associates as special
counsel has been approved by the Bankruptcy Court.





During
the year ended March 31, 2010, the Company incurred engineering and oilfield
operating consulting fees totaling $68,907 with TCF Services, Inc., an
engineering consulting firm  in which Mr. Bennett is a
principal.  The employment of TCF Services, Inc.  has been
approved by the Bankruptcy Court.


39




The
Company has not implemented a formal written policy concerning the review of
related party transactions, but compiles information about transactions between
the Company and its directors and officers, their immediate family members, and
their affiliated entities, including the nature of each transaction and the
amount involved. The Board of Directors has responsibility for reviewing these
transactions.





Director
Independence





Our Board
of Directors is comprised of four individuals.  We have determined
that three of our directors (Messrs. Overton, Bennett and van Houweninge) are
each an “independent director” as defined under the published listing
requirements of The NASDAQ Stock Market.




ITEM
14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.





Auditor’s
Fees





The
following table describes fees for professional audit services rendered by Hein,
our principal accountant, for the audit of our annual financial statements for
the years ended March 31, 2010 and March 31, 2009 and fees billed for other
services rendered by Hein during the 2010 and 2009 fiscal years.





Type of Fee
                          
                          Fiscal 2010
                          
                          
                          Fiscal 2009Audit
      Fees (1)
                          
                          $
                          74,093
                          
                          
                          $
                          117,396Audit-Related
      Fees
                          
                          
                          -
                          
                          
                          
                          -Tax
      Fees (2)
                          
                          
                          10,464
                          
                          
                          
                          10,000All
      Other Fees
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          $
                          84,557
                          
                          
                          $
                          127,396





1.           Audit
Fees include the aggregate fees incurred by us for professional services
rendered by Hein for the audit of our annual financial statements and review of
financial statements included in our Forms 10-Q for the 2010 and 2009 fiscal
years.


2.           Tax
Fees include the aggregate fees incurred by us for professional services
rendered by Hein for tax compliance and tax planning for the 2010 and 2009
fiscal years.





Pre-approval Policies and
Procedures





The Board
of Directors on an annual basis reviews audit and non-audit services performed
by the independent auditor. All audit and non-audit services are preapproved by
the Board of Directors, which considers, among other things, the possible effect
of the performance of such services on the auditors' independence. The Board of
Directors has considered the role of Hein in providing services to us for the
fiscal years ended March 31, 2010 and March 31, 2009 and has concluded that such
services are compatible with their independence as our auditors. In 2010 and
2009, 100% of the Audit Related Fees, Tax Fees and All Other Fees were
pre-approved by the Board of Directors.




PART
IV




ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES




(a) Documents filed as a part of the
report:




(1)
              Index to Consolidated Financial
      Statements of the
Company





An “Index
to Consolidated Financial Statements” has been filed as a part of this Report
beginning on page F-1 hereof.


40




(2)
            All
      schedules for which provision is made in the applicable accounting
      regulation of the SEC have been omitted because of the absence of the
      conditions under which they would be required or because the information
      required is included in the consolidated financial statements of the
      Registrant or the notes thereto.




(3)
            Exhibits




Exhibit
            
            Description23.1
            
            Consent
      of Ryder Scott Company, L.P., Independent Petroleum
    Engineers*31.1
            
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive
      Officer)*31.2
            
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Accounting
      Officer)*32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002*32.2
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002*99.1
            
            Report
      of Ryder Scott Company, L.P., Independent Petroleum
    Engineer*





* Filed
herewith.


41




EXHIBIT
INDEX




23.1
            
            Consent
      of Ryder Scott Company, L.P., Independent Petroleum
    Engineers*31.1
            
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive
      Officer)*31.2
            
            Certification
      Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Accounting
      Officer)*32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002*32.2
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002*99.1
            
            Report
      of Ryder Scott Company, L.P., Independent Petroleum
    Engineers*




* Filed
herewith.


42




INDEX
TO FINANCIAL STATEMENTS





Audited
      Financial Statements - Rancher Energy Corp.Report
      of Independent Registered Public Accounting Firm
              F-2Balance
      Sheets as of March 31, 2010 and 2009
              F-3Statements
      of Operations for the Years Ended March 31, 2010 and
    2009
              F-4Statement
      of Changes in Stockholders’ Equity (Deficit) for the Years Ended
      March 31, 2010, 2009
              F-5Statements
      of Cash Flows for the Years Ended March 31, 2010 and
    2009
              F-6Notes
      to Financial Statements
              F-7


F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Rancher
Energy Corp.





We have
audited the accompanying balance sheets of Rancher Energy Corp. (the “Company” )
as of March 31, 2010 and 2009, and the related statements of operations, changes
in stockholders’ equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Rancher Energy Corp. as of March
31, 2010 and 2009, and the results of its operations and its cash flows for each
of the years then ended, in conformity with U.S. generally accepted accounting
principles.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, on October 28, 2009 the Company filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code.  Uncertainties inherent
in the Bankruptcy process, as well as  recurring losses from
operations raise substantial doubt about the Company’s ability to continue as a
going concern.  Management’s plans in regard to these matters are also
described in Note 1.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





We were
not engaged to examine management’s assertion about the effectiveness of Rancher
Energy Corp.’s internal control over financial reporting as of March 31, 2010
included in the accompanying Management Report on Internal
Controlsand, accordingly, we do not express an opinion
thereon.





HEIN & ASSOCIATES
LLP




Denver,
Colorado




July 12,
2010


F-2




Rancher
Energy Corp.


(Debtor-in-Possession)


Balance
Sheets





March 31,2010
                                                
                                                
                                                2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                
                                                $
                                                372,286
                                                
                                                
                                                $
                                                917,160Accounts
      receivable and prepaid expenses
                                                
                                                
                                                615,602
                                                
                                                
                                                
                                                584,139Derivative
      receivable
                                                
                                                
                                                -
                                                
                                                
                                                
                                                455,960Total
      current assets
                                                
                                                
                                                987,888
                                                
                                                
                                                
                                                1,957,259Oil
      and gas properties (successful efforts method):Unproved
                                                
                                                
                                                53,030,814
                                                
                                                
                                                
                                                53,328,147Proved
                                                
                                                
                                                19,432,703
                                                
                                                
                                                
                                                20,631,487Less:
      Accumulated depletion, depreciation, amortization and
      impairment
                                                
                                                
                                                (56,355,224
                                                )
                                                
                                                
                                                (41,840,978
                                                )Net
      oil and gas properties
                                                
                                                
                                                16,108,293
                                                
                                                
                                                
                                                32,118,656Furniture
      and equipment, net of accumulated depreciation of $568,529 and $381,396
      respectively
                                                
                                                
                                                574,938
                                                
                                                
                                                
                                                770,354Other
      assets
                                                
                                                
                                                914,097
                                                
                                                
                                                
                                                933,592Total
      other assets
                                                
                                                
                                                1,489,035
                                                
                                                
                                                
                                                1,703,946Total
      assets
                                                
                                                $
                                                18,585,216
                                                
                                                
                                                $
                                                35,779,861LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Accounts
      payable and accrued liabilities – post petition
                                                
                                                $
                                                1,698,488
                                                
                                                
                                                $
                                                185,972Asset
      retirement obligation
                                                
                                                
                                                174,332
                                                
                                                
                                                
                                                108,884Note
      payable, net of unamortized discount of $-0- and $165,790,
      respectively
                                                
                                                
                                                10,089,987
                                                
                                                
                                                
                                                9,834,210Total
      current liabilities
                                                
                                                
                                                11,962,807
                                                
                                                
                                                
                                                10,129.066Long-term
      liabilities:Asset
      retirement obligation
                                                
                                                
                                                1,255,497
                                                
                                                
                                                
                                                1,171,796Total
      long-term liabilities
                                                
                                                
                                                1,255,497
                                                
                                                
                                                
                                                1,171,796Total
      liabilities not subject to compromise
                                                
                                                
                                                13,218,304
                                                
                                                
                                                
                                                11,300,862Liabilities
      subject to compromise
                                                
                                                
                                                1,336,133
                                                
                                                
                                                
                                                630,836Total
      liabilities
                                                
                                                
                                                14,554,437
                                                
                                                
                                                
                                                11,931,698Commitments
      and contingencies (Notes 2,3,6 and 8)Stockholders’
      equity:Common
      stock, $0.00001 par value, 275,000,000 and 100,000,000 shares authorized
      at March 31, 2010 and 2009 ;  119,316,700 and
      119,016,700  shares issued and outstanding at
      March 31, 2010 and 2009, respectively
                                                
                                                
                                                1,194
                                                
                                                
                                                
                                                1,191Additional
      paid-in capital
                                                
                                                
                                                93,025,876
                                                
                                                
                                                
                                                92,582,001Accumulated
      deficit
                                                
                                                
                                                (88,996,291
                                                )
                                                
                                                
                                                (68,735,029
                                                )Total
      stockholders’ equity
                                                
                                                
                                                4,030,779
                                                
                                                
                                                
                                                23,848,163Total
      liabilities and stockholders’ equity
                                                
                                                $
                                                18,585,216
                                                
                                                
                                                $
                                                35,779,861





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


F-3




Rancher
Energy Corp.


(Debtor-in-Possession)


Statements
of Operations





For the Year Ended March 31,2010
                  
                  
                  2009Revenue:Oil
      and gas sales
                  
                  $
                  3,585,738
                  
                  
                  $
                  5,140,660Gains
      (losses) on derivative activities
                  
                  
                  (357,582
                  )
                  
                  
                  1,020,672Total
      revenues
                  
                  
                  3,228,156
                  
                  
                  
                  6,161,332Operating
      expenses:Production
      taxes
                  
                  
                  573,992
                  
                  
                  
                  647,755Lease
      operating
                  
                  
                  1,723,015
                  
                  
                  
                  2,423,015Depreciation,
      depletion, and amortization
                  
                  
                  1,178,986
                  
                  
                  
                  1,196,970Impairment
      of unproved properties
                  
                  
                  13,525,642
                  
                  
                  
                  39,050,000Accretion
      on discount of asset retirement obligations
                  
                  
                  167,896
                  
                  
                  
                  158,009Exploration
                  
                  
                  19,181
                  
                  
                  
                  20,108General
      and administrative
                  
                  
                  2,490,453
                  
                  
                  
                  3,631,580Total operating expenses
                  
                  
                  19,679,165
                  
                  
                  
                  47,127,437Loss
      from operations
                  
                  
                  (16,451,009
                  )
                  
                  
                  (40,966,105
                  )Other
      income (expense):Amortization
      of deferred financing costs and discount on note payable
                  
                  
                  (1,770,789
                  )
                  
                  
                  (4,021,767
                  )Interest
      expense
                  
                  
                  (1,732,360
                  )
                  
                  
                  (1,369,957
                  )Interest
      and other income
                  
                  
                  3,487
                  
                  
                  
                  16,488Total other income (expense)
                  
                  
                  (3,499,662
                  )
                  
                  
                  (5,375,236
                  )Loss
      before reorganization items
                  
                  $
                  (19,950,671
                  )
                  
                  
                  (46,341,341
                  )Reorganization
      items:Professional
      and legal fees
                  
                  
                  310,591
                  
                  
                  
                  -Net
      loss
                  
                  $
                  (20,261,262
                  )
                  
                  $
                  (46,341,341
                  )Basic
      and diluted net loss per share
                  
                  $
                  (0.17
                  )
                  
                  $
                  (0.40
                  )Basic
      and diluted weighted average shares outstanding
                  
                  
                  119,347,248
                  
                  
                  
                  116,398,755




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


F-4




Rancher
Energy Corp.


(Debtor-in-Possession)


Statement
of Changes in Stockholders’ Equity




Shares
                                
                                
                                Amount
                                
                                
                                Additional
                                  Paid- In
                                  Capital
                                
                                
                                Accumulated
                                  Deficit
                                
                                
                                Total
                                  Stockholders’
                                  EquityBalance
      March 31, 2008
                                
                                
                                114,878,341
                                
                                
                                $
                                1,150
                                
                                
                                $
                                91,790,181
                                
                                
                                $
                                (22,393,688
                                )
                                
                                $
                                69,397,643Common
      stock issued on exercise of stock options
                                
                                
                                750,000
                                
                                
                                
                                7
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                7Common
      stock issued to directors for services rendered
                                
                                
                                3,388,359
                                
                                
                                
                                34
                                
                                
                                
                                217,466
                                
                                
                                
                                -
                                
                                
                                
                                217,500Stock-based
      compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                574,354
                                
                                
                                
                                -
                                
                                
                                
                                574,354Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (46,341,341
                                )
                                
                                
                                (46,341,341
                                )Balance
      March 31, 2009
                                
                                
                                119,016,700
                                
                                
                                $
                                1,191
                                
                                
                                $
                                92,582,001
                                
                                
                                $
                                (68,735,029
                                )
                                
                                $
                                23,848,163Common
      stock issued on exercise of stock options
                                
                                
                                500,000
                                
                                
                                
                                5
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5Common
      stock issued to directors for services rendered
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                51,700
                                
                                
                                
                                -
                                
                                
                                
                                51,700Cancellation
      of non vested restricted stock
                                
                                
                                (200,000
                                )
                                
                                
                                (2
                                )
                                
                                
                                2
                                
                                
                                
                                -
                                
                                
                                
                                -Discount
      on convertible notes due to beneficial conversion feature
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                105,000
                                
                                
                                
                                -
                                
                                
                                
                                105,000Stock-based
      compensation
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                287,173
                                
                                
                                
                                -
                                
                                
                                
                                287,173Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (20,261,262
                                )
                                
                                
                                (20,261,262
                                )Balance
      March 31, 2010
                                
                                
                                119,316,700
                                
                                
                                $
                                1,194
                                
                                
                                $
                                93,025,876
                                
                                
                                $
                                (88,996,291
                                )
                                
                                $
                                4,030,779




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


F-5




Rancher
Energy Corp.


(Debtor-in-Possession)


Statements
of Cash Flows





For the Year Ended March 31,2010
                                  
                                  
                                  2009Cash
      flows from operating activities:Net
      loss
                                  
                                  $
                                  (20,261,262
                                  )
                                  
                                  $
                                  (46,341,341
                                  )Adjustments
      to reconcile net loss to net cash used for operating
      activities:Depreciation,
      depletion, and amortization
                                  
                                  
                                  1,178,986
                                  
                                  
                                  
                                  1,196,970Impairment
      of unproved properties
                                  
                                  
                                  13,525,642
                                  
                                  
                                  
                                  39,050,000Reorganization
      items, net
                                  
                                  
                                  310,591
                                  
                                  
                                  
                                  -Interest
      expense – convertible notes beneficial conversion feature
                                  
                                  
                                  105,000
                                  
                                  
                                  
                                  -Interest
      expense added to principle balance
                                  
                                  
                                  188,112
                                  
                                  
                                  
                                  -Accretion
      expense
                                  
                                  
                                  167,896
                                  
                                  
                                  
                                  158,009Asset
      retirement obligations settled
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (147,662
                                  )Stock-based
      compensation expense
                                  
                                  
                                  287,173
                                  
                                  
                                  
                                  470,953Amortization
      of deferred financing costs and discount on notes payable
                                  
                                  
                                  1,665,789
                                  
                                  
                                  
                                  4,021,767Unrealized
      (gains) losses on crude oil hedges
                                  
                                  
                                  455,960
                                  
                                  
                                  
                                  (1,227,567
                                  )Common
      stock issued for services, directors
                                  
                                  
                                  51,700
                                  
                                  
                                  
                                  320,900Loss
      on sale of assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  39,972Changes
      in operating assets and liabilities:Accounts
      receivable and prepaid expenses
                                  
                                  
                                  (31,463
                                  )
                                  
                                  
                                  586,501Accounts
      payable and accrued liabilities
                                  
                                  
                                  1,826,879
                                  
                                  
                                  
                                  (1,093,445
                                  )Other
                                  
                                  
                                  77,142
                                  
                                  
                                  
                                  -Net cash used for operating activities, before reorganization
      items
                                  
                                  
                                  (451,855
                                  )
                                  
                                  
                                  (2,964,943
                                  )Cash
      effect of reorganization items
                                  
                                  
                                  (110,154
                                  )
                                  
                                  
                                  -Net
      cash used by operating activities
                                  
                                  
                                  (562,009
                                  )
                                  
                                  
                                  (2,964,943
                                  )Cash
      flows from investing activities:Capital
      expenditures for oil and gas properties
                                  
                                  
                                  (32,760
                                  )
                                  
                                  
                                  (260,735
                                  )Proceeds
      from sales of assets
                                  
                                  
                                  8,015
                                  
                                  
                                  
                                  -Increase
      in other assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (358,056
                                  )Net
      cash used for investing activities
                                  
                                  
                                  (24,745
                                  )
                                  
                                  
                                  (618,791
                                  )Cash
      flows from financing activities:Increase
      in deferred financing costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (101,478
                                  )Proceeds
      from borrowings
                                  
                                  
                                  140,000
                                  
                                  
                                  
                                  -Proceeds
      from issuance of common stock upon exercise of stock
    options
                                  
                                  
                                  5
                                  
                                  
                                  
                                  7Repayment
      of debt
                                  
                                  
                                  (98,125
                                  )
                                  
                                  
                                  (2,240,000
                                  )Net
      cash provided by (used for) financing activities
                                  
                                  
                                  41,880
                                  
                                  
                                  
                                  (2,341,471
                                  )Decrease
      in cash and cash equivalents
                                  
                                  
                                  (544,874
                                  )
                                  
                                  
                                  (5,925,205
                                  )Cash
      and cash equivalents, beginning of year
                                  
                                  
                                  917,160
                                  
                                  
                                  
                                  6,842,365Cash
      and cash equivalents, end of year
                                  
                                  $
                                  372,286
                                  
                                  
                                  $
                                  917,160Supplemental
      Statement of Cash Flow Information:Cash
      paid for interest
                                  
                                  $
                                  613,479
                                  
                                  
                                  
                                  1,369,733Non-cash
      investing and financing activities:Payables
      for purchase of oil and gas properties
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  53,799Asset
      retirement asset and obligation
                                  
                                  $
                                  (18,747
                                  )
                                  
                                  $
                                  10,481Discount
      on note payable, conveyance of overriding royalty and net profits
      interests
                                  
                                  $
                                  1,500,000
                                  
                                  
                                  $
                                  1,050,000





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


F-6




Rancher
Energy Corp.


(Debtor-in-Possession)


Notes
to Financial Statements




Note
1—Organization and Summary of Significant Accounting Policies




Organization




Rancher
Energy Corp. (Rancher Energy or the Company), formerly known as Metalex
Resources, Inc. (Metalex), was incorporated in Nevada on February 4, 2004.
The Company acquires, explores for, develops and produces oil and natural gas,
concentrating on applying secondary and tertiary recovery technology to older,
historically productive fields in North America.




Metalex
was formed for the purpose of acquiring, exploring and developing mining
properties. On April 18, 2006, the stockholders of Metalex voted to change
its name to Rancher Energy Corp. and announced that it changed its business plan
and focus from mining to oil and gas.




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. The Company is currently evaluating various courses of action to
address the operational and liquidity issues it is facing and has begun the
process of 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.




Financial
Accounting Standards Board (FASB) Accounting Standards Codification (FASB ASC)
852 "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.  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.


F-7




Revenue
Recognition




The
Company derives revenue primarily from the sale of produced crude oil. The
Company reports revenue and its net revenue interests as the amount received
before taking into account production taxes and transportation costs, which are
reported as separate expenses. Revenue is recorded in the month the Company’s
production is delivered to the purchaser, but payment is generally received
within 30 days after the date of production. No revenue is recognized unless it
is determined that title to the product has transferred to a purchaser. At the
end of each month the Company estimates the amount of production delivered to
the purchaser and the price the Company will receive. The Company uses its
knowledge of properties, their historical performance, NYMEX and local spot
market prices, and other factors as the basis for these
estimates.


Cash and Cash
Equivalents




The
Company considers all liquid investments purchased with an initial maturity of
three months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the short-term nature of these
instruments.




Concentration of Credit
Risk





Substantially
all of the Company’s receivables are from purchasers of oil and gas and from
joint interest owners. Although diversified among a number of companies,
collectability is dependent upon the financial wherewithal of each individual
company as well as the general economic conditions of the industry. The
receivables are not collateralized. To date the Company has had no bad
debts.




Oil and Gas Producing
Activities




The
Company uses the successful efforts method of accounting for its oil and gas
properties. Under this method of accounting, all property acquisition costs and
costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved reserves. If an
exploratory well does not find proved reserves, the costs of drilling the well
are charged to expense. Exploratory dry hole costs are included in cash flows
from investing activities as part of capital expenditures within the
consolidated statements of cash flows. The costs of development wells are
capitalized whether or not proved reserves are found. Costs of unproved leases,
which may become productive, are reclassified to proved properties when proved
reserves are discovered on the property. Unproved oil and gas interests are
carried at the lower of cost or estimated fair value and are not subject to
amortization.




Geological
and geophysical costs and the costs of carrying and retaining unproved
properties are expensed as incurred. DD&A of capitalized costs related to
proved oil and gas properties is calculated on a property-by-property basis
using the units-of-production method based upon proved reserves. The computation
of DD&A takes into consideration restoration, dismantlement, and abandonment
costs and the anticipated proceeds from salvaging equipment.




The Company complies with FASB ASC 932,
“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 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.  Recent global market conditions and declining
commodity price volatility have negatively impacted the valuation of the
Company’s unproved oil and gas properties.  During the years ended
March 31, 2010 and 2009, the Company recognized impairment of $13,525,000 and
$39,050,000, respectively, representing the excess of the carrying value over
the estimated realizable value of such properties.  Following the
recognition of impairment in the year ended March 31, 2010, the net book value
of the Company’s unproved properties is $-0-.


F-8




Sales of Proved and Unproved
Properties





The sale
of a partial interest in a proved oil and gas property is accounted for as
normal retirement, and no gain or loss is recognized as long as this treatment
does not significantly affect the units-of-production DD&A rate. A gain or
loss is recognized for all other sales of producing properties and is reflected
in results of operations.




The sale
of a partial interest in an unproved property is accounted for as a recovery of
cost when substantial uncertainty exists as to recovery of the cost applicable
to the interest retained. A gain on the sale is recognized to the extent the
sales price exceeds the carrying amount of the unproved property. A gain or loss
is recognized for all other sales of nonproducing properties and is reflected in
results of operations.




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 6 – 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 year ended March 31, 2010, the Company
recognized $150,280 as NPI expense, including such amount as lease operating
expense in its Statement of Operations.




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.




Other Property and
Equipment




Other
property and equipment, such as office furniture and equipment, automobiles, and
computer hardware and software, is recorded at cost. Costs of renewals and
improvements that substantially extend the useful lives of the assets are
capitalized. Maintenance and repair costs are expensed when incurred.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets from three to seven years. When other property and
equipment is sold or retired, the capitalized costs and related accumulated
depreciation are removed from the accounts.




Deferred Financing
Costs





Costs
incurred in connection with the Company’s debt issuances are capitalized and
amortized over the term of the debt, which approximates the effective interest
method. Amortization of deferred financing costs of $1,500,000 and $610,006 was
recognized for the years ended March 31, 2010 and 2009, respectively, and has
been charged to operations as an expense in the Statement of
Operations.




Fair Value of Financial
Instruments




The
Company’s financial instruments, including cash and cash equivalents, accounts
receivable, and accounts payable, are carried at cost, which approximates fair
value due to the short-term maturity of these instruments. Because considerable
judgment is required to develop estimates of fair value, the estimates provided
are not necessarily indicative of the amounts the Company could realize upon the
sale or refinancing of such instruments.




Income
Taxes





The
Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the accounting bases and the tax
bases of the Company’s assets and liabilities. The deferred tax assets and
liabilities are computed using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse.


F-9


The
Company adopted the provisions of FASB ASC 740, “Income Taxes” on April 1,
2007. FASB ASC 740 provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in
the financial statements. Tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FASB ASC 740 and in subsequent periods. The adoption of FASB ASC 740 had an
immaterial impact on the Company’s financial position and did not result in
unrecognized tax benefits being recorded. Subsequent to adoption, there have
been no changes to the Company’s assessment of uncertain tax positions.
Accordingly, no corresponding interest and penalties have been accrued. The
Company’s policy is to recognize penalties and interest, if any, related to
uncertain tax positions as general and administrative expense. The Company files
income tax returns in the U.S. Federal jurisdiction and various states. The
Company’s tax years of 2004 and forward are subject to examination by the
Federal and state taxing authorities.




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.


F-10





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 Years Ended March 31,2010
                
                2009Dilutive
                
                
                -
                
                
                -Anti-dilutive
                
                
                60,111,454
                
                
                69,091,225




Stock
options and warrants were not considered in the detailed calculations below as
their effect would be anti-dilutive.




The
following table sets forth the calculation of basic and diluted loss per
share:




Stock Based
Payment


For the Year Ended
      March 31,2010
                          
                          2009Net
      loss
                          
                          $
                          (20,261,262
                          )
                          $
                          (46,341,341
                          )Basic
      weighted average common shares outstanding
                          
                          
                          119,347,248
                          
                          
                          116,398,755Basic
      and diluted net loss per common share
                          
                          $
                          (0.17
                          )
                          $
                          (0.40
                          )




The Company recognizes compensation
cost for stock-based awards based on estimated fair value of the award and
records compensation expense over the requisite service period. See Note10“Share-Based Compensation” herein, for
further discussion.





Commodity
Derivatives





The
Company accounts for derivative instruments or hedging activities under the
provisions of FASB ASC 815 “Derivatives and Hedging."   FASB ASC
815 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 table
below summarizes the realized and unrealized losses related to the Company’s
derivative instruments for the years ended March 31, 2010 and 2009.




Year
      Ended March 31,2010
                
                
                2009Realized
      gains (losses) on derivative instruments
                
                $
                98,378
                
                
                $
                (206,895
                )Unrealized
      gains (losses) on derivative instruments
                
                
                (455,960
                )
                
                
                (1,227,567
                )Total
      realized and unrealized gains (losses) recorded
                
                $
                (357,582
                )
                
                $
                (1,020,672





The
Company’s sole derivative instrument expired during the year ended March 31,
2010, and the Company has no hedge positions as of that date.


F-11




Major
Customers




For the
years ended March 31, 2010 and 2009, one customer accounted for 100% of the
Company’s oil and gas sales. The loss of that customer would not be expected to
have a material adverse effect upon our sales and would not be expected to
reduce the competition for our oil production, which in turn would not be
expected to negatively impact the price we receive. As of March 31, 2010 and
2009 accounts receivable from this customer account for 79% and 60%,
respectively of the Company’s total accounts receivable.




Industry Segment and
Geographic Information




The
Company operates in one industry segment, which is the exploration,
exploitation, development, acquisition, and production of crude oil and natural
gas. All of the Company’s operations are conducted in the continental United
States. Consequently, the Company currently reports as a single industry
segment.




Off—Balance Sheet
Arrangements




As part
of its ongoing business, the Company has not participated in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities (SPEs), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. From February 4, 2004 (inception) through
March 31, 2010, the Company has not been involved in any
unconsolidated SPE transactions.





Reclassification





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





Recent Accounting
Pronouncements





In May 2009, the FASB issued SFAS
No. 165,“Subsequent Events”(ASC 855) to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. ASC 855 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the provisions of ASC 855
for theinterimperiod endedJune 30, 2009. There was no impact on the Company’s
operating results, financial position or cash flows.





In June 2009, the FASB issuedAccounting Standards
Update (ASU)No. 2009-01,“Generally Accepted Accounting
Principles”(ASU 2009-01). ASU 2009-01
establishes “The FASB Accounting Standards Codification,” or Codification, which
became the source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. On the effective date, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting
literature not included in the Codification will become non-authoritative. ASU 2009-01 is effective
for interim and annual periods ending after September 15, 2009. The
Company adopted the provisions of ASU 2009-01 for theinterim period ended December 31, 2009. There
was no impact on the Company’s operating results, financial position or cash
flows.





In August
2009, the FASB issued ASU No. 2009-05, “FairValue Measurements and
Disclosures” (ASU 2009-05). ASU 2009-05 amends Subtopic 820-10,  
“Fair Value Measurements and Disclosures” , to provide guidance on the fair
value measurement of liabilities. ASU 2009-05 provides clarification for
circumstances in which a quoted price in an active market for the identical
liability is not available. ASU 2009-05 is effective for interim and annual
periods beginning after August 26, 2009. The Company adopted the
provisions of ASU 2009-05 for the Interim period ended September 30, 2009. There
was no impact on the Company’s operating results, financial position or cash
flows.


F-12


In
December 2008, the SEC issued Release No. 33-8995,Modernization of Oil and Gas
Reporting (ASC 2010-3), which amends the oil and gas disclosures for oil
and gas producers contained in Regulations S-K and S-X, as well as adding a
section to Regulation S-K (Subpart 1200) to codify the revised disclosure
requirements in Securities Act Industry Guide 2, which is being eliminated. The
goal of Release No. 33-8995 is to provide investors with a more meaningful
and comprehensive understanding of oil and gas reserves. Energy companies
affected by Release No. 33-8995 are now required to price proved oil and
gas reserves using the unweighted arithmetic average of the price on the first
day of each month within the 12-month period prior to the end of the reporting
period, unless prices are defined by contractual arrangements, excluding
escalations based on future conditions. SEC Release No. 33-8995 is
effective beginning for financial statements for fiscal years ending on or after
December 31, 2009. The impact on the Company’s operating results, financial
position and cash flows has been recorded in the financial statements;
additional disclosures were added to the accompanying notes to the consolidated
financial statements for the Company’s supplemental oil and gas disclosure. See
Note 12-Disclosures about Oil
and Gas Producing Activities for more details.





In
January 2010, the FASB issued FASB Accounting Standards Update (ASU) No.
2010-03“Oil and Gas Estimations and
Disclosures”  (ASU 2010-03). This update aligns the current oil and
natural gas reserve estimation and disclosure requirements of the Extractive
Industries Oil and Gas topic of the FASB Accounting Standards Codification (ASC
Topic 932) with the changes required by the SEC final rule ASC 2010-3, as
discussed above, ASU 2010-03 expands the disclosures required for equity method
investments, revises the definition of oil- and natural gas-producing activities
to include nontraditional resources in reserves unless not intended to be
upgraded into synthetic oil or natural gas, amends the definition of proved oil
and natural gas reserves to require 12-month average pricing in estimating
reserves, amends and adds definitions in the Master Glossary that is used in
estimating proved oil and natural gas quantities and provides guidance on
geographic area with respect to disclosure of information about significant
reserves. ASU 2010-03 must be applied prospectively as a change in accounting
principle that is inseparable from a change in accounting estimate and is
effective for entities with annual reporting periods ending on or after
December 31, 2009. The Company adopted ASU 2010-03 effective
December 31, 2009.  The Company does not believe that provisions of
the new guidance, other than pricing, significantly impacted the reserve
estimates or consolidated financial statements. The Company does not believe
that it is practicable to estimate the effect of applying the new rules on net
loss or the amount recorded for depreciation, depletion and amortization for the
year ended March 31, 2010.





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 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.





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.


F-13


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 had the
exclusive right for 120 days after the Petition Date to file a plan of
reorganization and 60 additional days to obtain necessary acceptances. On May 26, 2010, the Company filed its
second motion to extend exclusive period to file a reorganization plan through
August 24, 2010 and the exclusive period to solicit acceptance of a plan through
October 22, 2010. The motion is currently under consideration by the Bankruptcy
Court. 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 holders of impaired claims
and equity interests in order to become effective. A Company’s Chapter 11 plan
of reorganization will have to be accepted by holders of claims against and
equity interests in the Company if (i) at least one-half in number and
two-thirds in dollar amount of claims actually voting in each impaired class of
claims have voted to accept the plan and (ii) at least two-thirds in amount of
equity interests 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 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 Bankruptcy Cases 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.





The
Bankruptcy Court established a March 5, 2010 deadline for the filing of proofs
of claim under the Bankruptcy Code, 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. Significant 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.





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
adverse publicity associated with the Bankruptcy Filing and the resulting
uncertainty regarding the Company's future prospects 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 impacting the ability of the Company
to attract, retain and compensate key executives and employees and to retain
employees generally; limiting the Company's ability to obtain trade credit; and
limiting 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
Bankruptcy Cases to each of these constituencies or what types or amounts of
distributions, if any, they would receive.


F-14





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 March 31, 2010 and 2009 include the following
pre-petition liabilities:





2010
                  
                  
                  2009Accounts
      payable, trade
                  
                  $
                  164,390
                  
                  
                  $
                  -Other
      payables and accrued liabilities
                  
                  
                  265,516
                  
                  
                  
                  105,985Property
      and advalorem taxes payable
                  
                  
                  766,227
                  
                  
                  
                  524,851Convertible
      notes payable
                  
                  
                  140,000
                  
                  
                  
                  -Total
      liabilities subject to compromise
                  
                  $
                  1,336,133
                  
                  
                  $
                  630,836





Note
3—Oil and Gas Properties





The
Company’s oil and gas properties are summarized in the following
table:





As of March 31,2010
                    
                    
                    2009Proved
      properties
                    
                    $
                    19,432,703
                    
                    
                    $
                    20,631,487Unproved
      properties excluded from DD&A
                    
                    
                    52,716,480
                    
                    
                    
                    52,953,185Equipment
      and other
                    
                    
                    314,334
                    
                    
                    
                    374,962Total
      oil and gas properties
                    
                    
                    72,463,517
                    
                    
                    
                    73,959,634Less
      accumulated depletion, depreciation, amortization and impairment
                    
                    
                    (56,355,224
                    )
                    
                    
                    (41,840,978
                    )$
                    16,108,293
                    
                    
                    $
                    32,118,656





Assignment
of Overriding Royalty and Net Profits Interest





In conjunction with the issuance of
short term debt in October 2007 (SeeNote 6 – Short Term Note
Payable),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 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 Lender and the Company agreed to an
extension of the maturity date of the short term debt by six months. As partial
consideration for the extension, the Company granted an increase the
proportionate ORRI from 2% to 3%. The Company estimated the fair value of 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. On June 3, 2009the Lender and 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.


F-15




Carbon
Dioxide (“CO2”) Enhanced
Oil Recovery Project




The
Company’s business plan at the time of the acquisition of its oil and gas
properties was to conduct an enhanced oil recovery project by injecting CO2 into the
productive formations in the fields. This plan required a significant amount of
capital to drill additional wells, and construct facilities to inject and
recycle the CO2.To ensure
an adequate supply of CO2 the Company entered into two separate supply
agreements, one with Anadarko Petroleum Corporation and the other with
ExxonMobil Corporation to deliver CO2 to the
Company’s fields. The Company has been unsuccessful in raising sufficient
capital to commence the enhanced oil recovery project or to take delivery of the
contracted volume of CO2.On April
3, 2009 ExxonMobil informed the Company, that ExxonMobil was terminating,
effective immediately, CO2 supply
agreement. ExxonMobil’s termination is based on the Company not providing
performance assurances in the form of a letter of credit. In connection with the
Company’s bankruptcy petition the Company rejected the supply agreement with
Anadarko. The Company currently does not have a CO2 supply
agreement.





Impairment
of Unproved Properties




In
conjunction with the regular periodic assessment of impairment of unproved
properties, the Company assessed the carrying value of its unproved properties
giving consideration to volatility of commodity prices and the difficulties
encountered in raising capital to develop the
properties.  Accordingly, during the years ended March 31, 2010 and
2009 the Company recorded impairment expense on unproved properties of
$13,525,000 and $39,050,000, reflecting the excess of the carrying value over
estimated realizable value of the assets.  The amounts charged to
impairment in 2010 represented the remaining book value of the Company’s
unproved properties  leaving a $-0 net book value for unproved
properties as 0f March 31, 2010.




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 is included in the operating section of the Company’s statement of
cash flows.





The
Company’s estimated asset retirement obligation liability is based on our
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. The
credit-adjusted risk-free rate used to discount the Company’s abandonment
liabilities was 13.1%. Revisions to the liability are due to changes in
estimated abandonment costs and 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
years ended March 31, 2010 and 2009 is as follows:





2010
                  
                  
                  2009Beginning
      asset retirement obligation
                  
                  $
                  1,280,680
                  
                  
                  $
                  1,259,851Liabilities
      incurred
                  
                  
                  -
                  
                  
                  
                  -Liabilities
      settled
                  
                  
                  -
                  
                  
                  
                  (147,662
                  )Changes
      in estimates
                  
                  
                  (18,747
                  )
                  
                  
                  10,482Accretion
      expense
                  
                  
                  167,896
                  
                  
                  
                  158,009Ending
      asset retirement obligation
                  
                  $
                  1,429,829
                  
                  
                  $
                  1,280,680Current
                  
                  $
                  174,332
                  
                  
                  $
                  108,884Long-term
                  
                  
                  1,255,497
                  
                  
                  
                  1,171,796$
                  1,429,829
                  
                  
                  $
                  1,280,680


F-16





Note 5  Fair Value
Measurements





On April
1, 2008, the Company adopted FASB ASC 820, “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:




·
            Level
      1: Quoted prices are available in active markets for identical assets or
      liabilities;


·
            Level
      2: Quoted prices in active markets for similar assets and liabilities that
      are observable for the asset or liability;
or


·
            Level
      3: Unobservable pricing inputs that are generally less observable from
      objective sources, such as discounted cash flow models or
      valuations.




FASB ASC
820 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. As of March 31, 2010 the Company had no derivative or other financial
assets or liabilities required to be reported at fair value.  In accordance with FSP
157-2, the Company has not applied the provisions of ASC 820 to its asset
retirement obligations.





The Company’s sole derivative financial
instrument was a participating cap costless collar agreement. The instrument
expired in October 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 are considered
level 3 inputs in the fair value hierarchy.  In the Company’s adoption
of FASB ASC 820, 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 for the year ended March 31, 2010:


Balance
      as of April 1, 2009, asset, (liability)
                      
                      $
                      (455,960
                      )Total
      gains (losses) (realized or unrealized):Included
      in earnings
                      
                      
                      (357,582
                      )Included
      in other comprehensive incomePurchases,
      issuances and settlements
                      
                      
                      (98,378
                      )Transfers
      in and out of Level 3Balance
      as of March 31, 2010
                      
                      $
                      -Change
      in unrealized gains (losses) included in earnings relating to derivatives
      still held as of March 31, 2010
                      
                      $
                      -





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 (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.


F-17


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 was required to make monthly interest payments on the amounts
outstanding but was not required to make any principal payments until the
Maturity Date.




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 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 $4,021,767 for the years ended March 31, 2010 and 2009
respectively.





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 demanded 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 provisions
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, 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 has 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.  That amount has been applied against the principle resulting
in an outstanding principle balance of approximately $10,090,000 as of March 31,
2010.




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.




See Note
8 - Commitments and Contingencies for additional information regarding an
adversary action filed by the Company against the Lender in an effort to avoid
certain of the interests previously assigned to the Lender.





F-18




Note
7– Convertible Promissory Notes Payable





On
October 27, 2009, the Company
issued  Convertible  Promissory  Notes (the
“Promissory Notes”) totaling $140,000. One hundred thousand dollars of the
Promissory Notes were issued to officers and/or directors ($25,000
each).   The remainder of the Promissory Notes were issued to
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.  Promissory Notes in the amount of $140,000 are included in
Liabilities subject to compromise in the accompanying Balance
Sheet.





In accordance with ASC 470 “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.





Note
8—Commitments and Contingencies





Commitments





The
Company leased office space under a non-cancelable operating lease that was
scheduled to expire on July 31, 2012. In October 2009, in connection with the
Company’s bankruptcy petition the Company rejected the office lease.
Subsequently the Company reached agreement with the building owner, to continue
to occupy the office space on a month to month basis at a significantly reduced
rental rate. The building owner has filed a Proof of Claim in the Bankruptcy
Court in the amount of $398,128. The Company continues to accrue the full amount
of rent expense in accordance with the original lease. As of March 31, 2010 the
amount accrued is $129,775.




The
Company had entered into CO2 supply
agreements with Anadarko and ExxonMobil as discussed in Note 2 above, Each of
the CO2 supply
agreements contain “take or-pay” provisions under which the Company would be
required to accept delivery of certain quantities of CO2 or make
cash payments to the sellers in specified amounts. The Exxon Mobil agreement was
terminated by ExxonMobil in April 2009. The Anadarko agreement was rejected by
the Company in connection with its bankruptcy petition. Anadarko has filed a
Proof of Claim with the Bankruptcy Court, in the amount of $54.75 million which
they claim represents the termination payment, the value of the overriding
royalty interests to be granted to Anadarko and the value of any greenhouse gas
reduction rights that would have been conveyed to Anadarko under the terms of
the supply agreement. The Company believes Anadarko’s claim is without merit and
anticipates vigorously prosecuting an objection to the claim. The Company cannot
predict the likelihood any objection to this claim, its possible outcome, or
estimate a range of possible loss, if any, that could result in the event of an
adverse ruling in any claims objection proceeding. Accordingly, and in
accordance with ASC 450, “Contingencies” the Company has not recorded a loss
contingency relating to this issue.





Contingencies





As
discussed in NOTE 2 - Proceedings
Under Chapter 11 of the Bankruptcy Code, the Company is operating as debtor in
possession under the provisions of the Bankruptcy Code.





Pending
Litigation


On February 12, 2020 the Company filed
an adversary action in the Bankruptcy Court against the holder of the senior
secured note payable (see NOTE 6 – Short Term Note Payable) seeking to avoid
certain ownership interests assigned to the Lender in connection with the Term
Credit Agreement and amendments thereto. On March 18, 2010 the Lender
filed a motion with the Court to dismiss the complaint. The Company filed its
response to the Lender’s motion on March 31, 2010 and oral arguments were made
in the Bankruptcy Court on May 10, 2010. The complaint and motions are now under
review by the Court.





The
lawsuit is in the early stages and the Company is unable to predict a likely
outcome or estimate the possible benefit should the Company prevail in the
litigation.





Threatened
Litigation


In a
letter dated February 18, 2009 sent to each of our Directors, attorneys
representing a group of persons who purchased approximately $1,800,000 of
securities (in the aggregate) in our 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 claimants have filed Proofs of Claim with the Bankruptcy Court in
the amount of $2,001,050 purported to be damages attributable to the alleged
securities violations. These claims are possibly subject to the imposition of
section 510 of the Bankruptcy Code, with the result that these claims may be
subordinated even in allowed. Accordingly, the Company has not yet determined
how such claims might be treated under a proposed plan of reorganization and,
therefore, how vigorously the amount of the claims should be contested. Nor can
the company 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. Accordingly, and in
accordance with ASC 450, the Company has not recorded a loss contingency
relating to this issue.


F-19





Other


Under the
terms of the Term Credit Agreement, See Note 6- Short Term Note Payable, the
Company is obligated to reimburse the Lender for all expenses, including
reasonable legal fees incurred in connection with the administration, amendment
enforcement of the Agreement or Lender’s rights and remedies under the Loan
Documents.  In connection with the Company’s bankruptcy proceedings,
the Lender has incurred legal fees and other expenses that could be covered by
the above provisions.  As of the date of filing this annual report,
the Company has received no formal notification of the amount or nature of such
costs, nor can we estimate a range of possible amounts to be reimbursed under
the provisions.  Accordingly, the Company has not recorded a loss
contingency relating to this issue.





Note
9—Stockholders’ Equity




The
Company’s capital stock as of March 31, 2010 and 2009 consists of 275,000,000
authorized shares of common stock, par value $0.00001 per share.





Issuance of Common
Stock





For
the Year Ended March 31, 2010




During
the year ended March 31, 2010, activity in the Company’s common stock consisted
of the following:




-
            issued 500,000 shares to an
      officer of the Company upon the exercise of stock
      options;


-
            cancelled 200,000 of non-vested
      shares previously issued to
directors





For
the Year Ended March 31, 2009




During
the year ended March 31, 2009, activity in the Company’s common stock consisted
of the following:




-
            Issued 750,000 shares to an
      officer of the Company upon the exercise of stock
      options;


-
            Issued 3,388,359 shares to
      directors of the Company in exchange for
  services;




Warrants




In
connection with sale of common stock and other securities in the fiscal year
ended March 31, 2007, the Company issued warrants to purchase shares of common
stock. The following is a summary of warrants outstanding as of March 31,
2010:





Warrants
                                                        
                                                        Exercise Price
                                                        
                                                        Expiration DateWarrants
      issued in connection with the following:Private
      placement of common stock
                                                        
                                                        45,940,510
                                                        
                                                        $
                                                        1.50
                                                        
                                                        March
      30, 2012Private
      placement of convertible notes payable
                                                        
                                                        6,996,322
                                                        
                                                        $
                                                        1.50
                                                        
                                                        March
      30, 2012Private
      placement agent commissions
                                                        
                                                        1,445,733
                                                        
                                                        $
                                                        1.50
                                                        
                                                        March
      30, 2012Acquisition
      of oil and gas properties
                                                        
                                                        250,000
                                                        
                                                        $
                                                        1.50
                                                        
                                                        December
      22, 2011Total
      warrants outstanding at March 31, 2010
                                                        
                                                        54,632,565


F-20





Registration and Other
Payment Arrangements




In
connection with the private placement sale of the Company’s common stock and
other securities during the fiscal year ended March 31, 2007, the Company
entered into Registration Rights Agreements (the “Agreements”) under which the
Company agreed to register for resale the shares of common stock issued in the
private placement as well as the shares underlying the other securities. Under
the terms of the Agreements the Company must pay the holders of the registrable
securities issued in the private placement, liquidated damages if the
registration statement that was filed in conjunction with the private placement
was not declared effective by the U.S. Securities and Exchange Commission (SEC)
within 150 days of the closing of the private placement (December 21, 2006). The
liquidated damages were due on or before the day of the failure (May 20, 2007)
and every 30 days thereafter, or three business days after the failure is cured,
if earlier. The amount due was 1% of the aggregate purchase price, or $794,000
per month. If the Company fails to make the payments timely, interest accrues at
a rate of 1.5% per month. Payments pursuant to the Registration Rights Agreement
and the private placement agreement are limited to 24% of the aggregate purchase
price, or $19,057,000 in total. The payment may be made in cash, notes, or
shares of common stock, at the Company’s option, as long as the Company does not
have an equity condition failure. The Company’s registration statement was not
declared effective prior to the May 20, 2007 failure date and pursuant to the
terms of the Registration Rights Agreement, the Company opted to pay the
liquidated damages in shares of common stock. During the period of
non-compliance, from May 20, 2007 until the date the registration statement was
declared effective, October 31, 2007, the Company opted to pay the liquidated
damages in shares of common stock issuing a total of 9,731,569 shares of common
stock valued at $5,463,412.





Since
that date the registration statement was declared effective,
October  31, 2007,Company has maintained the effectiveness of the
registration statement and complied with all other provisions of the
Registration Rights Agreement. No further liquidated damages have been assessed
or paid. In accordance with FASB ASC 815, ”Derivatives and Hedging” as
of the date of this Annual Report, the Company believes the likelihood it will
incur additional obligations to pay liquidated damages is remote, as defined in
FASB ASC 450 “Contingencies."Accordingly as of March
31, 2010 and 2009, the Company has not recorded a liability for future
liquidated damages under the Registration Rights Agreement.





Note
10—Share-Based Compensation




Share-based
awards to employees and directors are accounted for under FASB ASC 718
“Share-Based Payment. FASB ASC 718 requires companies to recognize share-based
payments to employees as compensation expense using a fair value method. Under
the fair value recognition provisions of FASB ASC 718, stock-based compensation
cost is measured at the grant date based on the fair value of the award and is
recognized as an expense over the service period on a straight-line basis, which
generally represents the vesting period. The Company did not recognize a tax
benefit from the stock compensation expense because it is more likely than not
that the related deferred tax assets, which have been reduced by a full
valuation allowance, will not be realized.





The
Black-Scholes option-pricing model was used to estimate the option fair values.
The option-pricing model requires a number of assumptions, of which the most
significant are the stock price at the valuation date, the expected stock price
volatility, and the expected option term (the amount of time from the grant date
until the options are exercised or expire).





Prior to
the adoption of FASB ASC 718, the Company reflected tax benefits from deductions
resulting from the exercise of stock options as operating activities in the
statements of cash flows. FASB ASC 718 requires tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options
(excess tax benefits) be classified and reported as both an operating cash
outflow and a financing cash inflow upon adoption of FASB ASC 718. As a result
of the Company’s net operating losses, the excess tax benefits, which would
otherwise be available to reduce income taxes payable, have the effect of
increasing the Company’s net operating loss carry forwards. Accordingly, because
the Company is not able to realize these excess tax benefits, such benefits have
not been recognized in the statements of cash flows for the years ended
March 31, 2010 and 2009.





Chief Executive Officer
(CEO)  and Non Executive Director Option Grants





On May
15, 2006, in connection with an employment agreement, the Company granted its
President & CEO options to purchase up to 4,000,000 shares of Company common
stock at an exercise price of $0.00001 per share. The options vest as follows:
(i) 1,000,000 shares upon execution of the employment agreement, (ii) 1,000,000
shares from June 1, 2006 to May 31, 2007 at the rate of 250,000 shares per
completed quarter of service, (iii) 1,000,000 shares from June 1, 2007 to May
31, 2008 at the rate of 250,000 shares per completed quarter of service, and
(iv) 1,000,000 shares from June 1, 2008 to May 31, 2009 at the rate of 250,000
shares per completed quarter of service. In the event the employment agreement
is terminated, the CEO will be allowed to exercise all options that are vested.
All unvested options shall be forfeited. The options have no expiration
date.


F-21





The
Company determined the fair value of the options to be $0.4235 per underlying
common share. The value was determined by using the Black-Scholes valuation
model using assumptions which resulted in the value of one Unit (one common
share and one warrant to purchase a common share) equaling $0.50, the price of
the most recently issued securities at the date of grant of the options. The
combined value was allocated between the value of the common stock and the value
of the warrant. The value of one common share from this analysis ($0.4235) was
used to calculate the resulting compensation expense under the provisions of
SFAS 123(R). The assumptions used in the valuation of the CEO options were as
follows:




Volatility
                  
                  
                  87.00
                  %Expected
      option term
                  
                  One
      yearRisk-free
      interest rate
                  
                  
                  5.22
                  %Expected
      dividend yield
                  
                  
                  0.00
                  %




The
expected term of options granted was based on the expected term of the warrants
included in the Units described above. The expected volatility was based on
historical volatility of the Company’s common stock price. The risk free rate
was based on the one-year U.S Treasury bond rate for the month of July
2006.





The
Company recognized stock compensation expense attributable to the CEO options of
$105,875 and $423,500 for the fiscal years ended March 31, 2010 and 2009,
respectively. All compensation expense related to the CEO’s options had been
recognized prior to the termination of the CEO on October 2, 2009.





On
October 27, 2009 in conjunction with the execution of Management Retention
Agreements (the “Retention Agreement”), the Company’s new CEO and each of the
Company’s three non-executive 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 after such transaction owning less the
50% of the stock outstanding immediately before 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
      yearsRisk-free
      interest rate
                    
                    
                    5.22
                    %Expected
      dividend yield
                    
                    
                    0.00
                    %




The
Company recognized stock based compensation expense relating to the new CEO’s
and non-executive Director’s options of $121,000 for the year ended March 31,
2010 and expects to recognize the remaining compensation expense of $134,000
relating to the unvested options over the next seven months.





2006 Stock Incentive
Plan





On March
30, 2007, the 2006 Stock Incentive Plan (the 2006 Stock Incentive Plan) was
approved by the shareholders and was effective October 2, 2006. The 2006 Stock
Incentive Plan had previously been approved by the Company’s Board of Directors.
Under the 2006 Stock Incentive Plan, the Board of Directors may grant awards of
options to purchase common stock, restricted stock, or restricted stock units to
officers, employees, and other persons who provide services to the Company or
any related company. The participants to whom awards are granted, the type of
awards granted, the number of shares covered for each award, and the purchase
price, conditions and other terms of each award are determined by the Board of
Directors, except that the term of the options shall not exceed 10 years. A
total of 10,000,000 shares of Rancher Energy common stock are subject to the
2006 Stock Incentive Plan. The shares issued for the 2006 Stock Incentive Plan
may be either treasury or authorized and unissued shares. During the year ended
March 31, 2010 options to purchase 1,700,000 of the Company’s stock were granted
to two employees and one non employee under the 2006 Stock Incentive Plan.
During the year ended March 31, 2009 no options were granted under the 2006
Stock Incentive Plan.


F-22





The fair
value of the options granted during fiscal 2010, under the 2006 Stock Incentive
Plan was estimated as of the grant date using the Black-Scholes option pricing
model with the following assumptions:





Volatility
                  
                  
                  125.14
                  %Expected
      option term
                  
                  3
      yearsRisk-free
      interest rate
                  
                  
                  5.22
                  %Expected
      dividend yield
                  
                  
                  0.00
                  %


The
expected volatility was based the volatility of the Company’s common stock for a
period of time equivalent to the expected term. The expected term of options
granted was estimated in accordance with the simplified method prescribed in SEC
Staff Accounting Bulletin (“SAB”) No. 107 and SAB No 110. The risk free rate was
based on the three-year U.S Treasury note rate




The
following table summarizes stock option activity for the year ended
March 31, 2010 and 2009:




2010
                  
                  
                  2009Number of
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Number of
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of yearNon-qualified
                  
                  
                  500,000
                  
                  
                  $
                  0.00001
                  
                  
                  
                  1,250,000
                  
                  
                  $
                  0.000012006
      Plan
                  
                  
                  576,000
                  
                  
                  $
                  0.612
                  
                  
                  
                  1,431,000
                  
                  
                  $
                  1.74GrantedNon-qualified
                  
                  
                  10,000,000
                  
                  
                  $
                  0.035
                  
                  
                  
                  -
                  
                  
                  
                  -2006
      Plan
                  
                  
                  1,700,000
                  
                  
                  $
                  0.035
                  
                  
                  
                  -
                  
                  
                  
                  -ExercisedNon-qualified
                  
                  
                  (500,000
                  )
                  
                  $
                  0.00001
                  
                  
                  
                  (750,000
                  )
                  
                  $
                  0.000012006
      Plan
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -CancelledNon-qualified
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -2006
      Plan
                  
                  
                  (70,000
                  )
                  
                  $
                  0.984
                  
                  
                  
                  (855,000
                  )
                  
                  $
                  1.73Outstanding
      at March 31Non-qualified
                  
                  
                  10,000,000
                  
                  
                  $
                  0.035
                  
                  
                  
                  500,000
                  
                  
                  $
                  0.000012006
      Plan
                  
                  
                  2,206,000
                  
                  
                  $
                  0.154
                  
                  
                  
                  576,000
                  
                  
                  $
                  0.612Exercisable
      at March 31Non-qualified
                  
                  
                  1,000,000
                  
                  
                  $
                  0.035
                  
                  
                  
                  250,000
                  
                  
                  $
                  0.000012006
      Plan
                  
                  
                  515,667
                  
                  
                  $
                  0.400
                  
                  
                  
                  210,000
                  
                  
                  $
                  0.71





The
following table summarizes information related to the outstanding and vested
options as of March 31, 2010:




Outstanding
                    Options
                  
                  
                  Vested
                    OptionsNumber
      of SharesNon-qualified
                  
                  
                  10,000,000
                  
                  
                  
                  1,000,0002006
      Plan
                  
                  
                  2,206,000
                  
                  
                  
                  515,667Weighted
      Average Remaining Contractual LifeNon-qualified
                  
                  4.6
      years
                  
                  
                  4.6
      years2006
      Plan
                  
                  4.1
      years
                  
                  
                  3.1
      yearsWeighted
      Average Exercise PriceNon-qualified
                  
                  $
                  0.035
                  
                  
                  $
                  0.0352006
      Plan
                  
                  $
                  0.154
                  
                  
                  $
                  0.400Aggregate
      Intrinsic ValueNon-qualified
                  
                  $
                  (200,000
                  )
                  
                  $
                  (20,000
                  )2006
      Plan
                  
                  $
                  (306,490
                  )
                  
                  $
                  (198,602
                  )


F-23





The
following table summarizes changes in the unvested options for the years ended
March 31, 2010 and 2009:





Number
      of
                        Options
                      
                      
                      Weighted
                        Average
                        Grant
      Date
                        Fair
      ValueNon-vested,
      April 1, 2008Non-qualified
                      
                      
                      1,250,000
                      
                      
                      $
                      0.422006
      Plan
                      
                      
                      1,001,000
                      
                      
                      $
                      0.50Total
                      
                      
                      2,251,000
                      
                      
                      
                      0.46Granted—Non-qualified
                      
                      
                      -
                      
                      
                      
                      -2006
      Plan
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      -
                      
                      
                      
                      -Vested—Non-qualified
                      
                      
                      (1,000,000
                      )
                      
                      $
                      0.422006
      Plan
                      
                      
                      (190,000
                      )
                      
                      $
                      0.28Total
                      
                      
                      (1,190,000
                      )
                      
                      $
                      0.40Cancelled
                      
                      
                      (445,000
                      )
                      
                      $
                      0.78PlanNon-vested,
      March 31, 2009Non-qualified
                      
                      
                      250,000
                      
                      
                      $
                      0.422006
      Plan
                      
                      
                      366,000
                      
                      
                      $
                      0.27Total
                      
                      
                      616,000
                      
                      
                      $
                      0.33Granted—Non-qualified
                      
                      
                      10,000,000
                      
                      
                      $
                      0.025452006
      Plan
                      
                      
                      1,700,000
                      
                      
                      $
                      0.02545Total
                      
                      
                      11,700,000
                      
                      
                      $
                      0.02545Vested—Non-qualified
                      
                      
                      (1,250,000
                      )
                      
                      $
                      0.105062006
      Plan
                      
                      
                      (338,334
                      )
                      
                      $
                      0.13791Total
                      
                      
                      (1,588,334
                      )
                      
                      $
                      0.01121Cancelled2006
      Plan
                      
                      
                      (37,333
                      )
                      
                      $
                      0.4996Non-vested,
      March 31, 2010Non-qualified
                      
                      
                      9,000,000
                      
                      
                      $
                      0.025452006
      Plan
                      
                      
                      1,690,333
                      
                      
                      $
                      0.04514Total
                      
                      
                      10,690,333
                      
                      
                      $
                      0.02856


The total
intrinsic value, calculated as the difference between the exercise price and the
market price on the date of exercise of all options exercised during the years
ended March 31, 2010 and 2009, was approximately $9,700 and $16,700,
respectively. The Company received $5 and $8 from stock options exercised during
the year ended March 31,  2010 and 2009, respectively. The
Company did not realize any tax deductions related to the exercise of stock
options during year.





Total
estimated unrecognized compensation cost from unvested stock options as of
March 31, 2010 was approximately $41,000 which the Company expects to
recognize within the next year


F-24





Note
11—Income Taxes





The
effective income tax rate for the years ended March 31, 2010 and 2009 differs
from the U.S. Federal statutory income tax rate due to the
following:




For the Year Ended March 31,2010
                    
                    
                    2009Federal
      statutory income tax rate
                    
                    $
                    7,092,000
                    
                    
                    $
                    16,219,000State
      income taxes, net of Federal benefit
                    
                    
                    21,000
                    
                    
                    
                    49,000Permanent
      items
                    
                    
                    (168,000
                    )
                    
                    
                    (18,000
                    )Other
                    
                    
                    68,000
                    
                    
                    
                    (34,000
                    )Change
      in valuation allowance
                    
                    
                    (7,013,000
                    )
                    
                    
                    (16,216,000
                    )$
                    -
                    
                    
                    $
                    -





The
components of the deferred tax assets and liabilities as of March 31, 2010 and
2009 are as follows:




For the Year Ended
      March 31,2010
                          
                          
                          2009Long-term
      deferred tax assets:Federal
      net operating loss carryforwards
                          
                          $
                          11,663,000
                          
                          
                          $
                          9,266,000Asset
      retirement obligation
                          
                          
                          502,000
                          
                          
                          
                          449,000Stock-based
      compensation
                          
                          
                          714,000
                          
                          
                          
                          616,000Accrued
      vacation
                          
                          
                          6,000
                          
                          
                          
                          22,000Unrealized
      hedging losses (gains)
                          
                          
                          -
                          
                          
                          
                          (160,000
                          )Property
      , plant and equipment
                          
                          
                          17,797,000
                          
                          
                          
                          13,475,000Valuation
      allowance
                          
                          
                          (30,682,000
                          )
                          
                          
                          (23,668,000
                          )Net
      long-term deferred tax assets
                          
                          $
                          -
                          
                          
                          $
                          -




The
Company has approximately $ 33,224,000 net operating loss carryover as of March
31, 2010. The net operating losses begin to expire in 2024.




The
Company has provided a full valuation allowance for the deferred tax assets as
of March 31, 2010 an 2009, based on the likelihood of the realization of the
deferred tax assets.




Note
12—Disclosures about Oil and Gas Producing Activities





Costs
Incurred in Oil and Gas Producing Activities:




Costs
incurred in oil and gas property acquisition, exploration and development
activities, whether capitalized or expensed, are summarized as
follows.





For the Year Ended March 31,2010
                    
                    
                    2009Exploration
                    
                    $
                    19,181
                    
                    
                    $
                    20,108Development
                    
                    
                    82,963
                    
                    
                    
                    245,172Acquisitions:
                    
                    
                    -
                    
                    
                    
                    -Unproved
                    
                    
                    -
                    
                    
                    
                    -Proved
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    102,144
                    
                    
                    $
                    265,280Costs
      associated with asset retirement obligations
                    
                    $
                    (18,747
                    )
                    
                    $
                    10,481


F-25





Oil
and Gas Reserve Quantities (Unaudited):




For the
years ended March 31, 2010 and 2009, Ryder Scott Company, L.P. prepared the
reserve information for the Company’s Cole Creek South, South Glenrock B, South
Glenrock A, and Big Muddy Fields in the Powder River Basin.





The
Company emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries and undeveloped locations are more imprecise than
estimates of established proved producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes
available.




Proved oil and gas reserves, as defined
in Regulation S-X., Rule 4-10(a)(22), proved oil and gas reserves are those
quantities of oil and gas, which, by analysis of geoscience and engineering
data, can be estimated with reasonable certainty to be economically producible
from a given date forward,Proved developed oil and gas reserves
are those expected to be recovered through existing wells with existing
equipment and operating methods. All of the Company’s proved reserves are
located in the continental United States.




Presented
below is a summary of the changes in estimated oil reserves (in barrels) of the
Company for the years ended March 31, 2010 and 2009 (the Company does not
have any natural gas reserves).




Total
      proved:
                                
                                2010
                                
                                
                                2009Beginning
      of year
                                
                                
                                1,166,702
                                
                                
                                
                                1,300,396Purchases,
      sales and assignments of minerals in-place
                                
                                
                                (51,235
                                )
                                
                                
                                -Production
                                
                                
                                (56,818
                                )
                                
                                
                                (66,308
                                )Revisions
      of previous estimates
                                
                                
                                (207,470
                                )
                                
                                
                                (67,386End
      of year
                                
                                
                                851,179
                                
                                
                                
                                1,166,702Proved
      developed reserves:
                                
                                
                                815,138
                                
                                
                                
                                955,151





Standardized
Measure of Discounted Future Net Cash Flows (Unaudited):




FASB ASC 932,“Disclosures about Oil and Gas Producing
Activities” prescribes guidelines for computing a
standardized measure of future net cash flows and changes therein relating to
estimated proved reserves. The Company has followed these guidelines, which are
briefly discussed below.




In 2010,
future cash inflows were determined by applying average first day of month
prices received for the previous year, including transportation, quality, and
basis differentials (“net prices," and production and development costs in
effect at year-end to the year-end estimated quantities of oil and gas to be
produced in the future. In 2009, in accordance with the guidelines then in
effect, future cash flows were determined by applying end-of-year net prices,
production costs and development costs to quantities of oil and gas to be
produced in the future. Each property the Company operates is also charged with
field-level overhead in the estimated reserve calculation. Estimated future
income taxes are computed using current statutory income tax rates, including
consideration for estimated future statutory depletion. The resulting future net
cash flows are reduced to present value amounts by applying a 10% annual
discount factor.




Future
operating costs are determined based on estimates of expenditures to be incurred
in developing and producing the proved oil and gas reserves in place at the end
of the period, using year-end costs and assuming continuation of existing
economic conditions, plus Company overhead incurred by the central
administrative office attributable to operating activities.





The
assumptions used to compute the standardized measure are those prescribed by the
FASB and the SEC. These assumptions do not necessarily reflect the Company’s
expectations of actual revenues to be derived from those reserves, nor their
present value. The limitations inherent in the reserve quantity estimation
process, as discussed previously, are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process. The price, as adjusted for transportation, quality, and basis
differentials, used in the calculation of the standardized measure was $61.66
and $44.75 per barrel of oil for the years ended March 31, 2010 and 2009,
respectively. The Company does produce marketable quantities of natural
gas.


F-26





The
following summary sets forth the Company’s future net cash flows relating to
proved oil and gas reserves based on the standardized measure prescribed in ASC
932:




As of
                          March 31,
                          2010
                        
                        
                        As of
                          March 31,
                          2009Future
      cash inflows
                        
                        $
                        54,752,000
                        
                        
                        $
                        52,217,000Future
      production costs
                        
                        
                        (34,313,000
                        )
                        
                        
                        (29,024,000
                        )Future
      development costs
                        
                        
                        (600,000
                        )
                        
                        
                        (2,007,000
                        )Future
      income taxes
                        
                        
                        -
                        
                        
                        
                        -Future
      net cash flows
                        
                        
                        19,839,000
                        
                        
                        
                        21,186,00010%
      annual discount
                        
                        
                        (10,089,000
                        )
                        
                        
                        (12,462,000
                        )Standardized
      measure of discounted future net cash flows
                        
                        $
                        9,750,000
                        
                        
                        $
                        8,724,000





The
principal sources of change in the standardized measure of discounted future net
cash flows are:




For the year
                          ended
                          March 31,
                          2010
                        
                        
                        For the year
                          ended
                          March 31,
                          2009Standardized
      measure of discounted future net cash flows, beginning of
    year
                        
                        $
                        8,724,000
                        
                        
                        $
                        30,928,000Sales
      of oil and gas produced, net of production costs
                        
                        
                        (1,522,000
                        )
                        
                        
                        (2,070,000
                        )Net
      changes in prices and production costs
                        
                        
                        3,114,000
                        
                        
                        
                        (20,285,000
                        )Purchase,
      sales and assignments of minerals in-place
                        
                        
                        (661,000
                        )
                        
                        
                        -Revisions
      of previous quantity estimates
                        
                        
                        (2,675,000
                        )
                        
                        
                        (666,000
                        )Changes
      in future development costs
                        
                        
                        828,000
                        
                        
                        
                        -Accretion
      of discount
                        
                        
                        872,000
                        
                        
                        
                        3,093,000Changes
      in timing and other
                        
                        
                        1,070,000
                        
                        
                        
                        (2,276,000
                        )Standardized
      measure of discounted future net cash flows, end of year
                        
                        $
                        9,750,000
                        
                        
                        $
                        8,724,000


F-27


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 13th day of July,
2010.





RANCHER
      ENERGY CORP./s/ Jon C. NicolaysenJon
      C. Nicolaysen, President, Chief Executive Officer,Principal
      Executive Officer,Director





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




Signature
                  
                  Title
                  
                  Date/s/ Jon C. NicolaysenJon
      C. Nicolaysen
                  
                  President,
      Chief Executive Officer, Director
                  
                  7/13/2010/s/Richard KurtenbachRichard
      E. Kurtenbach
                  
                  Chief
      Accounting Officer and Principal Accounting Officer
                  
                  7/13/2010/s/ A.L. Sid OvertonA.L.
      Sid Overton
                  
                  Director
                  
                  7/13/2010/s/ Mathijs van HouweningeMathijs
      van Houweninge
                  
                  Secretary,
      Treasurer, Director
                  
                  7/13/2010/s/ Jeffrey B. BennettJeffrey
      B. Bennett
                  
                  Director
                  
                  7/13/2010


43