UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q




(Mark
One)




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




FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2008




OR




oTRANSITION
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 Actof 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 tosuch filing requirements for the past
90 days. YesElNoEJ.


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. YesElNoEl.




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





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







i


PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements.


PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS


March
      31,
              2008
            
            
            December
      31,
              2007(Unaudited)
            
            
            (Audited)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            5,101,718
            
            
            $
            8,935,283Accounts
      receivable, trade
            
            
            248,021
            
            
            
            269,400Accounts
      receivable, related parties
            
            
            628,519
            
            
            
            592,237Joint-interest
      billing receivable, related parties, net
            
            
            273,139
            
            
            
            122,542Other
      current assets
            
            
            54,382
            
            
            
            322,110Total
      current assets
            
            
            6,305,779
            
            
            
            10,241,572Property
      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
            
            
            6,425,637
            
            
            
            4,750,188Oil
      and gas properties, unproved
            
            
            3,499,070
            
            
            
            3,330,402Capitalized
      asset retirement obligations
            
            
            220,237
            
            
            
            220,237Total
      oil and gas properties
            
            
            10,144,944
            
            
            
            8,300,827Less
      accumulated depreciation and depletion
            
            
            (760,166
            )
            
            
            (734,074
            )Oil
      and gas properties, net
            
            
            9,384,778
            
            
            
            7,566,753Total
      assets
            
            $
            16,417,664
            
            
            $
            18,492,243







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






F-1


PEGASI
ENERGY RESOURCES CORPORATION


CONSOLIDATED
BALANCE SHEETS (CONTINUED)







March
      31,
              2008
            
            
            December
      31,
              2007(Unaudited)
            
            
            (Audited)Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
            
            $
            798,293
            
            
            $
            977,757Accounts
      payable, related parties
            
            
            545,755
            
            
            
            560,095Revenuepayable
            
            
            189,861
            
            
            
            178,114Interest
      payable
            
            
            1,100,503
            
            
            
            1,003,105Other
      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
            
            
            6,706,547
            
            
            
            8,266,944Notes
      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
            
            
            8,413,176
            
            
            
            9,925,639Commitments
      and contingencies
            
            
            301,512
            
            
            
            150,756Stockholders'
      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
            
            
            11,957,528
            
            
            
            11,964,136Accumulated
      deficit
            
            
            (4,283,928
            )
            
            
            (3,577,666
            )Total
      stockholders' equity
            
            
            7,702,976
            
            
            
            8,415,848Total
      liabilities and stockholders' equity
            
            $
            16,417,664
            
            
            $
            18,492,243




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
              
              
              
              (5,533Contingent
      loss
              
              
              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 stock1
              
              
              (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
 12,681 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 annual report on Form 1 0-KSB filed with the
SEC on April 21, 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.  SEGMENT
INFORMATION




The
following information is presented in accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and RelatedInformation.The Company is
engaged in oil and gas exploration and production, saltwater disposal and
pipeline transportation. Pegasi Operating Incorporated (“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:




F-6




PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2008 AND 2007




3.
SEGMENT INFORMATION (CONTINUED)








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
              
              $
              1,844,117
              
              
              $
              96,442Transportation
      and gathering
              
              
              30,010
              
              
              
              432Saltwater
      disposal
              
              
              1,280
              
              
              
              28,492General
      corporate
              
              
              45,840
              
              
              
              -Total
      capital expenditures
              
              $
              1,921,247
              
              
              $
              125,366
  March
      31,
                    2008
              
              
              December
      31,2007Business
      segment assets:Oil
      and gas
              
              $
              14,152,705
              
              
              $
              16,061,652Transportation
      and gathering
              
              
              483,465
              
              
              
              322,588Saltwater
      disposal
              
              
              552,840
              
              
              
              288,699General
      corporate
              
              
              1,228,654
              
              
              
              1,819,304Total
      assets
              
              $
              16,417,664
              
              
              $
              18,492,243




F-7





PEGASI
ENERGY RESOURCES CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 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 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 will likely fail 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 $150,000 on the first day of effectiveness failure, or May 18,
2008. An additional $150,000 penalty will be required to be paid by the Company
every thirty days thereafter, pro rated for periods totaling less than thirty
days, until effectiveness failure is cured. The Company is currently in the
process of extending the effectiveness deadline by 60 days and it expects to get
the consent from the inveestors. The Company is currently undertaking to have
the registration statement declared effective as soon as possible. Accordingly,
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-of­production
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.




Cash used
in investing activities in the first three months of 2008 was $(1 ,92 1,248),
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 Childress #2 wells was 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 drillingopportunities 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.






PEGASI ENERGY RESOURCES
      CORPORATIONDate:
      May 15, 2008
              By:
              /s/ Michael
      NeufeldMichael
      NeufeldChief
      Executive Officer




Date: May 15, 2008
              By:
              /s/ Richard
      LindermanisRichard
      LindermanisChief
      Financial Officer























8