U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K





(Mark One)





|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ______________ to ______________





Commission File Number :333-162516


CIK Number:0001377469


_______________________________________________





PEGASUS TEL, INC.





(Exact name of registrant as specified in its charter)


______________________________________________





DELAWARE

41-2039686(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)118 Chatham Road, Syracuse, NY

13203(Address of principal executive offices)

(zip code)





Registrant's telephone number, including area code:

Issuer’s telephone number:   (315) 491-8262



Carl E. Worboys

118 Chatham Road

Syracuse, NY  13203

Telephone: (315) 491-8262





Securities registered under Section 12(b) of the Exchange Act:


None.





Securities registered under Section 12(g) of the Exchange Act:


Common Stock, $.0001 par value per share


(Title of Class)


1





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]





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 [X]





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 (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 90 days.


Yes [X] No [  ]





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):





Large accelerated filer [  ]
Accelerated filer [  ]Non-accelerated filer [  ]
Smaller reporting company [ X ](Do not check if a smaller reporting company)





Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).


Yes [  ]   No [ X ]





State issuer’s revenues for its most recent fiscal year: $4,544





As of March 15, 2011 the aggregate market value of the 7,107,991 shares common stock held by non-affiliates was approximately $711 based upon the par value of $.0001.





As of December 31, 2010, there were 20,215,136 shares of common stock outstanding.





Documents incorporated by reference: None.





Transitional Small Business Disclosure Format: Yes [  ]    No [ X ]





2





PEGASUS TEL.TABLE OF CONTENTSPART IITEM 1.
BUSINESS
4ITEM 1.A
RISK FACTORS
10ITEM 2.
PROPERTIES
14ITEM 3.
LEGAL PROCEEDINGS
14ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
14PART IIITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
15ITEM 6.
SELECTED FINANCIAL DATA
15ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16ITEM 7.A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
23ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
43ITEM 9.A
CONTROLS AND PROCEDURES
43ITEM 9.B
OTHER INFORMATION
44PART IIIITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
45ITEM 11.
EXECUTIVE COMPENSATION
46ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
47ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
48ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
48PART IVITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
49SIGNATURES
50





3








PART I.





FORWARD LOOKING STATEMENTS





When used in this Prospectus, the words or phrases “will likely result,” “we expect,” “will continue,” “anticipate,” “estimate,” “project,” ”outlook,” “could,” “would,” “may,” or similar expressions are intended to identify forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Such risks and uncertainties include, among others, success in reaching target markets for products in a highly competitive market and the ability to attract future customers, the size and timing of additional significant orders and their fulfillment, the success of our business emphasis, the ability to finance and sustain operations, the ability to raise equity capital in the future despite, and the size and timing of additional significant orders and their fulfillment. We have no obligation to publicly release the results of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.





ITEM 1.  BUSINESS .





Pegasus Tel, Inc., or Pegasus, was incorporated under the laws of the State of Delaware on February 19, 2002 to enter into the telecommunication business.





On March 28, 2002, American Industries, Inc. and Pegasus Tel, Inc. entered into an agreement with Pegasus Communications, Inc., a New York corporation, to acquire 100% of the outstanding shares of Pegasus Communications, Inc. in exchange for 72,721,966 shares of common stock of American Industries, Inc.  Pegasus Tel, Inc. continued as the surviving corporation and Pegasus Communications, Inc. was merged out of existence.





On September 21, 2006, the Company filed Amended and Restated Certificate of Incorporation increasing its authorized capital to 110,000,000 shares, of which 100,000,000 shares were designated as Common Stock, par value $0.0001 per share, and the remaining 10,000,000 as Preferred Stock, par value $0.0001 per share.  The designations and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of such shares shall be determined by the Board of Directors from time to time, without stockholder approval.





On May 7, 2007, we filed a Registration Statement on Form 10-SB (File No.: 0-52628), or the Registration Statement, with the SEC to register the Pegasus common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Registration Statement went effective on July 6, 2007 through the operation of law 60 days after its initial filing. On March 23, 2009, we filed with the SEC a Form 15 to deregister our common stock under Section 12(g) of the Exchange Act and to terminate our status as a reporting company under the Exchange Act.





On May 15, 2007, the Company filed an Amended Certificate of Incorporation to effectuate a forward stock split 5,100 to 1.  This change is retro-active and therefore changes the 1,000 shares of common stock issued on December 31, 2003 to 5,100,000 shares of common stock.  The par value remains at $.0001 per share.





On August 5, 2008, Pegasus filed a Certificate of Designations, Powers, Preferences and Rights (the “Certificate of Designation”) with the Secretary of State of the State of Delaware thereby designating 2,000,000 shares of preferred stock as Series A Convertible Preferred Stock, $0.0001 (the “Series A Preferred Stock”).  The Certificate of Incorporation of Pegasus authorizes the designation and issuance of an aggregate of ten million (10,000,000) shares of preferred stock in one or more series with all rights and privileges determined by the Board of Directors of Pegasus.  Prior to the filing of the Certificate of Designation, there were no shares of preferred stock designated or issued. Pursuant to the Certificate of Designation, each share of Series A Preferred Stock may be converted at any time by Pegasus or the holders thereof into ten (10) fully-paid and non-assessable shares of Pegasus Common Stock.





On August 15, 2008, Pegasus issued an aggregate of 1,800,000 shares of Series A Preferred Stock to an aggregate of 17 individuals pursuant to a Securities Purchase Agreement for $0.0001per share of Series A Preferred Stock. Pegasus issued the Series A Preferred Stock pursuant to an exemption under Section 4(2) of the Securities Act due to the fact that it did not involve a public offering of securities. The shares of Series A Preferred Stock were “restricted securities” (as such term is defined in the Securities Act).


4





On August 18, 2008, Sino Gas International Holdings, Inc., a Utah corporation, or Sino, (OTCBB: SGAS), our former parent company, distributed to its stockholders of record as of August 15, 2008, 100% of the issued and outstanding common stock of Pegasus.  The ratio of distribution was one (1) share of common stock of Pegasus for every twelve (12) shares of  common stock of Sino (1:12).  Fractional shares were rounded up to the nearest whole-number.  An aggregate of 2,215,136 shares of Pegasus common stock were issued pursuant to the distribution to an aggregate of 167 Sino stockholders. The Pegasus common stock issued were and remain “restricted securities” (as defined in Rule 144 of the Securities Act of 1933, as amended).


On August 18, 2008 and pursuant to the Certificate of Designation, Pegasus converted an aggregate of 1,800,000 shares of Series A Preferred Stock into an aggregate of 18,000,000 shares of Pegasus common stock.  Pegasus issued the common stock pursuant to Section 3(a)(9) of the Securities Act due to the fact that the securities were exchanged upon conversion of the Series A Preferred Stock held by existing security holders and there was no commission or other remuneration paid or given directly or indirectly for soliciting such exchange.





On March 23, 2009, Pegasus filed a Form 15 (File No. 000-52628) with the Securities and Exchange Commission pursuant to which the Company de-registered its class of Common Stock under the Securities Exchange Act of 1934, as amended.





On October 15, 2009, the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission and on December 28, 2009 the Company’s Registration Statement went effective.





We are subject to the information reporting requirements of the Exchange Act, and accordingly, are required to file periodic reports, including quarterly and annual reports and other information with the Securities and Exchange Commission. Any person or entity may read and copy our reports with the Securities and Exchange Commission at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Room by calling the SEC toll free at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov where reports, proxies and informational statements on public companies may be viewed by the public.





Services and Products





We own, operate and manage privately owned public payphones in the County of Delaware, State of New York. As of December 31, 2010, we owned, operated, and managed 11 payphones.  The Company does not have any long-term agreements with the customers of these payphones and they may terminate our license to operate at will.  We may pay site owners a commission based on a flat monthly rate or on a percentage of sales. Some of the businesses include, but are not limited to, retail stores, convenience stores, bars, restaurants, gas stations, colleges and hospitals. In the alternative, our agreement with business owners may be to provide the telecommunications services without the payment of any commissions.





5


The chart below describes the specific location of each of our 11 payphones respectively and the amount of revenue generated by each payphone for the audited fiscal years ended December 31, 2010. Some figures were updated from the previous estimates in the 2010 quarterly filings.








No.:

Location

20101

Andes Hotel

110 Main St., Andes, NY  13731

$
3722

Andes Public Booth

21 Main St., Andes, NY  13731

$
1403

Margaretville Central School

415 Main St., Margaretville, NY 12455

$
2854

Margaretville Memorial Hospital

42084 State Hwy. 28, Margaretville, NY 12455 (downstairs)

$
2005

Margaretville Memorial Hospital

42084 State Hwy. 28, Margaretville, NY 12455 (upstairs)

$
1206

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (1 st Floor)

$
5987

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (2 nd Floor)

$
5928

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (3 rd Floor)

$
5909

Town of Middletown

42339 State Hwy. 28, Margaretville, NY 12455

$
69510

Hess Mart

42598 State Hwy. 28, Margaretville, NY  12455

$
78911

Arkville Country Store

43525 State Hwy. 28, Arkville, NY  12406

$
163Total Revenues

$
4,544





6


The chart below describes the specific location of each of our 11 payphones respectively and the amount of revenue generated by each payphone for the audited fiscal years ended December 31, 2009.





No.:

Location

20091

Andes Hotel

110 Main St., Andes, NY  13731

$
3322

Andes Public Booth

21 Main St., Andes, NY  13731

$
2403

Margaretville Central School

415 Main St., Margaretville, NY 12455

$
4004

Margaretville Memorial Hospital

42084 State Hwy. 28, Margaretville, NY 12455 (downstairs)

$
2505

Margaretville Memorial Hospital

42084 State Hwy. 28, Margaretville, NY 12455 (upstairs)

$
2056

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (1 st Floor)

$
6607

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (2 nd Floor)

$
6008

Mountainside Residential Care

42158 State Hwy. 28, Margaretville, NY 12455 (3 rd Floor)

$
5609

Town of Middletown

42339 State Hwy. 28, Margaretville, NY 12455

$
54010

Hess Mart

42598 State Hwy. 28, Margaretville, NY  12455

$
74711

Arkville Country Store

43525 State Hwy. 28, Arkville, NY  12406

$
237Total Revenues

$
4,771





The local telephone switch controls the traditional payphone technology. The local switch does not provide any services in the payphone that can benefit the owner of the phone. As we purchase phones from other companies, we upgrade them with "smart card" payphone technology which we license from Quortech. The upgrade is a circuit board with improved technology. The “smart card” technology allows us to determine the operational status of the payphone. It also tells us when the coins in the phone have to be collected, the number and types of calls that have been made from each phone, as well as other helpful information that helps us provide better service to our payphone using public. This upgrade of the phones reduces the number and frequency of service visits due to outages and other payphone-related problems and, in turn, reduces the maintenance costs. Other companies manufacture the components of the payphones for the industry including Universal Communications and TCI, which provides handsets, key pads, totalizers, and relays.





Payphone users can circumvent the usual payment method and avoid inserting a coin by using an access code or 800 number provided by a long distance carrier. These “dial-around” numbers, while convenient for users, leave payphone service providers uncompensated for the call made. The Federal Communications Commission, or the FCC, as instructed by Congress in the Telecommunications Act of 1996, created regulations to ensure that payphone service providers receive compensation for these “dial-around” calls.





The FCC requires the sellers of long distance toll free services to pay the payphone owner $0.494 cents per call. These funds are remitted quarterly through a service provided by the American Public Communication Council (APCC).





7


Market and Competition





The market in which we do business is highly competitive and constantly evolving. We face competition from the larger and more established companies -- from companies that develop new technology, as well as the many smaller companies throughout the country. The last several years have shown a marked increase in the use of cellular phones and toll free services which cut into our potential payphone customer base. Companies that have greater resources, including but not limited to, a larger sales force, more money, larger manufacturing capabilities and greater ability to expand their markets also cut into our potential payphone customers. Many of our competitors have longer operating histories, significantly greater financial strength, nationwide advertising coverage and other resources that we do not have. Our competitors might introduce a less expensive or more improved payphone. These, as well as other factors can have a negative impact on our income.





The competition from cellular phones is a very serious threat that can result in substantially less revenue per payphone. We have attempted to address this issue by avoiding locations that service business travelers. For many years, these locations were the most lucrative, but now they are the locations most impacted by the cellular user.





The large former Bell companies and other large companies who provide local service dominate the industry. These companies have greater financial ability than us, and provide the greatest competitive challenge. However, we compete with these companies by paying a commission to the site owner. The commission is an enticement for the site owner to use our phone on its site. We believe we are able to provide a higher quality customer service because the phones alert us to any technical difficulties, and we can service them promptly. The ability to immediately know that a problem exists with a payphone is very important because down time for a phone means lost revenue for us.





Significant Customers




We do not rely on a major customer for our revenue. We have a variety of small single businesses as well as some small chain stores that we service. We do not believe that we would suffer dramatically if any one customer or small chain decided to stop using our phones.





Significant Vendors





We must buy dial tone for each payphone from the local exchange carrier. As long as we pay the carrier bill, it is required to provide a dial tone. As a regulated utility, the exchange carrier may not refuse to provide us service. Alternate service exists in certain areas where Verizon competitors are located. We use alternate local service providers when we can get a better price for the service. We use long distance providers on all the payphones.





Intellectual Property





As we purchase phones from other companies, we upgrade them with "smart card" payphone technology. The upgrade is a circuit board with improved technology. The “smart card” technology allows us to determine on a preset time basis the operational status of the payphone. We are given a license to use the “smart card” technology from Quortech, the founder and manufacturer of “smart card” technology.  The technology informs us when the coins in the phone have to be collected, the number and types of calls that have been made from each phone, as well as other helpful information that helps us provide better service to our payphone using public. This upgrade of the phones reduces the number and frequency of service visits due to outages and other payphone-related problems and, in turn, reduces the maintenance costs.  Other companies manufacture the components of the payphones for the industry including Universal Communications and TCI, which provides handsets, key pads, totalizers, and relays.




We do not own any patents or trademarks. Companies in the telecommunications industry and other industries in which we compete own large numbers of patents, copyrights and trademarks and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property claims against us grows. We might not be able to withstand any third-party claims or rights against their use.





8


Government Regulation:





We are subject to varying degrees of regulation by federal, state, local and foreign regulators. The implementation, modification, interpretation and enforcement of these laws and regulations vary and can limit our ability to provide many of our services. Our ability to compete in our target markets depends, in part, upon favorable regulatory conditions and the favorable interpretations of existing laws and regulations.





FCC Regulation and Interstate Rates:





Our services are subject to the jurisdiction of the Federal Communications Commission (FCC) with respect to interstate telecommunications services and other matters for which the FCC has jurisdiction under the Communications Act of 1934, as amended.





Payphone users can circumvent the usual payment method and avoid inserting a coin by using an access code or 800 number provided by a long distance carrier. These “dial-around” numbers, while convenient for users, leave payphone service providers uncompensated for the call made. The Federal Communications Commission, as instructed by Congress in the Telecommunications Act of 1996, created regulations to ensure that payphone service providers receive compensation for these “dial-around” calls.





The FCC requires the sellers of long distance toll free services to pay the payphone owner $0.494 cents per call. These funds are remitted quarterly through a service provided by the American Public Communication Council (APCC).  If the FCC regulation requiring sellers of long distance toll free services to pay payphone owners $0.494 per call is reduced or repealed, it could have a negative effect upon our revenue stream. We have no control over what rules and regulations the state and federal regulatory agencies require us to follow now or in the future. It is possible for future regulations to be so financially demanding that they cause us to go out of business. We are not aware of any proposed regulations or changes to any existing regulations.





Telecommunications Act of 1996





The Telecommunications Act of 1996, regulatory and judicial actions and the development of new technologies, products and services have created opportunities for alternative telecommunication service providers, many of which are subject to fewer regulatory constraints. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of our pursuit of new opportunities resulting from the Telecommunications Act of 1996 and technological advances.





Research and Development





We have not expended any money in the last two fiscal years on research and development activities.





Seasonality





Our revenues from payphone operation are affected by seasonal variations, geographic distribution of payphones and type of location. Because we operate in the northeastern part of the country with many of the payphones located outdoor, weather patterns affect our revenue streams. Revenues drop off significantly during winter and conversely show an increase in the spring and summer. Revenues are generally lowest in the first quarter and highest in the third quarter.





Employees





The company does not have any employees.  Joseph  Passalaqua is our Chief Financial Officer, Secretary and Director and Carl E. Worboys is our Chief Executive Officer President and Director.





9


No trading market





There is currently no market for our common stock.  As the registration statement is now effective, we intend to solicit a registered broker/dealer to apply with FINRA to have our common stock quoted on the OTCBB Bulletin Board (OTCBB). We cannot assure that FINRA will approve the application or that a market for our common stock will develop or maintained.  In not, your investment might be illiquid.





Dividend Policy





We have never paid dividends. We do not intend to declare any dividends in the foreseeable future. We presently intend to retain earnings, if any, for the development and expansion of our business.





Industry Trends





We operate 11 payphones in upstate New York.  However, industry trends in the payphone industry are not specific to upstate New York; but, rather, mirror what is happening in the industry nationwide.  Over the past years, more and more people are opting to use personal cell phones to communicate as compared to pay phones.  Cell phone technology has advanced over the recent years and competition has made cell phones and cell phone service plans more affordable to the average consumer.  Pay phones have had a hard time competing with cell phones and we do not see this changing in the foreseeable future.  Consumers might opt to use pay phones in areas where cell phone reception is nonexistent or unreliable or when consumers do not wish to incur charges for minutes used on their cell phone.  This is not specific to upstate New York but apply to the cell phone industry nationwide.





ITEM 1A.  RISK FACTORS





In addition to the other information in this report, the following risks should be considered carefully in evaluating our business and prospects:





We are a development stage company and have history of losses since our inception.  If we cannot reverse our losses, we will have to discontinue operations.





At December 31, 2010, we had $289 in cash on hand and an accumulated deficit of $(270,262), causing our auditors to express their doubt as to our ability to continue as a going concern. We anticipate incurring losses in the near future.  We do not have an established source of revenue sufficient to cover our operating costs. Our ability to continue as a going concern is dependent upon our ability to successfully compete, operate profitably and/or raise additional capital through other means. If we are unable to reverse our losses, we will have to discontinue operations.





Our history of losses is expected to continue and will need to obtain additional capital financing in the future.





We have a history of losses and expect to generate losses until such a time when we can become profitable in the collection of payphone service fees.





As of December 31, 2010, we had $289 in cash and cash equivalents on hand and an accumulated deficit of $(270,262).





During 2006, a Shareholder and Officer of the Company, Joseph Passalaqua, advanced the company $10,673. This is a Related Party Accounts Payable. As of December 31, 2010, the Company owes $10,673.





During 2006, a Shareholder and Officer of the Company, Carl Worboys, advanced the Company $224. This is a Related Party Accounts Payable. As of December 31, 2010, the Company owes $224.





As of December 31, 2010, the Company had Related Party Accounts Payable in the amount of $13,692 due to Lyboldt-Daly, Inc. for Bookkeeping expenses.  Joseph Passalaqua (a major shareholder of the Company and officer of the company) is President and Sole Director of Lyboldt-Daly, Inc.





As of December 31, 2010, the Company owed $140,627 in Related Party Notes Payable.  These notes are owed to Shareholders of the Company, Joseph C. Passalaqua, Mary Passalaqua, and Cobalt Blue of which Mary Passalaqua is President.  These notes are accruing simple interest of 10%, 15% and 18% annually. As of December 31, 2010, the Company owed a total principle balance of $140,627 related to these notes and had accrued $38,431 in simple interest.


10





All notes are payable upon demand. We believe that our cash from borrowings will be insufficient to fund our operations and to satisfy our long-term liquidity needs for the next twelve months.  We will required to seek additional financing in the future to respond to increased expenses or shortfalls in anticipated revenues, respond to competitive pressures or  take advantage of unanticipated acquisition opportunities. We cannot be certain we will be able to find such additional financing on reasonable terms, or at all. If we are unable to obtain additional financing when needed, we could be required to modify our business plan in accordance with the extent of available financing.





We do not have an external credit facility.





We currently do not have an external credit facility.  The current economic recession has hampered small businesses, like ours, from obtaining loans and lines of credit from banks and lending agencies.  Overall, due to the recession and increasing bank failures, banks have become more selective when granting loans and/or lines of credit to businesses and individuals.  If we are unable to grow our business from generating revenues, we may need access to additional capital such as loans and/or lines of credit. We might not qualify for such loans and/or lines of credit. Our failure to secure an external credit facility could prevent us from growing our business or to cease operations.





Our future financings could substantially dilute our stockholders or restrict our flexibility.





We will need additional funding which may not be available when needed. We estimate that we will need $50,000 to continue our operations for the next 12 months.  If we are able to raise additional funds and by issuing equity securities, you may experience significant dilution of your ownership interest and holders of these securities may have rights senior to those of the holders of our common stock. If we obtain additional financing by issuing debt securities, the terms of these securities could restrict or prevent us from paying dividends and could limit our flexibility in making business decisions. In this case, the value of your investment could be reduced.





We compete with the growing cell-phone industry and other well-established companies.





The market in which we do business is highly competitive and constantly evolving. We face competition from the larger and more established companies -- from companies that develop new technology, as well as the many smaller companies throughout the country. The last several years have shown a marked increase in the use of cellular phones and toll free services which cut into our potential payphone customer base. Companies that have greater resources, including but not limited to, a larger sales force, more money, larger manufacturing capabilities and greater ability to expand their markets also cut into our potential payphone customers. Many of our competitors have longer operating histories, significantly greater financial strength, nationwide advertising coverage and other resources that we do not have. Our competitors might introduce a less expensive or more improved payphone. These, as well as other factors can have a negative impact on our income.





The competition from cellular phones is a very serious threat that can result in substantially less revenue per payphone. We have attempted to address this issue by avoiding locations that service business travelers. For many years, these locations were the most lucrative, but now they are the locations most impacted by the cellular user.





The large former Bell companies who provide local service dominate the industry. These companies have greater financial ability than us, and provide the greatest competitive challenge. However, we compete with these companies by paying a commission to the site owner. The commission is an enticement for the site owner to use our phone on its site. We believe we are able to provide a higher quality customer service because the phones alert us to any technical difficulties, and we can service them promptly. The ability to immediately know that a problem exists with a payphone is very important because down time for a phone means lost revenue for us.





Our non-coin revenue is primarily attributable to “dial-around” commissions. If the FCC reduces or repeals the “dial-around” commission, our revenues could be materially adversely affected.





Our services are subject to the jurisdiction of the Federal Communications Commission (FCC) with respect to interstate telecommunications services and other matters for which the FCC has jurisdiction under the Communications Act of 1934, as amended.





11


Payphone users can circumvent the usual payment method and avoid inserting a coin by using an access code or 800 number provided by a long distance carrier. These “dial-around” numbers, while convenient for users, leave payphone service providers uncompensated for the call made. The Federal Communications Commission, as instructed by Congress in the Telecommunications Act of 1996, created regulations to ensure that payphone service providers receive compensation for these “dial-around” calls.





The FCC requires the sellers of long distance toll free services to pay the payphone owner $0.494 cents per call. These funds are remitted quarterly through a service provided by the American Public Communication Council “APCC.”





If the FCC regulation requiring sellers of long distance toll free services to pay payphone owners $0.494 per call is reduced or repealed, it could have a negative effect upon our revenue stream. We have no control over what rules and regulations the state and federal regulatory agencies require us to follow now or in the future. It is possible for future regulations to be so financially demanding that they cause us to go out of business.





We are highly dependent on our two executive officers, Carl E. Worboys and Joseph  Passalaqua. The loss of either of them would have a material adverse affect on our business and prospects.





We currently have only two executive officers, Carl E. Worboys and Joseph C. Passalaqua. Carl E. Worboys serves as our President and Director, and Joseph C. Passalaqua serves as our Chief Financial Officer, Secretary and Director. The loss of either executive officer could have a material adverse effect on our business and prospects.





If we cannot attract, retain, motivate and integrate additional skilled personal, our ability to compete will be impaired.





The Company has no employees and many of our current and potential competitors have employees. Our success depends in large part on our ability to attract, retain and motivate highly qualified management and technical personnel. We face intense competition for qualified personnel. The industry in which we compete has a high level of employee mobility and aggressive recruiting of skilled personnel. If we are unable to continue to employ our key personnel or to attract and retain qualified personnel in the future, our ability to successfully execute our business plan will be jeopardized and our growth will be inhibited.





We will depend on outside manufacturing sources and suppliers.





As we purchase phones from other companies, we upgrade them with "smart card" payphone technology. The upgrade is a circuit board with improved technology. The “smart card” technology allows us to determine on a preset time basis the operational status of the payphone. We were given a license to use the “smart card” technology from Quortech, the founder and manufacturer of “smart card” technology.  The technology informs us when the coins in the phone have to be collected, the number and types of calls that have been made from each phone, as well as other helpful information that helps us provide better service to our payphone using public. This upgrade of the phones reduces the number and frequency of service visits due to outages and other payphone-related problems and, in turn, reduces the maintenance costs.  Other companies manufacture the components of the payphones for the industry including Universal Communications and TCI, which provides handsets, key pads, totalizers, and relays.





We will have limited control over the actual production process. Moreover, difficulties encountered by any one of our third party manufacturers which result in product defects, delayed or reduced product shipments, cost overruns or our inability to fill orders on a timely basis, could have an adverse impact on our business. Even a short-term disruption in our relationship with third party manufacturers or suppliers could have a material adverse effect on our operations. We do not intend to maintain an inventory of sufficient size to protect ourselves for any significant period of time against supply interruptions, particularly if we are required to obtain alternative sources of supply.





12


We may be unable to adequately protect our proprietary rights or may be sued by third parties for infringement of their proprietary rights.





The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of trade secret, copyright or patent infringement. We may inadvertently infringe a patent of which we are unaware. In addition, because patent applications can take many years to issue, there may be a patent application now pending of which we are unaware that will cause us to be infringing when it is issued in the future. If we make any acquisitions, we could have similar problems in those industries. Although we are not currently involved in any intellectual property litigation, we may be a party to litigation in the future to protect our intellectual property or as a result of our alleged infringement of another's intellectual property, forcing us to do one or more of the following:





·
Cease selling, incorporating or using products or services that incorporate the challenged intellectual property;





·
Obtain from the holder of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms; or





·
Redesign those products or services that incorporate such technology.





A successful claim of infringement against us, and our failure to license the same or similar technology, could adversely affect our business, asset value or stock value. Infringement claims, with or without merit, would be expensive to litigate or settle, and would divert management resources.





Our employees may be bound by confidentiality and other nondisclosure agreements regarding the trade secrets of their former employers. As a result, our employees or we could be subject to allegations of trade secret violations and other similar violations if claims are made that they breached these agreements.





If we engage in acquisitions, we may experience significant costs and difficulty assimilating the operations or personnel of the acquired companies, which could threaten our future growth.





If we make any acquisitions, we could have difficulty assimilating the operations, technologies and products acquired or integrating or retaining personnel of acquired companies. In addition, acquisitions may involve entering markets in which we have no or limited direct prior experience. The occurrence of any one or more of these factors could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition, pursuing acquisition opportunities could divert our management's attention from our ongoing business operations and result in decreased operating performance. Moreover, our profitability may suffer because of acquisition-related costs or amortization of acquired goodwill and other intangible assets. Furthermore, we may have to incur debt or issue equity securities in future acquisitions. The issuance of equity securities would dilute our existing stockholders.





Because our officers and directors are indemnified against certain losses, we may be exposed to costs associated with litigation.





If our directors or officers become exposed to liabilities invoking the indemnification provisions, we could be exposed to additional unreimbursable costs, including legal fees. Our articles of incorporation and bylaws provide that our directors and officers will not be liable to us or to any shareholder and will be indemnified and held harmless for any consequences of any act or omission by the directors and officers unless the act or omission constitutes gross negligence or willful misconduct. Extended or protracted litigation could have a material adverse effect on our cash flow.





There currently is no trading market for our common stock and we cannot assure that one will develop or be maintained. If not, your investment might be illiquid.





Upon the effectiveness of this registration statement, we intend to solicit a market-maker to apply with FINRA (formerly, the NASD) to have our common stock quoted on the OTC Bulletin Board (OTCBB). We cannot assure that a market will develop or maintained.  In not, your investment might be illiquid.





13


If a trading market develops for our common stock, we will be subject to SEC regulations relating to “penny stock” and the market for our common stock could be adversely affected.





The SEC has adopted regulations concerning low-priced stock, or “penny stocks.” The regulations generally define "penny stock" to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our shares are offered at a market price less than $5.00 per share, and do not qualify for any exemption from the penny stock regulations, our shares may become subject to these additional regulations relating to low-priced stocks.





The penny stock regulations require that broker-dealers, who recommend penny stocks to persons other than institutional accredited investors make a special suitability determination for the purchaser, receive the purchaser's written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents that identify risks associated with investing in penny stocks. Furthermore, the broker-dealer must obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in penny stock. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules. The additional burdens imposed upon broker-dealers by these penny stock requirements may discourage broker-dealers from effecting transactions in the common stock, which could severely limit the market liquidity of our common stock and our shareholders' ability to sell our common stock in the secondary market.





ITEM 2.     PROPERTIES





At the present time we do not own or lease any real property.  Our operations are conducted out of Carl Worboy’s residence, located at 118 Chatham Road, Syracuse, NY 13203. Carl Worboys provides us this office space free of charge.




ITEM 3.     LEGAL PROCEEDINGS





Not Applicable. We are not a party to any legal proceedings nor are we aware of any investigation, claim or demand made on the company that may reasonably result in any legal proceedings.





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





Not Applicable.


14








PART II.





ITEM 5.  MARKET FOR REGISTRANTS RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.





(a)  Market Information. The Company's common stock is not trading on any public trading market or stock exchange.





(b)  Holders.  As of December 31, 2010, there were approximately 213 record holders of 20,215,136 shares of the Company’s common stock.





(c)  Dividend Policy. We have not declared or paid any cash dividends on our common stock and we do not intend to declare or pay any cash dividend in the foreseeable future.  The payment of dividends, if any, is within the discretion of our Board of Directors and will depend on our earnings, if any, our capital requirements and financial condition and such other factors as our Board of Directors may consider.





(d)  Securities Authorized for Issuance Under Equity Compensation Plans. We have not authorized the issuance of any of our securities in connection with any form of equity compensation plan.





(e)  Recent Sales of Unregistered Securities.  During the 12 months ended December 31, 2010, there were no sales of common stock. We did not have any sales of securities that were not registered under the Securities Act of 1933, as amended.





(f)  Transfer Agent


Fidelity Stock Transfer Company


8915 South 700 East, Suite 102


Sandy, Utah  84070


Phone: 801-562-1300


Fax: 801-233-0589





ITEM 6. SELECTED FINANCIAL DATA .





The table below summarizes our audited balance sheet at December 31, 2010 compared to December 31, 2009 and statement of operations for the fiscal year ended December 31, 2010 compared to December 31, 2009.





At

December 31,2010

(Audited)


2009

(Audited)Balance Sheet:Cash

$
289


$
39Total Assets

$
507


$
247Total Liabilities

$
212,905


$
163,253Total Stockholders’ Equity (Deficit)

$
(212,398)


$
(163,006)





For the Fiscal Year Ended

December 31,2010

(Audited)


2009

(Audited)Statement of Operations :Revenue

$
4,544


$
4,771Net Loss

$
(49,392)


$
(38,593)Net Loss Per Share of Common Stock


--



--





15





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





Forward Looking Statements





Some of the information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:





-
discuss our future expectations;-
contain projections of our future results of operations or of our financial condition; and-
state other "forward-looking" information.





We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."





ORGANIZATION AND BASIS OF PRESENTATION





The following discussion and analysis is based on the audited financial statements for the years ended December 31, 2010 and 2009 of Pegasus Tel, Inc., a Delaware corporation  (“Pegasus” the “Company,” “our,” or “we”). All significant inter-company amounts have been eliminated. In the opinion of management, the audited financial statements presented herein reflect all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation. Interim results are not necessary indicative of results to be expected for the entire year.





We prepare our financial statements in accordance with generally accepted accounting principles (GAAP), which require that management make estimates and assumptions that affect reported amounts. Actual results could differ from these estimates.





Certain of the statements contained below are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. We have limited assets of $507 as of December 31, 2010.  In 2010 the assets consisted of cash held in the bank account and accounts receivable from customers that purchased payphone services.





CRITICAL ACCOUNTING POLICIES & ESTIMATES





The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheet, and the amounts of revenues and expenses reported for each of our fiscal periods, are affected by estimates and assumptions which are used for, but not limited to, the accounting for allowance for doubtful accounts, goodwill and intangible asset impairments, restructurings, inventory and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our consolidated financial statements.





Use of Estimates





It is important to note that when preparing the financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain estimates and assumptions that affect the amounts reported and disclosed in the financial statements and related notes.  Actual results could differ if those estimates and assumptions approve to be incorrect.





16


On an ongoing basis, we evaluate our estimates, including those related to estimated customer life, used to determine the appropriate amortization period for deferred revenue and deferred costs associated with licensing fees, the useful lives of property and equipment and our estimates of the value of common stock for the purpose of determining stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.





Revenue Recognition Policies





The Company recognizes revenues in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) number 104, "Revenue Recognition."  SAB 104 clarifies application of U. S. generally accepted accounting principles to revenue transactions. As of the year ended December 31, 2010, there was no deferred revenue. The Company derives its primary revenue from the sources described below, which includes dial-around revenues, operator service revenue, coin collections, telephone equipment repairs, and sales. Other revenue generated by the company includes sales commissions.





The Dial Around revenue is recognized when the billing and collection agent of the Company, APCC, calculates and compensates the Company for the use of the payphone on a quarterly basis by billing the actual party’s long distance carrier that received the calls.  The date of the Dial Around revenue recognition is determined when this compensation is collected and deposited into the Company’s bank account.





The Operator Service revenue is recognized when the collection agents of the Company, Legacy Long Distance and US Intercom calculates and compensates the Company for the use of operator services on a monthly basis. The date of the Operator Service revenue recognition is determined when this compensation is collected and deposited into the Company’s bank account.





Coin revenues are recorded in an equal amount to the coins collected.





Revenues on commissions, telephone equipment and sales are realized when the services are provided and payment for such services is deemed certain.





Off- Balance Sheet Arrangements





We did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.





Cash and Cash Equivalents





For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents to the extent the funds are not being held for investment purposes.





SERVICES AND PRODUCTS





We own, operate and manage privately owned public payphones in the County of Delaware, State of New York. As of December 31, 2010, we owned, operated and managed 11 payphones. We may pay site owners a commission based on a flat monthly rate or on a percentage of sales. Some of the businesses include, but are not limited to, retail stores, convenience stores, bars, restaurants, gas stations, colleges and hospitals. In the alternative, our agreement with business owners may be to provide the telecommunications services without the payment of any commissions.





Seasonality





Our revenues from payphone operation are affected by seasonal variations, geographic distribution of payphones and type of location. Because we operate in the northeastern part of the country with many of the payphones located outdoor, weather patterns affect our revenue streams. Revenues drop off significantly during winter and conversely show an increase in the spring and summer. Revenues are generally lowest in the first quarter and highest in the third quarter.





17


Our installed payphone base generates revenue from two principal sources: coin-calls and non-coin calls.





1. Coin calls:





Coin calls represent calls paid for by customers who deposit coins into the payphones. Coin call revenue is recorded as the actual amount of coins collected from the payphones.





2. Non-Coin calls:





Non-coin revenue includes commissions from operator service telecommunications companies and a “dial-around” commission of $0.494 per call that the FCC requires sellers of long distance toll free services to pay payphone owners. The commissions for operator services are paid 45 days in arrears. These funds are remitted quarterly through a service provided by the American Public Communication Council (APCC).





If we are unable to achieve or sustain profitability, or if operating losses increase in the future, we may not be able to remain a viable company and may have to discontinue operations. Our expenses have historically exceeded our revenues and we have had losses in all fiscal years of operation, including those in fiscal years 2009 and 2010, and the losses are projected to continue in 2011. Our net losses were $(38,593) and $(49,392) through the fiscal years ended 2009 and 2010, respectively. We have a cumulative net loss from February 19, 2002 (Date of Inception) to December 31, 2010 of $(270,262). We have been concentrating on the development of our products, services and business plan. There is no assurance that we will be successful in implementing our business plan or that we will be profitable now or in the future.





COSTS RELATED TO OUR OPERATION





The principal costs related to the ongoing operation of our payphones include telecommunication costs, commissions and depreciation. Telecommunication expenses consist of payments made by us to local exchange carriers and long distance carriers for access to and use of their telecommunications networks and service and maintenance costs. Commission expense represents payments to owners or operators of the premises at which a payphone is located.





GOING CONCERN QUALIFICATION





In their Independent Auditor's Report for the fiscal years ending December 31, 2010 and 2009, Robison, Hill & Co. stated that several conditions and events cast substantial doubt about our ability to continue as a “going concern.”   At December 31, 2010, we had $289 cash on hand and $218 in accounts receivable. We have incurred a deficit of $(270,262) from our inception to December 31, 2010. See “Liquidity and Capital resources.”





THE FISCAL YEAR ENDED DECEMBER 31, 2010, COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 2009.





REVENUES





Our total revenue decreased by $227, from $4,771 for the year ended December 31, 2009 to $4,544 for the year ended December 31, 2010. This decrease was primarily due to a decline in payphone customers and a lower volume of calls. We foresee revenues decreasing further in light of the growing trend of cell phone use. We anticipate remedying this situation by strategically placing payphones in key areas, especially where cell phone reception is not reliable.





Our coin call increased by $60, from $1,508 for the year ended December 31, 2009 to $1,568 for year ended December 31, 2010.  This increase was primarily due to a higher number of coin calls required by payphone customers.





Our non-coin call revenue, or commission income, which is comprised primarily of “dial around” revenue, star 88 commission revenue and operator service revenue decreased $287 from $1,103 for the year ended December 31, 2009 to $816 for the year ended December 31, 2010. This decrease was primarily due to a decline in payphone customers that made operator assisted calls and a lower volume of total calls. The FCC requires the sellers of long distance toll free services to pay the payphone owner $0.494 cents per “dial-around” call. These funds are remitted quarterly through a service provided by the American Public Communication Council (APCC).





18


Our local service revenue which is comprised primarily of service for payphone customers was $2,160 for both of the years ended December 31, 2009 and December 31, 2010, respectively. This is the revenue from monthly invoices billed to payphone customers in which the Company owns the payphone and provides service to operate the payphone on the premises. As of December 31, 2010 two customers made up the local service revenue:





Mountainside Residential Care Center, Lake Katrine, New York


Town of Middletown, Margaretville, New York





COST OF SERVICES





Our overall cost of services decreased by $65, from $3,632 for the year ended December 31, 2009, to $3,567 for the year ended December 31, 2010.  The principal costs related to the ongoing operation of our payphones include telecommunication costs, commissions and depreciation. Telecommunication costs consist of payments made by us to local exchange carriers and long distance carriers for access to and use of their telecommunications networks and service and maintenance costs. Commission expense represents payments to owners or operators of the premises at which a payphone is located and APCC commission fees related to Dial Around processing. Telecommunication costs decreased by $148 for the year ended December 31, 2010 when compared to the same period in 2009 due to a lower volume of calls.  Commissions increased by $83 for the year ended December 31, 2010 when compared to the same period in 2009.  There was no Depreciation expense in 2009 or 2010. As of December 31, 2010 and December 31, 2009, the payphone equipment was fully depreciated.





Once a low revenue payphone is identified, we offer the site owner an opportunity to purchase the equipment. If the site owner does not purchase the payphone, we remove it from the site. Also a correction was made at the central office of Margaretville Telephony Company to provide a higher level of uninterrupted service to increase revenue in the future. We own telephone equipment which provides a service for a number of years. The term of service is commonly referred to as the "useful life" of the asset. Because an asset such as telephone equipment or motor vehicle is expected to provide service for many years, it is recorded as an asset, rather than an expense, in the year acquired. A portion of the cost of the long-lived asset is reported as an expense each year over its useful life and the amount of the expense in each year is determined in a rational and systematic manner.





The FCC requires the sellers of long distance toll free services to pay the payphone owner $0.494 cents per call. These funds are remitted quarterly through a service provided by the American Public Communication Council (APCC).  If the FCC regulation requiring sellers of long distance toll free services to pay payphone owners $0.494 per call is reduced or repealed, it could have a negative effect upon our revenue stream. We have no control over what rules and regulations the state and federal regulatory agencies require us to follow now or in the future. It is possible for future regulations to be so financially demanding that they cause us to go out of business. We are not aware of any proposed regulations or changes to any existing regulations.





OPERATION AND ADMINISTATIVE EXPENSES





Operating expenses increased by $297, from $30,408 for the year ended December 31, 2009 to $30,705 for the year ended December 31, 2010. Professional fees decreased from $28,369 for the fiscal year ended December 31, 2009 to $24,610 for the fiscal year ended December 31, 2009.  Professional fees include fees the Company pays for accountants, bookkeepers and attorneys throughout the year for performing various tasks. This decrease was primarily due to decrease in legal fees when comparing the same period ending 2009 and 2010. General and Administrative expenses (G&A) increased by $1,159 in the fiscal year ended December 31, 2010.  Outside Services expenses increased by $2,897 in the fiscal year ended December 31, 2010.  Our expenses to date are largely due to professional fees that include accounting, bookkeeping and legal fees.





LIQUIDITY AND CAPITAL RESOURCES





In their 2010 audit report, our auditors have expressed their doubt as to our ability to continue as a going concern.  Our primary source of liquidity has been from borrowing funds from certain executive officers and principal stockholders related to certain of our executive officers. As of December 31, 2010 and 2009, we had $289 and $39 in cash and cash equivalents respectively. Our net loss for years ended December 31, 2010 and 2009 were $(49,392) and $(38,593) respectively.  Our accounts receivable for the years ended December 31, 2010 and 2009 were $218 and $208, respectively.  The accumulated deficit as of December 31, 2010 was $ (270,262).





19


As of December 31, 2010, the Company owed $24,589 in Related Party Accounts Payable. As of December 31, 2010 this balance includes $10,673 due to Joseph C. Passalaqua, an officer and major shareholder of the Company, $13,692 due to Lyboldt-Daly Inc. for bookkeeping expenses (of which Joseph C. Passalaqua is President and Sole Director), and $224 owed to Carl Worboys, an officer of the Company.  These amounts are non-interest bearing.





As of December 31, 2010, the Company owed $140,627 in Related Party Notes Payable.  These notes are owed to Shareholders of the Company, Joseph C. Passalaqua, Mary Passalaqua, and Cobalt Blue LLC, of which Mary Passalaqua is the President.  These notes are accruing simple interest between 10%, 15% and 18% annually. As of December 31, 2010, the Company owed a total principle balance of $140,627 related to these notes and had accrued $38,431 in simple interest.





Net cash used in operating activities was $71,890 during the twelve-month period ended December 31, 2010, mainly representative of the net loss incurred during 2010. This compares to net cash used in operating activities of $579 during the twelve-month period ended December 31, 2009.





Net cash provided by investing activities was $0 during twelve-month period ended December 31, 2010.  This compares to net cash provided by investing activities of $0 for the twelve-month period ended December 31, 2009.





Net cash provided by financial activities was $72,140 during twelve-month period ended December 30, 2010, representing the proceeds from related party notes in the amount of $72,585, of which $445 was repaid in 2010. This compares to net cash provided by financing activities of $0 during the twelve-month period ended December 31, 2009 due to proceeds from related party notes of $0.





To date, we have had minimal revenues; and we require additional financing in order to finance our business activities on an ongoing basis.  Our future capital requirements will depend on numerous factors including, but not limited to, continued progress in finding a merger candidate and the pursuit of business opportunities. We are actively pursuing alternative financing and have had discussions with various third parties, although no firm commitments have been obtained to date.  In the interim, shareholders of the Company have committed to meet our minimal operating expenses.  We believe that actions presently being taken to revise our operating and financial requirements provide them with the opportunity to continue as a “going concern,” although no assurances can be given.





COMMON STOCK





Our board of directors is authorized to issue 100,000,000 shares of Common stock, with a par value of $0.0001. There are an aggregate of 20,215,136 shares of Common Stock issued and outstanding, which are held by 213 stockholders as of the date of this Annual Report.  All shares of our common stock have one vote per share on all matters, including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. The common stock currently outstanding is validly issued, fully paid and non-assessable. In the event of liquidation of the Company, the holders of common stock will share equally in any balance of the Company's assets available for distribution to them after satisfaction of creditors and preferred stockholders, if any. The holders of our common stock are entitled to equal dividends and distributions per share with respect to the Common Stock when, as and if, declared by the board of directors from funds legally available.





Dividends





We have never declared dividends. We do not intend to declare any dividends in the foreseeable future. We presently intend to retain earnings, if any, for the development and expansion of our business.





Share Purchase Warrants





We have not issued and do not have outstanding any warrants to purchase shares of our common stock.





Options





We do not have a stock option plan in place nor are there any outstanding exercisable for shares of our common stock.





20


Convertible Securities





We have not issued and do not have outstanding any securities convertible into shares of our common stock or any rights convertible or exchangeable into shares of our common stock.





PREFERRED STOCK





Our board of directors is authorized to issue 10,000,000 shares of Common stock, with a par value of $0.0001. There are an aggregate of 0 shares of Common Stock issued and outstanding as of the date of this Annual Report.





COMMON AND PREFERRED STOCK TRANSACTIONS





On February 19, 2002, we filed a Certificate of Incorporation with the Secretary of State of Delaware.  Our authorized capital was 1,000 shares of common stock, no par value.





On September 21, 2006, we filed an Amended and Restated Certificate of Incorporation increasing our authorized capital to 110,000,000 shares, of which 100,000,000 shares were designated as Common Stock, par value $0.0001 per share, and the remaining 10,000,000 as Preferred Stock, par value $0.0001 per share.  The designations and the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of such shares shall be determined by the Board of Directors from time to time, without stockholder approval.





On May 15, 2007, the Company filed an Amended Certificate of Incorporation and there was forward stock split 5,100 to 1.  This change is retro-active and therefore changes the 1,000 shares of common stock issued on December 31, 2003 to 5,100,000 shares of common stock.  The par value remains at $.0001 per share.





On August 5, 2008, we filed a Certificate of Designations, Powers, Preferences and Rights (the “Certificate of Designation”) with the Secretary of State of the State of Delaware thereby designating 2,000,000 shares of preferred stock as Series A Convertible Preferred Stock, $0.0001 (the “Series A Preferred Stock”).  Prior to the filing of the Certificate of Designation, there were no shares of preferred stock designated or issued. Pursuant to the Certificate of Designation, each share of Series A Preferred Stock may be converted at any time by Pegasus or the holders thereof into ten (10) fully-paid and non-assessable shares of Pegasus Common Stock.





On August 15, 2008, Pegasus issued an aggregate of 1,800,000 shares of Series A Preferred Stock to an aggregate of 17 individuals pursuant to a Securities Purchase Agreement for $0.0001per share of Series A Preferred Stock. Pegasus issued the Series A Preferred Stock pursuant to an exemption under Section 4(2) of the Securities Act due to the fact that it did not involve a public offering of securities. The shares of Series A Preferred Stock are “restricted securities” (as such term is defined in the Securities Act).





On August 18, 2008, Sino Gas International Holdings, Inc., a Utah corporation, or Sino Gas, (OTCBB: SGAS), our former parent company, distributed to its stockholders of record as of August 15, 2008, 100% of the issued and outstanding common stock of Pegasus (the “Spin-off”).  The ratio of distribution was one (1) share of common stock of Pegasus for every twelve (12) shares of  common stock of Sino (1:12).  Fractional shares were rounded up to the nearest whole-number.  An aggregate of 2,215,136 shares of Pegasus common stock were issued pursuant to the distribution to an aggregate of 167 Sino stockholders. The Pegasus common stock issued were “restricted securities” (as defined in Rule 144 of the Securities Act of 1933, as amended).





On August 18, 2008 and pursuant to the Certificate of Designation, Pegasus converted an aggregate of 1,800,000 shares of Series A Preferred Stock into an aggregate of 18,000,000 shares of Pegasus common stock.  Pegasus issued the common stock pursuant to Section 3(a)(9) of the Securities Act due to the fact that the securities were exchanged upon conversion of the Series A Preferred Stock held by existing security holders and there was no commission or other remuneration paid or given directly or indirectly for soliciting such exchange.





On March 23, 2009, Pegasus filed a Form 15 (File No. 000-52628) with the Securities and Exchange Commission pursuant to which the Company de-registered its class of Common Stock under the Securities Exchange Act of 1934, as amended.





On October 15, 2009, the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission to register the Common Stock under the Securities Exchange Act of 1934, as amended, and on December 28, 2009 the Company’s Registration Statement went effective.


21


ITEM 7A.  QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from the fact that the area in which we do business is highly competitive and constantly evolving. We face competition from the larger and more established companies -- from companies that develop new technology, as well as the many smaller companies throughout the country.





We face competition from the larger and more established companies, from companies that develop new technology, as well as the many smaller companies throughout the country. Companies who have a larger sales force, more money, larger manufacturing capabilities and greater ability to expand their markets also cut into our potential customers. Many of our competitors have longer operating histories, significantly greater financial strength, nationwide advertising coverage, brand identification and other resources that we do not have. Our competitors might introduce less expensive or more improved merchandise. These, as well as other factors, can negatively impact our business strategy.





The competition from cellular phones is a very serious threat that can result in substantially less revenue per payphone. We have attempted to address this issue by avoiding locations that service business travelers. For many years, these locations were the most lucrative, but now they are the locations most impacted by the cellular user.





The large former Bell companies and other large companies who provide local service dominate the industry. These companies have greater financial ability than us, and provide the greatest competitive challenge.





Market Price





There is no trading market for our common stock at present and there has been no trading market to date.  There is no assurance that a trading market will ever develop or, if such a market does develop, that it will continue.





Options, Warranties and Other Equity Items





There  are  no  outstanding  options  or  warrants  to  purchase,  nor  any securities convertible into, the our common shares.  Additionally, there are no shares that could be sold pursuant to Rule 144 under the Securities Act or that we had agreed to register under the Securities Act for sale by security holders.  Further, there are no common shares of the Company being, or proposed to be, publicly offered by the Company.





22




PEGASUS TEL, INC.
 (A Development Stage Company)
 
 
 
 -:-
 
 
 
 INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS’ REPORT
 
 
 DECEMBER 31, 2010
   
 
  23
  
 CONTENTS
 
 
 PageIndependent Registered Public Accountants’ Report
F - 1Balance SheetsDecember 31, 2010 andDecember 31, 2009
F - 2Statements of Operations for the year ended December 31, 2010 andfor the year ended December 31, 2009 and the cumulative period fromFebruary 19, 2002 (inception) to December 31, 2010
F - 3Statement of Stockholders' EquitySince February 19, 2002 (inception) to December 31, 2010
F - 4Statements of Cash Flows for year ended December 31, 2010 andfor the year ended December 31, 2009 and  the cumulative period fromFebruary 19, 2002 (inception) to December 31, 2010
F – 5Notes to Financial Statements
F – 6


24
  ROBISON, HILL & CO.



Certified Public AccountantsA PROFESSIONAL CORPORATIONBRENT M. DAVIES, CPADAVID O. SEAL, CPAW. DALE WESTENSKOW, CPABARRY D. LOVELESS, CPASTEPHEN M. HALLEY, CPA
 
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Board of Directors and
 Stockholders of Pegasus Tel, Inc.
 
 We have audited the accompanying balance sheets of Pegasus Tel, Inc. (a development stage company) as of December 31, 2010 and 2009, and the related statements of income, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2010. Pegasus Tel, Inc.’s management is responsible for these financial statements. 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 audit 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 financial statements referred to above present fairly, in all material respects, the financial position of Pegasus Tel, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has incurred net losses of approximately $270,000, has a liquidity problem and has minimal revenues, which raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
  /s/ Robison, Hill & Co.
 Certified Public Accountants
 
 Salt Lake City, UT
 March 15, 2011
   F - 1
  PEGASUS TEL, INC.(A Development Stage Company)BALANCE SHEETSDecember 31,2010


2009Assets:Cash and Cash Equivalents

$
289


$
39Accounts Receivable


218



208Total Current Assets


507



247Total Assets

$
507


$
247Liabilities:Accounts Payable

$
9,258


$
53,807Related Party Accounts Payable


24,589



20,489Accrued Interest


38,431



20,470Related Party Notes Payable


140,627



68,487Total Current Liabilities


212,905



163,253Total Liabilities


212,905



163,253Stockholders' Equity:Preferred Stock,  Par value $0.0001, Authorized 10,000,000 sharesIssued 0 shares at  December 31, 2010 and December 31, 2009


-



-Common Stock, Par value $0.0001, Authorized 100,000,000 sharesIssued  20,215,136 shares at  December 31, 2010 and December 31, 2009


2,022



2,022Paid-In Capital


55,842



55,842Deficit Accumulated During Development Stage


(270,262
)


(220,870
)Total Stockholders' Equity


(212,398
)


(163,006
)Total Liabilities and Stockholders' Equity

$
507


$
247The accompanying notes are an integral part of these financial statements.





F - 2


PEGASUS TEL, INC.(A Development Stage Company)STATEMENTS OF OPERATIONSCumulativeSinceFebruary 19,2002For the Year Ended


Inception ofDecember 31,


Development2010


2009


StageRevenues

$
4,544


$
4,771


$
69,761Costs of Services


(3,567
)


(3,632
)


(65,985
)Gross Margin


977



1,139



3,776ExpensesAccounting


20,510



14,757



85,594Advertising


-



-



770Related Party Bookkeeping


4,100



3,612



18,477General and Administrative


690



(469
)


11,799Legal


-



10,000



84,790Outside Services


5,405



2,508



30,838Operating Expenses


30,705



30,408



232,268Operating Income (Loss)


(29,728
)


(29,269
)


(228,492
)Other Income (Expense)Interest, Net


(19,016
)


(9,149
)


(39,486
)Net Loss Before Taxes


(48,744
)


(38,418
)


(267,978
)Income and Franchise Tax


(648
)


(175
)


(2,284
)Net Loss

$
(49,392
)

$
(38,593
)

$
(270,262
)Loss per Share, Basic &Diluted

$
(0.00
)

$
(0.00
)Weighted Average SharesOutstanding


20,215,136



20,215,136The accompanying notes are an integral part of these financial statements.


F - 3


PEGASUS TEL, INC.(A Development Stage Company)STATEMENT OF STOCKHOLDERS' EQUITYDeficitAccumulatedSinceFebruary 19,2002


TotalInception of


Stockholders'Preferred Stock


Common Stock


Paid in


Development


EquityShares


Par Value


Shares


Par Value


Capital


Stage


DeficiencyBalance at February 19, 2002


-


$
-



-


$
-


$
-


$
-


$
-Net Loss


-



-



-



-



-



(25,809
)


(25,809
)Balance at December 31, 2002


-



-



-



-



-



(25,809
)


(25,809
)December 31, 2003, Stock Issued as Intercompany Dues


-



-



1,000



1



999



-



1,000Forward Stock Split 5,100 to 1


-



-



5,099,000



509



(509
)


-



-Net Loss


-



-



-



-



-



(15,704
)


(15,704
)Balance at December 31, 2003


-



-



5,100,000



510



490



(41,513
)


(40,513
)Net Loss


-



-



-



-



-



(6,508
)


(6,508
)Balance at December 31, 2004


-



-



5,100,000



510



490



(48,021
)


(47,021
)Net Loss


-



-



-



-



-



(11,067
)


(11,067
)Balance at December 31, 2005


-



-



5,100,000



510



490



(59,088
)


(58,088
)December 31, 2006, Capital Contributed


-



-



-



-



56,684



-



56,684Net Loss


-



-



-



-



-



(16,596
)


(16,596
)Balance at December 31, 2006


-



-



5,100,000



510



57,174



(75,684
)


(18,000
)Net Loss


-



-



-



-



-



(65,711
)


(65,711
)Balance at December 31, 2007


-



-



5,100,000



510



57,174



(141,395
)


(83,711
)August 15, 2008, Spin-Off Completed and all Common Stock not Distrubutedto the Shareholders was Cancelled


-



-



(2,884,864
)


(288
)


288



-



-August 15, 2008 Issued Convertible Preferred Class A Stock for Cash


1,800,000



180



-



-



-



-



180August 18, 2008, Convertible Preferred Class A Stock Converted to Common Stock


(1,800,000
)


(180
)


18,000,000



1,800



(1,620
)


-



-Net Loss


-



-



-



-



-



(40,882
)


(40,882
)Balance at December 31, 2008


-



-



20,215,136



2,022



55,842



(182,277
)


(124,413
)Net Loss


-



-



-



-



-



(38,593
)


(38,593
)Balance at December 31, 2009


-



-



20,215,136



2,022



55,842



(220,870
)


(163,006
)Net Loss


-



-



-



-



-



(49,392
)


(49,392
)Balance at December 31, 2010


-



-



20,215,136


$
2,022


$
55,842


$
(270,262
)

$
(212,398
)The accompanying notes are an integral part of these financial statements




F - 4


PEGASUS TEL, INC.(A Development Stage Company)STATEMENTS OF CASH FLOWSCumulativeSinceFebruary 19,2002For the Year Ended


Inception ofDecember 31,


Development2010


2009


StageCASH FLOWS FROM OPERATING ACTIVITIES:Net Loss for the Period

$
(49,392
)

$
(38,593
)

$
(270,262
)Adjustments to reconcile net loss to net cashprovided by operating activities:Depreciation and Amortization


-



-



12,600Changes in Operating Assets and LiabilitiesDecrease (Increase) in Accounts Receivable


(10
)


1,334



(218
)Increase (Decrease) in Accounts Payable


(44,549
)


25,733



9,258Increase (Decrease) in Related Party Accounts Payable


4,100



1,798



24,589Increase (Decrease) in Interest Payable


17,961



9,149



38,431Decrease (Increase) in Intercompany Dues


-



-



56,684Net Cash Used in Operating Activities


(71,890
)


(579
)


(128,918
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of Property and Equipment


-



-



(11,600
)Net cash provided by Investing Activities


-



-



(11,600
)CASH FLOWS FROM FINANCING ACTIVITIES:Preferred Stock Issued for Cash


-



-



180Payments on Related Party Notes Payable


(445
)


-



(445
)Proceeds from Related Party Notes Payable


72,585



-



141,072Net Cash Provided by Financing Activities


72,140



-



140,807Net (Decrease) Increase in Cash


250



(579
)


289Cash at Beginning of Period


39



618



-Cash at End of Period

$
289


$
39


$
289SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
-


$
-


$
-Franchise and Income Taxes

$
648


$
175


$
2,284SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTINGAND FINANCING ACTIVITIES:Accounts Payable Satisfied through Contributed Capitaland Property and Equipment

$
-


$
-


$
56,684Common Stock Issued for Stock Receivable

$
-


$
-


$
-The accompanying notes are an integral part of these financial statements.




F - 5
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 This summary of accounting policies for Pegasus Tel, Inc. is presented to assist in understanding the Company's financial statements.  The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.
 
 Nature of Operations and Going Concern
 
 The accompanying financial statements have been prepared on the basis of accounting principles applicable to a “going concern”, which assume that Pegasus Tel., Inc. (hereto referred to as the “Company”) will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations.
 
 Several conditions and events cast doubt about the Company’s ability to continue as a “going concern.”  The Company has incurred net losses of approximately $270,000 for the period from February 19, 2002 (inception) to December 31, 2010, has an accumulated deficit, has recurring losses, has minimal revenues and requires additional financing in order to finance its business activities on an ongoing basis.  The Company is actively pursuing alternative financing and has had discussions with various third parties, although no firm commitments have been obtained.  In the interim, shareholders of the Company have committed to meeting its operating expenses.  Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide them with the opportunity to continue as a “going concern”.
 
 These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern”.  While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful.  If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported revenues and expenses, and the balance sheet classifications used.
  F - 6
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Organization and Basis of Presentation
 
 On February 19, 2002, Pegasus Tel, Inc., a Delaware company, was formed as a wholly owned subsidiary of American Industries.
 
 On March 28, 2002, American Industries, Inc. and Pegasus Tel, Inc. entered into an agreement with Pegasus Communications, Inc., a New York corporation, to acquire 100% of the outstanding shares of Pegasus Communications, Inc. in exchange for 72,721,966 shares of common stock of American Industries, Inc.  Pegasus Tel, Inc. continued as the surviving corporation and Pegasus Communications, Inc. was merged out of existence.
 
 The Company is in the development stage, and has not commenced planned principal operations.  The Company has a December 31 year end.
 
 Nature of Business
 
 The Company is primarily in the business of providing the use of outdoor payphones, and providing telecommunication services.
 
 Cash and Cash Equivalents
 
 For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of 90 days or less to be cash equivalents to the extent the funds are not being held for investment purposes.
 
 Revenue Recognition
 
 The Company derives its primary revenue from the sources described below, which includes dial-around revenues, coin collections, telephone equipment repairs, and sales. Other revenue generated by the company includes sales commissions.
  F - 7
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Revenue Recognition (continued)
 
 Coin revenues are recorded in an equal amount to the coins collected.  Revenues on commissions and telephone equipment and sales are realized on the date when the telephone repair services are provided or the telecommunication supplies are received by the customer. Dial Around revenues are earned when a customer uses the Company’s payphone to gain access to a different long distance carrier than is already programmed into the phone. The Dial Around revenue is recognized when the billing and collection agent of the Company, APCC, calculates and compensates the Company for the use of the payphone on a quarterly basis by billing the actual party’s long distance carrier that received the calls.  The date of the Dial Around revenue recognition is determined when this compensation is collected and deposited into the Company’s bank account.
 
 The Company recognizes revenues in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) number 104, "Revenue Recognition."  SAB 104 clarifies application of U. S. generally accepted accounting principles to revenue transactions.  The Company recognizes revenue when the earnings process is complete.  That is, when the arrangements of the goods are documented, the pricing becomes final and collectibility is reasonably assured. An allowance for bad debt is provided based on estimated losses. For revenue received in advance for goods, the Company records a current liability classified as either deferred revenue or customer deposits. As of December 31, 2010, there was no deferred revenue.
 
 Allowance for Doubtful Accounts
 
 The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position.  If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. As of December 31, 2010, the Company has determined an allowance for doubtful accounts is not necessary.
  F - 8
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Concentration of Credit Risk
 
 The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.  The Company had cash and cash equivalents of $ 289 and $39 as of December 31, 2010 and 2009 all of which was fully covered by federal depository insurance.
 
 Accounts Receivable
 
 Accounts Receivable consists of Local Service revenue and Commission Revenue. The Accounts Receivable was $218 and $208 as of December 31, 2010 and December 31, 2009 respectively.
 
 Pervasiveness of Estimates
 
 The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
 Loss per Share
 
 Basic loss per share has been computed by dividing the loss for the period applicable to the common stockholders’ by the weighted average number of common shares outstanding during the period.  There were no common equivalent shares outstanding during the periods ended December 31, 2010.
 
 Financial Instruments
 
 The Company’s financial assets and liabilities consist of cash and accounts receivable, and accounts payable. Except as otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values due to the short-term maturities of these instruments.
 
  F - 9
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Income Taxes
 
 The Company accounts for income taxes under the provisions of SFAS No.109, “Accounting for Income Taxes.”  SFAS No.109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities.
 
 Reclassification
 
 Certain reclassifications have been made in the 2009 financial statements to conform to the December 31, 2010 presentation.
 
 Recent Accounting Standards
 
 In December 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-29 (ASU 2010-29), Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations. This Accounting Standards Update requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The amendments in this Update affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted. The Company does not expect the provisions of ASU 2010-29 to have a material effect on its financial position, results of operations or cash flows.
  F - 10
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Recent Accounting Standards (Continued)
 
 In August 2010, the FASB issued Accounting Standards Update 2010-22 (ASU 2010-22), Accounting for Various Topics -- Technical Corrections to SEC Paragraphs - An announcement made by the staff of the U.S. Securities and Exchange Commission. This Accounting Standards Update amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics.  The Company does not expect the provisions of ASU 2010-22 to have a material effect on its financial position, results of operations or cash flows.
  In August 2010, the FASB issued Accounting Standards Update 2010-21 (ASU 2010-21), Accounting for Technical Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The Company does not expect the provisions of ASU 2010-21 to have a material effect on its financial position, results of operations or cash flows.
  InJuly 2010, the FASB issued Accounting Standards Update 2010-20 (ASU 2010-20), Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.The amendments in this Update are to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The Company does not expect the provisions of ASU 2010-20 to have a material effect on its financial position, results of operations or cash flows.
 In April 2010, the FASB issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition – Milestone Method (Topic 605).  ASU 2010-17 provides guidance on applying the milestone method of revenue recognition in arrangements with research and development activities. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  The Company’s adoption of the provisions of ASU 2010-17 did not have a material impact on its revenue recognition.
  F - 11
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
 Recent Accounting Standards (Continued)
 
 In March 2010, the FASB issued Accounting Standards Update 2010-11 (ASU 2010-11), Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives.  The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010.  Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update.  The Company’s adoption of the provisions of ASU 2010-11 did not have a material effect on its financial position, results of operations or cash flows.
  In February 2010, the FASB Accounting Standards Update 2010-10 (ASU 2010-10), Consolidation (Topic 810): Amendments for Certain Investment Funds. The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. Early application is not permitted.  The Company’s adoption of provisions of ASU 2010-10 did not have a material effect on its financial position, results of operations or cash flows.
  In February 2010, the FASB issued ASU No. 2010-09 Subsequent Events (ASC Topic 855) - Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09).  ASU No. 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date, in both issued and revised financial statements, through which the filer had evaluated subsequent events. The adoption did not have an impact on the Company’s financial position, results of operations or cash flows.
  In January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-09). ASU 2010-06 amends FASB Accounting Standards Codification (“ASC”) 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers’ disclosures about postretirement benefit plan assets. This ASU is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of ASU 2010-06 did not have a material impact on the Company’s financial statements.
 
  F - 12
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 2 - INCOME TAXES
 
 As of December 31, 2010, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $261,000 that may be offset against future taxable income through 2025.  Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs.  Therefore, the amount available to offset future taxable income may be limited.  No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry-forwards will expire unused.  Accordingly, the potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.
 
 2010


2009Net Operating Losses

$
88,740


$
72,080Valuation Allowance


(88,740
)


(72,080
)$
-


$
-
 
 The provision for income taxes differ from the amount computed using the federal US statutory income tax rate as follows:
 
 2010


2009Provision (Benefit) at US Statutory Rate

$
16,660


$
13,260Other Adjustments


-



-Increase (Decrease) in Valuation Allowance


(16,660
)


(13,260
)$
-


$
-
 
 The Company evaluates its valuation allowance requirements based on projected future operations.  When circumstances change and causes a change in management's judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.
 
  F - 13
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 3- DEVELOPMENT STAGE COMPANY
 
 The Company has not begun principal operations and as is common with a development stage company, the Company will have recurring losses during its development stage.  The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  However, the Company does not have significant cash or other material assets, nor does it have an established source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern.  In the interim, shareholders of the Company have committed to meeting its minimal operating expenses.
 
 NOTE 4 – UNCERTAIN TAX POSITIONS
 
 Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of FIN 48 did not have a material impact on the company’s financial position and results of operations. At January 1, 2008, the company had no liability for unrecognized tax benefits and no accrual for the payment of related interest.
 
 Interest costs related to unrecognized tax benefits are classified as “Interest expense, net” in the accompanying statements of operations. Penalties, if any, would be recognized as a component of “Selling, general and administrative expenses”. The Company recognized $0 of interest expense related to unrecognized tax benefits during 2010.  In many cases the company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities.
 
 With few exceptions, the company is generally no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2007. The following describes the open tax years, by major tax jurisdiction, as of January 1, 2010:
 
 United States (a)

2007– Present
 
 (a) Includes federal as well as state or similar local jurisdictions, as applicable.
 
  F - 14
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 5 - COMMITMENTS
 
 As of December 31, 2010, all activities of the Company have been conducted by corporate officers from either their homes or business offices.  Currently, there are no outstanding debts owed by the company for the use of these facilities and there are no commitments for future use of the facilities.
 
 NOTE 6 - COMMON STOCK TRANSACTIONS
 
 On December 31, 2003, the Company issued 1,000 shares of common stock in exchange for cash valued at $1,000.
 
 On September 21, 2006, the Company filed an Amended Certificate of Incorporation and the par value of the common stock was changed to $ .0001 per share.  This change is retro-active and therefore changes the 1,000 share of Common Stock issued on December 31, 2003 to the par value of $ .0001 per share.
 
 On May 15, 2007, the Company filed an Amended Certificate of Incorporation and there was forward stock split 5,100 to 1.  This change is retro-active and therefore changes the 1,000 shares of Common Stock issued on December 31, 2003 to 5,100,000 shares of Common Stock.  The par value remains at $ .0001 per share.
 
 On August 18, 2008, Sino Gas International Holdings, Inc., a Utah corporation (“Sino”) (OTCBB: SGAS), consummated a distribution of shares of the Company, a then wholly-owned subsidiary of Sino to Sino’s stockholders of record as of August 15, 2008.  The Ratio of Distribution was one (1) share of common stock of Pegasus for every twelve (12) shares of  common stock of Sino (1:12).  Fractional shares were rounded up to the nearest whole-number.  An aggregate of 2,215,136 shares of Pegasus common stock were issued to an aggregate of 167 Sino stockholders. The distributed shares of Pegasus common stock are “restricted securities” (as defined in Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”)), and were issued pursuant to Section 4(2) of the Securities Act due to the fact that the distribution did not involve a public offering of securities. Sino cancelled all the Pegasus Common Stock not distributed to the shareholders.  The amount cancelled was 2,884,864 shares of Common Stock.
 
 On July 21, 2010 John F. Passalaqua resigned as Director and Secretary of Pegasus Tel and Joseph C. Passalaqua was appointed as Director and Secretary.  A stock purchase agreement was filed stating that Joseph C. Passalaqua purchased 2,702,386 shares of Pegasus Tel. common stock from John F. Passalaqua for $20,000.
  F - 15
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 7 - PREFERRED STOCK TRANSACTIONS
 
 On August 5, 2008, Pegasus filed a Certificate of Designations, Powers, Preferences and Rights (the “Certificate of Designation”) with the Secretary of State of the State of Delaware thereby designating 2,000,000 shares of preferred stock as Series A Convertible Preferred Stock, $0.0001 (the “Series A Preferred Stock”).  The Certificate of Incorporation of Pegasus authorizes the designation and issuance of an aggregate of ten million (10,000,000) shares of preferred stock in one or more series with all rights and privileges determined by the Board of Directors of Pegasus.  Prior to the filing of the Certificate of Designation, there were no shares of preferred stock designated or issued. Pursuant to the Certificate of Designation, a copy of which is filed as an exhibit hereto, each share of Series A Preferred Stock may be converted at any time by Pegasus or the holders thereof into ten (10) fully-paid and non-assessable shares of Pegasus Common Stock.
 
 On August 15, 2008, Pegasus issued an aggregate of 1,800,000 shares of Series A Preferred Stock to an aggregate of 17 individuals pursuant to a Securities Purchase Agreement for $0.0001per share of Series A Preferred Stock. Pegasus issued the Series A Preferred Stock pursuant to Section 4(2) of the Securities Act due to the fact that it did not involve a public offering of securities. The shares of Series A Preferred Stock are “restricted securities” (as such term is defined in Rule 144 of the Securities Act.
 
 On August 18, 2008 and pursuant to the Series A Preferred Stock Certificate of Designation and Securities Purchase Agreement, Pegasus converted an aggregate of 1,800,000 shares of Series A Preferred Stock into an aggregate of 18,000,000 shares of Pegasus common stock.  Pegasus issued the common stock pursuant to Section 4(2) of Securities Act due to the fact that it did not involve a public offering of securities. The shares of common stock are “restricted securities.”
 
 NOTE 8 – RELATED PARTY ACCOUNTS PAYABLE
 
 As of December 31, 2010, the Company had Related Party Accounts Payable in the amount of $13,692 due to Lyboldt-Daly, Inc. for Bookkeeping expenses.  Joseph Passalaqua (a major shareholder of the Company and officer of the company) is President and Sole Director of Lyboldt-Daly, Inc.
 
 During 2006, a Shareholder and Officer of the Company, Joseph Passalaqua, advanced the company $10,673. This is a Related Party Accounts Payable. As of December 31, 2010, the Company owes $10,673.
 
  F - 16
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 8 – RELATED PARTY NOTES PAYABLE (continued)
 
 During 2006, an Officer of the Company, Carl Worboys, advanced the Company $224. This is a Related Party Accounts Payable. As of December 31, 2010, the Company owes $224.
 
 In 2006, 2007, and 2008, a Shareholder of the Company, Mary Passalaqua, advanced the Company $5,000, $30,300, and $18,300, respectively.  The notes are accruing between 10% and 15% simple interest per annum and are payable in full upon demand. As of December 31, 2010, the Company owed a total principle balance of $53,600 related to these notes and has accrued $23,915 in simple interest.
 
 In 2007, 2008 and 2010, a Shareholder and Officer of the Company, Joseph Passalaqua has advanced the company $5,000, $9,887, and $1,800, respectively. The notes are accruing between 10% and 18% in simple interest per annum and is payable in full upon demand.  On January 21, 2010, $1,500 was paid to Joseph Passalaqua as a partial repayment, with $1,055 paid to loan interest and $445 paid to loan principal by the Company. As of December 31, 2010, the Company owed a total principle balance of $16,242 related to these notes and has accrued $4,837 in simple interest.
 
 In 2010, Cobalt Blue LLC has advanced the Company $70,785. Mary Passalaqua is the Managing Member of Cobalt Blue LLC and is a Shareholder of the Company. The note is accruing 18% in simple interest per annum and is payable in full upon demand. As of December 31, 2010, the Company owed a total principle balance of $70,785 related to these notes and has accrued $9,679 in simple interest.
 
 NOTE 9 – SPIN OFF
 
 As reported by Pegasus Tel, Inc., Delaware corporation (“Pegasus”), on Form 8-K (File No. 000-5268) filed with the Securities and Exchange Commission on August 27, 2008, on August 18, 2008, Sino Gas International Holdings, Inc., a Utah corporation (“Sino”) (OTCBB: SGAS), declared a dividend and issued shares of Pegasus to Sino’s stockholders of record as of August 15, 2008 (“Spin-off”).  The ratio of distribution of the Pegasus shares was one (1) share of common stock of Pegasus for every twelve (12) shares of  common stock of Sino (1:12).  Fractional shares were rounded up to the nearest whole-number.  An aggregate of 2,215,136 shares of Pegasus common stock were issued to an aggregate of 167 Sino stockholders. The Pegasus common stock issued in distribution are “restricted securities” (as defined in Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”)), and were issued pursuant to Section 4(2) of the Securities Act due to the fact that the distribution did not involve a public offering.
  F - 17
  PEGASUS TEL, INC.
 (A Development Stage Company)
 NOTES TO FINANCIAL STATEMENTS
 (Continued)
 
 NOTE 9 – SPIN OFF (Continued)
 
 On August 5, 2008, Pegasus filed a Certificate of Designations, Powers, Preferences and Rights (the “Certificate of Designation”) with the Secretary of State of the State of Delaware thereby designating 2,000,000 shares of preferred stock as Series A Convertible Preferred Stock, $0.0001 (the “Series A Preferred Stock”).  The Certificate of Incorporation of Pegasus authorizes the designation and issuance of an aggregate of ten million (10,000,000) shares of preferred stock in one or more series with all rights and privileges determined by the Board of Directors of Pegasus and without stockholder approval.  Prior to the filing of the Certificate of Designation, there were no shares of preferred stock designated or issued. Pursuant to the Certificate of Designation, each share of Series A Preferred Stock may be converted at any time by Pegasus or the holders thereof into ten (10) fully-paid and non-assessable shares of Pegasus Common Stock.
 
 On August 15, 2008, Pegasus issued an aggregate of 1,800,000 shares of Series A Preferred Stock to an aggregate of 17 individuals pursuant to a Securities Purchase Agreement for $0.0001per share of Series A Preferred Stock. Pegasus issued the Series A Preferred Stock pursuant to Section 4(2) of the Securities Act due to the fact that it did not involve a public offering of securities. The shares of Series A Preferred Stock were restricted securities.
 
 On August 18, 2008, and pursuant to the Certificate of Designation, Pegasus converted an aggregate of 1,800,000 shares of Series A Preferred Stock into an aggregate of 18,000,000 shares of Pegasus common stock.  Pegasus issued the common stock pursuant to Section 4(2) of Securities Act due to the fact that it did not involve a public offering of securities. The shares of common stock are restricted securities.
 
 On March 23, 2009, Pegasus filed a Form 15 (File No. 000-52628) with the Securities and Exchange Commission pursuant to which the Company de-registered its class of Common Stock under the Securities Exchange Act of 1934, as amended.
 
 On October 15, 2009, the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission to register the Common Stock under the Securities Exchange Act of 1934, as amended, and on December 28, 2009 the Company’s Registration Statement went effective.
 
  F - 18


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING AND FINANCIAL DISCLOSURE





Not Applicable. There are not and have not been any disagreements between the Registrant and its accountants on any matter of accounting principles, practices or financial statement disclosure.





ITEM 9A.     CONTROLS AND PROCEDURES





The Company's Chief Executive Officer is responsible for establishing and maintaining disclosure controls and procedures for the Company.





EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES





For purposes of this Item 9A, the term disclosure controls and procedures means controls and other procedures of the Company (i) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (15 U.S.C. 78a et seq. and hereinafter the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “Commission”), and (ii)  include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures do not yet comply with the requirements in (i) and (ii) above.





Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as of the end of the period covered by this report and have concluded that (i) the Company’s disclosure controls and procedures are not effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Commission, and (ii) the Company’s controls and procedures have not been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING





There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our last quarter (our fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, our internal control over financial reporting does not provide assurance that a misstatement of our financial statements would be prevented or detected.





43


The Registrant’s management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, which assessment identified material weaknesses in internal control over financial reporting. A material weakness is a control deficiency, or a combination of deficiencies in internal control over financial reporting that creates a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis. Since the assessment of the effectiveness of our internal control over financial reporting did identify a material weakness, management considers its internal control over financial reporting to be ineffective.





Our independent public accountant, Robison, Hill & Company has not conducted an audit of our controls and procedures regarding internal control over financial reporting. Consequently, Robison, Hill & Company expresses no opinion with regards to the effectiveness or implementation of our controls and procedures with regards to internal control over financial reporting.





INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS





The Company's management does not expect that its disclosure controls or its internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.





ITEM 9B.     OTHER INFORMATION.





None.


44


PART III





ITEM 10.     DIRECTORS EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The following table sets forth the names and ages of our current directors, executive officers and key consultants as well as the principal offices and positions held by each person. We are managed by our Board of Directors. Currently, the Board has two members. Our executive officers serve at the discretion of the Board of Directors. There are no family relationships between any of the directors and executive officers. In addition, there was no arrangement or understanding between any executive officer and any other person pursuant to which any person was selected an executive officer.





Name

Age

Position with Pegasus

Year First Became a DirectorCarl  E. Worboys

68

Chief Executive Officer,

President and Director

2004Joseph  Passalaqua

61

Chief Financial Officer, Secretary and Director

2010





Biographies





Carl E. Worboys is a practicing attorney in the State of New York.  He has been active in the public payphone business for several clients.  From 1992 to 2004, Mr. Worboys was in charge of regulatory affairs for American Telecommunications Enterprises, Inc., a long distance carrier, and is responsible for the development of payphone leasing programs for the carrier.  From October 2004 to September 2006, Mr. Worboys served as an executive officer and director of Dolce Ventures, Inc.





Joseph C. Passalaqua was the owner of Laqua’s Chevrolet franchise and Laqua’s 481 Pontiac Buick, GMC Truck Center dealerships until July 2008.  Mr. Passalaqua was President of 3EEE, Inc. from March 2006 until May 2008.  He was the Secretary of Digital Utilities Ventures, Inc. from March 2009 through July 2010.  He became the President of Plantation Lifecare Developers, Inc. in January of 2010.  He is the sole owner of Greenwich Holdings, LLC.





Family Relationships amongst Directors and Officers:





None of the Officers or Directors are related.





Involvement in Certain Legal Proceedings





During the past five years no director or executive officer of the company (i) has been involved as a general partner or executive officer of any business which has filed a bankruptcy petition; (ii) has been convicted in any criminal proceeding nor is subject to any pending criminal proceeding; (iii) has been subjected to any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (iv) has been found by a court, the Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law.





Compliance with Section 16(a) of the Securities Exchange Act of 1934





Section 16(a) of the Exchange Act requires the Company’s directors and officers, and persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of beneficial ownership and changes in beneficial ownership of the Company’s securities with the SEC of forms 3, 4 and 5. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Item 405 of Regulation S-B requires every small business issuer that has a class of equity securities registered pursuant to Section 12 of the Exchange Act to identify each person who, at any time during the fiscal year, was a director, officer or beneficial owner of more than 10 percent of any class of equity securities registered pursuant to Section 12 of the Exchange Act that failed to file on a timely basis, as disclosed in the above forms as well as other information.  On March 23, 2009, we filed with the SEC a Form 15 to deregister our common stock under Section 12 of the Exchange Act and to terminate our status as a reporting company under the Exchange Act.  On October 15, 2009, the Company filed a Form S-1 Registration Statement with the SEC to register our common stock pursuant to Section 12 of the Exchange Act. On December 28, 2009 the Company’s Registration Statement went effective.





45


Significant Employees





The Company has no employees.  Our executive officers and directors serve as such on as-needed basis. The Company does not have any consultants or third parties.





Committees of the Board of Directors





Because of our limited resources, our Board does not currently have an established audit committee or executive committee. The current members of the Board perform the functions of an audit committee, governance/nominating committee, and any other committee on an as needed basis. If and when the Company grows its business and/or becomes profitable, the Board intends to establish such committees.





Code of Business Conduct and Code of Ethics





Our Board has not adopted a Code of Business Conduct and Ethics due to the Company’s limited size. As our business grows, we anticipate adopting a Code of Business Conduct and Ethics.





ITEM 11.     EXECUTIVE COMPENSATION





During the last fiscal year ended December 31, 2010, no compensation has been awarded to, earned by or paid to our officers or directors. Management has agreed to act without compensation until authorized by the Board of Directors, which is not expected to occur until we have generated revenues from operations. As of the date of this registration statement, we have no funds available to pay officers or directors. Further, our officers and directors are not accruing any compensation pursuant to any agreement with us.





Indemnity





The Articles of Incorporation provide for indemnification to the full extent permitted by the laws of the State of Delaware for each person who becomes a party to any civil or criminal action or proceeding by reason of the fact that he, or his testator, or intestate, is or was a director or officer of the corporation or served any other corporation of any type or kind, domestic or foreign in any capacity at the request of the corporation.





Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or officers pursuant to the foregoing provisions, we are informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable.





Director Compensation





We do not currently pay any cash fees to our directors, but we pay directors’ expenses in attending board meetings. During the year ended December 31, 2010, no director expenses were reimbursed.





Employment Agreements





The Company is not a party to any employment agreements.





46





ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The table on the following page sets forth certain information concerning the beneficial ownership of our common stock by (i) each person known by us to be the owner of more than 5% of our outstanding common stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all directors and executive officers as a group, without naming them. In general, “beneficial ownership” includes those shares a shareholder has the power to vote or the power to transfer, and stock options and other rights to acquire common stock that are exercisable currently or become exercisable within 60 days.





Except as indicated otherwise, the persons named in the table below have sole voting and investment power with respect to all shares shown as beneficially owned by them.  Unless otherwise indicated, the address of each of reporting person is c/o Pegasus Tel, Inc., 118 Chatham Road, Syracuse, NY 13203.





Beneficial Owner

Amount and Nature of

Beneficial Ownership

As of the Record Date


Percentage of Beneficial OwnershipCarl E. Worboys

Chief Executive Officer, President and Director

(Principal Executive Officer)


2,502,189


12.38
%Joseph  Passalaqua (2)

Chief Financial Officer, Secretary and Director

(Principal Financial Officer)


10,203,671


50.47
%Mary Passalaqua (3)


10,203,671


50.47
%All Officers and Directors as a group (without naming them) (2 persons)


12,705,860


62.85
%





(1)
Based on 20,215,136 shares of common stock issued and outstanding as of the date of this filing.(2)
Includes 2,500,000 shares of common stock held by Mary Passalaqua.  Mary Passalaqua is the wife of Joseph C. Passalaqua.(3)
Includes 7,703,671 shares of common stock held by Joseph C. Passalaqua.  Joseph C. Passalaqua is the husband of Mary Passalaqua





47





ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPDENCE





As of December 31, 2010, the Company had related party accounts payable in the amount of $24,589.  This includes a related party payable owed to Joseph C. Passalaqua in the amount of $10,673, a related party payable owed to Carl Worboys in the amount of $224 and related party payable owed to Lyboldt-Daly of which Joseph C. Passalaqua is the President in the amount of $13,692.





As of December 31, 2010, the Company had related party notes payable in the amount of $140,627 and $38,431 in related interest.  These notes are accruing between 10%, 15% and 18% simple interest per annum. This includes related party notes payable owed to Joseph C. Passalaqua in the amount of $16,242 with $4,837 in accrued interest, Mary Passalaqua in the amount of $53,600 with $23,915 in accrued interest and Cobalt Blue LLC, of which Mary Passalaqua is the President, in the amount of $70,785 with $9,679 in accrued interest.





Joseph C. Passalaqua is the Chief Financial Officer and Secretary of the Company and husband to Mary Passalaqua.  Carl Worboys is the Chief Executive Officer and President of the Company.





ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES





We became a reporting Company when our registration statement became effective on December 18, 2006. Robison Hill & Company ("RHC") is the Company's independent registered public accountant.





Audit Fees and Audit Related Fees





Aggregate fees billed by the Company's principal accountants, Robison, Hill & Company, for audit services related to the most recent two fiscal years, and for other professional services billed in the most recent two fiscal years, were as follows:





FISCAL 2010


FISCAL 2009Audit Fees (1)

$
20,010


$
14,261Tax Fees (2)

$
500


$
496Other Fees

None


None





(1) Comprised of the audit of the Company's annual financial statements and reviews of the Company's quarterly financial statements, as well as consents related to and reviews of other documents filed with the Securities and Exchange Commission.





(2) Comprised of preparation of all federal and state corporate income tax returns for the Company and its subsidiaries. Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the Company's independent accountants must now be approved in advance by the Audit Committee to assure that such services do not impair the accountants' independence from the Company. The Company does not have an Audit Committee, therefore, the Board of Directors reviews and approves audit and permissible non-audit services performed by Robinson, Hill & Company, as well as the fees charged by Robinson, Hill & Company for such services.





We do not currently have a standing audit committee. The services described above were approved by our Board of Directors.


48





ITEM 15.     EXHIBITS





Exhibit No.
Description3.1(1)
Articles of Incorporation, dated February 19, 20023.2(1)
Amended Articles of Incorporation, dated September 21, 20063.3(1)
Amendment to the Articles of Incorporation, dated September 18, 2006.3.4(2)
Amendment to Articles of Incorporation, date May 15, 20073.5(3)
Certificate of the Designations, Powers Preferences and Rights of the Series A Convertible Preferred Stock3.5(1)
By-laws4.1(1)
Form of Common Stock Certificate10.1 (3)
Series A Preferred Stock Purchase Agreement10.2 (4)
$1,205 18% Promissory Note, dated December 2, 2008, for the benefit of Joseph C. Passalaqua10.3 (4)
$8,682 18% Promissory  Note, dated August 13, 2008, for the benefit of Joseph C. Passalaqua10.4 (4)
$5,000 10% Promissory Note, dated December 13, 2007, for the benefit of Joseph C. Passalaqua10.5 (4)
$400 10% Promissory Note, dated March 21, 2008, for the benefit of Mary Passalaqua10.6 (4)
$17,900 10% Promissory Note, dated January 24, 2008, for the benefit of Mary Passalaqua10.7 (4)
$15,300 15% Promissory Note, dated June 11, 2007, for the benefit of Mary Passalaqua10.8 (4)
$15,000 15% Promissory Note, dated April 26, 2007, for the benefit of Mary Passalaqua10.9 (4)
$5,000 10% Promissory Note, dated October 24, 2006, for the benefit of Mary PassalaquaExhibit 31.1
Certification of the Principal Executive Officer of Registrant pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amendedExhibit 31.2
Certification of the Principal Financial Officer  of Registrant pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amendedExhibit 32.1
Certification of the Principal Executive Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2
Certification of the Principal Financial Officer  of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





(1) Filed as an exhibit to the Company’s Form 10-SB (File No.: 000-52628) filed with the SEC on May 7, 2007 and incorporated by reference herein.





(2) Filed as an exhibit to the Company’s Form 10-SB Amendment No. 1 (File No.: 000-52628) filed with the SEC on October 5, 2007 and incorporated by reference herein.





(3) Filed as an exhibit to the Company’s Form 8-K (File No.: 000-52628) filed on August 27, 2008 and incorporated by reference herein.





(4) Filed as an exhibit to the Company’s Form S-1 Amendment No. 2 (File No.: 333-162516) filed on November 13, 2009 and incorporated by reference herein.





49





SIGNATURES





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





PEGASUS TEL, INC.By:
/s/ CARL E. WORBOYSCarl E. WorboysPresident, Director, Chief Executive Officer(Principal Executive Officer)By:
/s/ JOSEPH  PASSALAQUAJoseph  Passalaqua

Secretary, Director, and Chief Financial Officer

(Principal Financial Officer

and Principal Accounting Officer)











Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.








Signature

Title

Date/s/ CARL E. WORBOYS

President, Director, and Chief Executive Officer

(Principal Executive Officer)

Date: March 15 ,2011Carl E. Worboys/s/ JOSEPH  PASSALAQUA

Secretary, Director, and Chief Financial Officer

(Principal Financial Officer

and Principal Accounting Officer)

Date: March 15 ,2011Joseph  Passalaqua