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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, 2005
 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2911 South County Road 1260Midland, Texas
    
    79706(Address of Principal Executive Offices
    
    (Zip Code)
   
   o þ
  o þ
  þ o
 o
  Large Accelerated Filer     o
    
    Accelerated Filer     o
    
    Non-Accelerated Filer     þ
  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 Stockholders Matters
and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    19Item 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
    
    
    32Item 9.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    32Item 9A.
    
    Controls and Procedures
    
    
    32Item 9B.
    
    Other Information
    
    
    32PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    33Item 11.
    
    Executive Compensation
    
    
    38Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    44Item 13.
    
    Certain Relationships and Related Transactions
    
    
    46Item 14.
    
    Principal Accountant Fees and Services
    
    
    48PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    E-1Consent of Hein & Associates LLPCertification of CEO Required by Section 302Certification of CFO Required by Section 302Certification of CEO Required by Section 906Certification of CFO Required by Section 906
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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
         1




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http://www.ngsgi.com
 Recent Developments
  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.
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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.
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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 30% to 40% by the end of 2006. We believe our growth will continue to be primarily
driven through our placement of small to medium horsepower wellhead gas compressors for
non-conventional 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, 2005, we had 820 natural gas compressors rented to third parties.
    
    Operational expansion.With the planned increase in our rental fleet, we
intend to expand our operations in existing areas, as well as pursue focused expansion
into new geographic regions. We have recently entered new markets in Appalachia and the
Rocky Mountains.
    
    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.
    
    Selectively pursue acquisitions.We intend 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 three 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.
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
    
    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.
 Major Customers
  Sales and Marketing
  Competition
   Backlog
  5




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Employees
  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.
  6




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
    
    the prevention of discharges, including oil and produced water spills, and
    
    liability for drainage into waters.
   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.
   
    
    issuance of administrative, civil and criminal penalties;
    
    denial or revocation of permits or other authorizations;
    
    reduction or cessation in operations; and
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
    
    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.
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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.
  If we fail to acquire or successfully integrate additional businesses, our growth may be limited
and our results of operations may suffer.
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As of December 31, 2005, 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.
It is likely that we will not continue to receive the same level of revenues we have received in
the past from one of our customers.
  Loss of key members of our management could adversely affect our business.
  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;
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
    
    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.
   
    
    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.
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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 which you 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.
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If we issue debt or equity securities, you may lose certain rights and be diluted.
  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
  Location
    
    Status
    

Square 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
    
    
    HighYear EndedDecember 31, 2003First Quarter
    
    $
    3.70
    
    
    $
    4.30Second Quarter
    
    
    3.65
    
    
    
    7.25Third Quarter
    
    
    5.45
    
    
    
    6.75Fourth Quarter
    
    
    5.25
    
    
    
    6.24
 Year EndedDecember 31, 2004First Quarter
    
    $
    5.41
    
    
    $
    7.20Second Quarter
    
    
    7.20
    
    
    
    10.04Third Quarter
    
    
    7.12
    
    
    
    9.45Fourth Quarter
    
    
    8.07
    
    
    
    9.43
 Year EndedDecember 31, 2005First Quarter
    
    $
    9.08
    
    
    $
    11.11Second Quarter
    
    
    9.51
    
    
    
    11.85Third Quarter
    
    
    11.55
    
    
    
    36.00Fourth Quarter
    
    
    15.67
    
    
    
    39.99
  Dividends
  
    
    financial condition,
    
    results of operations,
    
    current and anticipated cash requirements,
    
    plans for expansion,
    
    restrictions, under our debt obligations,
 17




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Sales of Unregistered Securities during the Year Ended December 31, 2005
   Equity Compensation Plans
  Number of SecuritiesRemaining AvailableNumber of
    
    
    
    
    
    for Future IssuanceSecurities to be
    
    
    
    
    
    Under EquityIssued Upon
    
    Weighted-average
    
    Compensation PlansExercise of
    
    Exercise Price of
    
    (ExcludingOutstanding
    
    Outstanding
    
    SecuritiesOptions, Warrants
    
    Options, Warrants
    
    Reflected in ColumnPlan Category
    
    and Rights
    
    and Rights
    
    (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    101,668
    
    
    $
    7.01
    
    
    
    9,500Equity compensation
plans not approved
by security holders
    
    
    99,028
    
    
    $
    5.61
    
    
    
    Total
    
    
    200,696
    
    
    $
    6.32
    
    
    
    9,500
 Repurchase of Equity Securities
  18




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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(1)(in thousands, except per share amounts)CONSOLIDATED STATEMENTS OF
INCOME AND OTHER INFORMATION:Revenues
    
    $
    8,762
    
    
    $
    10,297
    
    
    $
    12,750
    
    
    $
    15,958
    
    
    $
    49,311Costs of revenue, exclusive of depreciation
shown separately below
    
    
    4,942
    
    
    
    5,572
    
    
    
    6,057
    
    
    
    6,951
    
    
    
    31,338Gross profit
    
    
    3,820
    
    
    
    4,725
    
    
    
    6,693
    
    
    
    9,007
    
    
    
    17,973Depreciation and amortization
    
    
    901
    
    
    
    1,166
    
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224Other operating expenses
    
    
    1,720
    
    
    
    1,718
    
    
    
    2,292
    
    
    
    2,652
    
    
    
    4,890Operating income
    
    
    1,199
    
    
    
    1,841
    
    
    
    2,675
    
    
    
    3,911
    
    
    
    8,859Total other income (expense)(2)
    
    
    (503
    )
    
    
    (471
    )
    
    
    (671
    )
    
    
    603
    
    
    
    (1,798
    )Income before income taxes
    
    
    696
    
    
    
    1,370
    
    
    
    2,004
    
    
    
    4,514
    
    
    
    7,061Income tax expense
    
    
    314
    
    
    
    584
    
    
    
    697
    
    
    
    1,140
    
    
    
    2,615Net income
    
    
    382
    
    
    
    786
    
    
    
    1,307
    
    
    
    3,374
    
    
    
    4,446Preferred dividends
    
    
    11
    
    
    
    107
    
    
    
    121
    
    
    
    53
    
    
    
    Net income available to common stockholders
    
    $
    371
    
    
    $
    679
    
    
    $
    1,186
    
    
    $
    3,321
    
    
    $
    4,446Net income per common share:Basic
    
    $
    0.11
    
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.59Diluted
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.52Weighted average shares of common stock
outstanding:Basic
    
    
    3,358
    
    
    
    3,649
    
    
    
    4,947
    
    
    
    5,591
    
    
    
    7,564Diluted
    
    
    3,484
    
    
    
    4,305
    
    
    
    5,253
    
    
    
    6,383
    
    
    
    8,481EBITDA(3)
    
    $
    2,523
    
    
    $
    3,511
    
    
    $
    4,397
    
    
    $
    7,796
    
    
    $
    13,282
 As of December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(in thousands)BALANCE SHEET INFORMATION:Current assets
    
    $
    3,248
    
    
    $
    5,084
    
    
    $
    3,654
    
    
    $
    7,295
    
    
    $
    24,642Total assets
    
    
    18,810
    
    
    
    23,937
    
    
    
    28,270
    
    
    
    43,255
    
    
    
    86,369Long-term debt (including current portion)
    
    
    10,009
    
    
    
    8,847
    
    
    
    10,724
    
    
    
    15,017
    
    
    
    28,205Stockholders equity
    
    
    5,781
    
    
    
    13,001
    
    
    
    14,425
    
    
    
    22,903
    
    
    
    45,690
 
 (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 and Related Transactions 
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 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, 19




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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: 
    
    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 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(in thousands)EBITDA
    
    $
    2,523
    
    
    $
    3,511
    
    
    $
    4,397
    
    
    $
    7,796
    
    
    $
    13,282Depreciation and amortization
    
    
    903
    
    
    
    1,166
    
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224Interest expense, net
    
    
    924
    
    
    
    975
    
    
    
    667
    
    
    
    838
    
    
    
    1,997Income taxes
    
    
    314
    
    
    
    584
    
    
    
    697
    
    
    
    1,140
    
    
    
    2,615Net Income
    
    $
    382
    
    
    $
    786
    
    
    $
    1,307
    
    
    $
    3,374
    
    
    $
    4,446
 
 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(in thousands)Sales
    
    $
    4,336
    
    
    $
    3,865
    
    
    $
    3,593
    
    
    $
    30,278Service and maintenance
    
    
    1,563
    
    
    
    1,773
    
    
    
    1,874
    
    
    
    2,424Rental
    
    
    4,398
    
    
    
    7,112
    
    
    
    10,491
    
    
    
    16,609Total
    
    $
    10,297
    
    
    $
    12,750
    
    
    $
    15,958
    
    
    $
    49,311
    21




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##### Table of Contents



Results of Operations
 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
    %
  22




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##### Table of Contents



23




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##### Table of Contents



Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
  Revenue
    
    
    Gross Profit, exclusive of depreciationYear Ended December 31,
    
    
    Year Ended December 31,2003
    
    
    2004
    
    
    2003
    
    
    2004(dollars in thousands)Sales
    
    $
    3,865
    
    
    
    30
    %
    
    $
    3,593
    
    
    
    23
    %
    
    $
    1,005
    
    
    
    26
    %
    
    $
    1,037
    
    
    
    29
    %Service and maintenance
    
    
    1,773
    
    
    
    14
    %
    
    
    1,874
    
    
    
    11
    %
    
    
    530
    
    
    
    30
    %
    
    
    517
    
    
    
    28
    %Rental
    
    
    7,112
    
    
    
    56
    %
    
    
    10,491
    
    
    
    66
    %
    
    
    5,158
    
    
    
    73
    %
    
    
    7,453
    
    
    
    71
    %Total
    
    $
    12,750
    
    
    
    
    
    
    $
    15,958
    
    
    
    
    
    
    $
    6,693
    
    
    
    53
    %
    
    $
    9,007
    
    
    
    56
    %
          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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##### Table of Contents



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
  Recently Issued Accounting Pronouncements
 Share-Based
Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees
 26




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##### Table of Contents



Inventory Costs  an Amendment of ARB No. 43,
Chapter 4
 Environmental Regulations
  Liquidity and Capital Resources
     27




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##### Table of Contents



Contractual Obligations and Commitments
  Obligation Due in PeriodCash Contractual Obligations
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    Total(in thousands)Credit facility (secured)
    
    $
    4,980
    
    
    $
    5,143
    
    
    $
    5,143
    
    
    $
    5,043
    
    
    $
    3,143
    
    
    $
    1,753
    
    
    $
    25,205Interest on credit facility
    
    
    1,772
    
    
    
    1,391
    
    
    
    993
    
    
    
    598
    
    
    
    281
    
    
    
    97
    
    
    
    5,132Subordinated debt
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000Facilities and office leases
    
    
    146
    
    
    
    129
    
    
    
    62
    
    
    
    29
    
    
    
    29
    
    
    
    106
    
    
    
    501Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    7,898
    
    
    $
    7,663
    
    
    $
    7,198
    
    
    $
    5,670
    
    
    $
    3,453
    
    
    $
    1,956
    
    
    $
    33,838
 Senior Bank Borrowings
  Revolving Line of Credit Facility.
 28




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##### Table of Contents



$10.0 Million Multiple Advance Term Loan Facility. th
 Advancing Line of Credit Facility. th th
 $8.0 Million Term Loan.
     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 $14.5 million;
    
    at the end of each fiscal quarter, a debt service coverage ratio (as defined
in the Loan Agreement) of at least 1.25 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 1.5 to
1.0.
   Subordinated Debt and Related Letters of Credit
   Components of Our Principal Capital Expenditures
  Actual
    
    
    Budgeted 2006Expenditure Category
    
    2003
    
    
    2004
    
    
    2005
    
    
    (excluding acquisitions)(in thousands)Rental equipment, vehicles and
shop equipment
    
    $
    7,882
    
    
    $
    11,596
    
    
    $
    17,708
    
    
    $
    27,000 to $32,000
 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
  31




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  32




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Executive Officers and Directors
  Name
    
    Age
    
    PositionStephen C. Taylor
    
    52
    
    Chairman, President and Chief Executive OfficerEarl R. Wait
    
    62
    
    Vice President  Accounting and TreasurerPaul D. Hensley
    
    53
    
    Director, President of SCSS. Craig Rogers
    
    43
    
    Vice President  OperationsWilliam R. Larkin
    
    40
    
    Vice President  Sales and MarketingJames R. Hazlett
    
    50
    
    Vice President  Technical ServicesRonald D. Bingham
    
    61
    
    Vice President  Northern OperationsScott W. Sparkman
    
    44
    
    Secretary and Assistant TreasurerCharles G. Curtis(1)(2)(3)
    
    72
    
    DirectorWilliam F. Hughes, Jr.(1)(2)(3)
    
    53
    
    DirectorGene A. Strasheim(1)(2)(3)
    
    65
    
    DirectorRichard L. Yadon(1)(2)(3)
    
    47
    
    DirectorAlan A. Baker
    
    74
    
    Director
 
 (1)
    
    Member of our audit committee(2)
    
    Member of our compensation committee(3)
    
    Member of our nominating committee   33




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34




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##### Table of Contents



Board of Directors
  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
  35




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##### Table of Contents




    
    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.
  Governance, Personnel Development and 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;
    
    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.
  36




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##### Table of Contents



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.
  37




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Executive Compensation
  Summary Compensation Table
 Long-Term CompensationAwardsAnnual Compensation
    
    Restricted
    
    Securities
    
    All OtherBonus
    
    Stock
    
    Underlying
    
    CompensationName and Principal Position
    
    Year
    
    Salary ($)
    
    ($)
    
    Awards($)
    
    Options/SARS (#)
    
    ($)(1)Stephen C. Taylor
    
    
    2005
    (2)
    
    
    149,462
    
    
    
    69,750
    
    
    
    
    
    
    
    45,000
    
    
    
    3,726Chairman, President
and Chief Executive
OfficerWallace C. Sparkman
    
    
    2005
    
    
    
    121,027
    (3)
    
    
    44,000
    
    
    
    
    
    
    
    
    
    
    
    Former Director,
    
    
    2004
    
    
    
    120,000
    
    
    
    53,500
    
    
    
    
    
    
    
    
    
    
    
    Chairman and Chief
Executive OfficerPaul D. Hensley
    
    
    2005
    (4)
    
    
    129,681
    
    
    
    50,680
    
    
    
    
    
    
    
    
    
    
    
    6,772Director, President of
SCSEarl R. Wait
    
    
    2005
    
    
    
    94,720
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    4,326Vice
President 
    
    
    2004
    
    
    
    90,000
    
    
    
    40,250
    
    
    
    
    
    
    
    
    
    
    
    6,135Accounting
    
    
    2003
    
    
    
    90,000
    
    
    
    41,256
    
    
    
    
    
    
    
    
    
    
    
    3,600James R. Hazlett
    
    
    2005
    (5)
    
    
    105,000
    
    
    
    36,750
    
    
    
    
    
    
    
    
    
    
    
    Vice
President 
Technical ServicesS. Craig Rogers
    
    
    2005
    
    
    
    98,764
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    4,270Vice
President 
    
    
    2004
    
    
    
    95,000
    
    
    
    42,750
    
    
    
    
    
    
    
    
    
    
    
    3,980Operations
    
    
    2003
    
    
    
    88,500
    
    
    
    37,669
    
    
    
    
    
    
    
    
    
    
    
    3,444
 
 (1)
    
    The amounts shown represent voluntary contributions made by Natural Gas Services Group to
the 401(k) Plan in which all employees are generally eligible to participate.(2)
    
    Mr. Taylor was first employed by us on January 13, 2005.(3)
    
    On January 1, 2004, we employed Mr. Sparkman as our Director of Investor Relations. He served
in this capacity until March 2004 when he was elected to serve as interim President and Chief
Executive Officer following the death of Mr. Vinson. The salary paid to Mr. Sparkman during
2004 was paid under an oral arrangement between Mr. Sparkman and us. As a result of Mr.
Taylors employment by us and the increase in his responsibilities following his employment,
Mr. Sparkmans annual salary was reduced to $110,000 in August 2005. Mr. Sparkman retired
from his employment with us and as Chairman effective as of December 31, 2005.(4)
    
    When we acquired SCS on January 3, 2005, Mr. Hensley retained and has continued in his
position as President of SCS.(5)
    
    Mr. Hazlett became an executive officer in June 2005. 38




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##### Table of Contents



Bonus Program
  Option Grants in Last Fiscal Year
   Potential RealizableIndividual Grants
    
    
    
    
    
    Value at AssumedNumber of
    
    Percent of Total
    
    
    
    
    
    
    
    
    
    Annual Rates ofSecurities
    
    Options/SARs
    
    
    
    
    
    
    
    
    
    Stock PriceUnderlying
    
    Granted to
    
    Exercise or
    
    
    
    
    
    Appreciation forOptions/Sars
    
    Employees in
    
    Base Price
    
    Expiration
    
    Option Term(1)Name
    
    Granted (#)
    
    Fiscal Year
    
    ($/Sh)
    
    Date
    
    5%($)
    
    10%($)Stephen C.
Taylor
    
    
    45,000
    (2)
    
    
    100
    %
    
    
    9.22
    
    
    August 24, 2015
    
    
    260,929
    
    
    
    661,244
 
 (1)
    
    These amounts are calculated based on the indicated annual rates of appreciation and
annual compounding from the date of grant to the end of the option term. Actual gains, if any,
on stock option exercises are dependent on the future performance of the common stock and
overall stock market conditions. There is no assurance that the amounts reflected in this
table will be achieved.(2)
    
    A nonstatutory stock option to purchase 45,000 shares of common stock was granted to Mr.
Taylor on August 24, 2005. The option is exercisable in three equal annual installments,
commencing on January 13, 2006. For additional information about the stock option granted to
Mr. Taylor and our compensation agreement with him, you should
refer to Compensation
Agreements with Management below. 39




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##### Table of Contents



Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
  Number of Unexercised
    
    Value of UnexercisedShares
    
    
    
    
    
    Securities Underlying
    
    In-the-MoneyAcquired
    
    
    
    
    
    Options/SARs at
    
    Options/SARS atOn
    
    Value
    
    Fiscal Year End
    
    Fiscal Year End ($)(2)Name
    
    Exercise
    
    Realized($)(1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableStephen C. Taylor
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    348,300Wallace C. Sparkman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paul D. Hensley
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earl R. Wait
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    205,650
    
    
    
    James R. Hazlett
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    S. Craig Rogers
    
    
    
    
    
    
    
    
    
    
    12,000
    
    
    
    
    
    
    
    164,520
    
    
    
    
 
 (1)
    
    The value realized is equal to the fair market value of a share of common stock on the
date of exercise, less the exercise price of the stock options exercised.(2)
    
    The value of in-the-money options is equal to the fair market value of a share of common
stock at fiscal year-end ($16.96 per share), based on the closing price of the common stock,
less the exercise price. 40




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##### Table of Contents



Compensation of Directors
  1998 Stock Option Plan
  Compensation Agreements with Management
   41




---



##### Table of Contents



42




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##### Table of Contents



Limitations on Directors and Officers Liability
       43




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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
    
    Class(1)Charles G. Curtis
    
    
    83,000
    (2)
    
    
    *William F. Hughes
    
    
    199,500
    (3)
    
    
    1.67
    %Gene A. Strasheim
    
    
    8,500
    (4)
    
    
    
    *Stephen C. Taylor
    
    
    15,000
    (5)
    
    
    
    *Richard L. Yadon
    
    
    276,683
    (6)
    
    
    2.32
    %Paul D. Hensley
    
    
    326,829
    (7)
    
    
    2.74
    %Alan A. Baker
    
    
    
    (8)
    
    
    Ronald D. Bingham
    
    
    4,000
    (9)
    
    
    
    *William R. Larkin
    
    
    
    (10)
    
    
    S. Craig Rogers
    
    
    14,125
    (11)
    
    
    
    *Earl R. Wait
    
    
    45,520
    (12)
    
    
    
    *James R. Hazlett
    
    
    50,976
    (13)
    
    
    
    *Scott W. Sparkman
    
    
    466,134
    (14)
    
    
    3.90
    %All directors and executive officers as a
group (13 persons)
    
    
    1,490,267
    (15)
    
    
    12.34
    %
 
 *
    
    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 30, 2006 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.(2)
    
    Includes 40,000 shares that may be acquired upon the exercise of warrants and 10,000
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 7,500 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. 44




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##### Table of Contents



(4)
    
    Includes 5,000 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.(5)
    
    Includes 15,000 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 14,683 shares that may be acquired upon the exercise of warrants and 7,500
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)
    
    Mr. Bakers address is 2702 Briar Knoll Ct., Sugar Land, Texas 77479.(9)
    
    Includes 4,000 shares that may be acquired upon the exercise of a stock option granted
under our 1998 Stock Option Plan. Mr. Binghams address is 3690 County Road 491, Lewiston,
Michigan 49756.(10)
    
    Mr. Larkins address is 2911 South County Road 1260, Midland, Texas 79706.(11)
    
    Includes 12,000 shares that may be acquired upon the exercise of a stock option granted
under our 1998 Stock Option Plan. Mr. Rogers address is 2911 South County Road 1260,
Midland, Texas 79706.(12)
    
    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.(13)
    
    Mr. Hazletts address is 2911 South County Road 1260, Midland, Texas 79706.(14)
    
    Includes 167 shares indirectly owned by Mr. Sparkman through our 401(k) Plan; 21,467
shares that may be acquired upon the exercise of warrants; 1,000 shares that may be acquired
upon the exercise of a stock option granted under our 1998 Stock Option Plan; and 425,000
shares held in the Diamond SDGT Trust, a trust for which Mr. Sparkman is sole trustee and a
co-beneficiary with his sister. Mr. Sparkmans address is 2911 South County Road 1260,
Midland, Texas 79706.(15)
    
    Includes 77,000 shares of common stock that may be acquired upon the exercise of stock
options and 76,150 shares that may be acquired upon the exercise of warrants to purchase
common stock. Section 16(a) Beneficial Ownership Reporting Compliance
     45




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 Acquisition of Screw Compression Systems, Inc.
     46




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##### Table of Contents



Guarantees of Indebtedness
  Number of Shares
    
    Amount of DebtName
    
    Underlying Warrants
    
    GuaranteedWallace O. Sellers(1)
    
    
    21,936
    
    
    $
    548,399Wallace C. Sparkman
    
    
    21,467
    (2)
    
    $
    536,671CAV-RDV, Ltd.(3)
    
    
    15,756
    
    
    $
    393,902Richard L. Yadon
    
    
    9,365
    
    
    $
    234,121
 
 (1)
    
    Mr. Sellers served as a Director from December 1998 until June 2005 after
declining to stand for re-election at the 2005 annual meeting of stockholders because of
health reasons.(2)
    
    Mr. Sparkman transferred such warrants to Diamond S DGT Trust, a trust of which
Scott W. Sparkman is the trustee and a beneficiary. Mr. Sparkman has represented to us
that he has no beneficial interest in Diamond S DGT Trust.(3)
    
    CAV-RDV, Ltd. is a limited partnership that was controlled by Wayne L. Vinson,
our former President and Chief Executive Officer.   Number of Shares
    
    Amount of DebtName
    
    Underlying Warrants
    
    GuaranteedWallace O. Sellers
    
    
    9,032
    
    
    $
    451,601CAV-RDV, Ltd.
    
    
    2,122
    
    
    $
    106,098Richard L. Yadon
    
    
    5,318
    
    
    $
    265,879
   Consulting Fees
  47




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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
 48




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
         Exhibit No.
    
    Description2.1
    
    Purchase and Sale Agreement by and between Hy-Bon Engineering Company, Inc. and NGE
Leasing, Inc. (Incorporated by reference to Exhibit 2.1 of the Registrants
Current Report on Form 8-K dated February 28, 2003 and filed with the Securities and
Exchange Commission on March 6, 2003)3.1
    
    Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of
the Registrants 10-QSB dated November 10, 2004 and filed with the Securities and
Exchange Commission on 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 lock-up agreement (Incorporated by reference to Exhibit 4.3 of the
Registrants Registration Statement on Form SB-2, No. 333-88314)4.4
    
    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)4.5
    
    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)10.1
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Registration Statement on Form SB-2, No. 333-88314)10.2
    
    Asset Purchase Agreement, dated January 1, 2001, between the Registrant and Great
Lakes Compression, Inc. (Incorporated by reference to Exhibit 10.2 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)
 E-1




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##### Table of Contents



Exhibit No.
    
    Description10.3
    
    Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(c)(4), 13(d)(1), 13(d)(2) and 13(d)(3) to
Asset Purchase Agreement, dated January 1, 2001, between the Registrant and Great Lakes
Compression, Inc. (Incorporated by reference to Exhibit 10.14 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)10.4
    
    Amendment to Guaranty Agreement between Natural Gas Services Group, Inc. and
Dominion Michigan Production Services, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Registration Statement on Form SB-2, No. 333-88314)10.5
    
    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)10.6
    
    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)10.7
    
    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)10.8
    
    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)10.9
    
    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)10.10
    
    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)10.11
    
    Articles of Organization of Hy-Bon Rotary Compression, L.L.C., dated April 17,
2000 (Incorporated by reference to Exhibit 10.18 of the Registrants Registration
Statement on Form SB-2, No. 333-88314)10.12
    
    Regulations of Hy-Bon Rotary Compression, L.L.C. (Incorporated by reference to
Exhibit 10.19 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.13
    
    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)10.14
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Alan Kurus (Incorporated by reference to Exhibit 10.25 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)10.15
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Wayne Vinson (Incorporated by reference to Exhibit 10.26 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)
 E-2




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##### Table of Contents



Exhibit No.
    
    Description10.16
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Earl Wait (Incorporated by reference to Exhibit 10.27 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)10.17
    
    Triple Net Lease Agreement, dated June 1, 2003, between NGE Leasing, Inc. and
Steven J. & Katherina L. Winer (Incorporated by reference to Exhibit 10.17 of the
Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003)10.18
    
    Lease Agreement, dated June 19, 2003, between NGE Leasing, Inc. and Wise
Commercial Properties (Incorporated by reference to Exhibit 10.18 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003)10.19
    
    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)10.20
    
    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)10.21
    
    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)10.22
    
    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)10.23
    
    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)10.24
    
    Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated
January 3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005)10.25
    
    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)10.26
    
    Promissory Note, dated January 3, 2005 in the original principal amount of
$2,100,000.00 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)
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##### Table of Contents



Exhibit No.
    
    Description10.27
    
    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)10.28
    
    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)10.29
    
    Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Services
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)10.30
    
    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)10.31
    
    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 on January 6, 2006)10.32
    
    First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K, dated May 1, 2005 and filed with
the Securities and Exchange Commission on May 13, 2005)10.33
    
    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)10.34
    
    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)10.35
    
    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)10.36
    
    Promissory Note, dated January 3, 2005, in the original principal amount of
$300,000 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)10.37
    
    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)10.38
    
    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)
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##### Table of Contents



Exhibit No.
    
    Description10.39
    
    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)14.0
    
    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)*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-5




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##### Table of Contents



SIGNATURES
  Date:  March 30, 2006
    
    NATURAL GAS SERVICES GROUP, INC./s/ Stephen C. TaylorStephen C. Taylor, Chairman of the Board, President and Chief Executive Officer (Principal
Executive 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 30, 2006/s/ Earl R. Wait

Earl R. Wait
    
    Vice President 
Accounting (Principal
Financial Officer)
    
    March 30, 2006/s/ Charles G. Curtis

Charles G. Curtis
    
    Director
    
    March 30, 2006/s/ William F. Hughes, Jr.

William F. Hughes, Jr.
    
    Director
    
    March 30, 2006/s/ Richard L. Yadon

Richard L. Yadon
    
    Director
    
    March 30, 2006/s/ Paul D. Hensley

Paul D. Hensley
    
    Director
    
    March 30, 2006/s/ Gene A. Strasheim

Gene A. Strasheim
    
    Director
    
    March 30, 2006Alan A. Baker
    
    Director
    
    March ___, 2006




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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, 2004 and 2005
    
    F-3Consolidated Statements of Income for the Years Ended December 31, 2003, 2004 and 2005
    
    F-4Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2003, 2004, and 2005
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  December 31,2004
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    685
    
    
    $
    3,271Trade accounts receivable, net of doubtful accounts of $25 and $75, respectively
    
    
    1,999
    
    
    
    6,192Inventory, net of allowance for obsolescence of $-0- and $361, respectively
    
    
    4,470
    
    
    
    14,723Prepaid expenses and other
    
    
    141
    
    
    
    456Total current assets
    
    
    7,295
    
    
    
    24,642Rental equipment,net of accumulated depreciation of $4,827 and $7,598,
respectively
    
    
    27,734
    
    
    
    41,201Property and equipment,net of accumulated depreciation of $1,446 and $2,458,
respectively
    
    
    3,134
    
    
    
    6,424Goodwill,net of accumulated amortization of $325
    
    
    2,590
    
    
    
    10,039Intangibles, net of accumulated amortization of $165 and $326, respectively
    
    
    86
    
    
    
    3,978Restricted cash
    
    
    2,000
    
    
    
    Other assets
    
    
    416
    
    
    
    85Total assets
    
    $
    43,255
    
    
    $
    86,369LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term debt
    
    $
    3,728
    
    
    $
    5,680Line of credit
    
    
    550
    
    
    
    300Accounts payable and accrued liabilities
    
    
    2,355
    
    
    
    5,124Deferred income
    
    
    22
    
    
    
    103Total current liabilities
    
    
    6,655
    
    
    
    11,207Long term debt, less current portion
    
    
    9,290
    
    
    
    20,225Subordinated notes, net of discount of $90 and $-0-, respectively
    
    
    1,449
    
    
    
    2,000Deferred income tax payable
    
    
    2,958
    
    
    
    7,247Commitments (Notes 5, 6 and 11)Stockholders equity:Common stock, 30,000 shares authorized, par value $0.01; 6,104 and 9,022 shares
issued and outstanding, respectively
    
    
    61
    
    
    
    90Additional paid-in capital
    
    
    16,355
    
    
    
    34,667Retained earnings
    
    
    6,487
    
    
    
    10,933Total stockholders equity
    
    
    22,903
    
    
    
    45,690Total liabilities and stockholders equity
    
    $
    43,255
    
    
    $
    86,369
  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 31,2003
    
    
    2004
    
    
    2005Revenue:Sales, net
    
    $
    3,865
    
    
    $
    3,593
    
    
    $
    30,278Service and maintenance income
    
    
    1,773
    
    
    
    1,874
    
    
    
    2,424Rental income
    
    
    7,112
    
    
    
    10,491
    
    
    
    16,609Total revenue
    
    
    12,750
    
    
    
    15,958
    
    
    
    49,311Operating costs and expenses:Cost of sales, exclusive of depreciation stated separately below
    
    
    2,860
    
    
    
    2,556
    
    
    
    23,331Cost of service, exclusive of depreciation stated separately below
    
    
    1,243
    
    
    
    1,357
    
    
    
    1,479Cost of rental, exclusive of depreciation stated separately below
    
    
    1,954
    
    
    
    3,038
    
    
    
    6,528Selling expenses
    
    
    679
    
    
    
    875
    
    
    
    1,034General and administrative
    
    
    1,613
    
    
    
    1,777
    
    
    
    3,856Depreciation and amortization
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224Total operating costs and expenses
    
    
    10,075
    
    
    
    12,047
    
    
    
    40,452Operating income
    
    
    2,675
    
    
    
    3,911
    
    
    
    8,859Other income (expense):Interest expense
    
    
    (667
    )
    
    
    (838
    )
    
    
    (1,997
    )Other income (expense)
    
    
    (4
    )
    
    
    1,441
    
    
    
    199Total other income (expense)
    
    
    (671
    )
    
    
    603
    
    
    
    (1,798
    )Income before provision for income taxes
    
    
    2,004
    
    
    
    4,514
    
    
    
    7,061Provision for income taxes:Current
    
    
    25
    
    
    
    20
    
    
    
    207Deferred
    
    
    672
    
    
    
    1,120
    
    
    
    2,408Total income tax expense
    
    
    697
    
    
    
    1,140
    
    
    
    2,615Net income
    
    
    1,307
    
    
    
    3,374
    
    
    
    4,446Preferred dividends
    
    
    121
    
    
    
    53
    
    
    
    Income available to common stockholders
    
    $
    1,186
    
    
    $
    3,321
    
    
    $
    4,446Earnings per common share:Basic
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.59Diluted
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.52Weighted average common shares outstanding:Basic
    
    
    4,947
    
    
    
    5,591
    
    
    
    7,564Diluted
    
    
    5,253
    
    
    
    6,383
    
    
    
    8,481
  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, 2003, 2004 and 2005
 Preferred Stock

    
    
    Common Stock

    
    
    Additional
    
    
    
    
    
    
    TotalPaid-In
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    EquityBALANCES, January 1, 2003
    
    
    382
    
    
    $
    4
    
    
    
    4,858
    
    
    $
    49
    
    
    $
    10,968
    
    
    $
    1,980
    
    
    $
    13,001Exercise of common stock options and warrants
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    1
    
    
    
    237
    
    
    
    
    
    
    
    238Conversion of preferred stock to common stock
    
    
    (38
    )
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    (121
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,307
    
    
    
    1,307BALANCES, 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, December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    9,022
    
    
    $
    90
    
    
    $
    34,667
    
    
    $
    10,933
    
    
    $
    45,690
  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 31,2003
    
    
    2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,307
    
    
    $
    3,374
    
    
    $
    4,446Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,726
    
    
    
    2,444
    
    
    
    4,224Deferred taxes
    
    
    672
    
    
    
    1,120
    
    
    
    2,408Amortization of debt issuance costs
    
    
    65
    
    
    
    65
    
    
    
    49Employee stock option expense
    
    
    
    
    
    
    
    
    
    
    135Loss (gain) on disposal of assets
    
    
    18
    
    
    
    71
    
    
    
    (28
    )Changes in current assets:Trade and other receivables
    
    
    (392
    )
    
    
    (1,182
    )
    
    
    (1,352
    )Inventory and work in process
    
    
    (1,078
    )
    
    
    (1,915
    )
    
    
    (5,699
    )Prepaid expenses and other
    
    
    66
    
    
    
    (34
    )
    
    
    (362
    )Changes in current liabilities:Accounts payable and accrued liabilities
    
    
    543
    
    
    
    1,284
    
    
    
    524Deferred income
    
    
    174
    
    
    
    (185
    )
    
    
    (855
    )Other assets
    
    
    (77
    )
    
    
    (344
    )
    
    
    299NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    3,024
    
    
    
    4,698
    
    
    
    3,789CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (7,882
    )
    
    
    (11,596
    )
    
    
    (17,708
    )Assets acquired, net of cash
    
    
    
    
    
    
    
    
    
    
    (7,584
    )Proceeds from sale of property and equipment
    
    
    120
    
    
    
    50
    
    
    
    264Changes in restricted cash
    
    
    
    
    
    
    (2,000
    )
    
    
    2,000Distribution from equity method investment
    
    
    108
    
    
    
    
    
    
    
    Decrease in lease receivable
    
    
    210
    
    
    
    
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (7,444
    )
    
    
    (13,546
    )
    
    
    (23,028
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from lines of credit
    
    
    300
    
    
    
    550
    
    
    
    300Proceeds from long-term debt
    
    
    3,479
    
    
    
    6,592
    
    
    
    21,517Repayments of long-term debt
    
    
    (2,014
    )
    
    
    (2,589
    )
    
    
    (13,077
    )Repayment of line of credit
    
    
    
    
    
    
    (300
    )
    
    
    Dividends paid on preferred stock
    
    
    (121
    )
    
    
    (53
    )
    
    
    Proceeds from sale of stock and exercise of stock options and
warrants, net of transaction costs
    
    
    238
    
    
    
    5,157
    
    
    
    13,085NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    1,882
    
    
    
    9,357
    
    
    
    21,825NET CHANGE IN CASH
    
    
    (2,538
    )
    
    
    509
    
    
    
    2,586CASH AT BEGINNING OF PERIOD
    
    
    2,714
    
    
    
    176
    
    
    
    685CASH AT END OF PERIOD
    
    $
    176
    
    
    $
    685
    
    
    $
    3,271SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Interest paid
    
    $
    667
    
    
    $
    775
    
    
    $
    1,877Income taxes paid
    
    $
    35
    
    
    $
    31
    
    
    $
    24SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:Assets acquired for issuance of subordinated debt
    
    
    
    
    
    
    
    
    
    
    3,000Assets acquired for issuance of common stock
    
    
    
    
    
    
    
    
    
    
    5,120
  F-6




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##### Table of Contents



NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Summary of Significant Accounting Policies
 Organization and Principles of Consolidation
   
    
    Rotary Gas Systems, Inc. (RGS) (a Texas corporation) was engaged in the
manufacturing and distribution of natural gas compressor packages for use in the
petroleum industry and natural gas flare stacks and ignition systems for use in
oilfield, refinery, petrochemical plant, and landfill applications in New Mexico,
California and Texas.
    
    NGE Leasing, Inc. (NGE) (a Texas corporation) was engaged in leasing
natural gas compressor packages to entities in the petroleum industry and irrigation
motor units to entities in the agricultural industry. NGEs leasing income is
concentrated in New Mexico, California and Texas.
    
    Great Lakes Compression, Inc., (GLC) (a Colorado corporation) was formed
in March 2001 and acquired the assets and certain operations of a business that
fabricates, rents, and services natural gas compressors to producers of oil and natural
gas, primarily in Michigan.
   Nature of Operations
  Use of Estimates
  F-7




---



##### Table of Contents



Cash Equivalents
  Accounts Receivable
  Revenue Recognition
  Description of Rental Arrangements
  Major Customers and Concentration of Credit Risk
  Inventory
  2004
    
    
    2005Raw materials
    
    $
    3,034
    
    
    $
    11,771Work in process
    
    
    1,436
    
    
    
    2,952$
    4,470
    
    
    $
    14,723
 F-8




---



##### Table of Contents



Property and Equipment
   Goodwill
    Intangibles
   Patents
  Restricted Cash
  Other Assets
  F-9




---



##### Table of Contents



Warranty
  Financial Instruments
  Advertising Costs
  Per Share Data
   Year EndedDecember 31,2003
    
    
    2004
    
    
    2005Numerator:Net income
    
    $
    1,307
    
    
    $
    3,374
    
    
    $
    4,446Less preferred dividends
    
    
    121
    
    
    
    53
    
    
    
    Income available to common stockholders
    
    
    1,186
    
    
    
    3,321
    
    
    
    4,446Denominator for basic net income per common share:Weighted average common shares outstanding
    
    
    4,947
    
    
    
    5,591
    
    
    
    7,564Denominator for diluted net income per share:Weighted average common shares outstanding
    
    
    4,947
    
    
    
    5,591
    
    
    
    7,564Dilutive effect of stock options and warrants
    
    
    306
    
    
    
    792
    
    
    
    917Diluted weighted average shares
    
    
    5,253
    
    
    
    6,383
    
    
    
    8,481Earnings per common share:Basic
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.59Diluted
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.52
 Stock-Based Compensation
 Accounting for Stock Issued to
Employees
 F-10




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##### Table of Contents



Accounting for Stock-Based Compensation
  Years EndedDecember 312003
    
    
    2004
    
    
    2005Net income, as reported
    
    $
    1,307
    
    
    $
    3,374
    
    
    $
    4,446Less preferred dividends
    
    
    121
    
    
    
    53
    
    
    
    Income available to common stockholders
    
    
    1,186
    
    
    
    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)
    
    
    (39
    )
    
    
    (38
    )
    
    
    (295
    )Income available to common stockholders, pro forma
    
    $
    1,147
    
    
    $
    3,283
    
    
    $
    4,286Earnings per common share:Basic, as reported
    
    $
    0.24
    
    
    $
    0.59
    
    
    $
    0.59Basic, pro forma
    
    $
    0.23
    
    
    $
    0.59
    
    
    $
    0.57Diluted, as reported
    
    $
    0.23
    
    
    $
    0.52
    
    
    $
    0.52Diluted, pro forma
    
    $
    0.21
    
    
    $
    0.51
    
    
    $
    0.51Weighted average fair value of options granted during the year
    
    $
    3.35
    
    
    $
    4.75
    
    
    $
    10.37Weighted average Black-Scholes fair value assumptions:Risk free rate
    
    
    4.0
    %
    
    
    5.25
    %
    
    
    7.25
    %Expected life

    
    0-10 yrs
    
    

    0-10 yrs
    
    
    0-10 yrsExpected volatility
    
    
    44.0
    %
    
    
    44.0
    %
    
    
    47.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 Income Taxes
  Recently Issued Accounting Pronouncements
 Share-Based
Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
  F-11




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##### Table of Contents



Reclassifications
  2. Acquisitions
     
    
    $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. All of the
shares are restricted securities within the meaning of Rule 144 under the Securities
Act of 1933, as amended, and will bear a legend to that effect.
  F-12




---



##### Table of Contents



(Unaudited)
Pro Forma Results
 Twelve MonthsEndedDecember 31, 2004Revenue
    
    $
    37,382Net income available to common stockholders
    
    
    4,148Net income per common share, basic
    
    
    0.67Net income per common share, diluted
    
    
    0.59
 3. Rental Activity
  Years Ended December 31,2006
    
    $
    2,5292007
    
    
    3912008
    
    
    3482009
    
    
    1142010
    
    
    70Thereafter
    
    
    4Total
    
    $
    3,456
 4. Property and Equipment
  2004
    
    
    2005Land and building
    
    $
    1,346
    
    
    $
    3,365Leasehold improvements
    
    
    207
    
    
    
    283Office equipment and furniture
    
    
    200
    
    
    
    424Software
    
    
    143
    
    
    
    268Machinery and equipment
    
    
    507
    
    
    
    1,153Vehicles
    
    
    2,177
    
    
    
    3,389Less accumulated depreciation
    
    
    (1,446
    )
    
    
    (2,458
    )Total
    
    $
    3,134
    
    
    $
    6,424
  F-13




---



##### Table of Contents



5. Line of Credit
    F-14




---



##### Table of Contents



6. Long-term Debt
  2004
    
    
    2005Note payable to a bank, interest at banks
prime rate plus .5% but not less than 5.25%
(6.25% and 7.75% at December 31, 2004 and
2005, respectively), and monthly payments of
principal of $171,000 plus interest until
maturity on September 15, 2007. The note is
collateralized by substantially all of the
assets of the Company. See Note 5 regarding
loan covenants. All amounts due on the note
were paid in full during 2005.
    
    $
    5,301
    
    
    $
    Note payable to a bank, interest at banks
prime rate plus .5% but not less than 5.25%
(6.25% and 7.75% at December 31, 2004 and
2005, respectively). This is an advance line
of credit note for $10,000,000. Interest is
payable monthly. Principal is due in 60
consecutive payments of $167,000 beginning
December 15, 2004 until November 15, 2009. The
note is collateralized by substantially all of
the assets of the Company. See Note 5
regarding loan covenants.
    
    
    7,133
    
    
    
    7,900Note 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 is an
$8,000,000 term loan. Principal under this
credit facility is due and payable in 84
monthly installments of $95,000 each,
commencing February 1, 2005 and continuing
through December 1, 2011. Interest on the
unpaid principal balance is due and payable on
the same dates as principal payments. All
outstanding principal and unpaid interest is
due on January 1, 2012. See Note 5 regarding
loan covenants.
    
    
    
    
    
    
    6,952Note 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 credit
facility is due and payable in 59 monthly
installments of $167,000 each, commencing May
1, 2006 and continuing through April 1, 2011.
See Note 5 regarding loan covenants.
    
    
    
    
    
    
    10,000Note payable to a bank, interest at 7%,
monthly payments of principal and interest
totaling $2,614 until maturity in September
2010, collateralized by a building. All
amounts due on the note were paid in full
during 2005.
    
    
    182
    
    
    
    Various notes payable to a bank, interest
rates ranging from prime plus 1%
(6.25% at December 31, 2004) to 7.50%. All
amounts due on the note were paid in full
during 2005.
    
    
    177
    
    
    
    Capital lease
    
    
    13
    
    
    
    Other notes payable for vehicles, various terms
    
    
    212
    
    
    
    53Total
    
    
    13,018
    
    
    
    24,905Less current portion
    
    
    (3,728
    )
    
    
    (4,680
    )Total
    
    $
    9,290
    
    
    $
    20,225
  2006
    
    
    4,6802007
    
    
    5,1432008
    
    
    5,1432009
    
    
    5,0432010
    
    
    3,143Thereafter
    
    
    1,753Total
    
    $
    24,905
 F-15




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##### Table of Contents



7. Subordinated Notes
   8. Income Taxes
  2003
    
    
    2004
    
    
    2005Current provision:Federal
    
    $
    
    
    
    $
    
    
    
    $
    91State
    
    
    25
    
    
    
    20
    
    
    
    11625
    
    
    
    20
    
    
    
    207Deferred provision:Federal
    
    
    593
    
    
    
    1,029
    
    
    
    2,310State
    
    
    79
    
    
    
    91
    
    
    
    98672
    
    
    
    1,120
    
    
    
    2,408$
    697
    
    
    $
    1,140
    
    
    $
    2,615
  2003
    
    
    2004
    
    
    2005Deferred income tax assets:Net operating loss
    
    $
    727
    
    
    $
    2,669
    
    
    $
    984Alternative minimum tax credit
    
    
    
    
    
    
    
    
    
    
    91Other
    
    
    5
    
    
    
    7
    
    
    
    60Total deferred income tax assets
    
    
    732
    
    
    
    2,676
    
    
    
    1,135Deferred income tax liabilities:Property and equipment
    
    
    (2,410
    )
    
    
    (5,483
    )
    
    
    (6,736
    )Goodwill and other intangible assets
    
    
    (154
    )
    
    
    (142
    )
    
    
    (1,575
    )Other
    
    
    (11
    )
    
    
    (9
    )
    
    
    (71
    )Total deferred income tax liabilities
    
    
    (2,575
    )
    
    
    (5,634
    )
    
    
    (8,382
    )Net deferred income tax liabilities
    
    $
    (1,843
    )
    
    $
    (2,958
    )
    
    $
    (7,247
    )
  2003
    
    
    2004
    
    
    2005Statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State and local taxes
    
    
    5
    %
    
    
    3
    %
    
    
    3
    %Nontaxable life insurance proceeds
    
    
    
    
    
    
    (12
    )%
    
    
    Other
    
    
    (4
    )%
    
    
    
    
    
    
    Effective rate
    
    
    35
    %
    
    
    25
    %
    
    
    37
    %
 F-16




---



##### Table of Contents



9. Stockholders Equity
 Initial Public Offering
  Conversion
  Warrants
  Preferred Stock
    F-17




---



##### Table of Contents



Common Stock Private Placement
  10. Stock-Based Compensation
 Stock Options
       F-18




---



##### Table of Contents



Number of
    
    
    Weighted AverageStock Options
    
    
    Exercise PriceOptions outstanding, January 1, 2003
    
    
    161,500
    
    
    $
    2.41Granted
    
    
    27,500
    
    
    
    5.57Exercised
    
    
    (100,000
    )
    
    
    2.00Canceled or expired
    
    
    (9,000
    )
    
    
    3.25Outstanding, January 1, 2004
    
    
    80,000
    
    
    $
    3.92Granted
    
    
    38,000
    
    
    
    7.50Exercised
    
    
    (11,000
    )
    
    
    3.23Canceled or expired
    
    
    
    
    
    
    Outstanding, January 1, 2005
    
    
    107,000
    
    
    $
    5.26Granted
    
    
    67,500
    
    
    
    10.41Exercised
    
    
    (20,332
    )
    
    
    4.43Canceled or expired
    
    
    (7,500
    )
    
    
    6.29Outstanding, December 31, 2005
    
    
    146,668
    
    
    $
    7.69Exercisable, end of year 2003
    
    
    43,000
    
    
    $
    3.68Exercisable, end of year 2004
    
    
    46,000
    
    
    $
    5.06Exercisable, end of year 2005
    
    
    71,335
    
    
    $
    6.94
  Options OutstandingNumber of
    
    WeightedOptions
    
    Average
    
    WeightedOutstanding at
    
    Remaining
    
    AverageDecember 31,
    
    Contractual
    
    ExerciseRange of Exercise Prices
    
    2005
    
    Life
    
    Price$0.005.55
    
    
    50,000
    
    
    
    7.01
    
    
    
    4.23$5.569.22
    
    
    86,668
    
    
    
    9.21
    
    
    
    8.62$9.2316.96
    
    
    10,000
    
    
    
    10.00
    
    
    
    16.96$0.0016.96
    
    
    146,668
    
    
    
    8.51
    
    
    
    7.69
 F-19




---



##### Table of Contents



11. Commitments
 4 01(k) Plan
  Rented Facilities
  2006
    
    
    146,0002007
    
    
    129,0002008
    
    
    62,0002009
    
    
    29,0002010
    
    
    29,000Thereafter
    
    
    106,000Total
    
    $
    501,000
 12. Other Income
  F-20




---



##### Table of Contents



13. Segment Information
 Disclosures About Segments of an Enterprise and Related Information
  For the Year Ended December 31, 2003
 Service &Sales
    
    
    Maintenance
    
    
    Rental
    
    
    Corporate
    
    
    Total(in thousands of dollars)Revenue
    
    $
    3,865
    
    
    $
    1,773
    
    
    $
    7,112
    
    
    
    
    
    
    $
    12,750Operating costs and expenses
    
    
    2,860
    
    
    
    1,243
    
    
    
    1,954
    
    
    
    4,018
    
    
    
    10,075Operating income
    
    $
    1,005
    
    
    $
    530
    
    
    $
    5,158
    
    
    
    (4,018
    )
    
    $
    2,675Other income/(expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (671
    )
    
    
    (671
    )Income before provision for income
taxes
    
    $
    1,005
    
    
    $
    530
    
    
    $
    5,158
    
    
    $
    (4,689
    )
    
    $
    2,004*Segment assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,270
    
    
    $
    28,270
 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
 
  F-21




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##### Table of Contents



14. Subsequent Events (Unaudited)
   F-22




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##### Table of Contents



Exhibit No.
    
    Description2.1
    
    
    Purchase and Sale Agreement by and between Hy-Bon Engineering Company, Inc. and NGE
Leasing, Inc. (Incorporated by reference to Exhibit 2.1 of the Registrants
Current Report on Form 8-K dated February 28, 2003 and filed with the Securities and
Exchange Commission on March 6, 2003)3.1
    
    
    Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of
the Registrants 10-QSB dated November 10, 2004 and filed with the Securities and
Exchange Commission on 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 lock-up agreement (Incorporated by reference to Exhibit 4.3 of the
Registrants Registration Statement on Form SB-2, No. 333-88314)4.4
    
    
    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)4.5
    
    
    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)10.1
    
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Registration Statement on Form SB-2, No. 333-88314)10.2
    
    
    Asset Purchase Agreement, dated January 1, 2001, between the Registrant and Great
Lakes Compression, Inc. (Incorporated by reference to Exhibit 10.2 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)10.3
    
    
    Exhibits 3(c)(1), 3(c)(2), 3(c)(3), 3(c)(4), 13(d)(1), 13(d)(2) and 13(d)(3) to
Asset Purchase Agreement, dated January 1, 2001, between the Registrant and Great Lakes
Compression, Inc. (Incorporated by reference to Exhibit 10.14 of the Registrants
Registration Statement on Form SB-2, No. 333-88314)10.4
    
    
    Amendment to Guaranty Agreement between Natural Gas Services Group, Inc. and
Dominion Michigan Production Services, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Registration Statement on Form SB-2, No. 333-88314)10.5
    
    
    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)10.6
    
    
    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)




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##### Table of Contents



Exhibit No.
    
    Description10.7
    
    
    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)10.8
    
    
    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)10.9
    
    
    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)10.10
    
    
    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)10.11
    
    
    Articles of Organization of Hy-Bon Rotary Compression, L.L.C., dated April 17,
2000 (Incorporated by reference to Exhibit 10.18 of the Registrants Registration
Statement on Form SB-2, No. 333-88314)10.12
    
    
    Regulations of Hy-Bon Rotary Compression, L.L.C. (Incorporated by reference to
Exhibit 10.19 of the Registrants Registration Statement on Form SB-2, No. 333-88314)10.13
    
    
    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)10.14
    
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Alan Kurus (Incorporated by reference to Exhibit 10.25 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)10.15
    
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Wayne Vinson (Incorporated by reference to Exhibit 10.26 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)10.16
    
    
    Form of Termination of Employment Agreement Letter relating to the Employment
Agreement of Earl Wait (Incorporated by reference to Exhibit 10.27 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002)10.17
    
    
    Triple Net Lease Agreement, dated June 1, 2003, between NGE Leasing, Inc. and
Steven J. & Katherina L. Winer (Incorporated by reference to Exhibit 10.17 of the
Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003)10.18
    
    
    Lease Agreement, dated June 19, 2003, between NGE Leasing, Inc. and Wise
Commercial Properties (Incorporated by reference to Exhibit 10.18 of the Registrants
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003)10.19
    
    
    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)10.20
    
    
    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)




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##### Table of Contents



Exhibit No.
    
    Description10.21
    
    
    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)10.22
    
    
    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)10.23
    
    
    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)10.24
    
    
    Employment Agreement between Paul D. Hensley and Natural Gas Services Group, Inc.
(Incorporated by reference to Exhibit 10.1 of the Registrants Form 8-K Report, dated
January 3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005)10.25
    
    
    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)10.26
    
    
    Promissory Note, dated January 3, 2005 in the original principal amount of
$2,100,000.00 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)10.27
    
    
    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)10.28
    
    
    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)10.29
    
    
    Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Services
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)10.30
    
    
    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)10.31
    
    
    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 on January 6, 2006)




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##### Table of Contents



Exhibit No.
    
    Description10.32
    
    
    First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K, dated May 1, 2005 and filed with
the Securities and Exchange Commission on May 13, 2005)10.33
    
    
    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)10.34
    
    
    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)10.35
    
    
    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)10.36
    
    
    Promissory Note, dated January 3, 2005, in the original principal amount of
$300,000 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)10.37
    
    
    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)10.38
    
    
    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)10.39
    
    
    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)14.0
    
    
    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)*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




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##### Table of Contents



Exhibit No.
    
    Description*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