**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**





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





For
      the
      fiscal year ended March 31, 2008





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





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. Employerincorporation
                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 if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o  No
þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes o No þ





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 þ No o





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definitions of "large accelerated filer", "accelerated filer" and "smaller
      reporting company" in Rule 12b-2 of the Exchange Act:














Large
                Accelerated Filer o
            Accelerated
                Filero
            Non-Accelerated
                Filer þ
            Smaller
                Reporting Companyo(Do
                not check if a smaller reporting company)


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





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant as of September 30, 2007 (the last business day of the Registrant’s
      most recently completed second quarter) was  $2,868,488
      based on Mexco Energy Corporation’s closing common stock price of $5.15 per
      share on that date as reported by the American Stock Exchange.





There
      were 1,757,366 shares of the registrant’s common stock, $.50 par value,
      outstanding as of June 19, 2008.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s Proxy Statement relating to the 2008 Annual Meeting of
      Shareholders to  be
      held
      on September 11, 2008, 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 18, 2008.





**TABLE
      OF CONTENTS**





**PART
                I**Item
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            10Item
                1B.
            Unresolved
                Staff Comments
            13Item
                2.
            Properties
            13Item
                3.
            Legal
                Proceedings
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            16**PART
                II**Item
                5.
            Market
                for the Registrant’s Common Equity, Related Stockholder Matters And Issuer
                Repurchases of Equity Securities
            16Item
                6.
            Selected
                Consolidated Financial Data
            17Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            17Item 7A.
            Quantitative
                and Qualitative Disclosures About Market Risks
            23Item
                8.
            Financial
                Statements and Supplementary Data
            23Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            23Item
                9A.
            Controls
                and Procedures
            24Item
                9B.
            Other
                Information
            24**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            24Item
                11.
            Executive
                Compensation
            24Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
            24Item
                13.
            Certain
                Relationships and Related Transactions
            24Item
                14.
            Principal
                Accounting Fees and Services
            24**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            25Signatures
            26Glossary
                of Abbreviations and Terms
            27





**This
      Annual Report on Form 10-K contains forward-looking statements that are based
      on
      management’s current expectations.  Forward-looking statements include
      statements regarding our plans, beliefs or current expectations and may be
      signified by the words “could”, “should”, “expect”, “project”, “estimate”,
“believe”, “anticipate”, “intend”, “budget”, “plan”, “forecast”, “predict” and
      other similar expressions.  Forward-looking statements appear throughout
      this Form 10-K with respect to, among other things: profitability; planned
      capital expenditures; estimates of oil and gas production; future project dates;
      estimates of future oil and gas prices; estimates of oil and gas reserves;
      our
      future financial condition or results of operations; and our business strategy
      and other plans and objectives for future operations.  Actual results in
      future periods may differ materially from those expressed or implied by such
      forward-looking statements because of a number of risks and uncertainties
      affecting our business, including those discussed in “Item 1 – Business – Risk
      Factors” and elsewhere in this report.  We disclaim any intention or
      obligation to update or revise any forward-looking statements, whether as a
      result of new information, future events or otherwise.**





**Unless
      the context otherwise requires, references to “the Company”, ”Mexco”, “we”, “us”
or “our” mean Mexco Energy Corporation and its consolidated subsidiaries.**




**Definitions
      of terms commonly used in the oil and gas industry and in this Form 10-K can
      be
      found in the “Glossary of Abbreviations and Terms”.**





**PART
      I**




**ITEM
      1. BUSINESS**





**General**





Mexco
      Energy Corporation, a Colorado corporation, 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.





In
      April
      2004, Mexco Energy Corporation formed OBTX, LLC, a Delaware limited liability
      company. OBTX, LLC owned 50% of GazTex, LLC, a limited liability company which
      was dissolved in May 2008. Since its date of formation, OBTX, LLC has been
      included in the consolidated financial statements. Prior to dissolution GazTex,
      LLC had no operations other than evaluation activities on properties in Russia.





Our
      total
      estimated proved reserves at March 31, 2008 were approximately 7.857 Bcf of
      natural gas and 217,000 barrels of oil and natural gas liquids, and our
      estimated present value of proved reserves was  approximately
      $41 million based on estimated future net revenues discounted at 10% per annum,
      pricing and other assumptions set forth in “Item 2 – Properties” below. During
      fiscal 2008, we added proved reserves of  794,000
      mcfe through extensions and discoveries, added 584,000 mcfe through acquisitions
      and had upward revisions of previous estimates of 43,000 mcfe.




Nicholas
      C. Taylor beneficially owns approximately 50% of the outstanding shares of
      our
      common stock. Mr. Taylor is also our President and Chief Executive Officer.
      As a
      result, Mr. Taylor has significant influence in matters voted on by our
      shareholders, including the election of our Board members. Mr. Taylor
      participates in all facets of our business and has a significant impact on
      both
      our business strategy and daily operations.


4


**Company
      Profile**





Since
      our
      inception, we have been engaged in acquiring and developing oil and gas
      properties and the exploration for and production of oil and gas within the
      United States. We primarily focus on the exploration for and development of
      natural gas reserves, as well as increased profit margins through reductions
      in
      operating costs. Our long-term strategy is to increase shareholder value by
      increasing oil and natural gas reserves, production and revenues. In addition
      to
      exploration, we are also engaged in the business of acquiring proved reserves
      that fit well within existing operations or in areas where the Company is
      establishing new operations. Preferred properties have most of their value
      in
      producing wells, behind pipe reserves or high quality proved undeveloped
      locations. Competition for the purchase of proved reserves is intense. Sellers
      often utilize a bid process to sell properties. This process usually intensifies
      the competition and makes it extremely difficult for us to acquire reserves
      without assuming significant price and production risks. We are actively
      searching for opportunities to acquire proved oil and gas properties; however,
      because the competition is intense, we cannot give any assurance that we will
      be
      successful in our efforts during fiscal 2009.





While
      we
      own oil and gas properties in other states, the majority of our activities
      are
      centered in West Texas. We acquire 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, we may
      acquire oil and gas interests by joining in oil and gas drilling prospects
      generated by third parties. We may also employ a combination of the above
      methods of obtaining producing acreage and prospects. In recent years, we have
      placed primary emphasis on the evaluation and purchase of producing oil and
      gas
      properties, both working and royalty interests, and prospects that could have
      a
      potentially meaningful impact on our reserves.





**Oil
      and Gas Operations**





As
      of
      March 31, 2008, gas reserves constituted approximately 86% of our total proved
      reserves and approximately 65% of our revenues for fiscal 2008. Revenues from
      oil and gas royalty interests accounted for approximately 29% of our revenues
      for fiscal 2008.





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 2% of our discounted future net cash flows
      from
      proved reserves as of March 31, 2008, and for fiscal 2008, approximately 6%
      of
      revenues and 7%  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  6%
      of our
      discounted future net cash flows from proved reserves as of March 31, 2008,
      and
      for fiscal 2008, approximately 9%  of
      revenues and  4%  of
      production costs. All of these properties, except for one, are royalties.





El
      Cinco
      Gas Field properties, encompassing  1,006
      gross acres, 766 net acres, 7 gross producing wells and 5.325 net wells in
      Pecos
      County, Texas, account for approximately 45% of our discounted future net cash
      flows from proved reserves as of March 31, 2008.  This
      is a
      multi-pay area where most of the leases have potential reserves in two zones.
      Of
      this amount approximately 26%  of
      our
      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 2008, these properties accounted for approximately
      19% of revenues and 43%  of
      production costs.





Newark
      East (Barnett Shale) Gas Field properties, encompassing 5116 gross acres, 54
      net
      acres, 84 gross producing wells and .44 net wells in Denton and Tarrant
      Counties, Texas, account for approximately 6% of our discounted future net
      cash
      flows from proved reserves as of March 31, 2008, and for fiscal 2008,
      approximately 8% of revenues and 1% of production costs. These costs are ad
      valorem and production taxes. All of these properties are royalties including
      a
      purchase of $1,850,000 on December 31, 2007, which has materially increased
      our
      earnings. Subsequently on June 6, 2008 we purchased additional Barnett Shale
      royalties in the Newark East Gas Field at a purchase price of $429,000.


5


We
      acted
      as operator of an exploratory well drilled to a depth of approximately 6,680
      feet in the Cherry Canyon producing interval in Loving County, TX. As of March
      31, 2008 and based on information available at that time, the calculated
      reserves for our 31.25% working interest (22.94% net revenue interest) in this
      well accounted for 8% of our discounted future net cash flows from proved
      reserves. This well, based on a four point test by an independent testing firm,
      was calculated to produce at an absolute open flow rate of 12,773,000 cubic
      feet
      of natural gas per day. During this four hour test the well actually produced
      1,366,000 cubic feet of natural gas, 26 barrels of 63 gravity condensate and
      12
      barrels of water on chokes ranging from 11/64 to 15/64 inches. Previously the
      well had been shut in for a period in excess of 72 hours. The rates at which
      this will be produced and sold have not yet been determined and may be
      substantially different from these potential tests, based on regulatory and
      engineering considerations as well as performance of the well over longer
      periods of time. We anticipate future development on this acreage.





We
      own
      interests in and operate 17 producing wells, one shut-in well and one salt
      water
      disposal well. We own partial interests in an additional 2,189 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 our oil and gas reserves is provided
      below.





The
      following table indicates our 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)2008
            
            
            17,504
            
            
            379,0482007
            
            
            16,738
            
            
            339,1742006
            
            
            17,118
            
            
            370,0692005
            
            
            17,372
            
            
            404,1332004
            
            
            20,279
            
            
            487,564





**Competition
      and Markets**





The
      oil
      and gas industry is a highly competitive business. Competition for oil and
      gas
      reserve acquisitions is significant. We may compete with major oil and gas
      companies, other independent oil and gas companies and individual producers
      and
      operators, some of which have financial and personnel resources substantially
      in
      excess of those available to us. As a result, we 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. Our
      ability to acquire and develop additional properties in the future will depend
      upon our ability to conduct operations, to evaluate and select suitable
      properties and to consummate transactions in this highly competitive environment
      in a timely manner.





In
      addition, the oil and gas industry as a whole also competes with other
      industries in supplying the energy and fuel requirements of industrial,
      commercial and individual consumers. The price and availability of alternative
      energy sources could adversely affect our revenue.





Market
      factors affect the quantities of oil and natural gas production and the price
      we
      can obtain for the production from our oil and natural gas properties. Such
      factors include: the extent of domestic production; the level of imports of
      foreign oil and natural gas; the general level of market demand on a regional,
      national and worldwide basis; domestic and foreign economic conditions that
      determine levels of industrial production; political events in foreign
      oil-producing regions; and variations in governmental regulations including
      environmental, energy conservation and tax laws or the imposition of new
      regulatory requirements upon the oil and natural gas industry.





The
      market for our oil, gas and natural gas liquids production depends on factors
      beyond our control including: domestic and foreign political conditions; the
      overall level of supply of and demand for oil, gas and natural gas liquids;
      the
      price of imports of oil and gas; weather conditions; the price and availability
      of alternative fuels; the proximity and capacity of gas pipelines and other
      transportation facilities; and overall economic conditions.


6


**Major
      Customers**





We
      had
      sales to the following company(s) that amounted to 10% or more of revenues
      for
      the year ended March 31:





2008
            
            2007
            
            2006Chesapeake
                Operating
            
            
            14%
            
            
            —
            
            
            —Conoco
                Phillips
            
            
            13%
            
            
            —
            
            
            —Southern
                Union Gas Services
            
            
            —
            
            
            12%
            
            
            16%





Because
      a
      ready market exists for oil and gas production, we do not believe the loss
      of
      any individual customer would have a material adverse effect on our financial
      position or results of operations.





**Regulation**





Our
      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 our properties. These statutes,
      along with the regulations interpreting the statutes, generally are intended
      to
      prevent waste of oil and natural gas, and to protect correlative rights to
      produce oil and natural gas by assigning allowable rates of production to each
      well or proration unit. 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, we are not able to predict the future cost or impact of complying
      with such laws.





The
      Federal Energy Regulatory Commission (“FERC”) regulates interstate natural gas
      transportation rates and service conditions, which affect the marketing of
      gas
      we produce, as well as the revenues we receive for sales of such production.
      Since the mid-1980s, the FERC has issued various orders that have significantly
      altered the marketing and transportation of gas. These orders resulted in a
      fundamental restructuring of interstate pipeline sales and transportation
      services, including the unbundling by interstate pipelines of the sales,
      transportation, storage and other components of the city-gate sales services
      such pipelines previously performed. These FERC actions were designed to
      increase competition within all phases of the gas industry. The interstate
      regulatory framework may enhance our ability to market and transport our gas,
      although it may also subject us to greater competition and to the more
      restrictive pipeline imbalance tolerances and greater associated penalties
      for
      violation of such tolerances.





Our
      sales
      of oil and natural gas liquids are not presently regulated and are made at
      market prices. The price we receive from the sale of those products is affected
      by the cost of transporting the products to market. The FERC has implemented
      regulations establishing an indexing system for transportation rates for oil
      pipelines, which, generally, would index such rate to inflation, subject to
      certain conditions and limitations. We are not able to predict with any
      certainty what effect, if any, these regulations will have on us. Other factors
      being equal, the regulations may, over time, tend to increase transportation
      costs which may have the effect of reducing wellhead prices for oil and natural
      gas liquids.


7


**Environmental
      Matters**





By
      nature
      of our oil and gas operations, we are 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 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 our operations. In addition, these laws and regulations
      may impose substantial liabilities and penalties for failure to comply with
      them
      or for any contamination resulting from our operations. We believe we are in
      compliance, in all material respects, with applicable environmental
      requirements. We do not believe costs relating to these laws and regulations
      have had a material adverse effect on our operations or financial condition
      in
      the past. Public interest in the protection of the environment has increased
      dramatically in recent years. The trend of applying more expansive and stricter
      environmental legislation and regulations to the natural gas and oil industry
      could continue, resulting in increased costs of doing business and consequently
      affecting our profitability. To the extent laws are enacted or other
      governmental action is taken that restricts drilling or imposes more stringent
      and costly waste handling, disposal and cleanup requirements, our business
      and
      prospects could be adversely affected.





The
      United States Oil Pollution Act of 1990 (“OPA ‘90”), and similar legislation
      enacted in Texas, Louisiana and other coastal states, addresses oil spill
      prevention and control and significantly expands liability exposure across
      all
      segments of the oil and gas industry. OPA ‘90 and such similar legislation and
      related regulations impose on us a variety of obligations related to the
      prevention of oil spills and liability for damages resulting from such spills.
      OPA ‘90 imposes strict and, with limited exceptions, joint and several
      liabilities upon each responsible party for oil removal costs and a variety
      of
      public and private damages.





The
      Comprehensive Environmental Response, Compensation, and Liability Act
      (“CERCLA”), also known as the “Superfund” law, imposes liability, without regard
      to fault or the legality of the original conduct, on certain classes of persons
      that are considered to have contributed to the release of a “hazardous
      substance” into the environment.  These persons include the owner or
      operator of the disposal site or the site where the release occurred and
      companies that disposed or arranged for the disposal of the hazardous substances
      at the site where the release occurred.  Under CERCLA, such persons may be
      subject to joint and several liability for the costs of cleaning up the
      hazardous substances that have been released into the environment and for
      damages to natural resources, and it is not uncommon for neighboring landowners
      and other third parties to file claims for personal injury and property damage
      allegedly caused by the hazardous substances released into the environment.
      We
      are able to control directly the operation of only those wells with respect
      to
      which we act as operator. Notwithstanding our lack of direct control over wells
      operated by others, the failure of an operator other than us to comply with
      applicable environmental regulations may, in certain circumstances, be
      attributed to us. We do not believe that we will be required to incur any
      material capital expenditures to comply with existing environmental
      requirements.





Our
      operations may be subject to the Clean Air Act (“CAA”) and comparable state and
      local requirements. In 1990 Congress adopted amendments to the CAA containing
      provisions that have resulted in the gradual imposition of certain pollution
      control requirements with respect to air emissions from our operations. The
      EPA
      and states have developed and continue to develop regulations to implement
      these
      requirements. We may be required to incur certain capital expenditures in the
      next several years for air pollution control equipment in connection with
      maintaining or obtaining operating permits and approvals addressing other air
      emission-related issues. However, we do not believe our operations will be
      materially adversely affected by any such requirements.





The
      Resource Conservation and Recovery Act (“RCRA”) and analogous state laws govern
      the handling and disposal of hazardous and solid wastes. Wastes that are
      classified as hazardous under RCRA are subject to stringent handling,
      recordkeeping, disposal and reporting requirements. RCRA specifically excludes
      from the definition of hazardous waste “drilling fluids, produced waters, and
      other wastes associated with the exploration, development, or production of
      crude oil, natural gas or geothermal energy.” However, these wastes may be
      regulated by the EPA or state agencies as solid waste. Moreover, many ordinary
      industrial wastes, such as paint wastes, waste solvents, laboratory wastes
      and
      waste compressor oils, are regulated as hazardous wastes. Although the costs
      of
      managing hazardous waste may be significant, we do not expect to experience
      more
      burdensome costs than similarly situated companies.


8


State
      water discharge regulations and federal waste discharge permitting requirements
      adopted pursuant to the Federal Water Pollution Control Act (“Clean Water Act”)
      prohibit, or are expected in the future to prohibit, the discharge of produced
      water and sand and other substances related to the oil and gas industry into
      coastal waters. Although the costs to comply with such mandates under state
      or
      federal law may be significant, the entire industry will experience similar
      costs, and we do not believe that these costs will have a material adverse
      impact on our financial condition and operations.





**Title
      to Properties**





As
      is
      customary in the oil and gas industry, only a preliminary title examination
      is
      conducted at the time properties believed to be suitable for drilling operations
      are acquired by us. Prior to the commencement of drilling operations, a thorough
      title examination of the drill site tract is conducted and curative work is
      performed with respect to significant defects, if any, before proceeding with
      operations. A thorough title examination has been performed with respect to
      substantially all leasehold producing properties currently owned by us. We
      believe the title to our leasehold properties is good and defensible in
      accordance with standards generally acceptable in the oil and gas industry
      subject to such exceptions that, in the opinion of counsel employed in the
      various areas in which we have conducted exploration activities, are not so
      material as to detract substantially from the use of such
      properties.




The
      leasehold properties we own are subject to royalty, overriding royalty and
      other
      outstanding interests customary in the industry. The properties may be subject
      to burdens such as liens incident to operating agreements and current taxes,
      development obligations under oil and gas leases and other encumbrances,
      easements and restrictions. We do not believe any of these burdens will
      materially interfere with the use of these properties.





Substantially
      all of our properties are currently mortgaged under a deed of trust to secure
      funding through a revolving line of credit.





**Insurance**





Our
      operations are subject to all the risks inherent in the exploration for, and
      development and production of oil and gas including blowouts, fires and other
      casualties. We maintain 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.





**Executive
      Officers**





The
      following table sets forth certain information concerning the executive officers
      of the Company as of March 31, 2008.





Name
            
            Age
            
            PositionNicholas
                C. Taylor
            
            70
            
            President
                and Chief Executive OfficerDonna
                Gail Yanko
            
            63
            
            Vice
                President and SecretaryTamala
                L. McComic
            
            39
            
            Vice
                President, Treasurer, Assistant Secretary and Chief Financial
                Officer





Set
      forth
      below is a description of the principal occupations during at least the past
      five years of each executive officer of the Company.





Nicholas
      C. Taylor was elected Chief Executive Officer, President, Treasurer and Director
      of the Company in April 1983 and continues to serve as Chief Executive Officer,
      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. In
      November 2005 he was appointed by the Speaker of the House to the Texas Ethics
      Commission for a term of five years.


9


Donna
      Gail Yanko worked as a part-time administrative assistant to the Chief Executive
      Officer and as Assistant Secretary of the Company until June 1992 when she
      was
      appointed 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, a Certified Public Accountant, became Controller for the Company in
      July 2001. She was appointed Assistant Secretary of the Company in August 2001
      and Treasurer in September 2001. In May 2003, Mrs. McComic was appointed Chief
      Financial Officer and Vice President and continues to serve as Treasurer and
      Assistant Secretary.





**Employees**





As
      of
      March 31, 2008, we had two full-time and four part-time employees. We believe
      that relations with these employees are generally satisfactory. Our employees
      are not covered by collective bargaining arrangements. From time to time, we
      utilize 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**





We
      maintain our principal offices at 214 W. Texas, Suite 1101, Midland, Texas
      pursuant to a month to month lease.





**Access
      to Company Reports**





Mexco
      Energy Corporation files quarterly, yearly and other reports with the Security
      Exchange Commission (“SEC”). You may obtain a copy of any materials filed by
      Mexco with the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, by calling
      1-800-SEC-0330 or visiting their website at  http://www.sec.gov which
      contains reports, proxy and information statements and other information
      regarding issuers that file electronically with the SEC. Mexco also employs
      the
      Public Register’s Annual Report Service which can provide you a copy of our
      annual report at http://www.prars.com ,
      free of
      charge, as soon as practicable after providing such report to the SEC. We also
      currently maintain an internet website at http://www.mexcoenergy.com .
      Our
      website contains our annual report on Form 10-K, quarterly reports on Form
      10-Q,
      current reports on Form 8-K, and all amendments to those reports as soon as
      reasonably practicable after such material is electronically filed with or
      furnished to the SEC. Additionally, our Code of Business Conduct and Ethics
      and
      the charters of our Audit Committee, Compensation Committee and Nominating
      Committee are posted on our website. Any of these corporate documents as well
      as
      any of the SEC filed reports are available in print free of charge to any
      stockholder who requests them. Requests should be directed to our corporate
      assistant secretary by mail to P.O. Box 10502, Midland, Texas 79702 or by email
      to mexco@sbcglobal.net .





**ITEM
      1A. RISK FACTORS**





There
      are
      many factors that affect our business and results of operations, some of which
      are beyond our 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.





*Volatility
      of oil and gas prices significantly affects our results and profitability.*





Prices
      for oil and natural gas fluctuate widely. We 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 the level of global demand for petroleum
      products, foreign supply of oil and gas, the establishment of and compliance
      with production quotas by oil-exporting countries, weather conditions, the
      price
      and availability of alternative fuels and overall political and economic
      conditions in oil producing countries.





Increases
      and decreases in prices also affect the amount of cash flow available for
      capital expenditures and our ability to borrow money or raise additional
      capital. The amount we can borrow from banks may be subject to redetermination
      based on changes in prices. In addition, we may have ceiling test writedowns
      when prices decline. Lower prices may also reduce the amount of crude oil and
      natural gas that can be produced economically. Thus, we 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.


10


Oil
      and
      natural gas prices do not necessarily fluctuate in direct relationship to each
      other. Our financial results are more sensitive to movements in natural gas
      prices than oil prices because most of our production and reserves are natural
      gas.




Changes
      in oil and gas prices impact both estimated future net revenue and the estimated
      quantity of proved reserves. Any reduction in reserves, including reductions
      due
      to price fluctuations, can reduce the borrowing base under our revolving credit
      facility and adversely affect the amount of cash flow available for capital
      expenditures and our ability to obtain additional capital for our exploration
      and development activities.





*Lower
      oil and gas prices and other factors may cause us to record ceiling test
      writedowns.*





Lower
      oil
      and gas prices increase the risk of ceiling limitation write-downs. We use
      the
      full cost method to account for oil and gas operations. Accordingly, we
      capitalize 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, we must charge the amount of the excess against
      earnings. This is called a “ceiling test writedown.” Under the accounting rules,
      we are required to perform a ceiling test each quarter. A ceiling test writedown
      does not impact cash flow from operating activities, but does reduce
      stockholders’ equity and earnings. The risk that we will be required to write
      down the carrying value of oil and natural gas properties increases when oil
      and
      natural gas prices are low.





*Information
      concerning our reserves and future net revenues estimates is inherently
      uncertain.*





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 our 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.





*We
      must replace reserves we produce.*





Our
      future success depends upon our ability to find, develop or acquire additional,
      economically recoverable oil and gas reserves. Our proved reserves will
      generally decline as reserves are depleted, except to the extent that we 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.





*Acquisitions
      are subject to the risks and uncertainties of evaluating reserves and potential
      liabilities and may be disruptive and difficult to integrate into our
      business.*





We
      plan
      to continue growing our reserves through acquisitions. Acquired properties
      can
      be subject to significant unknown liabilities. Prior to completing an
      acquisition, it is generally not feasible to conduct a detailed review of each
      individual property to be acquired in an acquisition. Even a detailed review
      or
      inspection of each property may not reveal all existing or potential liabilities
      associated with owning or operating the property. Moreover, some potential
      liabilities, such as environmental liabilities related to groundwater
      contamination, may not be discovered even when a review or inspection is
      performed. Our initial reserve estimates for acquired properties may be
      inaccurate. Downward adjustments to our estimated proved reserves, including
      reserves added through acquisitions, could require us to write down the carrying
      value of our oil and gas properties, which would reduce our earnings and our
      stockholders’ equity. Our failure to integrate acquired businesses successfully
      into our existing business could result in our incurring unanticipated expenses
      and losses. In addition, we may have to assume cleanup or reclamation
      obligations or other unanticipated liabilities in connection with these
      acquisitions. The scope and cost of these obligations may ultimately be
      materially greater than estimated at the time of the
      acquisition.


11


*Drilling
      and operating activities are high risk activities that subject us to a variety
      of factors that we can not control.*





These
      factors include 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 us. In addition, we
      incur the risk that no commercially productive reservoirs will be encountered,
      and there is no assurance that we will recover all or any portion of its
      investment in wells drilled or re-entered.





*Our
      business depends on oil and natural gas transportation facilities which are
      owned by others.*





The
      marketability of our 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 our ability to produce and market
      our oil and gas.





*We
      may not be insured against all of the operating hazards to which our business
      is
      exposed.*





Our
      operations are subject to all the risks inherent in the exploration for, and
      development and production of oil and gas including blowouts, fires and other
      casualties. We maintain 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.





*The
      oil and gas industry is highly competitive.*





Competition
      for oil and gas reserve acquisitions is significant. We may compete with major
      oil and gas companies, other independent oil and gas companies and individual
      producers and operators, some of which have financial and personnel resources
      substantially in excess of those available to us. As a result, we may be placed
      at a competitive disadvantage. Our ability to acquire and develop additional
      properties in the future will depend upon our ability to select and acquire
      suitable producing properties and prospects for future development activities.
      In addition, the oil and gas industry as a whole also competes with other
      industries in supplying the energy and fuel requirements of industrial,
      commercial and individual consumers. The price and availability of alternative
      energy sources could adversely affect our revenue. The market for our oil,
      gas
      and natural gas liquids production depends on factors beyond our control,
      including domestic and foreign political conditions, the overall level of supply
      of and demand for oil, gas and natural gas liquids, the price of imports of
      oil
      and gas, weather conditions, the price and availability of alternative fuels,
      the proximity and capacity of gas pipelines and other transportation facilities
      and overall economic conditions.





*Our
      business is subject to extensive environmental regulations, and to laws that
      can
      give rise to liabilities from environmental contamination.*





Our
      operations are subject to extensive federal, state and local environmental
      laws
      and regulations, which impose limitations on the discharge of pollutants into
      the environment, establish standards for the management, treatment, storage,
      transportation and disposal of hazardous materials and of solid and hazardous
      wastes, and impose obligations to investigate and remediate contamination in
      certain circumstances.  Liabilities to investigate or remediate
      contamination, as well as other liabilities concerning hazardous materials
      or
      contamination such as claims for personal injury or property damage, may arise
      at  many
      locations, including properties in which we have an ownership interest but
      no
      operational control, properties we formerly owned or operated and sites where
      our wastes have been treated or disposed of, as well as at properties that
      we
      currently own or operate.  Such liabilities may arise even where the
      contamination does not result from any noncompliance with applicable
      environmental laws.  Under a number of environmental laws, such liabilities
      may also be joint and several, meaning that we could be held responsible for
      more than our share of the liability involved, or even the entire share. 
Environmental requirements generally have become more stringent in recent years,
      and compliance with those requirements more expensive.


12


**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2. PROPERTIES**




Our
      properties consist primarily of oil and gas wells and our ownership in leasehold
      acreage, both  developed
      and undeveloped. As of March 31, 2008, we had interests in 2,208 gross (23
      net)  oil
      and
      gas wells and owned leasehold interests in approximately 301,403 gross (2,955
      net)  acres.





**Oil
      and Natural Gas Reserves**





Estimates
      of our 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
      (“FASB”). The estimates as of March 31, 2008, 2007 and 2006 are based on
      evaluations prepared by Joe C. Neal and Associates, Petroleum Consultants.
      For
      information concerning our costs incurred for oil and gas operations, net
      revenues from oil and gas production, estimated future net revenues attributable
      to our 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.





We
      emphasize 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 our oil and gas reserves, which in turn may adversely affect our 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 effect 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. Except to the extent that
      we
      acquire additional properties containing proved reserves or conduct successful
      exploration and development activities, or both, our proved reserves will
      decline as reserves are produced.





We
      have
      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.





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





**PROVED
      RESERVES**





March
                31,2008
            
            2007
            
            2006Oil
                (Bbls):Proved
                developed – Producing
            
            
            117,874
            
            
            110,060
            
            
            85,091Proved
                developed – Non-producing
            
            
            3,754
            
            
            1,432
            
            
            1,432Proved
                undeveloped
            
            
            95,599
            
            
            108,263
            
            
            96,557Total
            
            
            217,227
            
            
            219,755
            
            
            183,080Natural
                gas (Mcf):Proved
                developed – Producing
            
            
            3,954,269
            
            
            2,892,964
            
            
            2,816,566Proved
                developed – Non-producing
            
            
            1,096,174
            
            
            1,075,376
            
            
            1,074,550Proved
                undeveloped
            
            
            2,806,179
            
            
            2,936,708
            
            
            2,806,070Total
            
            
            7,856,622
            
            
            6,905,048
            
            
            6,697,186Present
                value of estimated future net revenues before income taxes(PV-10)
                (1)
            
            $
            40,899,620
            
            $
            26,172,460
            
            $
            23,290,420Present
                value of future income tax discounted at 10%
            
            
            (8,401,620
            )
            
            (5,965,460
            )
            
            (5,366,420
            )Standardized
                measure of discounted future net cash flows (2)
            
            $
            32,498,000
            
            $
            20,207,000
            
            $
            17,924,000


13


(1)
            Non-GAAP
                Financial Measure and Reconciliation (unaudited) – PV-10 is derived from
                the standardized measure of discounted future net cash flows which
                is the
                most directly comparable GAAP financial measure. PV-10 is a computation
                of
                the standardized measure of discounted future net cash flows on a
                pre-tax
                basis. PV-10 is relevant and useful to investors because it presents
                the
                discounted future net cash flows attributable to our estimated net
                proved
                reserves prior to taking into account future corporate income taxes,
                and
                it is a useful measure for evaluating the relative monetary significance
                of our oil and natural gas properties. Further, investors may utilize
                the
                measure as a basis for comparison of the relative size and value
                of our
                reserves to other companies. We use this measure when assessing the
                potential return on investment related to our oil and natural gas
                properties. PV-10, however, is not a substitute for the standardized
                measure of discounted future net cash flows. Our PV-10 measure and
                the
                standardized measure of discounted future net cash flows do not purport
                to
                present the fair value of our oil and natural gas
                reserves.


(2)
            Standardized
                measure of discounted future net cash flows is computed by applying
                year-end prices, costs and a discount factor of 10% to net proved
                reserves, taking into account the effect of future income
                taxes.





**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 our
      productive wells as of March 31, 2008:




Gross
              
              NetOil
              
              
              1,335
              
              
              13Gas
              
              
              873
              
              
              10Total
                  Productive Wells
              
              
              2,208
              
              
              23


The
      following table sets forth the approximate developed acreage in which we held
      a
      leasehold mineral or other interest as of March 31, 2008.





Developed
                AcresGross
            
            NetTexas
            
            
            154,074
            
            
            2,536New
                Mexico
            
            
            21,237
            
            
            155North
                Dakota
            
            
            27,119
            
            
            25Louisiana
            
            
            33,365
            
            
            37Oklahoma
            
            
            42,482
            
            
            167Montana
            
            
            9,788
            
            
            5Kansas
            
            
            8,520
            
            
            24Wyoming
            
            
            3,298
            
            
            5Colorado
            
            
            1,200
            
            
            1Arkansas
            
            
            320
            
            
            —Total
            
            
            301,403
            
            
            2,955





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, 2008, we own  approximately
      1,477 gross and 737 net acres of material undeveloped acreage located in Texas.


14


**Drilling
      Activities**





The
      following table sets forth our drilling activity in wells in which we own a
      working interest for the years ended March 31:





Year
                Ended March 31,2008
            
            2007
            
            2006Gross
            
            Net
            
            Gross
            
            Net
            
            Gross
            
            NetExploratory
                WellsProductive
            
            
            4
            
            
            .56
            
            
            —
            
            
            —
            
            
            3
            
            
            .03Nonproductive
            
            
            1
            
            
            .09
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            5
            
            
            .65
            
            
            —
            
            
            —
            
            
            3
            
            
            .03Development
                WellsProductive
            
            
            27
            
            
            .42
            
            
            47
            
            
            .22
            
            
            12
            
            
            .05Nonproductive
            
            
            1
            
            
            .06
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            28
            
            
            .48
            
            
            47
            
            
            .22
            
            
            12
            
            
            .05





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 us.





**Net
      Production, Unit Prices and Costs**





The
      following table summarizes our net oil and natural gas production, 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:





Year
                Ended March 31,2008
            
            2007
            
            2006Oil
                (a):Production
                (Bbls)
            
            
            17,504
            
            
            16,738
            
            
            17,118Revenue
            
            $
            1,348,725
            
            $
            995,557
            
            $
            938,681Average
                Bbls per day
            
            
            48
            
            
            46
            
            
            47Average
                sales price per Bbl
            
            $
            77.05
            
            $
            59.48
            
            $
            54.84Gas
                (b):Production
                (Mcf)
            
            
            379,048
            
            
            339,174
            
            
            370,069Revenue
            
            $
            2,539,230
            
            $
            1,973,768
            
            $
            2,777,883Average
                Mcf per day
            
            
            1,038
            
            
            929
            
            
            1,014Average
                sales price per Mcf
            
            $
            6.70
            
            $
            5.82
            
            $
            7.51Production
                cost:Production
                cost
            
            $
            1,240,305
            
            $
            870,778
            
            $
            843,927Equivalent
                Mcf (c)
            
            
            484,072
            
            
            439,602
            
            
            472,777Production
                cost per equivalent Mcf
            
            $
            2.56
            
            $
            1.98
            
            $
            1.79Production
                cost per sales dollar
            
            $
            0.32
            
            $
            0.29
            
            $
            0.23Total
                oil and gas revenues
            
            $
            3,887,955
            
            $
            2,969,325
            
            $
            3,716,564





(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**





We
      may,
      from time to time, be involved in litigation and claims arising out of our
      operations in the normal course of business. We are currently a party to a
      lawsuit that is being filed against the drilling company of a well in which
      we
      have a working interest of approximately 6.5%. We are not aware of any legal
      or
      governmental proceedings against us, or contemplated to be brought against
      us,
      under various environmental protection statutes or other regulations to which
      we
      are subject.


15


**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, 2008.





**PART
      II**





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





In
      September 2003, our 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 N.A., P.O.
      Box
      1596, Denver, Colorado, 80201 (Tel: 303-262-0600). As of March 31, 2008,
      we  had
      approximately 1,300 shareholders of record and 1,841,366 shares
      issued.





**PRICE
      RANGE OF COMMON STOCK**





High
            
            Low2008:April
                - June 2007 (1)
            
            $
            5.49
            
            $
            5.05July
                - September 2007 (1)
            
            
            5.91
            
            
            4.33October
                - December 2007 (1)
            
            
            5.47
            
            
            3.90January
                - March 2008 (1)
            
            
            4.50
            
            
            3.432007:April
                - June 2006 (1)
            
            $
            11.19
            
            $
            6.35July
                - September 2006(1)
            
            
            8.81
            
            
            6.09October
                - December 2006 (1)
            
            
            7.27
            
            
            5.80January
                - March 2007 (1)
            
            
            6.29
            
            
            5.15





(1)
            Reflects
                the high and low sales prices for the Company’s Common Stock, as reported
                on the American Stock Exchange.





On
      June
      16, 2008, the closing price was $44.63.





**Dividends**





We
      have
      never declared or paid any cash dividends on our common stock. We currently
      intend to retain future earnings and other cash resources, if any, for the
      operation and development of our business and do not anticipate paying any
      cash
      dividends on our common stock in the foreseeable future. Payment of any future
      dividends will be at the discretion of our board of directors after taking
      into
      account many factors, including our financial condition, operating results,
      current and anticipated cash needs and plans for expansion. In addition, our
      current bank loan prohibits us from paying cash dividends on our common stock.
      Any future dividends may also be restricted by any loan agreements which we
      may
      enter into from time to time.





**Issuer
      Repurchases**





In
      June
      2006, the board of directors authorized the use of up to $250,000 in addition
      to
      a prior authorization of $250,000 to repurchase shares of our common stock
      for
      the treasury account. Throughout fiscal 2007, we repurchased 30,000 shares
      at an
      aggregate cost of $183,309. Of these shares, 20,000 were shares issued pursuant
      to options exercised by a consultant and repurchased by Mexco. During fiscal
      2008, we repurchased 24,475 shares at an aggregate cost of $
      119,093.


16




**ITEM
      6. SELECTED CONSOLIDATED FINANCIAL DATA**





Year
                Ended March 31,2008
            
            2007
            
            2006
            
            2005
            
            2004Statement
                of Operations:Operating
                revenues
            
            $
            3,899,408
            
            $
            2,971,717
            
            $
            3,719,643
            
            $
            2,969,826
            
            $
            2,915,355Operating
                income
            
            
            1,031,437
            
            
            594,876
            
            
            1,114,966
            
            
            924,230
            
            
            785,739Other
                income (expense)
            
            
            (100,199
            )
            
            (19,376
            )
            
            (95,820
            )
            
            (88,408
            )
            
            (82,766
            )Net
                income
            
            $
            713,644
            
            $
            608,385
            
            $
            788,805
            
            $
            577,527
            
            $
            429,846Net
                income per share – basic (1)
            
            $
            0.40
            
            $
            0.35
            
            $
            0.45
            
            $
            0.33
            
            $
            0.25Net
                income per share – diluted (1)
            
            $
            0.40
            
            $
            0.33
            
            $
            0.43
            
            $
            0.32
            
            $
            0.24Weighted
                average shares outstanding – basic
            
            
            1,767,777
            
            
            1,761,344
            
            
            1,733,890
            
            
            1,734,726
            
            
            1,736,047Weighted
                average shares outstanding – diluted
            
            
            1,773,049
            
            
            1,819,969
            
            
            1,827,026
            
            
            1,801,167
            
            
            1,802,300Balance
                Sheet:Property
                and equipment, net
            
            $
            11,982,949
            
            $
            9,337,566
            
            $
            8,399,929
            
            $
            8,484,743
            
            $
            7,647,284Total
                assets
            
            
            13,202,659
            
            
            9,958,980
            
            
            8,978,324
            
            
            9,303,149
            
            
            8,172,464Total
                debt
            
            
            2,600,000
            
            
            700,000
            
            
            600,000
            
            
            1,990,000
            
            
            1,700,000Stockholders’
                equity
            
            
            8,460,064
            
            
            7,775,636
            
            
            6,898,996
            
            
            6,038,195
            
            
            5,435,219Cash
                Flow:Cash
                provided by operations
            
            $
            1,474,764
            
            $
            1,325,024
            
            $
            1,900,665
            
            $
            1,451,628
            
            $
            1,517,479





(1)
            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.





**Selected
      Quarterly Financial Data (Unaudited)**





FISCAL
                20084TH
                QTR
            
            3RD
                QTR
            
            2ND
                QTR
            
            1ST
                QTROil
                and gas revenue
            
            $
            1,245,653
            
            $
            952,211
            
            $
            839,947
            
            $
            850,144Operating
                profit
            
            
            613,742
            
            
            345,203
            
            
            4,344
            
            
            68,148Net
                income
            
            
            466,480
            
            
            221,114
            
            
            (8,756
            )
            
            34,806Net
                income per share-basic
            
            
            0.27
            
            
            0.13
            
            
            -
            
            
            0.02Net
                income per share-diluted
            
            
            0.27
            
            
            0.12
            
            
            -
            
            
            0.02





FISCAL
                20074TH
                QTR
            
            3RD
                QTR
            
            2ND
                QTR
            
            1ST
                QTROil
                and gas revenue
            
            $
            755,184
            
            $
            663,031
            
            $
            773,698
            
            $
            777,412Operating
                profit
            
            
            110,106
            
            
            109,906
            
            
            229,920
            
            
            144,944Net
                income
            
            
            183,481
            
            
            67,080
            
            
            130,534
            
            
            227,290Net
                income per share-basic
            
            
            0.11
            
            
            0.04
            
            
            0.07
            
            
            0.13Net
                income per share-diluted
            
            
            0.10
            
            
            0.04
            
            
            0.07
            
            
            0.12





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





The
      following discussion is intended to provide information relevant to an
      understanding of our financial condition, changes in our financial condition
      and
      our results of operations and cash flows and should be read in conjunction
      with
      our consolidated financial statements and notes thereto included elsewhere
      in
      this Form 10-K.


17


**Liquidity
      and Capital Resources and Commitments**





Historically,
      we have funded our operations, acquisitions, exploration and development
      expenditures from cash generated by operating activities, bank borrowings and
      issuance of common stock. Our primary financial resource is our base of oil
      and
      gas reserves. We pledge our producing oil and gas properties to secure our
      revolving line of credit.





Our
      long
      term strategy is on increasing profit margins while concentrating on obtaining
      reserves with low cost operations by acquiring and developing primarily gas
      properties and secondarily oil properties with potential for long-lived
      production.





In
      fiscal
      2008, we primarily used cash provided by operations ($1,474,764) to fund oil
      and
      gas property acquisitions and development ($3,060,194). We had working capital
      of $627,674 as of March 31, 2008 compared to working capital of $446,831 as
      of
      March 31, 2007, an increase of $180,483. This was mainly as a result of an
      increase in accounts receivable and cash and cash equivalents. The accounts
      receivable increase was related to drilling costs billed to co-owners on wells
      we operate in Loving and Reeves Counties.





During
      fiscal 2008, we participated in the drilling of a well in Crane County, Texas
      of
      which our costs are approximately $172,000. The well is scheduled for additional
      procedures including acidizing and possible new pay zones may be added in fiscal
      2009.





We
      also
      participated in the drilling of a well in Lea County, New Mexico. The initial
      well failed due to mechanical reasons; however, other methods are being
      evaluated for the exploration and development of this project. Total costs
      incurred related to this project are approximately $237,000 through March 31,
      2008. A lawsuit has been filed against the drilling company to recover damages
      due to this failure.





We
      are
      currently participating in the drilling and completion of a well in Borden
      County, Texas. Costs incurred related to this project are approximately
      $326,000. This oil well began producing in March 2008.





During
      fiscal 2008, we participated in an exploratory well in San Patricio County,
      Texas. This well has been completed and began producing natural gas as well
      as
      oil in April 2008. Costs incurred for this project are approximately
      $166,000.





We
      are in
      the process of acquiring mineral, royalty and surface interests in several
      counties, mainly in Texas. Purchases incurred related to this project through
      May 2008 are approximately $34,000.





During
      the third quarter of fiscal 2008, we acted as operator and drilled an
      exploratory well in Loving County, Texas. This well has been completed and
      based
      on a four point test by an independent testing firm, was calculated to produce
      at an absolute open flow rate of 12,773,000 cubic feet of natural gas per day. During
      this four hour test the well actually produced 1,366,000 cubic feet of natural
      gas, 26 barrels of 63 gravity condensate and 12 barrels of water on chokes
      ranging from 11/64 to 15/64 inches. Previously the well had been shut in for
      a
      period in excess of 72 hours. The rates at which this will be produced and
      sold
      have not yet been determined and may be substantially different from these
      potential tests, based on regulatory and engineering considerations as well
      as
      performance of the well over longer periods of time. Our share of the costs
      incurred for this project through April 30, 2008 is approximately $345,000.





On
      December 31, 2007, we purchased 122 mineral acres amounting to approximately
      21.45% royalty interest in Tarrant County, Texas for $1,850,000. At the time
      of
      purchase, this property contained one producing well in the Newark East (Barnett
      Shale) Field. Subsequently, two additional wells have been completed. All three
      wells are now producing natural gas into a sales pipeline. A director and
      employee of the Company received a finder’s fee of 2.5% ORRI in lieu of a cash
      payment as disclosed on Form 8-K dated December 31, 2007.





On
      June
      6, 2008 we purchased mineral and royalty interests contained in an aggregate
      of
      522 acres with royalties varying from .126% to .385% in 6 producing natural
      gas
      wells and 5 proven undeveloped well locations in the Newark East (Barnett-Shale)
      Field of Tarrant County, Texas. There are an additional 6 potential drill sites
      on this acreage.


18


During
      the fourth quarter of fiscal 2008, we drilled a gas well in Reeves County,
      Texas. This well has been completed and began producing in April 2008. Our
      share
      of the costs incurred for this project is approximately $181,000.





We
      are
      participating in several other projects and are reviewing several other projects
      in which we 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
      3 of
      Notes to Consolidated Financial Statements for a description of our 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 our
      financial condition and liquidity. However, management is of the opinion that
      cash flow from operations and funds available from financing will be sufficient
      to provide adequate liquidity for the next fiscal year.





**Results
      of Operations**





**Fiscal
      2008 Compared to Fiscal 2007**





Net
      income increased from $608,385 for the year ended March 31, 2007 to $713,644
      for
      the year ended March 31, 2008, an increase of $105,259 or 17%.





*Oil
      and gas sales.*  Revenue
      from oil and gas sales  increased
      from $2,969,325 in 2007 to  $3,887,955
      in 2008,  an
      increase of $918,630 or 31%.  This
      increase was attributable to  an
      increase in oil  and
      gas  prices  and
      oil
      and gas production.  The
      average oil price increased from $59.48 per bbl in 2007 to $77.05 per bbl in
      2008,  an
      increase of $17.57 per bbl or 30%. The average gas price increased from $5.82
      in
      2007 to $6.70 per mcf in 2008, an increase of $.88 per mcf or 15%.





*Production
      and exploration.*  Production
      costs increased from $870,778 in 2007 to $1,240,305 in 2008, an increase of
      $369,527 or 42%. This is primarily a result of an increase in repairs and
      maintenance to operated wells in the El Cinco field and increased production
      taxes due to the increase in oil and gas sales and production. Oil production
      increased from 16,738 bbls in 2007 to 17,504 bbls in 2008, an increase of 766
      bbls or 5%.  Gas
      production increased from 339,174 mcf in 2007 to 379,048 mcf in 2008, an
      increase of 39,874 mcf or 12%.





*Depreciation,
      depletion and amortization.* Depreciation,
      depletion and amortization expense  increased
      from $652,826 in 2007 to $779,618 in 2008, an increase of $126,792 or
      19%.  This
      is
      the result of an increase in production and an increase in full cost pool
      partially offset by an increase in reserves.





*General
      and administrative expenses.*  General
      and administrative expenses decreased  from
      $829,180 in 2007 to $821,786 in 2008, a decrease of $7,394 or 1%.  This
      decrease was attributable to a decrease in stock option compensation expense
      partially offset by an increase in engineering and geological services due
      to
      the continuous evaluation of projects.





*Interest
      expense.*  Interest
      expense increased from $24,046 in 2007 to $105,312  in
      2008,  an
      increase of $81,266 or 338%.  This
      increase was attributable to an increase in average borrowings during
      the  current
      fiscal year.





*Income
      taxes.* Income
      tax expense increased from a tax benefit of $28,050 in 2007 to a tax expense
      of
      $217,594 in 2008, an increase of $245,644. This increase was attributable to
      our
      increased income and only a small revision of prior year estimates.





**Fiscal
      2007 Compared to Fiscal 2006**





*Oil
      and gas sales.*  Oil
      and
      gas sales decreased from $3,716,564 in 2006 to $2,969,325 in 2007, a decrease
      of
      $747,239 or 20%. This decrease was attributable to a decrease in gas prices
      and
      oil and gas production. The average oil price increased from $54.84 per bbl
      in
      2006 to $59.48 per bbl in 2007, an increase of $4.64 per bbl or 8%. The average
      gas price decreased from $7.51 in 2006 to $5.82 per mcf in 2007, a decrease
      of
      $1.69 per mcf or 22%.


19


*Production
      and exploration.*  Production
      costs increased from $843,927 in 2006 to $870,778 in 2007, an increase of
      $26,851 or 3%. This is primarily a result of an increase in lease operating
      expenses on our operated properties. Oil production decreased from 17,118 bbls
      in 2006 to 16,738 bbls in 2007, a decrease of 380 bbls or 2%. Gas production
      decreased from 370,069 mcf in 2006 to 339,174 mcf in 2007, a decrease of 30,895
      mcf or 8%. Such decreases primarily were due to normal decline in
      production.





*Depreciation,
      depletion and amortization.* Depreciation,
      depletion and amortization decreased from $658,365 in 2006 to $652,826 in 2007,
      a decrease of $5,539 or 1%. This is partially the result of a decrease in
      production and an increase in reserves.





*General
      and administrative expenses.*  General
      and administrative expenses increased from $817,332 in 2006 to $829,180 in
      2007,
      an increase of $11,848 or 1%. This increase was attributable to the adoption
      of
      FAS 123(R) offset by a decrease in expenses related to Russian projects in
      fiscal 2007.





*Interest
      expense.*  Interest
      expense decreased from $98,657 in 2006 to $24,046 in 2007, a decrease of $74,611
      or 76%. This decrease was attributable to a decrease in average borrowings
      during the current fiscal year.





*Income
      taxes.*  Income
      tax expense decreased from $272,140 in 2006 to a tax benefit of $28,050 in
      2007,
      a decrease of $300,190. This decrease was partially attributable to our
      decreased income and the write-off of expired leases. We also had a current
      tax
      deduction for options exercised during fiscal year 2007.





**Alternative
      Capital Resources**





Although
      we have primarily used cash from operating activities and funding from the
      line
      of credit as our primary capital resources, we have in the past, and could
      in
      the future, use alternative capital resources. These could include joint
      ventures, carried working interests and the sale of assets and/or issuances
      of
      common stock through a private placement or public offering of our common
      stock.





**Contractual
      Obligations**





We
      have
      no off-balance sheet debt or unrecorded obligations and have not guaranteed
      the
      debt of any other party. The following table summarizes our future payments
      we
      are obligated to make based on agreements in place as of March 31,
      2008:





Payments Due In:Total
            
            1 year
            
            1-3 years
            
            3 yearsContractual
                obligations:Secured
                bank line of credit
            
            $
            2,600,000
            
            $
            —
            
            $
            2,600,000
            
            $
            —





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**





**Critical
      Accounting Policies and Estimates**





In
      preparing financial statements, management makes informed judgments and
      estimates that affect the reported amounts of assets and liabilities as of
      the
      date of the financial statements and affect the reported amounts of revenues
      and
      expenses during the reporting period. On an ongoing basis, management reviews
      its estimates, including those related to litigation, environmental liabilities,
      income taxes, fair value and determination of proved reserves. Changes in facts
      and circumstances may result in revised estimates and actual results may differ
      from these estimates.





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.


20


**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. We have
      chosen to follow the full cost method under which all costs associated with
      property acquisition, exploration and development are capitalized. We also
      capitalize 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. Effective with
      the
      adoption of SFAS No. 143 in 2003, the carrying amount of oil and gas properties
      also includes estimated asset retirement costs recorded based on the fair value
      of the asset retirement obligation when incurred. Gain or loss on the sale
      or
      other disposition of oil and gas properties is not recognized, unless the gain
      or loss would significantly alter the relationship between capitalized costs
      and
      proved reserves of oil and natural gas attributable to a country. 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 our
      financial statements will differ from companies that apply the successful
      efforts method since we will generally reflect a higher level of capitalized
      costs as well as a higher depreciation, depletion and amortization (“DD&A”)
      rate on our 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 us more 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. Our crude oil and natural
      gas
      reserves have a relatively long life. However, temporary drops in commodity
      prices can have a material impact on our business including impact from the
      full
      cost method of accounting.





**Ceiling
      Test** .
      Companies that use the full cost method of accounting for oil and gas
      exploration and development activities are required to perform a ceiling test
      each quarter. The full cost ceiling test is an impairment test prescribed by
      SEC
      Regulation S-X Rule 4-10. The test determines a limit, or ceiling, on the book
      value of oil and gas properties. That limit is basically the after tax present
      value of the future net cash flows from proved crude oil and natural gas
      reserves, excluding future cash outflows associated with settling asset
      retirement obligations that have been accrued on the balance sheet, 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, we
      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 our stockholders'
      equity and reported earnings. The risk that we 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 we experience substantial downward adjustments to our 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.




Estimates
      of our 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:


·
            the
                quality and quantity of available
                data;


·
            the
                interpretation of that data;


·
            the
                accuracy of various mandated economic
                assumptions;


·
            and
                the judgment of the persons preparing the
                estimate.





Our
      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.


21


It
      should
      not be assumed that the present value of future net cash flows is the current
      market value of our estimated proved reserves. In accordance with SEC
      requirements, we base 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 we record 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** .
      In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make informed judgments and estimates that affect the reported amounts of assets
      and liabilities as of the date of the financial statements and affect the
      reported amounts of revenues and expenses during the reporting period. 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** .
      We
      recognize crude oil and natural gas revenue from our interest in producing
      wells
      as crude oil and natural gas is sold from those wells, net of royalties. We
      utilize the sales method to account for gas production volume imbalances. Under
      this method, income is recorded based on our net revenue interest in production
      taken for delivery. We had no material gas imbalances.





**Excluded
      Costs** .
      Oil and
      gas properties include costs that are excluded from capitalized costs being
      amortized. These amounts represent investments in unproved properties and major
      development projects. These costs are excluded until proved reserves are found
      or until it is determined that the costs are impaired. All costs excluded are
      reviewed at least quarterly to determine if impairment has occurred. The amount
      of any impairment is transferred to the capitalized costs being amortized (the
      DD&A pool) or a charge is made against earnings for those international
      operations where a reserve base has not yet been established. Impairments
      transferred to the DD&A pool increase the DD&A rate. Costs excluded for
      oil and gas properties are generally classified and evaluated as significant
      or
      individually insignificant properties.





**Asset
      Retirement Obligations** **(“ARO”)** . 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. If the liability is settled
      for
      an amount other than the recorded amount, a gain or loss is recognized. For
      all
      periods presented, we have included estimated future costs of abandonment and
      dismantlement in the full cost amortization base and amortize these costs as
      a
      component of our depletion expense.




**Recent
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which provides guidance for using fair value to measure assets and
      liabilities. The pronouncement defines fair value, establishes a framework
      for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, SFAS 157 does not
      require any new fair value measurement. SFAS 157, as originally issued, was
      effective for fiscal years beginning after November 15, 2007. However, in
      February 2008, the FASB issued FASB Staff Position FAS 157-2, *Effective
      Date of FASB Statement No. 157,* which
      provides a one year delay of the effective date of FAS 157 as it relates to
      nonfinancial assets and liabilities, except those that are recognized or
      disclosed at fair value in the financial statements on a recurring basis (at
      least annually). SFAS 157 as it relates to financial assets and liabilities
      will
      be effective as of the beginning of our 2009 fiscal year. Management is
      currently evaluating the impact of SFAS 157 on our financial statements.


22


In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities – Including an
      amendment of FASB Statement No. 115* (“SFAS
      159”). SFAS 159 permits entities to choose to measure certain financial assets
      and liabilities at fair value. Unrealized gains and losses, arising subsequent
      to adoption, are reported in earnings. SFAS 159 is effective for fiscal years
      beginning after November 15, 2007. Management does not anticipate that the
      adoption of SFAS 159 will have a material effect on our consolidated financial
      statements.





**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





**Risk
      Factors**





The
      primary source of market risk for us includes fluctuations in commodity prices
      and interest rates. All of our financial instruments are for purposes other
      than
      trading. At March 31, 2008, we 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.** Our
      variable rate bank debt is tied to prime rate. On March 31, 2008
      we had an outstanding loan balance of $2,600,000 under our $5.0 million
      revolving credit agreement, which bears interest at the prime rate, which varies
      from time to time. If
      the
      interest rate on our bank debt increases or decreases by one percentage point,
      our annual pretax income would change by $26,000 based on borrowings at March
      31, 2008.





**Credit
      Risk.** Credit
      risk is the risk of loss as a result of nonperformance by other parties of
      their
      contractual obligations. Our primary credit risk is related to oil and gas
      production sold to various purchasers and the receivables are generally not
      collateralized. At March 31, 2008, our largest credit risk associated
      with  any
      single purchaser was $224,541. We are also exposed to credit risk in the event
      of nonperformance from any of our working interest partners. At March 31, 2008,
      our largest credit risk associated with any working interest partner was
      $31,515. We have not experienced any significant credit losses.





**Energy
      Price Risk** .
      Our
      most significant market risk is the pricing for natural gas and crude oil.
      Our
      financial condition, results of operations, and capital resources are highly
      dependent upon the prevailing market prices of, and demand for, oil and natural
      gas. These commodity prices are subject to wide fluctuations and market
      uncertainties due to a variety of factors that are beyond our control. These
      factors include the level of global demand for petroleum products, foreign
      supply of oil and gas, the establishment of and compliance with production
      quotas by oil-exporting countries, weather conditions, the price and
      availability of alternative fuels and overall economic conditions, both foreign
      and domestic. We cannot predict future oil and gas prices with any degree of
      certainty and expect energy prices to remain volatile and unpredictable. If
      energy prices decline significantly, revenues and cash flow would significantly
      decline. In addition, a noncash write-down of our oil and gas properties could
      be required under full cost accounting rules if prices declined significantly,
      even if it is only for a short period of time. See Critical Accounting Policies
      and Estimates — Ceiling Test under Item 7 of this Form 10-K. Sustained weakness
      in oil and gas prices may also reduce the amount of net oil and gas reserves
      that we can produce economically. Any reduction in reserves, including
      reductions due to price fluctuations, can reduce the borrowing base under our
      revolving credit facility and adversely affect our liquidity and our ability
      to
      obtain capital for our exploration and development activities. Similarly, any
      improvements in oil and gas prices can have a favorable impact on our financial
      condition, results of operations and capital resources.  If the average oil
      price had increased or decreased by one dollar per barrel for fiscal 2008,
      our
      pretax income would have changed by $17,504. If the average gas price had
      increased or decreased by one dollar per mcf for fiscal  2008,
      our
      pretax income would have changed by $379,048.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      information required by this Item appears on pages F1 through F17 hereof and
      are
      incorporated herein by reference.





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





None.


23


**ITEM
      9A. CONTROLS AND PROCEDURES**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f). Our principal executive officer and principal financial officer
      evaluated the effectiveness of our internal control over financial reporting
      based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations
      of the Treadway Commission.  All internal control systems, no matter how
      well designed, have inherent limitations.  Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation.  Projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may deteriorate. 
Based on our evaluation under that framework and applicable SEC rules, our
      management concluded that our internal control over financial reporting was
      effective as of March 31, 2008.





We
      maintain disclosure controls and procedures to ensure that the information
      we
      must disclose in our filings with the SEC is recorded, processed, summarized
      and
      reported on a timely basis. Our principal executive officer and principal
      financial officer have reviewed and evaluated the effectiveness of our
      disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e)
      and 15d-15(e), as of March 31, 2008. Based on such evaluation, such officers
      have concluded that, as of March 31, 2008, our disclosure controls and
      procedures were effective in timely alerting them to material information
      relating to us (and our consolidated subsidiaries) required to be included
      in
      our periodic SEC filings.





**ITEM
      9B. OTHER INFORMATION**





None





**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**





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 Proxy Statement for our Annual Meeting of Stockholders, which
      will be filed with the SEC not later than July 18, 2008.





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 by this Item is incorporated by reference to the Proxy
      Statement for our Annual Meeting of Stockholders, which will be filed with
      the
      SEC no later than July 18, 2008.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      information required by this Item is incorporated by reference to the Proxy
      Statement for our Annual Meeting of Stockholders, which will be filed with
      the
      SEC no later than July 18, 2008.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





The
      information required by this Item is incorporated by reference to the Proxy
      Statement for our Annual Meeting of Stockholders, which will be filed with
      the
      SEC no later than July 18, 2008.





**ITEM
      14. PRINCIPAL ACCOUNTING FEES AND SERVICES**





The
      information required by this Item is incorporated by reference to the Proxy
      Statement for our Annual Meeting of Stockholders, which will be filed with
      the
      SEC no later than July 18, 2008.


24


**PART
      IV**





**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**





**Financial
      Statements and Schedules.** For
      a
      list of the consolidated financial statements filed as part of this Form 10-K,
      see the “Index to Consolidated Financial Statements” set forth on page F1 of
      this report. 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.





**Exhibits.** For
      a
      list of the exhibits required by this Item and accompanying this Form 10-K
      see
      the  “Index
      to
      Exhibits” set forth on page F18 of this report.


25


**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 CORPORATIONBy:
            /s/
                Nicholas C. TaylorNicholas
                C. TaylorDated:
                June 19, 2008
            
            Chief
                Executive Officer and President





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below as of June 19, 2008, by the following persons on behalf of the
      Company and in the capacity indicated.





/s/
                Thomas R. CraddickThomas
                R. CraddickDirector/s/
                Thomas Graham, Jr.Thomas
                Graham, Jr.Chairman
                of the Board of Directors/s/
                Arden GroverArden
                GroverDirector/s/
                Jack D. LaddJack
                D. LaddDirector/s/
                Tamala L. McComicTamala
                L. McComicChief
                Financial Officer, Vice President, Treasurerand
                Assistant Secretary/s/
                Jeffry A. SmithJeffry
                A. SmithDirector/s/
                Nicholas C. TaylorNicholas
                C. TaylorChief
                Executive Officer, President and Director/s/
                Donna Gail YankoDonna
                Gail YankoVice
                President, Secretary and
                Director


26


**Glossary
      of Abbreviations and Terms**





The
      following are abbreviations and definitions of terms commonly used in the oil
      and gas industry and this Form 10-K.




*Bbl* . 
      One stock tank barrel, or 42 U.S. gallons of liquid volume, used in reference
      to
      oil or other liquid hydrocarbons.




*Bcf* . 
      One billion cubic feet of natural gas.




*Bcfe.* One
      billion cubic feet equivalent of natural gas, calculated by converting oil
      to
      equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.




*Completion* . 
      The installation of permanent equipment for the production of oil or natural
      gas.




*Credit
      Facility.* A
      line of credit provided by a group of banks, secured by oil and gas
      properties.




*DD&A.* Refers to depreciation, depletion and amortization of the Company’s property and
      equipment.




*Developed
      acreage* . 
      The number of acres which are allocated or assignable to producing wells or
      wells capable of production.





*Development
      costs.* Capital
      costs incurred in the acquisition, exploitation and exploration of proved oil
      and natural gas reserves divided by proved reserve additions and revisions
      to
      proved reserves.





*Development
      well* . 
A
      well drilled into a proved oil or natural gas reservoir to the depth of a
      stratigraphic horizon known to be productive.




*Dry
      hole* . 
A
      well found to be incapable of producing hydrocarbons in sufficient quantities
      such that proceeds from the sale of such production exceed production expenses
      and taxes.




*Exploration.* The
      search for natural accumulations of oil and natural gas by any geological,
      geophysical or other suitable means.





*Exploratory
      well* . 
A
      well drilled to find and produce oil or natural gas reserves not classified
      as
      proved, to find a new reservoir in a field previously found to be productive
      of
      oil or natural gas in another reservoir or to extend a known
      reservoir.




*Extensions
      and discoveries* . 
      As to any period, the increases to proved reserves from all sources other than
      the acquisition of proved properties or revisions of previous
      estimates.





*Field.* An
      area
      consisting of either a single reservoir or multiple reservoirs, all grouped
      on
      or related to the same individual geological structural feature and/or
      stratigraphic condition.




*Gross
      acres or wells.* Refers
      to
      the total acres or wells in which the Company owns any amount of working
      interest.





*Lease.* An
      instrument which grants to another (the lessee) the exclusive right to enter
      and
      explore for, drill for, produce, store and remove oil and natural gas from
      the
      mineral interest, in consideration for which the lessor is entitled to certain
      rents and royalties payable under the terms of the lease. Typically, the
      duration of the lessee’s authorization is for a stated term of years and “for so
      long thereafter” as minerals are producing.





*MBbls* . 
      One thousand barrels of oil or other liquid hydrocarbons.




*Mcf* . 
      One thousand cubic feet of natural gas at standard atmospheric
      conditions.




*Mcfe.* One
      thousand cubic feet equivalent of natural gas, calculated by converting oil
      to
      equivalent Mcf at a ratio of 6 Mcf for each Bbl of oil.


27


*MMcf* . 
      One million cubic feet of natural gas at standard atmospheric
      conditions.




*MMcfe.* One
      million cubic feet equivalent of natural gas, calculated by converting oil
      to
      equivalent Mcf at a ratio of 6 Mcf for each Bbl of oil.




*Natural
      gas liquids* . 
      Liquid hydrocarbons that have been extracted from natural gas, such as ethane,
      propane, butane and natural gasoline.





*Net
      acres or wells.* Refers
      to
      gross acres or wells multiplied, in each case, by the percentage interest owned
      by the Company.





*Net
      production* . 
      Oil and gas production that is owned by the Company, less royalties and
      production due others.




*Net
      revenue interest.* An
      owner’s interest in the revenues of a well after deducting proceeds allocated to
      royalty and overriding interests.





*Oil* . 
      Crude oil or condensate.





*Operator* . 
      The individual or company responsible for the exploration, development and
      production of an oil or natural gas well or lease.





*Overriding
      royalty interest (“ORRI”).* A
      royalty
      interest that is created out of the operating or working interest. Its term
      is
      coextensive with that of the operating interest from which it was
      created.




*Plugging
      and abandonment.* Refers
      to
      the sealing off of fluids in the strata penetrated by a well so that the fluids
      from one stratum will not escape into another or to the surface. Regulations
      of
      all states require plugging of abandoned wells.





*Present
      value of proved reserves* . 
      The present value of estimated future revenues, discounted at 10% annually,
      to
      be generated from the production of proved reserves determined in accordance
      with SEC guidelines, net of estimated production and future development costs,
      using prices and costs as of the date of estimation without future escalation,
      without giving effect to (i) estimated future abandonment costs, net of the
      estimated salvage value of related equipment, (ii) non-property related expenses
      such as general and administrative expenses, debt service and future income
      tax
      expense, or (iii) depreciation, depletion and amortization.




*Productive
      well.* A
      well
      that is found to be capable of producing hydrocarbons in sufficient quantities
      such that proceeds from the sale of the production exceed operating and
      production expenses and taxes.





*Prospect.* A
      specific geographic area which, based on supporting geological, geophysical
      or
      other data and also preliminary economic analysis using reasonably anticipated
      prices and costs, is deemed to have potential for the discovery of commercial
      hydrocarbons.





*Proved
      developed nonproducing reserves (PDNP)* . 
      Reserves that consist of (i) proved reserves from wells which have been
      completed and tested but are not producing due to lack of market or minor
      completion problems which are expected to be corrected and (ii) proved reserves
      currently behind the pipe in existing wells and which are expected to be
      productive due to both the well log characteristics and analogous production
      in
      the immediate vicinity of the wells.




*Proved
      developed producing reserves (PDP).* Proved reserves that can be expected to be recovered from currently producing
      zones under the continuation of present operating methods.




*Proved
      developed reserves.* The combination of proved developed producing and proved developed nonproducing
      reserves.




*Proved
      reserves.* The
      estimated quantities of oil, natural gas, and natural gas liquids which
      geological and engineering data demonstrate with reasonable certainty to be
      commercially recoverable in future years from known reservoirs under existing
      economic and operating conditions.


28


*Proved
      undeveloped reserves (PUD)* . 
      Proved reserves that are expected to be recovered from new wells on undrilled
      acreage or from existing wells where a relatively major expenditure is required
      for recompletion.





*PV-10.* When
      used
      with respect to oil and natural gas reserves, PV-10 means the estimated future
      gross revenue to be generated from the production of proved reserves, net of
      estimated production and future development and abandonment costs, using prices
      and costs in effect at the determination date, before income taxes, and without
      giving effect to non-property-related expenses except for specific general
      and
      administrative expenses incurred to operate the properties, discounted to a
      present value using an annual discount rate of 10% in accordance with the
      guidelines of the SEC.





*Recompletion.* A
      process
      of re-entering an existing wellbore that is either producing or not producing
      and completing new reservoirs in an attempt to establish or increase existing
      production.





*Re-entry.* Entering
      an existing well bore to redrill or repair.





*Reservoir.* A
      porous
      and permeable underground formation containing a natural accumulation of
      producible natural gas and/or oil that is confined by impermeable rock or water
      barriers and is separate from other reservoirs.





*Royalty* . 
      An interest in an oil and natural gas lease that gives the owner of the interest
      the right to receive a portion of the production from the leased acreage, or
      of
      the proceeds of the sale thereof, but generally does not require the owner
      to
      pay any portion of the costs of drilling or operating the wells on the leased
      acreage.  Royalties may be either landowner’s royalties, which are reserved
      by the owner of the leased acreage at the time the lease is granted, or
      overriding royalties, which are usually reserved by an owner of the leasehold
      in
      connection with a transfer to a subsequent owner.





*Standardized
      measure of discounted future net cash flows* . 
      The present value of proved reserves, as adjusted to give effect to (i)
      estimated future abandonment costs, net of the estimated salvage value of
      related equipment, and (ii) estimated future income taxes.




*Undeveloped
      acreage* . 
      Leased acreage on which wells have not been drilled or completed to a point
      that
      would permit the production of commercial quantities of oil and natural gas
      regardless of whether such acreage contains proved reserves.




*Working
      interest* . 
      An interest in an oil and gas lease that gives the owner of the interest the
      right to drill for and produce oil and natural gas on the leased acreage and
      requires the owner to pay a share of the costs of drilling and production
      operations.  The share of production to which a working interest is
      entitled will be smaller than the share of costs that the working interest
      owner
      is required to bear to the extent of any royalty burden.




*Workover* . 
      Operations on a producing well to restore or increase
      production.


29




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Report
                of Independent Registered Public Accounting Firm
            
            
            F2Consolidated
                Balance Sheets
            
            
            F3Consolidated
                Statements of Operations
            
            
            F4Consolidated
                Statements of Changes in Stockholders’ Equity
            
            
            F5Consolidated
                Statements of Cash Flows
            
            
            F6Notes
                to Consolidated Financial Statements
            
            
            F7




F1


***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 Subsidiaries as of March 31, 2008 and 2007 and the related consolidated
      statements of operations, changes in stockholders’ equity and cash flows for
      each of the three years in the period ended March 31, 2008. 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. The Company is not required to
      have, nor were we engaged to perform an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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
      Subsidiaries as of March 31, 2008 and 2007, and the results of their operations
      and their cash flows for each of the three years in the period ended March
      31,
      2008, in conformity with accounting principles generally accepted in the United
      States of America.





As
      discussed in Note 10 to the financial statements, effective April 1, 2006,
      the
      Company adopted Statement of Financial Accounting Standards No. 123(R), *Share-Based
      Payment* ,
      and
      changed its method of accounting for stock-based compensation.




/s/
      GRANT
      THORNTON LLP





Oklahoma
      City, Oklahoma


June
      23,
      2008


F2


**Mexco
      Energy Corporation and Subsidiaries**


CONSOLIDATED
      BALANCE SHEETS


As
      of
      March 31,





2008
            
            2007**ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            303,617
            
            $
            72,537Accounts
                receivable:Oil
                and gas sales
            
            
            758,459
            
            
            399,659Trade
            
            
            102,403
            
            
            2,987Related
                parties
            
            
            12,659
            
            
            -Income
                tax receivable
            
            
            -
            
            
            59,736Prepaid
                costs and expenses
            
            
            22,062
            
            
            65,986Total
                current assets
            
            
            1,199,200
            
            
            600,905Investment
                in GazTex, LLC
            
            
            20,509
            
            
            20,509Property
                and equipment, at costOil
                and gas properties, using the full cost method
            
            
            23,941,483
            
            
            20,526,431Other
            
            
            61,362
            
            
            51,41224,002,845
            
            
            20,577,843Less
                accumulated depreciation, depletion, and amortization
            
            
            12,019,895
            
            
            11,240,277Property
                and equipment, net
            
            
            11,982,950
            
            
            9,337,566$
            13,202,659
            
            $
            9,958,980**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            571,526
            
            $
            154,074Long-term
                debt
            
            
            2,600,000
            
            
            700,000Asset
                retirement obligation
            
            
            374,789
            
            
            350,584Deferred
                income tax liabilities
            
            
            1,196,280
            
            
            978,686Stockholders’
                equityPreferred
                stock - $1.00 par value; 10,000,000 shares authorized; none
                outstanding
            
            
            -
            
            
            -Common
                stock - $0.50 par value; 40,000,000 shares authorized; 1,841,366
                and
                1,840,366 shares issued; 1,757,366 and 1,780,841 shares outstanding
                as of
                March 31, 2008 and 2007, respectively
            
            
            920,683
            
            
            920,183Additional
                paid-in capital
            
            
            4,381,269
            
            
            4,291,892Retained
                earnings
            
            
            3,584,729
            
            
            2,871,085Treasury
                stock, at cost (84,000 and 59,525 shares, respectively)
            
            
            (426,617
            )
            
            (307,524
            )Total
                stockholders’ equity8,460,064
            
            
            7,775,636$
            13,202,659
            
            $
            9,958,980




The
      accompanying notes to the consolidated financial statements


are
      an
      integral part of these statements.


F3


**Mexco
      Energy Corporation and Subsidiaries**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


Year
      ended March 31,





**2008**
            
            **2007**
            
            **2006**Operating
                revenues:Oil
                and gas
            
            $
            3,887,955
            
            $
            2,969,325
            
            $
            3,716,564Other
            
            
            11,453
            
            
            2,392
            
            
            3,079Total
                operating revenues
            
            
            3,899,408
            
            
            2,971,717
            
            
            3,719,643Operating
                expenses:Production
            
            
            1,240,305
            
            
            870,778
            
            
            843,927Accretion
                of asset retirement obligation
            
            
            26,262
            
            
            24,057
            
            
            23,436Depreciation,
                depletion, and amortization
            
            
            779,618
            
            
            652,826
            
            
            658,365General
                and administrative
            
            
            821,786
            
            
            829,180
            
            
            817,332Impairment
                of long-term asset
            
            
            -
            
            
            -
            
            
            261,617Total
                operating expenses
            
            
            2,867,971
            
            
            2,376,841
            
            
            2,604,677Operating
                profit
            
            
            1,031,437
            
            
            594,876
            
            
            1,114,966Other
                income (expense):Interest
                income
            
            
            5,113
            
            
            4,670
            
            
            2,837Interest
                expense
            
            
            (105,312
            )
            
            (24,046
            )
            
            (98,657
            )Net
                other expense
            
            
            (100,199
            )
            
            (19,376
            )
            
            (95,820
            )Earnings
                before income taxes and minority interest
            
            
            931,238
            
            
            575,500
            
            
            1,019,146Income
                tax expense (benefit):Current
            
            
            -
            
            
            -
            
            
            (19,312
            )Deferred
            
            
            217,594
            
            
            (28,050
            )
            
            291,452217,594
            
            
            (28,050
            )
            
            272,140Earnings
                before minority interest
            
            
            713,644
            
            
            603,550
            
            
            747,006Minority
                interest in loss of subsidiary
            
            
            -
            
            
            4,835
            
            
            41,799Net
                income
            
            $
            713,644
            
            $
            608,385
            
            $
            788,805Net
                income per common share:Basic:
            
            $
            0.40
            
            $
            0.35
            
            $
            0.45Diluted:
            
            $
            0.40
            
            $
            0.33
            
            $
            0.43




The
      accompanying notes to the consolidated financial statements


are
      an
      integral part of these statements.


F4


**Mexco
      Energy Corporation and Subsidiaries**


CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY





Additional
            
            
            
            TotalCommon Stock
            
            Treasury
            
            Paid-In
            
            Retained
            
            Stockholders’Par Value
            
            Stock
            
            Capital
            
            Earnings
            
            EquityBalance,
                April 1, 2005
            
            $
            883,283
            
            $
            (145,575
            )
            $
            3,826,592
            
            $
            1,473,895
            
            $
            6,038,195Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            788,805
            
            
            788,805Issuance
                    of stock through options
                    exercised
            
            
            5,000
            
            
            -
            
            
            47,500
            
            
            -
            
            
            52,500Stock
                based compensation
            
            
            -
            
            
            -
            
            
            19,496
            
            
            -
            
            
            19,496Balance,
                March 31, 2006
            
            
            888,283
            
            
            (145,575
            )
            
            3,893,588
            
            
            2,262,700
            
            
            6,898,996Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            608,385
            
            
            608,385Purchase
                of stock
            
            
            -
            
            
            (183,309
            )
            
            -
            
            
            -
            
            
            (183,309
            )Issuance
                of stock through options exercised
            
            
            30,900
            
            
            -
            
            
            258,750
            
            
            -
            
            
            289,650Issuance
                of stock for property
            
            
            -
            
            
            21,360
            
            
            -
            
            
            -
            
            
            21,360Stock
                award
            
            
            1,000
            
            
            -
            
            
            13,100
            
            
            -
            
            
            14,100Stock
                based compensation
            
            
            -
            
            
            -
            
            
            126,454
            
            
            -
            
            
            126,454Balance,
                March 31, 2007
            
            
            920,183
            
            
            (307,524
            )
            
            4,291,892
            
            
            2,871,085
            
            
            7,775,636Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            713,644
            
            
            713,644Purchase
                of stock
            
            
            -
            
            
            (119,093
            )
            
            -
            
            
            -
            
            
            (119,093
            )Issuance
                of stock through options exercised
            
            
            500
            
            
            -
            
            
            3,500
            
            
            -
            
            
            4,000Stock
                based compensation
            
            
            -
            
            
            -
            
            
            85,877
            
            
            -
            
            
            85,877Balance,
                March 31, 2008
            
            $
            920,683
            
            $
            (426,617
            )
            $
            4,381,269
            
            $
            3,584,729
            
            $
            8,460,064




Share
                Activity2008
            
            2007
            
            2006Common
                stock issuedAt
                beginning of year
            
            
            1,840,366
            
            
            1,776,566
            
            
            1,766,566Issued
            
            
            1,000
            
            
            63,800
            
            
            10,000At
                end of year
            
            
            1,841,366
            
            
            1,840,366
            
            
            1,776,566Held
                in treasuryAt
                beginning of year
            
            
            (59,525
            )
            
            (33,525
            )
            
            (33,525
            )Acquisitions
            
            
            (24,475
            )
            
            (30,000
            )
            
            -Exchange
                for property
            
            
            -
            
            
            4,000
            
            
            -At
                end of year
            
            
            (84,000
            )
            
            (59,525
            )
            
            (33,525
            )Common
                shares outstanding at end of year
            
            
            1,757,366
            
            
            1,780,841
            
            
            1,743,041




The
      accompanying notes to the consolidated financial statements


are
      an
      integral part of these statements.


F5


**Mexco
      Energy Corporation and Subsidiaries**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Year
      ended March 31,





2008
            
            2007
            
            2006Cash
                flows from operating activities:Net
                income
            
            $
            713,644
            
            $
            608,385
            
            $
            788,805Adjustments
                to reconcile net income to net cash provided by operating
                activities:Increase
                (decrease) in deferred tax liabilities
            
            
            217,594
            
            
            (28,050
            )
            
            291,452Excess
                tax benefit from share based payment arrangement
            
            
            (1,100
            )
            
            (14,191
            )
            
            -Stock-based
                compensation
            
            
            85,877
            
            
            126,454
            
            
            19,496Common
                stock issued to director
            
            
            -
            
            
            14,100
            
            
            -Depreciation,
                depletion, and amortization
            
            
            779,618
            
            
            652,826
            
            
            658,365Accretion
                of asset retirement obligations
            
            
            26,262
            
            
            24,057
            
            
            23,436Impairment
                of long-term asset
            
            
            -
            
            
            -
            
            
            261,617Minority
                interest in loss of GazTex, LLC
            
            
            -
            
            
            (4,835
            )
            
            (41,799
            )(Increase)
                decrease in accounts receivable
            
            
            (411,139
            )
            
            26,896
            
            
            14,167Decrease
                (increase) in prepaid expenses
            
            
            43,924
            
            
            (50,146
            )
            
            (68,214
            )Decrease
                in income taxes payable
            
            
            -
            
            
            -
            
            
            (48,127
            )Increase
                (decrease) in accounts payable and accrued expenses
            
            
            20,084
            
            
            (30,472
            )
            
            1,467Net
                cash provided by operating activities
            
            
            1,474,764
            
            
            1,325,024
            
            
            1,900,665Cash
                flows from investing activities:Additions
                to oil and gas properties
            
            
            (3,060,194
            )
            
            (1,545,023
            )
            
            (676,633
            )Proceeds
                from sale of oil and gas properties and equipment
            
            
            40,452
            
            
            28,016
            
            
            65,532Additions
                to other property and equipment
            
            
            (9,950
            )
            
            (11,564
            )
            
            (2,993
            )Net
                cash used in investing activities
            
            
            (3,029,692
            )
            
            (1,528,571
            )
            
            (614,094
            )Cash
                flows from financing activities:Acquisition
                of treasury stock
            
            
            (119,093
            )
            
            (90,809
            )
            
            -Proceeds
                from exercise of stock options
            
            
            4,000
            
            
            197,150
            
            
            52,500Reduction
                of long-term debt
            
            
            (525,000
            )
            
            (740,000
            )
            
            (1,390,000
            )Proceeds
                from long term debt
            
            
            2,425,000
            
            
            840,000
            
            
            -Minority
                interest contributions
            
            
            -
            
            
            4,835
            
            
            18,488Repurchase
                of OBTX, LLC stock
            
            
            -
            
            
            (2,051
            )
            
            -Excess
                tax benefit from share based payment arrangement
            
            
            1,100
            
            
            14,191
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            1,786,007
            
            
            223,316
            
            
            (1,319,012
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            231,080
            
            
            19,769
            
            
            (32,441
            )Cash
                and cash equivalents at beginning of year
            
            
            72,537
            
            
            52,768
            
            
            85,209Cash
                and cash equivalents at end of year
            
            $
            303,617
            
            $
            72,537
            
            $
            52,768Interest
                paid
            
            $
            97,163
            
            $
            22,736
            
            $
            102,669Income
                taxes paid
            
            $
            -
            
            $
            -
            
            $
            88,551Supplemental
                disclosure of non-cash investing and financing activities:Issuance
                of common stock in exchange for oil and gas properties
            
            $
            -
            
            $
            21,360
            
            $
            -Cashless
                exercise of stock options and repurchase of treasury
                shares
            
            $
            -
            
            $
            92,500
            
            $
            -Percentage
                of royalty interest purchase issued as payment for finder’s
                fee
            
            $
            46,250
            
            $
            -
            
            $
            -Asset
                retirement obligations
            
            $
            36,729
            
            $
            46,355
            
            $
            2,851




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


F6


**MEXCO
      ENERGY CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.
      Nature of Operations**





Mexco
      Energy Corporation (a Colorado corporation), its wholly owned subsidiaries,
      Forman Energy Corporation (a New York corporation) and OBTX, LLC (a Delaware
      limited liability company) (collectively, the “Company”) are engaged in the
      exploration, development and production of natural gas, crude oil, condensate
      and natural gas liquids (“NGLs”). Although most of the Company’s oil and gas
      interests are centered in West Texas, we own producing properties and
      undeveloped acreage in ten states. Although most of our oil and gas interests
      are operated by others, we operate several properties in which we own an
      interest.





**2.
      Summary of Significant Accounting Policies**





**Principles
      of Consolidation** .
      The
      consolidated financial statements include the accounts of Mexco Energy
      Corporation and its wholly owned subsidiaries. All significant intercompany
      balances and transactions associated with the consolidated operations have
      been
      eliminated.





**Estimates
      and Assumptions** .
      In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make informed judgments and estimates that affect the reported amounts of assets
      and liabilities as of the date of the financial statements and affect the
      reported amounts of revenues and expenses during the reporting period. 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,
      the
      future development, dismantlement and abandonment costs, fair value of stock
      options and income taxes.





**Cash
      and Cash Equivalents** .
      We
      consider all highly liquid debt instruments purchased with maturities of three
      months or less and money market funds to be cash equivalents. We maintain our
      cash in bank deposit accounts and money market funds, some of which are not
      federally insured. We have not experienced any losses in such accounts and
      believe we are 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 as
      defined by the SEC. Under this method of accounting, the costs of unsuccessful,
      as well as successful, exploration and development activities are capitalized
      as
      property and equipment. This includes any internal costs that are directly
      related to exploration and development activities but does not include any
      costs
      related to production, general corporate overhead or similar activities. The
      carrying amount of oil and gas properties also includes estimated asset
      retirement costs recorded based on the fair value of the asset retirement
      obligation when incurred. Generally, no gains or losses are recognized on the
      sale or disposition of oil and gas properties.





**Excluded
      Costs** .
      Oil and
      gas properties include costs that are excluded from capitalized costs being
      amortized. These amounts represent investments in unproved properties and major
      development projects. These costs are excluded until proved reserves are found
      or until it is determined that the costs are impaired. All costs excluded are
      reviewed at least quarterly to determine if impairment has occurred. The amount
      of any impairment is transferred to the capitalized costs being amortized (the
      depreciation, depletion and amortization (“DD&A”) pool). Impairments
      transferred to the DD&A pool increase the DD&A rate.





**Depreciation,
      Depletion and Amortization** .
      The
      depreciable base for oil and gas properties includes the sum of capitalized
      costs, net of accumulated DD&A, estimated future development costs and asset
      retirement costs not accrued in oil and gas properties, less costs excluded
      from
      amortization and salvage. The depreciable base of oil and gas properties is
      amortized using the unit-of-production method.




F7


**Ceiling
      Test** .
      Under
      the full cost method of accounting, a ceiling test is performed each quarter.
      The full cost ceiling test is an impairment test prescribed by SEC Regulation
      S-X Rule 4-10. The ceiling test determines a limit, on a country-by-country
      basis, on the book value of oil and gas properties. The capitalized costs of
      proved oil and gas properties, net of accumulated DD&A and the related
      deferred income taxes, may not exceed the estimated future net cash flows from
      proved oil and gas reserves, excluding future cash outflows associated with
      settling asset retirement obligations that have been accrued on the balance
      sheet, generally using prices in effect at the end of the period held flat
      for
      the life of production and including the effect of derivative contracts that
      qualify as cash flow hedges, discounted at 10%, net of related tax effects,
      plus
      the cost of unevaluated properties and major development projects excluded
      from
      the costs being amortized. If capitalized costs exceed this limit, the excess
      is
      charged to expense and reflected as additional accumulated
      DD&A.





**Asset
      Retirement Obligations (“ARO”)** .
      We have
      significant obligations to plug and abandon natural gas and crude oil wells
      and
      related equipment at the end of oil and gas production operations. We record
      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. We use the present value of estimated cash flows related to the
      ARO
      to determine the fair value. Inherent in the present value 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.





**Income
      Taxes** .
      In
      accordance with SFAS No. 109, *Accounting
      for Income Taxes* ,
      we
      recognize 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 under SFAS No. 109 is recognized in net income in the period
      that includes the enactment date.





Effective
      April 1, 2007, we adopted Financial Accounting Standards Bulletin (“FASB”)
      Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An
      Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the
      financial statement recognition and disclosure requirements for uncertain tax
      positions taken or expected to be taken in a tax return. Any interest and
      penalties related to uncertain tax positions are recorded as interest expense
      and general and administrative expense, respectively. At the time of adoption
      and as of March 31, 2008, we did not have any uncertain tax
      positions.





**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. We have 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
      our excess takes of natural gas volumes exceeds our 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). We have no significant gas imbalances.





**Income
      Per Common Share** .
      Basic
      net income per share is computed by dividing net income by the weighted average
      number of shares outstanding during the period. Diluted net income per share
      is
      computed by dividing net income by the weighted average number of common shares
      and dilutive potential common shares (stock options) 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.




F8


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:





2008
            
            2007
            
            2006Weighted
                average number of common shares outstanding, basic
            
            
            1,767,777
            
            
            1,761,344
            
            
            1,733,890Incremental
                shares from the assumed exercise of dilutive stock options
            
            
            5,272
            
            
            58,625
            
            
            93,136Dilutive
                potential common shares
            
            
            1,773,049
            
            
            1,819,969
            
            
            1,827,026





For
      the
      year ended March 31, 2008, potential common shares of 240,000, relating to
      stock
      options, were excluded in the computation of diluted net earnings per share
      because the exercise price of the options was greater than the average market
      price of the common shares and, therefore, the effect would be anti-dilutive.
      During the year ending March 31, 2007, 135,000 shares were excluded from the
      diluted net earnings per share calculations. For the year ended March 31, 2006,
      no anti-dilutive shares relating to stock options were excluded from the
      calculation. Anti-dilutive stock options have a weighted average exercise price
      of $6.49 at March 31, 2008.





**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.





**Stock-based
      Compensation** .
      Prior
      to April 1, 2006 we accounted for employee stock-based compensation using the
      intrinsic value method in accordance with APB 25. Under APB 25, if the exercise
      price of employee stock options equaled the market price of the underlying
      stock
      on the grant date, no compensation expense was recorded. Effective the first
      quarter of fiscal 2007 (the quarter beginning April 2006), we adopted SFAS
      123(R) using the modified prospective method which requires companies to
      recognize the cost of employee services received in exchange for awards of
      equity instruments based on the grant date fair value of those awards in their
      financial statements. For all unvested options outstanding as of April 1, 2006,
      the previously measured but unrecognized compensation expense based on the
      fair
      value at the original grant date will be recognized in our financial statements
      over the remaining vesting period. For equity-based compensation awards granted
      or modified subsequent to April 1, 2006, compensation expense based on the
      fair
      value at the date of grant or modification will be recognized in our financial
      statements over the vesting period. We recognize the fair value of stock-based
      compensation awards as wages in the Consolidated Statements of Operations based
      on a graded-vesting schedule over the vesting period. We utilize the Binomial
      option pricing model to measure the fair value of stock options. The adoption
      of
      SFAS 123(R) does not require restatement of previously issued financial
      statements.





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





**Recent
      Accounting Pronouncements** .  In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which provides guidance for using fair value to measure assets and
      liabilities. The pronouncement defines fair value, establishes a framework
      for
      measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, SFAS 157 does not
      require any new fair value measurement. SFAS 157, as originally issued, was
      effective for fiscal years beginning after November 15, 2007. However, in
      February 2008, the FASB issued FASB Staff Position FAS 157-2, *Effective
      Date of FASB Statement No. 157,* which
      provides a one year delay of the effective date of FAS 157 as it relates to
      nonfinancial assets and liabilities, except those that are recognized or
      disclosed at fair value in the financial statements on a recurring basis (at
      least annually). SFAS 157 as it relates to financial assets and liabilities
      will
      be effective as of the beginning of our 2009 fiscal year. Management is
      currently evaluating the impact of SFAS 157 on our financial statements.


F9


In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Liabilities - Including an amendment
      of FASB Statement No. 115* (“SFAS
      159”). SFAS 159 permits entities to choose to measure certain financial assets
      and liabilities at fair value. Unrealized gains and losses, arising subsequent
      to adoption, are reported in earnings. SFAS 159 is effective for fiscal years
      beginning after November 15, 2007. We do not anticipate that the adoption of
      SFAS 159 will have a material effect on our consolidated financial statements.





**3.
      Long-Term Debt**





We
      have 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 September 26, 2007, the borrowing base was redetermined and set at $4,225,000
      bearing interest at prime rate per annum with a maturity date of October 31,
      2009. As of March 31, 2008, the balance outstanding under this agreement was
      $2,600,000 compared to $700,000 at March 31, 2007. Availability of this line
      of
      credit at March 31, 2008 was $1,625,000. No principal payments are anticipated
      to be required through March 31, 2009 based on the revised borrowing base.
      Two
      letters of credit for $50,000 each, in lieu of a plugging bond covering the
      properties we operate are outstanding under the facility, one with the Texas
      Railroad Commission and one with the State of New Mexico. 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 our wholly owned
      subsidiary, Forman Energy Corporation, and substantially all oil and gas
      properties. Interest under this agreement is payable monthly at prime rate
      (5.25% and 8.25% at March 31, 2008 and 2007, respectively). This agreement
      generally restricts our ability to transfer assets or control of the Company,
      incur debt, extend credit, change the nature of our business, substantially
      change management personnel, or pay cash dividends.





**4.
      Asset Retirement Obligations**





Our
      asset
      retirement obligations relate to the plugging of wells, the removal of
      facilities and equipment, and site restoration on oil and gas properties. 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
      following table provides a rollforward of the asset retirement obligations
      for
      the fiscal years ended March 31, 2008 and 2007:





2008
            
            2007Carrying
                amount of asset retirement obligations as of April 1
            
            $
            400,584
            
            $
            372,956Liabilities
                incurred
            
            
            36,729
            
            
            46,355Liabilities
                settled
            
            
            (38,786
            )
            
            (42,784
            )Accretion
                expense
            
            
            26,262
            
            
            24,057Carrying
                amount of asset retirement obligations as of March 31
            
            
            424,789
            
            
            400,584Less:
                current portion
            
            
            50,000
            
            
            50,000Non-current
                asset retirement obligation
            
            $
            374,789
            
            $
            350,584





The
      asset
      retirement obligation is included on the consolidated balance sheets with the
      current portion being included in the accounts payable and accrued expenses.




**5.
      Income Taxes**





Significant
      components of net deferred tax assets (liabilities) at March 31 are as
      follows:





2008
            
            2007Deferred
                tax assets:Percentage
                depletion carryforwards
            
            $
            760,299
            
            $
            667,423Deferred
                stock-based compensation
            
            
            42,226
            
            
            39,876Asset
                retirement obligation
            
            
            131,685
            
            
            124,182Net
                operating loss
            
            
            36,445
            
            
            60,655Other
            
            
            3,168
            
            
            3,871973,823
            
            
            896,007Deferred
                tax liabilities:Excess
                    financial accounting bases over tax bases of property
                    and equipment
            
            
            (2,170,103
            )
            
            (1,874,693
            )Net
                deferred tax liabilities
            
            $
            (1,196,280
            )
            $
            (978,686
            )




F10




As
      of
      March 31, 2008, we have statutory depletion carryforwards of approximately
      $2,453,000, which do not expire.





At
      March
      31, 2008, we had a net operating loss carryforward for regular income tax
      reporting purposes of approximately $118,000, which will begin expiring in
      2021.
      Our ability to use some of our net operating loss carryforwards and certain
      other tax attributes to reduce current and future U.S. federal taxable income
      is
      subject to limitations under the Internal Revenue Code.





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




2008
            
            2007
            
            2006Tax
                expense at statutory rate
            
            $
            316,621
            
            $
            197,314
            
            $
            360,721Depletion
                in excess of basis
            
            
            (93,000
            )
            
            (99,200
            )
            
            (10,806
            )Effect
                of graduated rates
            
            
            (27,937
            )
            
            (17,410
            )
            
            (31,828
            )Revision
                of prior year estimates
            
            
            7,487
            
            
            (123,443
            )
            
            (46,099
            )Permanent
                differences
            
            
            14,423
            
            
            14,689
            
            
            -Other
            
            
            -
            
            
            -
            
            
            152$
            217,594
            
            $
            (28,050
            )
            $
            272,140Effective
                tax rate
            
            
            23%
            
            
            (5%)
            
            
            26%





**6** **.
      Investment in GazTex, LLC**





Our
      long-term asset consists of an investment in GazTex, LLC, a Russian company
      owned 50% by OBTX, LLC, accounted for by the equity method. OBTX, LLC is a
      Delaware limited liability company in which from January 16, 2007, Mexco owned
      100% of the interest. There has not been any activity for the year ended March
      31, 2008. In May 2008, we dissolved GazTex, LLC and received our initial cash
      investment less related fees and expenses for a net amount of
      $18,700.





**7.
      Major Customers**





Currently,
      we operate exclusively within the United States and our 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, we have not experienced significant credit losses on our 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 our ability to sell our oil and gas production.





In
      fiscal
      2008, Chesapeake Operating accounted for 14% and Conoco Phillips accounted
      for
      13% of our total revenues. In fiscal 2007 and 2006, Southern Union Gas Services
      accounted for 12% and 16%, respectively, of revenues. At March 31, 2008,
      accounts receivable from Chesapeake Operating and Conoco Phillips were
      approximately 37% and 4%, respectively, of oil and gas accounts
      receivable.


F11


**8.
      Oil and Gas Costs**





The
      costs
      related to our oil and gas activities were incurred as follows for the year
      ended March 31:




2008
            
            2007
            
            2006Property
                acquisition costs:Proved
            
            $
            1,952,171
            
            $
            603,271
            
            $
            171,593Unproved
            
            
            -
            
            
            -
            
            
            29,592Exploration
            
            
            820,436
            
            
            24,493
            
            
            96,936Development
            
            
            685,043
            
            
            953,271
            
            
            335,122Capitalized
                asset retirement obligations
            
            
            36,729
            
            
            46,355
            
            
            2,851Total
                costs incurred for oil and gas properties
            
            $
            3,494,379
            
            $
            1,627,390
            
            $
            636,094





We
      had
      the following aggregate capitalized costs relating to our oil and gas property
      activities at March 31:





2008
            
            2007
            
            2006Proved
                oil and gas properties
            
            $
            23,770,996
            
            $
            20,355,944
            
            $
            18,655,627Unproved
                oil and gas properties:subject
                to amortization
            
            
            170,487
            
            
            170,487
            
            
            170,487not
                subject to amortization
            
            
            -
            
            
            -
            
            
            121,41823,941,483
            
            
            20,526,431
            
            
            18,947,532Less
                accumulated depreciation,depletion,
                and amortization
            
            
            11,974,477
            
            
            11,202,369
            
            
            10,554,659$
            11,967,006
            
            $
            9,324,062
            
            $
            8,392,873





Depreciation,
      depletion, and amortization amounted to $1.60, $1.47 and $1.39 per equivalent
      mcf of production for the years ended March 31, 2008, 2007, and 2006,
      respectively.





**9.
      Stockholders’ Equity**





In
      June
      2006, the board of directors authorized the use of up to $250,000 in addition
      to
      a prior authorization of $250,000 to repurchase shares of our common stock
      for
      the treasury account. Throughout fiscal 2007, we repurchased 30,000 shares
      at an
      aggregate cost of $183,309, and during fiscal 2008, we repurchased 24,475 shares
      at an aggregate cost of $119,093.





**10.
      Stock Options**





We
      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 or 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.





In
      September 2004, the board of directors of the Company adopted the 2004 Incentive
      Stock Plan to replace, modify and extend the termination date of the September
      15, 1997 stock plan to September 14, 2009. This new plan provides for the award
      of stock options up to 375,000 shares of which 125,000 may be the subject of
      stock grants without restrictions and without payment by the recipient and
      stock
      awards of up to 125,000 shares with restrictions including payment for the
      shares and employment of not less than three years from the date of the award.
      The terms of the stock options are similar to those of the existing stock option
      plan except that the term of the Plan is five years from the date of its
      adoption.




F12





In
      accordance with both Plans, upon the exercise of stock options, new shares
      will
      be issued. The Company can repurchase shares exercised under these Plans.
      Through the year ended March 31, 2007, we repurchased 20,000 shares for the
      treasury at an aggregate cost of $127,300. We did not repurchase any exercised
      shares for the treasury during the year ended March 31, 2008. The Plan also
      provides for the granting of stock awards. During fiscal 2007, we granted a
      stock award of 2,000 shares to a director of the Company. No stock awards were
      granted during fiscal 2008.





The
      following pro forma information presents net income and earnings per share
      for
      the year ended March 31, 2006 as if the stock-based compensation had been
      recorded at the estimated fair value of stock awards on the grant date. The
      fair
      value of stock options issued was estimated at the date of grant using the
      Binomial option pricing model.




2006Net
                income, as reported
            
            $
            788,805Deduct:
                Stock-based employee compensation expensedetermined
                under fair value based method (SFAS 123), net of tax
            
            
            (72,078
            )Net
                income, pro forma
            
            $
            716,727Basic
                income per share:As
                reported
            
            $
            0.45Pro
                forma
            
            $
            0.41Diluted
                income per share:As
                reported
            
            $
            0.43Pro
                forma
            
            $
            0.39





The
      adoption of SFAS 123(R) in the first quarter of fiscal year 2007 resulted in
      prospective changes in the accounting for stock-based compensation awards
      including recording stock-based compensation expense related to stock options
      that became vested during each quarter on a prospective basis. If an exercise
      and sale of vested options results in a disqualifying disposition, a tax
      deduction for the Company occurs. The excess tax benefit from the disqualifying
      disposition of options is reflected both in cash flows from operating activities
      and cash flows from financing activities in the Consolidated Statements of
      Cash
      Flows.





We
      recognized compensation expense of $85,877, $126,454 and $19,496 in general
      and
      administrative expense in the Consolidated Statements of Operations for fiscal
      2008, 2007 and 2006, respectively. The total cost related to non-vested awards
      not yet recognized at March 31, 2008 totals $88,929, which is expected to be
      recognized over a weighted average of 2.66 years.





In
      periods ending prior to April 1, 2006 the income tax benefits from the exercise
      of stock options were classified as net cash provided by operating activities
      pursuant to Emerging Issues Task Force Issue No. 00-15. However, for periods
      beginning after April 1, 2006 pursuant to SFAS 123(R), the excess tax benefits
      are required to be reported in net cash provided by financing activities. For
      the year ended March 31, 2008, excess tax benefits from disqualifying
      dispositions of options of $1,100 were reflected in both cash flows from
      operating activities and cash flows from financing activities in the
      Consolidated Statements of Cash Flows.





The
      fair
      value of each stock option is estimated on the date of grant using the Binomial
      valuation model. Expected volatilities are based on historical volatility of
      the
      Company’s stock over the expected term of 60 months and other factors. We use
      historical data to estimate option exercise and employee termination within
      the
      valuation model. The expected term of options granted is derived from the output
      of the option valuation model and represents the period of time that options
      granted are expected to be outstanding. The risk-free rate for periods within
      the contractual life of the option is based on the U.S. Treasury yield curve
      in
      effect at the time of grant. As the Company has never declared dividends, no
      dividend yield is used in the calculation. Actual value realized, if any, is
      dependent on the future performance of the Company’s common stock and overall
      stock market conditions. There is no assurance the value realized by an optionee
      will be at or near the value estimated by the Binomial model.




F13


Included
      in the following table is a summary of the grant-date fair value of stock
      options granted and the related assumptions used in the Binomial models for
      stock options granted in fiscal 2008 and 2007 (no options were granted in fiscal
      2006). All such amounts represent the weighted average amounts for each
      period.




For
                the year ended March 31,2008
            
            2007
            
            2006Grant-date
                fair value
            
            $
            2.20
            
            $
            5.15
            
            
            -Volatility
                factor
            
            
            56.06
            %
            
            71.46
            %
            
            -Dividend
                yield
            
            
            -
            
            
            -
            
            
            -Risk-free
                interest rate
            
            
            3.54
            %
            
            5.07
            %
            
            -Expected
                term (in years)
            
            
            5
            
            
            5
            
            
            -





During
      the year ended March 31, 2008 and 2007, stock options covering 25,000 and 35,000
      shares, respectively, were granted. Stock options covering 1,000 shares were
      exercised during the year ended March 31, 2008 and 61,800 shares were exercised
      during the year ended March 31, 2007.





Prior
      to
      April 1, 2007, notice of termination was sent to a consultant and his remaining
      30,000 vested options forfeited on June 20, 2007. During the second quarter
      of
      fiscal 2008 we received notice of resignation from an employee and her remaining
      5,250 vested and 3,750 unvested options forfeited on November 30, 2007. During
      the year ended March 31, 2007, 18,200 stock options were forfeited due to the
      termination of consulting agreements with two of our consultants. However,
      these
      are all isolated events which we do not expect in the future. We have assumed
      no
      options will be forfeited before vesting due to the limited number of employees
      at the executive and senior management level who receive stock options, past
      employment history and current stock price projections.





The
      following table is a summary of activity of stock options for the year ended
      March 31, 2007 and 2008:





Number of
              Shares
            
            Weighted Average
              Exercise Price
              Per Share
            
            Weighted Aggregate
              Average Remaining
              Contract Life in Years
            
            Intrinsic
              ValueOutstanding at March 31, 2006
            
            
            350,000
            
            $
            5.88Granted
            
            
            35,000
            
            
            8.24Exercised
            
            
            (61,800
            )
            
            4.69Forfeited
                or Expired
            
            
            (18,200
            )
            
            6.75Outstanding
                at March 31, 2007
            
            
            305,000
            
            $
            6.35
            
            
            4.01
            
            $
            (366,350
            )Granted
            
            
            25,000
            
            
            4.35Exercised
            
            
            (1,000
            )
            
            4.00Forfeited
                or Expired
            
            
            (39,000
            )
            
            7.31Outstanding
                at March 31, 2008
            
            
            290,000
            
            $
            6.06
            
            
            3.30
            
            $
            (535,750
            )Vested
                at March 31, 2008
            
            
            235,000
            
            $
            6.02
            
            
            3.11
            
            $
            (424,225
            )Exercisable
                at March 31, 2008
            
            
            235,000
            
            $
            6.02
            
            
            3.11
            
            $
            (424,225
            )




Outstanding
      options at March 31, 2008 expire between April 2008 and July 2014 and have
      exercise prices ranging from $4.00 to $8.24.





Other
      information pertaining to option activity was as follows during the year ended
      March 31:




2008
            
            2007
            
            2006Weighted
                average grant-date fair value of stock options granted (per
                share)
            
            $
            4.35
            
            $
            5.15
            
            $
            —Total
                fair value of options vested
            
            $
            124,300
            
            $
            137,925
            
            $
            147,575Total
                intrinsic value of options exercised
            
            $
            1,100
            
            $
            110,019
            
            $
            42,500




F14





Cash
      received from option exercise under all share-based payment arrangements for
      the
      years ended March 31, 2008, 2007 and 2006, was $4,000, $197,150 and $52,500,
      respectively.





The
      following table summarizes information about options outstanding at March 31,
      2008:





Range of Exercise Prices
            
            Number of
              Options
            
            Weighted Average
              Exercise Price
              Per Share
            
            Weighted Average
              Remaining Contractual
              Life in Years
            
            Aggregate
              Intrinsic
              Value$4.00
                - 5.24
            
            
            75,000
            
            $
            4.125.25
                - 6.49
            
            
            85,000
            
            
            5.676.50
                - 7.74
            
            
            80,000
            
            
            7.057.75
                - 8.24
            
            
            50,000
            
            
            8.04$4.00
                - 8.24
            
            
            290,000
            
            $
            6.06
            
            
            3.30
            
            $
            (535,750
            )





The
      following table summarizes information about options exercisable at March 31,
      2008:


Range of Exercise Prices
                  
                  Number
                    Exercisable
                  
                  Weighted Average
                    Exercise Price
                    Per Share
                  
                  Aggregate
                    Intrinsic
                    Value$4.00
                      - 5.24
                  
                  
                  50,000
                  
                  $
                  4.005.25
                      - 6.49
                  
                  
                  82,500
                  
                  
                  5.656.50
                      - 7.74
                  
                  
                  75,000
                  
                  
                  7.077.75
                      - 8.24
                  
                  
                  27,500
                  
                  
                  7.88$4.00
                      - 8.24
                  
                  
                  235,000
                  
                  $
                  6.02
                  
                  $
                  (424,225
                  )
 
 **11.
        Related Party Transactions**
 
 Related
        party transactions with the majority stockholder for the years ended March
        31,
        2008, 2007 and 2006 relate to shared office expenditures. The total billed
        to
        the stockholder for years ended March 31, 2008, 2007 and 2006 was $36,368,
        $44,194 and $40,805, respectively.
 
 A
        Family
        Limited Partnership of Thomas Craddick, a member of the board of directors
        and
        Company employee, received from the Company a finders fee in kind, equal
        to 2.5%
        of the total interest purchased of the mineral acres in the Newark East Field
        in
        Tarrant County, Texas.
 
 On
        April
        1, 2007, Jeff Smith, a member of the board of directors entered into a
        consulting agreement with the Company to provide geological consulting services
        for a fee of $10,000 per month. As part of this agreement, Mr. Smith received
        from the Company a 0.5% overriding interest in our well in Loving County,
        Texas.
        Mr. Smith invested his personal funds in a working interest (2.5% before
        payout
        and 1.875% after payout) and also received from the Company a 0.5% overriding
        interest in our well in Reeves County, Texas.
 
 **12.
        Oil and Gas Reserve Data (Unaudited)**
 
 The
        estimates of our 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, 2008, 2007, and 2006 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 our
        reserves.
  F15
  **Changes
        in Proved Reserve Quantities** :
 
 2008
              
              2007
              
              2006Bbls
              
              Mcf
              
              Bbls
              
              Mcf
              
              Bbls
              
              McfProved
                  reserves, beginning of year
              
              
              220,000
              
              
              6,905,000
              
              
              183,000
              
              
              6,697,000
              
              
              151,000
              
              
              7,327,000Revision
                  of previous estimates
              
              
              (11,000
              )
              
              109,000
              
              
              6,000
              
              
              212,000
              
              
              47,000
              
              
              (292,000
              )Purchase
                  of minerals in place
              
              
              -
              
              
              584,000
              
              
              33,000
              
              
              199,000
              
              
              -
              
              
              36,000Extensions
                  and discoveries
              
              
              26,000
              
              
              638,000
              
              
              15,000
              
              
              136,000
              
              
              2,000
              
              
              1,000Sales
                  of minerals in place
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,000
              )Production
              
              
              (18,000
              )
              
              (379,000
              )
              
              (17,000
              )
              
              (339,000
              )
              
              (17,000
              )
              
              (370,000
              )Proved
                  reserves, end of year
              
              
              217,000
              
              
              7,857,000
              
              
              220,000
              
              
              6,905,000
              
              
              183,000
              
              
              6,697,000
 **Proved
          Developed Reserves:**
 Beginning
                  of year
              
              
              111,000
              
              
              3,968,000
              
              
              87,000
              
              
              3,891,000
              
              
              108,000
              
              
              4,597,000End
                  of year
              
              
              122,000
              
              
              5,050,000
              
              
              111,000
              
              
              3,968,000
              
              
              87,000
              
              
              3,891,000
 
 The
        following is a standardized measure of the discounted net future cash flows
        and
        changes applicable to proved oil and gas reserves required by *SFAS
        No. 69, Disclosures about Oil and Gas Producing Activitites* (SFAS
        No. 69). The future cash flows are based on estimated oil and gas reserves
        utilizing prices and costs in effect as of year end, discounted at 10% per
        year
        and assuming continuation of existing economic conditions.
 
 The
        year
        ended weighted average oil price utilized in the computation of future cash
        inflows was $96.61, $59.61, and $58.55 per barrel at March 31, 2008, 2007
        and
        2006, respectively. The year ended weighted average gas price utilized in
        the
        computation of future cash inflows was $8.70, $6.85 and $6.73 per mcf at
        March
        31, 2008, 2007 and 2006, respectively. Future cash flows are reduced by
        estimated future costs to develop and to produce the proved reserves assuming
        continuation of existing economic conditions.
 
 The
        standardized measure of discounted future net cash flows, in management’s
        opinion, should be examined with caution. The basis for this table is the
        reserve studies prepared by independent petroleum engineering consultants,
        which
        contain imprecise estimates of quantities and rates of production of reserves.
        Revisions of previous year estimates can have a significant impact on these
        results. Also, exploration costs in one year may lead to significant discoveries
        in later years and may significantly change previous estimates of proved
        reserves and their valuation. Therefore, the standardized measure of discounted
        future net cash flow is not necessarily indicative of the fair value of our
        proved oil and gas properties.
 
 **Standardized
        Measure of Discounted Future Net Cash Flows Relating to Proved
        Reserves:**
 
 March
                  312008
              
              2007
              
              2006Future
                  cash inflows
              
              $
              89,327,000
              
              $
              60,428,000
              
              $
              55,804,000Future
                  production and development costs
              
              
              (15,891,000
              )
              
              (13,181,000
              )
              
              (13,939,000
              )Future
                  income taxes (a)
              
              
              (15,086,000
              )
              
              (10,769,000
              )
              
              (9,646,000
              )Future
                  net cash flows
              
              
              58,350,000
              
              
              36,478,000
              
              
              32,219,000Annual
                  10% discount for estimated timing of
                  cash flows
              
              
              (25,852,000
              )
              
              (16,271,000
              )
              
              (14,295,000
              )Standardized
                  measure of discounted futurenet
                  cash flows
              
              $
              32,498,000
              
              $
              20,207,000
              
              $
              17,924,000
 
 (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.
  F16
  **Changes
        in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
        Oil and Gas Reserves**
 
 March
                  312008
              
              2007
              
              2006Sales
                  of oil and gas produced, net of production costs
              
              $
              (2,648,000
              )
              $
              (2,099,000
              )
              $
              (2,873,000
              )Net
                  changes in price and production costs
              
              
              9,027,000
              
              
              1,835,000
              
              
              3,985,000Changes
                  in previously estimated development costs
              
              
              295,000
              
              
              313,000
              
              
              701,000Revisions
                  of quantity estimates
              
              
              (121,000
              )
              
              825,000
              
              
              428,000Net
                  change due to purchases and sales of minerals in place
              
              
              2,343,000
              
              
              1,362,000
              
              
              74,000Extensions
                  and discoveries, less related costs
              
              
              5,025,000
              
              
              561,000
              
              
              45,000Net
                  change in income taxes
              
              
              (2,437,000
              )
              
              (599,000
              )
              
              (579,000
              )Accretion
                  of discount
              
              
              2,617,000
              
              
              2,329,000
              
              
              2,095,000Changes
                  in timing of estimated cash flows and other
              
              
              (1,810,000
              )
              
              (2,244,000
              )
              
              (2,111,000
              )Changes
                  in standardized measure
              
              
              12,291,000
              
              
              2,283,000
              
              
              1,765,000Standardized
                  measure, beginning of year
              
              
              20,207,000
              
              
              17,924,000
              
              
              16,159,000Standardized
                  measure, end of year
              
              $
              32,498,000
              
              $
              20,207,000
              
              $
              17,924,000
 
 **13.
        Selected Quarterly Financial Data (Unaudited)**
 
 FISCAL 20084TH QTR
              
              3RD QTR
              
              2ND QTR
              
              1ST QTROil and
                  gas revenue
              
              $
              1,245,653
              
              $
              952,211
              
              $
              839,947
              
              $
              850,144Operating
                  profit
              
              
              613,742
              
              
              345,203
              
              
              4,344
              
              
              68,148Net
                  income (loss)
              
              
              466,480
              
              
              221,114
              
              
              (8,756
              )
              
              34,806Net
                  income per share-basic
              
              
              0.27
              
              
              0.13
              
              
              -
              
              
              0.02Net
                  income per share-diluted
              
              
              0.27
              
              
              0.12
              
              
              -
              
              
              0.02
 
 FISCAL
                  20074TH
                  QTR
              
              3RD
                  QTR
              
              2ND
                  QTR
              
              1ST
                  QTROil
                  and gas revenue
              
              $
              755,184
              
              $
              663,031
              
              $
              773,698
              
              $
              777,412Operating
                  profit
              
              
              110,106
              
              
              109,906
              
              
              229,920
              
              
              144,944Net
                  income
              
              
              183,481
              
              
              67,080
              
              
              130,534
              
              
              227,290Net
                  income per share-basic
              
              
              0.11
              
              
              0.04
              
              
              0.07
              
              
              0.13Net
                  income per share-diluted
              
              
              0.10
              
              
              0.04
              
              
              0.07
              
              
              0.12
  F17
  **INDEX
        TO EXHIBITS**
 
 **Exhibit**
                **Number**3.1*
              
              Articles
                  of Incorporation.3.2***
              
              Bylaws.10.1**
              
              Stock
                  Option Plan.10.2*
              
              Bank
                  Line of Credit.10.3****
              
              2004
                  Incentive Stock Option.14.1*****
              
              Code
                  of Business Conduct and Ethics.21*
              
              Subsidiaries
                  of the Company.31.1
              
              Certification
                  of the Chief Executive Officer of the Company pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of the Chief Financial Officer of the Company pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of the Chief Executive Officer and Chief Financial Officer 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.
 ****
              Filed
                  with the Company’s Proxy Statement filed July 9,
                  2004.
 *****
              Filed
                  with the Company’s Quarterly Report on Form 10-Q filed on November 15,
                  2004.
  F18