T-REX OIL, INC. - Quarter Report: 2007 September (Form 10-Q)

PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2007 and March 31, 2007	1

	Consolidated Statements of Operations for the Three Months ended September 30, 2007 and 2006	2

	Consolidated Statements of Operations for the Six Months ended September 30, 2007 and 2006	3

	Consolidated Statement of Changes in Stockholders’ Equity for the Six Months ended September 30, 2007	4

	Consolidated Statements of Cash Flows for the Six Months ended September 30, 2007 and 2006	5

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	20

PART II - OTHER INFORMATION

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 6.	Exhibits	22

SIGNATURES		25

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Rancher Energy Corp.

Consolidated Balance Sheets

(Unaudited)

	September 30, 2007			March 31, 2007
ASSETS

Current assets:
Cash and cash equivalents	$	1,444,420		$	5,129,883
Accounts receivable		633,029			453,709
Prepaid expenses		49,857			-
Total current assets		2,127,306			5,583,592

Oil & gas properties, at cost (successful efforts method):
Unproved		56,998,862			56,079,133
Proved		18,667,591			18,552,188
Less: Accumulated depletion, depreciation, and amortization		(966,951	)		(347,821	)
Net oil & gas properties		74,699,502			74,283,500

Other assets, net of accumulated depreciation of $109,006 and $27,880, respectively		2,144,502			1,610,939
Total assets	$	78,971,310		$	81,478,031
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	1,535,611		$	1,542,840
Accrued oil & gas property costs		291,867			250,000
Asset retirement obligation		180,260			196,000
Liquidated damages pursuant to registration rights arrangement		1,227, 626			2,705,531
Total current liabilities		3,235,364			4,694,371

Long-term liabilities:
Accrued liabilities		306,160			-
Asset retirement obligation		1,090,723			1,025,567
Total long-term liabilities		1,396,883			1,025,567

Commitments and contingencies

Stockholders’ equity:
Common stock, $0.00001 par value, 275,000,000 shares authorized, 111,608,158 and 102,041,432 shares issued and outstanding at September 30, 2007 and March 31, 2007, respectively		1,117			1,021
Additional paid-in capital		89,973,759			84,985,934
Accumulated deficit		(15,635,813	)		(9,228,862	)
Total stockholders’ equity		74,339,063			75,758,093

Total liabilities and stockholders’ equity	$	78,971,310		$	81,478,031

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Rancher Energy Corp.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,
	2007			2006

Revenues:
Oil & gas sales	$	1,650,628		$	-

Operating expenses:
Production taxes		201,182			-
Lease operating expenses		712,195			-
Depreciation, depletion, and amortization		368,724			-
Impairment of unproved properties		-			395,785
Accretion expense		31,618			-
Exploration expense		89,670			-
General and administrative expense		1,545,734			395,214
Total operating expenses		2,949,123			790,999

Loss from operations		(1,298,495	)		(790,999	)

Other income (expense):
Liquidated damages pursuant to registration rights arrangement		(1,268,283	)		-
Interest expense		(41,941	)		1,644
Write-off of deferred financing costs		(99,254	)
Interest and other income		78,943			22,120
Total other income (expense)		(1,330,535	)		23,764

Net loss	$	(2,629,030	)	$	(767,235	)

Basic and fully diluted net loss per share	$	(0.02	)	$	(0.02	)

Basic and fully diluted weighted average shares outstanding		108,018,888			37,598,545

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Rancher Energy Corp.

Consolidated Statements of Operations

(Unaudited)

	Six Months Ended September 30,
	2007			2006

Revenues:
Oil & gas sales	$	2,981,107		$	-

Operating expenses:
Production taxes		362,651			-
Lease operating expenses		1,312,109			-
Depreciation, depletion, and amortization		700,256			-
Impairment of unproved properties		-			395,785
Accretion expense		77,608			-
Exploration expense		130,828			-
General and administrative expense		4,130,160			966,282
Total operating expenses		6,713,612			1,362,067

Loss from operations		(3,732,505	)		(1,362,067	)

Other income (expense):
Liquidated damages pursuant to registration rights arrangement		(2,645,393	)		-
Interest expense		(113,180	)		(33,000	)
Write-off of deferred financing costs		(99,254	)		-
Interest and other income		183,381			23,485
Total other income (expense)		(2,674,446	)		(9,515	)

Net loss	$	(6,406,951	)	$	(1,371,582	)

Basic and fully diluted net loss per share	$	(0.06	)	$	(0.04	)

Basic and fully diluted weighted average shares outstanding		105,888,646			33,336,427

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Rancher Energy Corp.

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

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

Balance, April 1, 2007		102,041,432	$	1,021	$	84,985,934		$	(9,228,862	)	$	75,758,093

Liquidated damages and imputed interest pursuant to registration rights arrangement, settled in shares		7,426,772		75		4,235,712			-			4,235,787

Stock issued upon exercise of stock options		1,250,000		12		-			-			12

Restricted stock awards		500,000		5		155,095			-			155,100

Common stock exchanged for services - non-employee directors		282,811		3		148,497			-			148,500

Common stock exchanged for services - non-employee		107,143		1		112,499			-			112,500

Stock-based compensation		-		-		570,034			-			570,034

Offering costs		-		-		(234,012	)		-			(234,012	)

Net loss		-		-		-			(6,406,951	)		(6,406,951	)

Balance, September 30, 2007		111,608,158	$	1,117	$	89,973,759		$	(15,635,813	)	$	74,339,063

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Rancher Energy Corp.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(6,406,951	)	$	(1,371,582	)
Adjustments to reconcile net loss to cash used for operating activities:
Depreciation, depletion, and amortization		700,256			1,800
Impairment of unproved properties		-			395,785
Accretion expense		77,608			-
Settlement of asset retirement obligation		(46,665	)		-
Liquidated damages pursuant to registration rights arrangement		2,645,393			-
Imputed interest expense		112,488			33,453
Stock-based compensation expense		570,034			529,375
Restricted stock compensation expense		155,095			-
Services exchanged for common stock - non-employee directors		148,497			-
Services exchanged for common stock - non-employee		112,499			-
Other		-			2,284
Changes in operating assets and liabilities:
Accounts receivable		(179,320	)		-
Prepaid expenses		(49,857	)
Other assets		6,416			-
Accounts payable and accrued liabilities		298,930			86,290
Net cash used for operating activities		(1,855,577	)		(322,595	)

Cash flows from investing activities:
Capital expenditures for oil & gas properties		(1,466,291	)		(2,800,167	)
Proceeds from conveyance of unproved oil & gas properties		491,500			-
Increase in other assets		(619,144	)		(37,709	)
Net cash used for investing activities		(1,593,935	)		(2,837,875	)

Cash flows from financing activities:
Payment of deferred financing costs		(1,951	)		-
Proceeds from issuance of convertible notes payable		-			150,000
Payments of convertible notes payable		-			(150,000	)
Proceeds from notes payable converted to common stock		-			500,000
Proceeds from sale of common stock and warrants		-			8,093,397
Proceeds from issuance of common stock upon exercise of stock options		12			-
Payment of offering costs		(234,012	)		-
Net cash provided by (used for) financing activities		(235,951	)		8,593,397

Increase (decrease) in cash and cash equivalents		(3,685,463	)		5,432,926
Cash and cash equivalents, beginning of period		5,129,883			46,081
Cash and cash equivalents, end of period	$	1,444,420		$	5,479,007

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Rancher Energy Corp.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended September 30,
	2007		2006
Non-cash investing and financing activities:
Payables for purchase of oil & gas properties	$	41,867	$	603,537
Asset retirement asset and obligation	$	18,473	$	-
Common stock and warrants issued on payment of liquidated damages pursuant to registration rights arrangement	$	4,235,787	$	-

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Rancher Energy Corp.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1—Organization and Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of the Company’s wholly owned subsidiary, Rancher Energy Wyoming, LLC, a Wyoming limited liability company that was formed on April 24, 2007. In management’s opinion, the Company has made all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of financial position, results of operations, and cash flows. The consolidated financial statements should be read in conjunction with financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2007. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2007. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.

Other Significant Accounting Policies

The accounting policies followed by the Company are set forth in Note 1 to the consolidated financial statements included in its Annual Report on Form 10-K for the year ended March 31, 2007, and are supplemented in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the six months ended September 30, 2007. These unaudited consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended March 31, 2007.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We have not determined the effect, if any, of the adoption of this statement will have on our financial position or results of operations.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to entities that elect the fair value option. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not determined the effect, if any, of the adoption of this statement will have on our financial position or results of operations.

Net Income (Loss) per Share

Basic net income (loss) per common share of stock is calculated by dividing net income (loss) available to common stockholders by the basic weighted-average of common shares outstanding during each period.

Fully-diluted net income per common share of stock is calculated by dividing adjusted net income by the weighted-average of fully -diluted 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 shares of the Company’s common stock. Fully-diluted net loss per common share does not give effect to dilutive securities as their effect would be anti-dilutive.

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The treasury stock method is used to measure the dilutive impact of stock options and warrants. For the three and six months ended September 30, 2007, securities totaling 80,523,550 were excluded from fully-diluted weighted average shares outstanding, consisting of 75,960,550 warrants and 4,763,000 options to acquire shares of the Company’s common stock, as their effect would be anti-dilutive.

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

	For the Three Months Ended September 30,						For the Six Months Ended September 30,
	2007			2006			2007			2006

Net loss	$	(2,629,030	)	$	(767,235	)	$	(6,406,951	)	$	(1,371,582	)
Basic weighted-average common shares outstanding		108,018,888			37,598,545			105,888,646			33,336,427
Basic and fully-diluted net loss per common share	$	(0.02	)	$	(0.02	)	$	(0.06	)	$	(0.04	)

Note 2—Property Acquisitions

Cole Creek South Field and South Glenrock B Field Acquisitions

On December 22, 2006, the Company acquired certain oil & gas properties including (i) a 100% working interest (79.3% net revenue interest) in the Cole Creek South Field, which is located in Wyoming’s Powder River Basin; and (ii) a 93.6% working interest (74.5% net revenue interest) in the South Glenrock B Field, which is also located in Wyoming’s Powder River Basin.

Big Muddy Field Acquisition

On January 4, 2007, the Company acquired the Big Muddy Field, which is located in the Powder River Basin east of Casper, Wyoming.

Pro Forma Results of Operations

The following table reflects the pro forma results of operations for the three and six months ended September 30, 2006, as though the acquisitions had occurred on April 1, 2006. The pro forma amounts include certain adjustments, including recognition of depreciation, depletion, and amortization based on the allocated purchase price.

The pro forma results do not necessarily reflect the actual results that would have occurred had the acquisitions occurred during the period presented, nor does it necessarily indicate the future results of the Company and the acquisitions.

		Three Months Ended September 30, 2006			Six Months Ended September 30, 2006
Revenue	$	1,576,578		$	2,780,723
Net loss		(685,571	)		(1,196,390	)
Net loss per basic and fully-diluted share		(0.01	)		(0.02	)

Note 3—Asset Retirement Obligations

The Company recognizes an estimated liability for future costs associated with the abandonment of its oil & 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 & gas properties in the balance sheets. The Company depletes the amount added to proved oil & gas property costs and recognizes accretion expense in connection with the discounted liability over the remaining estimated economic lives of the respective oil & gas properties. Cash paid to settle asset retirement obligations is included in the operating section of the Company’s statements of cash flows.

The Company’s estimated asset retirement obligation liability is based on historical experience in abandoning wells, estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. 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.

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The Company did not have any oil & gas properties prior to the Cole Creek South Field, the South Glenrock B Field, and the Big Muddy Field acquisitions discussed in Note 2, Property Acquisitions, and, consequently, did not have any asset retirement obligation liability. A reconciliation of the Company’s asset retirement obligation liability during the six months ended September 30, 2007 is as follows:

Balance, April 1, 2007	$	1,221,567
Liabilities incurred		18,473
Liabilities settled		(46,665	)
Accretion expense		77,608
Balance, September 30, 2007	$	1,270,983

Current	$	180,260
Long-term		1,090,723
	$	1,270,983

Note 4—Income Taxes

As of September 30, 2007, because the Company believes that it is more likely than not that its net deferred tax assets, consisting primarily of net operating losses, will not be utilized in the future, the Company has fully provided for a valuation of its net deferred tax assets.

Effective April 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, which clarifies the financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. Any interest and penalties related to uncertain tax positions are recorded as interest expense and general and administrative expense, respectively. At the time of adoption, there was no impact to the Company’s consolidated financial statements, and as of September 30, 2007, the Company did not have any unrecognized tax benefits, and no interest or penalties related to income tax reporting were reflected in the consolidated balance sheet and statement of operations. We do not expect any material changes to the unrecognized tax positions within the next 12 months.

The Company is subject to United States federal income tax and income tax from multiple state jurisdictions. Currently, the Internal Revenue Service is not reviewing any of the Company’s federal income tax returns, and agencies in states where the Company conducts business are not reviewing any of the Company’s state income tax returns. All tax years remain subject to examination by tax authorities, including for the period from February 4, 2004 through March 31, 2007.

Note 5—Common Stock

Registration and Other Payment Arrangements

In connection with the sale of certain Units, consisting of common stock and warrants to acquire common stock, the Company entered into agreements that require the transfer of consideration under registration and other payment arrangements, if certain conditions are not met. The following is a description of the conditions and those that have not been met as of September 30, 2007.

Under the terms of the Registration Rights Agreement, the Company must pay the holders of the registrable securities issued in the December 2006 and January 2007 equity private placement, liquidated damages if the registration statement that was filed in conjunction with the private placement has not been 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 are 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 is 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. All payments pursuant to the registration rights agreement and the private placement agreement cannot exceed 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 equity condition failures are described further below. Pursuant to the terms of the registration rights agreement, if the Company opts to pay the liquidated damages in shares of common stock, the number of shares issued is based on the payment amount of $794,000 divided by 90% of the volume weighted average price of the Company’s common stock for the 10 trading days immediately preceding the payment due date.

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The Company’s registration statement was declared effective on October 31, 2007. The following is a summary of payments during the six months ended September 30, 2007 and in October 2007:

Payment Date	90% of Volume Weighted Average Price for 10 Days Preceding Payment		Shares Issued		Closing Price at Payment Date		Value of Shares Issued

May 18, 2007	$	0.85		933,458	$	1.04	$	970,797
June 19, 2007	$	0.84		946,819	$	0.88		833,201
July 19, 2007	$	0.60		1,321,799	$	0.66		872,387
August 17, 2007	$	0.45		1,757,212	$	0.41		720,457
September 17, 2007	$	0.32		2,467,484	$	0.34		838,945
				7,426,772			$	4,235,787

October 17, 2007	$	0.55		1,443,712	$	0.57	$	822,916
October 31, 2007	$	0.43		861,085	$	0.47		404,710
				2,304,797			$	1,227,626

Following the end of the quarter ended September 30, 2007, the Company paid liquidated damages on October 17, 2007 and October 31, 2007. In accordance with FSP EITF 00-19-2, Accounting for Registration Payment Arrangements, the Company has recorded a liability for these arrangements.

A reconciliation of the Company’s liquidated damages pursuant to registration rights arrangements during the six months ended September 30, 2007 is as follows:

Balance, April 1, 2007	$	2,705,531
Obligations incurred		2,645,393
Imputed interest expense		112,489
Common stock issued in payment of obligations		(4,235,787	)
Balance, September 30, 2007	$	1,227,626

The liability is based on the actual amount of the payments that were settled in shares of the Company’s common stock.

On the payment date, the portion of the current liability attributable to the issuance of shares of the Company’s common stock was reclassified to stockholders’ equity. During the Company’s third fiscal quarter, the portion of the current liability attributable to the issuance of shares of the Company’s common stock on October 17, 2007 and October 31, 2007 will be reclassified to stockholders’ equity.

The Registration Rights Agreement requires that the Company must maintain effectiveness of the registration statement, provide the information necessary for sale of shares to be made, register a sufficient number of shares, and maintain the listing of the shares. Lack of compliance requires the Company to pay the holders of the registrable securities liquidated damages under the same terms discussed above. As of the date of this Quarterly Report, the Company has not recorded any liability associated with the requirement to maintain effectiveness of the registration statement.

Failure to maintain the equity conditions, a description of which follows, negates the Company’s ability to settle the liquidated damages in shares of common stock. The Company must ensure that:

·	Common stock is designated for quotation on OTC Bulletin Board, the New York Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market, or the American Stock Exchange;

·	Common stock has not been suspended from trading, other than for two days due to business announcements; and

·	Delisting or suspension has not been threatened, or is not pending.

·	Shares of common stock have been delivered upon conversion of Notes and Warrants on a timely basis;

·	Shares may be issued in full without violating the rules and regulations of the exchange or market upon which they are listed or quoted;

·	Payments have been made within five business days of when due pursuant to the Securities Purchase Agreement, the Convertible Notes, the Registration Rights Agreement, the Transfer Agent Instructions, or the Warrants (Transaction Documents);

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·	There has not been a change in control of the company, a merger of the company or an event of default as defined in the Notes; and

·	There is material compliance with the provisions, covenants, representations or warranties of all Transaction Documents.

There is an equity conditions failure if, on any day during the 10 trading days prior to when a registration-delay payment is due, the equity conditions have not been satisfied or waived.

Under the terms of the Securities Purchase Agreement, liquidated damages are due to the holders of the securities if the Company meets the applicable listing requirements on an approved exchange or market but the registrable shares are not listed by December 21, 2007 on an approved exchange or market. The liquidated damages are equal to 0.25% of the aggregate purchase price, or $198,000, payable in cash. The payments are due on the day of the listing failure.

Currently, there are no equity conditions failures and we are not subject to any listing requirements.

Note 6—Share-Based Compensation

Chief Executive Officer (CEO) Options

During the six months ended September 30, 2007, the Company’s CEO exercised options to acquire 1,250,000 shares of common stock, for a cumulative exercise price of $12.50 ($0.00001/share).

2006 Stock Incentive Plan

During the six months ended September 30, 2007, options to purchase 40,000, 673,000 and 25,000 shares of common stock were granted to directors, employees and a consultant, respectively. The options granted have exercise prices of $1.02, $0.45 to $1.18 and $1.64, vest over five years, three years and one year, and have a maximum term of ten, five and five years, respectively. The fair value of the options granted was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:

Volatility		76.00%
Expected option term		Five to 10 years
Risk-free interest rate		4.63% to 4.68%
Expected dividend yield		0.00%

During the six months ended September 30, 2007, options to purchase 1,060,000 shares of common stock granted to employees expired. The options had exercise prices of $1.18 to $3.19.

Total estimated unrecognized compensation cost from unvested stock options as of September 30, 2007 was approximately $1,573,083 which the Company expects to recognize over 4.5 years. As of September 30, 2007 there were 3,013,000 options outstanding under the 2006 Stock Incentive Plan and 6,987,000 options are available for issuance.

The expected term of options granted was estimated to be the contractual term. The expected volatility was based on an average of the volatility disclosed by other comparable companies who had similar expected option terms. The risk free rate was based on the five-year and 10-year U.S. Treasury bond rate.

Restricted Stock Award

On April 20, 2007, four new members were appointed to our Board of Directors. Each newly appointed director received a stock grant of 100,000 shares of the Company’s common stock that vests 20% (20,000 shares) on the date of grant with vesting 20% per year thereafter. On May 31, 2007, the remaining independent Board member not covered by the April 20, 2007 award received a stock grant of 100,000 shares of the Company’s common stock that vests 20% (20,000 shares) on the date of grant with vesting 20% per year thereafter.

On May 22, 2007, the Company issued 400,000 shares of common stock to the four new members, and on June 26, 2007, the Company issued 100,000 shares of common stock to the remaining independent Board member. Pursuant to the vesting discussed above, of the total fair market value at the date of grant of $517,000, and for the six months ended September 30, 2007, $155,100 has been reflected as a charge to general and administrative expense in the statement of operations, with a credit of $5 to common stock and $155,095 to additional paid-in capital.

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Common Stock Exchanged for Services

Consulting Agreement

On February 2, 2007, the Company entered into an agreement with an executive search firm to recruit additional members for its Board of Directors. Upon acceptance and retention of the additional directors, the Company could pay a portion of the executive search firm’s services in shares of common stock.

On April 20, 2007, four new members were appointed to our Board of Directors. On April 23, 2007, the Company and the executive search firm agreed to payment of a portion of services through the issuance of 107,143 shares of common stock at a price of $1.05 per share, the closing price on that date. The stock issuance was authorized by the Board of Directors on June 27, 2007. For the six months ended September 30, 2007, total compensation of $112,500 has been reflected as a charge to general and administrative expense in the statement of operations, with a corresponding credit to additional paid-in capital. .

Board of Director Fees

On April 20, 2007, the Board of Directors approved a resolution whereby members may receive stock in lieu of cash for Board meeting fees, Committee meeting fees and Committee Chairmen fees. For the three months ended June 30, 2007, board members elected to receive 101,713 shares of common stock in lieu of cash, valued at $0.73 per share, the closing price of the Company’s stock on June 29, 2007. Total compensation of $74,250 has been reflected as a charge to general and administrative expense in the statement of operations, with a corresponding credit to additional paid-in capital.

For the three months ended September 30, 2007, board members elected to receive 181,098 shares of common stock in lieu of cash, valued at $0.41 per share, the closing price of the Company’s stock on September 28, 2007. Total compensation of $74,250 has been reflected as a charge to general and administrative expense in the statement of operations, with a corresponding credit to additional paid-in capital.

Note 7—Subsequent Events - Short Term Debt

Term Credit Agreement

On October 16, 2007, the Company borrowed $12,240,000 pursuant to a Term Credit Agreement with a financial institution (the Lender), resulting in net proceeds of $11,622,800 after the deduction of the Lender’s fees, expenses, and three months of interest to be held in escrow. In addition, the Company incurred approximately $390,000 in investment banking, legal, and other fees and expenses in connection with the transaction. All amounts outstanding under the Credit Agreement are due and payable on October 31, 2008 (Maturity Date) and bear interest at a rate equal to the greater of (a) 12% per annum and (b) the one-month LIBOR rate plus 6% per annum. The Company is required to make monthly interest payments on the amounts outstanding under the Credit Agreement, but is not required to make any principal payments until the Maturity Date. The Company may prepay the amounts outstanding under the Credit Agreement at any time without penalty.

The Company’s obligations under the Credit Agreement are secured by a first priority security interest in its properties and assets, including all rights under oil & gas leases in its three producing oil fields in the Powder River Basin of Wyoming and all of its equipment on those properties. The Company also granted the Lender a 2% Overriding Royalty Interest (ORRI), proportionally reduced when the Company’s working interest is less than 100%, in all crude oil and natural gas produced from its three Powder River Basin fields. The fair value of the ORRI will be recorded as a discount to the note, and amortized over the term of the debt. As long as any of its obligations remain outstanding under the Credit Agreement, the Company will be required to grant the same ORRI to the Lender on any new working interests acquired after closing. Prior to the Maturity Date, the Company may re-acquire 50% of the ORRI granted to the Lender at a repurchase price calculated to ensure that total payments by the Company to the Lender of principal, interest, ORRI revenues, and ORRI repurchase price will equal 120% of the loan amount.

The Company is subject to various restrictive covenants under the Credit Agreement, including limitations on its ability to sell properties and assets, pay dividends, extend credit, amend material contracts, incur indebtedness, provide guarantees, effect mergers or acquisitions (other than to change its state of incorporation), cancel claims, create liens, create subsidiaries, amend its formation documents, make investments, enter into transactions with its affiliates, and enter into swap agreements. The Company must maintain (a) a current ratio of at least 1.0 (excluding from the calculation of current liabilities any loans outstanding under the Credit Agreement) and (b) a loan-to-value ratio greater than 1.0 to 1.0 for the term of the loan.

The Credit Agreement contains several events of default, including if, at any time after closing, the Company’s most recent reserve report indicates that its projected net revenue attributable to proved reserves is insufficient to fully amortize the amounts outstanding under the Credit Agreement within a 48-month period and it is unable to demonstrate to the Lender’s reasonable satisfaction that it would be able to satisfy such outstanding amounts through a sale of its assets or equity. Upon the occurrence of an event of default under the Credit Agreement, the Lender may accelerate the Company’s obligations under the Credit Agreement. Upon certain events of bankruptcy, obligations under the Credit Agreement would automatically accelerate. In addition, at any time that an event of default exists under the Credit Agreement, the Company will be required to pay interest on all amounts outstanding under the Credit Agreement at a default rate, which is equal to the then-prevailing interest rate under the Credit Agreement plus four percent per annum.

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Crude Oil Hedging

As required by the Credit Agreement, the Company entered into an oil hedge agreement covering approximately 75% of its proved developed producing reserves scheduled to be produced during a two-year period. The Company has entered into a Participation Cap Costless Collar with an unrelated third party with a price floor of $65 per barrel, indexed to West Texas Intermediate NYMEX (WTI - NYMEX), covering 75% of scheduled production in the next two years, or a total of 113,220 barrels; and a ceiling price, WTI - NYMEX, of $83.50 covering 45% of scheduled production in the next two years, or a total of 67,935 barrels. The price the Company receives for production 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 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical are “forward-looking statements”, as that term is defined in Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that involve a number of risks and uncertainties. These forward-looking statements include, among others, the following:

	·		business strategy; water availability and waterflood production targets

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

	·		construction of a CO₂pipeline and surface facilities;

	·		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 CO₂ injection;

	·		ability to obtain permits and governmental approvals;

	·		technology;

	·		financial strategy;

	·		realized oil prices;

	·		production;

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

	·		availability and costs of drilling rigs and field services;

	·		future operating results; and

	·		plans, objectives, expectations, and intentions.

These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and other sections of this Quarterly Report. Forward-looking statements are typically identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently.

The forward-looking statements contained in this Quarterly Report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Quarterly Report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended March 31, 2007. All forward-looking statements speak only as of the date of this Quarterly Report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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Organization

Rancher Energy is an independent energy company which explores for and develops, produces, and markets oil & gas in North America. Prior to April 2006, Rancher Energy, formerly known as Metalex Resources, Inc. (“Metalex”), was engaged in the exploration of a gold prospect in British Columbia, Canada. Metalex found no commercially exploitable deposits or reserves of gold. During April 2006, stockholders voted to change the name to Rancher Energy Corp. Since April 2006, we have employed a new Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Senior Vice President, Engineering, and Chief Accounting Officer and are actively pursuing oil & gas prospects in the Rocky Mountain region.

We operate three 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, and the Cole Creek South Field. All three fields currently produce some oil and are waterflood or CO₂ tertiary recovery candidates. We plan to substantially increase production in our fields by using waterflood, CO₂injection and other enhanced oil recovery (EOR) techniques. To fund the acquisition of the three fields and our operating expenses, from June 2006 through January 2007, we sold $89.3 million of our securities in two private placements. In December 2006, we also entered into an agreement with the Anadarko Petroleum Corporation to supply us with CO₂needed to conduct CO₂ tertiary recovery operations in our three fields.

Since late 2006 we have added operating staff and have engaged consultants to conduct field studies of secondary (waterflood) and tertiary( CO₂flood) development of the three Powder River Basin fields. To date, work has focused on field and engineering studies to prepare for development operations. We have also engaged an engineering firm to evaluate routes and undertake the required front end engineering and design for the required CO₂ pipeline, as well as another engineering firm to evaluate and design surface facilities appropriate for CO₂injection.

Outlook for the Coming Year

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

·	To utilize a portion of the funds raised in the October 2007 short term financing to enhance production in two of our fields, to initiate waterflood operations on one of our fields and to continue permitting for our CO₂pipeline project;

·	Borrow additional funds on a long-term fixed rate basis to conduct 3-D seismic surveys on our fields and to complete our waterflood plan on our Big Muddy Field;

·	Continue to seek long-term financing for our CO₂ pipeline and EOR development plan for all our fields.

·	Pursue additional asset and project opportunities that are expected to be accretive to stockholder value.

Oil & Gas Properties Development Plans

Our plans for production enhancement, waterflood and CO₂ EOR development of our oil fields are dependent on our obtaining substantial additional funding. That funding is dependent on many factors, some of which are outside our control, and cannot be assured. One major factor is the level of and projected trends in oil prices, which we cannot protect against by hedging at this time.

Short term production enhancement plan - commencing late 2007

In October 2007, we borrowed approximately $11.6 million (after fees and expenses). We plan to utilize these funds to:

·	Install down-hole pumps in six wells in our Cole Creek South Field that are currently flowing oil wells, at an estimated cost of approximately $1.7 million;

·	Drill two wells in our Big Muddy Field as part of the waterflood plan and evaluation to be conducted later in the year, at a cost of approximately $2.1 million;

·	Drill one well in our South Glenrock B Field to access oil reserves that are currently classified as proved undeveloped, at a cost of approximately $1 million;

·	Continue permit process for CO₂ pipeline project at a cost of approximately $0.5 million; and

·	Allocate the remainder of the funds to working capital, general corporate purposes, and cash reserves.

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Waterflood development plan - Big Muddy Field - commencing 1^st or 2^nd quarter of 2008

In late 2007 or early 2008, we plan to raise approximately $50 million in a long-term fixed rate debt financing to complete the Big Muddy Field waterflood. Specifically, we plan utilize these funds, together with internally generated funds from crude oil sales, to:

·	Conduct up to 100 square miles of 3-D seismic surveys and processing to better determine injection pattern locations and alignment of the waterflood and CO₂ EOR project, at a cost of approximately $3.5 million;

·	Drill, complete and equip 70 wells as water injectors or oil producers at a cost of approximately $46 million; and

·	Acquire and construct waterflood surface facilities, at a cost of approximately $11.5 million.

CO₂EOR development plan - commencing 2009 to 2010

Following the raising of additional funds, we plan to begin CO₂ development operations in the Big Muddy Field followed by the South Glenrock B Field and then the Cole Creek South Field. Capital expenditures to implement our CO₂ EOR plans include:

·	Construct a pipeline to transport CO₂from the source to our Big Muddy Field at a cost of approximately $50 to $100 million;

·	Acquire and construct surface and compression facilities at our Big Muddy Field to compress, inject and recycle CO₂ at a cost of approximately $20 to $30 million;

·	Drill, complete and equip 70-80 wells as CO₂ injectors or oil producers on our Big Muddy Field at a cost of approximately $48 million.

Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months September 30, 2006

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

	Three Months Ended September 30,
	2007			2006

Revenues:
Oil production (in barrels)	23,622			-
Oil price (per barrel)	$	69.88		$	-
Oil sales		1,650,628			-

Operating expenses:
Production taxes		201,182			-
Lease operating expenses		712,195			-
Depreciation, depletion, and amortization		368,724			-
Impairment of unproved properties		-			395,785
Accretion expense		31,618			-
Exploration expense		89,670			-
General and administrative expense		1,545,734			395,214
Total operating expenses		2,949,123			790,999

Loss from operations		(1,298,495	)		(790,999	)

Other income (expense):
Liquidated damages pursuant to registration rights arrangement		(1,268,283	)		-
Interest expense		(41,941	)		1,644
Write-off of deferred financing costs		(99,254	)		-
Interest and other income		78,943			22,120
Total other income (expense)		(1,330,535	)		23,764

Net loss	$	(2,629,030	)	$	(767,235	)

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Overview. For the three months ended September 30, 2007, we reported a net loss of $2,629,030, or $(0.02) per basic and fully-diluted share, compared to a net loss of $767,235, or $(0.02) per basic and fully-diluted share, for the corresponding three months of 2006. On December 22, 2006, we completed our acquisition of the Cole Creek South Field and South Glenrock B Field, and on January 4, 2007, we completed our acquisition of the Big Muddy Field. We did not have any oil & gas properties during the three months ended September 30, 2006. Included in the net loss of $2,629,030 are non-cash charges of $1,265,283 for liquidated damages pursuant to a registration rights arrangement, and $327,001 for stock-based compensation expense, restricted stock compensation expense, and services exchanged for common stock to a non-employee and non-employee directors.

Revenue, production taxes, and lease operating expenses. For the three months ended September 30, 2007, we reflected oil & gas sales of $1,650,628 on 23,622 barrels of oil at $69.88 per barrel, production taxes (including ad valorem taxes) of $201,182 and lease operating expenses of $712,195, as compared to $0, $0 and $0, respectively, for the corresponding three months ended September 30, 2006. For the three months ended September 30, 2007, production taxes were $8.52 per barrel, and lease operating expenses were $30.15 per barrel.

Depreciation, depletion, and amortization. For the three months ended September 30, 2007, we reflected depreciation, depletion, and amortization of $368,724 ($318,624 related to oil & gas properties, and $50,100 related to other assets) as compared to $0 for the corresponding three months ended September 30, 2006. For the three months ended September 30, 2007, depreciation, depletion, and amortization of oil & gas properties was $13.49 per barrel.

Impairment expense. For the three months ended September 30, 2006, there was no impairment of unproved properties, as compared to $395,785, related solely to the Burke Ranch property, for the corresponding three months ended September 30, 2006.

Accretion expense. For the three months ended September 30, 2007, we reflected accretion expense of $31,618 as compared to $0 for the corresponding three months ended September 30, 2006. We have reflected accretion of our asset retirement obligation associated with the Cole Creek South Field, the South Glenrock B Field, and the Big Muddy Field.

Exploration expense. For the three months ended September 30, 2007, we reflected exploration expense of $89,670 as compared to $0 for the corresponding three months ended September 30, 2006. The exploration expense is attributed to geological and geophysical work at our Cole Creek South Field, the South Glenrock B Field, and the Big Muddy Field.

General and administrative expense. For the three months ended September 30, 2007, we reflected general and administrative expenses of $1,545,734 as compared to $395,214 for the corresponding three months ended September 30, 2006. The increase is primarily attributed to focusing our efforts on building our oil & gas infrastructure. For the three months ended September 30, 2007, included in general and administrative expenses is stock-based compensation expense, restricted stock compensation expense, and services exchanged for common stock to a non-employee and non-employee directors that aggregate $327,001. Other key elements comprising the increase include salaries, Sarbanes-Oxley compliance, audit fees, legal, and reservoir engineering. For the three months ended September 30, 2006, included in general and administrative expenses is stock-based compensation of $105,875.

Liquidated damages pursuant to registration rights agreement. In connection with our equity private placement in December 2006 and January 2007, we entered into a registration rights agreement and agreed to file a registration statement to register for resale the shares of common stock. The agreement includes provisions for payment if the registration statement was not declared effective by May 20, 2007, and additional payments are due if there are additional delays in obtaining effectiveness. During the fourth quarter of fiscal 2007, we determined that the obligation to pay the liquidated damages was both probable and could be estimated, and we reflected three months of estimated damages totaling $2,705,531 in that quarter.

During the three months ended September 30, 2007, we determined that we would incur additional damages. Consequently, we reflected two months and 14 days of damages totaling $1,268,283 for the three months ended September 30, 2007.

Interest expense. For the three months ended September 30, 2007, we reflected interest expense of $41,941 as compared to $(1,644) for the corresponding three months ended September 30, 2006. The increase is primarily attributed to imputed interest on the liquidated damages pursuant to the registration rights arrangement discussed above.

Write off of deferred financing costs. For the three months ended September 30, 2007, we reflected $99,254 of write off of deferred financing costs as compared to $0 for the corresponding three months ended September 30, 2006. The write off resulted from certain unsuccessful pursuits of debt financing.

Interest and other income. For the three months ended September 30, 2007, we reflected interest and other income of $78,943 as compared to $22,120 for the corresponding three months ended September 30, 2006. The interest and other income included earnings on excess cash derived from our December 2006 and January 2007 private placement of units, consisting of common stock and warrants to acquire shares of common stock.

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Six Months Ended September 30, 2007 Compared to Six Months September 30, 2006

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

	Six Months Ended September 30,
	2007			2006

Revenues:
Oil production (in barrels)	46,056			-
Oil price (per barrel)	$	64.73		$	-
Oil sales		2,981,107			-

Operating expenses:
Production taxes		362,651			-
Lease operating expenses		1,312,109			-
Depreciation, depletion, and amortization		700,256			-
Impairment of unproved properties		-			395,785
Accretion expense		77,608			-
Exploration expense		130,828			-
General and administrative expense		4,130,160			966,282
Total operating expenses		6,713,612			1,362,067

Loss from operations		(3,732,505	)		(1,362,067	)

Other income (expense):
Liquidated damages pursuant to registration rights arrangement		(2,645,393	)		-
Interest expense		(113,180	)		(33,000	)
Write-off of deferred financing costs		(99,254	)		-
Interest and other income		183,381			23,485
Total other income (expense)		(2,674,446	)		(9,515	)

Net loss	$	(6,406,951	)	$	(1,371,582	)

Overview. For the six months ended September 30, 2007, we reported a net loss of $6,406,951, or $(0.06) per basic and fully-diluted share, compared to a net loss of $1,371,582, or $(0.04) per basic and fully-diluted share, for the corresponding six months of 2006. On December 22, 2006, we completed our acquisition of the Cole Creek South Field and South Glenrock B Field, and on January 4, 2007, we completed our acquisition of the Big Muddy Field. We did not have any oil & gas properties during the six months ended September 30, 2006. Included in the net loss of $6,406,951 are non-cash charges of $2,645,393 for liquidated damages pursuant to a registration rights arrangement, and $986,134 for stock-based compensation expense, restricted stock compensation expense, and services exchanged for common stock to a non-employee and non-employee directors.

Revenue, production taxes, and lease operating expenses. For the six months ended September 30, 2007, we reflected oil & gas sales of $2,981,107 on 46,056 barrels of oil at $64.73 per barrel, production taxes (including ad valorem taxes) of $362,651 and lease operating expenses of $1,312,109, as compared to $0, $0 and $0, respectively, for the corresponding six months ended September 30, 2006. For the six months ended September 30, 2007, production taxes were $7.87 per barrel, and lease operating expenses were $28.49 per barrel.

Depreciation, depletion, and amortization. For the six months ended September 30, 2007, we reflected depreciation, depletion, and amortization of $700,256 ($619,130 related to oil & gas properties, and $81,126 related to other assets) as compared to $0 for the corresponding six months ended September 30, 2006. For the six months ended September 30, 2007, depreciation, depletion, and amortization of oil & gas properties was $13.44 per barrel.

Impairment expense. For the six months ended September 30, 2006, there was no impairment of unproved properties, as compared to $395,785, related solely to the Burke Ranch property, for the corresponding three months ended September 30, 2006.

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Accretion expense. For the six months ended September 30, 2007, we reflected accretion expense of $77,608 as compared to $0 for the corresponding six months ended September 30, 2006. We have reflected accretion of our asset retirement obligation associated with the Cole Creek South Field, the South Glenrock B Field, and the Big Muddy Field.

Exploration expense. For the six months ended September 30, 2007, we reflected exploration expense of $130,828 as compared to $0 for the corresponding six months ended September 30, 2006. The exploration expense is attributed to geological and geophysical work at our Cole Creek South Field, the South Glenrock B Field, and the Big Muddy Field.

General and administrative expense. For the six months ended September 30, 2007, we reflected general and administrative expenses of $4,130,160 as compared to $966,282 for the corresponding six months ended September 30, 2006. The increase is primarily attributed to focusing our efforts on building our oil & gas infrastructure. For the six months ended September 30, 2007, included in general and administrative expenses is stock-based compensation expense, restricted stock compensation expense, and services exchanged for common stock to a non-employee and non-employee directors that aggregate $986,134. Other key elements comprising the increase include salaries, Sarbanes-Oxley compliance, audit fees, legal, and reservoir engineering. For the six months ended September 30, 2006, included in general and administrative expenses is stock-based compensation expense of $529,375.

Liquidated damages pursuant to registration rights agreement. In connection with our equity private placement in December 2006 and January 2007, we entered into a registration rights agreement and agreed to file a registration statement to register for resale the shares of common stock. The agreement includes provisions for payment if the registration statementwas not declared effective by May 20, 2007, and additional payments are due if there are additional delays in obtaining effectiveness. During the fourth quarter of fiscal 2007, we determined that the obligation to pay the liquidated damages was both probable and could be estimated, and we reflected three months of estimated damages totaling $2,705,531 in that quarter.

During the six months ended September 30, 2007, we determined that we would incur additional damages. Consequently, we reflected four months and 14 days of damages totaling $2,645,393.

Interest expense. For the six months ended September 30, 2007, we reflected interest expense of $113,180 as compared to $33,000 for the corresponding six months ended September 30, 2006. The increase is primarily attributed to imputed interest on the liquidated damages pursuant to the registration rights arrangement discussed above.

Write off of deferred financing costs. For the six months ended September 30, 2007, we reflected $99,254 of write off of deferred financing costs as compared to $0 for the corresponding six months ended September 30, 2006. The write off resulted from certain unsuccessful pursuits of debt financing.

Interest and other income. For the six months ended September 30, 2007, we reflected interest and other income of $183,381 as compared to $23,485 for the corresponding six months ended September 30, 2006. The interest and other income included earnings on excess cash derived from our December 2006 and January 2007 private placement of units, consisting of common stock and warrants to acquire shares of common stock.

Liquidity and Capital Resources

As of September 30, 2007, we had a working capital deficiency of $1,108,058. Current liabilities include $1,227,626 for penalty payments pursuant to the registration rights agreement, all of which we have settled in shares of our common stock. On October 17, 2007 and October 31, 2007, penalty payments of $822,916 and $404,710 were paid by the issuance of stock.

We have revenue from production operations in our three fields. However, we currently have negative cash flow from operating activities. Monthly oil & gas production revenue is adequate to cover monthly field operating costs and production taxes at the current time. Only a portion of the remaining cash costs, which consist primarily of general and administrative expenses, are covered by cash flow.

Our currently available cash sources are not sufficient to fund our planned expenditures for the secondary and tertiary development of our three fields. Essentially all of the necessary funding for their development is expected to come from, and is dependent on, successful completion of a debt financing. As of September 30, 2007, the Company was debt-free.

Short-Term Financing

On October 16, 2007, we borrowed $12,240,000 pursuant to a Term Credit Agreement with GasRock Capital LLC (GasRock). We received net proceeds of $11,622,800 after the deduction of GasRock’s fees, expenses, and three months of interest to be held in escrow. In addition, we incurred approximately $390,000 in investment banking, legal, and other fees and expenses in connection with the transaction.

All amounts outstanding under the Credit Agreement are due and payable on October 31, 2008 (Maturity Date), and bear interest at a rate equal to the greater of (a) 12% per annum and (b) the LIBOR rate plus 6% per annum. We are required to make monthly interest payments on the amounts outstanding under the Credit Agreement but are not required to make any principal payments until the Maturity Date. We may prepay the amounts outstanding under the Credit Agreement at any time without penalty.

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Our obligations under the Credit Agreement are secured by a first priority security interest in all of our properties and assets, including all rights under our oil & gas leases in our three producing oil fields in the Powder River Basin of Wyoming and all of our equipment on those properties.

We also granted GasRock a 2% Overriding Royalty Interest (ORRI), proportionally reduced when our working interest is less than 100%, in all crude oil and natural gas produced from our three Powder River Basin fields. As long as any of our obligations remain outstanding under the Credit Agreement, we will be required to grant the same ORRI to GasRock on any new working interests acquired by us after closing. Prior to the Maturity Date, we may re-acquire 50% of the ORRI granted to GasRock at a repurchase price calculated to ensure that total payments by us to GasRock of principal, interest, ORRI revenues, and ORRI repurchase price will equal 120% of the loan amount.

As required by the Credit Agreement, we entered into an oil hedge agreement covering approximately 75% of our proved developed producing reserves scheduled to be produced during a two-year period. We have entered into a Participation Cap Costless Collar with BP Corporation North America Inc. (BP) with a price floor of $65/bbl for NYMEX light sweet crude oil on 75% of our scheduled production and a ceiling price of $83.50 on 45% of our scheduled production. The price we receive for production in our three fields is indexed to Wyoming Sweet crude oil posted price. We have not hedged the basis differential between the NYMEX price and the Wyoming Sweet price.

We are subject to various restrictive covenants under the Credit Agreement, including limitations on our ability to sell properties and assets, pay dividends, extend credit, amend our material contracts, incur indebtedness, provide guarantees, effect mergers or acquisitions (other than to change our state of incorporation), cancel claims, create liens, create subsidiaries, amend our formation documents, make investments, enter into transactions with our affiliates, and enter into swap agreements. We must maintain (a) a current ratio of at least 1.0 (excluding from the calculation of current liabilities any loans outstanding under the Credit Agreement) and (b) a loan-to-value ratio greater than 1.0 to 1.0 for the term of the loan.

The Credit Agreement contains several events of default, including if, at any time after closing, our most recent reserve report indicates that our projected net revenue attributable to our proved reserves is insufficient to fully amortize the amounts outstanding under the Credit Agreement within a 48-month period and we are unable to demonstrate to GasRock’s reasonable satisfaction that we would be able to satisfy such outstanding amounts through a sale of our assets or equity. Upon the occurrence of an event of default under the Credit Agreement, GasRock may accelerate our obligations under the Credit Agreement. Upon certain events of bankruptcy, our obligations under the Credit Agreement would automatically accelerate. In addition, at any time that an event of default exists under the Credit Agreement, we will be required to pay interest on all amounts outstanding under the Credit Agreement at a default rate, which is equal to the then-prevailing interest rate under the Credit Agreement plus four percent per annum.

Long-Term Debt Financings

We anticipate raising approximately $50 million in late 2007 or early 2008, in one or more long-term debt financings, to carry out the waterflood program on our Big Muddy Field. There is substantial potential for oil recovery via waterflood at our Big Muddy Field, and the waterflood strategy will stand alone as a project separate and apart from our overall CO₂ flood strategy. The waterflood development implemented on the Big Muddy Field also is a precursor to eventual CO₂ flooding of the field, as the work necessary to prepare the field for waterflood is similarly needed for the comprehensive CO₂ flood. We anticipate that the short-term debt financing will be refinanced or rolled into the long-term debt financing. We also anticipate that the Big Muddy Field will be the first field targeted for our comprehensive CO₂ flood, followed by the South Glenrock B field and then the Cole Creek South Field.

Following the financing for the Big Muddy Field waterflood project, we plan to raise additional financing in 2008 to proceed with our CO₂ EOR tertiary development plans of our three fields.

Completion of the long-term debt financings will be subject to market conditions and Company-specific factors. Irrespective of whether long-term financing is completed as planned, the funds from the short-term financing should be sufficient to cover the negative cash flow from operations through the Maturity Date of the short-term financing. Without additional funding, we would not be able to repay the short-term financing on the Maturity Date. Accordingly, if the long-term financing is not completed as planned, we will reconsider our business plan and consider other strategic alternatives, which could include partnering with other industry participants, property sales and a scale back of operating plans and staffing.

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Cash Flows

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

	For the Six Months Ended September 30,
	2007			2006
Cash flows from:
Operating activities	$	(1,855,577	)	$	(322,595	)
Investing activities		(1,593,935	)		(2,837,875	)
Financing activities		(235,951	)		8,593,397

Cash flows used for operating activities increased primarily as a result of general and administrative expenses incurred in connection with the expansion of the Company’s oil & gas operations.

Cash flows used for investing activities decreased modestly. During the six months ended September 30, 2007 and 2006, net cash used for investing activities included expenditures of $1,466,291 and $2,800,167 for oil & gas properties, and $619,144 and $37,709 for other assets, respectively. Expenditures for oil & gas properties during the six months ended September 30, 2007 were reduced by net proceeds of $491,500 from the conveyance of certain unproved oil & gas properties.

During the six months ended September 30, 2007, cash flows used for financing activities included $234,012 for offering costs associated with the registration of certain equity securities included in our Form S-1 and subsequent amendments filed with the Securities and Exchange Commission. During the six months ended September 30, 2006, cash flows provided by financing activities included $500,000 of proceeds from the issuance of notes payable that were converted to common stock, and $8,093,397 of proceeds, net of offering costs, from the sale of common stock and warrants in connection with a Regulation S offering.

Off-Balance Sheet Arrangements

Other than operating leases, we do not have any off-balance sheet arrangements, and we do not have any unconsolidated subsidiaries.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are provided in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the Annual Report on Form 10-K for the year ended March 31, 2007. Additional footnote disclosures are provided in Notes to Consolidated Financial Statements in Part I, Financial Information, Item 1, Financial Statements to this Quarterly Report on Form 10-Q for the six months ended September 30, 2007.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Commodity Price Risk

Because of our relatively low level of current oil & 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 & 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. As of September 30, 2007 we had not utilized hedging contracts or derivative instruments to protect against commodity price risk; however, in connection with our short term financing in October 2007, we entered into an oil hedge agreement covering approximately 75% of our proved developed producing reserves scheduled to be produced during a two-year period. Terms of future debt facilities may also require that we hedge a portion of our expected future production.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Evaluations have been performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act). We view internal control over financial reporting to be an integral part of our disclosure control over financial reporting. Based on the evaluation of our Chief Executive Officer and Chief Accounting Officer that there are material weaknesses in our internal control over financial reporting, we concluded that our disclosure controls and procedures are not effective as of September 30, 2007. The weaknesses and our remediation efforts were discussed in our Form 10-K filed with the SEC on June 29, 2007. Since June 29, 2007, we have implemented additional remediation efforts including:

1.	The appointment of a Chief Accounting Officer with significant experienced in financial reporting:

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2.	The implementation of quarterly fraud assessments carried out by management as part of our financial closing process;

3.	The appointment of an independent, experienced accounting and business advisory firm to review public filings for completeness and to consult on complex or emerging accounting issues;

4.	The appointment of an experienced consulting firm to assist in the development of internal control process documentation and to conduct independent testing of such controls and processes;

5.	The implementation of a new accounting software system, with significantly enhanced segregation of duties and formal authority processes.

Our management does not expect that our disclosure controls and procedures will prevent all errors and all fraud. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Based on the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realties that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Therefore, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes in Internal Control over Financial Reporting

The following changes in our internal controls over financial reporting that occurred during the six months ended September 30, 2007 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

1.	The appointment of four new independent directors;

2.	The establishment of an Audit Committee;

3.	The establishment of a Compensation Committee;

4.	The establishment of a Nominating and Corporate Governance Committee;

5.	The adoption of an updated Code of Business Conduct and Ethics; and

6.	The adoption of an Insider Trading Policy, and:

7.	The appointment of a Chief Accounting Officer.

Because these controls have not been tested, the operating effectiveness of these changes has yet to be evaluated. Accordingly, the material weaknesses in our internal control over financial reporting as discussed above and in our Form 10-K filed with the SEC on June 29, 2007 remain in effect as of September 30, 2007, the end of the period covered by this Quarterly Report on Form 10-Q.

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PART II - OTHER INFORMATION

Item 1A. Risk Factors.

As a result of the completion of our short-term debt financing in October 2007, we have amended the risk factors discussed in Part I, “Item 1A Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007 by adding the two below risk factors. In addition to the other information set forth in this report and the below risk factors, you should carefully consider the risk factors, discussed in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007, which could materially affect our business, financial condition and/or future results of operations. The risks, described in our Annual Report on Form 10-K and below, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or results of operations. There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K, as amended, for the year ended March 31, 2007 other than the addition of the two below risk factors.

If we are unable to obtain additional financing our business plans will not be achievable.

Our current cash position will not be sufficient to fund the development of the Big Muddy Field for waterflood operations and our three properties for CO₂ EOR operations. We will require substantial additional funding. Our plan is to obtain debt financing. The terms of any debt financing may restrict our future business activities and expenditures. We do not know if additional financing will be available at all when needed or on acceptable terms. Insufficient funds will prevent us from implementing our secondary and tertiary recovery business strategy.

Our October 2007 short-term debt financing required the imposition of a mortgage interest in favor of our lender on our three fields and a default by us of the financing terms could result in the foreclosure and loss of one or more of our fields and other assets.

We borrowed $12 million in October 2007, which is due in October 2008, and granted to the lender a mortgage on our interests in three fields and our other assets. We plan to use these funds to increase oil production and for working capital. We do not expect that our cash flow from operations or other assets will be sufficient to repay this loan. We plan to refinance this loan and borrow additional funds to pursue our business strategy. There is no assurance that such funding will be available. If we are not successful in repaying this debt within the term of the loan, or default under the terms of the loan, the lender will be able to foreclose one or more of our three properties and other assets and we could lose the properties. A foreclosure could significantly reduce or eliminate our property interests, force us to alter our business strategy, which could involve the sale of properties or working interests in the properties, and adversely affect our results of operations and financial condition.

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

On July 23, 2007, pursuant to our compensation arrangement with our non-employee directors, we issued 101,713 shares of our common stock in the aggregate under our 2006 Stock Incentive Plan to our non-employee directors for their service on our Board of Directors and for attending board and committee meetings, as the case may be. More specifically, we issued to the following directors the shares specified: (i) William A. Anderson, 22,603 shares; (ii) Joseph P. McCoy, 25,685 shares, (iii) Patrick M. Murray, 15,411 shares, (iv) Myron M. Sheinfeld, 15,411 shares, and (v) Mark Worthey, 22,603 shares. The foregoing issuances were made pursuant to Section 4(2) of the Securities Act.

On September 30, 2007, pursuant to our compensation arrangement with our non-employee directors, we issued 181,098 shares of our common stock in the aggregate under our 2006 Stock Incentive Plan to our non-employee directors for their service on our Board of Directors and for attending board and committee meetings, as the case may be. More specifically, we issued to the following directors the shares specified: (i) William A. Anderson, 40,244 shares; (ii) Joseph P. McCoy, 45,732 shares, (iii) Patrick M. Murray, 27,439 shares, (iv) Myron M. Sheinfeld, 27,439 shares, and (v) Mark Worthey, 40,244 shares. The foregoing issuances were made pursuant to Section 4(2) of the Securities Act.

Item 6. Exhibits.

Exhibit		Description
3.1		Amended and Restated Articles of Incorporation ⁽¹⁷⁾
3.2		Articles of Correction ⁽²²⁾
3.3		Amended and Restated Bylaws ⁽²⁾
4.1		Form of Stock Certificate for Fully Paid, Non-Assessable Common Stock of the Company ⁽¹⁾
4.2		Form of Unit Purchase Agreement ⁽²⁾
4.3		Form of Warrant Certificate ⁽²⁾
4.4		Form of Registration Rights Agreement, dated December 21, 2006 ⁽³⁾

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Exhibit		Description
4.5		Form of Warrant to Purchase Common Stock ⁽³⁾
10.1		Burke Ranch Unit Purchase and Participation Agreement between Hot Springs Resources Ltd. and PIN Petroleum Partners Ltd., dated February 6, 2006⁽⁴⁾
10.2		Employment Agreement between John Works and Rancher Energy Corp., dated June 1, 2006 ⁽⁵⁾
10.3		Assignment Agreement between PIN Petroleum Partners Ltd. and Rancher Energy Corp., dated June 6, 2006 ⁽⁵⁾
10.4		Loan Agreement between Enerex Capital, Corp. and Rancher Energy Corp., dated June 6, 2006 ⁽⁵⁾
10.5		Letter Agreement between NITEC LLC and Rancher Energy Corp., dated June 7, 2006 ⁽⁵⁾
10.6		Loan Agreement between Venture Capital First LLC and Rancher Energy Corp., dated June 9, 2006 ⁽⁶⁾
10.7		Exploration and Development Agreement between Big Snowy Resources, LP and Rancher Energy Corp., dated June 15, 2006 ⁽⁵⁾
10.8		Assignment Agreement between PIN Petroleum Partners Ltd. and Rancher Energy Corp., dated June 21, 2006 ⁽⁵⁾
10.9		Purchase and Sale Agreement between Wyoming Mineral Exploration, LLC and Rancher Energy Corp., dated August 10, 2006 ⁽⁴⁾
10.10		South Glenrock and South Cole Creek Purchase and Sale Agreement by and between Nielson & Associates, Inc. and Rancher Energy Corp., dated October 1, 2006 ⁽⁷⁾
10.11		Rancher Energy Corp. 2006 Stock Incentive Plan⁽⁷⁾
10.12		Rancher Energy Corp. 2006 Stock Incentive Plan Form of Option Agreement ⁽⁷⁾
10.13		Employment Agreement by and between John Dobitz and Rancher Energy Corp., dated October 2, 2006 ⁽⁷⁾
10.14		Denver Place Office Lease between Rancher Energy Corp. and Denver Place Associates Limited Partnership, dated October 30, 2006 ⁽⁸⁾
10.15		Employment Agreement between Andrew Casazza and Rancher Energy Corp., dated October 23, 2006 ⁽⁹⁾
10.16		Finder’s Fee Agreement between Falcon Capital and Rancher Energy Corp. ⁽¹⁰⁾
10.17		Amendment to Purchase and Sale Agreement between Wyoming Mineral Exploration, LLC and Rancher Energy Corp. ⁽¹¹⁾
10.18		Letter Agreement between Certain Unit Holders and Rancher Energy Corp., dated December 8, 2006 ⁽²⁾
10.19		Letter Agreement between Certain Option Holders and Rancher Energy Corp., dated December 13, 2006⁽²⁾
10.20		Product Sale and Purchase Contract by and between Rancher Energy Corp. and the Anadarko Petroleum Corporation, dated December 15, 2006 ⁽¹²⁾
10.21		Amendment to Purchase and Sale Agreement between Nielson & Associates, Inc. and Rancher Energy Corp. ⁽¹³⁾
10.22		Securities Purchase Agreement by and among Rancher Energy Corp. and the Buyers identified therein, dated December 21, 2006 ⁽³⁾
10.23		Lock-Up Agreement between Rancher Energy Corp. and Stockholders identified therein, dated December 21, 2006 ⁽³⁾
10.24		Voting Agreement between Rancher Energy Corp. and Stockholders identified therein, dated as of December 13, 2006 ⁽³⁾
10.25		Form of Convertible Note ⁽¹⁴⁾
10.26		Employment Agreement between Daniel Foley and Rancher Energy Corp., dated January 12, 2007 ⁽¹⁵⁾
10.27		First Amendment to Securities Purchase Agreement by and among Rancher Energy Corp. and the Buyers identified therein, dated as of January 18, 2007 ⁽¹⁶⁾
10.28		Rancher Energy Corp. 2006 Stock Incentive Plan Form of Restricted Stock Agreement ⁽¹⁹⁾
10.29		First Amendment to Employment Agreement by and between John Works and Rancher Energy Corp., dated March 14, 2007 ⁽¹⁸⁾
10.30		Employment Agreement between Richard Kurtenbach and Rancher Energy Corp., dated August 3, 2007⁽²⁰⁾
10.31		Term Credit Agreement between Rancher Energy Corp. and GasRock Capital LLC, dated as of October 16, 2007 ⁽²²⁾
10.32		Term Note made by Rancher Energy Corp. in favor of GasRock Capital LLC, dated October 16, 2007 ⁽²²⁾
10.33		Mortgage, Security Agreement, Financing Statement and Assignment of Production and Revenues from Rancher Energy Corp. to GasRock Capital LLC, dated as of October 16, 2007 ⁽²²⁾

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Exhibit		Description
10.34		Security Agreement between Rancher Energy Corp. and GasRock Capital LLC, dated as of October 16, 2007 ⁽²²⁾
10.35		Conveyance of Overriding Royalty Interest by Rancher Energy Corp. in favor of GasRock Capital LLC, dated as of October 16, 2007 ⁽²²⁾
10.36		ISDA Master Agreement between Rancher Energy Corp. and BP Corporation North America Inc., dated as of October 16, 2007 ⁽²²⁾
10.37		Restricted Account and Securities Account Control Agreement by and among Rancher Energy Corp., GasRock Capital LLC, and Wells Fargo Bank, National Association, dated as of October 16, 2007 ⁽²²⁾
10.38		Intercreditor Agreement by and among Rancher Energy Corp., GasRock Capital LLC, and BP Corporation North America Inc., dated as of October 16, 2007 ⁽²²⁾
31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer)⁽²¹⁾
31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Accounting Officer)⁽²¹⁾
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽²¹⁾
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽²¹⁾

(1)	Incorporated by reference from our Form SB-2 Registration Statement filed on June 9, 2004 (File No. 333-116307).

(2)	Incorporated by reference from our Current Report on Form 8-K filed on December 18, 2006 (File No. 000-51425).

(3)	Incorporated by reference from our Current Report on Form 8-K filed on December 27, 2006 (File No. 000-51425).

(4)	Incorporated by reference from our Quarterly Report on Form 10-Q/A filed on August 28, 2006 (File No. 000-51425).

(5)	Incorporated by reference from our Annual Report on Form 10-K filed on June 30, 2006 (File No. 000-51425).

(6)	Incorporated by reference from our Current Report on Form 8-K filed on June 21, 2006 (File No. 000-51425).

(7)	Incorporated by reference from our Current Report on Form 8-K filed on October 6, 2006 (File No. 000-51425).

(8)	Incorporated by reference from our Current Report on Form 8-K filed on November 9, 2006 (File No. 000-51425).

(9)	Incorporated by reference from our Current Report on Form 8-K filed on November 14, 2006 (File No. 000-51425).

(10)	Incorporated by reference from our Current Report on Form 8-K/A filed on November 14, 2006 (File No. 000-51425).

(11)	Incorporated by reference from our Current Report on Form 8-K filed on December 4, 2006 (File No. 000-51425).

(12)	Incorporated by reference from our Current Report on Form 8-K filed on December 22, 2006 (File No. 000-51425).

(13)	Incorporated by reference from our Current Report on Form 8-K filed on December 27, 2006 (File No. 000-51425).

(14)	Incorporated by reference from our Current Report on Form 8-K filed on January 8, 2007 (File No. 000-51425).

(15)	Incorporated by reference from our Current Report on Form 8-K filed on January 16, 2007 (File No. 000-51425).

(16)	Incorporated by reference from our Current Report on Form 8-K filed on January 25, 2007 (File No. 000-51425).

(17)	Incorporated by reference from our Current Report on Form 8-K filed on April 3, 2007 (File No. 000-51425).

(18)	Incorporated by reference from our Current Report on Form 8-K filed on March 20, 2007 (File No. 000-51425).

(19)	Incorporated by reference from our Annual Report on Form 10-K filed on June 29, 2007 (File No. 000-51425).

(20)	Incorporated by reference from our Current Report on Form 8-K filed on August 7, 2007 (File No. 000-51425

(21)	Incorporated by reference from our Current Report on Form 8-K filed on October 17, 2007 (File No. 000-51425).

(22)	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	RANCHER ENERGY CORP. (Registrant)

Dated: November 8, 2007	By:	/s/ John Works
		John Works
		President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer (Principal Executive Officer)


Dated: November 8, 2007	By:	/s/ Richard Kurtenbach
		Chief Accounting Officer (Principal Accounting Officer)

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