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SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2006
 o
    
    Transition Report Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 1-31398
 NATURAL GAS SERVICES GROUP, INC.
  Colorado
    
    
    
    75-2811855(State or Other Jurisdiction of Incorporation or Organization)
    
    
    
    (I.R.S. Employer Identification No.)2911 South County Road 1260 Midland, Texas
    
    
    
    79706(Address of Principal Executive Offices)
    
    
    
    (Zip Code)
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $.01 par value
    
    American Stock Exchange
   o þ
  o þ
  þ o
 o
  o þ o
  o þ




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Item No.
    
    
    
    PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    15Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    31Item 8.
    
    Financial Statements and Supplementary Data
    
    
    31Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    
    
    32Item 9A.
    
    Controls and Procedures
    
    
    32Item 9B.
    
    Other Information
    
    
    34PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    35Item 11.
    
    Executive Compensation
    
    
    40Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    58Item 13.
    
    Certain Relationships, Related Transactions, and Director Independence
    
    
    59Item 14.
    
    Principal Accountant Fees and Services
    
    
    62PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    E-1Consent of Hein & Associates LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Required by Section 906Certification Required by Section 906
 (i)




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    conditions in the oil and natural gas industry, including the demand for natural gas
and fluctuations in the prices of oil and natural gas;
    
    competition among the various providers of compression services and products;
    
    changes in safety, health and environmental regulations;
    
    changes in economic or political conditions in the markets in which we operate;
    
    failure of our customers to continue to rent equipment after expiration of the
primary rental term;
    
    the inherent risks associated with our operations, such as equipment defects,
malfunctions and natural disasters;
    
    our inability to comply with covenants in our debt agreements and the decreased
financial flexibility associated with our substantial debt;
    
    future capital requirements and availability of financing;
    
    general economic conditions;
    
    events similar to September 11, 2001; and
    
    fluctuations in interest rates.
  (ii)




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PART I
 
 ITEM 1. BUSINESS
  The Company
         http://www.ngsgi.com
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Industry Trends
    
    
    the increasing demand for and limited supply of energy, both domestically and abroad;
    
    continued non-conventional gas exploration and production;
    
    environmental considerations which provide strong incentives to use natural gas in
place of other carbon fuels;
    
    the cost savings of using natural gas rather than electricity for heat generation;
    
    implementation of international environmental and conservation laws;
    
    the aging of producing natural gas reserves worldwide; and
    
    the extensive supply of undeveloped natural gas reserves.
 Our Operating Units
  Gas Compressor Rental.
  2




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Engineered Equipment Sales.
 
    
    Compressor fabrication.Fabrication involves the assembly of compressor
components manufactured by us or other third parties into compressor units that are
ready for rental or sale. In addition to fabricating compressors for our rental fleet,
we engineer and fabricate natural gas compressors for sale to customers to meet their
specifications based on well pressure, production characteristics and the particular
applications for which compression is sought.
    
    Compressor manufacturing.We design and manufacture our own proprietary
line of reciprocating compressor frames, cylinders and parts known as our CiP, or
Cylinder-in-Plane, product line. We use the finished components to fabricate
compressor units for our rental fleet or for sale to third parties. We also sell
finished components to other fabricators.
    
    Flare fabrication.We design, fabricate, sell, install and service flare
stacks and related ignition and control devices for the onshore and offshore
incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and
liquefied petroleum gases. Applications for this equipment are often environmentally
and regulatory driven, and we believe we are a leading supplier to this market.
    
    Parts sales and compressor rebuilds.To provide customer support for our
compressor and flare sales businesses, we stock varying levels of replacement parts at
our Midland, Texas facility and at field service locations. We also provide an
exchange and rebuild program for screw compressors and maintain an inventory of new and
used compressors to facilitate this part of our business.
 Service and Maintenance.
 Business Strategy
  
    
    Expand rental fleet.Using the additional fabrication capacity gained with
the SCS acquisition, we intend to increase our market share by expanding our rental
fleet by approximately 250-300 additional units by the end of 2007. We believe our
growth will continue to be primarily driven through our placement of small to medium
horsepower wellhead natural gas compressors for non-conventional natural gas
production, which is the single largest and fastest growing segment of U.S. gas
production according to data from the Energy Information Administration. As of
December 31, 2006, we had 974 natural gas compressors rented to third parties.
    
    Operational expansion.With the planned increase in our rental fleet, we
will continue to expand our operations in existing areas, as well as pursue focused
expansion into new geographic regions.
    
    Expand CiP (Cylinder-in-Plane) product line.The CiP, or
Cylinder-in-Plane, is our proprietary reciprocating compressor product line. This
product line has allowed us to expand our compressor rentals and sales into higher
pressure gas gathering and transmission lines. We intend to establish new
distributorship relationships and after-market sales and services networks.
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
    
    Selectively pursue acquisitions.We will continue to evaluate potential
acquisitions that would provide us with access to new markets or enhance our current
market position.
 Competitive Strengths
  
    
    Superior customer service.Our emphasis on the small to medium horsepower
markets has enabled us to effectively meet the evolving needs of our customers. We
believe these markets have been under-serviced by our larger competitors which, coupled
with our personalized services and in-depth knowledge of our customers operating needs
and growth plans, have allowed us to enhance our relationships with existing customers
as well as attract new customers. The size, type and geographic diversity of our
rental fleet enables us to provide customers with a range of compression units that can
serve a wide variety of applications. We are able to select the correct equipment for
the job, rather than the customer trying to fit its application to our equipment.
    
    Diversified product line.Our compressors are available as high and low
pressure rotary screw and reciprocating packages. They are designed to meet a number
of applications, including wellhead production, natural gas gathering, natural gas
transmission, vapor recovery and gas and plunger lift. In addition, our compressors
can be built to handle a variety of gas mixtures, including air, nitrogen, carbon
dioxide, hydrogen sulfide and hydrocarbon gases. A diversified product line helps us
compete by being able to satisfy widely varying pressure, volume and production
conditions that customers encounter.
    
    Purpose built rental compressors.Our rental compressor packages have been
designed and built to address the primary requirements of our customers in the
producing regions in which we operate. Our units are compact in design and are easy,
quick and inexpensive to move, install and start-up. Our control systems are
technically advanced and allow the operator to start and stop our units remotely and/or
in accordance with well conditions. We believe our rental fleet is also one of the
newest with an average age of less than four years old.
    
    Experienced management team.On average, our executive and operating
management team has over 20 years of oilfield services industry experience. We believe
our management team has successfully demonstrated its ability to grow our business both
organically and through selective acquisitions.
    
    Broad geographic presence.We presently provide our products and services
to a customer base of oil and natural gas exploration and production companies
operating in New Mexico, Texas, Michigan, Colorado, Wyoming, Utah, Oklahoma,
Pennsylvania, West Virginia and Kansas. Our footprint allows us to service many of the
natural gas producing regions in the United States. We believe that operating in
diverse geographic regions allows us better utilization of our compressors, minimal
incremental expenses, operating synergies, volume-based purchasing, leveraged
inventories and cross-trained personnel.
    
    Long-standing customer relationships.We have developed long-standing
relationships providing compression equipment to many major and independent oil and
natural gas companies. Our customers generally continue to rent our compressors after
the expiration of the initial terms of our rental agreements, which we believe reflects
their satisfaction with the reliability and performance of our services and products.
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Major Customers
  Sales and Marketing
  Competition
   Backlog
  Employees
  5




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Liability and Other Insurance Coverage
  Government Regulation
      
    
    owners and operators of sites,
    
    persons who disposed of or arranged for the disposal of hazardous substances found at sites.
   
    
    the prevention of discharges, including oil and produced water spills, and
    
    liability for drainage into waters.
 6




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Patents, Trademarks and Other Intellectual Property
  Suppliers and Raw Materials
  Glossary of Industry Terms
      7




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ITEM 1A. RISK FACTORS
  Risks Associated With Our Industry
 Decreased oil and natural gas prices and oil and gas industry expenditure levels would adversely
affect our revenue.
  
    
    the level of oil and natural gas production;
    
    the level of oil and natural gas inventories;
    
    domestic and worldwide demand for oil and natural gas;
    
    the expected cost of developing new reserves;
    
    the cost of producing oil and natural gas;
    
    the level of drilling and producing activity;
    
    inclement weather;
    
    domestic and worldwide economic activity;
    
    regulatory and other federal and state requirements in the United States;
    
    the ability of the Organization of Petroleum Exporting Countries to set and
maintain production levels and prices for oil;
    
    political conditions in or affecting oil and natural gas producing countries;
    
    terrorist activities in the United States and elsewhere;
    
    the cost of developing alternate energy sources;
    
    environmental regulation; and
    
    tax policies.
  8




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The intense competition in our industry could result in reduced profitability and loss of market
share for us.
   Our industry is highly cyclical, and our results of operations may be volatile.
   We are subject to extensive environmental laws and regulations that could require us to take costly
compliance actions that could harm our financial condition.
  9




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
    
    issuance of administrative, civil and criminal penalties;
    
    denial or revocation of permits or other authorizations;
    
    reduction or cessation in operations; and
    
    performance of site investigatory, remedial or other corrective actions.
 Risks Associated With Our Company
 We might be unable to employ adequate technical personnel, which could hamper our plans for
expansion or increase our costs.
  We could be subject to substantial liability claims that could harm our financial condition.
   
    
    we may not be able to continue to obtain insurance on commercially
reasonable terms;
    
    we may be faced with types of liabilities that will not be covered by our
insurance, such as damages from significant product liabilities and from environmental
contamination;
    
    the dollar amount of any liabilities may exceed our policy limits; and
    
    we do not maintain coverage against the risk of interruption of our business.
  We will require a substantial amount of capital to expand our compressor rental fleet and grow our
business.
  10




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Our current debt level is high and may negatively impact our current and future financial
stability.
  
    
    our ability to obtain additional financing for working capital,
acquisitions, capital expenditures and other purposes may be limited;
    
    a significant portion of our cash flow from operations may be dedicated to
the payment of principal and interest on our debt, thereby reducing funds available for
other purposes; and
    
    our significant leverage could make us more vulnerable to economic
downturns.
 If we are unable to service our debt, we will likely be forced to take remedial steps that are
contrary to our business plan.
  
    
    sell assets at disadvantageous prices;
    
    obtain additional financing; or
    
    refinance all or a portion of our indebtedness on terms that may be less favorable to us.
 Our current bank loan agreement contains covenants that limit our operating and financial
flexibility and, if breached, could expose us to severe remedial provisions.
  
    
    comply with a minimum current ratio;
    
    maintain minimum levels of tangible net worth;
    
    not exceed specified levels of debt;
    
    comply with a debt service coverage ratio; and
    
    comply with a debt to tangible net worth ratio.
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If we fail to acquire or successfully integrate additional businesses, our growth may be limited
and our results of operations may suffer.
  As of December 31, 2006, a significant majority of our compressor rentals were for terms of six
months or less which, if terminated or not renewed, would adversely impact our revenue and our
ability to recover our initial equipment costs.
  The loss of one or more of our current customers could adversely affect our results of operations.
  Loss of key members of our management could adversely affect our business.
  12




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Failure to effectively manage our growth and expansion could adversely affect our business and
operating results and our internal controls.
  
    
    accurately assess the number of additional officers and employees we will
require and the areas in which they will be required;
    
    attract, hire and retain additional highly skilled and motivated officers and employees;
    
    train and manage our work force in a timely and effective manner;
    
    upgrade and expand our office infrastructure so that it is appropriate for
our level of activity; and
    
    improve our financial and management controls, reporting systems and
procedures.
 Liability to customers under warranties may materially and adversely affect our earnings.
  Failure to maintain effective internal controls could have a material adverse effect on our
operations.
  We must evaluate our intangible assets annually for impairment.
   13




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
    
    significant underperformance relative to expected historical or projected
future operating results;
    
    significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
    
    significant negative industry or economic trends;
    
    significant decline in our stock price for a sustained period; and
    
    our market capitalization relative to net book value.
  Risks Associated With Our Common Stock
 The price of our common stock may fluctuate which may cause our common stock to trade at a
substantially lower price than the price paid for our common stock.
  Future sales of our common stock could adversely affect our stock price.
  If securities analysts downgrade our stock or cease coverage of us, the price of our stock could
decline.
  If we issue debt or equity securities, you may lose certain rights and be diluted.
  14




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We do not intend to pay, and have restrictions upon our ability to pay, dividends on our common
stock.
  We have a comparatively low number of shares of common stock outstanding and, therefore, our common
stock may suffer from limited liquidity and its prices will likely be volatile and its value may be
adversely affected.
  Provisions contained in our governing documents could hinder a change in control of us.
  
    
    directors will be elected for three-year terms, with approximately one-third of the
board of directors standing for election each year;
    
    cumulative voting is not allowed, which limits the ability of minority shareholders
to elect any directors;
    
    the unanimous vote of the board of directors or the affirmative vote of the holders
of not less than 80% of the votes entitled to be cast by the holders of all shares
entitled to vote in the election of directors is required to change the size of the
board of directors; and
    
    directors may be removed only for cause and only by the holders of not less than 80%
of the votes entitled to be cast on the matter.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  15




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ITEM 2. PROPERTIES
  SquareLocation
    
    Status
    
    Feet
    
    
    UsesTulsa, Oklahoma
    
    Owned and Leased
    
    
    91,780(1)
    
    
    Executive offices of SCS and compressor fabrication, manufacturing, rental and servicesMidland, Texas
    
    Owned
    
    
    24,600
    
    
    Compressor fabrication, rental and servicesLewiston, Michigan
    
    Owned
    
    
    15,360
    
    
    Compressor fabrication, rental and servicesBridgeport, Texas
    
    Leased
    
    
    4,500
    
    
    Office and parts and servicesMidland, Texas
    
    Owned
    
    
    4,100
    
    
    Executive offices and parts and servicesBloomfield, New Mexico
    
    Leased
    
    
    4,672
    
    
    Office and parts and services145,012
 
 (1)
    
    Includes 52,780 square feet owned by SCS on which its executive offices are located and on
which compressor fabrication, rental and service operations are conducted; 19,500 square feet
leased by SCS for manufacturing CiP compressors; and 19,500 square feet leased by SCS for
compressor fabrication.  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  16




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  Low
    
    High2004First Quarter
    
    $
    5.41
    
    
    $
    7.20Second Quarter
    
    
    7.20
    
    
    
    10.04Third Quarter
    
    
    7.12
    
    
    
    9.45Fourth Quarter
    
    
    8.07
    
    
    
    9.432005First Quarter
    
    $
    9.08
    
    
    $
    11.11Second Quarter
    
    
    9.51
    
    
    
    11.85Third Quarter
    
    
    11.55
    
    
    
    36.00Fourth Quarter
    
    
    15.67
    
    
    
    39.992006First Quarter
    
    $
    16.57
    
    
    $
    22.80Second Quarter
    
    
    13.77
    
    
    
    18.00Third Quarter
    
    
    12.01
    
    
    
    16.69Fourth Quarter
    
    
    12.76
    
    
    
    16.43
  Dividends
  
    
    financial condition,
    
    results of operations,
    
    current and anticipated cash requirements,
    
    plans for expansion, and
    
    restrictions under our debt obligations,
  17




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Equity Compensation Plans
  (c)Number of Securities(a)
    
    
    (b)
    
    
    Remaining AvailableNumber of
    
    
    Weighted-
    
    
    forSecurities to be
    
    
    average
    
    
    Future Issuance UnderIssued Upon
    
    
    Exercise Price of
    
    
    Equity CompensationExercise of
    
    
    Outstanding
    
    
    PlansOutstanding
    
    
    Options,
    
    
    (Excluding SecuritiesOptions, Warrants
    
    
    Warrants and
    
    
    Reflected in ColumnPlan Category
    
    and Rights
    
    
    Rights
    
    
    (a))Equity compensation
plans approved by
security holders
    
    
    129,170
    
    
    $
    9.77
    
    
    
    360,000Equity compensation
plans not approved
by security holders
    
    
    45,000
    
    
    $
    9.22
    
    
    
    Total
    
    
    174,170
    
    
    $
    9.63
    
    
    
    360,000
 Repurchase of Equity Securities
  Sale of Unregistered Securities
   
 ITEM 6. SELECTED FINANCIAL DATA
  18




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Year Ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005(1)
    
    
    2006(in thousands, except per share amounts)CONSOLIDATED STATEMENTS OF
INCOME AND OTHER INFORMATION:Revenues
    
    $
    10,297
    
    
    $
    12,750
    
    
    $
    15,958
    
    
    $
    49,311
    
    
    $
    62,729Costs of revenue, exclusive of depreciation
shown separately below
    
    
    5,572
    
    
    
    6,057
    
    
    
    6,951
    
    
    
    31,338
    
    
    
    39,308Gross profit
    
    
    4,725
    
    
    
    6,693
    
    
    
    9,007
    
    
    
    17,973
    
    
    
    23,421Depreciation and amortization
    
    
    1,166
    
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224
    
    
    
    6,020Other operating expenses
    
    
    1,718
    
    
    
    2,292
    
    
    
    2,652
    
    
    
    4,890
    
    
    
    5,270Operating income
    
    
    1,841
    
    
    
    2,675
    
    
    
    3,911
    
    
    
    8,859
    
    
    
    12,131Total other income (expense)(2)
    
    
    (471
    )
    
    
    (671
    )
    
    
    603
    
    
    
    (1,798
    )
    
    
    (256
    )Income before income taxes
    
    
    1,370
    
    
    
    2,004
    
    
    
    4,514
    
    
    
    7,061
    
    
    
    11,875Income tax expense
    
    
    584
    
    
    
    697
    
    
    
    1,140
    
    
    
    2,615
    
    
    
    4,287Net income
    
    
    786
    
    
    
    1,307
    
    
    
    3,374
    
    
    
    4,446
    
    
    
    7,588Preferred dividends
    
    
    107
    
    
    
    121
    
    
    
    53
    
    
    
    
    
    
    
    Net income available to common stockholders
    
    $
    679
    
    
    $
    1,186
    
    
    $
    3,321
    
    
    $
    4,446
    
    
    $
    7,588Net income per common share:Basic
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.59
    
    
    $
    0.67Diluted
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    0.66Weighted average shares of common stock
outstanding:Basic
    
    
    3,649
    
    
    
    4,947
    
    
    
    5,591
    
    
    
    7,564
    
    
    
    11,405Diluted
    
    
    4,305
    
    
    
    5,253
    
    
    
    6,383
    
    
    
    8,481
    
    
    
    11,472EBITDA(3)
    
    $
    3,511
    
    
    $
    4,397
    
    
    $
    7,796
    
    
    $
    13,282
    
    
    $
    19,541
 As of December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(in thousands)BALANCE SHEET INFORMATION:Current assets
    
    $
    5,084
    
    
    $
    3,654
    
    
    $
    7,295
    
    
    $
    24,642
    
    
    $
    55,170Total assets
    
    
    23,937
    
    
    
    28,270
    
    
    
    43,255
    
    
    
    86,369
    
    
    
    135,552Long-term debt (including current portion)
    
    
    8,847
    
    
    
    10,724
    
    
    
    15,017
    
    
    
    28,205
    
    
    
    18,392Stockholders equity
    
    
    13,001
    
    
    
    14,425
    
    
    
    22,903
    
    
    
    45,690
    
    
    
    101,201
 
 (1)
    
    The information for the periods presented may not be comparable because of our acquisition
of SCS in January 2005. For additional information regarding this acquisition, you should
read the information under Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 13. Certain Relationships, Related Transactions
and Director Independence  Acquisition of Screw Compression Systems, Inc. in this Annual
Report on Form 10-K.(2)
    
    Total other income (expense) for the year ended December 31, 2004 includes $1.5 million in
life insurance proceeds paid to us upon the death of our former Chief Executive Officer.(3)
    
    EBITDA is a non-GAAP financial measure of earnings (net income) from continuing operations
before interest, taxes, depreciation, and amortization. This term, as used and defined by us,
may not be comparable to similarly titled measures employed by other companies and is not a
measure of performance calculated in accordance with GAAP. EBITDA should not be considered in
isolation or as a substitute for operating income, net income or loss, cash flows provided by
operating, investing and financing activities, or other income or cash flow statement data
prepared in accordance with GAAP. However, management believes EBITDA is useful to an
investor in evaluating our operating performance because: 19




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
    
    it is widely used by investors in the energy industry to measure a companys
operating performance without regard to items excluded from the calculation of
EBITDA, which can vary substantially from company to company depending upon
accounting methods and book value of assets, capital structure and the method by
which assets were acquired, among other factors;
    
    it helps investors to more meaningfully evaluate and compare the results of our
operations from period to period by removing the impact of our capital structure and
asset base from our operating structure; and
    
    it is used by our management for various purposes, including as a measure of
operating performance, in presentations to our Board of Directors, as a basis for
strategic planning and forecasting, and as a component for setting incentive
compensation.
  Year Ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(in thousands)EBITDA
    
    $
    3,511
    
    
    $
    4,397
    
    
    $
    7,796
    
    
    $
    13,282
    
    
    $
    19,541Depreciation and amortization
    
    
    1,166
    
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224
    
    
    
    6,020Interest expense, net
    
    
    975
    
    
    
    667
    
    
    
    838
    
    
    
    1,997
    
    
    
    1,646Income taxes
    
    
    584
    
    
    
    697
    
    
    
    1,140
    
    
    
    2,615
    
    
    
    4,287Net Income
    
    $
    786
    
    
    $
    1,307
    
    
    $
    3,374
    
    
    $
    4,446
    
    
    $
    7,588
 
 ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
  20




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##### Table of Contents



Year Ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(in thousands)Sales
    
    $
    4,336
    
    
    $
    3,865
    
    
    $
    3,593
    
    
    $
    30,278
    
    
    $
    38,214Service and maintenance
    
    
    1,563
    
    
    
    1,773
    
    
    
    1,874
    
    
    
    2,424
    
    
    
    979Rental
    
    
    4,398
    
    
    
    7,112
    
    
    
    10,491
    
    
    
    16,609
    
    
    
    23,536Total
    
    $
    10,297
    
    
    $
    12,750
    
    
    $
    15,958
    
    
    $
    49,311
    
    
    $
    62,729
    21




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##### Table of Contents



Results of Operations
 Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
  Revenue
    
    
    Gross Profit, Exclusive of DepreciationYear Ended December 31,
    
    
    Year Ended December 31,2005
    
    
    2006
    
    
    2005
    
    
    2006(dollars in thousands)Sales
    
    $
    30,278
    
    
    
    61
    %
    
    $
    38,214
    
    
    
    61
    %
    
    $
    6,947
    
    
    
    23
    %
    
    $
    8,585
    
    
    
    23
    %Service and maintenance
    
    
    2,424
    
    
    
    5
    %
    
    
    979
    
    
    
    1
    %
    
    
    945
    
    
    
    39
    %
    
    
    244
    
    
    
    25
    %Rental
    
    
    16,609
    
    
    
    34
    %
    
    
    23,536
    
    
    
    38
    %
    
    
    10,081
    
    
    
    61
    %
    
    
    14,592
    
    
    
    62
    %Total
    
    $
    49,311
    
    
    
    
    
    
    $
    62,729
    
    
    
    
    
    
    $
    17,973
    
    
    
    36
    %
    
    $
    23,421
    
    
    
    37
    %
   22




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23




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##### Table of Contents



Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
  Revenue
    
    
    Gross Profit, Exclusive of DepreciationYear Ended December 31,
    
    
    Year Ended December 31,2004
    
    
    2005
    
    
    2004
    
    
    2005(dollars in thousands)Sales
    
    $
    3,593
    
    
    
    23
    %
    
    $
    30,278
    
    
    
    61
    %
    
    $
    1,037
    
    
    
    29
    %
    
    $
    6,947
    
    
    
    23
    %Service and maintenance
    
    
    1,874
    
    
    
    11
    %
    
    
    2,424
    
    
    
    5
    %
    
    
    517
    
    
    
    28
    %
    
    
    945
    
    
    
    39
    %Rental
    
    
    10,491
    
    
    
    66
    %
    
    
    16,609
    
    
    
    34
    %
    
    
    7,453
    
    
    
    71
    %
    
    
    10,081
    
    
    
    61
    %Total
    
    $
    15,958
    
    
    
    
    
    
    $
    49,311
    
    
    
    
    
    
    $
    9,007
    
    
    
    56
    %
    
    $
    17,973
    
    
    
    36
    %
          24




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##### Table of Contents



Critical Accounting Policies and Practices
   
    
    revenue recognition;
    
    estimating the allowance for doubtful accounts;
    
    accounting for income taxes;
    
    valuation of long-lived and intangible assets and goodwill; and
    
    valuation of inventory
 Revenue Recognition
  Allowance for Doubtful Accounts Receivable
  25




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Accounting for Income Taxes
   Valuation of Long-Lived and Intangible Assets and Goodwill
  
    
    significant underperformance relative to expected historical or projected
future operating results;
    
    significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
    
    significant negative industry or economic trends.
   Inventories
  26




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Share-Based
Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees
  Inventory Costs  an Amendment of ARB No. 43,
Chapter 4
 Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement 109 Accounting for Income Taxes
  27




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Environmental Regulations
  Liquidity and Capital Resources
    Contractual Obligations and Commitments
  28




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##### Table of Contents



Obligation Due in PeriodCash Contractual Obligations
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    Total(in thousands)Credit facility (secured)
    
    $
    3,442
    
    
    $
    3,378
    
    
    $
    3,378
    
    
    $
    3,378
    
    
    $
    2,816
    
    
    $
    
    
    
    $
    16,392Interest on credit facility.
    
    
    1,160
    
    
    
    865
    
    
    
    591
    
    
    
    338
    
    
    
    211
    
    
    
    
    
    
    
    3,165Subordinated debt
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Facilities and office leases
    
    
    129
    
    
    
    62
    
    
    
    29
    
    
    
    29
    
    
    
    30
    
    
    
    76
    
    
    
    355Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,731
    
    
    $
    5,305
    
    
    $
    3,998
    
    
    $
    3,745
    
    
    $
    3,057
    
    
    $
    76
    
    
    $
    21,912
 Senior Bank Borrowings
  Revolving Line of Credit Facility.
 $16.9 Million Multiple Advance Term Loan Facility.
     29




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##### Table of Contents




    
    at the end of each month, a consolidated current ratio (as defined in the
Loan Agreement) of at least 1.4 to 1.0;
    
    at the end of each month, consolidated tangible net worth (as defined in
the Loan Agreement) of at least $70.0 million;
    
    at the end of each fiscal quarter, a debt service coverage ratio (as
defined in the Loan Agreement) of at least 1.50 to 1.00; and
    
    at the end of each month, a ratio of consolidated debt to consolidated
tangible net worth (as such terms are defined in the Loan Agreement) of less than 2.0
to 1.0.
   Subordinated Debt and Related Letters of Credit
   Components of Our Principal Capital Expenditures
  ActualBudgeted 2007Expenditure Category
    
    2004
    
    2005
    
    2006
    
    (excluding acquisitions)(in thousands)Rental equipment, vehicles and
shop equipment
    
    $
    11,596
    
    
    $
    17,708
    
    
    $
    27,684
    
    
    $30,000 to $35,000
 30




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##### Table of Contents



Off-Balance Sheet Arrangements
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Commodity Risk
  Interest Rate Risk
  Financial Instruments and Debt Maturities
  Customer Credit Risk
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  31




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that our receipt and
expenditures are being made only in accordance with authorizations of management and
our Board of Directors; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
  32




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Internal Control-Integrated Framework
  Report of Independent Registered Public Accounting Firm
 
      33




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##### Table of Contents



/s/HEIN & ASSOCIATES LLP
 
 ITEM 9B. OTHER INFORMATION
  34




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PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Executive Officers and Directors
  Name
    
    Age
    
    PositionStephen C. Taylor
    
    53
    
    Chairman, President and Chief Executive OfficerEarl R. Wait
    
    63
    
    Vice President  Accounting and TreasurerPaul D. Hensley
    
    54
    
    Director, President of SCSJames R. Hazlett
    
    51
    
    Vice President  Technical ServicesCharles G. Curtis (1)(3)(4)
    
    73
    
    DirectorWilliam F. Hughes, Jr. (1)(2)
    
    54
    
    DirectorGene A. Strasheim (1)(4)
    
    66
    
    DirectorRichard L. Yadon (2)(3)(4)
    
    48
    
    DirectorAlan A. Baker (2)(3)
    
    75
    
    DirectorJohn W. Chisholm (2)(3)
    
    52
    
    Director
 
 (1)
    
    Member of our audit committee(2)
    
    Member of our compensation committee(3)
    
    Member of our governance and personnel development committee(4)
    
    Member of our nominating committee   35




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36




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##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance
      Board of Directors
   
    
    Audit Committee,
    
    Compensation Committee,
    
    Governance and Personnel Development, and
    
    Nominating Committee.
  37




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##### Table of Contents



Audit Committee
   
    
    assisting the Board in fulfilling its oversight responsibilities as they
relate to our accounting policies, internal controls, financial reporting practices and
legal and regulatory compliance;
    
    hiring independent auditors;
    
    monitoring the independence and performance of our independent auditors;
    
    maintaining, through regularly scheduled meetings, a line of communication
between the Board, our financial management and independent auditors; and
    
    overseeing compliance with our policies for conducting business, including
ethical business standards.
 Compensation Committee
   
    
    assisting the Board in overseeing the management of our human resources,
including compensation and benefits programs and evaluating the performance and
compensation of our chief executive officer; and
    
    overseeing the evaluation of management.
  38




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##### Table of Contents



Governance and Personnel Development
   
    
    assisting the Board in interpreting the Board Governance Guidelines, the
Boards Principles of Conduct and any other similar governance documents adopted by the
Board;
    
    overseeing the evaluation of the Board and its committees;
    
    generally overseeing the governance of the Board; and
    
    overseeing executive development and succession and diversity efforts.
  Nominating Committee
   
    
    identifying individuals qualified to become board members, consistent with
the criteria approved by the Board;
    
    recommending director nominees and individuals to fill vacant positions;
  Code of Ethics
 www.ngsgi.com
  
    
    we will comply with all laws, rules and regulations;
    
    our Directors, officers and employees are to avoid conflicts of interest
and are prohibited from competing with us or personally exploiting our corporate
opportunities;
    
    our Directors, officers and employees are to protect our assets and maintain our confidentiality;
    
    we are committed to promoting values of integrity and fair dealing; and
    
    we are committed to accurately maintaining our accounting records under
generally accepted accounting principles and timely filing our periodic reports.
 39




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ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
 Introduction and Overview
 http://www.ngsgi.com.
   Compensation Philosophy and Objectives
  
    
    rewards performance and talents necessary to advance our company objectives
and further the interests of our stockholders;
    
    is fair and reasonable and appropriately applied to each executive officer; and
    
    is competitive with compensation programs offered by our competitors.
  
    
    provide a competitive level of current annual income that attracts and
retains qualified executives at a reasonable cost to us;
    
    retain and motivate executives to accomplish our company goals;
    
    provide long-term incentive compensation opportunities at levels
appropriate for the respective responsibilities and performance of each executive;
    
    align compensation and benefits with our business strategies and goals;
    
    encourage the application of a decision making process that takes into
account both short-term and long-term risks and the sometimes volatile nature of our
industry; and
    
    align the financial interests of our executives with those of our
stockholders through the potential grant of equity based rewards.
 40




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##### Table of Contents



Assistance Provided to the Committee
    Compensation Components
  
    
    base salary;
    
    cash bonuses under our incentive cash bonus program;
    
    stock option grants;
    
    retirement and other benefits generally available to all of our employees; and
    
    limited perquisites.
 41




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##### Table of Contents




    
    stock awards;
    
    defined benefit pension plans;
    
    tax gross-ups;
    
    employee stock purchase/ownership plans;
    
    supplemental executive retirement plans/benefits; and
    
    deferred compensation plans.
 Compensation Evaluation Factors
  
    
    our general knowledge of executive compensation levels in the natural gas compression industry;
    
    each executives individual performance and the overall performance of Natural Gas Services Group; and
    
    specific company financial metrics and the application of specific weights to such metrics.
  Executive Compensation Levels of other Companies in the Natural Gas Compression and Related
Businesses
  Individual and Company Performance  Base Salary and Stock Options
  42




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##### Table of Contents




    
    the individual performance, leadership, business knowledge and
level of responsibility of our officers;
    
    the particular skill-set and longevity of service of the officer;
    
    the effectiveness of the officer in implementing our overall strategy;
    
    the general level of competitive compensation packages;
    
    cash flows from operations;
    
    earnings per share;
    
    our market share in the rental of natural gas compression units; and
    
    the market value of our common stock.
 Specific Company Financial Metrics  Cash Bonuses
  
    
    total revenues;
    
    EBITDA; and
    
    net income before taxes.
   Base Salary
  43




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##### Table of Contents



Mr. Taylor
    
    
    
    from $155,000 to $175,000;Mr. Wait
    
    
    
    from $100,000 to $112,500; andMr. Hazlett
    
    
    
    from $105,000 to $115,000.
  Short-Term Incentives  Incentive Cash Bonus Program
   
    
    total revenues;
    
    EBITDA; and
    
    net income before taxes.
    44




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Long-Term Incentives  Stock Option Grants
     Other Compensation
   Employment Agreements
  45




---



##### Table of Contents



Allocation of Amounts and Types of Compensation
  Assistance of Compensation Consultants
  Change of Control and Severance Arrangements
  Stock Ownership/Retention Guidelines
  Perquisites
 General Perquisites
   46




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##### Table of Contents



Cash Payment to Chief Executive OfficerUpon Exercise of Stock Option
  Limit on Deductibility of Certain Compensation
          47




---



##### Table of Contents



Executive Compensation
  Summary Compensation Table
 Change inPension ValueNon-Equity
    
    andOption
    
    Incentive
    
    NonqualifiedName
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards
    
    Plan
    
    Deferred
    
    All Otherand
    
    
    
    
    
    Salary
    
    Bonus
    
    Stock
    
    ($)
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    Awards ($)
    
    (3)
    
    (6)
    
    Earnings
    
    ($)(7)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)Stephen C. Taylor
    
    
    2006
    
    
    $
    175,350
    
    
    $
    0
    
    
    
    
    
    
    $
    215,550(4)
    
    
    $
    87,500
    
    
    
    
    
    
    $
    7,259
    
    
    $
    485,659Chairman,
President and Chief
Executive OfficerEarl R. Wait
    
    
    2006
    
    
    $
    102,769
    
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    $
    39,375
    
    
    
    
    
    
    $
    16,490
    
    
    $
    158,634Vice President 
AccountingPaul D. Hensley
    
    
    2006
    
    
    $
    133,110
    
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    $
    50,680
    
    
    
    
    
    
    $
    10,941
    
    
    $
    194,731Director,
President of SCSJames R. Hazlett
    
    
    2006
    
    
    $
    107,715
    
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    $
    40,250
    
    
    
    
    
    
    $
    5,623
    
    
    $
    153,588Vice President -
Technical ServicesS. Craig Rogers(1)
    
    
    2006
    
    
    $
    93,846
    
    
    $
    0
    
    
    
    
    
    
    $
    0
    
    
    
    N/A
    
    
    
    
    
    
    $
    8,074
    
    
    $
    101,920Vice President-
OperationsWilliam R. Larkin(2)
    
    
    2006
    
    
    $
    90,769
    
    
    $
    0
    
    
    
    
    
    
    $
    18,240
    (5)
    
    
    N/A
    
    
    
    
    
    
    $
    13,887
    
    
    $
    122,896Vice President-
Sales and Marketing
 
 (1)
    
    Mr. Rogers ceased serving as Vice President-Operations on November 10, 2006.(2)
    
    Mr. Larkin ceased serving as Vice President-Sales and Marketing on October 31, 2006.(3)
    
    The amounts in column (f) reflect the dollar amounts recognized for financial statement
reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R),
associated with stock option grants under our 1998 Stock Option Plan and the stock option
grant to Mr. Taylor under his employment agreement and thus include amounts associated with
grants made in 2006 and prior to 2006. Assumptions used to calculate these amounts are
included in footnote 10 to our audited consolidated financial statements for the fiscal year
ended December 31, 2006, as set forth on page F-17. There were no stock options exercised or
stock awards that vested during the fiscal year ended December 31, 2006 with respect to any
named executive officer.(4)
    
    This amount reflects the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended December 31, 2006, in accordance with FAS 123(R), for 15,000 shares
that vested on January 13, 2006 under the stock option granted to Mr. Taylor in August 2005
under his employment agreement.(5)
    
    This amount reflects the dollar amount recognized for financial statement reporting purposes
for the fiscal year ended December 31, 2006, in accordance with FAS 123(R), for 4,000 shares
that vested on August 26, 2006 under the stock option granted to Mr. Larkin under our 1998
Stock Option Plan. 48




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(6)
    
    The amounts in column (g) reflect the cash bonus awards to the named executive officers
under our IBP, which is discussed in further detail on page 44 under the caption Short-Term
Incentives  Incentive Bonus Program.(7)
    
    The amounts shown in column (i) include matching contributions made by Natural Gas Services
Group to each named executive officer under our 401(k) plan and the aggregate incremental cost
to Natural Gas Services Group of perquisites provided to our named executive officers as
follows: Personal Use of
    
    
    
    
    
    Additional IncrementalCompany
    
    
    
    
    
    Portion of HealthAutomobile
    
    Provided
    
    Reimbursement
    
    Insurance PremiumsAllowance
    
    Automobiles
    
    of Club Dues
    
    Paid for Officers Only
    
    401(k)
    
    TotalStephen C.
Taylor
    
    $
    
    
    
    $
    4,566
    
    
    $
    
    
    
    $
    927
    
    
    $
    1,766
    
    
    $
    7,259Earl R. Wait
    
    
    9,000
    
    
    
    
    
    
    
    
    
    
    
    4,581
    
    
    
    2,909
    
    
    
    16,490Paul D. Hensley
    
    
    
    
    
    
    3,464
    
    
    
    
    
    
    
    2,895
    
    
    
    4,582
    
    
    
    10,941James R. Hazlett
    
    
    
    
    
    
    1,041
    
    
    
    
    
    
    
    4,582
    
    
    
    
    
    
    
    5,623S. Craig Rogers
    
    
    
    
    
    
    3,865
    
    
    
    
    
    
    
    3,279
    
    
    
    930
    
    
    
    8,074William R.
Larkin
    
    
    7,547
    
    
    
    
    
    
    
    2,879
    
    
    
    513
    
    
    
    2,948
    
    
    
    13,887Total
    
    $
    16,547
    
    
    $
    12,936
    
    
    $
    2,879
    
    
    $
    16,777
    
    
    $
    13,135
    
    
    $
    62,274
 Grants of Plan Based Awards
  Grants of Plan-Based Awards Table
 Estimated Future Payouts
    
    
    
    
    
    All
    
    
    
    
    
    GrantUnder Equity Incentive
    
    All
    
    Other
    
    Exercise
    
    DatePlan Awards
    
    Other Stock
    
    Option
    
    or
    
    FairAwards:
    
    Awards:
    
    Base
    
    ValueEstimated Future
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number
    
    Number
    
    Price
    
    ofPayouts Under Non-Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    of Shares
    
    of Securities
    
    of
    
    Stock andIncentive Plan Awards(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    of Stock
    
    Underlying
    
    Option
    
    OptionGrant
    
    Threshold
    
    Target
    
    Maximum
    
    Threshold
    
    Target
    
    Maximum
    
    or Units
    
    Option
    
    Awards
    
    AwardsName
    
    Date
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    (#)
    
    (#)
    
    (#)
    
    (#)(2)
    
    ($/Sh)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)
    
    (k)
    
    (l)Stephen C. Taylor
    
    
    11/21/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    $
    14.22
    
    
    $
    108,150N/A
    
    
    
    
    
    
    $
    105,000
    
    
    $
    105,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earl R. Wait
    
    
    11/21/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    $
    14.22
    
    
    $
    36,050N/A
    
    
    
    
    
    
    $
    39,375
    
    
    $
    39,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paul D. Hensley
    
    
    N/A
    
    
    
    
    
    
    $
    50,680
    
    
    $
    50,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James R. Hazlett
    
    
    N/A
    
    
    
    
    
    
    $
    40,250
    
    
    $
    40,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    S. Craig Rogers.
    
    
    N/A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William R. Larkin
    
    
    N/A
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 49




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##### Table of Contents



(1)
    
    No amounts are shown in column (c) because there is no minimum bonus amount under our
Incentive Bonus Program. The amounts shown in column (d) reflect the product of the target
award opportunity for each executive under our Incentive Bonus Program, times the
executives base salary and are based on the assumption that all three components of the
company financial objective portion of the IBP (total revenues, EBITDA and net income before
taxes) will be met and each executive will receive the full amount of the individual
performance portion of the IBP. The amounts shown in column (e) match the amounts shown in
column (d) because there are no circumstances under which any executive would be entitled to
a cash bonus award under the Incentive Bonus Program that exceeds the target amount. These
amounts are based on each executives current salary and position.(2)
    
    All of the awards reflected in column (j) were made under our 1998 Stock Option Plan. Incentive Cash Bonus Program
   1998 Stock Option Plan
   50




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##### Table of Contents



Outstanding Equity Awards at Fiscal Year-End
  Outstanding Equity Awards at Fiscal Year-End Table
 Stock AwardsEquityEquity
    
    Incentive PlanNumber
    
    Market
    
    Incentive Plan
    
    Awards:Option Awards
    
    of
    
    Value of
    
    Awards:
    
    Market orNumber of
    
    Number of
    
    
    
    
    
    
    
    
    
    Shares
    
    Shares of
    
    Number of
    
    Payout ValueSecurities
    
    Securities
    
    
    
    
    
    
    
    
    
    that
    
    Stock
    
    Unearned
    
    of UnearnedUnderlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Have
    
    that
    
    Shares or
    
    Shares orUnexercised
    
    Unexercised
    
    Option
    
    Option
    
    Not
    
    Have
    
    Other Rights
    
    Other RightsOptions (#)
    
    Options (#)
    
    Exercise
    
    Expiration
    
    Vested
    
    Not
    
    that Have
    
    that HaveName
    
    Exercisable
    
    Unexercisable
    
    Price
    
    Date
    
    (#)
    
    Vested
    
    Not Vested
    
    Not Vested(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)Stephen C. Taylor
    
    
    15,000
    
    
    
    30,000
    
    
    $
    9.22
    
    
    
    8/06/2015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    $
    14.22
    
    
    
    11/21/2016Earl R. Wait
    
    
    15,000
    
    
    
    
    
    
    $
    3.25
    
    
    
    4/12/2012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    $
    14.22
    
    
    
    11/21/2016Paul D. Hensley
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James R. Hazlett
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    S. Craig Rogers(1)
    
    
    12,000
    
    
    
    
    
    
    $
    3.25
    
    
    
    2/08/2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William R. Larkin(2)
    
    
    4,000
    
    
    
    
    
    
    $
    7.50
    
    
    
    1/29/2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Before leaving our employment, Mr. Rogers held a fully-vested stock option to purchase
12,000 shares of our common stock. The expiration date of Mr. Rogers stock option was April
12, 2012; however, under our 1998 Stock Option Plan, upon Mr. Rogers departure from our
employment, the stock option became subject to an accelerated ninety-day expiration period.
This accelerated expiration period was February 8, 2007 and Mr. Rogers exercised his stock
option in full on January 26, 2007.(2)
    
    Before leaving our employment, Mr. Larkin owned a stock option to purchase 8,000 shares of
our common stock, 4,000 of which had vested. The expiration date of Mr. Larkins stock option
was August 26, 2014; however, under 1998 Our Stock Option Plan, the unvested portion of the
stock option (4,000 shares) immediately expired and the vested portion (4,000 shares) became
subject to an accelerated ninety-day expiration period. This accelerated expiration period
was January 29, 2007 and Mr. Larkin exercised his stock option with respect to the vested
portion on January 26, 2007. 51




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##### Table of Contents



Potential Payments Upon Termination or Change of Control
     Change of Control and Severance Arrangements- Stephen C. Taylors Employment Agreement
   
    
    for cause;
    
    the mental or physical incapacity or inability of Mr. Taylor to
perform his duties for a period of 120 or more consecutive days or for multiple
periods totaling 180 or more days during any twelve-month period;
    
    the death of Mr. Taylor; or
    
    the voluntary retirement or resignation of Mr. Taylor.
 52




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##### Table of Contents




    
    the dissolution, merger or consolidation of Natural Gas Services Group;
    
    the sale of all or substantially all of the assets of Natural Gas Services Group;
    
    the recapitalization or any other type of transaction which
results in 51% or more of the common stock of Natural Gas Services Group being
changed into, or exchanged for, different securities of Natural Gas Services
Group, or other securities in other entities; or
    
    any change in the duties, functions, responsibilities or
authority of Mr. Taylor or any decrease in his base salary.
  
    
    a single lump sum cash payment equal to 200% of his base salary;
    
    immediate vesting of all unvested stock options;
    
    continued health care and insurance benefits and premium
payments for a period of 18 months from the date of termination;
    
    bonuses or individual incentive compensation not yet paid but
earned prior to the year of termination;
    
    bonuses or individual incentive compensation earned during the
fiscal year, prorated to reflect the date of termination; and
    
    immediate vesting of 100% of all other compensation plans or
bonus or incentive plans that Mr. Taylor contributed to at the date of
termination, except to the extent covered by the benefits listed above.
   53




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##### Table of Contents



Chief Executive Officer Potential Payments Table
 Potential Payments
    
    
    
    
    
    Termination
    
    Voluntary
    
    
    
    
    
    Incapacityand other Benefits
    
    
    
    
    
    Upon
    
    Resignation
    
    
    
    
    
    or Inability
    
    
    
    
    
    Terminationupon a Change of
    
    Fundamental
    
    Fundamental
    
    or
    
    
    
    
    
    to Perform
    
    Termination
    
    WithoutControl or Severance
    
    Change
    
    Change
    
    Retirement
    
    Death
    
    Duties
    
    for Cause
    
    CauseCompensation:Salary
    
    
    
    
    
    $
    350,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    350,000Short-Term Incentive
Compensation-Cash
Bonus Under IBP
    
    
    
    
    
    $
    87,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    87,500Long-Term Incentive
Stock Option Grants
    
    $
    215,550
    
    
    $
    215,550
    
    
    $
    215,550
    
    
    $
    215,550
    
    
    $
    215,550
    
    
    
    
    
    
    $
    215,550Benefits:401(k) Plan
    
    
    
    
    
    $
    8,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,583Medical Benefits
    
    
    
    
    
    $
    5,209
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,209Life Insurance
Benefits
    
    
    
    
    
    $
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,135Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    215,550
    
    
    $
    667,977
    
    
    $
    215,550
    
    
    $
    215,550
    
    
    $
    215,550
    
    
    
    
    
    
    $
    667,977
 54




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##### Table of Contents



Compensation of Directors
 Director Compensation Table
  Change inPension ValueFees
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    andEarned
    
    
    
    
    
    
    
    
    
    Incentive
    
    Nonqualified
    
    AllOr
    
    Stock
    
    Option
    
    Plan
    
    Deferred
    
    OtherPaid
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)(3)(4)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)Charles G. Curtis
    
    $
    12,500
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,250Gene A. Strasheim(1)
    
    $
    17,500
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,250William F. Hughes
    
    $
    12,500
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,250Richard L. Yadon
    
    $
    12,500
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,250Alan A. Baker
    
    $
    12,500
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,250John W. Chisholm(2)
    
    $
    3,750
    
    
    
    
    
    
    $
    34,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38,500
 
 (1)
    
    Mr. Strasheim served as the Chairman of the Audit Committee in 2006, and as a result, he
received in additional cash fee of $1,250 per quarter.(2)
    
    Effective December 19, 2006, the Board of Directors voted to increase the number of Directors
constituting our Board of Directors from seven to eight and appointed Mr. Chisholm to fill the
vacancy created by the increase in the number of Directors.(3)
    
    On December 29, 2006, each of our non-employee Directors was granted a stock option to
purchase 2,500 shares of common stock at an exercise price of $13.90 per share, the closing
price of our common stock on December 29, 2006. Initially, the stock options were exercisable
for a term of ten years from the date of grant. On January 15, 2007, the Compensation
Committee unanimously consented to an amendment to the stock options, making the stock options
exercisable for a term of ten years from January 1, 2007, rather than from the date of grant.(4)
    
    The amounts set forth in column (d) represent the dollar amounts we recognized for financial
statement reporting purposes for 2006 in accordance with FAS 123R with respect to the stock
options granted to our non-employee Directors. The grant date fair value, as calculated in
accordance with FAS 123R, for the stock options granted to our non-employee Directors in 2006
was $38 thousand per option. Compensation of Directors
    55




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##### Table of Contents



Other
    Compensation Agreements with Management
   56




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##### Table of Contents



Limitations on Directors and Officers Liability
       57




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  Name and Address
    
    Amount and Nature
    
    Percentof
    
    of
    
    ofBeneficial Owner
    
    Beneficial Ownership(1)
    
    ClassCharles G. Curtis
    
    
    76,357
    (2)
    
    
    *William F. Hughes
    
    
    202,000
    (3)
    
    
    1.67
    %Gene A. Strasheim
    
    
    11,000
    (4)
    
    
    *Stephen C. Taylor
    
    
    31,000
    (5)
    
    
    *Richard L. Yadon
    
    
    278,683
    (6)
    
    
    2.31
    %Paul D. Hensley
    
    
    326,829
    (7)
    
    
    2.71
    %Alan A. Baker
    
    
    2,500
    (8)
    
    
    *John Chisholm
    
    
    2,500
    (9)
    
    
    *Earl R. Wait
    
    
    45,870
    (10)
    
    
    *James R. Hazlett
    
    
    51,976
    (11)
    
    
    *Westcliff Capital Management, LLC
    
    
    927,150
    (12)
    
    
    7.68
    %Keeley Asset Management Corp.
    
    
    755,000
    (13)
    
    
    6.26
    %Wellington Management Company, LLP
    
    
    1,328,000
    (14)
    
    
    11.01
    %All directors and executive
officers as a
group (10 persons)
    
    
    1,028,715
    (15)
    
    
    8.46
    %
 
 *
    
    Less than one percent(1)
    
    The number of shares listed includes all shares of common stock owned by, or which may be
acquired within 60 days of March 12, 2007 upon the exercise of warrants and options held by
the stockholder (or group). Beneficial ownership is calculated in accordance with the rules
of the Securities and Exchange Commission. As of March 12, 2007, none of the shares of common
stock owned by our officers and directors had been pledged as collateral to secure repayment
of loans.(2)
    
    Includes 12,500 shares that may be acquired upon the exercise of stock options granted under
our 1998 Stock Option Plan. Mr. Curtis address is 1 Penrose Lane, Colorado Springs, Colorado
80906.(3)
    
    Includes 190,500 shares indirectly owned by Mr. Hughes through the William and Cheryl Hughes
Family Trust and 10 thousand shares that may be acquired upon the exercise of stock options
granted under our 1998 Stock Option Plan. Mr. and Mrs. Hughes are co-trustees of the William
and Cheryl Hughes Family Trust and have shared voting and investment powers with respect to
the shares held by the trust. Mr. and Mrs. Hughes are beneficiaries of the trust along with
their two children. Mr. Hughes address is 42921 Normandy Lane, Lancaster, California 93536.(4)
    
    Includes 7,500 shares that may be acquired upon exercise of stock options granted under our
1998 Stock Option Plan. Mr. Strasheims address is 165 Huntington Place, Colorado Springs,
Colorado 80906. 58




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##### Table of Contents



(5)
    
    Includes 30,000 shares that may be acquired upon exercise of a stock option granted to Mr.
Taylor as an inducement for his employment. Mr. Taylors address is 2911 South County Road
1260, Midland, Texas 79706.(6)
    
    Includes 10,000 shares that may be acquired upon the exercise of stock options granted under
our 1998 Stock Option Plan. Mr. Yadons address is 4444 Verde Glen Ct., Midland, Texas 79707.(7)
    
    Mr. Hensleys address is 3005 N. 15th Street, Broken Arrow, Oklahoma 74012.(8)
    
    All of such shares may be acquired upon exercise of a stock option granted under our 1998
Stock Option Plan. Mr. Bakers address is 2702 Briar Knoll Ct., Sugar Land, Texas 77479.(9)
    
    All of such shares may be acquired upon exercise of a stock option granted under our 1998
Stock Option Plan. Mr. Chisholms address is 539 Green Isle Beach, Montgomery, Texas 77356(10)
    
    Includes 15,000 shares that may be acquired upon exercise of a stock option granted under our
1998 Stock Option Plan. Mr. Waits address is 2911 South County Road 1260, Midland, Texas
79706.(11)
    
    Mr. Hazletts address is 2911 South County Road 1260, Midland, Texas 79706.(12)
    
    As reported in Schedule 13G filed with the Securities and Exchange Commission on February 6,
2007, Westcliff Capital Management, LLC has shared voting and dispositive powers with respect
to such shares. Westcliff, as investment manager of various client accounts, and Richard S.
Spencer III, as Westcliffs manager and majority owner, may be deemed to beneficially own the
stock owned by such accounts, in that they may be deemed to have the power to direct the
voting or disposition of that stock.(13)
    
    As reported in Schedule 13G filed with the Securities and Exchange Commission on February 13,
2007, Keeley Asset Management Corp., an investment adviser, and Keeley Small Cap Value Fund,
Inc., an investment company, have shared voting and dispositive powers with respect to such
shares.(14)
    
    As reported in Amendment No. 1 to Schedule 13G filed with the Securities and Exchange
Commission on February 14, 2007, Wellington Management Company, LLP, in its capacity as
investment adviser, may be deemed to beneficially own such shares and has shared voting powers
with respect to 758,000 shares and shared dispositive powers with respect to 1,328,000 shares.(15)
    
    Includes 90,000 shares of common stock that may be acquired upon the exercise of stock
options. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Acquisition of Screw Compression Systems, Inc.
   59




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##### Table of Contents



Director Independence
    60




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##### Table of Contents



Procedures for Reviewing Certain Transactions
  
    
    a director, officer or employee of Natural Gas Services or a nominee to become a director;
    
    an owner of more than 5% of our outstanding common stock;
    
    certain family members of any of the above persons; and
    
    any entity in which any of the above persons is employed or is a partner or
principal or in which such person has a 5% or greater ownership interest.
 Approval Procedures
  
    
    the related partys relationship to Natural Gas Services and interest in the transaction;
    
    the material terms of the proposed transaction;
    
    the benefits to Natural Gas Services of the proposed transaction;
    
    the availability of other sources of comparable properties or services; and
    
    whether the proposed transaction is on terms comparable to terms available
to an unrelated third party or to employees generally.
  Ratification Procedures
  61




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees
  Audit Related Fees
  Tax Fees
  All Other Fees
  Audit Committees Pre-Approval Policies and Procedures
  de minimus de minimus
 62




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
   
     Exhibit No.
    
    Description3.1
    
    Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10QSB
filed and dated November 10, 2004)3.2
    
    Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrants Registration Statement
on Form SB-2, No. 333-88314)4.1
    
    Form of warrant certificate (Incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)4.2
    
    Form of warrant agent agreement (Incorporated by reference to Exhibit 4.2 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)4.3
    
    Form of representatives option for the purchase of common stock (Incorporated by reference
to Exhibit 4.4 of the Registrants Registration Statement on Form SB-2, No. 333-88314)4.4
    
    Form of representatives option for the purchase of warrants (Incorporated by reference to
Exhibit 4.5 of the Registrants Registration Statement on Form SB-2, No. 333-88314)4.5
    
    Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the
Registrants From 8-K Report, dated January 3, 2005, as filed with the Securities and Exchange
Commission on January 7, 2005) Executive Compensation Plans and Arrangements (Exhibits 10.1,
10.14, 10.15, 10.16, 10.23, 10.24, 10.26 and 10.27)10.1
    
    1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated June 20, 2006 on file with the SEC June 26, 2006)10.2
    
    Form of Series A 10% Subordinated Notes due December 31, 2006 (Incorporated by reference to
Exhibit 10.8 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.3
    
    Form of Five-Year Warrants to Purchase Common Stock (Incorporated by reference to Exhibit
10.9 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.4
    
    Warrants issued to Berry-Shino Securities, Inc. (Incorporated by reference to Exhibit 10.10
of the Registrants Registration Statement on Form SB-2, No. 333-88314)
 E-1




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##### Table of Contents



Exhibit No.
    
    Description10.5
    
    Warrants issued to Neidiger, Tucker, Bruner, Inc. (Incorporated by reference to Exhibit
10.11 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.6
    
    Form of warrant issued in March 2001 for guaranteeing debt (Incorporated by reference to
Exhibit 10.12 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.7
    
    Form of warrant issued in April 2002 for guaranteeing debt (Incorporated by reference to
Exhibit 10.13 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.8
    
    First Amended and Restated Loan Agreement between the Registrant and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K,
dated March 27, 2003 and filed with the Securities and Exchange Commission on April 14, 2003)10.9
    
    Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas
(Incorporated by reference to Exhibit 10.19 of the Registrants Form 10-QSB for the fiscal
quarter ended June 30, 2004)10.10
    
    Second Amended and Restated Loan Agreement, dated November 3, 2003, between the Registrant
and Western National Bank (Incorporated by reference to Exhibit 10.20 of the Registrants Form
10-QSB for the fiscal quarter ended June 30, 2004)10.11
    
    Securities Purchase Agreement, dated July 20, 2004, between the Registrant and CBarney
Investments, Ltd. (Incorporated by reference to Exhibit 4.1 of the Registrants Current
Report on Form 8-K dated July 20, 2004 and filed with the Securities and Exchange Commission
on July 27, 2004)10.12
    
    Stock Purchase Agreement, dated October 18, 2004, by and among the Registrant, Screw
Compression Systems, Inc., Paul D. Hensley, Jim Hazlett and Tony Vohjesus (Incorporated by
reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K dated October 18, 2004
and filed with the Securities and Exchange Commission on October 21, 2004)10.13
    
    Third Amended and Restated Loan Agreement, dated as of January 3, 2005, among Natural Gas
Services Group, Inc., Screw Compression Systems, Inc. and Western National Bank (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, dated January 3,
2005, and filed with the Securities and Exchange Commission on January 7, 2005)10.14
    
    Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated January
3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005)10.15
    
    Employment Agreement between William R. Larkin and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.25 of the Registrants Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on March
30, 2005)10.16
    
    Promissory Note, dated January 3, 2005, in the original principal amount of $2.1 million
made by Natural Gas Services Group, Inc. payable to Paul D. Hensley (Incorporated by
reference to Exhibit 10.26 of the Registrants Form 10-KSB for the fiscal year ended December
31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)10.17
    
    Fourth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K, dated March 14, 2005, and filed with the Securities
and Exchange Commission on March 18, 2005)10.18
    
    Modification Agreement, dated as of January 3, 2005, by and between Natural Gas Services
Group, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)
 E-2




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##### Table of Contents



Exhibit No.
    
    Description10.19
    
    Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Service Group, Inc.,
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)10.20
    
    Guaranty Agreement, dated as of January 3, 2005, made by Screw Compression Systems, Inc.,
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)10.21
    
    Fifth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.2 of the
Registrants Form 8-K dated January 3, 2006 and filed with the Securities and Exchange
Commission January 6, 2006)10.22
    
    First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by reference
Exhibit 10.1 of the Registrants Form 8-K dated May 1, 2005 and filed with Securities and
Exchange Commission May 13, 2005)10.23
    
    Employment Agreement between Stephen C. Taylor and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated August
24, 2005, and filed with the Securities and Exchange Commission on August 30, 2005)10.24
    
    Employment Agreement between James R. Hazlett and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated June 14,
2005, and filed with the Securities and Exchange Commission on November 14, 2005)10.25
    
    Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the
Registrants Form 8-K Report, dated January 3, 2005, and filed with the Securities and
Exchange Commission on January 7, 2005)10.26
    
    Promissory Note, dated January 3, 2005, in the original principal amount of $300 thousand
made by Natural Gas Services Group, Inc. payable to Jim Hazlett (Incorporated by reference to
Exhibit 10.3 of the Registrants Form 8-K Report, dated June 14, 2005, and filed with the
Securities and Exchange Commission on November 14, 2005)10.27
    
    Retirement Agreement, dated December 14, 2005, between Wallace C. Sparkman and Natural Gas
Services Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K
Report, dated December 14, 2005, and filed with the Securities and Exchange Commission on
December 15, 2005)10.28
    
    Sixth Amended and Restated Loan Agreement, dated as of January 3, 2006 (Incorporated by
reference to Exhibit 10.3 of the Registrants Current Report on Form 8-K, dated January 3,
2006, and filed with the Securities and Exchange Commission on January 6, 2006)10.29
    
    Guaranty Agreement, dated as of January 3, 2006, and made by Screw Compression Systems, Inc.
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K, dated January 3, 2006, and filed with the Securities
and Exchange Commission on January 6, 2006)10.30
    
    Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of
the Registrants Form 8-K dated October 26, 2006 and filed with the Securities and Exchange
Commission on November 1, 200614.0
    
    Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrants Form 10-KSB for
the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission
on March 30, 2005)
 E-3




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##### Table of Contents



Exhibit No.
    
    Description21.0
    
    Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrants Form 10-KSB for
the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission
on March 30, 2005)*23.1
    
    Consent of Hein & Associates LLP*31.1
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith. E-4




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##### Table of Contents



SIGNATURES
  Date: March 12, 2007
    
    NATURAL GAS SERVICES GROUP, INC./s/ Stephen C. TaylorStephen C. Taylor, Chairman of the Board,President and Chief Executive Officer (PrincipalExecutive Officer)
  Signature
    
    Title
    
    Date/s/ Stephen C. Taylor

Stephen C. Taylor
    
    Chairman of the Board of
Directors, Chief
Executive Officer and
President (Principal
Executive Officer
    
    March 12, 2007/s/ Earl R. Wait

Earl R. Wait
    
    Vice President 
Accounting (Principal
Financial Officer)
    
    March 12, 2007/s/Charles G. Curtis

Charles G. Curtis
    
    Director
    
    March 12, 2007/s/William F. Hughes, Jr.

William F. Hughes, Jr.
    
    Director
    
    March 12, 2007/s/Richard L. Yadon

Richard L. Yadon
    
    Director
    
    March 12, 2007/s/Paul D. Hensley

Paul D. Hensley
    
    Director
    
    March 12, 2007/s/Gene A. Strasheim

Gene A. Strasheim
    
    Director
    
    March 12, 2007/s/Alan A. Baker

Alan A. Baker
    
    Director
    
    March 12, 2007John W. Chisholm
    
    Director
    
    March 12, 2007




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2006
    
    
    F-3Consolidated Statements of Income for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-4Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2005, and 2006
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
 /s/ HEIN & ASSOCIATES LLP
 F-2




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2005
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,271
    
    
    $
    4,391Short-term investments
    
    
    
    
    
    
    25,052Trade accounts receivable, net of doubtful accounts of $75 and $110, respectively
    
    
    6,192
    
    
    
    8,463Inventory, net of allowance for obsolescence of $361 and $347, respectively
    
    
    14,723
    
    
    
    16,943Prepaid expenses and other
    
    
    456
    
    
    
    321Total current assets
    
    
    24,642
    
    
    
    55,170Rental equipment,net of accumulated depreciation of $7,598 and $11,320,
respectively
    
    
    41,201
    
    
    
    59,866Property and equipment,net of accumulated depreciation of $2,458 and $3,679,
respectively
    
    
    6,424
    
    
    
    6,714Goodwill,net of accumulated amortization of $325
    
    
    10,039
    
    
    
    10,039Intangibles, net of accumulated amortization of $492 and $819, respectively
    
    
    3,978
    
    
    
    3,650Other assets
    
    
    85
    
    
    
    113Total assets
    
    $
    86,369
    
    
    $
    135,552LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term debt and subordinated notes
    
    $
    5,680
    
    
    $
    4,442Line of credit
    
    
    300
    
    
    
    Accounts payable and accrued liabilities
    
    
    4,917
    
    
    
    4,914Current income tax liability
    
    
    207
    
    
    
    1,056Deferred income
    
    
    103
    
    
    
    225Total current liabilities
    
    
    11,207
    
    
    
    10,637Long term debt, less current portion
    
    
    20,225
    
    
    
    12,950Subordinated notes, less current portion
    
    
    2,000
    
    
    
    1,000Deferred income tax payable
    
    
    7,247
    
    
    
    9,764Commitments (Note 11)
Stockholders equity:Common stock, 30,000 shares authorized, par value $0.01; 9,022 and 12,046 shares
issued and outstanding, respectively
    
    
    90
    
    
    
    120Additional paid-in capital
    
    
    34,667
    
    
    
    82,560Retained earnings
    
    
    10,933
    
    
    
    18,521Total stockholders equity
    
    
    45,690
    
    
    
    101,201Total liabilities and stockholders equity
    
    $
    86,369
    
    
    $
    135,552
  F-3




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 For the Years Ended December 31,2004
    
    
    2005
    
    
    2006Revenue:Sales, net
    
    $
    3,593
    
    
    $
    30,278
    
    
    $
    38,214Service and maintenance income
    
    
    1,874
    
    
    
    2,424
    
    
    
    979Rental income
    
    
    10,491
    
    
    
    16,609
    
    
    
    23,536Total revenue
    
    
    15,958
    
    
    
    49,311
    
    
    
    62,729Operating costs and expenses:Cost of sales, exclusive of depreciation stated separately below
    
    
    2,556
    
    
    
    23,331
    
    
    
    29,629Cost of service, exclusive of depreciation stated separately below
    
    
    1,357
    
    
    
    1,479
    
    
    
    735Cost of rental, exclusive of depreciation stated separately below
    
    
    3,038
    
    
    
    6,528
    
    
    
    8,944Selling expenses
    
    
    875
    
    
    
    1,034
    
    
    
    1,273General and administrative
    
    
    1,777
    
    
    
    3,856
    
    
    
    3,997Depreciation and amortization
    
    
    2,444
    
    
    
    4,224
    
    
    
    6,020Total operating costs and expenses
    
    
    12,047
    
    
    
    40,452
    
    
    
    50,598Operating income
    
    
    3,911
    
    
    
    8,859
    
    
    
    12,131Other income (expense):Interest expense
    
    
    (838
    )
    
    
    (1,997
    )
    
    
    (1,646
    )Other income
    
    
    1,441
    
    
    
    199
    
    
    
    1,390Total other income (expense)
    
    
    603
    
    
    
    (1,798
    )
    
    
    (256
    )Income before provision for income taxes
    
    
    4,514
    
    
    
    7,061
    
    
    
    11,875Provision for income taxes:Current
    
    
    20
    
    
    
    207
    
    
    
    1,743Deferred
    
    
    1,120
    
    
    
    2,408
    
    
    
    2,544Total income tax expense
    
    
    1,140
    
    
    
    2,615
    
    
    
    4,287Net income
    
    
    3,374
    
    
    
    4,446
    
    
    
    7,588Preferred dividends
    
    
    53
    
    
    
    
    
    
    
    Income available to common stockholders
    
    $
    3,321
    
    
    $
    4,446
    
    
    $
    7,588Earnings per common share:Basic
    
    $
    0.59
    
    
    $
    0.59
    
    
    $
    0.67Diluted
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    0.66Weighted average common shares outstanding:Basic
    
    
    5,591
    
    
    
    7,564
    
    
    
    11,405Diluted
    
    
    6,383
    
    
    
    8,481
    
    
    
    11,472
  F-4




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2004, 2005 and 2006
 Additional
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Stockholders'Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    EquityBALANCES, January 1, 2004
    
    
    344
    
    
    $
    4
    
    
    
    5,031
    
    
    $
    50
    
    
    $
    11,205
    
    
    $
    3,166
    
    
    $
    14,425Exercise of common stock options and warrants
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    1
    
    
    
    245
    
    
    
    
    
    
    
    246Conversion of preferred stock to common stock
    
    
    (344
    )
    
    
    (4
    )
    
    
    344
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Transaction costs of private placement of
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (39
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    649
    
    
    
    6
    
    
    
    4,944
    
    
    
    
    
    
    
    4,950Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    (53
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,374
    
    
    
    3,374BALANCES, January 1, 2005
    
    
    
    
    
    $
    
    
    
    
    6,104
    
    
    $
    61
    
    
    $
    16,355
    
    
    $
    6,487
    
    
    $
    22,903Exercise of common stock options and warrants
    
    
    
    
    
    
    
    
    
    
    2,308
    
    
    
    23
    
    
    
    13,063
    
    
    
    
    
    
    
    13,086Compensation expense on issuance
of common stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    135Issuance of common stock for acquisition
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    6
    
    
    
    5,114
    
    
    
    
    
    
    
    5,120Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,446
    
    
    
    4,446BALANCES, January 1, 2006
    
    
    
    
    
    $
    
    
    
    
    9,022
    
    
    $
    90
    
    
    $
    34,667
    
    
    $
    10,933
    
    
    $
    45,690Exercise of common stock options and warrants
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    1
    
    
    
    356
    
    
    
    
    
    
    
    357Compensation expense on issuance
of common stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    376Income tax benefit realized from the exercise
of employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Issuance of common stock, net of offering costs
    
    
    
    
    
    
    
    
    
    
    2,895
    
    
    
    29
    
    
    
    47,134
    
    
    
    
    
    
    
    47,163Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,588
    
    
    
    7,588BALANCES, December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    12,046
    
    
    $
    120
    
    
    $
    82,560
    
    
    $
    18,521
    
    
    $
    101,201
  F-5




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Years Ended December 31,2004
    
    
    2005
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,374
    
    
    $
    4,446
    
    
    $
    7,588Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,444
    
    
    
    4,224
    
    
    
    6,020Deferred taxes
    
    
    1,120
    
    
    
    2,408
    
    
    
    2,544Employee stock option expense
    
    
    
    
    
    
    135
    
    
    
    376Loss (gain) on disposal of assets
    
    
    71
    
    
    
    (28
    )
    
    
    13Gross profit from sale of rental equipment
    
    
    
    
    
    
    
    
    
    
    (1,263
    )Changes in current assets:Trade accounts and other receivables
    
    
    (1,182
    )
    
    
    (1,352
    )
    
    
    (2,271
    )Inventory
    
    
    (1,915
    )
    
    
    (5,699
    )
    
    
    (2,220
    )Prepaid expenses and other
    
    
    (34
    )
    
    
    (362
    )
    
    
    135Changes in current liabilities:Accounts payable and accrued liabilities
    
    
    1,264
    
    
    
    337
    
    
    
    (3
    )Current income tax liability
    
    
    20
    
    
    
    187
    
    
    
    849Deferred income
    
    
    (185
    )
    
    
    (855
    )
    
    
    122Other assets
    
    
    (279
    )
    
    
    348
    
    
    
    (46
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    4,698
    
    
    
    3,789
    
    
    
    11,844CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (11,596
    )
    
    
    (17,708
    )
    
    
    (27,684
    )Purchase of short-term investments
    
    
    
    
    
    
    
    
    
    
    (38,252
    )Redemption of short-term investments
    
    
    
    
    
    
    
    
    
    
    13,200Assets acquired, net of cash
    
    
    
    
    
    
    (7,584
    )
    
    
    Proceeds from sale of property and equipment
    
    
    50
    
    
    
    264
    
    
    
    4,305Changes in restricted cash
    
    
    (2,000
    )
    
    
    2,000
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (13,546
    )
    
    
    (23,028
    )
    
    
    (48,431
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from line of credit
    
    
    550
    
    
    
    300
    
    
    
    1,375Proceeds from long-term debt
    
    
    6,592
    
    
    
    21,517
    
    
    
    68Repayments of long-term debt
    
    
    (2,589
    )
    
    
    (13,077
    )
    
    
    (9,581
    )Repayment of line of credit
    
    
    (300
    )
    
    
    
    
    
    
    (1,675
    )Dividends paid on preferred stock
    
    
    (53
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options and warrants
    
    
    5,157
    
    
    
    13,085
    
    
    
    357Proceeds from sale of stock, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    47,163NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    9,357
    
    
    
    21,825
    
    
    
    37,707NET CHANGE IN CASH
    
    
    509
    
    
    
    2,586
    
    
    
    1,120CASH AT BEGINNING OF PERIOD
    
    
    176
    
    
    
    685
    
    
    
    3,271CASH AT END OF PERIOD
    
    $
    685
    
    
    $
    3,271
    
    
    $
    4,391SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Interest paid
    
    $
    775
    
    
    $
    1,877
    
    
    $
    1,692Income taxes paid
    
    $
    31
    
    
    $
    24
    
    
    $
    894SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:Assets acquired for issuance of subordinated debt
    
    
    
    
    
    
    3,000
    
    
    
    Assets acquired for issuance of common stock
    
    
    
    
    
    
    5,120
    
    
    
    
  F-6




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 1. Summary of Significant Accounting Policies
 Organization and Principles of Consolidation
      Nature of Operations
  Use of Estimates
  Cash Equivalents
  Short-term Investments
  F-7




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##### Table of Contents



Accounts Receivable
  Revenue Recognition
  Description of Rental Arrangements
  Major Customers and Concentration of Credit Risk
  Inventory
  2005
    
    
    2006Raw materials
    
    $
    11,771
    
    
    $
    12,154Finished goods
    
    
    
    
    
    
    1,084Work in process
    
    
    2,952
    
    
    
    3,705$
    14,723
    
    
    $
    16,943
 Property and Equipment
  F-8




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##### Table of Contents



Goodwill
    Intangibles
   2007
    
    
    2992008
    
    
    2992009
    
    
    2992010
    
    
    2602011
    
    
    179Thereafter
    
    
    1,629$
    2,965
  Patents
  Restricted Cash
  F-9




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##### Table of Contents



Other Assets
  Warranty
  Financial Instruments
  Advertising Costs
  Per Share Data
   Year EndedDecember 31,2004
    
    
    2005
    
    
    2006Numerator:Net income
    
    $
    3,374
    
    
    $
    4,446
    
    
    $
    7,588Less preferred dividends
    
    
    53
    
    
    
    
    
    
    
    Income available to common stockholders
    
    
    3,321
    
    
    
    4,446
    
    
    
    7,588Denominator for basic net income per common share:Weighted average common shares outstanding
    
    
    5,591
    
    
    
    7,564
    
    
    
    11,405Denominator for diluted net income per share:Weighted average common shares outstanding
    
    
    5,591
    
    
    
    7,564
    
    
    
    11,405Dilutive effect of stock options and warrants
    
    
    792
    
    
    
    917
    
    
    
    67Diluted weighted average shares
    
    
    6,383
    
    
    
    8,481
    
    
    
    11,472Earnings per common share:Basic
    
    $
    0.59
    
    
    $
    0.59
    
    
    $
    0.67Diluted
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    0.66
 F-10




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##### Table of Contents



Income Taxes
  Reclassification
  Recently Issued Accounting Pronouncements
 Share-Based
Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement 109 Accounting for Income Taxes
 2. Acquisitions
   F-11




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##### Table of Contents




    
    $8 million in cash;
    
    Promissory notes issued by Natural Gas Services Group, Inc. in the
aggregate principal amount of $3 million bearing interest at the rate of 4.00% per
annum, maturing three years from the date of closing and secured by a letter of credit
in the face amount of $2 million; and
    
    609,756 shares of Natural Gas Services Group, Inc. common stock valued at
$5.1 million based upon the closing price of the Companys stock at the time of the
transaction. All of the shares are restricted securities within the meaning of Rule
144 under the Securities Act of 1933, as amended, and bear a legend to that effect.This transaction was completed January 3, 2005 and Natural Gas Services Group, Inc. began
reporting combined financial information with SCS in January 2005. The total purchase price was
$16.1 million and the Company recorded goodwill of approximately $6.9 million, of which none is
expected to be deductible for tax purposes and intangible assets of approximately $4.2 million,
reflecting the additional value to our previously existing operations achieved with this
acquisitions ability to expand production capacity and product line. Intangible assets relate to
developed technology, acquired customer contracts, distribution agreements, non-compete agreements
and the trade name of SCS. The trade name of SCS was valued at $0.7 million and will not be
amortized as it was deemed to have an indefinite life. The remaining intangible assets of $3.5
million had a weighted average life on the date of acquisition of sixteen years.
  (Unaudited)
Pro Forma Results
 Twelve Months EndedDecember 31, 2004Revenue
    
    $
    37,382Net income available to common stockholders
    
    
    4,148Net income per common share, basic
    
    
    0.67Net income per common share, diluted
    
    
    0.59Summary of net assets acquired is as follows:Current assets
    
    $
    8,274Other assets
    
    
    3,047Intangibles
    
    
    4,218Goodwill
    
    
    7,468Total assets
    
    
    23,007Current liabilities
    
    
    3,180Notes payable
    
    
    1,403Other liabilities
    
    
    1,884Total liabilities
    
    
    6,467Net assets
    
    
    16,540Acquisition expenses
    
    
    (418
    )Purchase price
    
    $
    16,122
 F-12




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##### Table of Contents



3. Rental Activity
  Years Ended December 31,2007
    
    
    1,6242008
    
    
    74Total
    
    $
    1,698
 4. Property and Equipment
  2005
    
    
    2006Land and building
    
    $
    3,365
    
    
    $
    3,365Leasehold improvements
    
    
    283
    
    
    
    398Office equipment and furniture
    
    
    424
    
    
    
    501Software
    
    
    268
    
    
    
    360Machinery and equipment
    
    
    1,153
    
    
    
    1,447Vehicles
    
    
    3,389
    
    
    
    4,322Less accumulated depreciation.
    
    
    (2,458
    )
    
    
    (3,679
    )Total
    
    $
    6,424
    
    
    $
    6,714
  5. Line of Credit
   F-13




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##### Table of Contents



6. Long-term Debt
  2005
    
    
    2006Note payable to a bank, interest at banks
prime rate plus .5% but not less than 5.25%
(7.75% at December 31, 2005). This was an
advance line of credit note for $10.0 million.
Interest was payable monthly. Principal was
due in 60 consecutive payments of $167
thousand beginning December 15, 2004 until
November 15, 2009. The note was
collateralized by substantially all of the
assets of the Company. See Note 5 regarding
loan covenants. This note was consolidated
into the last note in this table on October
15, 2006.
    
    $
    7,900
    
    
    $
    Note payable to a bank, interest at the
greater of (1) the prime rate plus 0.5% or (2)
6.0% (7.75% at December 31, 2005). This was
an $8.0 million term loan. Principal under
this was credit facility was due and payable
in 84 monthly installments of $95 thousand
each, commencing February 1, 2005 and
continuing through December 1, 2011. Interest
on the unpaid principal balance was due and
payable on the same dates as principal
payments. All outstanding principal and
unpaid interest was due on January 1, 2012.
See Note 5 regarding loan covenants. This
note was consolidated into the last note in
this table on October 15, 2006.
    
    
    6,952
    
    
    
    Note payable to a bank, interest at the
greater of (1) the prime rate plus 0.5% or (2)
5.25% (7.75% at December 31, 2005). Interest
only under this credit facility was due and
payable on the 15th day of each month
commencing May 1, 2005 and continuing through
April 30, 2006. Principal under this was
credit facility was due and payable in 59
monthly installments of $167 thousand each,
commencing May 1, 2006 and continuing through
April 1, 2011. See Note 5 regarding loan
covenants. This note was consolidated into
the last note in this table on October 15,
2006.
    
    
    10,000
    
    
    
    Note payable to a bank, interest at a fixed
rate of 7.5%. Principal and interest payment
due and payable on the 1st day of each month
commencing November 1, 2006 and continuing
through September 1, 2011. Principal under
this credit facility is due and payable in 59
monthly installments of $281,500 each. The
note is collateralized by substantially all of
the assets of the Company. See Note 5
regarding loan covenants. This note
consolidated the three previous notes into one
obligation on October 15, 2006.
    
    
    
    
    
    
    16,328Other notes payable for vehicles, various terms
    
    
    53
    
    
    
    64Total
    
    
    24,905
    
    
    
    16,392Less current portion
    
    
    (4,680
    )
    
    
    (3,442
    )Total
    
    $
    20,225
    
    
    $
    12,950
  2007
    
    $
    3,4422008
    
    
    3,3782009
    
    
    3,3782010
    
    
    3,3782011
    
    
    2,816Total
    
    $
    16,392
 F-14




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##### Table of Contents



7. Subordinated Notes
   8. Income Taxes
  2004
    
    
    2005
    
    
    2006Current provision:Federal
    
    $
    
    
    
    $
    91
    
    
    $
    1,475State
    
    
    20
    
    
    
    116
    
    
    
    26820
    
    
    
    207
    
    
    
    1,743Deferred provision:Federal
    
    
    1,029
    
    
    
    2,310
    
    
    
    2,403State
    
    
    91
    
    
    
    98
    
    
    
    1411,120
    
    
    
    2,408
    
    
    
    2,544$
    1,140
    
    
    $
    2,615
    
    
    $
    4,287
  2004
    
    
    2005
    
    
    2006Deferred income tax assets:Net operating loss
    
    $
    2,669
    
    
    $
    984
    
    
    $
    Alternative minimum tax credit
    
    
    
    
    
    
    91
    
    
    
    99Other
    
    
    7
    
    
    
    60
    
    
    
    242Total deferred income tax assets
    
    
    2,676
    
    
    
    1,135
    
    
    
    341Deferred income tax liabilities:Property and equipment
    
    
    (5,483
    )
    
    
    (6,736
    )
    
    
    (8,571
    )Goodwill and other intangible assets
    
    
    (142
    )
    
    
    (1,575
    )
    
    
    (1,508
    )Other
    
    
    (9
    )
    
    
    (71
    )
    
    
    (26
    )Total deferred income tax liabilities
    
    
    (5,634
    )
    
    
    (8,382
    )
    
    
    (10,105
    )Net deferred income tax liabilities
    
    $
    (2,958
    )
    
    $
    (7,247
    )
    
    $
    (9,764
    )
  2004
    
    2005
    
    2006Statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State and local taxes
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Nontaxable life insurance proceeds
    
    
    (12
    )%
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (1
    )%Effective rate
    
    
    25
    %
    
    
    37
    %
    
    
    36
    %
 F-15




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##### Table of Contents



9. Stockholders Equity
 Initial Public Offering
  Secondary Public Offering
  Conversion
  Warrants
  Preferred Stock
  F-16




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##### Table of Contents



Common Stock Private Placement
  10. Stock-Based Compensation
 Stock Options
 Share-Based Payment Share-Based Payment
  F-17




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##### Table of Contents



Accounting for Stock Issued to Employees
 Pro-Forma Stock Compensation Expense for the Year Ended December 31, 2005
  Years EndedDecember 312004
    
    
    2005Net income, as reported
    
    $
    3,374
    
    
    $
    4,446Less preferred dividends
    
    
    53
    
    
    
    Income available to common stockholders
    
    
    3,321
    
    
    
    4,446Compensation expenses regained under Opinion 25
    
    
    
    
    
    
    135Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards (net of tax)
    
    
    (38
    )
    
    
    (295
    )Income available to common stockholders, pro forma
    
    $
    3,283
    
    
    $
    4,286Earnings per common share:Basic, as reported
    
    $
    0.59
    
    
    $
    0.59Basic, pro forma
    
    $
    0.59
    
    
    $
    0.57Diluted, as reported
    
    $
    0.52
    
    
    $
    0.52Diluted, pro forma
    
    $
    0.51
    
    
    $
    0.51Weighted average fair value of options granted during the year
    
    $
    4.75
    
    
    $
    10.37
  Stock Option Plan
   F-18




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##### Table of Contents



2004
    
    2005
    
    2006Weighted average Black-Scholes fair value assumptions:Risk free rate
    
    
    5.25
    %
    
    
    7.25
    %
    
    
    8.25
    %Expected life
    
    10 yrs
    
    10 yrs
    
    4 yrsExpected volatility
    
    
    44.0
    %
    
    
    47.0
    %
    
    
    50.3
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  WeightedNumber
    
    
    Weighted
    
    
    Averageof
    
    
    Average
    
    
    RemainingStock
    
    
    Exercise
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Price
    
    
    Life (years)
    
    
    Intrinsic Value(in thousands)Outstanding, January 1, 2006
    
    
    146,668
    
    
    $
    7.69Granted
    
    
    49,500
    
    
    
    14.12Exercised
    
    
    (8,998
    )
    
    
    6.43Forfeited or expired
    
    
    (13,000
    )
    
    
    7.06Outstanding, December 31, 2006
    
    
    174,170
    
    
    $
    9.63
    
    
    
    8.22
    
    
    $
    744Exercisable, December 31, 2006
    
    
    88,332
    
    
    $
    7.41
    
    
    
    7.15
    
    
    $
    574
   Options Outstanding

    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageContractual
    
    Exercise
    
    
    
    
    
    ExerciseRange of Exercise Prices

    
    Shares
    
    Life (years)
    
    Price
    
    Shares
    
    Price$0.005.58
    
    
    
    42,000
    
    
    
    5.83
    
    
    $
    3.98
    
    
    
    42,000
    
    
    $
    3.985.59  9.43
    
    
    
    72,670
    
    
    
    8.32
    
    
    
    8.83
    
    
    
    36,332
    
    
    
    8.749.44  16.96
    
    
    
    59,500
    
    
    
    9.77
    
    
    
    14.60
    
    
    
    10,000
    
    
    
    16.96$0.00-16.96
    
    
    
    174,170
    
    
    
    8.22
    
    
    $
    9.63
    
    
    
    88,332
    
    
    $
    7.41
 F-19




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##### Table of Contents



Unvested stock options:
    
    Shares
    
    
    Weighted Average Grant Date Fair ValueUnvested at January 1, 2006
    
    
    75,333
    
    
    $
    10.34Granted
    
    
    49,500
    
    
    
    4.75Vested
    
    
    27,328
    
    
    
    9.86Forfeited
    
    
    11,667
    
    
    
    4.25Unvested at December 31, 2006
    
    
    85,838
    
    
    $
    8.10
  11. Commitments
 401(k) Plan
  Rented Facilities
  2007
    
    $
    1292008
    
    
    622009
    
    
    292010
    
    
    292011
    
    
    30Thereafter
    
    
    76Total
    
    $
    355
 12. Other Income
  F-20




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##### Table of Contents



13. Segment Information
 Disclosures About Segments of an Enterprise and Related Information
  For the Year Ended December 31, 2004
 Service &Sales
    
    
    Maintenance
    
    
    Rental
    
    
    Corporate
    
    
    Total(in thousands of dollars)Revenue
    
    $
    3,593
    
    
    $
    1,874
    
    
    $
    10,491
    
    
    $
    
    
    
    $
    15,958Operating costs and expenses
    
    
    2,556
    
    
    
    1,357
    
    
    
    3,038
    
    
    
    5,096
    
    
    
    12,047Operating income
    
    
    1,037
    
    
    
    517
    
    
    
    7,453
    
    
    
    (5,096
    )
    
    
    3,911Other income/(expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    603
    
    
    
    603Income before provision for income
taxes
    
    
    1,037
    
    
    
    517
    
    
    
    7,453
    
    
    
    (4,493
    )
    
    
    4,514*Segment assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    43,255
    
    
    $
    43,255
 For the Year Ended December 31, 2005
 Service &Sales
    
    
    Maintenance
    
    
    Rental
    
    
    Corporate
    
    
    Total(in thousands of dollars)Revenue
    
    $
    30,278
    
    
    $
    2,424
    
    
    $
    16,609
    
    
    $
    
    
    
    $
    49,311Operating costs and expenses
    
    
    23,331
    
    
    
    1,479
    
    
    
    6,528
    
    
    
    9,114
    
    
    
    40,452Operating income
    
    
    6,947
    
    
    
    945
    
    
    
    10,081
    
    
    
    (9,114
    )
    
    
    8,859Other income/(expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,798
    )
    
    
    (1,798
    )Income before provision for income
taxes
    
    
    6,947
    
    
    
    945
    
    
    
    10,081
    
    
    $
    (10,912
    )
    
    
    7,061*Segment assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    86,369
    
    
    $
    86,369
 For the Year Ended December 31, 2006
 Service &Sales
    
    
    Maintenance
    
    
    Rental
    
    
    Corporate
    
    
    Total(in thousands of dollars)Revenue
    
    $
    38,214
    
    
    $
    979
    
    
    $
    23,536
    
    
    $
    
    
    
    $
    62,729Operating costs and expenses
    
    
    29,629
    
    
    
    735
    
    
    
    8,944
    
    
    
    11,290
    
    
    
    50,598Operating income
    
    
    8,585
    
    
    
    244
    
    
    
    14,592
    
    
    
    (11,290
    )
    
    
    12,131Other income/(expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (256
    )
    
    
    (256
    )Income before provision for income
taxes
    
    
    8,585
    
    
    
    244
    
    
    
    14,592
    
    
    
    (11,546
    )
    
    
    11,875*Segment assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    135,552
    
    
    $
    135,552
 
 *
    
    Management does not track assets by segment. 14. Quarterly Financial Data (In thousands, except per share data)  Unaudited
 Q1
    
    
    Q2
    
    
    Q3
    
    
    Q42006
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    TotalNet Revenue
    
    $
    13,578
    
    
    $
    15,458
    
    
    $
    17,130
    
    
    $
    16,563
    
    
    $
    62,729Operating income
    
    
    3,053
    
    
    
    1,912
    
    
    
    3,690
    
    
    
    3,476
    
    
    
    12,131Net income applicable to common
shares
    
    
    1,696
    
    
    
    1,208
    
    
    
    2,364
    
    
    
    2,320
    
    
    
    7,588Net income per share - Basic
    
    
    0.18
    
    
    
    0.10
    
    
    
    0.20
    
    
    
    0.19
    
    
    
    0.67Net income per share - Diluted
    
    
    0.17
    
    
    
    0.10
    
    
    
    0.20
    
    
    
    0.19
    
    
    
    0.66
 Q1
    
    
    Q2
    
    
    Q3
    
    
    Q42005
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    TotalNet Revenue
    
    $
    11,041
    
    
    $
    12,031
    
    
    $
    12,460
    
    
    $
    13,779
    
    
    $
    49,311Operating income
    
    
    1,837
    
    
    
    2,200
    
    
    
    2,207
    
    
    
    2,615
    
    
    
    8,859Net income applicable to common
shares
    
    
    898
    
    
    
    1,070
    
    
    
    1,091
    
    
    
    1,387
    
    
    
    4,446Net income per share - Basic
    
    
    0.13
    
    
    
    0.16
    
    
    
    0.14
    
    
    
    0.15
    
    
    
    0.59Net income per share - Diluted
    
    
    0.11
    
    
    
    0.13
    
    
    
    0.12
    
    
    
    0.15
    
    
    
    0.52
 F-21




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##### Table of Contents



(a)
    
    Exhibits
  Exhibit No.
    
    Description3.1
    
    Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10QSB
filed and dated November 10, 2004)3.2
    
    Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrants Registration Statement
on Form SB-2, No. 333-88314)4.1
    
    Form of warrant certificate (Incorporated by reference to Exhibit 4.1 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)4.2
    
    Form of warrant agent agreement (Incorporated by reference to Exhibit 4.2 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)4.3
    
    Form of representatives option for the purchase of common stock (Incorporated by reference
to Exhibit 4.4 of the Registrants Registration Statement on Form SB-2, No. 333-88314)4.4
    
    Form of representatives option for the purchase of warrants (Incorporated by reference to
Exhibit 4.5 of the Registrants Registration Statement on Form SB-2, No. 333-88314)4.5
    
    Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the
Registrants From 8-K Report, dated January 3, 2005, as filed with the Securities and Exchange
Commission on January 7, 2005)Executive Compensation Plans and Arrangements (Exhibits 10.1,
10.14, 10.15, 10.16, 10.23, 10.24, 10.26 and 10.27).10.1
    
    1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated June 20, 2006 on file with the SEC June 26, 2006)10.2
    
    Form of Series A 10% Subordinated Notes due December 31, 2006 (Incorporated by reference to
Exhibit 10.8 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.3
    
    Form of Five-Year Warrants to Purchase Common Stock (Incorporated by reference to Exhibit
10.9 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.4
    
    Warrants issued to Berry-Shino Securities, Inc. (Incorporated by reference to Exhibit 10.10
of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.5
    
    Warrants issued to Neidiger, Tucker, Bruner, Inc. (Incorporated by reference to Exhibit
10.11 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.6
    
    Form of warrant issued in March 2001 for guaranteeing debt (Incorporated by reference to
Exhibit 10.12 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.7
    
    Form of warrant issued in April 2002 for guaranteeing debt (Incorporated by reference to
Exhibit10.13 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.8
    
    First Amended and Restated Loan Agreement between the Registrant and Western National Bank
(Incorporated by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K,
dated March 27, 2003 and filed with the Securities and Exchange Commission on April 14, 2003)




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Exhibit No.
    
    Description10.9
    
    Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas
(Incorporated by reference to Exhibit 10.19 of the Registrants Form 10-QSB for the fiscal
quarter ended June 30, 2004)10.10
    
    Second Amended and Restated Loan Agreement, dated November 3, 2003, between the Registrant
and Western National Bank (Incorporated by reference to Exhibit 10.20 of the Registrants Form
10-QSB for the fiscal quarter ended June 30, 2004)10.11
    
    Securities Purchase Agreement, dated July 20, 2004, between the Registrant and CBarney
Investments, Ltd. (Incorporated by reference to Exhibit 4.1 of the Registrants Current
Report on Form 8-K dated July 20, 2004 and filed with the Securities and Exchange Commission
on July 27, 2004)10.12
    
    Stock Purchase Agreement, dated October 18, 2004, by and among the Registrant, Screw
Compression Systems, Inc., Paul D. Hensley, Jim Hazlett and Tony Vohjesus (Incorporated by
reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K dated October 18, 2004
and filed with the Securities and Exchange Commission on October 21, 2004)10.13
    
    Third Amended and Restated Loan Agreement, dated as of January 3, 2005, among Natural Gas
Services Group, Inc., Screw Compression Systems, Inc. and Western National Bank (Incorporated
by reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K, dated January 3,
2005, and filed with the Securities and Exchange Commission on January 7, 2005)10.14
    
    Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated January
3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005)10.15
    
    Employment Agreement between William R. Larkin and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.25 of the Registrants Form 10-KSB for the fiscal
year ended December 31, 2004, and filed with the Securities and Exchange Commission on March
30, 2005)10.16
    
    Promissory Note, dated January 3, 2005, in the original principal amount of $2.1 million
made by Natural Gas Services Group, Inc. payable to Paul D. Hensley (Incorporated by
reference to Exhibit 10.26 of the Registrants Form 10-KSB for the fiscal year ended December
31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)10.17
    
    Fourth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K, dated March 14, 2005, and filed with the Securities
and Exchange Commission on March 18, 2005)10.18
    
    Modification Agreement, dated as of January 3, 2005, by and between Natural Gas Services
Group, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)10.19
    
    Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Service Group, Inc.,
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)10.20
    
    Guaranty Agreement, dated as of January 3, 2005, made by Screw Compression Systems, Inc.,
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities
and Exchange Commission on January 7, 2005)




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Exhibit No.
    
    Description10.21
    
    Fifth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.2 of the
Registrants Form 8-K dated January 3, 2006 and filed with the Securities and Exchange
Commission January 6, 2006)10.22
    
    First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by reference
Exhibit 10.1 of the Registrants Form 8-K dated May 1, 2005 and filed with Securities and
Exchange Commission May 13, 2005)10.23
    
    Employment Agreement between Stephen C. Taylor and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated August
24, 2005, and filed with the Securities and Exchange Commission on August 30, 2005)10.24
    
    Employment Agreement between James R. Hazlett and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated June 14,
2005, and filed with the Securities and Exchange Commission on November 14, 2005)10.25
    
    Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim
Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the
Registrants Form 8-K Report, dated January 3, 2005, and filed with the Securities and
Exchange Commission on January 7, 2005)10.26
    
    Promissory Note, dated January 3, 2005, in the original principal amount of $300 thousand
made by Natural Gas Services Group, Inc. payable to Jim Hazlett (Incorporated by reference to
Exhibit 10.3 of the Registrants Form 8-K Report, dated June 14, 2005, and filed with the
Securities and Exchange Commission on November 14, 2005)10.27
    
    Retirement Agreement, dated December 14, 2005, between Wallace C. Sparkman and Natural Gas
Services Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K
Report, dated December 14, 2005, and filed with the Securities and Exchange Commission on
December 15, 2005)10.28
    
    Sixth Amended and Restated Loan Agreement, dated as of January 3, 2006 (Incorporated by
reference to Exhibit 10.3 of the Registrants Current Report on Form 8-K, dated January 3,
2006, and filed with the Securities and Exchange Commission on January 6, 2006)10.29
    
    Guaranty Agreement, dated as of January 3, 2006, and made by Screw Compression Systems, Inc.
for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K, dated January 3, 2006, and filed with the Securities
and Exchange Commission on January 6, 2006)10.30
    
    Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of
the Registrants Form 8-K dated October 26, 2006 and filed with the Securities and Exchange
Commission on November 1, 200614.0
    
    Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrants Form 10-KSB for
the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission
on March 30, 2005)21.0
    
    Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrants Form 10-KSB for
the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission
on March 30, 2005)




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##### Table of Contents



Exhibit No.
    
    Description*23.1
    
    Consent of Hein & Associates LLP*31.1
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002*32.2
    
    Certification required by Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.