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

                                    FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended March 31, 2004              Commission File No. 0-6694

                            MEXCO ENERGY CORPORATION
             (Exact name of registrant as specified in its charter)

               COLORADO                                          84-0627918
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                         Identification No.)

     214 W. TEXAS AVENUE, SUITE 1101                               79701
            MIDLAND, TEXAS                                       (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (432) 682-1119

        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 Exchange on Which Registered
-----------------------------               ------------------------------------
Common Stock, $0.50 par value                     American Stock Exchange

     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  twelve (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 ninety (90) days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (ss.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 an amendment to this Form 10-K. [ ]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

     As of June 24, 2004, the aggregate market value of the registrant's  common
stock held by non-affiliates  (using the last price at which a common equity was
sold ($6.80)) was approximately $3,488,148.

     The number of shares  outstanding  of the  registrant's  common stock as of
June 24, 2004 was 1,736,041.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the  Registrant's  Proxy Statement  relating to the 2004 Annual
Meeting of Shareholders to be held on September 14, 2004, have been incorporated
by reference in Part III of this Form 10-K.  Such Proxy  Statement will be filed
with the Commission not later than July 30, 2004.

<PAGE>

                                TABLE OF CONTENTS

                                     PART 1

Item 1.   Business ..........................................................  3
Item 2.   Properties.........................................................  7
Item 3.   Legal Proceedings.................................................. 10
Item 4.   Submission of Matters to a Vote of Security Holders................ 11

                                     PART II

Item 5.   Market for the Registrant's Common Equity and Related
          Stockholder Matters................................................ 11
Item 6.   Selected Financial Data............................................ 12
Item 6A.  Selected Quarterly Financial Data.................................. 13
Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations................................ 13
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk......... 19
Item 8.   Financial Statements and Supplementary Data........................ 20
Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosures............................... 38
Item 9A.  Controls and Procedures............................................ 38

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant................. 39
Item 11.  Executive Compensation............................................. 39
Item 12.  Security Ownership of Certain Beneficial Owners and Management..... 39
Item 13.  Certain Relationships and Related Transactions..................... 39
Item 14.  Principal Accountant Fees and Services............................. 39

                                     PART IV

Item 15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 40
Signatures    ............................................................... 40


                                       2

<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

     Mexco Energy Corporation,  a Colorado  corporation,  (the "Company",  which
reference shall include the Company's wholly-owned subsidiary) is an independent
oil and gas company engaged in the  acquisition,  exploration and development of
oil and gas properties located in the United States.  Incorporated in April 1972
under the name Miller Oil Company,  the Company changed its name to Mexco Energy
Corporation  effective  April 30, 1980. At that time,  the  shareholders  of the
Company also approved amendments to the Articles of Incorporation resulting in a
one-for-fifty reverse stock split of the Company's common stock.

     On February  25, 1997 Mexco Energy  Corporation  acquired all of the issued
and outstanding stock of Forman Energy Corporation,  a New York corporation also
engaged in oil and gas exploration and development.

     Since  its  inception,  the  Company  has been  engaged  in  acquiring  and
developing oil and gas properties and the  exploration for and production of oil
and  gas  within  the  United  States.  The  Company  primarily  focuses  on the
exploration for and  development of natural gas resources,  as well as increased
profit margins through  reductions in operating costs.  The Company's  long-term
strategy  is  to  increase   production  and  profits,   while   increasing  its
concentration on gas reserves.

     While the Company owns oil and gas properties in other states, the majority
of its activities are centered in West Texas. The Company acquires  interests in
producing and  non-producing oil and gas leases from landowners and leaseholders
in areas  considered  favorable  for oil and gas  exploration,  development  and
production.  In  addition,  the Company may  acquire  oil and gas  interests  by
joining  in oil and gas  drilling  prospects  generated  by third  parties.  The
Company may employ a  combination  of the above  methods of obtaining  producing
acreage and prospects.  In recent years, the Company has placed primary emphasis
on the evaluation and purchase of producing oil and gas properties, both working
and royalty  interests,  and re-entry  prospects  that could have a  potentially
meaningful impact on Company reserves.

OIL AND GAS OPERATIONS

     As of March 31, 2004,  gas reserves  constituted  approximately  91% of the
Company's total proved reserves and approximately 74% of the Company's  revenues
for fiscal  2004.  Revenues  from oil and gas royalty  interests  accounted  for
approximately 17% of the Company's revenues for fiscal 2004.

     VIEJOS GAS FIELD properties, encompassing 2,583 gross acres, 156 net acres,
18  gross  wells  and  1.27  net  wells in  Pecos  County,  Texas,  account  for
approximately 6% of the Company's  discounted  future net cash flows from proved
reserves  as of March  31,  2004,  and for  fiscal  2004,  approximately  20% of
revenues and 10% of production costs.

     GOMEZ GAS FIELD properties,  encompassing 13,847 gross acres, 73 net acres,
24  gross  wells  and  .11  net  wells  in  Pecos  County,  Texas,  account  for
approximately 12% of the Company's  discounted future net cash flows from proved
reserves  as of March  31,  2004,  and for  fiscal  2004,  approximately  12% of
revenues and 6% of production costs.

     EL CINCO GAS FIELD properties,  encompassing  1,713 gross acres,  1,237 net
acres, 9 gross producing wells and 6.6 net wells in Pecos County, Texas, account
for  approximately  53% of the Company's  discounted  future net cash flows from
proved reserves as of March 31, 2004. This is a multi-pay area where most of the
leases have potential reserves in two zones. Of this amount approximately 36% of
the  Company's  discounted  future  net cash  flows  from  proved  reserves  are
attributable  to proven  undeveloped  reserves  which will be developed  through
re-entry of existing wells and new drilling.  For fiscal 2004,  these properties
accounted for approximately 18% of revenues and 24% of production costs.


                                       3
<PAGE>

     The Company  owns  interests  in and  operates 22  producing  wells and two
shut-in  wells.  The Company  owns  partial  interests  in an  additional  1,704
producing wells located in the states of Texas, New Mexico, Oklahoma, Louisiana,
Arkansas,  Wyoming,  Kansas,  Colorado,  Montana  and North  Dakota.  Additional
information  concerning  these  properties  and the oil and gas  reserves of the
Company is provided below.

     The following  table indicates the Company's oil and gas production in each
of the last five years, all of which is located within the United States:

  Year                                            Oil(Bbls)       Gas (Mcf)
  ----                                            ---------       ---------
  2004......................................         20,279         487,564
  2003......................................         23,391         538,787
  2002......................................         21,139         467,013
  2001......................................         18,545         503,773
  2000......................................         19,334         540,793

COMPETITION

      The oil and gas industry is a highly competitive business. Competition for
oil and gas reserve  acquisitions is  significant.  The Company may compete with
major  oil and gas  companies,  other  independent  oil  and gas  companies  and
individual producers and operators. Some of these competitors have financial and
personnel  resources  substantially  in excess of those available to the Company
and,  therefore,  the  Company  may be  placed  at a  competitive  disadvantage.
Competitive  factors  include price,  contract  terms,  and types and quality of
service,  including pipeline  distribution.  The price for oil and gas is widely
followed and is generally  subject to worldwide  market  factors.  The Company's
ability to acquire and develop  additional  properties in the future will depend
upon its  ability  to  conduct  operations,  to  evaluate  and  select  suitable
properties,   and  to  consummate   transactions  in  this  highly   competitive
environment in a timely manner.

MAJOR CUSTOMERS

     The Company had sales to the following company that amounted to 10% or more
of revenues for the year ended March 31:

                                                           2004    2003    2002
                                                           ----    ----    ----
Sid Richardson Energy Services, Co.
  (formerly Koch Midstream Services Company)                29%     28%     24%

     Because a ready market exists for the Company's oil and gas production, the
Company  does not  believe  the loss of any  individual  customer  would  have a
material adverse effect on its financial position or results of operations.

RISK FACTORS

     There are many  factors that affect the  Company's  business and results of
operations,  some of which are beyond the Company's control.  The following is a
description  of  some  of the  important  factors  that  may  cause  results  of
operations in future periods to differ materially from those currently  expected
or desired.


                                       4
<PAGE>

Oil and gas  prices  are  volatile  and could  adversely  affect  the  Company's
revenues, cash flow, liquidity and reserve estimates. The Company cannot predict
future oil and natural gas prices with any certainty.  Historically, the markets
for oil and gas have  been  volatile,  and they are  likely  to  continue  to be
volatile.  Factors that can cause price  fluctuations  include changes in supply
and demand, weather conditions, the price and availability of alternative fuels,
political and economic conditions in oil producing countries,  and other factors
that are beyond the  Company's  control.  Natural gas prices  affect the Company
more than oil prices  because most of the Company's  production and reserves are
natural gas.

     Prices  also  affect  the  amount  of  cash  flow   available  for  capital
expenditures  and the  Company's  ability  to borrow  money or raise  additional
capital.  Lower  prices may also  reduce the amount of crude oil and natural gas
that can be  produced  economically.  Changes in oil and gas prices  impact both
estimated  future net revenue  and the  estimated  quantity of proved  reserves.
Price  increases  may permit  additional  quantities  of reserves to be produced
economically,  and price  decreases  may render  uneconomic  the  production  of
reserves  previously  classified  as proved.  Thus,  the Company may  experience
material  increases  or decreases  in reserve  quantities  solely as a result of
price changes and not as a result of drilling or well performance.

     Lower  oil  and  gas  prices  increase  the  risk  of  ceiling   limitation
write-downs.  The  Company  uses the full cost method to account for oil and gas
operations.  Accordingly,  the Company capitalizes the cost to acquire,  explore
for and  develop  crude  oil and  natural  gas  properties.  Under the full cost
accounting  rules,  the net  capitalized  cost of  crude  oil  and  natural  gas
properties  may not exceed a  "ceiling  limit"  which is based upon the  present
value of estimated future net cash flows from proved reserves, discounted at 10%
plus the  lower of cost or fair  market  value of  unproved  properties.  If net
capitalized  costs of oil and natural gas  properties  exceed the ceiling limit,
the Company must charge the amount of the excess to  earnings.  This charge does
not impact cash flow from operating  activities,  but does reduce  stockholders'
equity and  earnings.  The risk that the Company  will be required to write down
the  carrying  value of oil and natural gas  properties  increases  when oil and
natural gas prices are low.

     Estimates of proved reserves and the estimated future net revenue from such
reserves are uncertain and inherently  imprecise.  The process of estimating oil
and gas reserves is complex and requires  significant  decisions and assumptions
in the evaluation of available geological, geophysical, engineering and economic
data for each reservoir. The interpretation of such data is a subjective process
dependent upon the quality of the data and the  decision-making  and judgment of
reservoir engineers.

     Actual future production,  oil and gas prices, revenues, taxes, development
expenditures,  operating  expenses and  quantities  of  recoverable  oil and gas
reserves most likely will vary from those  estimated.  Any significant  variance
could materially affect the estimated  quantities and present value of reserves,
which  may in  turn  adversely  affect  the  Company's  cash  flow,  results  of
operations and the availability of capital resources.

     One should not assume that the present value of proved reserves is equal to
the current fair market value of the  Company's  estimated oil and gas reserves.
In accordance with the  requirements  of the Securities and Exchange  Commission
("SEC"), the estimated discounted future net cash flows from proved reserves are
generally  based on  prices  and  costs as of the date of the  estimate.  Actual
future prices and costs may be  materially  higher or lower than those as of the
date of the estimate.  The timing of both the  production  and the expenses with
respect to the  development and production of oil and gas properties will affect
the  timing of future  net cash flows from  proved  reserves  and their  present
value.


                                       5
<PAGE>

REGULATION

     The Company's exploration, development, production and marketing operations
are subject to  extensive  rules and  regulations  by  federal,  state and local
authorities.  Numerous  federal,  state and local  departments and agencies have
issued rules and regulations, binding on the oil and gas industry, some of which
carry substantial  penalties for  noncompliance.  State statutes and regulations
require  permits  for  drilling   operations,   bonds  and  reports   concerning
operations.   Most  states  also  have   statutes  and   regulations   governing
conservation  and safety  matters,  including the unitization and pooling of oil
and gas properties,  the  establishment  of maximum rates of production from oil
and gas wells and the spacing of such wells.  Such statutes and  regulations may
limit  the rate at  which  oil and gas  otherwise  could  be  produced  from the
Company's  properties.  The  regulatory  burden  on the  oil  and  gas  industry
increases   its  cost  of  doing   business  and,   consequently,   affects  its
profitability.  Because these rules and  regulations  are frequently  amended or
reinterpreted,  the  Company is not able to predict the future cost or impact of
complying with such laws.

     Currently there are no laws that regulate the price for sales of production
by the Company.  However,  the rates  charged and terms and  conditions  for the
movement of gas in interstate commerce through certain intrastate  pipelines and
production area hubs are subject to regulation  under the Natural Gas Policy Act
of 1978  ("NGPA").  The  construction  of  pipelines  and hubs are, to a limited
extent,  also subject to  regulation  under the Natural Gas Act of 1938 ("NGA").
The NGA also  establishes  comprehensive  controls  over  interstate  pipelines,
including the transportation in interstate commerce. While these NGA controls do
not apply  directly to the  Company,  their effect on natural gas markets can be
significant in terms of competition  and cost of  transportation  services.  The
Federal Energy Regulatory Commission ("FERC") administers the NGA and NGPA.

     FERC has  taken  significant  steps to  increase  competition  in the sale,
purchase,  storage and transportation of natural gas. FERC's regulatory programs
generally  allow more accurate and timely price signals from the consumer to the
producer.  Nonetheless, the ability to respond to market forces can and does add
to  price  volatility,  inter-fuel  competition  and  pressure  on the  value of
transportation and other services.

     Additional  proposals  and  proceedings  that might  affect the natural gas
industry are considered from time to time by Congress,  FERC,  state  regulatory
bodies and the  courts.  Several  proposals  that might  affect the  natural gas
industry are pending before FERC. The Company cannot predict when or if any such
proposals  will become  effective  and their  effect,  if any, on the  Company's
operations.  Historically,  the natural gas industry has been heavily regulated;
therefore,  there is no assurance  that the less stringent  regulatory  approach
recently pursued by FERC and Congress will continue.

ENVIRONMENTAL

     The  Company,  by  nature  of its oil and gas  operations,  is  subject  to
extensive   federal,   state  and  local   environmental  laws  and  regulations
controlling the generation,  use,  storage,  and discharge of materials into the
environment or otherwise relating to the protection of the environment. Numerous
governmental  departments  issue rules and  regulations to implement and enforce
such laws,  which are often  difficult and costly to comply with and which carry
substantial  penalties  for failure to comply.  These laws and  regulations  may


                                       6
<PAGE>

require the  acquisition  of a permit before  drilling or production  commences,
restrict the types,  quantities and concentration of various substances that can
be released  into the  environment  in connection  with drilling and  production
activities,  limit or prohibit  construction  or drilling  activities on certain
lands lying within protected areas, restrict the rate of oil and gas production,
require remedial actions to prevent  pollution from former operations and impose
substantial  liabilities for pollution resulting from the Company's  operations.
In addition,  these laws and regulations may impose substantial  liabilities and
penalties for the Company's failure to comply with them or for any contamination
resulting  from  the  Company's  operations.  The  Company  believes  it  is  in
compliance,   in  all   material   respects,   with   applicable   environmental
requirements.  The  Company  does not believe  costs  relating to these laws and
regulations  have had a material  adverse effect on the Company's  operations or
financial  condition  in the past.  As these laws and  regulations  become  more
stringent  and complex,  there is no  assurance  that changes in or additions to
laws or regulations  regarding the protection of the  environment  will not have
such an impact in the future.

INSURANCE

     The Company is subject to all the risks  inherent in the  exploration  for,
and  development  and  production of oil and gas including  blowouts,  fires and
other  casualties.  The  Company  maintains  insurance  coverage  customary  for
operations of a similar  nature,  but losses could arise from uninsured risks or
in amounts in excess of existing insurance coverage.

EMPLOYEES

     As of March 31, 2004,  the Company had two  full-time  and three  part-time
employees.  The  Company  believes  that  relations  with  these  employees  are
generally  satisfactory.  The Company's  employees are not covered by collective
bargaining arrangements. From time to time, the Company utilizes the services of
independent contractors to perform various field and other services. Experienced
personnel are available in all  disciplines  should the need to hire  additional
staff arise.

OFFICE FACILITIES

     The Company  maintains its principal  offices at 214 W. Texas,  Suite 1101,
Midland, Texas pursuant to a month to month lease.

TITLE TO OIL AND GAS PROPERTIES

     The  Company  believes  that  its  methods  of  investigating  title to its
properties are consistent with practices  customary in the oil and gas industry,
and that such  practices  are  adequately  designed to enable it to acquire good
title to such properties. The Company's properties may be subject to one or more
royalty,   overriding  royalty,  carried  and  other  similar  non-cost  bearing
interests and contractual arrangements customary in the industry.  Substantially
all of the Company's properties are currently mortgaged under a deed of trust to
secure funding through a revolving line of credit.

ITEM 2. PROPERTIES

OIL AND NATURAL GAS RESERVES

     The  estimates  of the  Company's  proved oil and gas  reserves,  which are
located entirely within the United States,  were prepared in accordance with the
guidelines  established by the SEC and Financial Accounting Standards Board. The
estimates as of March 31, 2004, 2003 and 2002 are based on evaluations  prepared


                                       7
<PAGE>

by Joe C. Neal and Associates, Petroleum Consultants. For information concerning
costs incurred by the Company for oil and gas operations,  net revenues from oil
and gas production,  estimated future net revenues attributable to the Company's
oil and gas reserves, present value of future net revenues discounted at 10% and
changes therein, see Notes to the Company's consolidated financial statements.

     The Company emphasizes that reserve estimates are inherently  imprecise and
there can be no assurance  that the reserves set forth below will be  ultimately
realized.  Actual  future  production,  oil and  gas  prices,  revenues,  taxes,
development  expenditures,  operating expenses and quantities of recoverable oil
and gas reserves will most likely vary from the assumptions  and estimates.  Any
significant  variance could materially affect the estimated quantities and value
of  Company  oil and gas  reserves,  which  in turn  may  adversely  affect  the
Company's  cash flow,  results of  operations  and the  availability  of capital
resources.

     In accordance with applicable  financial accounting and reporting standards
of the SEC, the estimates of our proved reserves and the present value of proved
reserves set forth  herein are made using oil and gas sales prices  estimated to
be in  affect as of the date of such  reserve  estimates  and are held  constant
throughout  the life of the  properties.  Actual  future prices and costs may be
materially higher or lower than those as of the date of the estimate. The timing
of both the  production  and the expenses  with respect to the  development  and
production of oil and gas  properties  will affect the timing of future net cash
flows from proved reserves and their present value.

     The  Company  has not  filed  any other  oil or gas  reserve  estimates  or
included any such estimates in reports to other federal or foreign  governmental
authority or agency within the last twelve months.

     The  estimated  proved oil and gas reserves and present  value of estimated
future net  revenues  from  proved oil and gas  reserves  for the Company in the
periods ended March 31 are summarized below.

                                 PROVED RESERVES

<TABLE>
<CAPTION>
                                                                      March 31,
                                               -----------------------------------------------------
                                                    2004                2003                2002
                                               --------------      --------------      -------------
<S>                                              <C>                 <C>                 <C>
Oil (Bbls):
     Proved developed - Producing                     75,455              93,199             143,003
     Proved developed - Non-producing                  1,386               1,386               1,404
     Proved undeveloped                               55,613              55,564              92,900
                                               -------------       -------------       -------------
         Total                                       132,454             150,149             237,307
                                               =============       =============       =============
Natural gas (Mcf):
     Proved developed - Producing                  3,207,186           3,451,880           3,822,715
     Proved developed - Non-producing              1,067,010           1,065,902           1,336,190
     Proved undeveloped                            3,643,116           3,413,846           5,023,328
                                               -------------       -------------       -------------
         Total                                     7,917,312           7,931,628          10,182,233
                                               =============       =============       =============
Present value of estimated future
     net revenues before income taxes            $19,127,440         $20,772,830         $11,925,260
                                               =============       =============       =============

</TABLE>

     The  preceding  tables  should  be read in  connection  with the  following
definitions:

     PROVED RESERVES. Estimated quantities of oil and gas, based on geologic and
     engineering  data,  appear with  reasonable  certainty  to be  economically
     recoverable in future years from known reservoirs  under existing  economic
     and operating conditions.


                                       8
<PAGE>

     PROVED  DEVELOPED  RESERVES.  Proved oil and gas  reserves  expected  to be
     recovered  through  existing  wells with  existing  equipment and operating
     methods.  Developed  reserves  include  both  producing  and  non-producing
     reserves.  Producing  reserves are those reserves  expected to be recovered
     from existing completion  intervals producing as of the date of the reserve
     report.  Non-producing  reserves are currently  shut-in awaiting a pipeline
     connection or in  reservoirs  behind the casing or at minor depths above or
     below the  producing  zone and are  considered  recoverable  by  production
     either from wells in the field, by successful  drill-stem tests, or by core
     analysis.   Non-producing   reserves  require  only  moderate  expense  for
     recovery.

     PROVED  UNDEVELOPED  RESERVES.  Proved oil and gas reserves  expected to be
     recovered  from  additional  wells yet to be drilled or from existing wells
     where a relatively major expenditure is required for completion.

PRODUCTIVE WELLS AND ACREAGE

     Productive   wells  consist  of  producing   wells  and  wells  capable  of
production,  including gas wells awaiting pipeline  connections.  Wells that are
completed in more than one producing zone are counted as one well. The following
table indicates the Company's productive wells as of March 31, 2004:

                                                       Gross        Net
                                                       -----        ---
     Oil........................................       1,321         14
     Gas........................................         405         12
                                                       -----       ----
         Total Productive Wells.................       1,726         26
                                                       =====       ====


     Undeveloped  acreage  includes  leased  acres on which  wells have not been
drilled or completed to a point that would permit the  production  of commercial
quantities of oil and gas,  regardless  of whether or not such acreage  contains
proved  reserves.  A gross acre is an acre in which an interest is owned.  A net
acre is deemed to exist when the sum of fractional  ownership interests in gross
acres equals one. The number of net acres is the sum of the fractional interests
owned in gross acres. As of March 31, 2004 material undeveloped acreage owned by
the Company was approximately 11,350 gross and 3,699 net acres which is in Texas
and North Dakota.

     The following table sets forth the approximate  developed  acreage in which
the Company held a leasehold mineral or other interest at March 31, 2004.

                                                           Developed Acres
                                                        ---------------------
                                                          Gross        Net
                                                        ---------------------

      Texas.........................................      122,178     4,831
      New Mexico....................................       18,034       150
      North Dakota..................................       26,159        24
      Louisiana.....................................       25,879        31
      Oklahoma......................................       39,122       168
      Montana.......................................        9,788         5
      Kansas........................................        7,240        21
      Wyoming.......................................        2,338         4
      Colorado......................................        1,200         1
      Arkansas......................................          320         -
                                                          -------     -----
      Total.........................................      252,258     5,235
                                                          =======     =====


                                       9
<PAGE>

DRILLING ACTIVITIES

     The following table sets forth the drilling activity of the Company for the
years ended March 31, 2004, 2003 and 2002.

                                         Years ended March 31,
                      ---------------------------------------------------------
                            2004                  2003                2002
                      ---------------       ---------------     ---------------
                      Gross      Net        Gross       Net      Gross      Net
                      -----      ---        -----       ---      -----      ---
Exploratory Wells
     Productive         9        .03          2        .01         2        .01
     Nonproductive      2        .30          1        .07         1        .09
                      ---       ----        ---       ----       ---       ----
         Total         11        .33          3        .08         3        .10
                      ===       ====        ===       ====       ===       ====

Development Wells
     Productive        12        .02         10        .17        12        .13
     Nonproductive     --         --         --         --        --         --
                      ---       ----        ---       ----       ---       ----
         Total         12        .02         10        .17        12        .13
                      ===       ====        ===       ====       ===       ====

     The  information  contained in the foregoing table should not be considered
indicative of future drilling  performance,  nor should it be assumed that there
is any necessary  correlation between the number of productive wells drilled and
the amount of oil and gas that may ultimately be recovered by the company.

NET PRODUCTION, UNIT PRICES AND COSTS

     The following  table  summarizes the net oil and natural gas production for
the Company,  the average  sales price per barrel of oil and per thousand  cubic
feet ("mcf") of natural gas produced and the average  production  (lifting) cost
per unit of production for the years ended March 31, 2004, 2003 and 2002.

<TABLE>
<CAPTION>
                                                            Year Ended March 31,
                                               ------------------------------------------
                                                    2004           2003          2002
                                               -------------  ------------   ------------
<S>                                            <C>            <C>            <C>
Oil (a):
    Production (Bbls)                                20,278         23,391         21,139
    Revenue                                    $    588,089   $    640,685   $    456,108
    Average Bbls per day                                 56             64             58
    Average sales price per Bbl                $      29.00   $      27.39   $      21.58
Gas (b):
    Production (Mcf)                                487,564        538,787        467,013
    Revenue                                    $  2,321,864   $  2,041,074   $  1,312,452
    Average Mcf per day                               1,336          1,476          1,279
    Average sales price per Mcf                $       4.76   $       3.79   $       2.81
Production cost:
    Production cost                            $    942,093   $    848,513   $    648,820
    Equivalent Mcf (c)                              609,232        679,133        593,847
    Production cost per equivalent Mcf         $       1.55   $       1.25   $       1.09
    Production cost per sales dollar           $       0.32   $       0.32   $       0.37
Total oil and gas revenues                     $  2,909,953   $  2,681,759   $  1,768,560
</TABLE>

(a)  Includes condensate.
(b)  Includes natural gas products.
(c)  Oil  production  is  converted to  equivalent  mcf at the rate of 6 mcf per
     barrel  ("bbl"),  representing  the estimated  relative  energy  content of
     natural gas to oil.

ITEM 3. LEGAL PROCEEDINGS

     There are no pending or threatened legal proceedings involving the Company.


                                       10
<PAGE>

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

     There were no matters  submitted to a vote of security  holders  during the
fourth quarter ended March 31, 2004.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information concerning the executive
officers of the Company as of March 31, 2004.

         Name               Age                  Position
 -------------------       -----   ---------------------------------------------
 Nicholas C. Taylor         66     President and Chief Executive Officer
 Donna Gail Yanko           59     Vice President and Corporate Secretary
 Tamala L. McComic          35     Vice President, Treasurer, and Asst Secretary

     Set forth  below is a  description  of the  backgrounds  of each  executive
officer of the Company,  including employment history for at least the last five
years.

     Nicholas C. Taylor was elected  President,  Treasurer  and  Director of the
Company in April 1983 and continues to serve as President and Director on a part
time basis,  as required.  Mr. Taylor served as Treasurer until March 1999. From
July 1993 to the  present,  Mr.  Taylor  has been  involved  in the  independent
practice of law and other business activities. For more than the prior 19 years,
he was a director and  shareholder of the law firm of Stubbeman,  McRae,  Sealy,
Laughlin & Browder, Inc., Midland, Texas, and a partner of the predecessor firm.
In 1995 he was appointed by the Governor of Texas to the State  Securities Board
through  January  2001.  In addition to serving as chairman  for four years,  he
continued to serve as a member until 2004.

     Donna Gail Yanko worked as part-time  administrative assistant to the Chief
Executive Officer and as Assistant Secretary of the Company until June 1992 when
she was appointed Corporate Secretary.  Mrs. Yanko was appointed to the position
of Vice President and elected to the board of directors of the Company in 1990.

      Tamala L. McComic became  Controller for the Company in July 2001. She was
appointed  Assistant  Secretary  of the Company in August 2001 and  Treasurer in
September  2001.  From 1994 to 2001 Mrs.  McComic was  Regional  Controller  and
Credit  Manager for Transit Mix Concrete & Materials  Company,  a subsidiary  of
Trinity Industries, Inc. In May 2003, Mrs. McComic was appointed Vice President,
Chief  Financial  Officer and  continues  to serve as  Treasurer  and  Assistant
Secretary.

                                     PART II
                                     -------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     In September 2003, the Company's common stock began trading on the American
Stock  Exchange under the symbol "MXC".  Prior to September  2003, the Company's
common stock was traded on the over-the-counter  market bulletin board under the
symbol "MEXC". The registrar and transfer agent is Computershare  Trust Company,
Inc., P.O. Box 1596, Denver,  Colorado, 80201 (Tel:  303-262-0600).  As of March
31,  2004 the  Company  had  approximately  1,400  shareholders  of  record  and
1,766,566 shares issued.


                                       11
<PAGE>

                           PRICE RANGE OF COMMON STOCK

                                                       High          Low
                                                       ----          ---
  2004:
       April - June 2003 (1)                         $ 7.75       $ 4.00
       July - September 5, 2003(1)                     7.00         6.50
       September 5 - 30, 2003 (2)                      7.90         7.50
       October - December 2003 (2)                     8.50         7.85
       January - March 2004 (2)                        8.50         7.55
  2003:   (1)
       April - June 2002                               6.00         3.80
       July - September 2002                           6.00         2.50
       October - December 2002                         3.00         2.25
       January - March 2003                            4.80         2.85


(1)  Reflects  high and low bid  information  received  from  Pink  Sheets  LLC,
     formerly  National  Quotation Bureau,  LLC. These bid quotations  represent
     prices between dealers, without retail markup, markdown or commissions, and
     do not reflect actual transactions.
(2)  Reflects the high and low sales prices for the Company's  Common Stock,  as
     reported on the American Stock Exchange.

On June 24, 2004, the closing price was $6.80.

DIVIDENDS

On February 1, 2002 the Company's  board of directors  declared a stock dividend
consisting  of shares of par value  $0.50  common  stock of the  Company  in the
amount of ten percent (10%) of the  outstanding  shares,  or 1 share for each 10
shares held by all  stockholders  of record of the  Company as of  February  15,
2002, with any resulting  fractional share dividends to be rounded up or down to
the nearest  whole number of shares and issued the stock  dividend  accordingly.
The payable  date for this  dividend  was  February  28, 2002 and resulted in an
additional 160,566 shares of stock issued and outstanding.

The Company has never paid any cash dividends on its Common Stock, and the board
of directors  does not  currently  anticipate  paying any cash  dividends to the
common stockholders in the foreseeable  future. In addition,  under the terms of
the current loan agreement the Company is subject to  restrictions  on dividends
payments.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                    Years Ended March 31,
                                       -----------------------------------------------------------------------------
                                           2004            2003             2002            2001             2000
                                       -----------------------------------------------------------------------------
<S>                                    <C>             <C>              <C>             <C>              <C>
Statement of Operations:
Operating revenues                     $ 2,915,355     $ 2,949,113      $ 1,778,583     $ 3,099,966      $ 1,686,266
Operating income                           785,739         926,277          252,101       1,881,776          498,384
Other income (expense)                     (82,766)        (95,357)         (54,706)        (92,160)        (104,737)
Net income                             $   429,846     $   672,808      $   189,291     $ 1,539,458      $   393,647
Net income per share - basic (1)(2)    $      0.25     $      0.39      $      0.11     $      0.86      $      0.22
Net income per share - diluted (1)(2)  $      0.24     $      0.39      $      0.11     $      0.86      $      0.22
Weighted average shares
     outstanding - basic (1)             1,736,047       1,741,462        1,768,314       1,784,825        1,785,618
Weighted average shares
     outstanding - diluted (1)           1,802,300       1,746,831        1,768,579       1,787,503        1,785,618

Balance Sheet:
Property and equipment, net            $ 7,647,284     $ 7,028,659      $ 5,895,429     $ 4,009,852      $ 3,749,400
Total assets                             8,172,464       7,688,638        6,347,965       4,961,360        4,043,015
Total debt                               1,700,000       2,150,000        1,710,000         600,000        1,200,000
Stockholders' equity                   $ 5,435,219     $ 4,956,388      $ 4,276,042     $ 4,046,452      $ 2,567,228

Cash Flow:
Cash provided by operations            $ 1,517,479     $ 1,369,690      $   899,977     $ 1,903,345      $   722,088
</TABLE>


                                       12
<PAGE>

(1)  Amounts have been  adjusted to reflect the 10% stock  dividend  effected on
     February 1, 2002.
(2)  Year 2004 includes a cumulative  effect of change in  accounting  principle
     (Cumulative  Effect) loss of $0.06  related to the adoption of Statement of
     Financial   Accounting   Standards   (SFAS)  No.  143,   Asset   Retirement
     Obligations.

ITEM 6A.  SELECTED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                      FISCAL 2004
                                          -------------------------------------------------------------------
                                               4TH QTR           3RD QTR          2ND QTR          1ST QTR
                                          ----------------  ---------------  ----------------  --------------
<S>                                       <C>               <C>              <C>               <C>
Net sales                                 $      723,258    $      650,783   $      768,852    $      767,060
Gross profit                              $      528,920    $      412,888   $      527,684    $      498,368
Net income before cumulative effect       $      204,628    $       57,255   $      118,470    $      151,760
Net income per share-basic (2)            $        0.12     $        0.03    $        0.07     $        0.03
Net income per share-diluted (2)          $        0.12     $        0.03    $        0.06     $        0.03

                                                                   FISCAL 2003
                                          -------------------------------------------------------------------
                                               4TH QTR           3RD QTR          2ND QTR           1ST QTR
                                          ----------------  ---------------  ----------------  --------------
Net sales                                 $      956,890    $      668,039   $      512,180    $      544,650
Gross profit                              $      730,662    $      434,963   $      279,575    $      388,046
Net income                                $      336,588    $      238,718   $       20,356    $       77,146
Net income per share-basic(1)             $        0.19     $        0.14    $        0.01     $        0.04
Net income per share-diluted(1)           $        0.19     $        0.14    $        0.01     $        0.04
</TABLE>

     (1)  Amounts have been adjusted to reflect the 10% stock dividend  effected
          on February 1, 2002.
     (2)  First quarter of fiscal 2004 includes a cumulative effect of change in
          accounting principle  (Cumulative Effect) loss of $0.06 related to the
          adoption of  Statement of Financial  Accounting  Standards  (SFAS) No.
          143, Asset Retirement Obligations.

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

     The  following   information   should  be  read  in  conjunction  with  the
information  contained in the  Consolidated  Financial  Statements and the notes
thereto included in Item 10 of this report.

LIQUIDITY AND CAPITAL RESOURCES AND COMMITMENTS

     Historically,   the  Company  has  funded  its  operations,   acquisitions,
exploration  and  development  expenditures  from cash  generated  by  operating
activities, bank borrowings and issuance of common stock.

     In fiscal 2004,  the Company  primarily  used cash  provided by  operations
($1,517,479) and borrowings on the line of credit ($320,000) to fund oil and gas
property  acquisitions  and  development  ($982,872).  The Company had a working
capital deficit of $15,506 as of March 31, 2004 due primarily to current portion
of long term debt.

     For  fiscal  2002,  the  board  of  directors  authorized  the use of up to
$250,000 to repurchase shares of the Company's common stock.  During fiscal year
2002, the Company repurchased 22,533 shares, at an aggregate cost of $91,231. Of
such  shares,  18,400  shares were  reissued  in exchange  for oil and gas lease
rights representing 368 net acres valued at approximately $83,000. The remaining
4,133 shares were  cancelled.  In fiscal 2003, the board of directors once again
authorized  the use of up to  $250,000  to  repurchase  shares of the  Company's
common stock. During fiscal year 2003, the Company repurchased 30,244 shares, at
an aggregate cost of $127,536 for the treasury account.  During fiscal 2004, the
Company  repurchased 281 shares, at an aggregate cost of $1,389 for the treasury
account.


                                       13
<PAGE>

     In December,  2002, the Company entered into a participation agreement with
Falcon Bay  Exploration,  LLC  exercising  its right to purchase at an aggregate
cash price of  $597,301,  the acreage and seismic data on the first of four such
prospects  referred  to in the  exploration  agreement  between  the Company and
Falcon Bay Exploration,  LLC. This information is contained in Form 8-K filed by
the Company on December 6, 2002.

     During fiscal year 2004,  the Company  purchased a one-quarter  interest in
leases  and/or  options on leases in Stark  County,  North Dakota  covering 4920
gross acres for approximately  $107,000. A director and employee of Mexco Energy
Corporation, will receive a 1.5% ORRI on any wells drilled on this acreage.

     During fiscal year 2004, the Company purchased  partially developed royalty
interests  in  Jackson  Parish,   Louisiana  for  approximately  $80,000.  These
properties,  operated  by Anadarko  Petroleum  Corporation  in the Lower  Cotton
Valley  formation,  currently  contain 11  producing  wells and an  additional 2
permitted and/or drilling wells.

     In March 2004 the Company purchased  additional partially developed royalty
interests in Jackson Parish,  Louisiana and interests in Limestone County, Texas
for approximately  $224,000. The properties in Limestone County, operated by XTO
Energy,  Inc., are in the Cotton Valley formation and contain 23 producing wells
and an  additional 6 permitted  and/or  drilling  wells.  This acreage  contains
approximately 100 potential undrilled locations on 40 acre spacing. The property
in Louisiana,  operated by Anadarko and  producing  from the Lower Cotton Valley
formation,  contains 3 producing  wells and an  additional  5  permitted  and/or
drilling wells.  These royalty purchases  advanced the Company's primary goal of
acquiring natural gas reserves.

     In March 2004, the Company signed an agreement in Moscow, Russia to begin a
preliminary  feasibility  study for  exploration  and development of natural gas
reserves in Russia.  A team of U.S. and Russia  experts  commenced a feasibility
study of a number of  undeveloped  natural gas fields located in the vicinity of
Gasprom pipelines which serve Russia.  Mexco Energy  Corporation has set up OBTX
LLC, a Delaware limited  liability  company,  in which Mexco owns a 90% interest
with the remaining 10% interest  split equally among three  individuals,  one of
which is Arden Grover, a director of Mexco Energy Corporation.  OBTX, LLC, plans
to participate in any Russian ventures entered into and own a 50% interest.

     The  Company  is  reviewing   several  other   projects  in  which  it  may
participate.  The cost of such projects would be funded, to the extent possible,
from existing cash balances and cash flow from operations.  The remainder may be
funded  through  borrowings  on the  credit  facility.  See  Note B of  Notes to
Consolidated  Financial  Statements for a description of the Company's revolving
credit agreement with Bank of America, N.A.

     Crude oil and natural gas prices have  fluctuated  significantly  in recent
years as well as in recent  months.  Fluctuations  in price  have a  significant
impact on the Company's financial condition and liquidity.  However,  management
believes the Company can maintain adequate liquidity for the next fiscal year.

RESULTS OF OPERATIONS

FISCAL 2004 COMPARED TO FISCAL 2003

     Oil and gas sales  increased from $2,681,759 in 2003 to $2,909,953 in 2004,
an increase of $228,194 or 9%. This increase was  attributable to an increase in
oil and gas prices during the year. The average oil price  increased from $27.39


                                       14
<PAGE>

per bbl in 2003 to $29.00 per bbl in 2004,  an  increase of $1.61 per bbl or 6%.
The average gas price  increased from $3.79 in 2003 to $4.76 per mcf in 2004, an
increase of $.97 per mcf or 26%. Oil  production  decreased  from 23,391 bbls in
2003 to 20,279  bbls in 2004,  a decrease of 3,112 bbls or 13%.  Gas  production
decreased  from 538,787 mcf in 2003 to 487,564 mcf in 2004, a decrease of 51,223
mcf or 10%. Such decreases primarily were due to normal decline in production.

     Other income  decreased from $267,354 in 2003 to $5,402 in 2004, a decrease
of $261,952.  This  decrease is the result of the proceeds  received  ($254,862)
from the settlement of a class action lawsuit against a gas purchaser  involving
contract price disputes in fiscal 2003.

     Production  costs  increased  from $848,513 in 2003 to $942,093 in 2004, an
increase  of $93,580 or 11%.  This is  primarily  attributable  to an  increased
number of repairs on operated properties during the year.

     Depreciation, depletion and amortization decreased from $641,827 in 2003 to
$633,443  in 2004,  a decrease of $8,384 or 1%, due  primarily  to a decrease in
production.  There was no impairment of oil and gas properties in fiscal 2003 or
2004.

     General and  administrative  expenses  decreased  from  $532,496 in 2003 to
$529,834 in 2004,  a decrease of $2,662 or 0.5%.  This  decrease  was  primarily
attributable to the decreased cost of consulting expenses during the year.

     Interest  expense  decreased  from  $96,337 in 2003 to  $83,530 in 2004,  a
decrease  of  $12,807  or 13%.  This  decrease  was  attributable  to  decreased
borrowings during the current fiscal year.

FISCAL 2003 COMPARED TO FISCAL 2002

     Oil and gas sales  increased from $1,768,560 in 2002 to $2,681,759 in 2003,
an increase  of  $913,199 or 52%.  This  increase  was  attributable  to both an
increase in  production  and an increase in oil and gas prices  during the year.
The average oil price increased from $21.58 per bbl in 2002 to $27.39 per bbl in
2003, an increase of $5.81 per bbl or 27%. The average gas price  increased from
$2.81 in 2002 to $3.79 per mcf in 2003,  an increase of $.98 per mcf or 35%. Oil
production  increased  from  21,139  bbls in 2002 to  23,391  bbls in  2003,  an
increase of 2,252 bbls or 11%. Gas production increased from 467,013 mcf in 2002
to 538,787 mcf in 2003, an increase of 71,774 mcf or 15%.

     Other  income  increased  from  $10,023  in 2002 to  $267,354  in 2003,  an
increase  of  $257,331.  This  increase is the result of the  proceeds  received
($254,862) from the settlement of a class action lawsuit against a gas purchaser
involving contract price disputes.

     Production  costs  increased  from $648,820 in 2002 to $848,513 in 2003, an
increase of $199,633 or 31%.  This is  primarily  attributable  to an  increased
number of repairs on operated properties during the year.

     Depreciation, depletion and amortization increased from $448,422 in 2002 to
$641,827 in 2003,  an increase of $193,405 or 43%, due primarily to the downward
revisions of proved  undeveloped  reserves in the El Cinco  Field.  There was no
impairment of oil and gas properties in fiscal 2002 or 2003.

     General and  administrative  expenses  increased  from  $429,240 in 2002 to
$532,496 in 2003,  an increase of $103,256 or 24%.  This  increase was primarily
attributable  to the  increased  cost of  consulting  expenses  relating  to the
settlement  of the lawsuit which was settled  during the fiscal year  ($101,945)
and an increase in compensation  related to stock options granted to consultants
($12,792).


                                       15
<PAGE>

     Interest  expense  increased  from  $57,161 in 2002 to $96,337 in 2003,  an
increase  of  $39,176 or 69%.  This  increase  was  attributable  to  additional
borrowings during the current fiscal year.

ALTERNATIVE CAPITAL RESOURCES

     Although the Company primarily has used cash from operating  activities and
funding from the line of credit as its primary  capital  resources,  the Company
has in the past, and could in the future,  use  alternative  capital  resources.
These could include the sale of assets and/or  issuances of common stock through
a public  offering.  The  Company  could  also  obtain  funds  through a private
placement.

CONTRACTUAL OBLIGATIONS

     The Company has no off-balance sheet debt or unrecorded obligations and has
not guaranteed the debt of any other party.  The following table  summarizes the
Company's  future  payments it is obligated to make based on agreements in place
as of March 31, 2004:

<TABLE>
<CAPTION>

                                                                    Payments Due In:
                                               -------------------------------------------------------
                                                  Total         one year        1-3 years       3 year
                                               ----------       --------       ----------       ------
<S>                                            <C>              <C>            <C>                 <C>
Contractual obligations:
     Secured bank line of credit               $1,700,000       $443,378       $1,256,622          --
</TABLE>

     These  amounts  represent the balances  outstanding  under the bank line of
credit.  These  repayments  assume that interest will be paid on a monthly basis
and that no additional funds will be drawn.

OTHER MATTERS

FORWARD LOOKING STATEMENTS

     Certain  statements in this Form 10-K may be deemed to be  "forward-looking
statements"  within the meaning of 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"). All statements,  other than statements
of historical facts, included in this Form 10-K that address activities,  events
or developments that the Company expects, projects, believes or anticipates will
or may occur in the  future,  including  such  matters as oil and gas  reserves,
future  drilling and  operations,  future  production of oil and gas, future net
cash  flows,   future  capital   expenditures   and  other  such  matters,   are
forward-looking  statements.  These statements are based on certain  assumptions
and analysis made by management  of the Company in light of its  experience  and
its  perception  of  historical  trends,  current  conditions,  expected  future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties,
including general economic and business  conditions,  prices of oil and gas, the
business opportunities (or lack thereof) that may be presented to and pursued by
the Company, changes in laws or regulations and other factors, many of which are
beyond the control of the Company.

CRITICAL ACCOUNTING POLICIES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting   principles  requires  that  management  apply  accounting
policies and make  estimates and  assumptions  that affect results of operations
and the reported amounts of assets and liabilities in the financial statements.


                                       16
<PAGE>

     The  following  represents  those  policies  that  management  believes are
particularly  important to the financial  statements and that require the use of
estimates and assumptions to describe matters that are inherently uncertain.

     Full Cost Method of  Accounting  for Crude Oil and Natural Gas  Activities.
SEC Regulation S-X defines the financial  accounting and reporting standards for
companies  engaged in crude oil and  natural  gas  activities.  Two  methods are
prescribed:  the successful efforts method and the full cost method. The Company
has chosen to follow the full cost method under which all costs  associated with
property acquisition,  exploration and development are capitalized.  The Company
also   capitalizes   internal  costs  that  can  be  directly   identified  with
acquisition, exploration and development activities and do not include any costs
related to production,  general corporate overhead or similar activities.  Under
the successful  efforts method,  geological and  geophysical  costs and costs of
carrying  and  retaining  undeveloped  properties  are  charged  to  expense  as
incurred.  Costs of  drilling  exploratory  wells  that do not  result in proved
reserves  are  charged to expense.  Depreciation,  depletion,  amortization  and
impairment of crude oil and natural gas properties are generally calculated on a
well by well or lease  or  field  basis  versus  the  "full  cost"  pool  basis.
Additionally, gain or loss is generally recognized on all sales of crude oil and
natural gas properties  under the  successful  efforts  method.  As a result the
Company's  financial  statements  will  differ  from  companies  that  apply the
successful  efforts  method  since the Company will  generally  reflect a higher
level  of  capitalized  costs as well as a higher  depreciation,  depletion  and
amortization rate on Company crude oil and natural gas properties.

     At the time it was adopted,  management  believed that the full cost method
would be  preferable,  as  earnings  tend to be less  volatile  than  under  the
successful  efforts  method.  However,  the full cost  method  makes the Company
susceptible to significant  non-cash charges during times of volatile  commodity
prices  because  the full cost pool may be impaired  when prices are low.  These
charges are not recoverable  when prices return to higher levels.  The Company's
crude oil and  natural  gas  reserves  have a  relatively  long  life.  However,
temporary  drops in  commodity  prices  can have a  material  impact on  Company
business including impact from the full cost method of accounting.

     Under full cost accounting rules, the net capitalized cost of crude oil and
natural gas properties may not exceed a "ceiling  limit" which is based upon the
present  value  of  estimated  future  net  cash  flows  from  proved  reserves,
discounted  at 10%,  plus the  lower of cost or fair  market  value of  unproved
properties.  If net  capitalized  costs of crude oil and natural gas  properties
exceed the ceiling  limit,  the Company  must charge the amount of the excess to
earnings. This is called a "ceiling limitation write-down." This charge does not
impact  cash  flow  from  operating  activities,  but does  reduce  the  Company
stockholders'  equity and reported  earnings.  The risk that the Company will be
required  to  write  down  the  carrying  value of  crude  oil and  natural  gas
properties  increases  when crude oil and  natural gas prices are  depressed  or
volatile.  In  addition,  write-downs  may  occur  if  the  Company  experiences
substantial  downward  adjustments  to  its  estimated  proved  reserves  or  if
purchasers  cancel  long-term  contracts for natural gas production.  An expense
recorded in one period may not be reversed  in a  subsequent  period even though
higher  crude  oil and  natural  gas  prices  may  have  increased  the  ceiling
applicable to the subsequent period.


                                       17
<PAGE>

     Estimates  of the  Company's  proved  reserves  included in this report are
prepared in accordance with GAAP and SEC  guidelines.  The accuracy of a reserve
estimate is a function of:

          o    the quality and quantity of available data;

          o    the interpretation of that data;

          o    the accuracy of various mandated economic assumptions;

          o    and the judgment of the persons preparing the estimate.

     The Company's proved reserve information  included in this Report was based
on evaluations prepared by independent  petroleum engineers.  Estimates prepared
by other  third  parties  may be higher or lower  than  those  included  herein.
Because  these  estimates  depend  on  many   assumptions,   all  of  which  may
substantially  differ from future  actual  results,  reserve  estimates  will be
different from the quantities of oil and gas that are ultimately  recovered.  In
addition,  results of  drilling,  testing  and  production  after the date of an
estimate may justify material revisions to the estimate.

     It should not be assumed that the present value of future net cash flows is
the  current  market  value  of the  Company's  estimated  proved  reserves.  In
accordance  with SEC  requirements,  the Company based the estimated  discounted
future net cash flows from  proved  reserves  on prices and costs on the date of
the estimate.  Actual future prices and costs may be materially  higher or lower
than the prices and costs as of the date of the estimate.

     The estimates of proved  reserves  materially  impact DD&A expense.  If the
estimates of proved reserves decline, the rate at which the Company records DD&A
expense will  increase,  reducing  future net income.  Such a decline may result
from lower market prices,  which may make it uneconomic to drill for and produce
higher cost fields.

Use of  Estimates.  The  preparation  of  consolidated  financial  statements in
conformity with accounting principles generally accepted in the United States of
America  requires  management to make estimates and assumptions  that affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and  liabilities at the date of the  consolidated  financial  statements and the
reported  amounts of revenues and expenses during the reporting  period.  Actual
results  could  differ  from those  estimates.  Management  believes  that it is
reasonably  possible that estimates of proved crude oil and natural gas revenues
could significantly change in the future.

Revenue  Recognition.  The Company  recognizes crude oil and natural gas revenue
from its interest in  producing  wells as crude oil and natural gas is sold from
those wells, net of royalties.  The Company utilizes the sales method to account
for gas  production  volume  imbalances.  Under this method,  income is recorded
based on the  Company's net revenue  interest in production  taken for delivery.
The Company had no material gas imbalances.

Asset Retirement Obligations.  The estimated costs of restoration and removal of
facilities are accrued.  The fair value of a liability for an asset's retirement
obligation  is  recorded  in  the  period  in  which  it  is  incurred  and  the
corresponding  cost capitalized by increasing the carrying amount of the related
long-lived  asset.  The  liability  is accreted to its then  present  value each
period,  and the  capitalized  cost is  depreciated  by the units of  production
method.


                                       18
<PAGE>

If the liability is settled for an amount other than the recorded amount, a gain
or loss is  recognized.  For all periods  presented,  the  Company has  included
estimated  future  costs of  abandonment  and  dismantlement  in the  full  cost
amortization  base and  amortize  these  costs as a component  of the  Company's
depletion expense.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK FACTORS

     All of the  Company's  financial  instruments  are for purposes  other than
trading.  At March  31,  2004,  the  Company  had not  entered  into  any  hedge
arrangements,  commodity swap agreements,  commodity  futures,  options or other
similar agreements relating to crude oil and natural gas.

     INTEREST RATE RISK. The Company's  variable rate bank debt is tied to prime
rate. If the interest rate on the Company's  bank debt increases or decreases by
one  percentage  point,  the  Company's  annual  pretax  income  would change by
$17,000.

     CREDIT RISK.  Credit risk is the risk of loss as a result of nonperformance
by  counter-parties  of their  contractual  obligations.  The Company's  primary
credit risk is related to oil and gas production sold to various  purchasers and
the  receivables  are  generally  not  collateralized.  At  March  31,  2004 the
Company's largest credit risk associated with any single purchaser was $116,008.
The Company has not experienced any significant credit losses.

     VOLATILITY OF OIL AND GAS PRICES. The Company's revenues, operating results
and future rate of growth are  dependent  upon the prices  received  for oil and
gas. These market prices tend to fluctuate  significantly in response to factors
beyond the Company's control.  The prices the Company receives for its crude oil
production are based on global market  conditions.  The continued terror threats
in the Middle East,  the continuing  political  crisis in Venezuela (a major oil
exporter), and actions of OPEC and its maintenance of production constraints, as
well as other  economic,  political,  and  environment  factors will continue to
affect world supply.  Natural gas prices fluctuate  significantly in response to
numerous factors including the U.S. economic environment, North American weather
patterns, other factors affecting demand such as substitute fuels, the impact of
drilling levels on natural gas supply,  and the  environmental and access issues
that limit  future  drilling  activities  for the  industry.  Historically,  the
markets for oil and gas have been  volatile  and are likely to continue to be so
in the future.  Various  factors  beyond the  control of the Company  affect the
price of oil and gas,  including  but not  limited  to  worldwide  and  domestic
supplies  of oil and gas,  the  ability of the  members of the  Organization  of
Petroleum  Exporting Countries to agree to and maintain oil price and production
controls,  political instability or armed conflict in oil-producing regions, the
price and level of foreign imports,  the level of consumer demand, the price and
availability  of  alternative  fuels,  the  availability  of pipeline  capacity,
weather conditions, domestic and foreign governmental regulation and the overall
economic  environment.  Any significant decline in prices would adversely affect
the Company's  revenues and operating  income and may require a reduction in the
carrying value of the Company's oil and gas properties. If the average oil price
had increased or decreased by one cent per barrel for fiscal 2004, the Company's
pretax income would have changed by $203. If the average gas price had increased
or decreased by one cent per mcf for fiscal 2004,  the  Company's  pretax income
would have changed by $4,876.


                                       19
<PAGE>

     UNCERTAINTY  OF  RESERVE  INFORMATION  AND FUTURE  NET  REVENUE  ESTIMATES.
Estimates  of oil and gas  reserves,  by  necessity,  are  projections  based on
engineering data, and there are uncertainties  inherent in the interpretation of
such data as well as the projection of future rates of production and the timing
of development  expenditures.  Reserve  engineering  is a subjective  process of
estimating  underground  accumulations  of oil and gas  that  are  difficult  to
measure.  Estimates  of  economically  recoverable  oil and gas  reserves and of
future net cash flows depend upon a number of variable  factors and assumptions,
such as future  production,  oil and gas prices,  operating  costs,  development
costs  and  remedial  costs,  all of which  may vary  considerably  from  actual
results. As a result,  estimates of the economically  recoverable  quantities of
oil  and  gas  and  of  future  net  cash  flows  expected  therefrom  may  vary
substantially.  Moreover,  there can be no assurance that the Company's reserves
will ultimately be produced or that any undeveloped  reserves will be developed.
As  required by the SEC,  the  estimated  discounted  future net cash flows from
proved  reserves are  generally  based on prices and costs as of the date of the
estimate,  while  actual  future  prices and costs may be  materially  higher or
lower.

     RESERVE  REPLACEMENT  RISK. The Company's  future success  depends upon its
ability to find, develop or acquire additional, economically recoverable oil and
gas  reserves.  The proved  reserves of the Company  will  generally  decline as
reserves  are  depleted,  except to the extent the Company can find,  develop or
acquire  replacement  reserves.  One offset to the obvious benefits  afforded by
higher  product  prices  especially  for  small  to  mid-cap  companies  in this
industry,  is that quality  domestic oil and gas reserves are becoming harder to
find. Reserves to be produced from undiscovered reservoirs appear to be smaller,
and the risks to find  these  reserves  are  greater.  Reports  from the  Energy
Information  Administration indicate that on-shore domestic finding costs are on
the rise, and that the average reserves added per well are declining.

     DRILLING AND OPERATING RISKS. Drilling and operating activities are subject
to many risks,  including  availability  of workover  and  drilling  rigs,  well
blowouts,  cratering,  explosions,  fires,  formations with abnormal  pressures,
pollution,  releases of toxic gases and other  environmental  hazards and risks.
Any of these  operating  hazards  could  result  in  substantial  losses  to the
Company.  In  addition,  the  Company  incurs  the  risk  that  no  commercially
productive  reservoirs  will be  encountered  and there is no assurance that the
Company will recover all or any portion of its  investment  in wells  drilled or
re-entered.

     MARKETABILITY OF PRODUCTION.  The marketability of the Company's production
depends in part on the  availability,  proximity  and  capacity  of natural  gas
gathering  systems,  pipelines  and  processing  facilities.  Federal  and state
regulation  of oil  and  gas  production  and  transportation,  tax  and  energy
policies, changes in supply and demand and general economic conditions could all
affect the Company's ability to produce and market its oil and gas.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   Report of Independent Registered Public Accounting Firm................ 21
   Consolidated Balance Sheets............................................ 22
   Consolidated Statements of Operations.................................. 23
   Consolidated Statements of Changes in Stockholders' Equity............. 24
   Consolidated Statements of Cash Flows.................................. 25
   Notes to Consolidated Financial Statements............................. 26


                                       20
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

Board of Directors and Shareholders
Mexco Energy Corporation

We have audited the  accompanying  consolidated  balance  sheets of Mexco Energy
Corporation  and  Subsidiary  as of March  31,  2004  and  2003 and the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period  ended  March 31,  2004.  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 consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of Mexco  Energy
Corporation  and  Subsidiary  as of March 31, 2004 and 2003,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  March 31,  2004,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

As discussed in Note D to the financial statements, effective April 1, 2003, the
Company adopted Statement of Financial  Accounting Standards No. 143, Accounting
for Asset Retirement Obligations, and changed its method of accounting for asset
retirement obligations.

GRANT THORNTON LLP

Oklahoma City, Oklahoma
May 23, 2004


                                       21
<PAGE>

                     MEXCO ENERGY CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

                                 As of March 31,
<TABLE>
<CAPTION>
ASSETS                                                           2004               2003
                                                              ----------         ----------
<S>                                                           <C>                <C>
  Current assets
    Cash and cash equivalents                                 $   92,795         $   68,547
    Accounts receivable:
      Oil and gas sales                                          396,902            560,297
      Trade                                                        3,101             17,617
      Related parties                                                 --              3,475
    Prepaid costs and expenses                                    32,382             10,043
                                                              ----------         ----------
        Total current assets                                     525,180            659,979

  Property and equipment, at cost
    Oil and gas properties, using
      the full cost method ($858,602 and $673,690
      excluded from amortization in 2004 and 2003,
      respectively)                                           16,959,560         15,656,928
    Other                                                         34,542             33,708
                                                              ----------         ----------
                                                              16,994,102         15,690,636
    Less accumulated depreciation,
      depletion, and amortization                              9,346,818          8,661,977
                                                              ----------         ----------

        Property and equipment, net                            7,647,284          7,028,659
                                                              ----------         ----------

                                                              $8,172,464         $7,688,638
                                                              ==========         ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities
    Accounts payable - trade                                  $   97,308         $   93,434
    Lease obligation payable                                          --             61,086
    Current portion of long-term debt                            443,378            116,280
                                                              ----------         ----------
      Total current liabilities                                  540,686            270,800

  Long-term debt                                               1,256,622          2,033,720
  Asset retirement obligation                                    420,665                 --
  Deferred income tax liability                                  519,272            427,730
  Commitments and contingencies (Notes B, E, G and H)                 --                 --

  Stockholders' equity
    Preferred stock - $1.00 par value;
      10,000,000 shares authorized;
      none outstanding                                                --                 --
    Common stock - $0.50 par value;
      40,000,000 shares authorized;
      1,766,566 shares issued                                    883,283            883,283
    Additional paid-in capital                                 3,784,493          3,734,119
    Retained earnings                                            896,368            466,522
    Treasury stock, at cost                                     (128,925)          (127,536)
                                                              ----------         ----------
    Total stockholders' equity                                 5,435,219          4,956,388
                                                              ----------         ----------

                                                              $8,172,464         $7,688,638
                                                              ==========         ==========
</TABLE>

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


                                       22
<PAGE>

                     MEXCO ENERGY CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                              Year ended March 31,
<TABLE>
<CAPTION>

                                                        2004                   2003                  2002
                                                     -----------           -----------           -----------
<S>                                                  <C>                   <C>                   <C>
Operating revenues:
  Oil and gas                                        $ 2,909,953           $ 2,681,759           $ 1,768,560
  Other                                                    5,402               267,354                10,023
                                                     -----------           -----------           -----------

      Total operating revenues                         2,915,355             2,949,113             1,778,583

Operating expenses:
  Production                                             942,093               848,513               648,820
  Accretion of asset retirement obligation                24,246                    --                    --
  Depreciation, depletion,
    and amortization                                     633,443               641,827               448,422
  General and administrative                             529,834               532,496               429,240
                                                     -----------           -----------           -----------
      Total operating expenses                         2,129,616             2,022,836             1,526,482
                                                     -----------           -----------           -----------

                                                         785,739               926,277               252,101
Other income (expense):
  Interest income                                            764                   981                 2,455
  Interest expense                                       (83,530)              (96,337)              (57,161)
                                                     -----------           -----------           -----------

      Net other expense                                  (82,766)              (95,356)              (54,706)
                                                     -----------           -----------           -----------
Earnings before income taxes and
  cumulative effect of accounting change                 702,973               830,921               197,395

Income tax expense:
  Current                                                 33,371               (13,026)              (62,992)
  Deferred                                               137,489               171,139                71,096
                                                     -----------           -----------           -----------

                                                         170,860               158,113                 8,104
                                                     -----------           -----------           -----------

Income before cumulative effect
  of accounting change                                   532,113               672,808               189,291

Cumulative effect of accounting
  change, net of tax                                    (102,267)                   --                    --
                                                     -----------           -----------           -----------

Net income                                           $   429,846           $   672,808           $   189,291
                                                     ===========           ===========           ===========

Net income per common share:
Basic:
  Income before cumulative effect
    of accounting change                             $      0.31           $      0.39           $      0.11
  Cumulative effect, net of tax                      $     (0.06)          $        --           $        --
  Net income                                         $      0.25           $      0.39           $      0.11

Diluted:
  Income before cumulative effect
    of accounting change                             $      0.30           $      0.39           $      0.11
  Cumulative effect, net of tax                      $     (0.06)          $        --           $        --
  Net income                                         $      0.24           $      0.39           $      0.11

Pro forma amounts  assuming, the new
method of accounting for asset  retirement
obligations is applied retroactively:
Net income                                           $   532,113           $   651,669           $   170,780
Basic net income per share                           $      0.31           $      0.37           $      0.10
Diluted net income per share                         $      0.30           $      0.37           $      0.10
</TABLE>

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


                                       23
<PAGE>

                     MEXCO ENERGY CORPORATION AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                           Retained
                                        Common Stock                     Additional        Earnings
                                        Stockholders'      Treasury       Paid-In        (Accumulated         Total
                                          Par Value         Stock         Capital           Deficit)         Equity
                                        -------------      --------      ----------      ------------      ----------
<S>                                     <C>                <C>           <C>             <C>               <C>
Balance, April 1, 2001                  $     810,693     $ (71,592)     $2,900,097      $    407,254      $4,046,452

  Net earnings                                     --            --              --           189,291         189,291
  10% stock dividend                           80,283            --         722,548          (802,831)             --
  Purchase of stock                                --       (91,231)             --                --         (91,231)
  Issuance of stock
    for property                                   --        72,576          10,224                --          82,800
  Retirement of stock                          (7,693)       90,247         (82,554)               --              --
  Stock based
    compensation                                   --            --          48,730                --          48,730
                                        -------------      --------      ----------      ------------      ----------
Balance, March 31, 2002                       883,283            --       3,599,045          (206,286)      4,276,042

  Net earnings                                     --            --              --           672,808         672,808
  Purchase of stock                                --      (127,536)             --                --        (127,536)
  Issuance of warrants
    for acreage                                    --            --          73,552                --          73,552
  Stock based
    compensation                                   --            --          61,522                --          61,522
                                        -------------      --------      ----------      ------------      ----------
Balance, March 31, 2003                       883,283      (127,536)      3,734,119           466,522       4,956,388

  Net earnings                                     --            --              --           429,846         429,846
  Purchase of stock                                --        (1,389)             --                --          (1,389)
  Profits from sale of stock
    by insider                                     --            --           2,950                --           2,950
  Stock based
    compensation                                   --            --          47,424                --          47,424
                                        -------------      --------      ----------      ------------      ----------
Balance, March 31, 2004                 $     883,283     $(128,925)     $3,784,493      $    896,368      $5,435,219
                                        =============     ==========     ==========      ============      ==========

                                                                                        Share Activity
                                                                            2004             2003             2002
                                                                         ----------      ------------      ----------

Common stock issued
  At beginning of year                                                    1,766,566         1,766,566       1,621,387
    Issued                                                                       --                --         160,566
    Cancelled                                                                    --                --         (15,387)
                                                                         ----------      ------------      ----------
  At end of year                                                          1,766,566         1,766,566       1,766,566

Held in treasury

  At beginning of year                                                      (30,244)               --         (11,254)
    Acquisitions                                                               (281)          (30,244)        (22,533)
    Issued for property                                                          --                --          18,400
    Cancellation, returned to
      unissued                                                                   --                --          15,387
                                                                         ----------      ------------      ----------
  At end of year                                                            (30,525)          (30,244)             --
                                                                         ----------      ------------      ----------
Common shares outstanding at end
  of year                                                                 1,736,041         1,736,322       1,766,566
                                                                         ==========      ============      ==========
</TABLE>

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

                                       24
<PAGE>

                     MEXCO ENERGY CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              Year ended March 31,
<TABLE>
<CAPTION>
                                                                2004           2003          2002
Cash flows from operating activities:                       ----------     -----------    -----------
<S>                                                             <C>            <C>             <C>
  Net earnings                                              $   429,846    $   672,808    $   189,291
  Cumulative effect of accounting change                        102,267             --             --
  Adjustments to reconcile net income
    to net cash provided by operating
    activities:
      Increase in deferred income taxes                         137,489        171,139         71,096
      Stock-based compensation                                   47,424         61,522         48,730
      Depreciation, depletion, and amortization                 633,443        641,827        448,422
      Accretion of asset retirement obligations                  24,246              --             --
      (Increase) decrease in accounts receivable                181,386       (193,089)       114,896
      (Increase) decrease in prepaid expenses                   (22,340)        14,080         50,215
      Decrease in income taxes payable                               --             --        (51,637)
      Increase (decrease) in accounts payable
        and accrued expenses                                    (16,282)         1,403         28,964

        Net cash provided by operating activities             1,517,479      1,369,690        899,977

Cash flows from investing activities:
  Additions to oil and gas properties                          (982,872)    (1,628,695)    (2,247,423)
  Additions to other property and equipment                        (834)        (4,927)        (5,181)

        Net cash used in investing activities                  (983,706)    (1,633,622)    (2,252,604)

Cash flows from financing activities:
  Acquisition of treasury stock                                  (1,389)      (127,536)       (91,231)
  Profits from sale of stock by insider                           2,950             --             --
  Reduction of capital lease obligations                        (61,086)       (24,943)            --
  Reduction of long-term debt                                  (770,000)      (470,000)       (50,000)
  Proceeds from long term debt                                  320,000        910,000      1,160,000
        Net cash (used in) provided by
         financing activities                                  (509,525)       287,521      1,018,769

Net increase (decrease) in cash
  and cash equivalents                                           24,248         23,589       (333,858)

Cash and cash equivalents
  at beginning of year                                           68,547         44,958        378,816

Cash and cash equivalents
  at end of year                                            $    92,795    $    68,547    $    44,958

  Interest paid                                             $    83,196    $    94,792    $    55,022
  Income taxes paid (recovered)                             $    50,000    $  (117,056)   $    92,675

Supplemental Disclosure of Non-cash investing
  and financing activities:

    Issuance of common stock in exchange
      for oil and gas properties                            $        --    $        --    $    82,800
    Fair value of warrants issued for
      oil and gas properties                                $        --    $    73,552    $        --
    Acquisition of equipment under capital leases           $        --    $    81,182    $        --
</TABLE>

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


                                       25
<PAGE>

NOTE A - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Mexco  Energy  Corporation  and  its  wholly  owned  subsidiary,  Forman  Energy
Corporation  (collectively,  the  "Company")  are  engaged  in the  acquisition,
exploration,  development,  and  production  of  domestic  oil and gas and  owns
producing  properties and undeveloped  acreage in 11 states. The majority of the
Company's activities are centered in West Texas.  Although most of the Company's
oil and gas  interests  are  operated by others,  the Company  operates  several
properties in which it owns an interest.

SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.  The consolidated  financial statements include the
accounts  of Mexco  Energy  Corporation  and its wholly  owned  subsidiary.  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

Cash  and Cash  Equivalents.  The  Company  considers  all  highly  liquid  debt
instruments  purchased with  maturities of three months or less and money market
funds to be cash  equivalents.  The Company  maintains  its cash in bank deposit
accounts and money market funds,  some of which are not federally  insured.  The
Company has not  experienced  any losses in such accounts and believes it is not
exposed to any significant credit risk.

Oil and Gas Properties.  Oil and gas properties are accounted for using the full
cost method of  accounting.  Under this method,  all costs  associated  with the
acquisition,  exploration,  and  development of properties  (successful or not),
including leasehold  acquisition costs,  geological and geophysical costs, lease
rentals,  exploratory  and  developmental  drilling,  and equipment  costs,  are
capitalized.  All capitalized costs of oil and gas properties (excluding certain
unevaluated  property  costs),  including the estimated  future costs to develop
proved reserves, are amortized on the unit-of-production  method using estimates
of proved reserves.  If unamortized  costs,  less related deferred income taxes,
exceed the sum of the present value,  discounted at 10%, of estimated future net
revenues from proved  reserves,  less related income tax effects,  the excess is
charged to expense.  Generally, no gains or losses are recognized on the sale or
disposition of oil and gas properties.

Asset Retirement Obligations ("ARO"). The Company has significant obligations to
plug and abandon  natural gas and crude oil wells and related  equipment  at the
end of oil and gas production operations.  The Company records the fair value of
a liability for an ARO in the period in which it is incurred and a corresponding
increase in the carrying  amount of the related asset.  Subsequently,  the asset
retirement  costs  included  in the  carrying  amount of the  related  asset are
allocated  to  expense  using  the  units of  production  method.  In  addition,
increases in the discounted ARO liability resulting from the passage of time are
reflected as accretion expense in the Consolidated Statement of Operations.

Estimating  the future ARO requires  management to make  estimates and judgments
regarding  timing and  existence  of a  liability,  as well as what  constitutes
adequate restoration. The Company uses the present value of estimated cash flows
related to its ARO to determine the fair value. Inherent in the present value

                                       26


<PAGE>

calculation are numerous assumptions and judgments including the ultimate costs,
inflation  factors,  credit adjusted discount rates,  timing of settlement,  and
changes in the legal, regulatory,  environmental and political environments.  To
the extent future revisions to these assumptions impact the present value of the
existing ARO liability, a corresponding adjustment is made to the related asset.

Other Property and Equipment.  Provisions for  depreciation of office  furniture
and equipment are computed on the straight-line method based on estimated useful
lives of five to ten years.

Income Per Common  Share.  Basic  income per share is computed  by dividing  net
income by the weighted average number of shares  outstanding  during the period.
Diluted  income per share is  computed by  dividing  net income by the  weighted
average  number of common  shares and dilutive  potential  common  shares (stock
options and warrants) outstanding during the period. In periods where losses are
reported,  the  weighted-average  number of common shares  outstanding  excludes
potential  common shares,  because their inclusion would be  anti-dilutive.  The
following is a reconciliation of the number of shares used in the calculation of
basic income per share and diluted  income per share for the periods ended March
31:

                                   2004               2003             2002
                                 ---------         ---------         ---------
  Weighted average number
    of common shares
    outstanding, basic           1,736,047         1,741,462         1,768,314
  Incremental shares from
    the assumed exercise of
    dilutive stock options          66,253             5,369               265
                                 ---------         ---------         ---------
   Dilutive potential common
    shares                       1,802,300         1,746,831         1,768,579
                                 =========         =========         =========

Outstanding options and warrants to purchase 10,000,  388,500 and 200,000 shares
at March 31,  2004,  2003,  and 2002,  respectively,  were not  included  in the
computation  of diluted net earnings per share because the exercise price of the
options or warrants  was greater  than the  average  market  price of the common
shares and, therefore, the effect would be anti-dilutive.

Stock Dividend.  On February 1, 2002, the Company  declared a 10% stock dividend
to  shareholders  of record on February  15, 2002.  On February  28,  2002,  the
Company issued 160,566 shares of common stock in conjunction with this dividend.
Accordingly,  amounts  equal to the fair market value of the  additional  shares
issued have been  charged to retained  earnings and credited to common stock and
additional  paid-in  capital.  All  references  in  the  consolidated  financial
statements  to weighted  average  number of shares and earnings per common share
amounts have been adjusted to reflect the stock dividend on a retroactive basis.

Income Taxes. The Company recognizes deferred tax assets and liabilities for the
future tax consequences of temporary differences between the carrying amounts of
assets and liabilities and their  respective tax bases.  Deferred tax assets and
liabilities  are measured  using  enacted tax rates  applicable  to the years in
which those  differences are expected to be settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in net income in
the period that includes the enactment date.


                                       27
<PAGE>

Environmental.  The Company is subject to extensive  federal,  state,  and local
environmental laws and regulations.  These laws, which are constantly  changing,
regulate the  discharge of materials  into the  environment  and may require the
Company to remove or  mitigate  the  environmental  effects of the  disposal  or
release of  petroleum or chemical  substances  at various  sites.  Environmental
expenditures  are expensed or  capitalized  depending  on their future  economic
benefit.  Liabilities for expenditures of a non-capital nature are recorded when
environmental  assessment  and/or  remediation  is probable and the costs can be
reasonably estimated.  There were no significant  environmental  expenditures or
liabilities for the years ended March 31, 2004, 2003, or 2002.

Use  of  Estimates.   In  preparing  financial  statements  in  conformity  with
accounting  principles  generally  accepted  in the  United  States of  America,
management is required to make estimates and assumptions that affect the amounts
reported in the these financial  statements.  Although  management  believes its
estimates and assumptions are reasonable,  actual results may differ  materially
from those estimates. Significant estimates affecting these financial statements
include the  estimated  quantities  of proved oil and gas  reserves, the related
present  value of  estimated  future net cash flows and the future  development,
dismantlement and abandonment costs.

Revenue  Recognition  and  Gas  Balancing.  Oil  and  gas  sales  and  resulting
receivables  are  recognized  when the product is delivered to the purchaser and
title  has  transferred.  Sales  are to  credit-worthy  energy  purchasers  with
payments generally received within 60 days of transportation from the well site.
The  Company has  historically  had little,  if any,  uncollectible  oil and gas
receivables; therefore, an allowance for uncollectible accounts is not required.
Gas  imbalances  are accounted for under the sales method  whereby  revenues are
recognized  based on production sold. A liability is recorded when the Company's
excess takes of natural gas volumes exceed its estimated  remaining  recoverable
reserves (over produced).  No receivables are recorded for those wells where the
Company  has  taken  less  than its  ownership  share of gas  production  (under
produced). The Company has no significant gas imbalances.

Stock  Options and  Warrants.  The Company  accounts for  employee  stock option
grants in accordance  with Accounting  Principles  Board ("APB") Opinion No. 25,
"Accounting  for Stock Issued to Employees," as amended by Financial  Accounting
Standards  Board  ("FASB")   Interpretation  No.  44,  "Accounting  for  Certain
Transactions involving Stock Compensation," an interpretation of APB Opinion No.
25. The  Company  applies  the  intrinsic  value  method in  accounting  for its
employee  stock options and records no  compensation  costs for its stock option
awards to employees.  The Company recognizes  compensation cost related to stock
options awarded to independent consultants based on fair value of the options at
date of grant.

If  compensation  cost for the Company's  stock option plan had been  determined
based on the fair value at the grant  dates for all  employee  awards  under the
plan, net income,  basic income per common share,  and diluted income per common
share would have been as follows:

                                          2004           2003           2002
                                          ----           ----           ----

Net income, as reported                $  429,846     $  672,808     $  189,291
Deduct: Stock-based employee
compensation expense determined
under fair value based method
(SFAS 123), net of tax                 $  (86,070)    $  (63,133)    $  (50,066)
                                       ----------     ----------     -----------

Net income, pro forma                  $  343,776     $  609,675     $  139,225
                                       ==========     ==========     ==========
Basic income per share:

        As reported (1)                $     0.25     $     0.39     $     0.11
        Pro forma (1)                  $     0.20     $     0.35     $     0.08

Diluted income per share:

        As reported (1)                $     0.24     $     0.39     $     0.11
        Pro forma (1)                  $     0.19     $     0.35     $     0.08


                                       28
<PAGE>

     (1)  Amounts have been adjusted to reflect the 10% stock dividend  effected
          on February 1, 2002.

Financial  Instruments.  Cash and  money  market  funds,  stated  at  cost,  are
available upon demand and approximate fair value. Interest rates associated with
the Company's  long-term debt are linked to current  market rates.  As a result,
management  believes that the carrying amount approximates the fair value of the
Company's  credit  facilities.  All financial  instruments are held for purposes
other than trading.

NOTE B - DEBT

The  Company  has a  revolving  credit  agreement  with  Bank of  America,  N.A.
("Bank"),  which  provides  for a credit  facility of  $5,000,000,  subject to a
borrowing  base  determination.  On December 15, 2003 the credit  agreement  was
amended  with a  maturity  date of  August  15,  2005.  The  borrowing  base was
redetermined  on  this  date  and  set at  $1,938,372  with  monthly  commitment
reductions of $45,450  beginning on January 5, 2004.  As of March 31, 2004,  the
balance  outstanding under this agreement was $1,700,000.  Principal payments of
$443,378  are  anticipated  to be  required  for fiscal  2005 to comply with the
monthly  commitment  reductions.  A letter of credit for  $50,000,  in lieu of a
plugging bond with the Texas  Railroad  Commission  covering the  properties the
Company operates, is also outstanding under the facility.  The borrowing base is
subject to  redetermination on or about August 1, of each year. Amounts borrowed
under this  agreement are  collateralized  by the common stock of Forman and the
Company's  oil and gas  properties.  Interest  under this  agreement  is payable
monthly  at  prime  rate   (4.00%  and  4.25%  at  March  31,   2004  and  2003,
respectively).  This  agreement  generally  restricts the  Company's  ability to
transfer assets or control of the Company, incur debt, extend credit, change the
nature of the Company's business,  substantially change management personnel, or
pay cash dividends.

NOTE C - OTHER INCOME

During  the third  quarter  of fiscal  2003 the  Company  received  proceeds  of
$254,862,  before expenses of $101,945,  resulted from the settlement of a class
action lawsuit against a gas purchaser involving contract price disputes.

NOTE D - ASSET RETIREMENT OBLIGATIONS

The  Company's  asset  retirement   obligations   relate  to  the  plugging  and
abandonment of oil and gas properties. The Company adopted SFAS No. 143 on April
1,  2003.  SFAS No. 143  requires  the fair  value of a  liability  for an asset
retirement obligation to be recorded in the period in which it is incurred and a
corresponding  increase in the carrying amount of the related  long-lived asset.
The change  resulted in a cumulative  effect  charge to net income of ($102,267)
net of tax, or ($0.06) per share.  Additionally,  the Company  recorded an asset
retirement  obligation  liability of $358,419 and an increase to net  properties
and equipment and other assets of $210,206 upon adoption of SFAS No. 143.

The asset retirement  obligation,  which is included on the Consolidated Balance
Sheet was  $420,665  at March 31,  2004.  Accretion  expense for fiscal 2004 was
$24,246.

                                       29
<PAGE>

The asset  retirement  obligation  was  $358,419  and  $336,543 for fiscal years
ending  March 31, 2003 and 2002,  assuming  SFAS No. 143 had been  adopted as of
April 1, 2001.

The following  table provides a rollforward of the asset  retirement  obligation
for the fiscal year ended March 31, 2004.

Carrying amount of asset retirement obligations as of
  April 1, 2003                                                 $358,419
Liabilities incurred                                              48,321
Liabilities settled                                              (10,321)
Accretion expense                                                 24,246
Revisions in estimated cash flows                                      0
                                                                --------
Carrying amount of asset retirement obligations as of
  March 31, 2004                                                $420,665
                                                                ========
NOTE E - CAPITAL LEASE OBLIGATIONS

During  fiscal 2003,  the Company  began  leasing  three gas  compressors  under
separate  agreements  that are  classified  as capital  leases.  The cost of the
equipment  under the capital leases is included in the balance sheet as property
and  equipment  and was  $81,182  on March 31,  2004 and 2003.  The  accumulated
amortization  associated  with these  leases was $10,726 and $5,796 on March 31,
2004 and 2003,  respectively.  Amortization  of assets under  capital  leases is
included in depreciation  expense.  The lease  obligation  associated with these
three  compressors  was  $61,086  on March 31,  2003.  As of March 31,  2004 the
Company has fulfilled its obligation of the lease  agreements and received title
to the compressors.

NOTE F - INCOME TAXES

Deferred  tax assets and  liabilities  are the result of  temporary  differences
between the financial  statement carrying values and the tax bases of assets and
liabilities.  Significant components of net deferred tax assets (liabilities) at
March 31 are as follows:

                                                  2004            2003
                                              -----------      ---------
    Percentage depletion carryforwards        $   442,907      $ 403,344
    Vacation accrual                                2,636          1,334
    Deferred compensation                          56,536         41,835
    Asset retirement obligation                   130,406             --
    Other                                           1,777             --
    Net operating loss carryforwards                   --         43,927
                                              -----------      ---------
                                                  634,262        490,440
  Deferred tax liabilities:
    Excess financial accounting bases over
      tax bases of property and equipment      (1,153,534)      (918,170)
                                              -----------      ---------

    Net deferred tax liabilities              $  (519,272)     $(427,730)
                                              ===========      =========

As of March 31,  2004,  the Company has  statutory  depletion  carryforwards  of
approximately $1,428,000, which do not expire.

                                       30


<PAGE>

A  reconciliation  of the  provision  for income taxes to income taxes  computed
using the federal statutory rate for years ended March 31 follows:

                                          2004            2003          2002
                                       ----------      ----------    ---------
  Tax expense at statutory rate        $  239,011      $  282,513    $  67,114
  Depletion in excess of basis            (39,563)        (86,170)     (58,513)
  Effect of graduated rates               (21,089)        (24,928)      (5,922)
  Revision of prior year estimates             --         (13,026)       7,657
  Other                                    (7,499)           (276)      (2,232)
                                       ----------      ----------    ---------

                                       $  170,860      $  158,113    $   8,104
                                       ==========      ==========    =========
Effective tax rate                             24%             19%           4%
                                       ==========      ==========    =========

NOTE G - EXPLORATION AGREEMENT

On December 5, 2002,  the Company  entered into an  exploration  agreement  with
Falcon Bay Operating,  LLC. Pursuant to such agreement, the Company has obtained
the right to purchase and  inventory  seismic data and acreage in shallow  water
areas of Texas and Louisiana. In consideration for the right to obtain four such
prospects,  the Company has issued warrants to purchase 107,500 shares of common
stock at an exercise price of $5.00 per share. Such warrants are exercisable for
a period of two years from date of grant.  Additional  warrants,  exercisable at
the same exercise price and exercisable for two years,  would be issued covering
322,500 shares upon exercise of the Company's right to participate in a total of
four prospects.

NOTE H - FEASIBILITY STUDY

In March 2004,  the Company  signed an  agreement  in Moscow,  Russia to begin a
preliminary  feasibility  study for  exploration  and development of natural gas
reserves in Russia.  A team of U.S. and Russia  experts  commenced a feasibility
study of a number of  undeveloped  natural gas fields located in the vicinity of
Gasprom  pipelines  which  serve  Russia.  The  Company  has formed  OBTX LLC, a
Delaware  limited  liability  company,  in which it owns a 90% interest with the
remaining 10% interest  split equally among three  individuals,  one of which is
Arden Grover, a director of the Company.  OBTX, LLC, plans to participate in any
Russian ventures entered into and own a 50% interest.  The Company's  geological
and related costs  associated with the  feasibility  study total $41,596 through
March 31, 2004, which has been capitalized.

NOTE I - MAJOR CUSTOMERS

Currently,  the Company  operates  exclusively  within the United States and its
revenues and  operating  income are derived  predominately  from the oil and gas
industry.  Oil  and  gas  production  is  sold  to  various  purchasers  and the
receivables  are  unsecured.  Historically,  the  Company  has  not  experienced
significant  credit losses on its oil and gas accounts and  management is of the
opinion  that  significant  credit  risk does not  exist.  Management  is of the
opinion that the loss of any one purchaser  would not have an adverse  effect on
the ability of the Company to sell its oil and gas production.

In fiscal 2004,  2003, and 2002, one purchaser  accounted for 29%, 28%, and 24%,
respectively,  of revenues.  At March 31,  2004,  accounts  receivable  from the
purchaser was approximately 29% of accrued oil and gas sales.


                                       31
<PAGE>

NOTE J - OIL AND GAS COSTS

The costs related to the oil and gas  activities of the Company were incurred as
follows:

                                             Year ended March 31,
                                    ----------------------------------------
                                       2004            2003          2002
                                    ----------      ----------    ----------

  Property acquisition costs
    Proved                          $  339,519      $   64,090    $  649,021
    Unproved U.S.                   $  184,912      $  673,690    $  280,745
    Unproved Russia                 $   41,596      $       --    $       --
  Exploration costs                 $    4,757      $   55,543    $   46,907
  Development costs                 $  453,684      $  990,106    $1,353,553


The Russian costs in 2004 were for the  feasibility  study referred to in Note H
to the Company's financial statements.

The  Company  had the  following  aggregate  capitalized  costs  relating to the
Company's oil and gas property activities at March 31:

                                        2004          2003         2002
                                     -----------  -----------  -----------
Proved oil and gas properties        $15,758,031  $14,596,072  $13,462,406
Unproved oil and gas properties:
  subject to amortization                342,927      387,166      424,392
  not subject to amortization-U.S.       817,006      673,690           --
  not subject to amortization-Russia      41,596           --           --
                                     -----------  -----------  -----------
                                      16,959,560   15,656,928   13,886,798
Less accumulated depreciation,
 depletion, and amortization           9,320,174    8,637,902    7,999,539
                                     -----------  -----------  -----------
                                     $ 7,639,386  $ 7,019,026  $ 5,887,259
                                     ===========  ===========  ===========

The cost of certain oil and gas leases that the  Company has  acquired,  but not
evaluated  have been excluded in computing  amortization  of the full cost pool.
The Company  will begin to  amortize  these  properties  when the  projects  are
evaluated,  which is currently  estimated to be within the following year. Costs
excluded  from  amortization  at March 31, 2004 total  $858,602.  No  impairment
exists for these properties at March 31, 2004 based on geological studies.

Depreciation, depletion, and amortization amounted to $6.24, $5.64 and $4.49 per
equivalent  barrel of production  for the years ended March 31, 2004,  2003, and
2002, respectively.

NOTE K - STOCKHOLDERS' EQUITY

In fiscal 2002,  the board of directors  authorized the use of up to $250,000 to
repurchase shares of the Company's common stock. During fiscal 2002, the Company
repurchased  22,533  shares,  at an aggregate  cost of $91,231.  Of such shares,
18,400 were reissued in exchange for oil and gas lease rights  representing  368
net acres valued at $83,000.  The  remaining  4,133 shares along with the 11,254
shares of stock held in the  treasury  account from fiscal year ending March 31,
2001 were  cancelled.  On February 28,  2002,  the Company  distributed  160,566
shares of common stock in connection with a 10% stock  dividend.  As a result of
the stock  dividend,  par value of  outstanding  common  stock was  increased by


                                       32
<PAGE>

$80,283,  additional  paid-in  capital was  increased by $722,548,  and retained
earnings  was  decreased by  $802,831.  In fiscal  2003,  the board of directors
authorized  the use of up to  $250,000  to  repurchase  shares of the  Company's
common stock.  During fiscal 2003, the Company  repurchased  30,244 shares at an
aggregate  cost of $127,536 for the treasury  account.  For the fiscal 2004, the
board of directors repurchased 281 shares at an aggregate cost of $1,389 for the
treasury account.

During  the last  quarter of fiscal  2004,  the  Chairman  of the board paid the
Company $2,950,  representing  profits on stock sold which he held less than six
months. Such payment was made in accordance with Section 16(b) of the Securities
Exchange Act of 1934.

NOTE L - STOCK OPTIONS AND WARRANTS

The Company  adopted an employee  incentive  stock plan effective  September 15,
1997.  Under the plan,  350,000 shares are available for  distribution.  Awards,
granted  at the  discretion  of the  compensation  committee  of  the  board  of
directors,  include stock options of restricted  stock.  Stock options may be an
incentive  stock  option or a  nonqualified  stock  option.  Options to purchase
common  stock under the plan are granted at the fair market  value of the common
stock at the date of  grant,  become  exercisable  to the  extent  of 25% of the
shares optioned on each of four  anniversaries of the date of grant,  expire ten
years  from the date of grant,  and are  subject  to  forfeiture  if  employment
terminates.  Restricted stock awards may be granted with a condition to attain a
specified  goal.  The  purchase  price  will be at  least  $5.00  per  share  of
restricted stock. The awards of restricted stock must be accepted within 60 days
and will vest as determined by agreement.  Holders of restricted  stock have all
rights of a shareholder of the Company.

During fiscal 2004,  options for 49,000 shares were  granted.  Of these,  10,000
options were granted to contract consultants.  The exercise price of all options
granted equaled or exceeded the market price of the stock on the date of grant.

Additional  information  with respect to the Plan's  stock  option  activity for
options issued to employees and directors is as follows:

                                           Weighted
                                             Number               Average
                                           of Shares           Exercise Price
                                           ---------           --------------
Options outstanding, at April 1, 2001        170,000           $         6.49
  Granted                                     20,000                     4.00
  Exercised                                       --                       --
  Forfeited                                  (40,000)                    6.81
                                           ---------           --------------

Options outstanding, at March 31, 2002       150,000                     6.07
  Granted                                     31,000                     4.00
  Exercised                                       --                       --
  Forfeited                                       --                       --
                                           ---------           --------------
Options outstanding, at March 31, 2003       181,000                     5.71
  Granted                                     39,000                     6.00
  Exercised                                       --                       --
  Forfeited                                       --                       --
                                           ---------           --------------
Options outstanding, at March 31, 2004       220,000           $         5.76
                                           =========           ==============

Options exercisable at March 31, 2002         72,500           $         6.57
Options exercisable at March 31, 2003        110,000           $         6.40
Options exercisable at March 31, 2004        140,250           $         6.11


                                       33
<PAGE>

Weighted average grant date fair value of stock options granted to employees and
directors  during  fiscal  2004,  2003,  and 2002 were  $4.82,  $3.72 and $1.30,
respectively.  These  values  were  determined  using a Binomial  option-pricing
model.  The model values options based on the stock price at the grant date, the
expected life of the option, the estimated volatility of the stock, the expected
dividend payments, and the risk-free interest rate over the expected life of the
option.  The  Company  considers  the  binomial  model  more  accurate  than the
Black-Scholes  model,  in that it  recognizes  the  ability to  exercise  before
expiration once an option is vested. The assumptions used in the Binomial models
were as follows for stock options granted in fiscal 2004, 2003 and 2002:

                                   2004          2003         2002
                                  -------      -------      -------
  Expected volatility              67.46%      134.07%       27.24%
  Expected dividend yield           0.00%        0.00%        0.00%
  Risk-free rate of return          3.40%        5.40%        4.79%
  Expected life of options        7 years      7 years      7 years

The option  valuation models were developed for use in estimating the fair value
of traded options that have no vesting  restrictions and are fully transferable.
In addition,  option  valuation  models  require the input of highly  subjective
assumptions including expected stock price volatility.

The following  tables summarize  information  about employee and directors stock
options outstanding and exercisable at March 31, 2004:

                            Stock Options Outstanding

                                     Weighted Average
                       Number of        Remaining          Weighted
      Range of          Shares         Contractual          Average
   Exercise Prices    Outstanding     Life in Years      Exercise Price
   ---------------    -----------    ----------------    ---------------
     $7.50-$7.75           50,000         4.55               $7.60
     $6.00                 39,000         9.27               $6.00
     $6.75                 20,000         6.81               $6.75
     $5.25                 60,000         5.97               $5.25
     $4.00                 51,000         7.87               $4.00
                      -----------
                          220,000

                            Stock Options Exercisable

                                   Number of       Weighted
                  Range of          Shares          Average
               Exercise Prices    Exercisable    Exercise Price
               ---------------    -----------    --------------
                  $7.50-$7.75        50,000         $7.60
                  $6.75              15,000         $6.75
                  $5.25              60,000         $5.25
                  $4.00              15,250         $4.00


                                       34
<PAGE>

Since the Company  applies the  intrinsic  value  method in  accounting  for its
employee stock options,  it generally records no compensation cost for its stock
option  awards to employees.  The Company  recognizes  expense  related to stock
options awarded to independent  consultants and contractors  based on fair value
of the options at date of grant.  Additional  information  with respect to stock
option  and  warrant  activity  for  options  and  warrants  granted  to outside
consultants and contractors is as follows:

                                                                 Weighted
                                             Number              Average
                                           of Shares          Exercise Price
                                           ---------          --------------
Options outstanding, at April 1, 2001         70,000          $         6.57
  Granted                                     10,000                    4.00
  Exercised                                       --                      --
  Forfeited                                       --                      --
                                           ---------          --------------
Options outstanding, at March 31, 2002        80,000                    6.25
  Granted                                    127,500                    4.84
  Exercised                                       --                      --
  Forfeited                                       --                      --
                                           ---------          --------------
Options outstanding, at March 31, 2003       207,500                    5.39
  Granted                                     10,000                    7.00
  Exercised                                       --                      --
  Forfeited                                       --                      --
                                           ---------          --------------
Options outstanding, at March 31, 2004       217,500          $         5.83
                                           =========          ==============

Options exercisable at March 31, 2002         32,500          $         6.69
Options exercisable at March 31, 2003        160,000          $         5.50
Options exercisable at March 31, 2004        180,000          $         5.48


Weighted  average grant date fair value of stock options and warrants granted to
outside  consultants  and  contractors  during fiscal 2004,  2003, and 2002 were
$5.46,  $1.16 and $1.26,  respectively.  These  values were  determined  using a
Binomial option-pricing model. The model values options based on the stock price
at the grant date, the expected life of the option, the estimated  volatility of
the stock, the expected dividend payments,  and the risk-free interest rate over
the expected life of the option.  The  assumptions  used in the Binomial  models
were as follows for stock options granted in fiscal 2004, 2003 and 2002:

                                  2004       2003      2002
                                 -------   -------   -------
    Expected volatility           62.52%    90.09%    27.23%
    Expected dividend yield        0.00%     0.00%     0.00%
    Risk-free rate of return       3.81%     2.39%     4.52%
    Expected life of options     7 years   3 years   7 years


The option  valuation models were developed for use in estimating the fair value
of traded options that have no vesting  restrictions and are fully transferable.
In addition,  option  valuation  models  require the input of highly  subjective
assumptions including expected stock price volatility.

The  following  tables  summarize  information  about  outside  consultants  and
contractors stock options and warrants  outstanding and exercisable at March 31,
2004:


                                       35
<PAGE>

                       Stock Options/Warrants Outstanding

                                     Weighted Average
                       Number of         Remaining         Weighted
      Range of          Shares          Contractual         Average
   Exercise Prices    Outstanding      Life in Years     Exercise Price
   ---------------    -----------    ----------------    --------------
      $7.50-$7.75          20,000         4.46             $7.63
      $7.00                10,000         9.64             $7.00
      $6.75                30,000         6.81             $6.75
      $5.25                20,000         5.97             $5.25
      $5.00               107,500         0.68             $5.00
      $4.00                30,000         7.96             $4.00
                      -----------
                          217,500

                       Stock Options/Warrants Exercisable

                                   Number of       Weighted
                  Range of          Shares          Average
               Exercise Prices    Exercisable    Exercise Price
               ---------------    -----------    --------------
                  $7.50-$7.75       20,000          $7.63
                  $6.75             22,500          $6.75
                  $5.25             20,000          $5.25
                  $5.00            107,500          $5.00
                  $4.00             10,000          $4.00

The Company  recognizes  expense related to stock options awarded to independent
consultants  based on fair value of the options at date of grant.  Total expense
related to these  awards  was  $47,424  and  $61,522  for fiscal  2004 and 2003,
respectively.  The  Company  capitalizes  fair value of  warrants as part of the
leasehold  cost of the acreage  acquired in connection  with the issuance of the
warrants.

NOTE M - RELATED PARTY TRANSACTIONS

The Company  served as operator of properties in which the majority  stockholder
had interests and billed the majority  stockholder for lease operating  expenses
and shared office  expenditures on a monthly basis subject to usual trade terms.
The  billings  totaled  $43,827 for the year ended March 31,  2002.  All of such
properties  were sold in October 2001. The only related party  transactions  for
the years ended March 31,  2004 and 2003 relate to shared  office  expenditures.
The  total  billed  for years  ended  March 31,  2004 and 2003 was  $18,118  and
$10,016, respectively.

Effective  January 1, 2000,  the  Company  entered  into an  agreement  with the
husband  of an  officer  and  director  of the  Company  to  provide  geological
consulting services.  Amounts paid under this contract were $8,094,  $19,251 and
$23,627 for the years ended March 31, 2004, 2003, and 2002, respectively.

During the year ending March 31, 2004, a member of the board of directors,  also
a Company employee, entered into an agreement with Deepwater Resources, L.P. and
Gary Martin,  whereby he receives a 1.5%  overriding  royalty on certain  leases
related to the  Lodgepole  Prospect in Stark County,  North  Dakota.  In January
2004,  the Company  purchased a  one-quarter  interest  in these  leases  and/or
options to lease.

During the year ending March 31, 2003, a member of the board of directors,  also
a Company  employee,  entered into an agreement with Falcon Bay, LLC, whereby he
receives a  commission  from  Falcon  Bay  Operating,  LLC for any  transactions
consummated  between Falcon Bay Operating,  LLC and the Company in the course of
the Exploration Agreement.


                                       36
<PAGE>

During  the  year  ending  March  31,  2002,   the  Company   entered  into  two
transactions,  respectively,  with a Company  director  and employee and a trust
related  to but not  controlled  by said  director  and  employee.  In the first
transaction, the Company purchased oil and gas lease rights representing 369 net
acres for cash consideration of $83,000. In the second transaction,  the Company
exchanged 18,400 shares of its $.50 par value common stock for oil and gas lease
rights  representing 368 net acres with a value of approximately  $83,000.  Such
acreage is available for exploration and production of oil and gas.

NOTE M - OIL AND GAS RESERVE DATA (UNAUDITED)

The  estimates of the Company's  proved oil and gas reserves,  which are located
entirely  within  the  United  States,  were  prepared  in  accordance  with the
guidelines  established  by the SEC and  FASB.  These  guidelines  require  that
reserve estimates be prepared under existing  economic and operating  conditions
at  year-end,  with no  provision  for  price  and cost  escalators,  except  by
contractual  agreement.  The estimates as of March 31, 2004,  2003, and 2002 are
based  on  evaluations  prepared  by  Joe  C.  Neal  and  Associates,  Petroleum
Consultants.

Management  emphasizes that reserve  estimates are inherently  imprecise and are
expected  to  change  as new  information  becomes  available  and  as  economic
conditions in the industry  change.  The following  estimates of proved reserves
quantities  and related  standardized  measure of  discounted  net cash flow are
estimates only, and do not purport to reflect  realizable  values or fair market
values of the Company's reserves.

CHANGES IN PROVED RESERVE QUANTITIES (UNAUDITED):

<TABLE>
<CAPTION>
                                      2004                          2003                          2002
                              ----------------------        -----------------------       -----------------------
                               Bbls           Mcf            Bbls           Mcf             Bbls          Mcf
                              -------      ---------        -------      ----------       --------     ----------
<S>                           <C>          <C>              <C>          <C>               <C>          <C>

Proved reserves,
  beginning of year           150,000      7,931,000        237,000      10,182,000        235,000      6,345,000
Revision of previous
  estimates                     2,000        214,000        (66,000)     (1,746,000)       (70,000)    (1,204,000)
Purchase of minerals
  in place                         --        260,000             --          22,000         55,000      2,864,000
Extensions and
  discoveries                      --             --          2,000          12,000         38,000      2,644,000
Production                    (20,000)      (488,000)       (23,000)       (539,000)       (21,000)      (467,000)
                              -------      ---------        -------      ----------       --------     ----------
Proved reserves,
  end of year                 132,000      7,917,000        150,000       7,931,000        237,000     10,182,000
                              =======      =========        =======      ==========       ========     ==========

PROVED DEVELOPED RESERVES (UNAUDITED):

Beginning of year             94,000       4,518,000        144,000       5,159,000        235,000      6,337,000
End of year                   77,000       4,274,000         94,000       4,518,000        144,000      5,159,000
</TABLE>

STANDARDIZED  MEASURE OF  DISCOUNTED  FUTURE NET CASH FLOWS  RELATING  TO PROVED
RESERVES (UNAUDITED):

<TABLE>
<CAPTION>
                                                               March 31,
                                             --------------------------------------------
                                                 2004            2003            2002
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Future cash inflows                          $ 46,230,000    $ 49,820,000    $ 36,005,000
Future production and
   development costs                          (12,225,000)    (13,284,000)    (12,217,000)
Future income taxes (a)                        (7,761,000)     (8,444,000)     (5,228,000)
                                             ------------    ------------    ------------
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
<S>                                          <C>             <C>             <C>
Future net cash flows                          26,244,000      28,092,000      18,560,000
Annual 10% discount for
   estimated timing of cash flows             (11,482,000)    (12,120,000)     (9,256,000)
                                             ------------    ------------    ------------
Standardized measure of
   discounted future net cash flows          $ 14,762,000    $ 15,972,000    $  9,304,000
                                             ============    ============    ============
</TABLE>

(a)  Future  income taxes are computed  using  effective tax rates on future net
     cash  flows  before  income  taxes  less  the tax  bases of the oil and gas
     properties and effects of statutory depletion.

CHANGES IN STANDARIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES (UNAUDITED):

<TABLE>
<CAPTION>
                                                          Year ended March 31,
                                             ---------------------------------------------
                                                 2004            2003            2002
                                             ------------     -----------     ------------
<S>                                          <C>              <C>             <C>
Sales of oil and gas produced,
    net of production costs                    (1,968,000)    $(1,833,000)    $ (1,120,000)
Net changes in price and production costs      (1,697,000)     12,946,000       (7,145,000)
Changes in previously estimated
    development costs                                  --         512,000          (59,000)
Revisions of quantity estimates                   524,000      (5,103,000)      (1,862,000)
Net change due to purchases and sales of
    minerals in place                             681,000          77,000        3,685,000
Extensions and discoveries,
    less related costs                                 --          87,000        2,121,000
Net change in income taxes                        436,000      (2,180,000)       1,183,000
Accretion of discount                           2,077,000       1,193,000        1,599,000
Changes in timing of estimated cash
    flows and other                            (1,263,000)        969,000       (1,283,000)
                                             ------------     -----------     ------------
Changes in standardized measure                (1,210,000)      6,668,000       (2,881,000)

Standardized measure, beginning of year        15,972,000       9,304,000       12,185,000
                                             ------------     -----------     ------------

Standardized measure, end of year             $14,762,000     $15,972,000      $ 9,304,000
                                             ============     ===========     ============
</TABLE>

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

     None.

ITEM 9A. CONTROLS AND PROCEDURES

We  maintain   disclosure  controls  and  procedures  designed  to  ensure  that
information  required  to be  disclosed  in our  filings  under  the  Securities
Exchange Act of 1934 is recorded, processed,  summarized and reported within the
time periods  specified in the  Securities and Exchange  Commission's  rules and
forms.  Our  principal  executive  and  financial  officers  have  evaluated our
disclosure  controls and procedures  and have  determined  that such  disclosure
controls and  procedures  were  effective as of the end of the period covered by
this Annual Report on Form 10-K.


                                       38
<PAGE>

                                    PART III
                                    --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The information  required regarding Directors of the Company and compliance
with Section 16(a) of the  Securities  Exchange Act of 1934 is  incorporated  by
reference  to  the  Company's   Proxy   Statement  for  its  Annual  Meeting  of
Stockholders, which will be filed with the SEC not later than July 30, 2004.

     Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I of
this report.

ITEM 11. EXECUTIVE COMPENSATION

     The information required in this item is incorporated by reference from the
Company's Proxy Statement for its Annual Meeting of Stockholders,  which will be
filed with the SEC not later than July 30, 2004.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required in this item is incorporated by reference from the
Company's Proxy Statement for its Annual Meeting of Stockholders,  which will be
filed with the SEC not later than July 30, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required in this item is incorporated by reference from the
Company's Proxy Statement for its Annual Meeting of Stockholders,  which will be
filed with the SEC not later than July 30, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required in this item is incorporated by reference from the
Company's Proxy Statement for its Annual Meeting of Stockholders,  which will be
filed with the SEC not later than July 30, 2004.


                                       39
<PAGE>

                                     PART IV
                                     -------

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)  1. and 2. Financial Statements and Schedules.

          See "Index to Consolidated  Financial  Statements" set forth in Item 8
     of this Form 10-K.

          No  schedules  are  required  to be filed  because  of the  absence of
     conditions  under  which they would be  required  or because  the  required
     information  is set  forth in the  financial  statements  or notes  thereto
     referred to above.

     (a)  3. Exhibits.

Exhibit
Number
------
3.1   Articles of  Incorporation  (incorporated  by  reference  to the Company's
      Annual  Report  on Form 10-K  dated  June 24,  1998).
3.2   Bylaws  adopted December 5, 2002.
10.1  Stock Option Plan  (incorporated by reference to the Amendment to Schedule
      14C Information Statement filed on August 13, 1997).
10.2  Bank Line of Credit  (incorporated  by reference to the  Company's  Annual
      Report on Form 10-K dated June 24, 1998).
21    Subsidiaries  of the Company  (incorporated  by reference to the Company's
      Annual Report on Form 10-K dated June 24, 1998).
31.1  Certification by the President and Chief Executive  Officer of the Company
      pursuant to Rule 13a -- 14(a) of the Securities Exchange Act of 1934.
31.2  Certification  of the Chief Financial  Officer of the Company  pursuant to
      Rule 13a - 14(a) of the Securities Exchange Act of 1934.
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.

     (b)  Reports on Form 8-K.

          A report on Form 8-K,  dated March 24, 2004,  was filed by the Company
     for the year ended March 31, 2004 under Item 5 to provide public disclosure
     of an agreement to begin a preliminary  feasibility  study for  exploration
     and development of natural gas reserves in Russia.

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Company has duly caused this report to be signed on
behalf of the undersigned thereunto duly authorized.

                                   MEXCO ENERGY CORPORATION

                                   Registrant

                                   By:   /s/ Nicholas C. Taylor
                                        ---------------------------------------
                                        Nicholas C. Taylor
                                        President and Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below as of June 29, 2004,  by the  following  persons on
behalf of the Company and in the capacity indicated.


                                       40
<PAGE>

/s/  Nicholas C. Taylor
---------------------------------------------
     Nicholas C. Taylor
     President, Chief Executive Officer
     and Director

/s/  Donna Gail Yanko
---------------------------------------------
     Donna Gail Yanko
     Vice President, Operations
     and Director

/s/  Tamala L. McComic
---------------------------------------------
     Tamala L. McComic
     Vice President, Treasurer
     and Assistant Secretary

/s/  Thomas Graham, Jr.
---------------------------------------------
     Thomas Graham, Jr.
     Chairman of the Board of Directors

/s/  Thomas R. Craddick
---------------------------------------------
     Thomas R. Craddick
     Director

/s/  William G. Duncan, Jr.
---------------------------------------------
     William G. Duncan, Jr.
     Director

/s/  Arden Grover
---------------------------------------------
     Arden Grover
     Director

/s/  Jack D. Ladd
---------------------------------------------
     Jack D. Ladd
     Director

                                       41
<PAGE>

                                INDEX TO EXHIBITS
                                -----------------
Exhibit
Number  Exhibit                                                    Page
------  ---------------------------------------------------        ----
3.1*    Articles of Incorporation.
3.2***  Bylaws.
10.1**  Stock Option Plan.
10.2*   Bank Line of Credit.
21*     Subsidiaries of the Company.
31.1    Certification  by the  President  and  Chief  Executive  Officer  of the
        Company pursuant to Rule 13a -- 14(a) of the Securities  Exchange Act of
        1934.
31.2    Certification of the Chief Financial  Officer of the Company pursuant to
        Rule 13a - 14(a) of the Securities Exchange Act of 1934.
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.

*       Incorporated  by reference to the  Company's  Annual Report on Form 10-K
        dated June 24, 1998.
**      Incorporated  by reference to the Amendment to Schedule 14C  Information
        Statement filed on August 13, 1998.
***     Filed with the Company's Annual Report on Form 10-K dated June 29, 2004.