UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM
10-Q





(Mark
One)





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





FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2009


OR





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





FOR THE
TRANSITION PERIOD FROM ____________ TO ____________




COMMISSION
FILE NUMBER: 333-134568





PEGASI ENERGY RESOURCES
CORPORATION


(Exact
name of registrant as specified in its charter)





Nevada
            
            20-4711443(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      Number)




218
      N. Broadway, Suite 204
              Tyler,
      Texas 75702(Address
      of principal executive offices) (Zip
Code)





Registrant’s
telephone number, including area code: 903- 595-4139





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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company.  See definitions of “large accelerated filer,” “accelerated
filed,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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





There
were 33,610,801 shares of the registrant's common stock outstanding as of May 5,
2009.








1














PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
FINANCIAL STATEMENTS


FOR
THE QUARTER ENDED MARCH 31, 2009





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1. Financial Statements
                3Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                11Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                15Item
      4T. Controls and Procedures
                15PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
                17Item
      1A. Risk Factors
                17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                17Item
      3. Defaults Upon Senior Securities
                17Item
      4. Submission of Matters to a Vote of Security Holders
                17Item
      5. Other Information
                17Item
      6. Exhibits
                17SIGNATURES
                18












2









PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements.


PEGASI ENERGY
RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS











March
      31,
                      
                      
                      December
      31,2009
                      
                      
                      2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      629,271
                      
                      
                      $
                      792,255Accounts
      receivable, trade
                      
                      
                      133,884
                      
                      
                      
                      249,651Accounts
      receivable, related parties
                      
                      
                      55,909
                      
                      
                      
                      69,408Joint-interest
      billings receivable, related parties, net
                      
                      
                      53,630
                      
                      
                      
                      58,249Other
      current assets
                      
                      
                      235,442
                      
                      
                      
                      166,972Total
      current assets
                      
                      
                      1,108,136
                      
                      
                      
                      1,336,535Property
      and equipment:Equipment
                      
                      
                      583,822
                      
                      
                      
                      573,188Pipelines
                      
                      
                      701,806
                      
                      
                      
                      701,806Buildings
                      
                      
                      19,916
                      
                      
                      
                      19,916Leasehold
      improvements
                      
                      
                      7,022
                      
                      
                      
                      7,022Vehicles
                      
                      
                      50,663
                      
                      
                      
                      50,663Office
      furniture
                      
                      
                      134,407
                      
                      
                      
                      134,407Website
                      
                      
                      15,000
                      
                      
                      
                      15,000Total
      property and equipment
                      
                      
                      1,512,636
                      
                      
                      
                      1,502,002Less
      accumulated depreciation
                      
                      
                      (405,123
                      )
                      
                      
                      (368,878
                      )Property
      and equipment, net
                      
                      
                      1,107,513
                      
                      
                      
                      1,133,124Oil
      and gas properties:Oil
      and gas properties, proved
                      
                      
                      11,942,677
                      
                      
                      
                      11,905,413Oil
      and gas properties, unproved
                      
                      
                      9,013,953
                      
                      
                      
                      8,714,577Capitalized
      asset retirement obligations
                      
                      
                      220,237
                      
                      
                      
                      220,237Total
      oil and gas properties
                      
                      
                      21,176,867
                      
                      
                      
                      20,840,227Less
      accumulated depreciation and depletion
                      
                      
                      (831,122
                      )
                      
                      
                      (806,303
                      )Oil
      and gas properties, net
                      
                      
                      20,345,745
                      
                      
                      
                      20,033,924Total
      assets
                      
                      $
                      22,561,394
                      
                      
                      $
                      22,503,583











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











3








PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS (CONTINUED)











March
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
                    
                    $
                    362,797
                    
                    
                    $
                    202,710Accounts
      payable, related parties
                    
                    
                    720,634
                    
                    
                    
                    684,996Revenues
      payable
                    
                    
                    170,070
                    
                    
                    
                    194,560Interest
      payable, related parties
                    
                    
                    487,722
                    
                    
                    
                    385,160Liquidated
      damages payable
                    
                    
                    126,705
                    
                    
                    
                    121,579Other
      payables
                    
                    
                    52,475
                    
                    
                    
                    54,061Current
      portion of notes payable
                    
                    
                    6,601
                    
                    
                    
                    6,575Total
      current liabilities
                    
                    
                    1,927,004
                    
                    
                    
                    1,649,641Notes
      payable
                    
                    
                    9,750
                    
                    
                    
                    11,387Notes
      payable, related parties
                    
                    
                    5,427,303
                    
                    
                    
                    4,857,303Asset
      retirement obligations
                    
                    
                    287,558
                    
                    
                    
                    283,307Total
      liabilities
                    
                    
                    7,651,615
                    
                    
                    
                    6,801,638Commitments
      and contingencies (Note 5)Stockholders'
      equity:Common stock; $0.001 par value; 75,000,000 shares
    authorized;33,610,801 shares issued and outstandingat March 31, 2009 and December 31, 2008
                    
                    
                    33,611
                    
                    
                    
                    33,611Additional paid-in capital
                    
                    
                    19,673,102
                    
                    
                    
                    19,673,102Accumulated deficit
                    
                    
                    (4,796,934
                    )
                    
                    
                    (4,004,768
                    )Total
      stockholders' equity
                    
                    
                    14,909,779
                    
                    
                    
                    15,701,945Total
      liabilities and stockholders' equity
                    
                    $
                    22,561,394
                    
                    
                    $
                    22,503,583








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











4







PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)











Three
      Months EndedMarch
      31,2009
                          
                          
                          2008Revenues:Oil
      and gas
                          
                          $
                          114,807
                          
                          
                          $
                          230,348Condensate
      and skim oil
                          
                          
                          21,267
                          
                          
                          
                          31,209Transportation
      and gathering
                          
                          
                          74,831
                          
                          
                          
                          171,413Saltwater
      disposal income
                          
                          
                          71,490
                          
                          
                          
                          48,001Total
      revenues
                          
                          
                          282,395
                          
                          
                          
                          480,971Operating
      expenses:Lease
      operating expenses
                          
                          
                          76,740
                          
                          
                          
                          25,295Pipeline
      operating expenses
                          
                          
                          25,314
                          
                          
                          
                          45,605Saltwater
      disposal expenses
                          
                          
                          71,732
                          
                          
                          
                          46,892Cost
      of gas purchased for resale
                          
                          
                          50,325
                          
                          
                          
                          148,886Depletion
      and depreciation
                          
                          
                          61,064
                          
                          
                          
                          60,034General
      and administrative
                          
                          
                          683,081
                          
                          
                          
                          621,480Total
      operating expenses
                          
                          
                          968,256
                          
                          
                          
                          948,192Loss
      from operations
                          
                          
                          (685,861
                          )
                          
                          
                          (467,221
                          )Other
      income (expenses):Interest
      income
                          
                          
                          1,416
                          
                          
                          
                          47,558Interest
      expense
                          
                          
                          (102,831
                          )
                          
                          
                          (97,398
                          )Liquidated
      damages
                          
                          
                          (5,126
                          )
                          
                          
                          (150,756
                          )Other
      income
                          
                          
                          606
                          
                          
                          
                          6,914Total
      other expenses
                          
                          
                          (105,935
                          )
                          
                          
                          (193,682
                          )Loss
      before income tax expense
                          
                          
                          (791,796
                          )
                          
                          
                          (660,903
                          )Income
      tax expense
                          
                          
                          (370
                          )
                          
                          
                          (45,359
                          )Net
      loss
                          
                          $
                          (792,166
                          )
                          
                          $
                          (706,262
                          )Basic
      and diluted loss per share
                          
                          $
                          (0.02
                          )
                          
                          $
                          (0.02
                          )Weighted
      average sharesOutstanding
                          
                          
                          33,610,801
                          
                          
                          
                          29,373,674








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









5





PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three
      Months Ended March 31,2009
                        
                        
                        2008Operating
      ActivitiesNet
      loss
                        
                        $
                        (792,166
                        )
                        
                        $
                        (706,262
                        )Adjustments
      to reconcile net loss to netcash
      used in operating activities:Depletion
      and depreciation
                        
                        
                        61,064
                        
                        
                        
                        60,034Accretion
      of discount on asset retirement obligations
                        
                        
                        4,251
                        
                        
                        
                        4,009Deferred
      income taxes
                        
                        
                        -
                        
                        
                        
                        45,359Liquidated
      damages
                        
                        
                        5,126
                        
                        
                        
                        150,756Changes
      in operating assets and liabilities:Accounts
      receivable, trade
                        
                        
                        115,767
                        
                        
                        
                        21,379Accounts
      receivable, related parties
                        
                        
                        13,499
                        
                        
                        
                        (36,282
                        )Joint-interest
      billings receivable, related parties, net
                        
                        
                        4,619
                        
                        
                        
                        (150,597
                        )Other
      current assets
                        
                        
                        (68,470
                        )
                        
                        
                        267,728Accounts
      payable
                        
                        
                        160,087
                        
                        
                        
                        (179,464
                        )Accounts
      payable, related parties
                        
                        
                        35,638
                        
                        
                        
                        (14,340
                        )Revenues
      payable
                        
                        
                        (24,490
                        )
                        
                        
                        11,747Interest
      payable, related parties
                        
                        
                        102,562
                        
                        
                        
                        (180,058
                        )Other
      payables
                        
                        
                        (1,586
                        )
                        
                        
                        34,293Joint-interest
      deposits, related parties
                        
                        
                        -
                        
                        
                        
                        (489,770
                        )Net
      cash used in operating activities
                        
                        
                        (384,099
                        )
                        
                        
                        (1,161,468
                        )Investing
      ActivitiesPurchases
      of property and equipment
                        
                        
                        (10,634
                        )
                        
                        
                        (77,130
                        )Purchases
      of oil and gas properties
                        
                        
                        (336,640
                        )
                        
                        
                        (1,844,118
                        )Net
      cash used in investing activities
                        
                        
                        (347,274
                        )
                        
                        
                        (1,921,248
                        )Financing
      ActivitiesPayments
      on notes payable
                        
                        
                        (1,611
                        )
                        
                        
                        (1,695
                        )Proceeds
      from borrowings on notes payable, related party
                        
                        
                        570,000
                        
                        
                        
                        -Payments
      on notes payable, related party
                        
                        
                        -
                        
                        
                        
                        (742,544
                        )Payments
      for cancelled shares of common stock 1
                        
                        
                        -
                        
                        
                        
                        (6,610
                        )Net
      cash provided by (used in) financing activities
                        
                        
                        568,389
                        
                        
                        
                        (750,849
                        )Net
      decrease in cash and cash equivalents
                        
                        
                        (162,984
                        )
                        
                        
                        (3,833,565
                        )Cash
      and cash equivalents at beginning of period
                        
                        
                        792,255
                        
                        
                        
                        8,935,283Cash
      and cash equivalents at end of period
                        
                        $
                        629,271
                        
                        
                        $
                        5,101,718Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the period for interest
                        
                        $
                        269
                        
                        
                        $
                        277,4561
      2,681 net shares of common stock were cancelled by investors during the
      three months ended March 31, 2008.









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






6








PEGASI
ENERGY RESOURCES CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009 AND 2008


1.  NATURE
OF OPERATIONS




Pegasi
Energy Resources Corporation (“PERC” or the “Company”) is engaged in the
exploration and production of natural gas and oil through the development of a
repeatable, low geological risk, high potential project in the active East Texas
oil and gas region.  The Company's business strategy, which it
designated as the “Cornerstone Project”, is to identify and exploit resources in
and adjacent to existing or indicated producing areas within the Rodessa field
area.  PERC’s principals spent over three years and invested over $3.5
million in equity for data harvesting, prospect evaluation and acreage
acquisitions for the Cornerstone Project.





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





a)  Basis of
Presentation





The
accompanying unaudited interim consolidated financial statements of PERC have
been prepared in accordance with accounting principles generally accepted
(“GAAP”) in the United States of America and the rules of the Securities and
Exchange Commission (the “SEC”), and should be read in conjunction with PERC’s
audited consolidated financial statements for the year ended December 31,
2008, and notes thereto, which are included in the Company’s annual report on
Form 10-K filed with the SEC on March 31, 2009.  In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company’s consolidated financial
position and the consolidated results of operations for the interim periods
presented have been reflected herein.  The consolidated results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year.  The notes to consolidated financial
statements, which would substantially duplicate the disclosures required in the
Company’s 2008 annual consolidated financial statements, have been
omitted.





b)  New
Accounting Pronouncements





On
December 31, 2008, the SEC published the final rules and interpretations
updating its oil and gas reporting requirements. Many of the revisions are
updates to definitions in the existing oil and gas rules to make them consistent
with the petroleum resource management system, which is a widely accepted
standard for the management of petroleum resources that was developed by several
industry organizations. Key revisions include changes to the pricing used to
estimate reserves utilizing a 12-month average price rather than a single day
spot price which eliminates the ability to utilize subsequent prices to the end
of a reporting period when the full-cost ceiling was exceeded and subsequent
pricing exceeds pricing at the end of a reporting period, the ability to include
nontraditional resources in reserves, the use of new technology for determining
reserves, and permitting disclosure of probable and possible reserves. The SEC
will require companies to comply with the amended disclosure requirements for
registration statements filed after January 1, 2010, and for annual reports
on Form 10-K for fiscal years ending on or after December 15, 2009. Early
adoption is not permitted. The Company is currently assessing the impact that
the adoption will have on the Company’s disclosures, consolidated operating
results, financial position and cash flows.





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
GAAP, and expands disclosures regarding fair value measurements. SFAS No. 157
does not require any new fair value measurements, but provides guidance on how
to measure fair value by providing a fair value hierarchy used to classify the
source of the information. SFAS No. 157 was effective for financial assets and
liabilities in fiscal years beginning after November 15, 2007, and is effective
for nonfinancial assets and liabilities in fiscal years beginning after November
15, 2008. The Company adopted the provisions of SFAS No. 157 related to
recurring financial assets and liabilities in 2008 and the provisions of SFAS
No. 157 related to nonfinancial assets and liabilities were adopted during the
first quarter of 2009.  The adoption had no impact on the Company’s
consolidated financial position, results of operations, and cash
flows.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities including an amendment of FASB Statement No. 115.
  SFAS No. 159 provides the option to report certain financial assets
and liabilities at fair value, with the intent to mitigate volatility in
financial reporting that can occur when related assets and liabilities are
recorded on different bases and is effective for fiscal years beginning after
November 15, 2007.  The Company adopted SFAS No. 159 effective January
1, 2008 and it did not have a material impact on the Company’s consolidated
financial position, results of operations, and cash flows.





SFAS No.
141R (revised 2007), Business
Combinations, amends SFAS No. 141 by requiring an acquirer to
recognize: (i) the assets acquired, liabilities assumed, and any non-controlling
interest in the acquiree at fair value as of the acquisition date, (ii) a gain
attributable to any “negative goodwill” in a bargain purchase, and (iii) an
expense related to acquisition costs.  SFAS No. 141R is effective
for fiscal years beginning on or after December 15, 2008.  The Company
adopted SFAS No. 141R in the first quarter of 2009 and the adoption did not have
a material impact on the Company’s consolidated results of operations or
financial condition.




7






PEGASI
ENERGY RESOURCES CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009 AND 2008




2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51, which
amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary.  SFAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008.  The Company adopted SFAS No.160 during
the first quarter of 2009 and the adoption did not have a material impact on the
Company’s consolidated results of operations or financial
condition.





In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, which identifies a consistent framework for
selecting accounting principles to be used in preparing financial statements for
nongovernmental entities that are presented in conformity with
GAAP.  The current GAAP hierarchy was criticized due to its
complexity, ranking position of FASB Statements of Financial Accounting Concepts
and the fact that it is directed at auditors rather than entities. SFAS No. 162
will be effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  The
FASB does not expect that SFAS No. 162 will result in a change in current
practice, and the Company does not believe that SFAS No. 162 will have a
material impact on its consolidated operating results, financial position or
cash flows.





c)  Reclassifications





Certain
reclassifications have been made to the comparative financial statements to
conform to the current period’s presentation.





3.  NOTES
PAYABLE, RELATED PARTIES





Notes
payable, related parties consisted of the following at:





March
      31,
                          2009
                        
                        
                        December
      31, 2008Note
      payable dated May 21, 2007 of $5,579,847 to Teton, Ltd.
      (“Teton”)including
      interest at 8%, with interest payment due on May 21, 2009 for
      period
                          from
      date of note, remaining interest and principal due on maturity date
      of
                          May
      21, 2010.
                        
                        $
                        5,427,303
                        
                        
                        $
                        4,857,303Total
      notes payable, related parties
                        
                        
                        5,427,303
                        
                        
                        
                        4,857,303Less
      current portion
                        
                        
                        -
                        
                        
                        
                        -Total
      long-term notes payable, related parties
                        
                        $
                        5,427,303
                        
                        
                        $
                        4,857,303





Annual
maturities of notes payable subsequent to March 31, 2009 are as
follows:





Year
      Ended2009
                        
                        $
                        -2010
                        
                        
                        5,427,303Total
                        
                        $
                        5,427,303





On March
3, 2009, a “Second Amendment to Renewal Promissory Note and Loan Modification
Agreement” (“Second Amendment”) was executed, which amended the “Renewal
Promissory Note” dated May 21, 2007.  This agreement added $570,000 of
additional funds to the outstanding balance of the note payable to Teton and
pledged substantially all of the Company’s assets to secure repayment of the
note.  On May 1, 2007, a “Memorandum of Understanding” was executed to
grant Teton the right to convert the outstanding balance on the note into shares
of PERC’s common stock at a fixed conversion price of $1.20 per share. The
Second Agreement confirmed that the fixed conversion price of $1.20 per share
would remain for the portion of the note payable balance that existed prior its
execution, and a fixed conversion price of $1.60 was agreed upon for conversion
of the additional funds added by the Second Amendment. Teton has the right, but
not the obligation to convert all or a portion of the indebtedness at any time
after May 1, 2008, unless the debt is repaid before such date. This option will
continue in existence as long as any balance remains outstanding on the
note.






8








PEGASI
ENERGY RESOURCES CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009 AND 2008





4.  SEGMENT
INFORMATION





The
following information is presented in accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information.  The Company is engaged in
oil and gas exploration and production, saltwater disposal and pipeline
transportation.  PERC is engaged in the exploration and production of
natural gas and oil.  Pegasi Operating, Inc. (“POI”), a wholly-owned
subsidiary of PERC, conducts the exploration and production
operations.  TR Rodessa, Inc. (“TR Rodessa”) operates a 40-mile gas
pipeline and gathering system which is used to transport hydrocarbons to market
to be sold.  59 Disposal, L.P. (“59 Disposal”) operates a saltwater
disposal facility which disposes saltwater and flow-back waste into subsurface
storage  and  also  sells  the  skim  oil  it  separates  from  the  saltwater.  The
Company identified such segments based on management responsibility and the
nature of their products, services, and costs.  There are no major
distinctions in geographical areas served as all operations are in the United
States.  The Company measures segment profit (loss) as income (loss)
from operations.  Business segment assets are those assets controlled
by each reportable segment.  The following table sets forth certain
information about the financial information of each segment as of March 31, 2009
and December 31, 2008 and for the three months ended March 31, 2009 and
2008:





Three
      Months Ended
                  March
      31,
                  2009
                
                
                Three
      Months Ended
                  March
      31,
                  2008Business
      segment revenue:Oil
      and gas
                
                $
                114,807
                
                
                $
                230,348Condensate
      and skim oil
                
                
                21,267
                
                
                
                31,209Transportation
      and gathering
                
                
                74,831
                
                
                
                171,413Saltwater
      disposal income
                
                
                71,490
                
                
                
                48,001Total
      revenues
                
                $
                282,395
                
                
                $
                480,971Business
      segment profit (loss):Oil
      and gas
                
                $
                (197,296
                )
                
                $
                63,394Condensate
      and skim oil
                
                
                21,267
                
                
                
                44,584Transportation
      and gathering
                
                
                (17,271
                )
                
                
                (26,564
                )Saltwater
      disposal
                
                
                (27,351
                )
                
                
                (31,253
                )General
      corporate
                
                
                (465,210
                )
                
                
                (517,382
                )Loss
      from operations
                
                $
                (685,861
                )
                
                $
                (467,221
                )Depreciation
      and depletion:Oil
      and gas
                
                $
                27,752
                
                
                $
                27,299Transportation
      and gathering
                
                
                7,599
                
                
                
                5,383Saltwater
      disposal
                
                
                16,604
                
                
                
                20,250General
      corporate
                
                
                9,109
                
                
                
                7,102Total
      depreciation and depletion
                
                $
                61,064
                
                
                $
                60,034






9






PEGASI
ENERGY RESOURCES CORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2009 AND 2008





4.  SEGMENT
INFORMATION (CONTINUED)





Three
      Months Ended
                                        March
      31,
                                        2009
                                      
                                      
                                      Three
      Months Ended
                                        March
      31,
                                        2008Capital
      expenditures:Oil
      and gas
                                      
                                      $
                                      336,640
                                      
                                      
                                      $
                                      1,844,118Transportation
      and gathering
                                      
                                      
                                      -
                                      
                                      
                                      
                                      30,010Saltwater
      disposal
                                      
                                      
                                      10,634
                                      
                                      
                                      
                                      1,280General
      corporate
                                      
                                      
                                      -
                                      
                                      
                                      
                                      45,840Total
      capital expenditures
                                      
                                      $
                                      347,274
                                      
                                      
                                      $
                                      1,921,248March
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Business
      segment assets:Oil
      and gas
                                      
                                      $
                                      21,038,691
                                      
                                      
                                      $
                                      20,921,001Transportation
      and gathering
                                      
                                      
                                      671,725
                                      
                                      
                                      
                                      773,767Saltwater
      disposal
                                      
                                      
                                      375,171
                                      
                                      
                                      
                                      344,113General
      corporate
                                      
                                      
                                      475,807
                                      
                                      
                                      
                                      464,702Total
      assets
                                      
                                      $
                                      22,561,394
                                      
                                      
                                      $
                                      22,503,583





5.
COMMITMENTS AND CONTINGENCIES





Along
with the Company's counsel, management monitors developments related
to legal matters and, when appropriate, makes adjustments to record liabilities
to reflect current facts and circumstances.  Management has recorded a
liability related to its registration rights agreement with investors that
provides for the filing of a registration statement for the registration of the
shares issued in the offering in December 2007, as well as the shares issuable
upon exercise of related warrants.  The Company failed to meet the
deadline for the effectiveness of the registration statement and therefore was
required to pay liquidated damages of approximately $100,000 on the first day of
effectiveness failure, or July 18, 2008.  An additional $100,000
penalty was required to be paid by the Company every thirty days thereafter, pro
rated for periods totaling less than thirty days, until the effectiveness
failure was cured, up to a maximum of 18% of the aggregate purchase price, or
approximately $1,800,000.  The Company’s registration became effective
on August 21, 2008.  At March 31, 2009, management reevaluated the
status of the registration statement and determined an accrual of $126,705 was
sufficient to cover any potential payments for liquidated
damages.  The damages are reflected as liquidated damages payable of
$126,705 and $121,579 in the accompanying consolidated balance sheets as of
March 31, 2009 and December 31, 2008, respectively.






10











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





Forward Looking Statements





This
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such as
“may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or
similar words.  Those statements include statements regarding the
intent, belief or current expectations of us and members of our management team
as well as the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risk and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements.





Readers
are urged to carefully review and consider the various disclosures made by us in
this report and in our other reports filed with the SEC.  The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations of the Company should be read in conjunction with the
Consolidated Financial Statements and notes related thereto included in this
Quarterly Report on Form 10-Q. Important  factors
not  currently  known  to
management  could  cause  actual  results  to
differ  materially  from  those in
forward-looking  statements.  We undertake no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes in the future operating results
over time. We believe that our assumptions are based upon reasonable data
derived from and known about our business and operations.  No
assurances are made that actual results of operations or the results of our
future activities will not differ materially from our
assumptions.  Factors that could cause differences include, but are
not limited to, expected market demand for our products, fluctuations in pricing
for materials, and competition.





Company
Overview





We are an
organic growth-oriented independent energy company engaged in the exploration
and production of natural gas and oil through the development of a repeatable,
low-geological risk, high-potential project in the active East Texas oil and gas
region.  We currently hold interests in properties located in Marion
and Cass County, Texas, home to the Rodessa oil field, which has produced
approximately 2.3 trillion cubic feet of gas and approximately 400 million
barrels of oil.  The field has historically been the domain of small
independent operators and is not a legacy field for any major oil
company.





Our
business strategy, which we designated as the “Cornerstone Project”, is to
identify and exploit resources in and adjacent to existing or indicated
producing areas within the Rodessa field area. We intend to quickly develop and
produce reserves at a low cost and will take an aggressive approach to
exploiting our contiguous acreage position through utilization of “best in
class” drilling, (i.e. using the latest drilling techniques available and
seismic technology).  We believe that we are uniquely familiar with
the history and geology of the Cornerstone Project area based on our collective
experience in the region as well as through our ownership of a large proprietary
database which details the drilling history of the Cornerstone Project area over
the previous 29 years.  We believe implementing our drilling strategy
and using new drilling and completion techniques will enable us to find
significant gas and oil reserves in the Cornerstone Project area.




We
conduct our main exploration and production operations through our wholly-owned
subsidiary, POI.  We conduct additional operations through two other
wholly-owned subsidiaries: (i) TR Rodessa and (ii) 59 Disposal.





TR
Rodessa owns an 80% undivided interest in and operates a 40-mile natural gas
pipeline and gathering system which we currently use to transport our
hydrocarbons to market.  Excess capacity on this system is used to
transport third-party hydrocarbons.  TR Rodessa expanded the capacity
of its system through the construction of a new 9,238 foot 8” trunkline in 2008.
A total in excess of one mile of 4” laterals were constructed to the Childers
#2, Harris #2, Huntington #4 and Childers # 3 well sites. These gathering lines
have been tied into the central gathering point at the Huntington
location.





59
Disposal owns an 80% undivided interest in and operates a saltwater disposal
facility which disposes saltwater and flow-back waste into subsurface
storage.





We
previously operated under the name Maple Mountain Explorations, Inc. (“Maple
Mountain”).  On December 12, 2007, Maple Mountain entered into a Share
Exchange with the shareholders of PERC, a Texas corporation, pursuant to
which Maple Mountain purchased from PERC’s shareholders all issued and
outstanding shares of PERC’s common stock in consideration for the issuance of
17,500,000 shares of Maple Mountain’s common stock.  Effective January
23, 2008, we changed our name to Pegasi Energy Resources
Corporation.







11







Plan
of Operations





We intend
to continue to use our competitive strengths to advance our corporate
strategy.  The following are key elements of that
strategy:





·
            Develop the Cornerstone
      Project in East Texas through an aggressive drilling
      program.We will focus our near-term efforts on
      development drilling on existing acreage.  We expect this
      drilling program to increase our proved reserve and cash flow
      profile.·
            Apply management expertise in
      the Cornerstone Project area and recent developments in drilling and
      completion technology to identify new drilling opportunities and enhance
      production.We plan to maximize the present value of our
      vertical wells by utilizing a shotgun dual or sawtooth production
      technique. We will also implement the latest drilling, fracturing,
      and completion techniques, including shotgun duals, to develop our
      properties as well as horizontal drilling.  These horizontal
      wells will primarily target the Bossier formation and we anticipate these
      wells will yield significantly higher hydrocarbon flow rates than our
      vertical wells.·
            Continue to lease
      underdeveloped acreage in the Cornerstone Project
      area.We plan to use our extensive proprietary database
      to help optimize additional drilling locations and to acquire additional
      acreage.  We intend to target acreage with exploitation and
      technology upside within the Cornerstone Projectarea.  Most
      properties in the project area are held by smaller independent companies
      that lack the resources to exploit them fully.  We intend to
      pursue these opportunities to selectively expand our portfolio of
      properties.  These acreage additions will complement our
      existing substantial acreage position in the area and provide us with
      significant additional drilling inventory.·
            Maintain a conservative and
      flexible financial strategy.We intend to continue to
      focus on maintaining a low level of corporate overhead expense in addition
      to continued utilization of outsourcing, when appropriate, to maximize
      cash flow.  We believe this internally-generated cash flow,
      coupled with reserve-based debt financing when appropriate, will provide
      the optimal capital structure to fund our future drilling
      activity.





Our oil
and gas assets are located in Cass and Marion counties in northeast
Texas.  As of March 31, 2009, we operated nine wells.  The
Harris #2 well was completed in January 2008 and the Childers #2 well was
completed in February 2008 and each began producing in July and June 2008,
respectively.





The first
fracture treatment stage of the Cotton Valley Group in the Harris #2 and
Childers #2 wells occurred in June 2008.    Permanent
facilities have been installed and the wells have been placed on
production.  As of March 31, 2009, our leasehold position is
approximately 21,000 gross acres and 14,000 net acres.  We have an 80%
working interest in the acreage. We have an ongoing leasing program whereby
expiring leases are being renewed and previously unleased acreage is being
leased.





In
October 2008, we issued 4.2 million shares of our common stock to TR Energy,
Inc. (“TR Energy”), a related party, in exchange for a net 10% interest in the
Cornerstone Project.  The acquisition increased our interest in the
Cornerstone Project to 80% and TR Energy retains a 20% interest.





In
January 2009, we engaged an exclusive financial advisor to assist in securing
additional capital.  It is our intention to raise additional capital
so that we may add stages of fracture treatment to the Harris #2 and Childers #2
as well as deepening the Childers #1 and Harris #1.  The deepening
will be to a minimum depth to complete the wells in the Cotton Valley formation
and possibly deeper in order to evaluate the Cotton Valley
Lime.  Additional capital will also be used to drill and complete
wells on the previously constructed Huntington #4 and Childers #3 locations to
approximately 10,500 feet.  We are also considering the raising of
additional capital through the participation in drilling partnerships in order
to continue the development of our large leasehold.





Results
of Operations





Three Months Ended March 31,
2009 Compared to Three Months Ended March 31, 2008.





Summarized Results of Operations





2009
                  
                  
                  2008
                  
                  
                  Increase
      (Decrease)Total
      revenues
                  
                  $
                  282,395
                  
                  
                  $
                  480,971
                  
                  
                  $
                  (198,576
                  )Total
      operating expenses
                  
                  
                  968,256
                  
                  
                  
                  948,192
                  
                  
                  
                  20,064Loss
      from operations
                  
                  
                  (685,861
                  )
                  
                  
                  (467,221
                  )
                  
                  
                  (218,640
                  )Total
      other expenses
                  
                  
                  (105,935
                  )
                  
                  
                  (193,682
                  )
                  
                  
                  87,747Loss
      before income tax expense
                  
                  
                  (791,796
                  )
                  
                  
                  (660,903
                  )
                  
                  
                  (130,893
                  )Income
      tax expense
                  
                  
                  (370
                  )
                  
                  
                  (45,359
                  )
                  
                  
                  44,989Net
      loss
                  
                  $
                  (792,166
                  )
                  
                  $
                  (706,262
                  )
                  
                  $
                  (85,904
                  )






12







Revenues:  Total
revenues for the three months ended March 31, 2009 totaled $282,395, compared to
$480,971 for the three months ended March 31, 2008.  Production
revenues of oil and gas decreased $115,541 for the three months ended March 31,
2009 compared to the three months ended March 31, 2008.  This decrease
in revenues reflects the impact of a drop in sales prices for natural gas of
about 53% and oil of about 62%.  Transportation and gathering revenue
decreased $96,582 in the three months ended March 31, 2009, compared to the
three months ended March 31, 2008 due to the drop in sales prices for natural
gas.




Expenses:  Total
operating expenses for the three months ended March 31, 2009 were $968,256,
compared to $948,192 in the three months ended March 31, 2008.  This
change is comprised of increases in lease operating and general and
administrative expenses offset by a decrease in the cost of gas purchased for
resale.





·
            Lease Operating
      Expense:  The $51,445 increase in lease operating expense
      to $76,740 for the three months ended March 31, 2009 from $25,295 for the
      three months ended March 31, 2008 is primarily due to the Childers #2 and
      Harris #2 wells.  These two wells were not operating during the
      first quarter of 2008.





·
            General and Administrative
      Expense:  The $61,601 increase in general and
      administrative expense to $683,081 for the three months ended March 31,
      2009 from $621,480 for the three months ended March 31, 2008 is primarily
      due to increased accounting fees.   The large part of the
      accounting fee increase is due to work performed during 2009 related to
      the 2008 10-K preparation and documentation of internal controls in
      relation to management’s evaluation of disclosure controls and procedures
      and controls over financial reporting as required by
      Sarbanes-Oxley.





·
            Cost of Gas Purchased for
      Resale:The $98,561 decrease in cost of gas purchased
      for resale to $50,325 for the three months ended March 31, 2009 from
      $148,886 for the three months ended March 31, 2008 is due to a drop in the
      purchase price for natural gas purchased from
  operators.





Other Income
(Expenses):Total other expenses for the three months ended
March 31, 2009 was $105,935, compared to $193,682 of other expenses for the
three months ended March 31, 2008.  The primary reason for this
$87,747 decrease was due to an over accrual in 2008 of the liquidated damages
expense that was corrected in the third quarter of 2008.  This over
accrual of expense was offset by a decrease in interest income from the three
months ended March 31, 2008 compared to the three months ended March 31, 2009
due to the significant decrease in cash and lower interest rates.





Income Tax
Expense:In the three months ended March 31, 2009, we
recognized income tax expense of $370 compared to income tax expense of $45,359
in the first quarter of 2008.  The $44,989 decrease is primarily due
to our position that we are not likely to realize our deferred tax assets or
liabilities, and therefore, a valuation allowance was recorded to offset these
amounts.





Operating Loss:As
a result of the above described revenues and expenses, we incurred a net
operating loss of $792,166 in the three months ended March 31, 2009 as compared
to an operating loss of $706,262 in the three months ended March 31,
2008.





Liquidity and Capital Resources





We ended
the first quarter of 2009 with approximately $629,000 in cash and cash
equivalents, compared to approximately $792,000 at December 31,
2008.  The decrease in cash and cash equivalents is related to
purchases of lease and well equipment and oil and gas properties and payments
made on operating liabilities offset by increases in cash flows from operating
assets.





Cash
Flows





The
following table summarizes our cash flows for the three months ended March 31,
2009 and 2008:





Three
      Months Ended March 31,2009
                  
                  
                  2008Total
      cash provided by (used in):Operating
      activities
                  
                  $
                  (384,099
                  )
                  
                  $
                  (1,161,468
                  )Investing
      activities
                  
                  
                  (347,274
                  )
                  
                  
                  (1,921,248
                  )Financing
      activities
                  
                  
                  568,389
                  
                  
                  
                  (750,849
                  )Decrease
      in cash and cash equivalents
                  
                  $
                  (162,984
                  )
                  
                  $
                  (3,833,565
                  )





Cash used
in operating activities in the three months ended March 31, 2009 totaled
$384,099, compared to $1,161,468 used in operating activities in the three
months ended March 31, 2008.  The decrease is primarily due to
additional cash provided by changes in connection with operating assets and
liabilities offset by an increase in the net loss.  The net loss was
$792,166 in the three months ended March 31, 2009, an increase from the net loss
of $706,262 in the three months ended March 31, 2008.  The changes in
operating assets and liabilities are primarily due to changes in joint-interest
billings receivable, related parties, other current assets, accounts payable,
related party joint-interest deposits payable, and interest payable, related
parties.






13







Cash used
in investing activities in the three months ended March 31, 2009 was $347,274,
compared to $1,921,248 in the three months ended March 31, 2008.  The
change is due primarily to decreased drilling activities in three months ended
March 31, 2009.  Drilling and completion of the Harris #2 and Childers
#2 wells were finished in January 2008 and February 2008,
respectively.  We spent in excess of $1.8 million on lease and well
equipment, leasehold costs and intangible drilling and completion costs in the
first three months of 2008, compared to $336,640 in the first three months of
2009.  Finally, property and equipment purchases were approximately
$10,634 in the first three months of 2009 compared to $77,130 in the first three
months of 2008.





Cash
provided by financing activities in the three months ended March 31, 2009
totaled $568,389, compared to $750,849 of cash used in financing activities in
the three months ended March 31, 2008.  During the first quarter of
2009 we received proceeds of $570,000 on a related party note
payable.  During January of 2008 we made a payment of $742,544
principal on that same related party note payable.





Sources
of Liquidity





Our most
significant source of liquidity continues to be the funds generated in the
public offering in December 2007.  We have also utilized related party
financing in the form of notes payable.  We believe that the proceeds
from the offering and financing available from related parties will be
sufficient to finance our operations for the remainder of
2009.  However, future acquisitions and future exploration,
development, production and marketing activities, as well as administrative
requirements (such as salaries, insurance expenses, general overhead expenses,
legal compliance costs and accounting expenses) will require a substantial
amount of additional capital and cash flow.





We plan to pursue sources of additional
capital through various financing transactions or arrangements, including joint
venturing of projects, debt financing, equity financing or other
means.  In January 2009 we engaged an exclusive advisor to assist in
these matters and are considering raising additional capital through the
participation in drilling partnerships in order to continue the development of
our large leasehold.  We also entered into a credit agreement with
lenders led by Amegy Bank, N.A. in November 2007.  Pursuant to the
terms of the credit agreement, the aggregate commitment is $50 million, with no
initial borrowing base or borrowing base reduction under the
agreement.  Upon satisfaction of various conditions precedent to the
initial credit extension, the borrowing base will be $5 million and the initial
monthly borrowing base reduction will be determined on the initial funding
date.  As of March 31, 2009, these conditions had not been
met.





Off
Balance Sheet Arrangements





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our consolidated financial condition, revenues,
results of operations, liquidity or capital expenditures.





Critical
Accounting Policies




Our
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in the notes to consolidated financial statements which
accompany the consolidated financial statements included in our annual report on
Form 10-K filed with the SEC on March 31, 2009.  These policies have
been consistently applied in all material respects and address such matters as
revenue recognition and depreciation methods.  The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the recorded amounts of revenues and
expenses during the reporting period.  Actual results could differ
from these estimates.




Accounts
Receivable





We
perform ongoing credit evaluations of our customers’ financial condition and
extend credit to virtually all of our customers.  Collateral is
generally not required, nor is interest charged on past due
balances.  Credit losses to date have not been significant and have
been within management’s expectations.  In the event of complete
non-performance by our customers, our maximum exposure is the outstanding
accounts receivable balance at the date of non-performance.





Property
and Equipment





Property
and equipment are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, which range from five to
thirty-nine years.  Expenditures for major renewals and betterments
that extend the useful lives are capitalized.  Expenditures for normal
maintenance and repairs are expensed as incurred.  Upon the sale or
abandonment, the cost of the equipment and related accumulated depreciation are
removed from the accounts and any gains or losses thereon are recognized in the
operating results of the respective period.







14







Oil
and Gas Properties





We use
the full-cost method of accounting for our oil and gas producing activities,
which are all located in Texas.  Accordingly, all costs
associated with the acquisition, exploration, and development of oil and gas
reserves, including directly-related overhead costs, are
capitalized.





All
capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the units-of-production
method using estimates of proved reserves.  Investments in unproved
properties and major development projects are not amortized until proved
reserves associated with the projects can be determined or until impairment
occurs.  If the results of an assessment indicate that the properties
are impaired, the amount of the impairment will be added to the capitalized
costs to be amortized.




In
addition, the capitalized costs are subject to a “ceiling test,” which limits
such costs to the aggregate of the “estimated present value,” discounted at a
ten percent interest rate, of future net revenues from proved reserves, based on
current economic and operating conditions, plus the lower of cost or fair market
value of unproved properties and less the income tax effects related to the
properties.





Sales of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in the
operating results of the respective period.





Revenue
Recognition





We
utilize the accrual method of accounting for natural gas and crude oil revenues,
whereby revenues are recognized based on our net revenue interests in the
wells.  Crude oil inventories are immaterial and are not
recorded.





Gas
imbalances are accounted for using the entitlement method.  Under this
method, revenues are recognized only to the extent of our proportionate share of
the gas sold.  However, we have no history of significant gas
imbalances.





Income
Taxes





Deferred
income taxes are determined using the “liability method” in accordance with SFAS
No. 109, Accounting for Income
Taxes.Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.




Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which such temporary differences are
expected to be recovered or settled.  The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the operating
results of the period that includes the enactment date.  In addition,
a valuation allowance is established to reduce any deferred tax asset for which
it is determined that it is more likely than not that some portion of the
deferred tax asset will not be realized.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





Not
required under Regulation S-K for “smaller reporting companies.”





Item
4T.  Controls and Procedures.





MANAGEMENT’S
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES





Disclosure
controls and procedures have been designed to ensure that information required
to be disclosed by the Company is collected and communicated to management to
allow timely decisions regarding required disclosures.  The Chief
Executive Officer and the Chief Financial Officer have concluded, based on their
evaluation as of March 31, 2009 that, as a result of the following material
weaknesses in internal control over financial reporting as described further in
the Company’s annual report on Form 10-K filed with the SEC on March 31, 2009,
disclosure controls and procedures were ineffective in providing reasonable
assurance that material information is made known to them by others within the
Company:





a)
            We
      did not maintain sufficient personnel with an appropriate level of
      technical accounting knowledge, experience, and training in the
      application of GAAP commensurate with our complexity and our financial
      accounting and reporting requirements.  We have limited
      experience in the areas of financial reporting and disclosure controls and
      procedures.  Also, we do not have an independent audit
      committee.  As a result, there is a lack of monitoring of the
      financial reporting process and there is a reasonable possibility that
      material misstatements of the consolidated financial statements, including
      disclosures, will not be prevented or detected on a timely basis;
      and






15









b)
            Due
      to our small size, we do not have a proper segregation of duties in
      certain areas of our financial reporting process.  The areas
      where we have a lack of segregation of duties include cash receipts and
      disbursements, approval of purchases and approval of accounts payable
      invoices for payment. This control deficiency, which is pervasive in
      nature, results in a reasonable possibility that material misstatements of
      the financial statements will not be prevented or detected on a timely
      basis.





Changes
to Internal Controls and Procedures Over Financial Reporting





There
have been no changes to our internal control in the quarter ended March 31,
2009.





Management’s
Remediation Plans





We are
committed to improving our financial organization. As part of this commitment,
we will look to increase our personnel resources and technical accounting
expertise within the accounting function by the end of 2009 to resolve
non-routine or complex accounting matters. In addition, when funds are
available, which we expect to occur by the end of 2009, we will take the
following action to enhance our internal controls: Hiring additional
knowledgeable personnel with technical accounting expertise to further support
our current accounting personnel, which management estimates will cost
approximately $100,000 per annum. We currently engage an outside accounting firm
to assist us in the preparation of our consolidated financial
statements. As necessary, we will engage consultants in the future as necessary
in order to ensure proper accounting for our consolidated financial
statements.





Management
believes that hiring additional knowledgeable personnel with technical
accounting expertise will remedy the following material weakness: insufficient
personnel with an appropriate level of technical accounting knowledge,
experience, and training in the application of GAAP commensurate with our
complexity and our financial accounting and reporting requirements.





Management
believes that the hiring of additional personnel who have the technical
expertise and knowledge with the non-routine or technical issues we have
encountered in the past will result in both proper recording of these
transactions and a much more knowledgeable finance department as a whole. Due to
the fact that our internal accounting staff consists solely of a Chief Financial
Officer, additional personnel will also ensure the proper segregation of duties
and provide more checks and balances within the department. Additional personnel
will also provide the cross training needed to support us if personnel turn over
issues within the department occur. We believe this will greatly decrease any
control and procedure issues we may encounter in the future.









16








PART
II - OTHER INFORMATION





Item
1. Legal Proceedings.





From time to time, we may become involved in
various lawsuits and legal proceedings which arise in the ordinary course of
business. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may
harm our business. We are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, consolidated financial condition or operating
results.





Item
1A. Risk Factors.





Not
required under Regulation S-K for “smaller reporting companies.”





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.




None.





Item
3. Defaults Upon Senior Securities.





None.





Item
4. Submission of Matters to a Vote of Security Holders.





None.





Item
5. Other Information.





None.





Item
6. Exhibits.




31.01
              Certification
      of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
      15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002





31.02
              Certification
      of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
      15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002





32.01
              Certifications
      of Chief Executive Officer and Chief Financial Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002








17










SIGNATURES





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




PEGASI
      ENERGY RESOURCES CORPORATIONDate:  May
      13, 2009
            By:/s/ MICHAEL NEUFELDMichael
      NeufeldChief
      Executive Officer (Principal Executive Officer)Date:  May
      13, 2009
            By:/s/ RICHARD LINDERMANISRichard
      LindermanisChief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)














18