UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K





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





For the
fiscal year ended March 31, 2009





[  ]
            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
                    79701Midland, 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
      RegisteredCommon 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 [  ]  No [Ö ]





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 [  ]  No [Ö ]





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 [Ö ]  No
[  ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
[  ]  No [  ]





Indicate
by check mark 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. [  ]









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 [ ]
                        Accelerated Filer [ ]
                        Non-Accelerated Filer [ ]
                        Smaller Reporting Company [Ö](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 [  ]  No [Ö]





The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of September 30, 2008
(the last business day of the Registrant’s most recently completed second
quarter) was $11,026,273 based on Mexco Energy Corporation’s closing common
stock price of $17.01 per share on that date as reported by the American Stock
Exchange.





There were 1,878,616 shares of the
registrant’s common stock, $.50 par value, outstanding as of June 23,
2009.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant’s Proxy Statement relating to the 2009 Annual Meeting of
Shareholders to be held on September 15, 2009, 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 120 days after March 31, 2009, the end of the
fiscal year covered by this report.










TABLE OF CONTENTSPART IItem 1.
                                                                                                      Business
                                                                                                      4Item 1A.
                                                                                                      Risk Factors
                                                                                                      11Item 1B.
                                                                                                      Unresolved Staff Comments
                                                                                                      16Item 2.
                                                                                                      Properties
                                                                                                      16Item 3.
                                                                                                      Legal Proceedings
                                                                                                      19Item 4.
                                                                                                      Submission of Matters to a Vote of Security
      Holders
                                                                                                      19PART IIItem 5.
                                                                                                      Market for the Registrant’s Common Equity, Related
      Stockholder MattersAnd Issuer Repurchase of Equity
      Securities
                                                                                                      19Item 6.
                                                                                                      Selected Consolidated Financial
      Data
                                                                                                      20Item 7.
                                                                                                      Management’s Discussion and Analysis of Financial
      Condition and Resultsof
      Operations
                                                                                                      21Item 7A.
                                                                                                      Quantitative and Qualitative Disclosures About
      Market Risk
                                                                                                      26Item 8.
                                                                                                      Financial Statements and Supplementary
      Data
                                                                                                      27Item 9.
                                                                                                      Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosures
                                                                                                      27Item 9A.
                                                                                                      Controls and Procedures
                                                                                                      27Item 9B.
                                                                                                      Other Information
                                                                                                      28PART IIIItem 10.
                                                                                                      Directors and Executive Officers of the
      Registrant
                                                                                                      28Item 11.
                                                                                                      Executive Compensation
                                                                                                      28Item 12.
                                                                                                      Security Ownership of Certain Beneficial Owners
      and Management
                                                                                                      28Item 13.
                                                                                                      Certain Relationships and Related
      Transactions
                                                                                                      28Item 14.
                                                                                                      Principal Accounting Fees and
      Services
                                                                                                      28PART IVItem 15.
                                                                                                      Exhibits and Financial Statement
      Schedules
                                                                                                      29Signatures
                                                                                                      30Glossary of Abbreviations and
      Terms
                                                                                                      31









This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”) 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.  Since its date of formation, OBTX, LLC has been included in
the consolidated financial statements.  OBTX, LLC was dissolved in
March 2009.  OBTX, LLC owned 50% of GazTex, LLC, a limited liability
company which was dissolved in May 2008.  Prior to dissolution,
GazTex, LLC had no operations other than evaluation activities on properties in
Russia.





Our total
estimated proved reserves at March 31, 2009 were approximately 9.477 Bcf of
natural gas and 207,000 barrels of oil and natural gas liquids, and our
estimated present value of proved reserves was approximately $14.3 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
2009, we added proved reserves of 1,322,000 Mcfe through extensions and
discoveries, added 886,000 Mcfe through acquisitions and had downward revisions
of previous estimates of 4,000 Mcfe.





Nicholas
C. Taylor beneficially owns approximately 47% 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 focus primarily on acquiring natural gas
reserves.  We especially seek to acquire proved reserves that fit well
with existing operations or in areas where the Company has established
production.  Acquisitions preferably will contain most of their value
in producing wells, behind pipe reserves and 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 to acquire reserves without assuming significant
price and production risks.  We actively search 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 2010.





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, 2009, gas reserves constituted approximately 88% of our total proved
reserves and approximately 71% of our revenues for fiscal
2009.  Revenues from oil and gas royalty interests accounted for
approximately 42% of our revenues for fiscal 2009.





Newark
East (Barnett Shale) Gas Field properties, encompassing 5,874 gross acres, 70
net acres, 108 gross producing wells and .76 net wells in Denton, Johnson,
Tarrant and Wise Counties, Texas, account for approximately 22% of our
discounted future net cash flows from proved reserves as of March 31,
2009.  For fiscal 2009, this field, consisting of royalty
interests, accounted for approximately $1,207,000 or 25% of our total
revenues and approximately $63,000 or 5% of our total production
costs.  These costs were ad valorem and production
taxes.  During fiscal 2009, we purchased royalty interests totaling
approximately $1,700,000 in Johnson and Tarrant Counties, which have materially
increased our earnings.





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 26% of our discounted future net cash flows from proved reserves
as of March 31, 2009.  This is a multi-pay area where most of the
leases have potential reserves in two zones.  Of these discounted
future net cash flows from proved reserves, approximately 15% are attributable
to proven undeveloped reserves which will be developed through re-entry of
existing wells and new drilling.  For fiscal 2009, these properties
accounted for approximately $672,000 or 14% of our total revenues and
approximately $180,000 or 15% of our total production costs.





Gomez Gas
Field properties, encompassing 13,847 gross acres, 72 net acres, 28 gross wells
and .13 net wells in Pecos County, Texas, account for approximately 6% of our
discounted future net cash flows from proved reserves as of March 31,
2009.  For fiscal 2009, these properties accounted for approximately
$302,000 or 6% of our total revenues and approximately $32,000 or 3% of our
total production costs.  All of these properties, except for one, are
royalty interests.





Viejos
Gas Field properties, encompassing 2,583 gross acres, 157 net acres, 17 gross
wells and 1.19 net wells in Pecos County, Texas, account for approximately 1% of
our discounted future net cash flows from proved reserves as of March 31,
2009.  For fiscal 2009, this field accounted for approximately
$174,000 or 4% of our total revenues and approximately $47,000 or 4% of our
total production costs.




5





We own
interests in and operate 18 producing wells, one shut-in well and one salt water
disposal well.  We own partial interests in an additional 2,324
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)2009
                17,065
                542,0992008
                17,504
                379,0482007
                16,738
                339,1742006
                17,118
                370,0692005
                17,372
                404,133





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.





Major
Customers





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





2009
                2008
                2007Chesapeake
      Operating
                22%
                14%
                -Conoco
      Phillips
                10%
                13%
                -Southern
      Union Gas Services
                -
                -
                12%





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.




6





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; it may also
subject us to greater competition, 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.





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.




7





The following is some of the existing
laws, rules and regulations to which our business is subject:





The 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.





The
federal Clean Air Act
(“CAA”), and comparable state and local requirements, regulate emissions of
various air pollutants through air emissions permitting programs and the
imposition of other requirements.  The EPA and states have developed,
and continue to develop, regulations governing emissions of toxic air pollutants
at specified sources.  Federal and state regulatory agencies can
impose administrative, civil and criminal penalties for non-compliance with air
permits or other requirement of the federal CAA and associated state laws and
regulations.  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.





Recent
scientific studies have suggested that emissions of certain gases, commonly
referred to as “greenhouse gases” and including carbon dioxide and methane, may
be contributing to warming of the Earth’s atmosphere. In response to such
studies, the U.S. Congress is considering legislation to reduce emissions
of greenhouse gases.  The U.S. President has expressed support for
legislation to restrict or regulate emissions of greenhouse gases.  In
addition, more than one-third of the states, either individually or through
multi-state regional initiatives, already have begun implementing legal measures
to reduce emissions of greenhouse gases, primarily through the planned
development of emission inventories or regional greenhouse gas cap and trade
programs.  Depending on the particular program, we could be required
to purchase and surrender allowances for greenhouse gas emissions resulting from
our operations.





Also, as
a result of the United States Supreme Court’s decision on April 2, 2007 in
Massachusetts, et al. v.
EPA, the EPA may regulate greenhouse gas emissions from mobile sources
such as cars and trucks even if Congress does not adopt new legislation
specifically addressing emissions of greenhouse gases.  The Court’s
holding in Massachusettsthat greenhouse gases, including carbon dioxide, fall under the federal
Clean Air Act’s definition of “air pollutant” may also result in future
regulation of carbon dioxide and other greenhouse gas emissions from stationary
sources.  In July 2008, the EPA released an “Advance Notice of
Proposed Rulemaking” regarding possible future regulation of greenhouse gas
emissions under the Clean Air Act, in response to the Supreme Court’s
decision in Massachusetts.  In
the notice, the EPA evaluated the potential regulation of greenhouse gases under
the Clean Air Act and other potential methods of regulating greenhouse
gases.  Although the notice did not propose any specific, new
regulatory requirements for greenhouse gases, it indicates that federal
regulation of greenhouse gas emissions could occur in the near future even if
Congress does not adopt new legislation specifically addressing emissions of
greenhouse gases.  Although it is not possible at this time to predict
how legislation or new regulations that may be adopted to address greenhouse gas
emissions would impact our business, any such new federal, regional or state
restrictions on emissions of carbon dioxide or other greenhouse gases that may
be imposed in areas in which we conduct business could result in increased
compliance costs or additional operating restrictions, which could have an
adverse effect on our business and the demand for our products.




8





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.





The Federal Water Pollution Control
Act (“Clean Water Act”) and analogous state laws impose restrictions and
strict controls with respect to the discharge of pollutants, including spills
and leaks of oil and other substances, into waters of the United
States.  The discharge of produced water and sand and other substances
related to the oil and gas industry is prohibited, except in accordance with the
terms of a permit issued by the EPA or an analogous state
agency.  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.





We are
subject to the requirements of the federal Occupational Safety and Health Act(“OSHA”) and comparable state statutes.  The OSHA hazard
communication standard, the EPA community right-to-know regulations under the
Title III of CERCLA and similar state statutes require that we organize
and/or disclose information about hazardous materials used or produced in our
operations.  We believe that we are in substantial compliance with
these applicable requirements and with other OSHA and comparable
requirements.





We
believe that we are in substantial compliance with all existing environmental
laws and regulations applicable to our current operations and that our continued
compliance with existing requirements will not have a material adverse impact on
our financial condition and results of operations, however we cannot assure you
that the passage or application of more stringent laws or regulations in the
future will not have an negative impact on our financial position or results of
operation.  We did not incur any material capital expenditures for
remediation or pollution control activities for the year ended March 31,
2009.  Additionally, as of the date of this report, we are not aware
of any environmental issues or claims that will require material capital
expenditures during fiscal 2010.





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.




9





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,
2009.





Name
                Age
                PositionNicholas
      C. Taylor
                71
                President
      and Chief Executive OfficerDonna
      Gail Yanko
                64
                Vice
      President and SecretaryTamala
      L. McComic
                40
                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.





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 in 1990.  Mrs. Yanko served as a director of the Company
from 1990 to 2008.





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, 2009, 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 services such as drilling and
production operations as well as the services of independent consultants to
perform various professional services particularly in the areas of geological
and curative work.  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 Avenue, Suite 1101, Midland, Texas pursuant to a month to month
lease.




10





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.





RISKS
RELATED TO OUR BUSINESS





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.





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.




11




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.





Approximately
38 percent of our total estimated net proved reserves at March 31, 2009
were undeveloped, and those reserves may not ultimately be
developed.




Recovery
of undeveloped reserves requires significant capital expenditures and successful
drilling. Our reserve data assumes that we can and will make these expenditures
and conduct these operations successfully. These assumptions, however, may not
prove correct.  If we choose not to spend the capital to develop these
reserves, or if we are not able to successfully develop these reserves, we will
be required to write-off these reserves.  Any such write-offs of our
reserves could reduce our ability to borrow money and could reduce the value of
our common stock.





Our
exploration and development drilling may not result in commercially productive
reserves.





New wells
that we drill may not be productive, or we may not recover all or any portion of
our investment in such wells. The seismic data and other technologies we use do
not allow us to know conclusively prior to drilling a well that crude oil or
natural gas is present or may be produced economically. Drilling for crude oil
and natural gas often involves unprofitable efforts, not only from dry holes but
also from wells that are productive but do not produce sufficient net reserves
to return a profit at then realized prices after deducting drilling, operating
and other costs. The cost of drilling, completing and operating a well is often
uncertain, and cost factors can adversely affect the economics of a
project.




12





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.  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.





We
may be unable to make attractive acquisitions or successfully integrate acquired
companies, and any inability to do so may disrupt our business and hinder our
ability to grow.





We may
not be able to identify attractive acquisitions or opportunities that complement
or expand our current business.  Even if we do identify attractive
candidates, we may not be able to complete the acquisition of them or do so on
commercially acceptable terms.  Our credit facility imposes certain
direct limitations on our ability to enter into mergers or combination
transactions involving our company.  Our credit facility also limits
our ability to incur certain indebtedness, which could indirectly limit our
ability to engage in acquisitions of businesses.  If we desire to
engage in an acquisition that is otherwise prohibited by our credit facility, we
will be required to seek the consent of our lenders in accordance with the
requirements of the facility, which consent may be withheld by the lenders under
our credit facility in their discretion.  Furthermore, given the
current situation in the credit markets, many lenders are reluctant to provide
consents in any circumstances, including to allow accretive
transactions.  In addition, we could have difficulty integrating
acquired businesses successfully into our existing business which could result
in our incurring unanticipated expenses and losses and adversely affecting our
results of operations.  In addition, we may incur additional debt or
issue additional equity to pay for any future acquisitions, subject to the
limitations described above.





Failure
to comply with covenants under our debt agreement could adversely impact our
financial condition and results of operations.





Our
revolving credit facility agreement requires us to comply with certain customary
covenants including limitations on disposition of assets, mergers and
reorganizations.  We are also obligated to meet certain financial
covenants.  For example, our revolving credit facility requires us to,
among other things, maintain tangible net worth in accordance with computational
guidelines contained in the related loan agreement.  If we fail to
meet any of these loan covenants, the lender under the revolving credit facility
could accelerate the indebtedness and seek to foreclose on the pledged
assets.





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.




13





We
have limited control over activities on properties we do not operate, which
could reduce our production and revenues.





A
substantial amount of our business activities are conducted through joint
operating or other agreements under which we own working and royalty interests
in natural gas and oil properties in which we do not operate.  As a
result, we have a limited ability to exercise influence over normal operating
procedures, expenditures or future development of underlying properties and
their associated costs.  The failure of an operator of our wells to
adequately perform operations could reduce our revenues and
production.





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.





The
loss of our chief executive officer or other key personnel could adversely
impact our ability to execute our business strategy.





We
depend, and will continue to depend in the foreseeable future, upon the
continued services of our Chief Executive Officer, Nicholas C. Taylor, our Chief
Financial Officer, Tamala L. McComic, and other key personnel, who have
extensive experience and expertise in evaluating and analyzing producing oil and
gas properties and drilling prospects, maximizing production from oil and gas
properties and developing and executing acquisitions and
financing.  We do not have key-man insurance on the lives of Mr.
Taylor and Ms. McComic.  The unexpected loss of the services of one or
more of these individuals could, therefore, significantly and adversely affect
our operations.  Competition for qualified individuals is intense and
we may be unable to find or attract qualified replacements for our officers and
key employees on acceptable terms.





We may
be affected by one substantial shareholder.





Nicholas
C. Taylor beneficially owns approximately 47% 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.  The retirement, incapacity or death of Mr. Taylor, or any
change in the power to vote shares beneficially owned by Mr. Taylor, could
result in negative market or industry perception and could have an adverse
effect on our business.




14





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.





Increases
in taxes on energy sources may adversely affect the company's
operations.





Federal,
state and local governments which have jurisdiction in areas where the company
operates impose taxes on the oil and natural gas products
sold.  Historically, there has been an on-going consideration by
federal, state and local officials concerning a variety of energy tax
proposals.  Such matters are beyond the company's ability to
accurately predict or control.





The
continuing crisis in U.S. and world financial and securities markets could have
a material adverse effect on our business and operations.





Our
operations are affected by local, national and worldwide economic conditions.
Global financial markets and economic conditions have been and will likely
continue to be, disrupted and volatile.  The debt and equity capital
markets have become uncertain making it difficult to obtain
funding.  With the current turbulent credit markets, lenders may
become more restrictive in their lending practices, lower the borrowing base
available or be unable or unwilling to fund their commitments, which would limit
our access to capital to fund our capital expenditures and
operations.  Lenders may be reluctant to lend without receiving higher
fees and rates.  Our Credit Facility bears floating interest rates
based on the London Interbank Offer Rate (“LIBOR”).  As banks have
been reluctant to lend to each other to avoid risk, LIBOR has increased to
unprecedented spread levels.  This causes higher interest expense on
borrowings. The economic slowdown has led and could continue to lead to lower
demand for oil and natural gas by individuals and industries, which in turn
could result in even lower prices for the oil and natural gas we sell, thereby
adversely resulting in declining production, lower revenues, and possibly losses
and negative cash flow.





RISKS
RELATED TO OUR COMMON STOCK





We
have not and do not anticipate paying any cash dividends on our common stock in
the foreseeable future.





We have
paid no cash dividends on our common stock to date and it is not anticipated
that any will be paid to holders of our common stock in the foreseeable
future.  The terms of our existing credit facility restricts the
payment of dividends without the prior written consent of the
lenders.  We currently intend to retain all future earnings to fund
the development and growth of our business. Any payment of future dividends will
be at the discretion of our board of directors and will depend on, among other
things, our earnings, financial condition, capital requirements, level of
indebtedness, statutory and contractual restrictions applying to the payment of
dividends and other considerations that our board of directors deems relevant.
Stockholders must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize a return on their
investment.


15





We
may issue additional shares of common stock in the future, which could cause
dilution to all shareholders.





We may
seek to raise additional equity capital in the future.  Any issuance
of additional shares of our common stock will dilute the percentage ownership
interest of all shareholders and may dilute the book value per share of our
common stock.





Control
by our executive officers and directors may limit your ability to influence the
outcome of matters requiring stockholder approval and could discourage our
potential acquisition by third parties.





As of
March 31, 2009, our executive officers and directors beneficially owned
approximately 54% of our common stock.  These stockholders, if acting
together, would be able to influence significantly all matters requiring
approval by our stockholders, including the election of our board of directors
and the approval of mergers or other business combination
transactions.





The
price of our common stock has been volatile and could continue to fluctuate
substantially.





Mexco
common stock is traded on the American Stock Exchange.  The market
price of our common stock has been volatile and could fluctuate substantially
due to fluctuations in commodity prices, variations in results of operations,
legislative or regulatory changes, general trends in the industry, market
conditions, and analysts’ estimates and other events in the oil and gas oil
industry.





We
will continue to incur increased costs as a result of operating as a public
company, and our management is required to devote substantial time to new
compliance requirements.





As a
public company we incur legal, accounting and other expenses under the
Sarbanes-Oxley Act of 2002, together with rules implemented by the SEC and
applicable market regulators.  These rules impose various requirements
on public companies, including requiring certain corporate governance
practices.  Our management and other personnel devote a
substantial amount of time to these new compliance
requirements.  Moreover, these rules and regulations will increase our
legal and financial compliance costs and make some activities more
time-consuming and costly.  In addition, the Sarbanes-Oxley Act
states, among other things, that we are responsible for establishing and
maintaining effective internal control over financial
reporting.  Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of financial reporting
for external purposes in accordance with accounting principles generally
accepted in the USA.  Internal control over financial reporting
includes maintaining records that in reasonable detail accurately and fairly
reflect the Company's transactions; providing reasonable assurance that
transactions are recorded as necessary for preparation of the financial
statements; providing reasonable assurance that receipts and expenditures are
made in accordance with management authorization; and providing reasonable
assurance that unauthorized acquisition, use or disposition of the Company
assets that could have a material effect on the financial statements would be
prevented or detected on a timely basis.





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, 2009, we had
interests in 2,342 gross (24 net) oil and gas wells and owned leasehold
interests in approximately 278,706 gross (3,310 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, 2009, 2008 and 2007 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.




16





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
      31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Oil
      (Bbls):Proved
      developed – Producing
                                    
                                    
                                    78,959
                                    
                                    
                                    
                                    117,874
                                    
                                    
                                    
                                    110,060Proved
      developed – Non-producing
                                    
                                    
                                    32,732
                                    
                                    
                                    
                                    3,754
                                    
                                    
                                    
                                    1,432Proved
      undeveloped
                                    
                                    
                                    95,694
                                    
                                    
                                    
                                    95,599
                                    
                                    
                                    
                                    108,263Total
                                    
                                    
                                    207,385
                                    
                                    
                                    
                                    217,227
                                    
                                    
                                    
                                    219,755Natural
      gas (Mcf):Proved
      developed – Producing
                                    
                                    
                                    4,326,857
                                    
                                    
                                    
                                    3,954,269
                                    
                                    
                                    
                                    2,892,964Proved
      developed – Non-producing
                                    
                                    
                                    1,662,641
                                    
                                    
                                    
                                    1,096,174
                                    
                                    
                                    
                                    1,075,376Proved
      undeveloped
                                    
                                    
                                    3,487,579
                                    
                                    
                                    
                                    2,806,179
                                    
                                    
                                    
                                    2,936,708Total
                                    
                                    
                                    9,477,077
                                    
                                    
                                    
                                    7,856,622
                                    
                                    
                                    
                                    6,905,048Present
      value of estimated future net revenues before income taxes(PV-10)
      (1)
                                    
                                    $
                                    14,348,450
                                    
                                    
                                    $
                                    40,899,620
                                    
                                    
                                    $
                                    26,172,460Present
      value of future income tax discounted at 10%
                                    
                                    
                                    (2,840,450
                                    )
                                    
                                    
                                    (8,401,620
                                    )
                                    
                                    
                                    (5,965,460
                                    )Standardized
      measure of discounted future net cash flows (2)
                                    
                                    $
                                    11,508,000
                                    
                                    
                                    $
                                    32,498,000
                                    
                                    
                                    $
                                    20,207,000





(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.




17





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, 2009:





Gross
                            
                            
                            NetOil
                            
                            
                            1,396
                            
                            
                            
                            13Gas
                            
                            
                            946
                            
                            
                            
                            11Total Productive Wells
                            
                            
                            2,342
                            
                            
                            
                            24








The following table sets forth the
approximate developed acreage in which we held a leasehold mineral or other
interest as of March 31, 2009:





Developed
      AcresGross
                  
                  
                  NetTexas
                  
                  
                  141,602
                  
                  
                  
                  2,901Oklahoma
                  
                  
                  41,212
                  
                  
                  
                  163New
      Mexico
                  
                  
                  20,117
                  
                  
                  
                  154Louisiana
                  
                  
                  29,730
                  
                  
                  
                  36Kansas
                  
                  
                  8,520
                  
                  
                  
                  24North
      Dakota
                  
                  
                  24,919
                  
                  
                  
                  21Montana
                  
                  
                  7,868
                  
                  
                  
                  5Wyoming
                  
                  
                  3,298
                  
                  
                  
                  5Colorado
                  
                  
                  1,120
                  
                  
                  
                  1Arkansas
                  
                  
                  320
                  
                  
                  
                  -Total
                  
                  
                  278,706
                  
                  
                  
                  3,310





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, 2009, we own approximately 1,477 gross and 737 net acres of
material undeveloped acreage located in Texas.





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 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Gross
                                    
                                    
                                    Net
                                    
                                    
                                    Gross
                                    
                                    
                                    Net
                                    
                                    
                                    Gross
                                    
                                    
                                    NetExploratory WellsProductive
                                    
                                    
                                    2
                                    
                                    
                                    
                                    .28
                                    
                                    
                                    
                                    4
                                    
                                    
                                    
                                    .56
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Nonproductive
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    .09
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
                                    
                                    
                                    2
                                    
                                    
                                    
                                    .28
                                    
                                    
                                    
                                    5
                                    
                                    
                                    
                                    .65
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Development WellsProductive
                                    
                                    
                                    12
                                    
                                    
                                    
                                    .55
                                    
                                    
                                    
                                    27
                                    
                                    
                                    
                                    .42
                                    
                                    
                                    
                                    47
                                    
                                    
                                    
                                    .22Nonproductive
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    .06
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Total
                                    
                                    
                                    12
                                    
                                    
                                    
                                    .55
                                    
                                    
                                    
                                    28
                                    
                                    
                                    
                                    .48
                                    
                                    
                                    
                                    47
                                    
                                    
                                    
                                    .22





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.




18





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 31,2009
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2007Oil (a):Production (Bbls)
                                                                                          
                                                                                          
                                                                                          17,065
                                                                                          
                                                                                          
                                                                                          
                                                                                          17,504
                                                                                          
                                                                                          
                                                                                          
                                                                                          16,738Revenue
                                                                                          
                                                                                          $
                                                                                          1,403,076
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,348,725
                                                                                          
                                                                                          
                                                                                          $
                                                                                          995,557Average Bbls per day
                                                                                          
                                                                                          
                                                                                          47
                                                                                          
                                                                                          
                                                                                          
                                                                                          48
                                                                                          
                                                                                          
                                                                                          
                                                                                          46Average sales price per Bbl
                                                                                          
                                                                                          $
                                                                                          82.22
                                                                                          
                                                                                          
                                                                                          $
                                                                                          77.05
                                                                                          
                                                                                          
                                                                                          $
                                                                                          59.48Gas (b):Production (Mcf)
                                                                                          
                                                                                          
                                                                                          542,099
                                                                                          
                                                                                          
                                                                                          
                                                                                          379,048
                                                                                          
                                                                                          
                                                                                          
                                                                                          339,174Revenue
                                                                                          
                                                                                          $
                                                                                          3,473,551
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2,539,230
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,973,768Average Mcf per day
                                                                                          
                                                                                          
                                                                                          1,485
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,038
                                                                                          
                                                                                          
                                                                                          
                                                                                          929Average sales price per Mcf
                                                                                          
                                                                                          $
                                                                                          6.41
                                                                                          
                                                                                          
                                                                                          $
                                                                                          6.70
                                                                                          
                                                                                          
                                                                                          $
                                                                                          5.82Production cost:Production cost
                                                                                          
                                                                                          $
                                                                                          1,195,584
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,240,305
                                                                                          
                                                                                          
                                                                                          $
                                                                                          870,778Equivalent Mcf (c)
                                                                                          
                                                                                          
                                                                                          644,489
                                                                                          
                                                                                          
                                                                                          
                                                                                          484,072
                                                                                          
                                                                                          
                                                                                          
                                                                                          439,602Production cost per equivalent
      Mcf
                                                                                          
                                                                                          $
                                                                                          1.86
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2.56
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1.98Production cost per sales
      dollar
                                                                                          
                                                                                          $
                                                                                          0.25
                                                                                          
                                                                                          
                                                                                          $
                                                                                          0.32
                                                                                          
                                                                                          
                                                                                          $
                                                                                          0.29Total oil and gas revenues
                                                                                          
                                                                                          $
                                                                                          4,876,627
                                                                                          
                                                                                          
                                                                                          $
                                                                                          3,887,995
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2,969,325




(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 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.





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,
2009.





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 bulletin board market under the symbol
“MEXC”.  The registrar and transfer agent is Computershare Trust
Company N.A., 250 Royall Street, Canton, Massachusetts, 02021 (Tel:
800-962-4284).  As of March 31, 2009, we had approximately 1,300
shareholders of record and 1,962,616 shares issued.




19





PRICE
RANGE OF COMMON STOCK





High
                                    
                                    
                                    Low2009:April - June 2008 (1)
                                    
                                    $
                                    49.40
                                    
                                    
                                    $
                                    4.21July - September 2008 (1)
                                    
                                    
                                    37.56
                                    
                                    
                                    
                                    17.01October - December 2008 (1)
                                    
                                    
                                    16.11
                                    
                                    
                                    
                                    8.08January - March 2009 (1)
                                    
                                    
                                    13.88
                                    
                                    
                                    
                                    5.322008: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
                                    
                                    
                                    
                                    3.43





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





On June 19, 2009, the closing price was
$14.00.





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.  There were no shares of our common stock
repurchased for the treasury account during fiscal 2009.








ITEM
6.  SELECTED CONSOLIDATED FINANCIAL DATA





Year Ended March 31,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2006
                                                      
                                                      
                                                      2005Statement of Operations:Operating revenues
                                                      
                                                      $
                                                      4,925,993
                                                      
                                                      
                                                      $
                                                      3,899,408
                                                      
                                                      
                                                      $
                                                      2,971,717
                                                      
                                                      
                                                      $
                                                      3,719,643
                                                      
                                                      
                                                      $
                                                      2,969,826Operating profit
                                                      
                                                      
                                                      1,778,955
                                                      
                                                      
                                                      
                                                      1,031,437
                                                      
                                                      
                                                      
                                                      594,876
                                                      
                                                      
                                                      
                                                      1,114,966
                                                      
                                                      
                                                      
                                                      924,230Other income (expense)
                                                      
                                                      
                                                      (80,123
                                                      )
                                                      
                                                      
                                                      (100,199
                                                      )
                                                      
                                                      
                                                      (19,376
                                                      )
                                                      
                                                      
                                                      (95,820
                                                      )
                                                      
                                                      
                                                      (88,408
                                                      )Net income
                                                      
                                                      $
                                                      1,170,570
                                                      
                                                      
                                                      $
                                                      713,644
                                                      
                                                      
                                                      $
                                                      608,385
                                                      
                                                      
                                                      $
                                                      788,805
                                                      
                                                      
                                                      $
                                                      577,527Net income per share –
basic
                                                      
                                                      $
                                                      0.63
                                                      
                                                      
                                                      $
                                                      0.40
                                                      
                                                      
                                                      $
                                                      0.35
                                                      
                                                      
                                                      $
                                                      0.45
                                                      
                                                      
                                                      $
                                                      0.33Net income per share –
    diluted
                                                      
                                                      $
                                                      0.61
                                                      
                                                      
                                                      $
                                                      0.40
                                                      
                                                      
                                                      $
                                                      0.33
                                                      
                                                      
                                                      $
                                                      0.43
                                                      
                                                      
                                                      $
                                                      0.32Weighted average shares outstanding –
      basic
                                                      
                                                      
                                                      1,846,394
                                                      
                                                      
                                                      
                                                      1,767,777
                                                      
                                                      
                                                      
                                                      1,761,344
                                                      
                                                      
                                                      
                                                      1,733,890
                                                      
                                                      
                                                      
                                                      1,734,726Weighted average shares outstanding –
      diluted
                                                      
                                                      
                                                      1,934,235
                                                      
                                                      
                                                      
                                                      1,773,049
                                                      
                                                      
                                                      
                                                      1,819,969
                                                      
                                                      
                                                      
                                                      1,827,026
                                                      
                                                      
                                                      
                                                      1,801,167Balance Sheet:Property and equipment, net
                                                      
                                                      $
                                                      13,731,126
                                                      
                                                      
                                                      $
                                                      11,982,950
                                                      
                                                      
                                                      $
                                                      9,337,566
                                                      
                                                      
                                                      $
                                                      8,399,929
                                                      
                                                      
                                                      $
                                                      8,484,743Total assets
                                                      
                                                      
                                                      14,508,880
                                                      
                                                      
                                                      
                                                      13,202,659
                                                      
                                                      
                                                      
                                                      9,958,980
                                                      
                                                      
                                                      
                                                      8,978,324
                                                      
                                                      
                                                      
                                                      9,303,149Total debt
                                                      
                                                      
                                                      1,400,000
                                                      
                                                      
                                                      
                                                      2,600,000
                                                      
                                                      
                                                      
                                                      700,000
                                                      
                                                      
                                                      
                                                      600,000
                                                      
                                                      
                                                      
                                                      1,990,000Stockholders’ equity
                                                      
                                                      
                                                      10,927,610
                                                      
                                                      
                                                      
                                                      8,460,064
                                                      
                                                      
                                                      
                                                      7,775,636
                                                      
                                                      
                                                      
                                                      6,898,996
                                                      
                                                      
                                                      
                                                      6,038,195Cash Flow:Cash provided by operations
                                                      
                                                      $
                                                      2,794,379
                                                      
                                                      
                                                      $
                                                      1,474,764
                                                      
                                                      
                                                      $
                                                      1,325,024
                                                      
                                                      
                                                      $
                                                      1,900,665
                                                      
                                                      
                                                      $
                                                      1,451,628




20





Selected
Quarterly Financial Data (Unaudited)





FISCAL 20094THQTR
                                    
                                    
                                    3RDQTR
                                    
                                    
                                    2NDQTR
                                    
                                    
                                    1STQTROil and gas revenue
                                    
                                    $
                                    700,578
                                    
                                    
                                    $
                                    908,253
                                    
                                    
                                    $
                                    1,595,209
                                    
                                    
                                    $
                                    1,672,587Operating profit (loss)
                                    
                                    
                                    (52,505
                                    )
                                    
                                    
                                    217,985
                                    
                                    
                                    
                                    796,586
                                    
                                    
                                    
                                    816,889Net income (loss)
                                    
                                    
                                    (10,835
                                    )
                                    
                                    
                                    131,501
                                    
                                    
                                    
                                    511,115
                                    
                                    
                                    
                                    538,789Net income (loss) per
      share-basic
                                    
                                    
                                    (.01
                                    )
                                    
                                    
                                    0.07
                                    
                                    
                                    
                                    0.27
                                    
                                    
                                    
                                    0.31Net income (loss) per
      share-diluted
                                    
                                    
                                    (.01
                                    )
                                    
                                    
                                    0.07
                                    
                                    
                                    
                                    0.26
                                    
                                    
                                    
                                    0.29FISCAL 20084THQTR
                                    
                                    
                                    3RDQTR
                                    
                                    
                                    2NDQTR
                                    
                                    
                                    1STQTROil 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




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.





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.  In the past two
fiscal years, we have obtained additional financing for prospects by selling
fractional working interests to industry partners at prices in excess of our
cost.





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
2009, we primarily used cash provided by operations ($2,794,379) to fund oil and
gas property acquisitions and development ($2,937,939).  We had
working capital of $221,989 as of March 31, 2009 compared to working capital of
$627,674 as of March 31, 2008, a decrease of $405,685.  This was
mainly a result of a decrease in accounts receivable and cash and cash
equivalents.  The accounts receivable decrease was mainly a result of
a decrease in oil and gas sales during the fourth quarter from a decrease in oil
and gas prices.





During
the third quarter of fiscal 2008, we acted as operator and drilled an
exploratory well in Loving County, Texas which has been completed.  We
have acquired right-of-way, built a pipeline and commenced testing and sales of
natural gas from this well.  Our share of the costs incurred for this
project through April 2009 for our 31.25% working interest is approximately
$567,000.





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, 5 proven undeveloped well locations and an additional 6 potential drill
sites in the Newark East (Barnett-Shale) Field of Tarrant County, Texas for
approximately $429,000.  This acreage now has 8 producing natural gas
wells with an additional well currently being drilled.  We
subsequently purchased additional royalties in this acreage on March 31, 2009
for approximately $49,000.




21





Effective
July 1, 2008, we purchased a well in Loving County, Texas which is capable of
producing from the Lower Cherry Canyon section.  We are acting as
operator and have re-entered the well, tested one horizon as non-productive and
tested the Bell Canyon, for which we are currently purchasing right-of-way for
transmission and sales of natural gas.  Our share of the costs for our
50.2% working interest through April 2009 is approximately
$182,000.





In
September 2008, we committed to participate in the drilling of a development
well in Limestone County, Texas. This well has been completed and is currently
producing. Costs incurred for this project through April 2009 are approximately
$35,000.





In
September 2008, we acted as operator and re-entered a well in Ward County, Texas
to an approximate depth of 14,000 feet to test the upper and lower Pennsylvanian
intervals.  This well was recompleted, perforated, acid fraced and is
currently being tested after completion of a pipeline for sales of natural
gas.  Costs incurred for this project through April 2009 for our 25.5%
working interest are approximately $174,000.  We also own a 2%
overriding royalty interest in this well.





On
October 16, 2008, we purchased interests in approximately 143 mineral acres
amounting to an approximate 10% net royalty in three gas wells located in
Johnson County, Texas for approximately $1,275,000. This property contains
three (3) development wells in the Newark East (Barnett Shale) Field which were
put on production in mid-November 2008.  Approximately 28 of the 143 acres
are outside of the drilling and spacing unit for these three wells and are also
available for further development.  A Family Limited Partnership of a
director and employee of the Company received a finder’s fee of 2.5% of the
mineral interest purchased in lieu of a cash payment as disclosed in a report to
the SEC on Form 8-K dated October 15, 2008.





We
continue to focus our efforts on the acquisition of royalties in areas with
significant development potential.





We are
participating in other projects and are reviewing 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.  During the second quarter of fiscal 2009, oil and gas prices
began trending downward, while drilling, completion and operating costs remained
high.  The effect of declining product prices on our business is
significant.  Lower product prices reduce our cash flow from
operations and diminish the present value of our oil and gas
reserves.  Lower product prices also offer us less incentive to assume
the drilling risks that are inherent in our business. The volatility of the
energy markets make it extremely difficult to predict future oil and natural gas
price movements with any certainty.  For example, the West Texas
Intermediate (“WTI”) posted price for crude oil has ranged from a low of $30.28
per bbl in December 2008 to a high of $145.31 per bbl in July
2008.  The Henry Hub Spot Market Price (“Henry Hub”) for natural gas
has ranged from a low of $3.58 per MMBtu in March 2009 to a high of $13.31 in
July 2008 per MMBtu.  On March 31, 2009 the WTI posted price for crude
oil was $49.64 per bbl and the Henry Hub spot price for natural gas was $3.58
per MMBtu.  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
2009 Compared to Fiscal 2008





Net
income increased from $713,644 for the year ended March 31, 2008 to $1,170,570
for the year ended March 31, 2009, an increase of 64%.





Oil and gas
sales.  Revenue from oil and gas sales increased 25% from
$3,887,955 in 2008 to $4,876,627 in 2009.  This increase was
attributable to an increase in oil price and gas production partially offset by
a decrease in gas prices and oil production.  The average oil price
increased 7% from $77.05 per bbl in 2008 to $82.22 per bbl in 2009 and the
average gas price decreased 4% from $6.70 in 2008 to $6.41 per mcf in
2009.




22




Production
and exploration.  Production costs decreased 4% from $1,240,305
in 2008 to $1,195,584 in 2009, primarily as a result of a 67% decrease in
repairs and maintenance to operated wells in the El Cinco field offset by
increased production and ad valorem taxes due to the increase in oil and gas
sales and gas production.  Oil production decreased 3% from 17,504
bbls in 2008 to 17,065 bbls in 2009 and gas production increased 43% from
379,048 mcf in 2008 to 542,099 mcf in 2009.


Depreciation, depletion and
amortization.Depreciation, depletion and amortization
("DD&A") expense increased 34% from $779,618 in 2008 to $1,046,120 in 2009
due to an increase in production and an increase in full cost pool partially
offset by an increase in gas reserves.





General and administrative
expenses.  General and administrative expenses increased 7%
from $821,786 in 2008 to $876,756 in 2009, primarily as a result of an increase
in salaries.





Interest
expense.  Interest expense decreased 22% from $105,312 in 2008
to $81,961 in 2009 due to a decrease in average borrowings and interest rates
during the current fiscal year.





Income
taxes.  Income tax expense increased from $217,594 in 2008 to
$528,262 in 2009, an increase of $310,668.  This increase was attributable
to our increased income.





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 17%.





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





Production and
exploration.  Production costs increased 42% from $870,778 in
2007 to $1,240,305 in 2008, primarily as 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 5% from 16,738 bbls in 2007 to 17,504 bbls in 2008 and gas
production increased 12% from 339,174 mcf in 2007 to 379,048 mcf in
2008.





Depreciation, depletion and
amortization.DD&A expense increased 19% from $652,826 in
2007 to $779,618 in 2008 due to 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 1%
from $829,180 in 2007 to $821,786 in 2008, primarily as a result of a decrease
in stock option compensation expense partially offset by an increase in
engineering and geological services for evaluation of projects.





Interest
expense.  Interest expense increased 338% from $24,046 in 2007
to $105,312 in 2008 due 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
a small revision of prior year estimates.





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.




23





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,
2009:





Payments Due In: (1)Total
                    
                    
                    less than 1 year
                    
                    
                    1-3 years
                    
                    
                    3 yearsContractual obligations:Secured bank line of credit
                    
                    $
                    1,400,000
                    
                    
                    $
                    -
                    
                    
                    $
                    1,400,000
                    
                    
                    $
                    -




(1)
            Does not include
      estimated interest of $40,300 less than 1 year and $120,800 1-3
      years.




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.





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.  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 ("ARO") 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 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.




24





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.





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 projects.





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.





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.




25





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.





Asset Retirement
Obligations.  The estimated costs of restoration and removal of
facilities are accrued.  The fair value of a liability for an asset's
retirement obligation is recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related
long-lived asset.  The liability is accreted to its then present value
each period, and the capitalized cost is depreciated by the units of production
method.  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 April
2008, the FASB issued FASB Staff Position (“FSP”)
No. SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP SFAS No. 142-3”). FSP
SFAS No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS No. 142”). The intent of FSP
SFAS No. 142-3 is to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under
SFAS No. 141R and other applicable accounting literature.  FSP
SFAS No. 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and must be applied prospectively
to intangible assets acquired after the effective date.  We are currently
evaluating the potential impact, if any, of FSP SFAS No. 142-3 on our
financial statements.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which has been established by the FASB as a
framework for entities to identify the sources of accounting principles and for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with US GAAP. SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board’s (“PCAOB”) amendments to AU Section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.
The effective date of SFAS No. 162 was November 15, 2008.  The adoption of
this Standard did not have a material impact on our financial
statements.





In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that permit
the use of new technologies to determine proved reserves if those technologies
have been demonstrated empirically to lead to reliable conclusions about
reserves volumes. The new requirements also will allow companies to disclose
their probable and possible reserves to investors. In addition, the new
disclosure requirements require companies to: (a) report the independence and
qualifications of its reserves preparer or auditor; (b) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and (c) report oil and natural gas reserves using an average price based
upon the prior 12-month period rather than year-end prices. The new disclosure
requirements are effective for annual reports on Forms 10-K for fiscal years
ending on or after December 31, 2009. The Company is currently assessing the
impact that adoption of this rule will have on our financial statements,
which will vary depending on commodity prices.


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, 2009, 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.




26




Interest Rate Risk. On
March 31, 2009 we had an outstanding loan balance of $1,400,000 under our $5.0
million revolving credit agreement, which bears interest at an annual rate equal
to the British Bankers Association London Interbank Offered Rate ("BBA LIBOR")
daily floating rate, plus 2.5 percentage points.  If the interest rate
on our bank debt increases or decreases by one percentage point our annual
pretax income would change by $14,000 based on borrowings at March 31,
2009.





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, 2009, our largest credit risk
associated with any single purchaser was $37,513.  We are also
exposed to credit risk in the event of nonperformance from any of our working
interest partners.  At March 31, 2009, our largest credit risk
associated with any working interest partner was $63,660.  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.  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. Declines in oil and natural gas prices will
materially adversely affect our financial condition, liquidity, ability to
obtain financing and operating results.  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. 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
report on Form 10-K.  Similarly, any improvements in oil and gas
prices can have a favorable impact on our financial condition, results of
operations and capital resources.  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. If the
average oil price had increased or decreased by one dollar per barrel for fiscal
2009, our pretax income would have changed by $17,065.  If the average
gas price had increased or decreased by one dollar per mcf for fiscal 2009, our
pretax income would have changed by $542,099.




ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The information required by this item
appears on pages F1 through F18 hereof and are incorporated herein by
reference.





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





None.


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 evaluate 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,
2009.


27




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, 2009. Based on such evaluation, such
officers have concluded that, as of March 31, 2009, 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 Exchange Act is incorporated by reference to the Proxy
Statement for our Annual Meeting of Stockholders, which will be filed with
the SEC not later than 120 days after March 31, 2009, the end of the fiscal year
covered by this report.





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 not later than 120 days after March 31, 2009, the end of the fiscal
year covered by this report.





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 not later than 120 days
after March 31, 2009, the end of the fiscal year covered by this
report.





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 not later than 120 days
after March 31, 2009, the end of the fiscal year covered by this
report.




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 not later than 120 days
after March 31, 2009, the end of the fiscal year covered by this
report.


28





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.




29





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 23,
    2009
                    
                    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 23, 2009, 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/  Nicholas C. TaylorNicholas C. TaylorChief Executive Officer, President and
      Director/s/   Donna Gail YankoDonna Gail YankoVice President and
Secretary




30





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.





BBA LIBOR.British Bankers
Association London Interbank Offered Rate.  BBA Libor is the most
widely used rate for short term interest rates worldwide.





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 at standard atmospheric conditions.





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.





Condensate.  Liquid
hydrocarbons associated with the production of a primarily natural gas
reserve.





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.




31





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.




MMBtu.  One million British thermal units
of energy commonly used to measure heat value or energy content of natural
gas.


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
("NGLs").  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.





32




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.





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.


33





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




F-1




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, 2009 and 2008 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, 2009.  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, 2009 and 2008, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.





/s/ GRANT
THORNTON LLP





Oklahoma
City, Oklahoma


June 24,
2009




F-2




Mexco
Energy Corporation and Subsidiaries


CONSOLIDATED
BALANCE SHEETS


As of
March 31,





2009
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2008ASSETSCurrent assetsCash and cash equivalents
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          223,583
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          303,617Accounts receivable:Oil
      and gas sales
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          351,040
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          758,459Trade
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          164,834
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          102,403Related parties
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,687
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12,659Prepaid costs and expenses
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          36,610
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          22,062Total current assets
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          777,754
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,199,200Investment in GazTex, LLC
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          20,509Property and equipment, at
    costOil and gas properties, using the full cost
      method
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          26,735,778
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          23,941,483Other
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          61,362
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          61,36226,797,140
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          24,002,845Less accumulated depreciation, depletion, and
      amortization
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13,066,014
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          12,019,895Property and equipment, net
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          13,731,126
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          11,982,950$
                                                                                                                                          14,508,880
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          13,202,659LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent liabilitiesAccounts payable and accrued
      expenses
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          555,765
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          571,526Long-term debt
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,400,000
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2,600,000Asset retirement obligation
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          440,011
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          374,789Deferred income tax
    liabilities
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,185,494
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          1,196,280Stockholders’ equityPreferred stock - $1.00 par
      value;10,000,000 shares authorized; none
      outstanding
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -Common stock - $0.50 par
    value;40,000,000 shares
    authorized;1,962,616 and 1,841,366 shares
      issued;1,878,616 and 1,757,366 shares outstanding as
      ofMarch 31, 2009 and 2008,
      respectively
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          981,308
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          920,683Additional paid-in capital
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          5,617,620
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,381,269Retained earnings
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          4,755,299
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          3,584,729Treasury stock, at cost (84,000
      shares)
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (426,617
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (426,617
                                                                                                                                          )Total stockholders’ equity
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          10,927,610
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          8,460,064$
                                                                                                                                          14,508,880
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          13,202,659




The
accompanying notes to the consolidated financial statements


are an
integral part of these statements.




F-3




Mexco
Energy Corporation and Subsidiaries


CONSOLIDATED
STATEMENTS OF OPERATIONS


Year
ended March 31,





2009
                                                                                                                        
                                                                                                                        
                                                                                                                        2008
                                                                                                                        
                                                                                                                        
                                                                                                                        2007Operating revenues:Oil
      and gas
                                                                                                                        
                                                                                                                        $
                                                                                                                        4,876,627
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        3,887,955
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        2,969,325Other
                                                                                                                        
                                                                                                                        
                                                                                                                        49,366
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        11,453
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,392Total operating revenues
                                                                                                                        
                                                                                                                        
                                                                                                                        4,925,993
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,899,408
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,971,717Operating expenses:Production
                                                                                                                        
                                                                                                                        
                                                                                                                        1,195,584
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,240,305
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        870,778Accretion of asset retirement
      obligation
                                                                                                                        
                                                                                                                        
                                                                                                                        28,578
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        26,262
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        24,057Depreciation, depletion, and
      amortization
                                                                                                                        
                                                                                                                        
                                                                                                                        1,046,120
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        779,618
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        652,826General and administrative
                                                                                                                        
                                                                                                                        
                                                                                                                        876,756
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        821,786
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        829,180Total operating expenses
                                                                                                                        
                                                                                                                        
                                                                                                                        3,147,038
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,867,971
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,376,841Operating profit
                                                                                                                        
                                                                                                                        
                                                                                                                        1,778,955
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,031,437
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        594,876Other income (expense):Interest income
                                                                                                                        
                                                                                                                        
                                                                                                                        1,838
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        5,113
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        4,670Interest expense
                                                                                                                        
                                                                                                                        
                                                                                                                        (81,961
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (105,312
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (24,046
                                                                                                                        )Net
      other expense
                                                                                                                        
                                                                                                                        
                                                                                                                        (80,123
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (100,199
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (19,376
                                                                                                                        )Earnings before income taxes
      andminority interest
                                                                                                                        
                                                                                                                        
                                                                                                                        1,698,832
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        931,238
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        575,500Income tax expense
    (benefit):Current
                                                                                                                        
                                                                                                                        
                                                                                                                        539,048
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -Deferred
                                                                                                                        
                                                                                                                        
                                                                                                                        (10,786
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        217,594
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (28,050
                                                                                                                        )528,262
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        217,594
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (28,050
                                                                                                                        )Earnings before minority
      interest
                                                                                                                        
                                                                                                                        
                                                                                                                        1,170,570
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        713,644
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        603,550Minority interest in loss of
      subsidiary
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        -
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        4,835Net income
                                                                                                                        
                                                                                                                        $
                                                                                                                        1,170,570
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        713,644
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        608,385Earnings per common share:Basic:
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.63
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.40
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.35Diluted:
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.61
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.40
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        0.33Weighted average common shares
      outstanding:Basic:
                                                                                                                        
                                                                                                                        
                                                                                                                        1,846,394
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,767,777
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,761,344Diluted:
                                                                                                                        
                                                                                                                        
                                                                                                                        1,934,235
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,773,049
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,819,969




The
accompanying notes to the consolidated financial statements


are an
integral part of these statements.




F-4




Mexco
Energy Corporation and Subsidiaries


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY





Common Stock Par Value
                                                              
                                                              
                                                              Treasury Stock
                                                              
                                                              
                                                              Additional Paid-In Capital
                                                              
                                                              
                                                              Retained Earnings
                                                              
                                                              
                                                              Total Stockholders’ EquityBalance, April 1, 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
                                                              
                                                              
                                                              $
                                                              8,460,064Net
      income
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              1,170,570
                                                              
                                                              
                                                              
                                                              1,170,570Issuance of stock through options
      exercised
                                                              
                                                              
                                                              60,625
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              642,615
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              703,240Excess tax benefits fromstock-based compensation
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              539,048
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              539,048Stock based compensation
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              54,688
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              54,688Balance, March 31, 2009
                                                              
                                                              $
                                                              981,308
                                                              
                                                              
                                                              $
                                                              (426,617
                                                              )
                                                              
                                                              $
                                                              5,617,620
                                                              
                                                              
                                                              $
                                                              4,755,299
                                                              
                                                              
                                                              $
                                                              10,927,610







Share Activity2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007Common stock issuedAt
      beginning of year
                                              
                                              
                                              1,841,366
                                              
                                              
                                              
                                              1,840,366
                                              
                                              
                                              
                                              1,776,566Issued
                                              
                                              
                                              121,250
                                              
                                              
                                              
                                              1,000
                                              
                                              
                                              
                                              63,800At
      end of year
                                              
                                              
                                              1,962,616
                                              
                                              
                                              
                                              1,841,366
                                              
                                              
                                              
                                              1,840,366Held in treasuryAt
      beginning of year
                                              
                                              
                                              (84,000
                                              )
                                              
                                              
                                              (59,525
                                              )
                                              
                                              
                                              (33,525
                                              )Acquisitions
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (24,475
                                              )
                                              
                                              
                                              (30,000
                                              )Exchange for property
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4,000At
      end of year
                                              
                                              
                                              (84,000
                                              )
                                              
                                              
                                              (84,000
                                              )
                                              
                                              
                                              (59,525
                                              )Common shares outstanding at end of
      year
                                              
                                              
                                              1,878,616
                                              
                                              
                                              
                                              1,757,366
                                              
                                              
                                              
                                              1,780,841




The
accompanying notes to the consolidated financial statements


are an
integral part of these statements.




F-5




Mexco
Energy Corporation and Subsidiaries


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Year
ended March 31,





2009
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2008
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2007Cash flows from operating
      activities:Net
      income
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      1,170,570
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      713,644
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      608,385Adjustments to reconcile net income to net cash
      provided by operating activities:Deferred
      income tax (benefit) expense
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (10,786
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      217,594
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (28,050
                                                                                                                                      )Excess tax benefit from share based payment
      arrangement
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (539,048
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (1,100
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (14,191
                                                                                                                                      )Stock-based compensation
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      54,688
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      85,877
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      126,454Common stock issued to
    director
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      14,100Depreciation, depletion, and
      amortization
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,046,120
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      779,618
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      652,826Accretion of asset retirement
      obligations
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      28,578
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      26,262
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      24,057Other
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (4,135
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Minority interest in loss of GazTex,
      LLC
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (4,835
                                                                                                                                      )Changes in assets and
      liabilities:(Increase) decrease in accounts
      receivable
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      355,960
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (411,139
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      26,896(Increase) decrease in prepaid
      expenses
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (14,548
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      43,924
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (50,146
                                                                                                                                      )Increase in income taxes
      payable
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      539,048
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Increase (decrease) in accounts payable and
      accrued expenses
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      167,932
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      20,084
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (30,472
                                                                                                                                      )Net cash provided by operating
      activities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2,794,379
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,474,764
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,325,024Cash flows from investing
      activities:Additions to oil and gas
      properties
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (2,937,939
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (3,060,194
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (1,545,023
                                                                                                                                      )Proceeds from investment in GazTex,
      LLC
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      18,700
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -Proceeds from sale of oil and gas properties and
      equipment
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2,538
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      40,453
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      28,016Additions to other property and
      equipment
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (9,950
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (11,564
                                                                                                                                      )Net cash used in investing
      activities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (2,916,701
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (3,029,691
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (1,528,571
                                                                                                                                      )Cash flows from financing
      activities:Acquisition of treasury
    stock
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (119,093
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (90,809
                                                                                                                                      )Proceeds from exercise of stock
      options
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      703,240
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,000
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      197,150Reduction of long-term debt
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (2,849,521
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (525,000
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (740,000
                                                                                                                                      )Proceeds from long term
debt
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,649,521
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2,425,000
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      840,000Minority interest
    contributions
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,835Repurchase of OBTX, LLC
    stock
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (2,051
                                                                                                                                      )Excess tax benefit from share based payment
      arrangement
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      539,048
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,100
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      14,191Net cash provided by financing
      activities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      42,288
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,786,007
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      223,316Net (decrease) increase in cash and cash
      equivalents
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      (80,034
                                                                                                                                      )
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      231,080
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      19,769Cash and cash equivalents at beginning of
      year
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      303,617
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      72,537
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      52,768Cash and cash equivalents at end of
      year
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      223,583
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      303,617
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      72,537Supplemental disclosure of cash flow
      information:Cash paid for interest
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      89,490
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      97,163
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      22,736Income taxes paid
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -Non-cash investing and financing
      activities:Issuance of common stock in exchange for oil and
      gas properties
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      21,360Cashless exercise of stock options and
      repurchaseof treasury shares
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      92,500Percentage of royalty interest purchase issued as
      paymentfor finder’s fee
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      31,863
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      46,250
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      -Asset retirement
obligations
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      38,247
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      36,729
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      46,355




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




F-6




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.  OBTX, LLC was dissolved in March
2009.  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.





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.  Declines in oil and natural gas prices will materially adversely
affect our financial condition, liquidity, ability to obtain financing and
operating results.  Similarly, any improvements in oil and gas prices
can have a favorable impact on our financial condition, results of operations
and capital resources.





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 and the future development,
dismantlement and abandonment costs.





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 ARO 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 DD&A pool).  Impairments
transferred to the DD&A pool increase the DD&A rate.




F-7





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 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.





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.





Asset Retirement
Obligations.  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. For
the year ended March 31, 2009, the amount of unrecognized tax benefits was
approximately $467,164.  For the years ended March 31, 2008 and 2009,
we did not have any uncertain tax positions.





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





Income Per Common
Share.  Basic 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 assumes the exercise of all
stock options having exercise prices less than the average market price of the
common stock during the period using the treasury stock method and 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.




F-8





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:





2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Weighted average common sharesoutstanding - basic
                                  
                                  
                                  1,846,394
                                  
                                  
                                  
                                  1,767,777
                                  
                                  
                                  
                                  1,761,344Effect of the assumed exercise of dilutive stock
      options
                                  
                                  
                                  87,841
                                  
                                  
                                  
                                  5,272
                                  
                                  
                                  
                                  58,625Weighted average common sharesoutstanding - dilutive
                                  
                                  
                                  1,934,235
                                  
                                  
                                  
                                  1,773,049
                                  
                                  
                                  
                                  1,819,969Earnings per common share:Basic:
                                  
                                  $
                                  0.63
                                  
                                  
                                  $
                                  0.40
                                  
                                  
                                  $
                                  0.35Diluted:
                                  
                                  $
                                  0.61
                                  
                                  
                                  $
                                  0.40
                                  
                                  
                                  $
                                  0.33





For the
year ended March 31, 2009, no potential common shares relating to stock options
were excluded in the computation of diluted net income per share.  For
the years ended March 31, 2008 and 2007, potential common shares of 240,000 and
135,000, respectively, 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.  Anti-dilutive stock
options at March 31, 2008 had a weighted average exercise price of
$6.49.





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 Mexco has taken less than its ownership share of
gas production (under produced).  We have no significant gas
imbalances.





Stock-based
Compensation.  We account for stock-based compensation in
accordance with SFAS 123(R), “Share-Based Payment,” for transactions in
which we exchange our equity instruments for employee services.  The
cost of employee services received in exchange for equity instruments, employee
stock options, is measured based on the grant-date fair value of those
instruments using the Binomial option pricing model and is recognized as
compensation expense 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.





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 April 2008, the FASB issued FASB Staff
Position (“FSP”) No. SFAS No. 142-3, Determination of the Useful
Life of Intangible Assets (“FSP SFAS No. 142-3”). FSP
SFAS No. 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets (“SFAS No. 142”). The intent of FSP
SFAS No. 142-3 is to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under
SFAS No. 141R and other applicable accounting literature. FSP
SFAS No. 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and must be applied prospectively
to intangible assets acquired after the effective date. We are currently
evaluating the potential impact, if any, of FSP SFAS No. 142-3 on our
financial statements.


F-9





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which has been established by the FASB as a
framework for entities to identify the sources of accounting principles and for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with US GAAP. SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board’s (“PCAOB”) amendments to AU Section 411, The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.
The effective date of SFAS No. 162 was November 15, 2008.  The adoption of
this Standard did not have a material impact on our financial
statements.





In
December 2008, the SEC released Final Rule, Modernization of Oil and Gas
Reporting. The new disclosure requirements include provisions that permit
the use of new technologies to determine proved reserves if those technologies
have been demonstrated empirically to lead to reliable conclusions about
reserves volumes. The new requirements also will allow companies to disclose
their probable and possible reserves to investors. In addition, the new
disclosure requirements require companies to: (a) report the independence and
qualifications of its reserves preparer or auditor; (b) file reports when a
third party is relied upon to prepare reserves estimates or conducts a reserves
audit; and (c) report oil and natural gas reserves using an average price based
upon the prior 12-month period rather than year-end prices. The new disclosure
requirements are effective for annual reports on Forms 10-K for fiscal years
ending on or after December 31, 2009.  We are currently assessing the
impact that adoption of this rule will have on our financial statements, which
will vary depending on commodity prices.





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 with no monthly commitment
reductions.  The borrowing base is evaluated annually, on or about
September 1.  Amounts borrowed under this agreement are collateralized
by the common stock of one of the Company's wholly owned subsidiary and
substantially all of our oil and gas properties.  In September 2008,
the borrowing base was redetermined and set at
$4,900,000.  Availability of this line of credit at March 31, 2009 was
$3,500,000.  No principal payments are anticipated to be required through
March 31, 2010 based on the revised borrowing base.





In
December 2008, the credit agreement was renewed with a maturity date of October
31, 2010.  Under the renewed agreement, interest on the facility
accrues at an annual rate equal to the BBA LIBOR daily floating rate, plus 2.5
percentage points, which was 3.0225% on March 31, 2009.  Interest on
the outstanding amount under the credit agreement is payable
monthly.  In addition we will pay an unused commitment fee in an
amount equal to 1/2 of 1 percent (.5%) times the daily average of the unadvanced
amount of the commitment.  The unused commitment fee shall be payable
quarterly in arrears on the last day of each calendar quarter beginning March
31, 2009.  The loan agreement contains customary covenants for credit
facilities of this type including limitations on disposition of assets, mergers
and reorganizations.  We are also obligated to meet certain financial
covenants under the loan agreement.  Mexco is in compliance with all
covenants as of March 31, 2009.  In addition, this agreement prohibits
us from paying cash dividends on our common stock.





At the
end of fiscal 2009, two letters of credit for $50,000 each, in lieu of a
plugging bond covering the properties we operate were outstanding under the
facility, one with the Texas Railroad Commission and one with the State of New
Mexico.  These letters of credit renew annually.  Since we
no longer have any well operations and do not plan to have any operations in the
State of New Mexico, the letter of credit for the State of New Mexico was not
renewed and subsequently cancelled on April 29, 2009.





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 ARO 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.




F-10





The
following table provides a rollforward of the asset retirement obligations for
the fiscal years ended March 31, 2009 and 2008:





2009
                                        
                                        
                                        2008Carrying amount of asset retirement obligations as
      of April 1
                                        
                                        $
                                        424,789
                                        
                                        
                                        $
                                        400,584Liabilities incurred
                                        
                                        
                                        38,247
                                        
                                        
                                        
                                        36,729Liabilities settled
                                        
                                        
                                        (1,603
                                        )
                                        
                                        
                                        (38,786
                                        )Accretion expense
                                        
                                        
                                        28,578
                                        
                                        
                                        
                                        26,262Carrying amount of asset retirement obligations as
      of March 31
                                        
                                        
                                        490,011
                                        
                                        
                                        
                                        424,789Less:  Current
      portion
                                        
                                        
                                        50,000
                                        
                                        
                                        
                                        50,000Non-Current asset retirement
      obligation
                                        
                                        $
                                        440,011
                                        
                                        
                                        $
                                        374,789





The ARO
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:





2009
                                          
                                          
                                          2008
                                          
                                          
                                          2007Deferred tax assets:Percentage depletion
      carryforwards
                                          
                                          $
                                          839,900
                                          
                                          
                                          $
                                          760,299
                                          
                                          
                                          $
                                          667,423Deferred stock-based
      compensation
                                          
                                          
                                          31,468
                                          
                                          
                                          
                                          42,226
                                          
                                          
                                          
                                          39,876Asset retirement obligation
                                          
                                          
                                          151,903
                                          
                                          
                                          
                                          131,685
                                          
                                          
                                          
                                          124,182Net
      operating loss
                                          
                                          
                                          29,387
                                          
                                          
                                          
                                          36,445
                                          
                                          
                                          
                                          60,655Other
                                          
                                          
                                          4,692
                                          
                                          
                                          
                                          3,168
                                          
                                          
                                          
                                          3,8711,057,350
                                          
                                          
                                          
                                          973,823
                                          
                                          
                                          
                                          896,007Deferred tax liabilities:Excess financial accounting bases over tax
      basesof property and equipment
                                          
                                          
                                          (2,242,844
                                          )
                                          
                                          
                                          (2,170,103
                                          )
                                          
                                          
                                          (1,874,693
                                          )Net
      deferred tax liabilities
                                          
                                          $
                                          (1,185,494
                                          )
                                          
                                          $
                                          (1,196,280
                                          )
                                          
                                          $
                                          (978,686
                                          )





As of
March 31, 2009, we have statutory depletion carryforwards of approximately
$2,709,000, which do not expire.  At March 31, 2009, we had a net
operating loss carryforward for regular income tax reporting purposes of
approximately $1,830,000, 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.





The
amount of income taxes recorded by the Company requires the interpretation of
complex rules and regulations of federal and state taxing
jurisdictions.  We are subject to examination by any of these
jurisdictions for the fiscal tax years of 2006, 2007 and 2008.





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





2009
                                
                                
                                2008
                                
                                
                                2007Tax expense at statutory
    rate
                                
                                $
                                577,603
                                
                                
                                $
                                316,621
                                
                                
                                $
                                197,314Depletion in excess of
basis
                                
                                
                                (34,100
                                )
                                
                                
                                (93,000
                                )
                                
                                
                                (99,200
                                )Effect of graduated rates
                                
                                
                                (3,885
                                )
                                
                                
                                (27,937
                                )
                                
                                
                                (17,410
                                )Revision of prior year
      estimates
                                
                                
                                (16,833
                                )
                                
                                
                                7,487
                                
                                
                                
                                (123,443
                                )Permanent differences
                                
                                
                                10,598
                                
                                
                                
                                14,423
                                
                                
                                
                                14,689Other
                                
                                
                                (5,121
                                )
                                
                                
                                -
                                
                                
                                
                                -$
                                528,262
                                
                                
                                $
                                217,594
                                
                                
                                $
                                (28,050
                                )Effective tax rate
                                
                                
                                31
                                %
                                
                                
                                23
                                %
                                
                                
                                (5
                                %)




F-11





6.  Investment
in GazTex, LLC





Our
long-term asset consisted 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 Mexco owns 100% of the
interest.  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
profit 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
2009 and 2008, two customers accounted for 32% and 27% of our total revenues,
respectively.  At March 31, 2009, accounts receivable from these two
customers combined were approximately 16% of oil and gas accounts
receivable.  In fiscal 2007, one customer accounted for 12% of the
total revenues.





8.  Oil
and Gas Costs





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





2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Property acquisition costs:Proved
                                  
                                  $
                                  1,682,374
                                  
                                  
                                  $
                                  1,952,171
                                  
                                  
                                  $
                                  603,271Unproved
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Exploration
                                  
                                  
                                  615,073
                                  
                                  
                                  
                                  820,436
                                  
                                  
                                  
                                  24,493Development
                                  
                                  
                                  456,799
                                  
                                  
                                  
                                  685,043
                                  
                                  
                                  
                                  953,271Capitalized asset retirement
      obligations
                                  
                                  
                                  38,247
                                  
                                  
                                  
                                  36,729
                                  
                                  
                                  
                                  46,355Total costs incurred for oil and gas
      properties
                                  
                                  $
                                  2,792,493
                                  
                                  
                                  $
                                  3,494,379
                                  
                                  
                                  $
                                  1,627,390





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





2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Proved oil and gas
    properties
                                  
                                  $
                                  26,565,291
                                  
                                  
                                  $
                                  23,770,996
                                  
                                  
                                  $
                                  20,355,944Unproved oil and gas
      properties:subject to amortization
                                  
                                  
                                  170,487
                                  
                                  
                                  
                                  170,487
                                  
                                  
                                  
                                  170,487not subject to amortization
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -26,735,778
                                  
                                  
                                  
                                  23,941,483
                                  
                                  
                                  
                                  20,526,431Less accumulated
    depreciation,depletion, and amortization
                                  
                                  
                                  13,013,448
                                  
                                  
                                  
                                  11,974,477
                                  
                                  
                                  
                                  11,202,369$
                                  13,722,330
                                  
                                  
                                  $
                                  11,967,006
                                  
                                  
                                  $
                                  9,324,062





Depreciation,
depletion, and amortization amounted to $1.62, $1.60 and $1.47 per equivalent
mcf of production for the years ended March 31, 2009, 2008, and 2007,
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 50,000
shares at an aggregate cost of $310,609, and during fiscal 2008, we repurchased
24,475 shares at an aggregate cost of $119,093.  No shares of our
common stock were repurchased for the treasury account during fiscal
2009.




F-12





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, we 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 this plan is five years from the date of its
adoption.





According
to our employee stock incentive plans, new shares will be issued upon the
exercise of stock options and the Company can repurchase shares exercised under
these plans.  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 and 2009.





We
recognized compensation expense of $54,688, $85,877 and $126,454 in general and
administrative expense in the Consolidated Statements of Operations for fiscal
2009, 2008 and 2007, respectively.  The total cost related to
non-vested awards not yet recognized at March 31, 2009 totals $37,724, which is
expected to be recognized over a weighted average of 2.07 years.





For the
year ended March 31, 2009, employees and directors exercised options on a total
of 121,250 shares at exercise prices between $4.00 and $8.24 per
share.  The Company received proceeds of $703,240 from these
exercises. The total intrinsic value of the exercised options was
$4,209,381.  No tax deduction is recorded when options are
awarded.  Of these exercised options, 45,750 shares resulted in a
disqualifying disposition and a tax benefit for the Company of $539,048 for
the year ended March 31, 2009.  Mexco issued new shares of common
stock to settle these option exercises.  Stock options covering 1,000
shares were exercised during the year ended March 31, 2008 and resulted in a
disqualifying disposition and a tax benefit of $1,100.





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.





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 2009, 2008 and 2007.  All such amounts
represent the weighted average amounts for each period.




F-13







For the year ended
      March 31,2009
                              
                              
                              2008
                              
                              
                              2007Grant-date
      fair value
                              
                              
                              -
                              
                              
                              $
                              2.20
                              
                              
                              $
                              5.15Volatility
      factor
                              
                              
                              -
                              
                              
                              
                              56.06
                              %
                              
                              
                              71.46
                              %Dividend
      yield
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Risk-free
      interest rate
                              
                              
                              -
                              
                              
                              
                              3.54
                              %
                              
                              
                              5.07
                              %Expected
      term (in years)
                              
                              
                              -
                              
                              
                              
                              5
                              
                              
                              
                              5





No stock
options were granted during the year ended March 31, 2009.  During the
year ended March 31, 2008 and 2007, stock options covering 25,000 and 35,000
shares, respectively, were granted.  Stock options covering 121,250
shares were exercised during the year ended March 31, 2009.  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.





No
forfeiture rate is assumed for stock options granted to directors or employees
due to the forfeiture rate history for these types of awards.  On
April 2, 2008, 20,000 stock options expired because they were not exercised
prior to the end of their ten-year term.  During the year ended March
31, 2008, 35,250 vested and 3,750 unvested stock options were forfeited due to
the termination of a consulting agreement with a consultant and the resignation
of an employee.  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.





The
following table is a summary of activity of stock options for the year ended
March 31, 2008 and 2009:





Number ofShares
                                                      
                                                      
                                                      Weighted AverageExercise PricePer
      Share
                                                      
                                                      
                                                      WeightedAverage
      RemainingContract
      Life in Years
                                                      
                                                      
                                                      Aggregate
                                                        IntrinsicValueOutstanding 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
                                                      )Granted
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Exercised
                                                      
                                                      
                                                      (121,250
                                                      )
                                                      
                                                      
                                                      5.80Forfeited or Expired
                                                      
                                                      
                                                      (20,000
                                                      )
                                                      
                                                      
                                                      7.75Outstanding at March 31,
    2009
                                                      
                                                      
                                                      148,750
                                                      
                                                      
                                                      $
                                                      6.04
                                                      
                                                      
                                                      
                                                      3.04
                                                      
                                                      
                                                      $
                                                      (813,703
                                                      )Vested at March 31, 2009
                                                      
                                                      
                                                      115,000
                                                      
                                                      
                                                      $
                                                      6.03
                                                      
                                                      
                                                      
                                                      3.01
                                                      
                                                      
                                                      $
                                                      (630,403
                                                      )Exercisable at March 31,
    2009
                                                      
                                                      
                                                      115,000
                                                      
                                                      
                                                      $
                                                      6.03
                                                      
                                                      
                                                      
                                                      3.01
                                                      
                                                      
                                                      $
                                                      (630,403
                                                      )





Outstanding
options at March 31, 2009 expire between September 2009 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:





2009
                      
                      
                      2008
                      
                      
                      2007Weighted average grant-date fair value of stock
      options granted (per share)
                      
                      $
                      -
                      
                      
                      $
                      4.35
                      
                      
                      $
                      5.15Total fair value of options
      vested
                      
                      $
                      82,225
                      
                      
                      $
                      124,300
                      
                      
                      $
                      137,925Total intrinsic value of options
      exercised
                      
                      $
                      4,209,381
                      
                      
                      $
                      1,100
                      
                      
                      $
                      110,019





Cash
received from option exercise under all share-based payment arrangements for the
years ended March 31, 2009, 2008 and 2007, was $703,240, $4,000 and $197,150,
respectively.




F-14





The
following table summarizes information about options outstanding at March 31,
2009:





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
                                    
                                    
                                    41,250
                                    
                                    
                                    $
                                    4.185.25 – 6.49
                                    
                                    
                                    38,000
                                    
                                    
                                    
                                    5.626.50 – 7.74
                                    
                                    
                                    40,750
                                    
                                    
                                    
                                    6.767.75 – 8.24
                                    
                                    
                                    28,750
                                    
                                    
                                    
                                    8.24$4.00 – 8.24
                                    
                                    
                                    148,750
                                    
                                    
                                    $
                                    6.04
                                    
                                    
                                    
                                    3.04
                                    
                                    
                                    $
                                    (813,703
                                    )





The
following table summarizes information about options exercisable at March 31,
2009:





Range
      of Exercise Prices
                                  
                                  Number
      Exercisable
                                  
                                  
                                  Weighted
      Average Exercise Price Per Share
                                  
                                  
                                  Aggregate
                                    Intrinsic
      Value$4.00 – 5.24
                                  
                                  
                                  22,500
                                  
                                  
                                  $
                                  4.045.25 – 6.49
                                  
                                  
                                  38,000
                                  
                                  
                                  
                                  5.626.50 – 7.74
                                  
                                  
                                  40,750
                                  
                                  
                                  
                                  6.767.75 – 8.24
                                  
                                  
                                  13,750
                                  
                                  
                                  
                                  8.24$4.00 – 8.24
                                  
                                  
                                  115,000
                                  
                                  
                                  $
                                  6.03
                                  
                                  
                                  $
                                  (630,403
                                  )




11.  Related
Party Transactions





Related
party transactions with the majority stockholder for the years ended March 31,
2009, 2008, and 2007 relate to shared office expenditures.  The total
billed to the stockholder for years ended March 31, 2009, 2008 and 2007 was
$40,872, $36,368 and $44,194, respectively.





A Family
Limited Partnership of Thomas Craddick received from the Company a finder’s fee
in kind, equal to 2.5% of the mineral interest purchased in the Newark East
Field in Johnson County, Texas in October 2008.  Thomas Craddick is a
member of the board of directors and Company employee.  Mr. Craddick
invested his personal funds in a working interest (5.0% before payout and 3.75%
after payout) in the Company’s well in Ward County, Texas.  This
personal investment was made on the same basis as an unrelated third party
investor.





On April
1, 2007, Jeff Smith, a member of the board of directors through September 11,
2008 and a geological consultant, entered into an agreement with the Company to
provide geological consulting services for a fee of approximately $10,000 per
month plus expenses.  This agreement was amended to $5,000 per month
plus expenses on March 1, 2009.  The Company incurred charges from Mr.
Smith for services rendered under this agreement and subsequent amendment and
bonuses of approximately $114,000 for the year ended March 31,
2009.  As of March 31, 2009, there was an outstanding invoice of
$5,000 payable to Mr. Smith which was subsequently paid on April 15,
2009.  Also as part of this agreement, Mr. Smith received from the
Company a 0.25% overriding interest in each of the two wells in Loving County,
Texas, a 1.0% overriding interest in the well in Ward County, Texas and a .5%
overriding interest in the well in Reeves County, Texas.  Mr. Smith
invested his personal funds in a working interest in the Company’s wells in
Reeves County, Texas (2.5% before payout and 1.875% after payout) and Ward
County, Texas (2.0% before payout and 1.5% after payout), on a non-promoted
basis.  Royalties paid to Mr. Smith from the Reeves County well were
approximately $4,300 for the year ended March 31, 2009.





At March
31, 2009, the Company was owed by these related parties approximately $1,700,
which is reflected in accounts receivable — related
parties.





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, 2009, 2008, and 2007 are
based on evaluations prepared by Joe C. Neal and Associates, Petroleum
Consultants.




F-15





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.





Changes in Proved Reserve
Quantities:





2009
                                
                                
                                2008
                                
                                
                                2007Bbls
                                
                                
                                Mcf
                                
                                
                                Bbls
                                
                                
                                Mcf
                                
                                
                                Bbls
                                
                                
                                McfProved
      reserves, beginning of year
                                
                                
                                217,000
                                
                                
                                
                                7,857,000
                                
                                
                                
                                220,000
                                
                                
                                
                                6,905,000
                                
                                
                                
                                183,000
                                
                                
                                
                                6,697,000Revision
      of previous estimates
                                
                                
                                (24,000
                                )
                                
                                
                                140,000
                                
                                
                                
                                (11,000
                                )
                                
                                
                                109,000
                                
                                
                                
                                6,000
                                
                                
                                
                                212,000Purchase
      of minerals in place
                                
                                
                                -
                                
                                
                                
                                886,000
                                
                                
                                
                                -
                                
                                
                                
                                584,000
                                
                                
                                
                                33,000
                                
                                
                                
                                199,000Extensions
      and discoveries
                                
                                
                                31,000
                                
                                
                                
                                1,136,000
                                
                                
                                
                                26,000
                                
                                
                                
                                638,000
                                
                                
                                
                                15,000
                                
                                
                                
                                136,000Sales
      of mineralsin
    place
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Production
                                
                                
                                (17,000
                                )
                                
                                
                                (542,000
                                )
                                
                                
                                (18,000
                                )
                                
                                
                                (379,000
                                )
                                
                                
                                (17,000
                                )
                                
                                
                                (339,000
                                )Proved
      reserves, end of year
                                
                                
                                207,000
                                
                                
                                
                                9,477,000
                                
                                
                                
                                217,000
                                
                                
                                
                                7,857,000
                                
                                
                                
                                220,000
                                
                                
                                
                                6,905,000





Proved Developed
Reserves:





Beginning of year
                    
                    
                    122,000
                    
                    
                    
                    5,050,000
                    
                    
                    
                    111,000
                    
                    
                    
                    3,968,000
                    
                    
                    
                    87,000
                    
                    
                    
                    3,891,000End of year
                    
                    
                    112,000
                    
                    
                    
                    5,989,000
                    
                    
                    
                    122,000
                    
                    
                    
                    5,050,000
                    
                    
                    
                    111,000
                    
                    
                    
                    3,968,000





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 $42.12, $96.61 and  $59.61 per barrel at March 31, 2009,
2008 and 2007, respectively.  The year ended weighted average gas
price utilized in the computation of future cash inflows was $3.13, $8.70 and
$6.85 per mcf at March 31, 2009, 2008 and 2007, 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.




F-16





Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves:





March
      312009
                            
                            
                            2008
                            
                            
                            2007Future
      cash inflows
                            
                            $
                            38,369,000
                            
                            
                            $
                            89,327,000
                            
                            
                            $
                            60,428,000Future
      production and development costs
                            
                            
                            (11,566,000
                            )
                            
                            
                            (15,891,000
                            )
                            
                            
                            (13,181,000
                            )Future
      income taxes (a)
                            
                            
                            (5,306,000
                            )
                            
                            
                            (15,086,000
                            )
                            
                            
                            (10,769,000
                            )Future
      net cash flows
                            
                            
                            21,497,000
                            
                            
                            
                            58,350,000
                            
                            
                            
                            36,478,000Annual
      10% discount for estimated timing of cash flows
                            
                            
                            (9,989,000
                            )
                            
                            
                            (25,852,000
                            )
                            
                            
                            (16,271,000
                            )Standardized
      measure of discounted future net cash flows
                            
                            $
                            11,508,000
                            
                            
                            $
                            32,498,000
                            
                            
                            $
                            20,207,000





(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.





Changes
in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves





March
      312009
                            
                            
                            2008
                            
                            
                            2007Sales
      of oil and gas produced, net of production costs
                            
                            $
                            (3,681,000
                            )
                            
                            $
                            (2,648,000
                            )
                            
                            $
                            (2,099,000
                            )Net
      changes in price and production costs
                            
                            
                            (27,213,000
                            )
                            
                            
                            9,027,000
                            
                            
                            
                            1,835,000Changes
      in previously estimated development costs
                            
                            
                            1,116,000
                            
                            
                            
                            295,000
                            
                            
                            
                            313,000Revisions
      of quantity estimates
                            
                            
                            (324,000
                            )
                            
                            
                            (121,000
                            )
                            
                            
                            825,000Net
      change due to purchases and sales of minerals in place
                            
                            
                            1,572,000
                            
                            
                            
                            2,343,000
                            
                            
                            
                            1,362,000Extensions
      and discoveries, less related costs
                            
                            
                            1,931,000
                            
                            
                            
                            5,025,000
                            
                            
                            
                            561,000Net
      change in income taxes
                            
                            
                            3,124,000
                            
                            
                            
                            (2,437,000
                            )
                            
                            
                            (599,000
                            )Accretion
      of discount
                            
                            
                            4,090,000
                            
                            
                            
                            2,617,000
                            
                            
                            
                            2,329,000Changes
      in timing of estimated cash flows and other
                            
                            
                            (1,605,000
                            )
                            
                            
                            (1,810,000
                            )
                            
                            
                            (2,244,000
                            )Changes
      in standardized measure
                            
                            
                            (20,990,000
                            )
                            
                            
                            12,291,000
                            
                            
                            
                            2,283,000Standardized
      measure, beginning of year
                            
                            
                            32,498,000
                            
                            
                            
                            20,207,000
                            
                            
                            
                            17,924,000Standardized
      measure, end of year
                            
                            $
                            11,508,000
                            
                            
                            $
                            32,498,000
                            
                            
                            $
                            20,207,000





13.  Selected
Quarterly Financial Data (Unaudited)





FISCAL
      20094TH
      QTR
                                              
                                              
                                              3RD
      QTR
                                              
                                              
                                              2ND
      QTR
                                              
                                              
                                              1ST
      QTROil
      and gas revenue
                                              
                                              $
                                              700,578
                                              
                                              
                                              $
                                              908,253
                                              
                                              
                                              $
                                              1,595,209
                                              
                                              
                                              $
                                              1,672,587Operating
      profit(loss)
                                              
                                              
                                              (52,505
                                              )
                                              
                                              
                                              217,985
                                              
                                              
                                              
                                              796,586
                                              
                                              
                                              
                                              816,889Net
      income(loss)
                                              
                                              
                                              (10,835
                                              )
                                              
                                              
                                              131,501
                                              
                                              
                                              
                                              511,115
                                              
                                              
                                              
                                              538,789Net
      income(loss) per share-basic
                                              
                                              
                                              (.01
                                              )
                                              
                                              
                                              0.07
                                              
                                              
                                              
                                              0.27
                                              
                                              
                                              
                                              0.31Net
      income(loss) per share-diluted
                                              
                                              
                                              (.01
                                              )
                                              
                                              
                                              0.07
                                              
                                              
                                              
                                              0.26
                                              
                                              
                                              
                                              0.29FISCAL
      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




F-17





INDEX
TO EXHIBITS





Exhibit


Number





3.1*
            Articles
      of Incorporation.





3.2***
            Amended
      Bylaws as amended on November 15,
2008.





10.1**
            Stock
      Option Plan.





10.2*
            Bank
      Line of Credit.





10.3****
            2004
      Incentive Stock Option Plan.





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
      as Exhibit 3.1 with the Company’s Quarterly Report on Form 10-Q dated
      November 13, 2008.


****
            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.







F-18