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

FORM 10-Q

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

For the quarterly period ended September 30,December 31, 2008

OR

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

For the transition period from         to


Commission File No. 0-6994


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

Colorado
84-0627918
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification Number)
  
214 West Texas Avenue, Suite 1101
79701
Midland, Texas
(Zip code)
79701
(Address of principal executive offices)
(Zip code)


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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  YES [Ö]  NO [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.  (Check one):

Large Accelerated Filer [  ]
Accelerated Filer [  ]
  
Non-Accelerated Filer [  ]
Smaller reporting company [√]
 (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 number of shares outstanding of the registrant’s common stock, par value $.50 per share, as of November 10, 2008February 11, 2009 was 1,874,866.
 
Page 1
 
MEXCO ENERGY CORPORATION

Table of Contents

PART I.  FINANCIAL INFORMATION


  Page
PART I.  FINANCIAL INFORMATIONPage 
 
Item 1.
Consolidated Balance Sheets as of September 30,December 31, 2008
(Unaudited) and March 31, 20083
   
 
Consolidated Statements of Operations (Unaudited) for
the three months and sixnine months ended September 30,December 31, 2008
and September 30,December 31, 20074
   
 
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited) as of September 30,December 31, 20085
   
 
Consolidated Statements of Cash Flows (Unaudited) for
the sixnine months ended September 30,December 31, 2008 and September 30,December 31, 20076
   
 Notes to Consolidated Financial Statements (Unaudited)7
   
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations10
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk1213
   
Item 4.
Controls and Procedures1314
 
   
PART II.  OTHER INFORMATION14
   
Item 1.
Legal Proceedings 
Item 1A.
Risk Factors 
Item 4.
Submission of Matters to a Vote of Security Holders 
 Item 5.Other Information
Item 6.
Exhibits 
   
 
SIGNATURES15 14
 
   
EXHIBITS 
 
Page 2
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS

 
September 30, 2008
  
March 31, 2008
  
December 31,
2008
  
March 31,
2008
 
 (Unaudited)     (Unaudited)    
ASSETS            
      
Current assets
            
Cash and cash equivalents
 $220,239  $303,617  $256,872  $303,617 
Accounts receivable:
                
Oil and gas sales
  867,441   758,459   573,028   758,459 
Trade
  474,449   102,403   155,501   102,403 
Related parties
  42,446   12,659 
Related Parties
  -   12,659 
Prepaid costs and expenses
  51,304   22,062   41,000   22,062 
Total current assets
  1,655,879   1,199,200   1,026,401   1,199,200 
                
Investment in GazTex, LLC
  --   20,509   -   20,509 
                
Property and equipment, at cost
                
Oil and gas properties, using the full cost method
  24,805,130   23,941,483   26,430,616   23,941,483 
Other
  61,362   61,362   61,362   61,362 
  24,866,492   24,002,845   26,491,978   24,002,845 
                
Less accumulated depreciation, depletion and amortization
  12,499,702   12,019,895   12,771,232   12,019,895 
Property and equipment, net
  12,366,790   11,982,950   13,720,746   11,982,950 
 $14,022,669  $13,202,659  $14,747,147  $13,202,659 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                
Current Liabilities
        
Current liabilities
        
Accounts payable and accrued expenses
 $726,505  $571,526  $528,842  $571,526 
                
Long-term debt
  950,000   2,600,000   1,650,000   2,600,000 
Asset retirement obligation
  409,552   374,789   418,343   374,789 
Deferred income tax liability
  1,236,139   1,196,280 
Deferred income tax liabilities
  1,238,450   1,196,280 
                
Stockholders’ equity
                
Preferred stock - $1.00 par value;
        
10,000,000 shares authorized; none outstanding
  --   -- 
Common stock - $0.50 par value; 40,000,000 shares authorized;
        
1,958,866 and 1,841,366 shares issued;
        
1,874,866 and 1,757,366 shares outstanding as of
        
September 30 and March 31, 2008, respectively
  979,433   920,683 
Preferred stock - $1.00 par value; 10,000,000 shares authorized; none outstanding
  -   - 
Common stock - $0.50 par value; 40,000,000 shares authorized; 1,958,866 and 1,841,366 shares issued; 1,874,866 and 1,757,366 shares outstanding as of December 31 and March 31, 2008, respectively
  979,433   920,683 
Additional paid-in capital
  5,513,024   4,381,269   5,592,562   4,381,269 
Retained earnings
  4,634,633   3,584,729   4,766,134   3,584,729 
Treasury stock, at cost (84,000 shares)
  (426,617)  (426,617)  (426,617)  (426,617)
Total stockholders’ equity  10,700,473   8,460,064   10,911,512   8,460,064 
 $14,022,669  $13,202,659  $14,747,147  $13,202,659 
 
The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 3
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
September 30
  
Six Months Ended
September 30
  Three Months Ended
December 31		  Nine Months Ended
December 31		 
 
2008 
  2007  2008  2007  2008  2007  2008  2007 
Operating revenue:                        
Oil and gas sales
 $1,595,209  $839,947  $3,267,797  $1,690,092  $908,253  $952,211  $4,176,050  $2,642,302 
Other
  6,597   1,161   13,330   1,334   19,391   2,869   32,721   4,203 
Total operating revenues
  1,601,806   841,108   3,281,127   1,691,426  927,644  955,080  4,208,771  2,646,505 
                                
Operating expenses:                                
Production
  357,753   467,336   692,741   800,386  237,736  241,019  930,477  1,041,405 
Accretion of asset retirement obligation
  7,266   6,713   14,204   13,324  7,291  6,368  21,495  19,691 
Depreciation, depletion, and amortization  240,962   183,797   479,807   356,681  271,530  174,842  751,337  531,523 
General and administrative
  199,239   178,918   480,900   448,543   193,102   187,648   674,002   636,191 
Total operating expenses
  805,220   836,764   1,667,652   1,618,934   709,659   609,877   2,377,311   2,228,810 
                                
Income from operations  796,586   4,344   1,613,475   72,492 
Operating profit 217,985  345,203  1,831,460  417,695 
                                
Other income (expense):                                
Interest income
  671   1,747   1,007   2,085  110  1,170  1,117  3,255 
Interest expense
  (19,854)  (20,345)  (53,589)  (35,694)  (17,226)  (22,791)  (70,815)  (58,484)
                                
Net other expense
  (19,183)  (18,598)  (52,582)  (33,609)  (17,116)  (21,621)  (69,698)  (55,229)
                                
Earnings before income taxes 200,869  323,582  1,761,762  362,466 
                                
Income (loss) before income taxes  777,403   (14,254)  1,560,893   38,883 
                
                
Income tax expense (benefit):                
Income tax expense:                
Current
  257,562   --   471,130   --  67,057  -  538,187  - 
Deferred
  8,726   (5,498)  39,859   12,834   2,311   102,468   42,170   115,302 
  266,288   (5,498)  510,989   12,834   69,368   102,468   580,357   115,302 
                                
Net income (loss) $511,115  $(8,756) $1,049,904  $26,049 
                
Net income $131,501  $221,114  $1,181,405  $247,164 
                                
Earnings per common share:                                
Basic:
 $0.27  $--  $0.58  $0.01 
Diluted:
 $0.26  $--  $0.55  $0.01 
Basic
 $0.07  $0.13  $0.64  $0.14 
Diluted
 $0.07  $0.12  $0.61  $0.14 
                                
Weighted average common shares outstanding:                                
Basic:
  1,873,127   1,772,268   1,817,962   1,774,526 
Diluted:
  1,975,453   1,772,268   1,922,568   1,786,397 
Basic
 1,874,866  1,764,649  1,836,999  1,771,222 
Diluted
 1,938,746  1,772,583  1,928,029  1,778,008 

The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 4

Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)


       
Additional
Paid-In
Capital
     
Total
Stockholders’
Equity
 
 
Common Stock
Par Value
  
Treasury
Stock
  
Retained
Earnings
 
 Common Stock Par Value  Treasury Stock  Additional Paid-In Capital  Retained Earnings  Total Stockholders’ Equity 
                              
Balance at March 31, 2008 $920,683  $(426,617) $4,381,269  $3,584,729  $8,460,064  $920,683  $(426,617) $4,381,269  $3,584,729  $8,460,064 
                    
Net income
  --   --   --   538,789   538,789   -   -   -   538,789   538,789 
Issuance of stock through
                                        
options exercised
  53,750   --   593,178   --   646,928   53,750   -   593,178   -   646,928 
Excess tax benefits from
                                        
stock based compensation
          213,568       213,568 
Stock based compensation
  --   --   19,445   --   19,445 
stock-based compensation
          213,568       213,568 
Stock-based compensation
  -   -   19,445   -   19,445 
Balance at June 30, 2008 $974,433  $(426,617) $5,207,460  $4,123,518  $9,878,794  $974,433  $(426,617) $5,207,460  $4,123,518  $9,878,794 
                                        
Net income
  --   --   --   511,115   511,115   -   -   -   511,115   511,115 
Issuance of stock through
                                        
options exercised
  5,000   --   35,000   --   40,000   5,000   -   35,000   -   40,000 
Excess tax benefits from
                                        
stock based compensation
          257,562       257,562 
Stock based compensation
  --   --   13,002   --   13,002 
stock-based compensation
          257,562       257,562 
Stock-based compensation
  -   -   13,002   -   13,002 
Balance at September 30, 2008 $979,433  $(426,617) $5,513,024  $4,634,633  $10,700,473  $979,433  $(426,617) $5,513,024  $4,634,633  $10,700,473 
                    
Net income
  -   -   -   131,501   131,501 
Excess tax benefits from
                    
stock-based compensation
  -   -   67,057   -   67,057 
Stock-based compensation
  -   -   12,481   -   12,481 
Balance at December 31, 2008 $979,433  $(426,617) $5,592,562  $4,766,134  $10,911,512 
 
SHARE ACTIVITY

Common stock shares, issued:   
Balance at March 31, 2008
  1,841,366 
Issued
  107,500 
Balance at June 30, 2008
  1,948,866 
Issued
  10,000 
Balance at September 30, 2008
  1,958,866 
Issued
-
Balance at December 31, 2008
1,958,866
     
Common stock shares, held in treasury:    
Balance at March 31, 2008
  (84,000)
Acquisitions
  --- 
Balance at June 30, 2008
  (84,000)
Acquisitions
  --- 
Balance at September 30, 2008
  (84,000)
Acquisitions
-
Balance at December 31, 2008
(84,000)
     
Common stock shares, outstanding
at September 30,December 31, 2008
  1,874,866 
 
The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 5
 
Mexco Energy Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the SixNine Months Ended September 30,December 31,
(Unaudited)

 2008  2007  2008  2007 
Cash flows from operating activities:            
Net income
 $1,049,904  $26,049  $1,181,405  $247,164 
Adjustments to reconcile net income to net cash
        
provided by operating activities:
        
Adjustments to reconcile net income to net cash provided by operating activities:
        
Increase in deferred tax liabilities
  39,859   12,834   42,170   115,302 
Excess tax benefit from share based payment arrangement
  (471,130)  -- 
Excess tax benefit from share-based payment arrangement
  (538,187)  (1,100)
Stock-based compensation
  32,447   52,516   44,928   66,506 
Depreciation, depletion and amortization
  479,807   356,681   751,337   531,523 
Accretion of asset retirement obligations
  14,204   13,324   21,495   19,691 
Loss in subsidiary of OBTX, LLC
  1,809   -- 
Other
  1,809   - 
Changes in assets and liabilities:
                
Increase in accounts receivable
  (510,815)  (2,024)
(Increase) decrease in accounts receivable
  144,992   (436,916)
(Increase) decrease in prepaid expenses
  (29,242)  9,896   (18,938)  87,676 
Increase in income taxes payable
  471,130   --   538,187   - 
Increase in accounts payable and accrued expenses
  543,091   121,380   197,488   28,395 
                
Net cash provided by operating activities
  1,621,064   590,656   2,366,686   658,241 
                
Cash flows from investing activities:                
Additions to oil and gas properties
  (1,231,574)  (866,749)  (2,709,451)  (2,810,831)
Proceeds from investment in GazTex, LLC
  18,700   --   18,700   - 
Proceeds from sale of oil and gas properties and equipment
  374   10,800   2,205   39,000 
                
Net cash used in investing activities
  (1,212,500)  (855,949)  (2,688,546)  (2,771,831)
                
Cash flows from financing activities:                
Acquisition of treasury stock
  --   (51,422)  -   (119,093)
Proceeds from exercise of stock options
  686,928   4,000   686,928   4,000 
Reduction of long-term debt
  (2,025,000)  (50,000)  (2,599,521)  (50,000)
Proceeds from long-term debt
  375,000   400,000   1,649,521   2,425,000 
Excess tax benefit from share based payment arrangement
  471,130   -- 
Excess tax benefit from share-based payment arrangement
  538,187   1,100 
                
Net cash (used in) provided by financing activities
  (491,942)  302,578 
Net cash provided by financing activities
  275,115   2,261,007 
                
Net (decrease) increase in cash and cash equivalents  (83,378)  37,285   (46,745)  147,417 
                
Cash and cash equivalents at beginning of period  303,617   72,537 
Cash and cash equivalents at beginning of year  303,617   72,537 
                
Cash and cash equivalents at end of period $220,239  $109,822  $256,872  $219,954 
                
Supplemental disclosure of cash flow information:                
Cash paid for interest
 $60,794  $33,902  $76,803  $54,854 
Income taxes paid
 $--  $--  $-  $- 
                
Non-cash investing and financing activities:                
Percentage of royalty interest purchase issued as payment for finder’s fee
 $31,863  $46,250 
Asset retirement obligations
 $21,183  $12,469  $23,152  $26,076 



The accompanying notes are an integral part of
the consolidated financial statements.
 
Page 6
 
MEXCO ENERGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Nature of Operations

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position of the Company as of September 30,December 31, 2008, and the results of its operations and cash flows for the interim periods ended September 30,December 31, 2008 and 2007.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for a full year. The accounting policies followed by the Company are set forth in more detail in Note A2 of the “Notes to Consolidated Financial Statements” in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. However, the disclosures herein are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Form 10-K.

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.

Stock-based Compensation.  The Company recognized compensation expense of $13,002$12,481 and $33,387$13,989 in general and administrative expense in the Consolidated Statements of Operations for the three months ended September 30,December 31, 2008 and 2007, respectively.  Compensation expense recognized for the sixnine months ended September 30,December 31, 2008 and 2007 was $32,447$44,928 and $52,516,$66,506, respectively.

The following table is a summary of activity of stock options for the sixnine months ended September 30,December 31, 2008:

  
Number of
Shares
  
Weighted Average
Exercise Price
Per Share
  
Weighted Average
Contract Life
in Years
  
Aggregate
Intrinsic
Value
 
Outstanding at March 31, 2008
  290,000  $6.06   3.30  $(535,750)
Granted
  --   --         
Exercised
  117,500   5.85         
Forfeited or Expired
  20,000   7.75         
Outstanding at September 30, 2008
  152,500  $6.00   3.81  $1,679,303 
                 
Vested at September 30, 2008
  112,500  $6.07   3.52  $1,231,253 
Exercisable at September 30, 2008
  112,500  $6.07   3.52  $1,231,253 

There were no stock options granted during the six months ended September 30, 2008 and 2007.
     Weighted Average  Weighted Average  Aggregate 
  Number of  Exercise Price  Contract Life  Intrinsic 
  Shares  Per Share  in Years  Value 
Outstanding at March 31, 2008
  290,000  $6.06   3.30  $(535,750)
Granted
  -   -         
Exercised
  117,500   5.85         
Forfeited or Expired
  20,000   7.75         
Outstanding at December 31, 2008
  152,500  $6.00   3.30  $974,753 
                 
Vested at December 31, 2008
  118,750  $5.98   3.25  $761,753 
Exercisable at December 31, 2008
  118,750  $5.98   3.25  $761,753 
 
Page 7
 
There were no stock options granted during the nine months ended December 31, 2008.  During the sixnine months ended September 30,December 31, 2007, stock options covering 25,000 shares were granted.

During the nine months ended December 31, 2008, employees and directors exercised options on a total of 117,500 shares at exercise prices between $4.00 and $8.24 per share.  The Company received proceeds of $686,928 from these exercises. The total intrinsic value of the exercised options was $4,177,440.  No tax deduction is recorded when options are awarded. Of these exercised options, 44,500 shares resulted in a disqualifying disposition and a tax benefit for the Company of $471,130$538,187 for the sixnine months ended September 30,December 31, 2008.  The Company issued new shares of common stock to settle these option exercises.  Stock options covering 1,000 shares were exercised during the nine months ended December 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 nine months ended December 31, 2007, 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.

Outstanding options at September 30,December 31, 2008 expire between September 2009 and July 2014 and have exercise prices ranging from $4.00 to $8.24.

The total cost related to non-vested awards not yet recognized at September 30,December 31, 2008 totals approximately $59,965$47,483 which is expected to be recognized over a weighted average of 2.72.3 years.

Asset Retirement Obligations.  The Company’s asset retirement obligations relate to the plugging of wells, the removal of facilities and equipment, and site restoration on oil and gas properties.  SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recorded in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset.

The following table provides a rollforward of the asset retirement obligations for the first sixnine months of fiscal 2009:

Carrying amount of asset retirement obligations as of April 1, 2008
 $424,789  $424,789 
Liabilities incurred
  21,183  23,152 
Liabilities settled
  (624) (1,093)
Accretion expense
  14,204   21,495 
Carrying amount of asset retirement obligations as of September 30, 2008
  459,552 
Carrying amount of asset retirement obligations as of December 31, 2008
 468,343 
Less: Current portion
  50,000   50,000 
Non-Current asset retirement obligation
 $409,552  $418,343 

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

Related Party Transactions.  A Family Limited Partnership of Thomas Craddick a member of the board of directors and Company employee, 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.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.  As of September 30,December 31, 2008, Mr. Craddick owed $30,651did not have a balance due for his share of the expenses on this well, whichwell.  This personal investment was subsequently paidmade on October 1, 2008.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.  The Company incurred charges from Mr. Smith for services rendered under this agreement and bonuses of approximately $29,370$35,500 and $59,370$94,870 for the three and sixnine months ended September 30,December 31, 2008, respectively. As of September 30,December 31, 2008, there werewas an outstanding invoicesinvoice of $11,870$7,500 payable to Mr. Smith.Smith which was subsequently paid on January 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.  Royalties paid to Mr. Smith from the Reeves County well were $2,924$3,836 for the sixnine months ended September 30,December 31, 2008.  Mr. Smith invested his personal funds in a working interest (2.5% before payout and 1.875% after payout) in the Company’s wells in Reeves County, Texas (2.5% before payout and 1.875% after payout) and Ward County, Texas.Texas (2.0% before payout and 1.5% after payout), on a non-promoted basis.  As of September 30,December 31, 2008, Mr. Smith owed $11,795did not have a balance due for his share of the expenses on these wells.

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Income Per Common Share.  Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares (stock options) outstanding during the period.  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 three and sixnine month periods ended September 30,December 31, 2008 and 2007.2007:
 
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 Three Months Ended  Nine Months Ended 
 
Three Months Ended
September 30
  
Six Months Ended
September 30
  December 31  December 31 
 2008  2007  2008  2007  2008  2007  2008  2007 
Weighted average common shares
                        
outstanding - basic
 1,873,127  1,772,268  1,817,962  1,774,526   1,874,866   1,764,649   1,836,999   1,771,222 
Effect of the assumed exercise of
                                
dilutive stock options
  102,326   --   104,606   11,871   63,880   7,934   91,030   6,786 
Weighted average common share
                                
outstanding - dilutive
  1,975,453   1,772,268   1,922,568   1,786,397   1,938,746   1,772,583   1,928,029   1,778,008 
                                
Earnings per common share:                                
Basic
 $0.27  $--  $0.58  $0.01  $0.07  $0.13  $  0.64  $0.14 
Diluted
 $0.26  $--  $0.55  $0.01  $0.07  $0.12  $  0.61  $0.14 

For the three month and sixnine month periods ended September 30,December 31, 2008, no potential common shares relating to stock options were excluded in the computation of diluted net income per share.  For the three month and sixnine month periods ended September 30,December 31, 2007, potential common sharesstock of 274,000 and 224,000, respectively,240,000 shares, relating to stock options, were excluded in the computation of diluted net income per share because the options were anti-dilutive.  The September 30,December 31, 2007 anti-dilutive stock options had a weighted average exercise price of $6.75.$6.49.

Income Taxes.  The Company recognizes deferred tax assets and liabilities for 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. For the three and sixnine months ending September 30,December 31, 2008, current income tax is $257,562$67,057 and $471,130$538,187 and deferred income tax is $8,726$2,311 and $39,859,$42,170, resulting in an effective tax rate of 34%35% and 33%, respectively.  There was no current income tax expense for the three and sixnine months ending September 30,December 31, 2007.  There was a deferred income tax benefitexpense of $5,498$102,468 and $115,302 for the three months and nine months ended September 30,December 31, 2007, and a deferredrespectively.  The effective income tax expense of $12,834rate for the sixthree and nine months ended September 30,December 31, 2007 which resulted in an effective tax rate of 33%was 32%.

Effective April 1, 2007, we adopted the provisions of Financial Accounting Standards Bulletin ("FASB"(“FASB”) Interpretation No,No. 48, Accounting for Uncertainty in Income Taxes -– An Interpretation of FASB Statement No. 109 ("(“FIN 48"48”), which clarifies the financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. For the sixnine months ending September 30,2008,December 31, 2008, the amount of unrecognized tax benefits was $563,000.approximately $496,000.  For the sixnine months ending September 30,December 31, 2007, there were no unrecognized tax benefits.  Any interest and penalties related to incomeuncertain tax positions are recorded as interest expense and general and administrative expense, respectively.

Investment in GazTex, LLC.  The Company’s 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 from January 16, 2007, Mexco owned 100% of the interest.  In May 2008, the Company dissolved GazTex, LLC and received the initial cash investment less related fees and expenses for a net amount of $18,700.

Long Term Liabilities.  Long term liabilities consist of 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 subsidiaries and all of the Company’s oil and gas properties.   In September 2008, the borrowing base was redetermined and set at $4,900,000 bearing interest at prime rate per annum$4,900,000.  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 British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) daily floating rate, plus 2.50 percentage points.  Interest on the outstanding amount under the credit agreement is payable monthly.  In addition, the Company will pay an unused commitment fee in an amount equal to ½ 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.  Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, are outstanding under the facility, one with the Texas Railroad Commission and one with the State of New Mexico.  InterestThe loan agreement contains customary covenants for credit facilities of this type including limitations on disposition of assets, mergers and reorganizations.  The Company is also obligated to meet certain financial covenants under this agreementthe loan agreement.  The Company is payable monthly at prime rate (5.0% and 7.75% at September 30, 2008 and 2007, respectively).in compliance with all covenants as of December 31, 2008.  The balance outstanding on the line of credit as of September 30,December 31, 2008 was $950,000.$1,650,000.
 
Subsequent Events. 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 million. This property contains three (3)  development wells in the Newark East (Barnett Shale) Field which have been drilled and are being prepared for production. 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.
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Recent Accounting Pronouncements.  Effective April 1, 2008, the Company implemented Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements.  The Company elected to implement this Statement with the one-year deferral permitted by FASB Staff Position (“FSP”) 157-2 for nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed on a recurring basis (at least annually).  The deferral applies to nonfinancial assets and liabilities measured at fair value in a business combination; impaired properties, plants and equipment; intangible assets and goodwill; and initial recognition of asset retirement obligations and restructuring costs for which the Company uses fair value.  Management does not expect any significant impact to the consolidated financial statements when SFAS 157 for these assets and liabilities is implemented.
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In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of FASB statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP is effective upon issuance and will not have a material impact on our financial position, results of operations or cash flows.

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.  Accordingly, the Company will adopt SFAS No. 162 within the required period.  The Company does not expect that the adoption of this Standard will have an impact on the financial statements.

In June 2008, the SEC announced that it has approved a one-year extension of the compliance data for smaller reporting companies to meet the section 404(b) auditor attestation requirement of the Sarbanes-Oxley Act.  With the extension, small companies will now be required to provide the attestation reports in their annual reports for the fiscal years ending on or after December 15, 2009.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of FASB statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP is effective upon issuance and will not have a material impact on our financial position, results of operations or cash flows.

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 its financial disclosures.

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

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

Cautionary Statements Regarding Forward-Looking Statements.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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”).  Forward-looking statements can be identified with words and phrases such as “believe,” “expect,” “anticipate,” “should,” “estimate,” “foresee” or other words and phrases of similar meaning.  Forward-looking statements appear throughout this Form 10-Q with respect to, among other things:  profitability, planned capital expenditures; estimates of oil and gas production, estimates of future oil and gas prices; estimates of oil and gas reserves; future financial condition or results of operations; and business strategy and other plans and objectives for future operations. Forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in any forward-looking statement.  While we have made assumptions that we believe are reasonable, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change.  All forward-looking statements in the Form 10-Q are qualified in their entirety by the cautionary statement contained in this section.  We do not undertake to update, revise or correct any of the forward-looking information.

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Liquidity and Capital Resources.  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.

For the first sixnine months of fiscal 2009, cash flow from operations was $1,621,064$2,366,686 compared to $590,656$658,241 for the first sixnine months of fiscal 2008.  This increase was primarily due to an increase in cash provided by oil and gas sales.  Cash of $1,231,574$2,709,451 was used for additions to oilproperty and gas propertiesequipment and $1,650,000$950,000 for net reductionreductions in long term debt.  Accordingly, net cash decreased $83,378.$46,745.

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, and are preparing to buildbuilt a pipeline to enable productionand commenced testing and sales of natural gas from this well.  Our share of the costs incurred for this project through October 2008January 2009 for our 31.25% working interest is approximately $440,000.$524,000.

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, and 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.  There areThis acreage now has 8 producing natural gas wells with an additional 6 potential drill sites on this acreage.well currently being drilled.

Effective July 1, 2008, we purchased a well in Loving County, Texas currentlywhich is capable of producing from the Lower Cherry Canyon section.  We are acting as operator and have re-entered the well, tested one horizon and plan to test two other pay horizons.  Our share of the costs for our 31.25% working interest through October 2008January 2009 is approximately $81,000.$116,000.

In September 2008, we committed to participate in the drilling of a development well in Limestone County, Texas.  This well has been drilledcompleted and is in the process of completion.currently producing.  Costs incurred for this project through October 9, 2008January 2009 are approximately $22,000.
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$31,000.

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 pending completion of a pipeline for sales of natural gas.  Costs incurred for this project through October 2008January 2009 for our 25.5% working interest are approximately $72,000.$76,000. 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 million.  This property contains three (3) development wells in the Newark East (Barnett Shale) Field which have been drilled and are being prepared for production.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 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 several otherothers projects and are reviewing several other projects in which we may participate.  The cost of such projects would be funded, to the extent possible, from existing cash balances and cash flow from operations. The remainder may be funded through borrowings on the credit facility.

At September 30,December 31, 2008, we had working capital of approximately $929,374$497,559 compared to working capital of $627,674 at March 31, 2008, an increasea decrease of $301,700.$130,115.  This was mainly as a result of an increasea decrease in accounts receivable partially offset by an increase in accounts payableoil and accrued expenses.gas sales.

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Crude oil and natural gas prices have fluctuated significantly in recent years.  There have been substantial decreases in recent months.  Fluctuations in price have a significant impact on our financial condition and liquidity.  However, management is of the opinion that cash flow from operations and funds available from financing will be sufficient to provide adequate liquidity for the current fiscal year.

We have a revolving credit agreement with Bank of America, N.A. (“Bank”), which provides for a credit facility of $5,000,000, subject to a borrowing base determination.  In September 2008, the borrowing base was redetermined and increased toset at $4,900,000 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 ourthe Company’s wholly owned subsidiaries and all of ourthe Company’s oil and gas properties.   Two letters of credit for $50,000 each, in lieu of a plugging bond covering the properties we operate, are outstanding under the facility, one with the Texas Railroad commissionCommission and one with the State of New Mexico.  Interest under this agreement is payable monthly at prime rate (5.0% and 7.75% at September 30, 2008 and 2007, respectively).  This agreement generally restricts our ability to transfer assets or control of the Company, incur debt, extend credit, change the nature of our business, substantially change management personnel or pay cash dividends.monthly.  The balance outstanding under this agreement as of September 30,December 31, 2008 was $950,000$1,650,000 and $1,750,000$1,575,000 as of November 7, 2008.February 11, 2009.

Results of Operations – Three Months Ended September 30,December 31, 2008 and 2007. Net income decreased from $221,114 for the quarter ended December 31, 2007 to $131,501 for the quarter ended December 31, 2008, a decrease of $89,613 or 41% primarily as a result of a decrease in oil and gas sales and an increase in depreciation, depletion and amortization.

Oil and gas sales.  Revenue from oil and gas sales decreased from $952,211 for the third quarter of fiscal 2008 to $908,253 for the same period of fiscal 2009.  This decrease of 5% or $43,958 resulted from a decrease in oil and gas prices and oil production partially offset by an increase in gas production.  Revenues from oil and gas royalty interests accounted for approximately 47% of our total revenues for the third quarter of fiscal 2009 compared to 16% for the third quarter of fiscal 2008. Average gas prices decreased from $6.36 per mcf for the third quarter of fiscal 2008 to $4.54 per mcf for the same period of fiscal 2009.  Average oil prices also decreased from $86.05 per bbl for the third quarter of fiscal 2008 to $54.55 for the same period of fiscal 2009.  Oil and gas production quantities were 4,515 barrels (“bbls”) and 88,630 thousand cubic feet (“mcf”) for the third quarter of fiscal 2008 and 4,190 bbls and 149,778 mcf for the same period of fiscal 2009, a decrease of 7% in oil production and an increase of 69% in gas production.

Production and exploration.  Production costs decreased 1% from $241,019 for the third quarter of fiscal 2008 to $237,736 for the same period of fiscal 2009. This was the result of decreased production taxes due to the decrease in oil and gas sales partially offset by an increase in lease operating expenses and ad valorem taxes.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 55%, from $174,842 for the third quarter of fiscal 2008 to $271,530 for the same period of fiscal 2009, primarily due to an increase to the full cost pool amortization base.

General and administrative expenses.  General and administrative expenses increased 3% from $187,648 for the third quarter of fiscal 2008 to $193,102 for the same period of fiscal 2009. This was due to an increase in salaries, consulting services and fees.

Interest expense. Interest expense decreased 24% from $22,791 for the third quarter of fiscal 2008 to $17,226 for the same period of fiscal 2009, due to a decrease in borrowings as well as interest rate.

Results of Operations – Nine Months Ended December 31, 2008 and 2007. Net income increased from a net loss of $8,756$247,164 for the quarternine months ended September 30,December 31, 2007 to a net profit of $511,115$1,181,405 for the quarter ended September 30, 2008,same period of fiscal 2009, an increase of $519,871 as a result of an increase in oil and gas sales.$934,241 or 378%.

Oil and gas sales.sales.  Revenue from oil and gas sales increased from $839,947$2,642,302 for the second quarter of fiscal 2008nine months ended December 31, 2007 to $1,595,209$4,176,050 for the same period of fiscal 2009. This increase of 90%58%, or $755,262$1,533,748, resulted from an increaseincreases in oil and gas prices and gas production partially offset by a decrease in oil production. Revenues from oil and gas royalty interests accounted for approximately 36% of our total revenues for the second quarter of fiscal 2009nine months ended December 31, 2008 compared to 23%18% for the second quartersame period of fiscal 2008.  Average gas prices increased from $5.97$6.35 per mcf for the second quarter of fiscal 2008first nine months ended December 31, 2007 to $8.78$7.45 per mcf for the same period of fiscal 2009.  Average oil prices also increased from $70.53$72.09 per bbl for the second quarterfirst nine months of fiscal 2008 to $116.07$96.89 for the same period of fiscal 2009.  Oil and gas production quantities were 4,441 barrels (“bbls”)13,348 bbls and 88,266 thousand cubic feet (“mcf”)264,435 mcf for the second quarter of fiscal 2008first nine months ended December 31, 2007 and 4,60612,903 bbls and 120,856392,921 mcf for the same period of fiscal 2009, an increasea decrease of 4%3% in oil production and 37%an increase of 49% in gas production.

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Production and exploration.Production costs decreased 23% from $467,336$1,041,405 for the second quarter of fiscal 2008first nine months ended December 31, 2007 to $357,753$930,477 for the same period of fiscal 2009.  This was the result of an approximate 82%78% decrease in repairs and maintenance to operated wells in the El Cinco field partially offset by an increase in production taxes due to increased revenues.revenues and an increase in ad valorem taxes.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 31%41%, from $183,797$531,523 for the second quarter of fiscal 2008first nine months ended December 31, 2007 to $240,962$751,337 for the same period of fiscal 2009 primarily due to an increase to the full cost pool amortization base and an increase in production.
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General and administrative expenses.  General and administrative expenses increased 11% from $178,918 for the second quarter of fiscal 2008 to $199,239 for the same period of fiscal 2009. This was due to an increase in salaries, consulting services and fees.

Interest expense. Interest expense decreased 2% from $20,345 for the second quarter of fiscal 2008 to $19,854 for the same period of fiscal 2009, due to a decrease in the interest rate, partially offset by increased borrowings.

Results of Operations – Six Months Ended September 30, 2008 and 2007. Net income increased from $26,049 for the six months ended September 30, 2007 to $1,049,904 for the same period of fiscal 2009, an increase of $1,023,855 or 3930%.

Oil and gas sales. Revenue from oil and gas sales increased from $1,690,092 for the six months ended September 30, 2007 to $3,267,797 for the same period of fiscal 2009. This increase of 93%, or $1,577,705, resulted from an increase in oil and gas prices and gas production.  Revenues from oil and gas royalty interests accounted for approximately 37% of our total revenues for the six months ended September 30, 2008 compared to 24% for the same period of fiscal 2008.  Average gas prices increased from $6.35 per mcf for the first six months ended September 30, 2007 to $9.24 per mcf for the same period of fiscal 2009.  Average oil prices also increased from $64.95 per bbl for the first six months of fiscal 2008 to $117.25 for the same period of fiscal 2009.  Oil and gas production quantities were 8,833 bbls and 175,805 mcf for the first six months ended September 30, 2007 and 8,713 bbls and 243,143 mcf for the same period of fiscal 2009, an increase of 38% in gas production and a decrease of 1% in oil production.

Production and exploration. Production costs decreased 13% from $800,386 for the first six months ended September 30, 2007 to $692,741 for the same period of fiscal 2009.  This was the result of an approximate 81% decrease in repairs and maintenance to operated wells in the El Cinco field partially offset by an increase in production taxes due to increased revenues.

Depreciation, depletion and amortization. Depreciation, depletion and amortization expense increased 35%, from $356,681 for the first six months ended September 30, 2007 to $479,807 for the same period of fiscal 2009 primarily due to an increase to the full cost pool amortization base and an increase in production.base.

General and administrative expenses.  General and administrative expenses increased 7%6% from $448,543$636,191 for the first sixnine months ended September 30,December 31, 2007 to $480,900$674,002 for the same period of fiscal 2009.  This was due to an increase in salary expense, consulting services and fees.

Interest expense.Interest expense increased 50%21% from $35,694$58,484 for the first sixnine months ended September 30,December 31, 2007 to $53,589$70,815 for the same period of fiscal 2009 due to an increase in borrowings partially offset by a decrease indecreased interest rates.rate.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The primary sources of market risk for us include fluctuations in commodity prices and interest rate fluctuations.  At September 30,December 31, 2008, we had not entered into any hedge arrangements, commodity swap agreements, commodity futures, options or other similar agreements relating to crude oil and natural gas.

Interest Rate Risk.  At September 30,December 31, 2008 we had an outstanding loan balance of $950,000$1,650,000 under our $5.0 million revolving credit agreement, which bears interest at BBA LIBOR daily floating rate, plus 2.50 percentage points.  In addition, beginning March 31, 2009, we will pay quarterly, in arrears, an unused commitment fee in an amount equal to ½ of 1 percent (.5%) times the prime rate, which varies from time to time.daily average of the unadvanced amount of the commitment.  If the interest rate on our bank debt increases or decreases by one percentage point, our annual pretax income would change by $9,500$16,500 based on the outstanding balance at September 30,December 31, 2008.

Credit Risk.  Credit risk is the risk of loss as a result of nonperformance by other parties of their contractual obligations. Our primary credit risk is related to oil and gas production sold to various purchasers and the receivables are generally not collateralized.  At September 30,December 31, 2008, our largest credit risk associated with any single purchaser was $188,620.$171,619. We are also exposed to credit risk in the event of nonperformance from any of our working interest partners.  At September 30,December 31, 2008, our largest credit risk associated with any working interest partner was $42,759.$72,465. We have not experienced any significant credit losses.

Volatility of Oil and Gas Prices.  Our revenues, operating results and future rate of growth 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.
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Changes in oil and gas prices impact both estimated future net revenue and the estimated quantity 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, 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.

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 the first sixnine months of fiscal 2009, our pretax income would have changed by $8,713.$12,903. If the average gas price had increased or decreased by ten cents per mcf for the first sixnine months of fiscal 2009, our pretax income would have changed by $24,314.$39,292.

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Item 4.  Controls and Procedures

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. At the end of the period covered by this report, 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).  Based onupon such evaluation, such officers have concluded that, as of September 30,December 31, 2008, our disclosure controls and procedures were effective in timely alerting them to material information relating to us (and our consolidated subsidiaries) required to be included in our periodic SEC filings.

No changes in the Company’s internal control over financial reporting occurred during the quarter ended September 30,December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II – OTHER INFORMATION

Item 1.    Legal Proceedings
We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business.  We are currently a party to a lawsuit that is being filed against the drilling company of a well in which we have a working interest of approximately 6.5%.  We are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under various environmental protection statutes or other regulations to which we are subject.

Item 1A.  Risk Factors
There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2008 Annual Report on Form 10-K, except to add that worldwide credit markets have experienced considerable difficulty in recent months. Thus, Mexco expects future increased costs of and restricted ability to obtain financing.

Item 4.     Submission of Matters to a Vote of Security Holders
Our annual meeting was held on September 11, 2008.  Following are the two proposals voted on at the meeting andthe results of each:

Proposal #1 was the election of the following directors:
 Votes For: Votes Withheld:
Thomas R. Craddick
1,435,205 33,898
Thomas Graham, Jr.
1,449,322 19,781
Arden R. Grover
1,450,777 18,326
Jack D. Ladd
1,450,777 18,326
Nicholas C. Taylor
1,449,644 19,459

Proposal #2 was to ratify the selection of Grant Thornton, LLP as independent registered public accounting firm for the Company for the fiscal year ended March 31, 2009.  Votes for were 1,445,419, votes against were 9,382 and votes abstained were 14,302.
Item 5.     Other Information
The Board of Directors of the Company amended Article II and Article X of the Company's By-laws (the "By-laws"), effective as of November 15, 2008, to revise the date of the annual meeting of shareholders to the second Thursday in September from the previously designated second Tuesday in July; and to allow for the issuance of uncertificated shares thereby allowing the Company to participate in the Direct Registration System, which is currently administered by The Depository Trust Company.  The Direct Registration System allows investors to have securities registered in their names without the issuance of physical certificates and allows investors to electronically transfer securities to broker-dealers in order to effect transactions without the risks and delays associated with transferring physical certificates.  The Article X amendment to the By-laws also provides that each registered stockholder shall be entitled to a stock certificate upon written request to the transfer agent or registrar of the Company.

The full text of the By-laws, as amended, is filed as Exhibit 3.1 to this Form 10-Q, and amended Articles II and X thereof is incorporated herein by reference.

Item 6.     Exhibits

Item 1.3.1Amended and Restated Bylaws of the Mexco Energy CorporationLegal 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 were a party to a lawsuit against the drilling company of a well in which we have a working interest of approximately 6.5%.  The operator of this well is currently in the process of dismissing all claims.  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 1A.Risk Factors
There have been no material changes to the information previously disclosed in Item 1A. “Risk Factors” in our 2008 Annual Report on Form 10-K except to add that worldwide credit markets have experienced considerable difficulty in recent months.  Thus, we expect future increased costs of and restricted ability to obtain financing.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 6.Exhibits
  
 31.1Certification of the Chief Executive Officer of Mexco Energy Corporation
   
 31.2Certification of the Chief Financial Officer of Mexco Energy Corporation
   
 32.1Certification of the Chief Executive Officer and Chief Financial Officer of Mexco Energy Corporation pursuant to 18 U.S.C. §1350
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SIGNATURES

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

MEXCO ENERGY CORPORATION
(Registrant)


Dated: November 13, 2008                                       /s/ Nicholas C. Taylor
Nicholas C. Taylor
President


Dated: November 13, 2008                                       /s/Tamala L. McComic
Tamala L. McComic
Vice President, Treasurer and Assistant Secretary
MEXCO ENERGY CORPORATION
(Registrant)
Dated: February 11, 2009/s/ Nicholas C. Taylor
Nicholas C. Taylor
President
Dated: February 11, 2009/s/ Tamala L. McComic
Tamala L. McComic
Vice President, Treasurer and Assistant Secretary
 
 

 
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