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 JUNE 30, 2008




OR





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





FOR THE
TRANSITION PERIOD FROM ____________ TO ____________




COMMISSION
FILE 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
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 x No  ̈ .


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.




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





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 29,375,801 shares of the registrant's common stock outstanding as ofAugust
12, 2008.







PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
FINANCIAL STATEMENTS


FOR
THE QUARTER ENDED JUNE 30, 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
            7PART
      II - OTHER INFORMATIONItem
      1. Legal Proceedings
            8Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            8Item
      3. Defaults Upon Senior Securities
            8Item
      4. Submission of Matters to a Vote of Security Holders
            8Item
      5. Other Information
            8Item
      6. Exhibits
            8SIGNATURES
            9











PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements.


PEGASI ENERGY
RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS











June
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)
            
            
            (Audited)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            2,492,163
            
            
            $
            8,935,283Accounts
      receivable, trade
            
            
            390,431
            
            
            
            269,400Accounts
      receivable, related parties
            
            
            260,364
            
            
            
            106,926Joint-interest
      billing receivable, related parties, net
            
            
            363,289
            
            
            
            122,542Other
      current assets
            
            
            104,716
            
            
            
            322,110Total
      current assets
            
            
            3,610,963
            
            
            
            9,756,261Property
      and equipment:Equipment
            
            
            643,982
            
            
            
            635,090Pipelines
            
            
            569,870
            
            
            
            185,745Buildings
            
            
            28,451
            
            
            
            28,451Leasehold
      improvements
            
            
            6,087
            
            
            
            -Vehicles
            
            
            50,663
            
            
            
            50,663Office
      furniture
            
            
            118,843
            
            
            
            39,125Website
            
            
            15,000
            
            
            
            15,000Total
      property and equipment
            
            
            1,432,896
            
            
            
            954,074Less
      accumulated depreciation
            
            
            (346,558
            )
            
            
            (270,156
            )Property
      and equipment, net
            
            
            1,086,338
            
            
            
            683,918Oil
      and gas properties:Oil
      and gas properties, proved
            
            
            4,578,187
            
            
            
            4,044,670Oil
      and gas properties, unproved
            
            
            6,680,892
            
            
            
            4,035,920Capitalized
      asset retirement obligations
            
            
            220,237
            
            
            
            220,237Total
      oil and gas properties
            
            
            11,479,316
            
            
            
            8,300,827Less
      accumulated depreciation and depletion
            
            
            (797,700
            )
            
            
            (748,133
            )Oil
      and gas properties, net
            
            
            10,681,616
            
            
            
            7,552,694Total
      assets
            
            $
            15,378,917
            
            
            $
            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)





June
      30,
            
            
            December
      31,2008
            
            
            2007(Unaudited)
            
            
            (Audited)Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
            
            $
            775,152
            
            
            $
            977,757Accounts
      payable, related parties
            
            
            553,787
            
            
            
            560,095Revenues
      payable
            
            
            310,468
            
            
            
            178,114Interest
      payable
            
            
            1,197,901
            
            
            
            1,003,105Liquidated
      damages payable
            
            
            301,512
            
            
            
            150,756Other
      payables
            
            
            235,186
            
            
            
            57,842Joint-interest
      deposits, related party
            
            
            -
            
            
            
            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
            
            
            6,994,157
            
            
            
            8,417,700Notes
      payable
            
            
            7,068
            
            
            
            9,627Notes
      payable, related parties
            
            
            279,691
            
            
            
            279,691Deferred
      income taxes
            
            
            1,150,045
            
            
            
            1,097,934Asset
      retirement obligations
            
            
            279,461
            
            
            
            271,443Total
      liabilities
            
            
            8,710,422
            
            
            
            10,076,395Commitments
      and contingencies (Note 4)Stockholders'
      equity:Common
      stock; $0.001 par value; 75,000,000 shares authorized;29,375,801
      and 29,378,482 shares issued and outstandingat
      June 30, 2008 and December 31, 2007, respectively
            
            
            29,376
            
            
            
            29,378Additional
      paid-in capital
            
            
            11,200,337
            
            
            
            11,206,945Accumulated
      deficit
            
            
            (4,561,218
            )
            
            
            (3,319,845
            )Total
      stockholders' equity
            
            
            6,668,495
            
            
            
            7,916,478Total
      liabilities and stockholders' equity
            
            $
            15,378,917
            
            
            $
            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
              June
      30, 2008
            
            
            Three
      Months Ended
              June
      30, 2007
            
            
            Six
      Months Ended
              June
      30, 2008
            
            
            Six
      Months Ended
              June
      30, 2007Revenues:Oil
      and gas
            
            $
            317,554
            
            
            $
            220,618
            
            
            $
            547,902
            
            
            $
            493,033Condensate
      and skim oil
            
            
            98,367
            
            
            
            98,644
            
            
            
            142,951
            
            
            
            174,704Transportation
      and gathering
            
            
            382,819
            
            
            
            289,433
            
            
            
            627,695
            
            
            
            553,196Saltwater
      disposal income
            
            
            59,982
            
            
            
            96,720
            
            
            
            128,540
            
            
            
            279,608Total
      revenues
            
            
            858,722
            
            
            
            705,415
            
            
            
            1,447,088
            
            
            
            1,500,541Operating
      expenses:Lease
      operating expenses
            
            
            43,822
            
            
            
            58,000
            
            
            
            69,116
            
            
            
            114,868Saltwater
      disposal expenses
            
            
            75,059
            
            
            
            65,869
            
            
            
            143,695
            
            
            
            249,591Pipeline
      operating expenses
            
            
            65,588
            
            
            
            56,759
            
            
            
            117,631
            
            
            
            94,234Cost
      of gas purchased for resale
            
            
            330,657
            
            
            
            246,534
            
            
            
            543,350
            
            
            
            464,794Depletion
      and depreciation
            
            
            65,940
            
            
            
            79,332
            
            
            
            125,969
            
            
            
            153,201General
      and administrative
            
            
            713,784
            
            
            
            90,384
            
            
            
            1,352,942
            
            
            
            211,416Total
      operating expenses
            
            
            1,294,850
            
            
            
            596,878
            
            
            
            2,352,703
            
            
            
            1,288,104Income
      (loss) from operations
            
            
            (436,128
            )
            
            
            108,537
            
            
            
            (905,615
            )
            
            
            212,437Other
      income (expenses):Interest
      income
            
            
            16,306
            
            
            
            1,070
            
            
            
            63,865
            
            
            
            1,618Interest
      expense
            
            
            (97,599
            )
            
            
            (125,673
            )
            
            
            (194,998
            )
            
            
            (250,409
            )Loss
      on investment in unconsolidated partnerships
            
            
            -
            
            
            
            (20,440
            )
            
            
            -
            
            
            
            (20,440
            )Liquidated
      damages
            
            
            -
            
            
            
            -
            
            
            
            (150,756
            )
            
            
            -Other
      income (expense)
            
            
            (296
            )
            
            
            -
            
            
            
            8,883
            
            
            
            -Total
      other expenses
            
            
            (81,589
            )
            
            
            (145,043
            )
            
            
            (273,006
            )
            
            
            (269,231
            )Loss
      before income tax expense
            
            
            (517,717
            )
            
            
            (36,506
            )
            
            
            (1,178,621
            )
            
            
            (56,794
            )Income
      tax expense
            
            
            (17,392
            )
            
            
            (688,390
            )
            
            
            (62,752
            )
            
            
            (682,857
            )Net
      loss
            
            $
            (535,109
            )
            
            $
            (724,896
            )
            
            $
            (1,241,373
            )
            
            $
            (739,651
            )Basic
      and diluted loss per share
            
            $
            (0.02
            )
            
            $
            (0.21
            )
            
            $
            (0.04
            )
            
            $
            (0.21
            )Weighted
      average shares outstanding
            
            
            29,375,801
            
            
            
            3,500,000
            
            
            
            29,374,738
            
            
            
            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)




Six
      Months Ended June 30,2008
            
            
            2007Operating
      ActivitiesNet
      loss
            
            $
            (1,241,373
            )
            
            $
            (739,651
            )Adjustments
      to reconcile net loss to netcash
      provided by (used in) operating activities:Depletion
      and depreciation
            
            
            125,969
            
            
            
            153,201Accretion
      of discount on asset retirement obligations
            
            
            8,018
            
            
            
            5,620Deferred
      income taxes
            
            
            52,111
            
            
            
            682,857Liquidated
      damages
            
            
            150,756
            
            
            
            -Loss
      on investment in unconsolidated partnerships
            
            
            -
            
            
            
            20,440Changes
      in operating assets and liabilities:Accounts
      receivable, trade
            
            
            (121,031
            )
            
            
            41,300Accounts
      receivable, related parties
            
            
            (153,438
            )
            
            
            29,653Joint-interest
      billing receivable, related parties, net
            
            
            (240,747
            )
            
            
            76,745Other
      current assets
            
            
            217,394
            
            
            
            (245,657
            )Accounts
      payable
            
            
            (202,605
            )
            
            
            (207,620
            )Accounts
      payable, related parties
            
            
            (6,308
            )
            
            
            38,288Revenues
      payable
            
            
            132,354
            
            
            
            144,172Interest
      payable
            
            
            194,796
            
            
            
            229,144Other
      payables
            
            
            177,344
            
            
            
            30,754Joint-interest
      deposits, related parties
            
            
            (849,619
            )
            
            
            -Net
      cash provided by (used in) operating activities
            
            
            (1,756,379
            )
            
            
            259,246Investing
      ActivitiesPurchases
      of property and equipment
            
            
            (478,822
            )
            
            
            (41,304
            )Purchases
      of oil and gas properties
            
            
            (3,178,489
            )
            
            
            (156,183
            )Net
      cash used in investing activities
            
            
            (3,657,311
            )
            
            
            (197,487
            )Financing
      ActivitiesCapital
      contributions
            
            
            -
            
            
            
            39,759Net
      payments on lines-of-credit
            
            
            -
            
            
            
            (60,000
            )Advances
      on line-of-credit, related party
            
            
            -
            
            
            
            100,000Payments
      on line-of-credit, related party
            
            
            (1,000,000
            )
            
            
            -Payments
      on notes payable
            
            
            (2,820
            )
            
            
            (4,869
            )Proceeds
      from borrowings on notes payable, related party
            
            
            -
            
            
            
            51,772Payments
      on notes payable, related party
            
            
            (20,000
            )
            
            
            -Payments
      for cancelled shares of common stock 1
            
            
            (6,610
            )
            
            
            -Net
      cash provided by (used in) financing activities
            
            
            (1,029,430
            )
            
            
            126,662Net
      increase (decrease) in cash and cash equivalents
            
            
            (6,443,120
            )
            
            
            188,421Cash
      and cash equivalents at beginning of period
            
            
            8,935,283
            
            
            
            359,007Cash
      and cash equivalents at end of period
            
            $
            2,492,163
            
            
            $
            547,428Supplemental
      Disclosure of Cash Flow InformationCash
      paid during the six months for interest
            
            $
            202
            
            
            $
            21,265


1 2,681
net shares of common stock were cancelled by investors during the six months
ended June 30, 2008.


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





F-4




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 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.





At June
30, 2008, the Company had a working capital deficit of $3,383,194 and an
accumulated deficit of $4,561,218.  For the six month period ended
June 30, 2008 the Company incurred a net loss of $1,241,373.  These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern.  However, at June 30, 2008, approximately $4,814,000 of
the Company’s current liabilities is due to a related parties of the Company
that have a vested interest in the continuation of the Company.  The
Company is also in negotiations with numerous potential funding sources to
provide additional working capital as well as several oil and gas drilling
prospects which the Company anticipates will be online in the near future;
however, the Company has no assurance that these activities will be successfully
completed.  If not successfully completed, additional sources of
capital and/or financing may be required to assist the Company in meeting its
future obligations.  Based upon these conditions any substantial doubt
about the Company’s ability to continue as a going concern has been alleviated
for a reasonable period of time.








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 restated annual report on Form
10-KSB filed with the SEC on August 8, 2008. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of 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 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


JUNE
30, 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 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.  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 and
six months ended June 30, 2008 and 2007 and as of June 30, 2008 and December 31,
2007:





F-6




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008 AND 2007








3.  SEGMENT
      INFORMATION (CONTINUED)





Three
      Months Ended June 30, 2008
            
            
            Three
      Months Ended June 30, 2007
            
            
            Six
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2007Business
      segment revenue:Oil
      and gas
            
            $
            317,554
            
            
            $
            220,618
            
            
            $
            547,902
            
            
            $
            493,033Condensate
      and skim oil
            
            
            98,367
            
            
            
            98,644
            
            
            
            142,951
            
            
            
            174,704Transportation
      and gathering
            
            
            382,819
            
            
            
            289,433
            
            
            
            627,695
            
            
            
            553,196Saltwater
      disposal income
            
            
            59,982
            
            
            
            96,720
            
            
            
            128,540
            
            
            
            279,608Total
      revenues
            
            $
            858,722
            
            
            $
            705,415
            
            
            $
            1,447,088
            
            
            $
            1,500,541Business
      segment profit (loss):Oil
      and gas
            
            $
            24,406
            
            
            $
            101,779
            
            
            $
            87,800
            
            
            $
            257,728Condensate
      and skim oil
            
            
            98,367
            
            
            
            98,644
            
            
            
            142,951
            
            
            
            174,704Transportation
      and gathering
            
            
            (49,768
            )
            
            
            (23,940
            )
            
            
            (78,597
            )
            
            
            (28,455
            )Saltwater
      disposal
            
            
            (43,936
            )
            
            
            10,888
            
            
            
            (75,189
            )
            
            
            (10,734
            )General
      corporate
            
            
            (465,197
            )
            
            
            (78,834
            )
            
            
            (982,580
            )
            
            
            (180,806
            )Income
      (loss) from operations
            
            $
            (436,128
            )
            
            $
            108,537
            
            
            $
            (905,615
            )
            
            $
            212,437Depreciation
      and depletion:Oil
      and gas
            
            $
            25,770
            
            
            $
            57,729
            
            
            $
            53,068
            
            
            $
            110,007Transportation
      and gathering
            
            
            12,520
            
            
            
            5,395
            
            
            
            17,903
            
            
            
            10,790Saltwater
      disposal
            
            
            20,251
            
            
            
            13,263
            
            
            
            40,501
            
            
            
            26,526General
      corporate
            
            
            7,399
            
            
            
            2,945
            
            
            
            14,497
            
            
            
            5,878Total
      depreciation and depletion
            
            $
            65,940
            
            
            $
            79,332
            
            
            $
            125,969
            
            
            $
            153,201




Six
      Months Ended June 30, 2008
            
            
            Six
      Months Ended June 30, 2007Capital
      expenditures:Oil
      and gas
            
            $
            3,230,009
            
            
            $
            156,184Transportation
      and gathering
            
            
            351,117
            
            
            
            432Saltwater
      disposal
            
            
            6,550
            
            
            
            40,371General
      corporate
            
            
            69,635
            
            
            
            500Total
      capital expenditures
            
            $
            3,657,311
            
            
            $
            197,487June
      30,
            
            
            December
      31,2008
            
            
            2007Business
      segment assets:Oil
      and gas
            
            $
            12,996,671
            
            
            $
            16,281,398Transportation
      and gathering
            
            
            953,977
            
            
            
            322,588Saltwater
      disposal
            
            
            442,553
            
            
            
            599,794General
      corporate
            
            
            985,716
            
            
            
            789,093Total
      assets
            
            $
            15,378,917
            
            
            $
            17,992,873








F-7




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008 AND 2007







4.
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, 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 18,
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, or approximately $1,800,000.  The
Company is currently undertaking to have the registration statement declared
effective as soon as possible.  At June 30, 2008, management
reevaluated the status of the registration statement and determined the current
accrual of $301,512 is sufficient to cover any potential payments for liquidated
damages.  The damages are reflected as liquidated damages payable in
the consolidated balance sheets as of June 30, 2008 and December 31,
2007.


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.  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 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.





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 the Company’s board
of directors and appointed as the Company’s 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 Exchange 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 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 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.





2




Critical Accounting
Policies(Continued)





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.





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 second quarter of 2008 with approximately $2.5 million in cash
and cash equivalents, compared to approximately $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 Childers #2 wells in
January 2008 and February 2008, respectively, fracture treatment on the Harris
#2 and Childers #2 in June 2008, 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 six months ended
June 30, 2008 and 2007:





Six
      Months Ended June 30,2008
            
            
            2007Total
      cash provided by (used in):Operating
      activities
            
            $
            (1,756,379
            )
            
            $
            259,246Investing
      activities
            
            
            (3,657,311
            )
            
            
            (197,487
            )Financing
      activities
            
            
            (1,029,430
            )
            
            
            126,662Increase
      (decrease) in cash and cash equivalents
            
            $
            (6,443,120
            )
            
            $
            188,421





Cash used
in operating activities in the first six months of 2008 totaled $1,756,379,
compared to $259,246 provided by operating activities in the first six 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 $1,241,373 in the first six months
of 2008, an increase from the net loss of $739,651 in the first six months of
2007.  The changes in operating assets and liabilities are primarily
due to changes in related party joint-interest deposits payable.





Cash used
in investing activities in the first six months of 2008 was $3,657,311, compared
to $197,487 in the first six months of 2007.  The change is due
primarily to increased drilling activities in the first six months of 2008,
compared to the first six months of 2007.  Drilling and completion of
the Harris #2 and Childers #2 wells was finished in January 2008 and February
2008, respectively.  In addition, fracture treatment of the two wells
began in June 2008.  The Company also spent in excess of $3 million in
additional funds on lease and well equipment and leasehold costs in the first
six months of 2008, compared to the first six months of
2007.  Finally, property and equipment purchases were approximately
$438,000 more in the first six months of 2008 than in the first six months of
2007.





3




Liquidity
and Capital Resources (Continued)





Cash used
in financing activities in the first six months of 2008 totaled $1,029,430,
compared to $126,662 of cash provided by financing activities in the first six
months of 2007.  This change is due primarily to the payment of
$1,000,000 on a related party line-of-credit in January 2008.





Sources
of Liquidity


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 June 30, 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 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 June 30, 2008, the Company operated nine
wells.  The Harris #2 well was spudded in December of 2007 and
drilling was completed in January 2008.  The Childers #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 now complete.





The first
fracture treatment stage of the Cotton Valley Group in the Harris # 2 and
Childers # 2 wells occurred in the month of June 2008.  The two wells
are flowing back treatment fluid and oil and natural gas through temporary
production facilities as of the end of June.  It is anticipated that
the permanent facilities will be installed to accommodate the new production
from these wells within 60 days from the end of the second
quarter.  As of June 30, 2008 the Company had increased its leasehold
to approximately 20,000 gross acres with the Company owning approximately 14,000
net acres.  The Company also 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 Childers #2.  Additional work is being conducted on the
pipeline to enhance transportation of third-party
gas.





4




Results
of Operations





Three Months Ended June 30,
2008 Compared to Three Months Ended June 30, 2007





Summarized Results of Operations








2008
            
            
            2007
            
            
            Increase
      (Decrease)Total
      revenues
            
            $
            858,722
            
            
            $
            705,415
            
            
            $
            153,307Total
      operating expenses
            
            
            1,294,850
            
            
            
            596,878
            
            
            
            697,972Income
      (loss) from operations
            
            
            (436,128
            )
            
            
            108,537
            
            
            
            (544,665
            )Total
      other income (expenses)
            
            
            (81,589
            )
            
            
            (145,043
            )
            
            
            63,454Loss
      before income tax expense
            
            
            (517,717
            )
            
            
            (36,506
            )
            
            
            (481,211
            )Income
      tax expense
            
            
            (17,392
            )
            
            
            (688,390
            )
            
            
            670,998Net
      loss
            
            $
            (535,109
            )
            
            $
            (724,896
            )
            
            $
            189,787





Revenues:  Total
revenues for the quarter ended June 30, 2008 totaled $858,722, compared to
$705,415 for the quarter ended June 30, 2007.  Production revenues of
oil and gas increased $96,936 for the second quarter of 2008 compared to the
second quarter of 2007.  This increase in revenues reflects the impact
of higher sales volume for natural gas as well as an increase in sales prices
for natural gas of about 61%.  In addition, we completed a rework of
the Bramlet well in the second quarter which resulted in a significant increase
in its production, and, consequently, an increase in revenue of approximately
$91,000 from that well.  Oil prices during the second quarter of 2008
also increased about 99% from the second quarter of
2007.  Transportation and gathering revenue increased $93,386 in the
second quarter of 2008, compared to the second quarter of 2007 due to an overall
increase in gas produced by third-party operators in the area during that time
period.  Saltwater disposal income decreased by $36,738 in the second
quarter of 2008 compared to the second quarter of 2007.  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.




Expenses:  Total
operating expenses for the second quarter of 2008 were $1,294,850, compared to
$596,878 in the second quarter of 2007.  This change is comprised of
increases in general and administrative expenses and cost of gas purchased for
resale, partially offset by small reductions in production and depreciation and
depletion expense.





·
            General and Administrative
      Expense:  The $623,400 increase in general and
      administrative expense to $713,784 for the three months ended June 30,
      2008 from $90,384 for the three months ended June 30, 2007 is primarily
      due to payroll expenses.  The current officer employment
      agreements were executed on May 1, 2007; however, the officers waived
      their salaries for the period May to November 2007.  Therefore,
      PERC did not pay officer salaries during the three months ended June 30,
      2007.  In addition, increased legal, accounting and regulatory
      filing expenses have been incurred as a result of the Company going public
      in late 2007.





·
            Cost of Gas Purchased for
      Resale:The $84,123 increase in cost of gas purchased
      for resale to $330,657 for the three months ended June 30, 2008 from
      $246,534 for the three months ended June 30, 2007 is due to an increase in
      the gas produced by third-party operators in the area and is consistent
      with the increase in the related transportation and gathering
      revenue.





·
            Saltwater Disposal
      Expenses:The saltwater disposal expenses increased to
      $75,059 for the second three months of 2008 from $65,869 for the second
      three months of 2007.  The expenses increased although there was
      a decrease in saltwater disposal income due to contract labor for welding
      services being charged at a fixed rate regardless of the amount of
      sales.





Other Income
(Expenses):Total other expenses for the three months ended
June 30, 2008 were $81,589, compared to $145,043 for the three months ended June
30, 2007.  In the second quarter of 2008 the Company recognized
$16,306 in interest income, primarily from its interest-bearing bank
accounts.  In the second quarter of 2007 the Company did not have
interest-bearing bank accounts.  The Company also had a $28,074
decrease in its interest expense to $97,599 for the three months ended June 30,
2008 from $125,673 for the three months ended June 30, 2007 primarily due to the
$1 million principal payment made on the note payable to Teton, Ltd. in January
2008.





Income Tax
Expense:In the second quarter of 2008 the Company recognized
deferred income tax expense of $17,392 and recognized deferred income tax
expense of $688,390 in the second quarter of 2007.  The $670,998
difference is primarily 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 as
well as property and equipment.





5




Results
of Operations (continued)





Operating Loss:As
a result of the above described revenues and expenses, we incurred a net
operating loss of $535,109 in the second quarter of 2008 as compared to an
operating loss of $724,896 in the second quarter of 2007.





Six Months Ended June 30,
2008 Compared to Six Months Ended June 30, 2007





Summarized
Results of Operations




2008
            
            
            2007
            
            
            Increase
      (Decrease)Total
      revenues
            
            $
            1,447,088
            
            
            $
            1,500,541
            
            
            $
            (53,453
            )Total
      operating expenses
            
            
            2,352,703
            
            
            
            1,288,104
            
            
            
            1,064,599Income
      (loss) from operations
            
            
            (905,615
            )
            
            
            212,437
            
            
            
            (1,118,052
            )Total
      other income (expenses)
            
            
            (273,006
            )
            
            
            (269,231
            )
            
            
            (3,775
            )Loss
      before income tax expense
            
            
            (1,178,621
            )
            
            
            (56,794
            )
            
            
            (1,121,827
            )Income
      tax expense
            
            
            (62,752
            )
            
            
            (682,857
            )
            
            
            620,105Net
      loss
            
            $
            (1,241,373
            )
            
            $
            (739,651
            )
            
            $
            (501,722
            )





Revenues:  Total
revenues for the six months ended June 30, 2008 totaled $1,447,088, compared to
$1,500,541 for the six months ended June 30, 2007.  Production
revenues of oil and gas increased $54,869 for the six months ended June 30, 2008
compared to the six months ended June 30, 2007.  This increase in
revenues reflects the impact of higher sales volume for natural gas as well as
an increase in sales prices for natural gas of about 44%.  In
addition, we completed a rework of the Bramlet well during the six months ended
June 30, 2008 which resulted in a significant increase in the production, and,
consequently, an increase in revenue of approximately $152,000 from that
well.  The increase in production from the Bramlet well was partially
offset by a decrease in production from the Childers #1 well which stopped
producing in January 2008.  Overall, oil prices during the first six
months of 2008 also increased about 87% from the first six months of
2007.  Transportation and gathering revenue increased $74,499 for the
six months ended June 30, 2008, compared to the six months ended June 30, 2007
due to an overall increase in gas produced by third-party operators in the area
during that time period.  Saltwater disposal income decreased by
$151,068 for the first six months of 2008 as compared to the first six months of
2007.  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.




Expenses:  Operating
expenses increased to $2,352,703 in the first six months of 2008 from $1,288,104
in the first six months of 2007.  This change is comprised of
increases in general and administrative expenses and cost of gas purchased for
resale, partially offset by reductions in lease operating expenses, saltwater
disposal expenses and depreciation and depletion expense.





·
            General and Administrative
      Expense:  The $1,141,526 increase in general and
      administrative expense to $1,352,942 for the six months ended June 30,
      2008 from $211,416 for the six months ended June 30, 2007 is primarily due
      to payroll expenses.  The current officer employment agreements
      were executed on May 1, 2007; however, the officers waived their salaries
      for the period May to November 2007.  Therefore, PERC did not
      pay officer salaries during the six months ended June 30,
      2007.  Total salaries for the first six months of 2008 were
      approximately $493,000 as compared to approximately $48,000 for the first
      six months of 2007.  In addition, increased legal, accounting
      and regulatory filing expenses have been incurred in the first six months
      of 2008 as a result of the Company going public in late
    2007.





·
            Cost of Gas Purchased for
      Resale:The $78,556 increase in cost of gas purchased
      for resale to $543,350 for the six months ended June 30, 2008 from
      $464,794 for the six months ended June 30, 2007 is due to an increase in
      the gas produced by third-party operators in the area and is consistent
      with the increase in the related transportation and gathering
      revenue.





·
            Saltwater Disposal
      Expenses:The decrease in saltwater disposal expenses to
      $143,695 for the first six months of 2008 from $249,591 for the first six
      months of 2007 corresponds to the decrease in saltwater disposal
      income.





6




Results
of Operations (continued)




Other Income
(Expense):Total other expenses for the six months ended June
30, 2008 were $273,006, compared to $269,231 for the six months ended June 30,
2007.  Although the overall change was small, various accounts had
large variances.  In the first six months of 2008 the Company
recognized $63,865 in interest income, primarily from its interest-bearing bank
accounts.  In the first six months of 2007 the Company did not have
interest-bearing bank accounts.  The Company also had a $55,411
decrease in its interest expense to $194,998 for the six months ended June 30,
2008 from $250,409 for the six months ended June 30, 2007 primarily due to the
$1 million principal payment made on the note payable to Teton, Ltd. in January
2008.  The Company also recognized liquidated damages 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.





Income Tax
Expense:In the first six months of 2008 the Company
recognized deferred income tax expense of $62,752 and recognized deferred income
tax expense of $682,857 in the second quarter of 2007.  The $620,105
difference is primarily the 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 as well as property and equipment.





Operating Loss:As
a result of the above described revenues and expenses, we incurred a net
operating loss of $1,241,373 for the six months ended June 30, 2008 as compared
to an operating loss of $739,651 for the six months ended June 30,
2007.





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
June 30, 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.  There was no change in our
internal controls or in other factors that could affect these controls during
the first quarter of 2008 that has materially affected, or it is reasonably
likely to materially affect, our internal control over financial
reporting.





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.  These issues
included proper accounting for a minority interest in 2006 and early 2007,
adjustments necessary to receivables that were improperly recorded as
contributions and ensuring that the reserve report cutoff date is
correct.  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.  The
Company no longer has a minority interest owner and the contributions receivable
accounts have been corrected.  We have been in contact with our
petroleum engineers regarding the reserve report cutoff date, and we expect that
the controls over the reserve report will be improved by the end of 2008. The
costs to improve this control will be insignificant.  However, there
can be no assurance that management will be successful in the remediation of all
control and procedure deficiencies.





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





7





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 13a-14(a) or Rule
      15d-14(a)31.2*
            
            Certification
      of Chief Financial Officer required by Rule 13a-14(a) or Rule
      15d-14(a)32.1*
            
            Certification
      of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
      and Section 1350 of Chapter 63 of Title 18 of the United States
      Code32.2*
            
            Certification
      of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
      and Section 1350 of Chapter 63 of Title 18 of the United States
      Code




* Filed
herewith.




8





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 CORPORATIONAugust
      13, 2008
              By:
              /s/ Michael
      NeufeldMichael
      NeufeldChief
      Executive Officer




August
      13, 2008
              By:
              /s/ Richard
      LindermanisRichard
      LindermanisChief
      Financial Officer












9