UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549






FORM
10-Q/ A




(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, 2008




OR




o   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
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            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
past 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 El No EJ.


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
definition of “accelerated filer”, “large accelerated filer”, “non-accelerated
filer” and “smaller reporting company” in Rule 12b­2 of the Exchange
Act.







Large
      accelerated filer o
            Accelerated
      filer o
            Non-accelerated
      filer o
            Smaller
      reporting company  x




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




There
were 29,375,801 shares of the registrant's common stock outstanding as of May
14, 2008.





PRELIMINARY NOTE





This
amendment to the Quarterly Report on Form 10-Q of Pegasi Energy Resources
Corporation is being filed for the purpose of making revisions in the sections
included herein in response to comments issued by the Securities and Exchange
Commission.







PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
FINANCIAL STATEMENTS


FOR
THE QUARTER ENDED MARCH 31, 2008




TABLE
OF CONTENTS













PagePART I - FINANCIAL
      INFORMATIONItem
      1. Financial Statements
            F-1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            1Item
      4T. Controls and Procedures
            6PART
      II- OTHER INFORMATIONItem
      1. Legal Proceedings
            7Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            7Item
      3. Defaults Upon Senior Securities
            7Item
      4. Submission of Matters to a Vote of Security Holders
            7Item
      5. Other Information
            7Item
      6. Exhibits
            7SIGNATURES
            8







PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements.


PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS





March
      31,
            
            
            December
      31,2008
            
            
            2007(Unaudited)
            
            
            (Audited)(Restated)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            5,101,718
            
            
            $
            8,935,283Accounts
      receivable, trade
            
            
            248,021
            
            
            
            269,400Accounts
      receivable, related parties
            
            
            143,208
            
            
            
            106,926Joint-interest
      billing receivable, related parties, net
            
            
            273,139
            
            
            
            122,542Other
      current assets
            
            
            54,382
            
            
            
            322,110Total
      current assets
            
            
            5,820,468
            
            
            
            9,756,261Property
      and equipment:Equipment
            
            
            666,380
            
            
            
            635,090Pipelines
            
            
            185,745
            
            
            
            185,745Buildings
            
            
            28,451
            
            
            
            28,451Vehicles
            
            
            50,663
            
            
            
            50,663Office
      furniture
            
            
            84,965
            
            
            
            39,125Website
            
            
            15,000
            
            
            
            15,000Total
      property and equipment
            
            
            1,031,204
            
            
            
            954,074Less
      accumulated depreciation
            
            
            (304,097
            )
            
            
            (270,156
            )Property
      and equipment, net
            
            
            727,107
            
            
            
            683,918Oil
      and gas properties:Oil
      and gas properties, proved
            
            
            5,375,040
            
            
            
            4,044,670Oil
      and gas properties, unproved
            
            
            4,549,667
            
            
            
            4,035,920Capitalized
      asset retirement obligations
            
            
            220,237
            
            
            
            220,237Total
      oil and gas properties
            
            
            10,144,944
            
            
            
            8,300,827Less
      accumulated depreciation and depletion
            
            
            (774,225
            )
            
            
            (748,133
            )Oil
      and gas properties, net
            
            
            9,370,719
            
            
            
            7,552,694Total
      assets
            
            $
            15,918,294
            
            
            $
            17,992,873




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


F-1


PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS (CONTINUED)













March
      31,
            
            
            December
      31,2008
            
            
            2007(Unaudited)
            
            
            (Audited)(Restated)Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
            
            $
            798,293
            
            
            $
            977,757Accounts
      payable, related parties
            
            
            545,755
            
            
            
            560,095Revenue
      payable
            
            
            189,861
            
            
            
            178,114Interest
      payable
            
            
            1,100,503
            
            
            
            1,003,105Liquidating
      damages payable
            
            
            301,512
            
            
            
            150,756Other
      payables
            
            
            92,135
            
            
            
            57,842Joint-interest
      deposits, related party
            
            
            359,849
            
            
            
            849,619Line-of-credit,
      related party
            
            
            3,616,214
            
            
            
            4,616,214Current
      portion of notes payable
            
            
            3,937
            
            
            
            4,198Current
      portion of notes payable, related parties
            
            
            -
            
            
            
            20,000Total
      current liabilities
            
            
            7,008,059
            
            
            
            8,417,700Notes
      payable
            
            
            8,193
            
            
            
            9,627Notes
      payable, related parties
            
            
            279,691
            
            
            
            279,691Deferred
      income taxes
            
            
            1,143,293
            
            
            
            1,097,934Asset
      retirement obligations
            
            
            275,452
            
            
            
            271,443Total
      liabilities
            
            
            8,714,688
            
            
            
            10,076,395Commitments
      and Contingencies (Note 16)Stockholders'
      equity:Common
      stock, $0.001 par value, 75,000,000 shares authorizedand
      29,375,801 and 29,378,482 shares issued and outstandingat
      March 31, 2008 and December 31, 2007, respectively
            
            
            29,376
            
            
            
            29,378Additional
      paid-in capital
            
            
            11,200,337
            
            
            
            11,206,945Accumulated
      deficit
            
            
            (4,026,107
            )
            
            
            (3,319,845
            )Total
      stockholders' equity
            
            
            7,203,606
            
            
            
            7,916,478Total
      liabilities and stockholders' equity
            
            $
            15,918,294
            
            
            $
            17,992,873




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


F-2
  PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS


(UNAUDITED)









Three
      Months Ended March 31,2008
            
            
            2007Revenues:Oil
      and gas
            
            $
            230,348
            
            
            $
            272,415Condensate
      and skim oil
            
            
            44,584
            
            
            
            76,060Transportation
      and gathering
            
            
            244,876
            
            
            
            263,763Saltwater
      disposal income
            
            
            68,559
            
            
            
            182,888Total
      revenues
            
            
            588,367
            
            
            
            795,126Operating
      expenses:Lease
      operating expenses
            
            
            25,295
            
            
            
            56,868Saltwater
      disposal expenses
            
            
            67,483
            
            
            
            183,722Pipeline
      operating expenses
            
            
            49,541
            
            
            
            37,475Cost
      of gas purchased for resale
            
            
            212,695
            
            
            
            218,260Depletion
      and depreciation
            
            
            60,034
            
            
            
            73,869General
      and administrative
            
            
            640,540
            
            
            
            121,032Total
      operating expenses
            
            
            1,055,588
            
            
            
            691,226Income
      (loss) from operations
            
            
            (467,221
            )
            
            
            103,900Other
      income (expenses):Interest
      income
            
            
            47,558
            
            
            
            548Interest
      expense
            
            
            (97,398
            )
            
            
            (124,736
            )Contingent
      loss
            
            
            (150,756
            )
            
            
            -Other
      income
            
            
            6,914
            
            
            
            -Total
      other expenses
            
            
            (193,682
            )
            
            
            (124,188
            )Loss
      before income tax (expense) benefit
            
            
            (660,903
            )
            
            
            (20,288
            )Income
      tax (expense) benefit
            
            
            (45,359
            )
            
            
            5,533Net
      loss
            
            $
            (706,262
            )
            
            $
            (14,755
            )Basic
      and diluted loss per share
            
            $
            (0.02
            )
            
            $
            (0.00
            )Weighted
      average shares outstanding
            
            
            29,373,674
            
            
            
            3,500,000





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


F-3


PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)









Three
      Months Ended March 31,2008
            
            
            2007Operating
      ActivitiesNet
      loss
            
            $
            (706,262
            )
            
            $
            (14,755
            )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activities:Depletion
      and depreciation
            
            
            60,034
            
            
            
            73,869Accretion
      of discount on asset retirement obligations
            
            
            4,009
            
            
            
            2,810Deferred
      income taxes
            
            
            45,359
            
            
            
            (5,533Liquidating
      damages payable
            
            
            150,756
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable, trade
            
            
            21,379
            
            
            
            (44,999
            )Accounts
      receivable, related parties
            
            
            (36,282
            )
            
            
            26,046Joint-interest
      billing receivable, related parties, net
            
            
            (150,597
            )
            
            
            42,410Other
      current assets
            
            
            267,728
            
            
            
            (154,953Accounts
      payable
            
            
            (179,464
            )
            
            
            11,161Accounts
      payable, related parties
            
            
            (14,340
            )
            
            
            7,078Revenue
      payable
            
            
            11,747
            
            
            
            16,688Interest
      payable
            
            
            97,398
            
            
            
            113,739Other
      payables
            
            
            34,293
            
            
            
            4,377Joint
      -interest deposits, related parties
            
            
            (489,770
            )
            
            
            -Net
      cash provided by (used in) operating activities
            
            
            (884,012
            )
            
            
            77,938Investing
      ActivitiesPurchases
      of property and equipment
            
            
            (77,130
            )
            
            
            (28,924
            )Purchases
      of oil and gas properties
            
            
            (1,844,118
            )
            
            
            (96,442
            )Net
      cash used in investing activities
            
            
            (1,921,248
            )
            
            
            (125,366
            )Financing
      ActivitiesCapital
      contributions
            
            
            -
            
            
            
            39,759Net
      payments on lines-of-credit
            
            
            -
            
            
            
            (45,000
            )Advances
      on line-of-credit, related party
            
            
            -
            
            
            
            100,000Payments
      on line-of-credit, related party
            
            
            (1,000,000
            )
            
            
            -Payments
      on notes payable
            
            
            (1,695
            )
            
            
            (2,193
            )Proceeds
      from borrowings on notes payable, related party
            
            
            
            
            
            
            52,625Payments
      on notes payable, related party
            
            
            (20,000
            )
            
            
            (3,477
            )Payments
      for cancelled shares of common stock 1
            
            
            (6,610
            )
            
            
            -Net
      cash provided by (used in) financing activities
            
            
            (1,028,305
            )
            
            
            141,714Net
      increase (decrease) in cash and cash equivalents
            
            
            (3,833,565
            )
            
            
            94,286Cash
      and cash equivalents at beginning of period
            
            
            8,935,283
            
            
            
            359,007Cash
      and cash equivalents at end of period
            
            $
            5,101,718
            
            
            $
            453,293Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the three months for interest
            
            $
            -
            
            
            $
            10,997


1 2,681
net shares of common stock were cancelled by investors in the three months ended
March 31, 2008.






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


F-4




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2008 AND 2007




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.




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 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, 2007, and notes thereto,
which are included in the Company’s amended  annual report on Form
10-KSB/A filed with the SEC on August 7 , 2008. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the consolidated financial
statements, which would substantially duplicate the disclosure required in the
Company’s 2007 annual consolidated financial statements have been
omitted.




b)   New Accounting
Pronouncements


Statement
of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, was
issued by the Financial Accounting Standards Board (“FASB”) in September 2006.
SFAS No. 157 defines fair values, establishes a framework for measuring fair
value under accounting principles generally accepted in the United States of
America and expands disclosures about fair value measurements. SFAS No. 157 also
applies to other accounting pronouncements that require or permit fair value
measurement. No new requirements are included in SFAS No. 157, but the
application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for consolidated financial statements issued for fiscal years
beginning after November 15, 2007. The Company adopted SFAS No. 157 effective
January 1, 2008. The adoption of SFAS No. 157 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.




On July
13, 2006, the FASB released Financial Interpretation (“FIN”) 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement 109. FIN 48 requires
companies to evaluate and disclose material uncertain tax positions it has taken
with various taxing jurisdictions. The Company adopted FIN 48 effective January
1, 2007, and such adoption did not have a material impact on the Company’s
consolidated financial position, results of operations or cash
flows.


F-5




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2008 AND 2007




2.   SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)




b)
New Accounting Pronouncements (Continued)


In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities. 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 the adoption had no effect on the Company's on its
consolidated financial position, results of operations, or cash
flows.




SFAS No.
141R (revised 2007), Business
Combinations, amends SFAS No. 141, Business Combinations, 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 does not expect the adoption of SFAS No. 141R to have a material impact
on its consolidated financial position or results of operations.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, which amends Accounting Research
Bulletin ("ARB") 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 does not expect the adoption of SFAS No. 160 to
have a material impact on its consolidated financial position or results of
operations.




3.   RESTATEMENT
OF CONSOLIDATED FINANCIAL STATEMENTS




The
Company has restated certain amounts reported for the three months ended March
31, 2008.  The restatements were to (1) roll forward the effects of
restatements made to the Company’s December 31, 2007 and 2006 consolidated
financial statements and (2) reclassify unproved properties that previously were
disclosed as proved.  See the Company’s restated December 31, 2007 and
2006 consolidated financial statements for a discussion of the
changes.





The
following is a summary of the impact of the restatements on the Company’s
accompanying consolidated balance sheet as of March 31,
2008:




March
      31, 2008Amounts
      asOriginally
            
            Restatement
            
            
            
            Amounts
      asReported
            
            Amount
            
            
            
            RevisedAccounts
      receivable, related parties
            
            $
            628,519
            
            $
            (485,311
            )
            (a)
            
            $
            143,208Total
      current assets
            
            
            6,305,779
            
            
            (485,311
            )
            (a)
            
            
            5,820,468Oil
      and gas properties, proved
            
            
            6,425,637
            
            
            (1,050,597
            )
            (b)
            
            
            5,375,040Oil
      and gas properties, unproved
            
            
            3,499,070
            
            
            1,050,597
            
            (b)
            
            
            4,549,667Less
      accumulated depreciation and depletion
            
            
            (760,166
            )
            
            (14,059
            )
            (a)
            
            
            (774,225
            )Oil
      and gas properties, net
            
            
            9,384,778
            
            
            (14,059
            )
            (a)
            
            
            9,370,719Total
      assets
            
            
            16,417,664
            
            
            (499,370
            )
            (a)
            
            
            15,918,294Additional
      paid-in capital
            
            
            11,957,528
            
            
            (757,191
            )
            (a)
            
            
            11,200,337Accumulated
      deficit
            
            
            (4,283,928
            )
            
            257,821
            
            (a)
            
            
            (4,026,107
            )Total
      stockholders' equity
            
            
            7,702,976
            
            
            (499,370
            )
            (a)
            
            
            7,203,606Total
      liabilities and stockholders' equity
            
            
            16,417,664
            
            
            (499,370
            )
            (a)
            
            
            15,918,294








(a)
            To
      roll forward the effect of restatements made to the Company’s December 31,
      2007 and 2006 consolidated financial statements.  See the
      Company’s restated December 31, 2007 and 2006 consolidated financial
      statements for a discussion of the
changes.


(b)
            To
      reclassify unproved properties that were previously classified as
      proved.


F-6




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2008 AND 2007








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. 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, Inc. ("59 Disposal")  owns and operates a saltwater disposal
facility which disposes saltwater and flow back waste into subsurface storage
and also sales the skim oil it separates from the saltwater. Management has
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 for the three months ended March 31, 2008 and 2007
and as of March 31, 2008 and December 31, 2007:








Three
      Months Ended March 31,2008
            
            
            2007Business
      segment revenue:Oil
      and gas
            
            $
            230,348
            
            
            $
            272,415Condensate
      and skim oil
            
            
            44,584
            
            
            
            76,060Transportation
      and gathering
            
            
            244,876
            
            
            
            263,763Saltwater
      disposal income
            
            
            68,559
            
            
            
            182,888Total
      revenues
            
            $
            588,367
            
            
            $
            795,126




Business
      segment profit (loss):Oil
      and gas
            
            $
            63,394
            
            
            $
            (23,561
            )Condensate
      and skim oil
            
            
            44,584
            
            
            
            76,060Transportation
      and gathering
            
            
            (26,564
            )
            
            
            174,995Saltwater
      disposal
            
            
            (31,253
            )
            
            
            (21,622
            )General
      corporate
            
            
            (517,382
            )
            
            
            (101,972
            )Income
      (loss) from operations
            
            $
            (467,221
            )
            
            $
            103,900




Depreciation
      and depletion:Oil
      and gas
            
            $
            27,299
            
            
            $
            52,278Transportation
      and gathering
            
            
            5,383
            
            
            
            5,395Saltwater
      disposal
            
            
            20,250
            
            
            
            13,263General
      corporate
            
            
            7,102
            
            
            
            2,933Total
      depreciation and depletion
            
            $
            60,034
            
            
            $
            73,869




Capital
      expenditures:Oil
      and gas
            
            $
            1,844,118
            
            
            $
            96,442Transportation
      and gathering
            
            
            30,010
            
            
            
            432Saltwater
      disposal
            
            
            1,280
            
            
            
            28,492General
      corporate
            
            
            45,840
            
            
            
            -Total
      capital expenditures
            
            $
            1,921,248
            
            
            $
            125,366


F-7




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2008 AND 2007




4.    SEGMENT INFORMATION
(Continued)








March
      31,
            
            
            December
      31,2008
            
            
            2007Business
      segment assets:Oil
      and gas
            
            $
            14,372,451
            
            
            $
            16,281,398Transportation
      and gathering
            
            
            483,465
            
            
            
            322,588Saltwater
      disposal
            
            
            863,935
            
            
            
            599,794General
      corporate
            
            
            198,443
            
            
            
            789,093Total
      assets
            
            $
            15,918,294
            
            
            $
            17,992,873








5 .
COMMITMENTS AND CONTINGENCIES




Along
with the Company's counsel, management monitors developments related
to legal matters and, when appropriate, makes adjustments to recorded
liabilities to reflect current facts and circumstances. Management has recorded
a liability related to the registration rights agreement with the investors that
provides for the filing of a registration statement for the registration of the
shares issued in the offering, 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 (150 days after the closing of
the offering) and therefore will be required to pay liquidated damages of
approximately $ 100,000 on the first day of effectiveness failure, or May
11 , 2008.  An additional $ 100,000 penalty will be
required to be paid by the Company every thirty days thereafter, pro rated for
periods totaling less than thirty days, until the effectiveness failure
is cured, up to a maximum of 18% of the aggregate purchase price of
the common shares of $1,800,000.   The Company is currently
undertaking to have the registration statement declared effective as soon as
possible.   Management made an accrual of approximately $150,000
at December 31, 2007.  At March 31, 2008, management reevaluated the
status of the registration statement and determined the recognition of an
additional approximate $150,000 liability related to liquidated damages
appropriate. The damages are reflected as a contingent loss in the consolidated
statement of operations for the three months ended March 31,
2008.


F-8




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




Forward
Looking Statements




Some of
the statements contained in this quarterly report that are not historical facts
are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this quarterly report, reflect our current beliefs with respect to future events
and involve known and unknown risks, uncertainties, and other factors affecting
our operations, market growth, services, products, and licenses. No assurances
can be given regarding the achievement of future results, as actual results may
differ materially as a result of the risks we face, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:




1.  
Our ability to attract and retain management, and to integrate and maintain
technical information and management information systems;


2.  
Our ability to generate customer demand for our services;


3.  
The intensity of competition; and


4.  
General economic conditions.




All
written and oral forward-looking statements made in connection with this
quarterly report that are attributable to us or persons acting on our behalf,
are expressly qualified in their entirety by these cautionary statements. Given
the uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.




Company
Overview




PERC is
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. The Company currently holds 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 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.




PERC’s
Cornerstone Project (“Cornerstone Project” or "CP") is to identify and exploit
resources in and adjacent to existing or indicated producing areas within the
Rodessa field area. PERC intends to quickly develop and produce reserves at a
low cost and will take an aggressive approach to exploiting its contiguous
acreage position through utilization of “best in class” drilling, (i.e. using
the latest drilling techniques available and seismic technology). The Company
and its management team believe that we are uniquely familiar with the history
and geology of the CP 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 CP area over the previous 28 years. The Company believes
implementing its drilling strategy and using new drilling and completion
techniques will enable it to find significant gas and oil reserves in the CP
area.




The
Company conducts its main exploration and production operations through its
wholly-owned subsidiary, POI. PERC conducts additional operations through two
other wholly-owned subsidiaries: (i) TR Rodessa and (ii) 59
Disposal.


1




Company
Overview (Continued)




TR
Rodessa operates a 40-mile natural gas pipeline and gathering system which is
currently being used by PERC to transport its hydrocarbons to market. Excess
capacity on this system is used to transport third-party hydrocarbons. TR
Rodessa will expand the capacity of its system through the construction of new
pipelines in 2008.




59
Disposal owns and operates a saltwater disposal facility which disposes
saltwater and flow-back waste into subsurface storage.




On
December 12, 2007, Maple Mountain, Inc. ("Maple Mountain", a publicly traded
shell company) entered into a Share Exchange Agreement (the “Share Exchange”)
with each of the shareholders of PERC pursuant to which Maple Mountain purchased
from PERC’s shareholders all issued and outstanding shares of our common stock
in consideration for the issuance of 17,500,000 shares of Maple Mountain’s
common stock.




The Share
Exchange resulted in a change in control of the Company with the shareholders
owning 17,500,000 shares of common stock of the Company out of a total of
21,000,000 issued and outstanding shares, after giving effect to the Share
Exchange . Also, the shareholders were elected to our board of directors
and appointed as our executive officers. As a result of the Share Exchange , (i)
PERC became the wholly-owned subsidiary of Maple Mountain and (ii) Maple
Mountain succeeded to the business of PERC as its sole business. Effective
January 23, 2008, Maple Mountain changed its name to Pegasi Energy Resources
Corporation. The Share E xchange was accounted for as a reverse merger.
Accordingly,the historical financial results reported herein are those of
PERC.




Critical
Accounting Policies




PERC’s
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. 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


PERC
performs ongoing credit evaluations of its customers’ financial condition and
extends credit to virtually all of its customers. Collateral is generally not
required, nor is interested 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 PERC’s customers, the maximum exposure to
PERC 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 ranges 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 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.




Oil
and Gas Properties


PERC uses
the full-cost method of accounting for its 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 is removed from the
capitalized costs to be amortized.




In
addition, the capitalized costs are subject to a “ceiling test,” which basically
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.




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.


2




Critical
Accounting Policies (Continued)




Abandonment
of properties is recognized as an expense in the period of abandonment and
accounted for as an adjustment of capitalized costs.




Revenue
Recognition


PERC
utilizes the accrual method of accounting for natural gas and crude oil
revenues, whereby revenues are recognized based on the Company’s net revenue
interest in the wells. Crude oil inventories are immaterial and are not
recorded.




Gas
imbalances are accounted for using the sales method. Under this method revenues
are recognized based on actual volumes of oil and gas sold to purchasers.
However, the Company has 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.




Liquidity
and Capital Resources




Summary


The
Company ended the first quarter of 2008 with $5.1 million in cash and cash
equivalents, compared to $8.9 million at December 31, 2007. The decrease in cash
and cash equivalents is related to drilling and completion work performed on the
Harris #2 and Childress #2 wells in January 2008 and February 2008,
respectively, purchases of lease and well equipment and oil and gas properties,
a payment made on the Company’s line-of-credit with Teton, Inc., a related
party,  and payments made on operating liabilities .




Cash
Flows


The
following table summarizes the Company’s cash flows for the three months ended
March 31, 2008 and 2007:




Three
      Months Ended March 31,2008
            
            
            2007Total
      cash provided by (used in):Operating
      activites
            
            $
            (884,012
            )
            
            $
            77,938Investing activities
            
            
            (1,921,248
            )
            
            
            (125,366
            )Financing
      activities
            
            
            (1,028,305
            )
            
            
            141,714Increase
      (decrease) in cash and equivalents
            
            $
            (3,833,565
            )
            
            $
            94,286




Cash used
in operating activities in the first three months of 2008 totaled $(884,012),
compared to $77,938 provided by operating activities in the first three months
of 2007.  The change is primarily due to an increase in cash used by
changes in connection with operating assets and liabilities, and by an increase
in the net loss.  The net loss was $(706,262) in the first three
months of 2008, an increase from $(14,755) in the first three months of
2007.   The changes in operating assets and liabilities are
primarily due to changes in related party joint-interest deposits payable and
the contingency loss.





Cash used
in investing activities in the first three months of 2008 was
$( 1,921,248 ), compared to $(125,366) in the first three months of
2007.  The change is due primarily to increased drilling activities in
the first three months of 2008, compared to the first three months of
2007.  Drilling and completion of the Harris #2 and Childers #2
wells were finished in January 2008 and February 2008,
respectively.  The Company also spent significantly more on lease and
well equipment and leasehold costs in the first three months of 2008, compared
to the first three months of 2007.   Finally, property and
equipment purchases were $48,206 more in the first three months of 2008 than in
the first three months of 2007.


3




Liquidity
and Capital Resources (Continued)




Cash used
in financing activities in the first three months of 2008 totaled $(1 ,028,305),
compared to $141,714 provided by financing activities in the first three months
of 2007. This change is due primarily to the payment of $1,000,000 on a related
party line-of-credit in the first three months of 2008.




Sources
ofLiquidity


The
Company’s most significant source of liquidity continues to be the funds
generated in the public offering in December 2007. The Company believes that the
proceeds from the offering will be sufficient to finance its operations for the
reminder of 2008. 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.




The
Company plans to pursue sources of additional capital through various financing
transactions or arrangements, including joint venturing of projects, debt
financing, equity financing or other means. As previously disclosed in the
Company’s annual report, PERC 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, 2008,
the Company has not drawn any funds on the line-of-credit, but may choose to do
so in the future.




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. PERC
      will focus its 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 CP 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 “Sawtooth” production technique. This technique is
      characterized by sequentially completing multiple geologic horizons in a
      single wellbore in order to maximize well economics. PERC will also
      implement the latest drilling, fracturing, and completion techniques to
      develop its properties including horizontal drilling. These horizontal
      wells will primarily target the Bossier formation and our management
      expects these wells to yield significantly higher hydrocarbon flow rates
      than the Company’s vertical wells.●
            Continue to lease
      underdeveloped acreage in the CP 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 CP area. 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 the Company’s existing substantial acreage position in the area
      and provide the Company 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.




The
Company’s oil and gas assets are located in Cass and Marion counties in
northeast Texas. As of March 31, 2008, the Company operated nine wells. The
Harris #2 well was spudded in December of 2007 and drilling was completed in
January 2008. The Childress #2 well was spudded in January 2008 and drilling
completed in February 2008. Both wells were logged to total depth and production
casing set. Pipeline connection to both wells is about 95%
complete.




Evaluation
of the wells in order to determine the appropriate completion procedures is
under way. Completion activities are expected to be completed in the second
quarter of 2008. As of March 31, 2008 the Company held leases on approximately
18,000 gross acres with the Company owning approximately 13,000 net acres. The
Company has an ongoing leasing program whereby expiring leases are being renewed
and previously unleased acreage is being leased.




In
addition to the operating of the wells the Company owns approximately 40 miles
of natural gas pipeline as well as a saltwater and drilling fluid disposal
system. The pipeline system is being extended to connect to the Harris #2 and
the Childress #2 prior to completions attempts. Additional work is being
conducted on the pipeline to enhance transportation of third-party
gas.




4





Results
of Operations




Summarized
Results of Operations


2008
            
            
            2007
            
            
            Increase
              (Decrease)Total
      revenues
            
            $
            588,367
            
            
            $
            795,126
            
            
            $
            (206,759
            )Total
      operating expenses
            
            
            1,055,588
            
            
            
            691,226
            
            
            
            364,362Income
      (loss) from operations
            
            
            (467,221
            )
            
            
            103,900
            
            
            
            (571,121
            )Total
      other expenses
            
            
            193,682
            
            
            
            124,188
            
            
            
            69,494Loss
      before income tax expense (benefit)
            
            
            (660,903
            )
            
            
            (20,288
            )
            
            
            (640,615
            )Income
      tax (expense) benefit
            
            
            (45,359
            )
            
            
            5,533
            
            
            
            (50,892
            )Net
      loss
            
            
            (706,262
            )
            
            
            (14,755
            )
            
            
            (691,507
            )





Results of Operations -
Quarter Ended March 31, 2008 Compared to Quarter Ended March 31,
2007




Total
revenues for the three months ended March 31, 2008 totaled $588,367, compared to
$795,126 for the three months ended March 31, 2007. Production revenues of oil
and gas decreased $42,067 in the first three months of 2008 compared to the
first three months of 2007. Oil and gas production revenues declined due to a
decrease in gas production of over 50%, primarily due to problems with one well.
The Company also experienced a normal decline in production from the other
wells, both oil and gas. Overall, actual oil and gas production declined
approximately 15%, but was partially offset by an increase in natural gas prices
of about 27% and oil prices of about 61%. Remedial procedures are currently in
process on the problem well. Condensate and skim oil sales decreased $31,476 in
the first three months of 2008 compared to the first three months of 2007.
Transportation and gathering revenue decreased $18,887 in the first three months
of 2008, compared to the first three months due to an overall decline in gas
produced by third-party operators in the area during that time period. Saltwater
disposal income decreased by $114,329 in the first three months of 2008 compared
to the first three months of 2007. Disposal revenues declined due partially to a
slow down in drilling activity in the area during January and February 2008,
which resulted in a significant decrease in the amount of flowback water
delivered to the disposal system. Drilling activity and the resulting delivery
of flowback water increased to near average historical levels in March 2008. In
addition to the drilling slowdown, many of 59 Disposal’s customers have opened
their own non-commercial disposal systems, and therefore no longer require
outside disposal services. This is a growing trend for hauling companies in the
area, and could continue to impact disposal revenues.




Total
operating expenses for the first three months of 2008 were $1,055,588, compared
to $691,226 in the first three months of 2007. General and administrative
expenses increased $519,508 in the three months ended March 31, 2008 compared to
the three months ended March 31, 2007, due primarily to increased legal,
accounting and regulatory filing expenses incurred as a result of the Company
going public in late 2007. Payroll expenses also increased significantly in 2008
compared to 2007. The current officer employment agreements were executed on May
1, 2007 and in the first three months of 2007 PERC did not pay officer salaries.
Saltwater disposal expenses were $67,483 in the first three months of 2008,
compared to $183,722 in the first three months of 2007. This decrease in
disposal expenses is directly related to the decline in disposal
income.




Total
other expenses for the three months ended March 31, 2008 were $193,682, compared
to $124,188 for the three months ended March 31, 2007. In the first three months
of 2008 the Company recognized $47,558 in interest income, primarily from its
interest bearing bank accounts. In the first three months of 2007 the Company
did not have interest bearing bank accounts. The Company also recognized a
contingent loss of $150,756 in the first three months of 2008 related to the
registration rights agreement entered into with the Company’s investors. See
note 4 in the notes to consolidated financial statements within in this
quarterly report for further details.




In the
first three months of 2008 the Company recognized deferred income tax expense
totaling $45,359 and recognized an income tax benefit of $5,533 in the first
three months of 2007. The $50,892 difference is a result of FSC, 59 Disposal,
and TR Rodessa converting from partnerships to taxable corporations in the
second quarter of 2007 and represents temporary differences primarily created by
oil and gas properties and fixed assets.


5




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.




Item
4T. Controls and Procedures.




As of
March 31, 2008, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures in accordance with the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d - 15(e). Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that as of that date our disclosure
controls and procedures were not effective in ensuring that information required
to be disclosed by us in our periodic reports is recorded, processed, summarized
and reported, within the time periods specified for each report and that such
information is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.




Specifically,
in the course of responding to comments issued by the Securities and Exchange
Commission on our registration statement, a number of accounting issues were
brought to our attention that needed to be addressed. As this occurred during
the audit of our 2007 financial statements, our annual report on Form 10-K for
the year ended December 31, 2007 was filed late. We are currently in the process
of evaluating how we may improve our disclosure controls and procedures by the
end of 2008. However, there can be no assurance that management will be
successful in the remediation of all control and procedure
deficiencies.




There was
no change in our internal controls or in other factors that could affect these
controls during the first fiscal quarter of 2008 that has materially affected,
or it is reasonably likely to materially affect, our internal control over
financial reporting.


6




PART
II- OTHER INFORMATION




Item
1. Legal Proceedings.




As of the
date this report was filed, we were not involved as litigants in any legal
proceedings. We have however received an inquiry from a court regarding the
assets of one of our shareholders.




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.




31.1
      *
            Certification
      of Chief Executive Officer required by Rule 1 3a-14(a) or Rule 1
      5d-14(a)




31.2*
            Certification
      of Chief Financial Officer required by Rule 1 3a-14(a) or Rule 1
      5d-14(a)




32.1
      *
            Certification
      of Chief Executive Officer required by Rule 1 3a-14(b) or Rule 1 5d-14(b)
      and Section 1350 of Chapter 63 of Title 18 of the United States
      Code




32.2*
            Certification
      of Chief Financial Officer required by Rule 1 3a-14(b) or Rule 1 5d-14(b)
      and Section 1350 of Chapter 63 of Title 18 of the United States
      Code




* Filed
herewith.





7






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.




August 6,
      2008
              By:
              /s/ Michael
      NeufeldMichael
      NeufeldChief
      Executive Officer







August
      6, 2008
              By:
              /s/ Richard
      LindermanisRichard
      LindermanisChief
      Financial Officer








8