UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934

                   For the fiscal year ended December 31, 2004

[_]  TRANSITION REPORT UNDER SECTION 13 OR 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.
                 (Name of small business issuer in its charter)

COLORADO                                                     75-2811855
--------                                                     ----------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                              Identification No.)

2911 South County Road 1260
Midland, Texas                                               79706
--------------                                               -----
(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number:  (432) 563-3974

                        ---------------------------------

         Securities registered under Section 12(b) of the Exchange Act:

                           Common Stock $.01 Par Value
                           ---------------------------
                                (Title of Class)


                        Warrants to Purchase Common Stock
                        ---------------------------------
                                (Title of Class)

         Securities registered under Section 12(g) of the Exchange Act:

                                      None
                                ----------------
                                (Title of Class)

                        ---------------------------------

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements  for the past 90 days.
Yes |X| No |_|

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

         State issuer's revenue for its most recent fiscal year:  $15,958,199

         The aggregate  market value of the voting and non-voting  common equity
held by non-affiliates  at March 23, 2004,  computed by reference to the closing
price of $6.85 per share on the American Stock Exchange, was $16,096,979.

         The number of shares  outstanding  of each of the  issuer's  classes of
common equity on March 23, 2005, was 6,765,764.

                       Documents Incorporated by Reference
                                      None

          Transitional Small Business Disclosure Format Yes |_| No |X|

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================================================================================

<PAGE>

                                     PART 1

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-KSB (this "Report" or this "Form 10-KSB")
contains certain  forward-looking  statements and information  pertaining to us,
our  industries and the oil and gas industry that is based on the beliefs of our
management,  as well as assumptions made by and information  currently available
to our  management.  All statements,  other than statements of historical  facts
contained in this Report,  including  statements  regarding our future financial
position,  growth strategy,  budgets,  projected costs,  plans and objectives of
management for future operation,  are  forward-looking  statements.  Although we
believe our expectations reflected in these forward-looking statements are based
on reasonable  assumptions,  no assurance  can be given that these  expectations
will prove to have been  correct.  Important  factors  that could  cause  actual
results  to  differ   materially   from  the   expectations   reflected  in  the
forward-looking statements include, among other things:

         o        conditions in the gas and oil  industry,  including the demand
                  for natural gas and the price of oil and natural gas,

         o        competition   among  the  various   providers  of  compression
                  services and products,

         o        changes  in  safety,  health  and  environmental   regulations
                  pertaining to the  production  and  transportation  of natural
                  gas,

         o        changes in economic or political  conditions in the markets in
                  which we operate, and

         o        introduction of competing technologies by other companies.

         In addition,  the factors  described in  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operation - Risk Factors"  could
cause our actual results to differ materially from the expectations reflected in
the  forward-looking  statements  contained  herein.  These statements relate to
"Description  of Business,"  "Management's  Discussion and Analysis of Financial
Condition and Results of Operation" and other  sections of this Report.  You can
identify  forward-looking  statements  by  terminology  such as  "may,"  "will,"
"should," "expect," "plan," "intend," "anticipate" and similar terminology.  The
forward-looking  statements in this Report are based largely on our expectations
and are subject to a number of risks and uncertainties,  which may be beyond our
control.  Actual results may differ  materially  from the anticipated or implied
results  in  the  forward-looking  statements.  In  light  of  these  risks  and
uncertainties,  we can give no  assurance  that the  forward-looking  events and
circumstances included in this Report will occur.



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<PAGE>

ITEM 1. DESCRIPTION OF BUSINESS

History and Organization

         We were  incorporated  under the laws of Colorado on December  17, 1998
and  initially  operated  as a holding  company  of Flare  King,  Inc.,  Hi-Tech
Compressor  Company,  L.C., NGE Leasing,  Inc. and CNG Engines Company.  In July
2000,  Flare King and Hi-Tech  merged and then  operated as Rotary Gas  Systems,
Inc. Effective March 31, 2000, we sold CNG.

         On March 29, 2001,  we  acquired,  through our then  subsidiary,  Great
Lakes  Compression,  Inc.,  all of the  compression  related  assets of Dominion
Michigan Petroleum Services,  Inc., an unaffiliated company that is a subsidiary
of Dominion  Resources,  Inc.  and that was in the  business  of  manufacturing,
fabricating, selling, leasing and maintaining natural gas compressors. As a part
of the transaction,  an affiliate of Dominion Michigan  committed to purchase or
to  enter  into  five  year  leases  for  compressors   totaling  five  thousand
horsepower. The purchases or leases are to be made by December 31, 2005.

         On October 24,  2002,  we closed our initial  public  offering  under a
registration  statement on Form SB-2 that was declared  effective on October 21,
2002. In the offering,  we sold a total of 1,500,000  shares of our common stock
and  warrants to  purchase  1,500,000  shares of our common  stock at a total of
$5.25  per share and one  warrant  for an  aggregate  amount  $7,875,000.  After
deducting the total expenses of the offering,  we received net offering proceeds
of approximately $6,529,170.

         On March 27,  2003,  we acquired  28  compressor  packages  from Hy-Bon
Engineering Company, Inc. for $2,150,000.

         On January 1, 2004, our then wholly-owned subsidiaries were merged into
us and, in June 21, 2004,  Hy-bon Rotary  Compression  LLC, a limited  liability
company in which we owned a 50% interest, was dissolved.  Presently,  all of our
assets are owned by, and our business is conducted through, Natural Gas Services
Group, Inc., and its wholly-owned subsidiary, Screw Compression Systems, Inc. On
October 18, 2004, Natural Gas Services Group, Inc. entered into a Stock Purchase
Agreement with Screw Compression  Systems,  Inc., or "SCS", and the stockholders
of SCS. Under this  agreement,  Natural Gas Services Group  purchased all of the
outstanding  shares of capital  stock of SCS.  This  transaction  was  completed
January 3, 2005 and Natural  Gas  Services  Group,  Inc.,  will begin  reporting
combined  financial  information  with SCS in January 2005. This filing does not
include  any  financial  information  related to this  transaction  since it was
completed in fiscal year 2005.

Company Business

Overview

         We provide  equipment and services to the natural gas and oil industry.
We manufacture,  fabricate,  sell and lease natural gas compressors that enhance
the  production  of oil and gas wells and we provide  maintenance  services  for
those  compressors.  We define a natural gas  compressor as a mechanical  device


                                       3
<PAGE>

with one basic goal - to deliver gas at a pressure  higher than that  originally
existing. It may be powered by a natural gas burning engine or an electric motor
to  accommodate  different  applications.   Gas  compression  is  undertaken  to
transport and distribute  natural gas to pipelines.  Pipeline pressures vary and
with the  addition  of new  wells  to the  pipeline,  the  need for  compression
increases.  We also manufacture and sell flare tips and ignition systems for oil
and gas plant and  production  facilities.  We define a flare tip as a burner on
the upper end of a flare stack that is designed to combust waste gases to assure
a clean  environment.  An ignition  system is a pilot light or a spark generator
that assures continuous  ignition of the waste gases going through the burner in
the flare tip.

         We primarily lease natural gas compressors. As of December 31, 2004, we
had 549 natural gas compressors under lease to third parties.

         We also fabricate natural gas compressors for our customers,  designing
compressors to meet unique specifications dictated by well pressures, production
characteristics and particular applications for which compression is sought.

         We have  established an exchange and rebuild program to attempt to help
minimize  costs and maximize  revenue for our customers.  Under the program,  we
work  with  maintenance  and  operating  personnel  of a  customer  to  identify
equipment for exchange.  When we receive a compressor for exchange  because of a
maintenance problem, we deliver to our customer a replacement compressor at full
price. We then rebuild the exchange compressor and credit our customer an amount
based on the  value of the  rebuilt  compressor.  We also  offer a  retrofitting
service by repackaging a customer's  compressor with a compressor that meets our
customer's changed conditions.

         We design,  manufacture,  install and service  flare stacks and related
ignition and control  devices for onshore and offshore  burning of gas compounds
such as hydrogen sulfide,  carbon dioxide,  natural gas and liquefied  petroleum
gases.

         We have  manufacturing and fabrication  facilities located in Lewiston,
Michigan,  and Midland,  Texas,  where we manufacture and fabricate  natural gas
compressors. We design and manufacture natural gas flare systems, components and
ignition  systems  in our  facility  in  Midland,  Texas,  for use in  oilfield,
refinery and petrochemical plant  applications.  We also have service facilities
located in Midland, Texas, Lewiston, Michigan, Bridgeport, Texas and Bloomfield,
New  Mexico  to  provide  maintenance  inventory  and  support  for  our  rental
compressor fleet and for third party services.

         We currently  provide our  products and services to a customer  base of
oil  and  gas  exploration  and  production  companies  operating  primarily  in
Colorado, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Texas and Wyoming.

         We  maintain  our  principal  office at 2911  South  County  Road 1260,
Midland, Texas 79706 and our telephone number is (432) 563-3974.



                                       4
<PAGE>

Industry Background

         Our  products  and  services  are  related to the oil and  natural  gas
industries.  The oil and natural gas  industry is  comprised  of several  large,
well-capitalized companies accounting for the majority of the market. There also
exist a large number of small  privately held companies  making up the remainder
of  the  market.   According  to   information   from  the  Energy   Information
Administration there is a growing demand for natural gas in this country.

         We believe that there will continue to be a growing  demand for natural
gas.  Because of this,  demand for our  products  and  services  are expected to
continue to rise as a result of:

         o        the  increasing  demand  for  energy,  both  domestically  and
                  abroad;

         o        environmental  considerations  which provide strong incentives
                  to use natural gas in place of other carbon fuels;

         o        the cost savings of using natural gas rather than  electricity
                  for heat generation;

         o        implementation of international environmental and conservation
                  laws;

         o        the aging of producing natural gas reserves worldwide; and

         o        the extensive supply of undeveloped natural gas reserves.

         By using a  compressor,  the  operator of a natural gas well is able to
increase the pressure of natural gas from a well to make it economically  viable
by enabling gas to continue to flow in the pipeline to its destination.  We feel
that we are  well  positioned  through  our gas  compression  and  flare  system
activities to take advantage of the aging of reserves and the development of new
reserves.

The Compression Business

         Natural gas compressors  are used in a number of applications  intended
to enhance the productivity of oil and gas wells, gas  transportation  lines and
processing  plants.  Compression  equipment is often  required to boost a well's
production to  economically  viable levels and enable gas to continue to flow in
the pipeline to its  destination.  We believe that most  producing  gas wells in
North America, at some point, will utilize compression. As of December 31, 2003,
the Energy  Information  Administration  reported that there were  approximately
393,327 producing gas and gas condensate wells in the United States.  The states
where we currently operate, account for approximately 273,123 of these wells.

The Leasing Business

         We primarily lease natural gas compressors. As of February 28, 2005, we
had 635 natural gas compressors totaling  approximately 70,242 horsepower leased
to  54  third  parties,   compared  to  385  natural  gas  compressors  totaling
approximately 43,149 horsepower leased to 45 third parties at February 28, 2004.
Of the 635 natural gas compressors,  51 were leased to Dominion Michigan and its
affiliates.



                                       5
<PAGE>

         As a part  of our  leasing  business,  in  2000  we  formed  a  limited
liability   company,   Hy-Bon  Rotary  Compression  LLC,  ("HBRC")  with  Hy-Bon
Engineering  Company,  Inc.,  a  non-affiliated  company,  to lease  natural gas
compressors.  We formed HBRC to lease  compressors  to a customer with which the
non-affiliated company had a relationship.  The non-affiliated company owned 50%
and we owned 50% of HBRC. The non-affiliated  company managed HBRC. We split the
expenses  of HBRC with the other  company.  After the  payment of  expenses,  we
received  whatever  profit  is  realized  by HBRC in  proportion  to the  amount
received by HBRC from the lease of natural gas compressors  that are contributed
by us and by the non-affiliated company to HBRC. As of February 28, 2003, we had
contributed 40 compressors  and the  non-affiliated  company had  contributed 28
compressors to HBRC.

         On March 27, 2003,  to be effective  January 1, 2003,  we purchased and
Hy-Bon sold to us the 28 compressor  packages it contributed.  In  consideration
therefore, we paid Hy-Bon $2,150,000. The $2,150,000 was borrowed by us from our
current lender.

         Hy-Bon has  withdrawn  as a member of HBRC  effective  as of January 1,
2003. We, as the other member of HBRC,  retained all assets of HBRC, which as of
January 1, 2003, had an unaudited aggregate value of approximately  $346,000. We
dissolve HBRC in 2004 and have agreed to not operate using the name Hy-Bon.

         In addition to 118 units covered under written  maintenance  agreements
covering  non-owned  compressor  units that we had entered  into at February 28,
2005, we provide  maintenance as a part of our compressor leases. Many companies
and  individuals  are  turning to leasing of  equipment  instead of  purchasing.
Leasing does not require the  purchaser to make large capital  expenditures  for
new equipment or to obtain financing through a lending  institution.  This frees
the  customer's  assets  for  developing  the  customer's  business.  Our leases
generally  have  initial  terms of from six to 24 months and then  continue on a
month-to-month  basis.  The leases  with  Dominion  Exploration  have an initial
five-year term expiring  between 2006 and 2010.  Lease rentals are paid monthly.
At the end of a lease term, the customer may continue to pay monthly  rentals on
the equipment, or we may require them to return it to us.

         Changing well and pipeline  pressures and conditions over the life of a
well often require  producers to reconfigure  their compressor units to optimize
the well  production  or pipeline  efficiency.  Because the  equipment is highly
technical,  a trained staff of field  service  personnel,  a  substantial  parts
inventory and a diversified fleet of natural gas compressors are often necessary
to perform reconfiguration  functions in an economic manner. It is not efficient
or, in many cases,  economically  possible for independent natural gas producers
to maintain  reconfiguration  capabilities  individually.  Also,  our management
believes that, in order to streamline  their operations and reduce their capital
expenditures  and other costs, a number of major oil and gas companies have sold



                                       6
<PAGE>

portions of their domestic energy reserves to independent  energy  producers and
have  outsourced  many  facets  of  their  operations.  We  believe  that  these
initiatives  are  likely  to  contribute  to  increased   rental  of  compressor
equipment.  For that reason, we have created our own compressor-rental  fleet to
take advantage of the rental market, we spent approximately  $10,663,000 in 2004
to  expand  our  natural  gas  compressor  inventory,  and we  intend  to  spend
approximately $16,800,000 in 2005 on natural gas compressors.

         The size, type and geographic  diversity of our rental fleet enables us
to provide our customers with a range of compression units that can serve a wide
variety of applications, and to select the correct equipment for the job, rather
than the customer  trying to fit the job to its own  equipment.  We base our gas
compressor  rental rates on several factors,  including the cost and size of the
equipment,  the type and  complexity  of service  desired by the  customer,  the
length of contract,  and the inclusion of any other  services  desired,  such as
leasing, installation, transportation and daily operation.

Custom Fabrication

         We  also  engineer  and  fabricate  natural  gas  compressors  for  our
customers to meet their unique specifications based on well pressure, production
characteristics and the particular applications for which compression is sought.
In  order  to meet  the  ongoing  needs  of our  customers  for  whom we  custom
fabricate,  we  offer  a  variety  of  services,   including:  (i)  engineering,
manufacturing and fabrication of the compressors;  (ii) installation and testing
of compressors; (iii) ongoing performance review to assess the need for a change
in compression:  and (iv) periodic maintenance and parts replacement. We receive
revenue for each service.

Maintenance

         Although  natural gas compressors  generally do not suffer  significant
technological  obsolescence,  they do require  routine  maintenance and periodic
refurbishing  to  prolong  their  useful  life.  Routine  maintenance   includes
alignment and compression  checks and other parametric  checks indicate a change
in the condition of the compressors. In addition, oil and wear-particle analysis
is  performed  on all  compressors.  Overhauls  are  done  on a  condition-based
interval  or  a  time-based  schedule.  Based  on  our  past  experience,  these
maintenance  procedures  maximize  component  life  and  unit  availability  and
minimize downtime.

         As of February 28, 2005,  we had written  maintenance  agreements  with
third parties relating to 118 compressors.  Each written  maintenance  agreement
has from two to 5 years left on its term and each  expires on December 31 in the
expiration year.  During our years ended December 31, 2004 and 2003, we received
revenue of approximately $1,618,000 and $1,073,000  (approximately 10% and 8% of
our total consolidated revenue), respectively, from maintenance agreements.

Exchange and Rebuild Program

         We have  established an exchange and rebuild program to attempt to help
minimize costs and maximize our customers' revenue. This program is designed for
operations  with rotary screw  compressors  where  downtime and lost revenue are
critical.



                                       7
<PAGE>

         Under  the  program,  we  work  with  our  customer's  maintenance  and
operating  personnel to identify and quantify  equipment for  exchange.  When we
receive a  compressor  for exchange  due to a problem  with the  compressor,  we
deliver to our customer a replacement  compressor at full price. We then rebuild
the  exchange  compressor  and credit our  customer  with an amount based on the
value of the compressor we rebuild.

         This program  enables our customers to obtain  replacement  compressors
and shorten the time that the customer is unable to realize gas production  from
one or more wells because of the lack of a compressor.

         During the years ended December 31, 2004 and 2003, we received  revenue
of approximately $515,000 and $597,000 (approximately 3.2% and 4.7% of our total
consolidated revenue), respectively, from exchanging and rebuilding rotary screw
compressors for third parties.

Retrofitting Service

         We recognize the capital  invested by our customers in compressors.  We
also  recognize  that   producing   wells  and  gas  gathering   systems  change
significantly during their operating life. To meet these changing conditions and
help our customers  maximize  their  operating  income,  we offer a retrofitting
service by repackaging a customer's  compressor with a compressor that meets our
customer's changed conditions.

The Flare Business

         The  drilling  for and  production  of oil and gas  results  in certain
gaseous hydrocarbon  byproducts that generally must be burned off at the source.
Although   flares  and  flare  systems  have  been  part  of  the  oilfield  and
petrochemical environment for many years, increasing regulation of emissions has
resulted in a significant  increase in demand for flare systems of  increasingly
complex  design  meeting  new  environmental  regulations.  Growth is  primarily
related,  as is the case for most industries  connected with oil and gas, to the
price of oil and gas and new environmental regulations.

         We design,  manufacture,  install and service  flare stacks and related
ignition  and  control  devices  for the  onshore  and  offshore  burning of gas
compounds such as hydrogen  sulfide,  carbon dioxide,  natural gas and liquefied
petroleum gases. We produce two ignition systems for varied applications:  (a) a
standing jet-like pipe for minimal fuel consumption,  with a patented electronic
igniter; and (b) an electronic sparked ignition system. Flare tips are available
in carbon steel as well as many grades of stainless steel alloys. The stacks can
be free  standing,  guyed,  or trailer  mounted.  The flare  stack and  ignition
systems  use a  smokeless  design  for  reduced  emissions  to  meet  or  exceed
government   regulated   clean  air   standards.   Our  product  line   includes
solar-powered  flare ignition systems and thermocouple  control systems designed
to detect the loss of combustion in the product  stream and reignite the product
stream.  These products contain  specially-designed  combustion tips and utilize


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<PAGE>

pilot flow Venturi tubes to maximize the  efficient  burning of waste gas with a
minimal  use of pilot or  assist  gas,  thereby  minimizing  the  impact  on the
environment  of the  residual  output.  Increased  emphasis  on "clean  air" and
industry  emissions has had a positive effect on the flare  industry.  Our broad
energy industry  experience has allowed us to work closely with our customers to
seek cost-effective solutions to their flare requirements.

         During the years ended  December  31, 2004 and 2003,  we sold 74 and 62
flare  systems,   respectively,   to  our  customers  generating   approximately
$1,160,000  and  $821,000  (approximately  7% and 6% of our  total  consolidated
revenue) in revenue, respectively.

Major Customers

         Sales to two customers in the year ended  December 31, 2004 amounted to
a total  of 21% and 17%  respectively  of  consolidated  revenue.  Sales  to two
customers  in  the  year  ended  December  31,  2003  amounted  to 28%  and  10%
respectively of  consolidated  revenue.  No other single customer  accounted for
more than 10% of the Company's  sales in 2003 or 2004. At December 31, 2004, two
customers  accounted  for 12%  and  10%  respectively,  of the  Company's  trade
accounts receivable.

Continuing Product Development

         We engage in a continuing  effort to improve our  compressor  and flare
operations.  Continuing  development  activities in this regard  include new and
existing  product  development  testing  and  analysis,  process  and  equipment
development and testing, and product performance improvement.  We also focus our
activities on reducing overall costs to the customer,  which include the initial
capital cost for  equipment,  the monthly  leasing cost if  applicable,  and the
operating costs associated with such equipment,  including  energy  consumption,
maintenance costs and environmental emissions.

         During our years ended December 31, 2004 and 2003, we did not spend any
material  amounts  on  research  and  development  activities.  Rather,  product
improvements were made as a part of our normal operating activities.

Sales and Marketing

         General.   We  conduct  our  operations  from  four  locations.   These
locations,  with the exception of our executive  offices,  maintain an inventory
for local customer requirements,  trained service technicians, and manufacturing
capabilities to provide quick delivery and service for our customers.  Our sales
force also operates out of these locations and focuses on communication with our
customers and potential  customers  through  frequent direct contact,  technical
assistance, print literature, direct mail and referrals. Our sales and marketing
is performed by nine employees.

         Additionally,  our  personnel  coordinate  with each  other to  develop
relationships  with  customers  who  operate  in  multiple  regions.  Our  sales
personnel maintain  intensive contact with our operations  personnel in order to



                                       9
<PAGE>

promptly  respond to and  address  customer  needs.  Our overall  sales  efforts
concentrate on  demonstrating  our  commitment to enhancing the customer's  cash
flow through enhanced product design, fabrication, manufacturing,  installation,
customer service and support.

         During  the  years  ended   December  31,  2004  and  2003,   we  spent
approximately $46,000 and $38,000, respectively, on advertising.


         Compression Activity.  The compression marketing program emphasizes our
ability to design and fabricate  natural gas  compressors in accordance with the
customer's unique  specifications  and to provide all necessary service for such
compressors.

         Flare Systems Activity.  The flare systems marketing program emphasizes
our ability to design, manufacture,  install and service flares with the updated
technology.

Competition

         Compression   Activity.   The  natural  gas  compression   business  is
competitive.  We experience  competition  from companies with greater  financial
resources.  On a regional basis, we experience  competition from several smaller
companies that compete  directly with us. We have a number of competitors in the
natural gas compression  segment,  but we do not have sufficient  information to
determine our competitive position within that group. We believe that we compete
effectively on the basis of price,  customer  service,  including the ability to
place personnel in remote  locations,  flexibility in meeting customer needs and
quality and reliability of our compressors and related services.

         Compressor  industry  participants can achieve  significant  advantages
through  increased  size  and  geographic  breadth.  As  the  number  of  rental
compressors in our rental fleet  increases,  the number of sales,  support,  and
maintenance  personnel  required  and the minimum  level of  inventory  does not
increase commensurately.  As a result of economies of scale, we believe that we,
with a growing rental fleet,  have  relatively  lower operating costs and higher
margins than smaller companies.

         Flare Systems Activity.  The flare business is highly  competitive.  We
have a number of  competitors in the flare systems  segment,  but we do not have
sufficient  information to determine our competitive position within that group.
We believe  that we are able to compete by our  offering  products  specifically
engineered for the customer's needs.

Employees

         As of December 31, 2004,  we had 111 total  employees of which 110 were
fulltime employees. No employees are represented by a labor union.

Liability and Other Insurance Coverage

         Our equipment and services are provided to customers who are subject to
hazards  inherent in the oil and gas  industry,  such as  blowouts,  explosions,



                                       10
<PAGE>

craterings,  fires,  and oil spills.  We maintain  liability  insurance  that we
believe is customary in the industry. We also maintain insurance with respect to
our  facilities.  Based  on our  historical  experience,  we  believe  that  our
insurance coverage is adequate.



Government Regulation

         We  are  subject  to  numerous  federal,   state  and  local  laws  and
regulations  relating  to the  storage,  handling,  emission  and  discharge  of
materials  into  the  environment,  including  the  Comprehensive  Environmental
Response, Compensation and Liability Act, the Clean Water Act, the Clean Air Act
and the Resource  Conservation  and Recovery Act. As a result of our operations,
we generate or manage hazardous wastes, such as solvents,  thinner, waste paint,
waste  oil,  washdown  wastes  and  sandblast  material.  We  currently  spend a
negligible  amount  each year to dispose of the  wastes.  Although we attempt to
identify and address contamination before acquiring properties,  and although we
attempt  to  utilize  generally  accepted  operating  and  disposal   practices,
hydrocarbons  or other wastes may have been  disposed of or released on or under
properties owned,  leased, or operated by us or on or under locations where such
wastes have been taken for disposal. These properties and the wastes or remedial
sites where they have been released might have to be remediated at our expense.

         We believe  that our  existing  environmental  control  procedures  are
adequate  and we have no  current  plans for  substantial  operating  or capital
expenditures relating to environmental control requirements.  We believe that we
are in substantial  compliance with  environmental laws and regulations and that
the phasing in of emission  controls and other known regulatory  requirements at
the rate currently  contemplated  by such laws and  regulations  will not have a
material adverse affect on our financial condition or operational results.  Some
risk of  environmental  liability  and other costs are inherent in the nature of
our business,  however,  and there can be no assurance that environmental  costs
will not rise.  Moreover,  it is  possible  that  future  developments,  such as
increasingly strict requirements and environmental laws and enforcement policies
thereunder,  could lead to material  costs of  environmental  compliance  by us.
While we may be able to pass on the additional  cost of complying with such laws
to our  customers,  there can be no  assurance  that  attempts  to do so will be
successful.

Patents, Trademarks and Other Intellectual Property

         We  believe  that  the  success  of our  business  depends  more on the
technical  competence,  creativity and marketing abilities of our employees than
on any individual patent, trademark, or copyright.  Nevertheless, as part of our
ongoing research,  development and manufacturing activities, we have a policy of
seeking  patents when  appropriate  on  inventions  concerning  new products and
product  improvements.  We  currently  own two United  States  patents  covering
certain flare system technologies, which expire in May 2006 and in January 2010,
respectively. We do not own any foreign patents. Although we continue to use the
patented  technology and consider it useful in certain  applications,  we do not
consider these patents to be material to our business as a whole.


                                       11
<PAGE>

Suppliers and Raw Materials

         With respect to our flare  system and  compressor  operations,  our raw
materials  used consist of cast and forged iron and steel.  Such  materials  are
generally  available  from a number of suppliers,  and  accordingly,  we are not
dependent on any particular  supplier for these new  materials.  We currently do
not have long-term  contracts  with our suppliers of raw materials,  but believe
our sources of raw  materials  are reliable and adequate for our needs.  We have
not experienced any significant supply problems in the past.

         Certain  components of our compressors are obtained primarily from four
suppliers.  If either one of our  current  major  suppliers  should  curtail its
operations  or be  unable  to meet our  needs,  we  would  encounter  delays  in
supplying our customers with compressors until an alternative  supplier could be
found. We may not be able to find acceptable alternative suppliers.

ITEM 2. DESCRIPTION OF PROPERTY

         We maintain our executive  offices in Midland,  Texas. This facility is
owned  by us  and  is  used  for  manufacturing,  fabrication,  remanufacturing,
operations,   testing,  warehousing  and  storage,  general  and  administrative
functions and training.

         The facility in Midland is an approximately 24,600 square foot building
that provides us with sufficient  space to  manufacture,  fabricate and test our
equipment on site and has land available to expand the building when needed. Our
current  facilities  in Midland are  anticipated  to provide us with  sufficient
space and  capacity  for at least the next  year and thus  there are no  current
plans to open new locations,  unless they are acquired as a result of any future
acquisitions.

         The   facilities   in  Lewiston,   Michigan   consist  of  a  total  of
approximately  15,360 square feet.  Approximately  9,360 square feet are used as
offices  and a repair  shop and  approximately  6,000  square  feet are used for
manufacturing and fabrication of compressors and storage.

         The facility in Bloomfield, New Mexico is an approximately 4,000 square
foot building that is leased at a current rate of $2,650 per month pursuant to a
lease that terminates in May 2008.  Approximately  1,000 square feet are used as
office space and approximately 3,000 square feet are used for shop space.

         The facility in Bridgeport, Texas is an approximately 4,500 square foot
building  that is leased at a current  rate of $1,500  per month  pursuant  to a
lease that terminates in August 2006.  Approximately  500 square feet is used as
office space and approximately 4,000 square feet is used as shop space.



                                       12
<PAGE>

         We also own an approximately 4,100 square foot building in Midland that
is leased  at a  current  rate of  $1,050  per  month to an  unaffiliated  party
pursuant  to a lease  that  terminates  in May 2005.  This  facility  previously
contained our executive offices and manufacturing and fabrication operations.

         We believe that our  properties  are generally  well  maintained and in
good condition.

ITEM 3. LEGAL PROCEEDINGS

         There are no pending legal proceedings against our properties or us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         We did not submit any matters to a vote of our security  holders during
the fourth quarter of 2004.

















                                       13
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

         Our common stock and warrants are quoted on the American Stock Exchange
under the symbols NGS and NGS.WS,  respectively.  The following table sets forth
for the periods indicated the high and low sales prices for our common stock and
warrants  as reported  by the  American  Stock  Exchange.  Our common  stock and
warrants began trading on October 21, 2002.

---------------------------------------- ----------------- ---------------------
                                            Common Stock         Warrants
---------------------------------------- ----------------- ---------------------
                                           High      Low      High       Low
---------------------------------------- -------- -------- --------- -----------

---------------------------------------- -------- -------- --------- -----------
Oct. 21, 2002 through Dec. 31, 2002        $4.25    $3.35    $0.90       $0.25
---------------------------------------- -------- -------- --------- -----------
---------------------------------------- -------- -------- --------- -----------
2003
---------------------------------------- -------- -------- --------- -----------
First Quarter                              $4.30    $3.70    $0.80       $0.63
---------------------------------------- -------- -------- --------- -----------
Second Quarter                             $7.25    $3.65    $1.55       $0.55
---------------------------------------- -------- -------- --------- -----------
Third Quarter                              $6.75    $5.45    $1.65       $1.06
---------------------------------------- -------- -------- --------- -----------
Fourth Quarter                             $6.24    $5.25    $1.70       $1.25
---------------------------------------- -------- -------- --------- -----------
---------------------------------------- -------- -------- --------- -----------
2004
---------------------------------------- -------- -------- --------- -----------
First Quarter                              $7.20    $5.41    $2.30       $1.15
---------------------------------------- -------- -------- --------- -----------
Second Quarter                            $10.04    $7.20    $4.10       $2.00
---------------------------------------- -------- -------- --------- -----------
Third Quarter                              $9.45    $7.12    $3.85       $2.48
---------------------------------------- -------- -------- --------- -----------
Fourth Quarter                             $9.43    $8.07    $3.82       $3.08
---------------------------------------- -------- -------- --------- -----------


         As of December 31, 2004, there were  approximately 32 holders of record
of our  common  stock and 3 holders  of record of our  warrants.  The  number of
holders of record does not include  holders whose  securities are held in street
name.











                                       14
<PAGE>
<TABLE>
<CAPTION>

         We have never  declared or paid any dividends on our common  stock.  We
anticipate that, for the foreseeable  future,  all earnings will be retained for
use in our business and no cash  dividends will be paid to holders of our common
stock.  If we were to pay cash  dividends in the future on the common stock,  it
would be dependent upon our:

         o        financial condition,

         o        results of operations,

         o        current and anticipated cash requirements,

         o        plans for expansion,

         o        restrictions, if any, under debt obligations,

         As well as other factors that our board of directors  deemed  relevant.
Our  agreement  with our bank contains  provisions  that restrict us from paying
dividends on our common stock.

         The  following  is  a  table  with  information  regarding  our  equity
compensation plans as of December 31, 2004:

----------------------- ------------------------- ---------------------- -------------------------
Plan category           Number of securities to   Weighted-average       Number of securities
                        be issued upon exercise   exercise price of      remaining available for
                        of outstanding options,   outstanding options,   future issuance under
                        warrants and rights       warrants and rights    equity compensation
                                                                         plans (excluding
                                                                         securities reflected in
                                                                         column (a))

                        (a)                       (b)                    (c)
----------------------- ------------------------- ---------------------- -------------------------
<S>                     <C>                       <C>                    <C>
Equity compensation
plans approved by
security holders                 107,000                     $5.26                  32,000

----------------------- ------------------------- ---------------------- -------------------------
Equity compensation
plans not approved by
security holders                    -                          -                      -
----------------------- ------------------------- ---------------------- -------------------------
Total                            107,000                     $5.26                  32,000
----------------------- ------------------------- ---------------------------- -------------------
</TABLE>


Sales of Unregistered Securities during the Year Ended December 31, 2004

         On July 20, 2004,  the Company and CBarney  Investments,  Ltd.  entered
into a Securities Purchase Agreement.  Under this agreement,  the Company issued
and sold  649,574  shares of its common  stock to CBarney at $7.69736 per share.



                                       15
<PAGE>

The per share  price was  determined  by  multiplying  (x)  $8.747,  the average
closing  market price of the common stock on the American Stock Exchange for the
twenty  consecutive  trading  days ended July 15, 2004,  times (y)  eighty-eight
percent.  The Company  received  aggregate  gross proceeds of $5,000,000 and net
proceeds of  $4,950,000.  The  issuance and sale of the common stock was made in
reliance  upon  the  exemption  from  registration  under  Section  4(2)  of the
Securities  Act of 1933,  as amended,  as a  transaction  not involving a public
offering.  All of the shares are "restricted"  securities  within the meaning of
Rule 144 under the Securities Act and bear a legend to that effect.  However, we
did file a registration  statement  with the Securities and Exchange  Commission
registering the resale of the common stock. There were no underwriters  involved
in the transaction.

         On March 26,  2004,  all the  remaining  holders  of the  shares of our
outstanding 10% Convertible Series A Preferred Stock converted their shares into
shares  of  our  common  stock.  There  was  no  underwriter   involved  in  the
transactions.  The shares of our common  stock were issued in reliance  upon the
exemption  contained in Section 4(2) of the  Securities Act of 1933, as amended,
as a  transaction  not  involving  a  public  offering.  All of the  shares  are
"restricted"  securities within the meaning of rule 144 under the Securities Act
and bear a legend to that effect. All of the holders were accredited investors.

         During the twelve  months  ended  December  31,  2004 we issued  74,560
shares of common stock to three persons upon the exercise of their warrants. The
shares were issued in a  transaction  not  involving a public  offering and were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the  Securities  Act of 1933.  The persons to whom the shares were issued had
access to full  information  concerning  us.  The  certificates  for the  shares
contain  restrictive  legends  advising  that the shares may not be offered  for
sale, sold or otherwise  transferred  without having first been registered under
the 1933 Act or pursuant to an exemption from registration  under the Securities
Act of 1933.  There was no  underwriter  involved in the  issuance of the 74,560
shares.

         No repurchases  of our  securities  were made by on our behalf of us or
any  "affiliated  purchaser" as defined in Rule 10b - 18(a)(3) during the fourth
quarter of the year ended December 31, 2004.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The  following  discussion  should  be read  in  conjunction  with  the
consolidated  financial  statements  and  attached  notes  thereto and the other
financial  information  included  elsewhere  in  this  Report.  This  discussion
contains  forward-looking  statements that involve risks and uncertainties.  Our
actual results could differ  materially from those  anticipated in these forward
looking  statements  as a result of any number of factors,  including  those set
forth under the section entitled "Risk Factors" and elsewhere in this Report.



                                       16
<PAGE>

Overview

         We have  combined  the  operations  of our  wholly-owned  subsidiaries:
Rotary Gas  Systems,  NGE Leasing and Great Lakes  Compression.  These  entities
provide products and services to the oil and gas industry and are engaged in (1)
the  manufacture,  sale and rental of natural  gas  compressors  to enhance  the
productivity of oil and gas wells, and (2) the  manufacture,  sale and rental of
flares and flare ignition systems for plant and production  facilities.  We have
been the parent company and provide  administrative  and management support and,
therefore,  have expenses associated with that activity.  On January 1, 2004, we
merged our subsidiaries into us.


Results of Operations

         Twelve  Months Ended  December 31, 2004,  Compared to the Twelve Months
Ended December 31, 2003.

         Total revenue  increased from $12,750,000 to $15,958,000 or 25% for the
twelve months ended December 31, 2004 compared to the same period ended December
31, 2003.  This was mainly the result of increased  leasing  income as discussed
below.

         Sales  revenue  from  outside  sources  decreased  from  $3,865,000  to
$3,593,000,  or 7% for the twelve months ended December 31, 2004 compared to the
same period ended December 31, 2003.  Sales from outside sources  included:  (1)
Compressor  unit sales,  (2) Flare  sales,  (3) Parts  sales and (4)  Compressor
rebuilds.  This  decrease  was mainly the result of a  reduction  in the sale of
compressor  units to outside third  parties in the twelve months ended  December
31,  2004  compared  to the  same  period  in 2003.  Because  our  products  are
custom-built,  fluctuations  in revenue from outside  sources is not unusual and
our focus has been more on building a rental base than on the sale of equipment.

         Service  and   maintenance   revenue   increased  from   $1,773,000  to
$1,874,000,  or 6% for the twelve months ended December 31, 2004 compared to the
same period ended December 31, 2003.

         Leasing revenue  increased from  $7,111,000 to $10,491,000,  or 48% for
the twelve  months  ended  December  31, 2004  compared to the same period ended
December 31, 2003. This increase was the result of additional units added to our
rental fleet and leased to third  parties.  The company ended the 2004 year with
585 compressor  packages in its rental fleet,  up from 399 units at December 31,
2003.

         ---------------------------------------------------------------
                 Total Revenue Breakdown for Twelve months ended
                                December 31, 2004
         ---------------------------------- ----------------------------
         ---------------------------------- ----------------------------
                  Sales Revenue                           23%
         ---------------------------------- ----------------------------
                  Service & Maintenance
                  Revenue                                 12%
         ---------------------------------- ----------------------------
                  Leasing Revenue                         65%
         ---------------------------------- ----------------------------



                                       17
<PAGE>

         The gross margin  percentage  increased  from 52% for the twelve months
ended  December  31, 2003,  to 56% for the same period ended  December 31, 2004.
This improvement  resulted mainly from the relative  increase in leasing revenue
as a percentage  of the total  revenue.  Our rental fleet carries a gross margin
averaging 70%, and an increase in rentals improves our total gross margin.

         Selling,  general and administrative  expense increased from $2,292,000
to $2,652,000 or 16% for the twelve months ended  December 31, 2004, as compared
to the same period ended  December  31, 2003.  This was mainly the result of the
increase in commissions from additional  leasing contracts on gas compressors to
third  parties,  and an  increase in  professional  fees  related to  regulatory
filings and Sarbanes- Oxley compliance matters.

         Depreciation and amortization expense increased 42 % from $1,726,000 to
$2,444,000 for the twelve months ended  December 31, 2004,  compared to the same
period  ended  December 31,  2003.  This  increase was the result of 186 new gas
compressor  rental units being added to rental  equipment from December 31, 2003
to December 31, 2004.

         Other income and expense  increased  approximately  $1,445,000  for the
twelve  months  ended  December  31,  2004,  compared to the same  period  ended
December 31, 2003.  This  increase was due mainly from the receipt of $1,500,000
in life insurance  payable in connection  with the death of Mr. Wayne L. Vinson,
our former  President and C.E.O. His death on March 15, 2004 left the company as
the beneficiary of two life insurance policies, one for $1,000,000,  and one for
$500,000.

         Interest expense increased  $770,000 or 26% for the twelve months ended
December 31, 2004  compared to the same period ended  December 31, 2003,  mainly
due to the increased loan balances on vehicles and rental equipment.

         Provision  for income tax increased  $443,000 or 64%,  primarily due to
the increase in net taxable income.  The income from the life insurance proceeds
described above is not subject to federal income tax.

         Net Income for the year  increased  158% mainly from  increased  rental
activity and life insurance proceeds.





                                       18
<PAGE>

Critical Accounting Policies and Practices

         We have  identified  the  policies  below as critical  to our  business
operations and the  understanding of our results of operations.  In the ordinary
course of business,  we have made a number of estimates and assumptions relating
to the  reporting  of results  of  operations  and  financial  condition  in the
preparation of our financial statements in conformity with accounting principles
generally   accepted  in  the  United   States.   Actual  results  could  differ
significantly  from those estimates under different  assumptions and conditions.
We believe that the following  discussion addresses our most critical accounting
policies,  which are  those  that are most  important  to the  portrayal  of our
financial  condition and results of operations  and require our most  difficult,
subjective,  and  complex  judgments,  often  as a  result  of the  need to make
estimates about the effect of matters that are inherently uncertain.

         Our critical accounting policies are as follows:

         o        revenue recognition;

         o        estimating the allowance for doubtful accounts;

         o        accounting for income taxes;

         o        valuation of long-lived  and  intangible  assets and goodwill;
                  and

         o        valuation of inventory

Revenue recognition

         We recognize  revenue from sales of compressors or flare systems at the
time of shipment and passage of title when collectability is reasonably assured.
We also offer certain of our customers the right to return  products that do not
function properly within a limited time after delivery.  We continuously monitor
and track such  product  returns  and we record a  provision  for the  estimated
amount  of  such  future  returns,   based  on  historical  experience  and  any
notification we receive of pending returns. While such returns have historically
been within our expectations and the provisions established, we cannot guarantee
that we will  continue to  experience  the same return rates that we have in the
past. Any significant increase in product failure rates and the resulting credit
returns could have a material  adverse  impact on our operating  results for the
period or periods in which such returns occur.

         When product is billed to customers  based on  contractual  agreements,
but has not yet been shipped, payments are recorded as deferred revenue, pending
shipment.

         Rental  and  lease  revenue  are  recognized  over  the  terms  of  the
respective lease agreements based upon the classification of the lease.

         Service  and  maintenance  revenue  is  recognized  as the  service  is
provided or over the term of the agreement, as applicable.



                                       19
<PAGE>

Allowance for doubtful accounts receivable

         We perform  ongoing  credit  evaluations  of our  customers  and adjust
credit  limits  based upon payment  history and the  customer's  current  credit
worthiness, as determined by our review of their current credit information.  We
continuously  monitor collections and payments from our customers and maintain a
provision for estimated  credit losses based upon our historical  experience and
any specific  customer  collection  issues that we have  identified.  While such
credit losses have  historically been within our expectations and the provisions
established,  we cannot  guarantee  that we will continue to experience the same
credit loss rates that we have in the past. Since 22% of our accounts receivable
are  concentrated  in  approximately  two  customers  at December  31,  2004,  a
significant  change in the  liquidity or financial  position of any one of these
customers  could have a material  adverse  impact on the  collectability  of our
accounts receivables and our future operating results.

Accounting for income taxes

         As  part  of  the  process  of  preparing  our  consolidated  financial
statements  we are  required to estimate  our  Federal  income  taxes as well as
income taxes in each of the states in which we operate. This process involves us
estimating  our actual current tax exposure  together with  assessing  temporary
differences  resulting from differing  treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are  included  in our  consolidated  balance  sheet.  We must  then  assess  the
likelihood  that our deferred tax assets will be recovered  from future  taxable
income and to the extent we  believe  that  recovery  is not  probable,  we must
establish  a  valuation  allowance.  To the  extent  we  establish  a  valuation
allowance or increase this allowance in a period,  we must include an expense in
the tax provision in the statement of operations.

         Significant   management   judgment  is  required  in  determining  our
provision  for income  taxes,  our deferred tax assets and  liabilities  and any
valuation allowance recorded against our net deferred tax assets.

Valuation of long-lived and intangible assets and goodwill

         We assess the impairment of identifiable intangibles, long-lived assets
and related goodwill  whenever events or changes in circumstances  indicate that
the carrying value may not be recoverable.  Factors we consider  important which
could trigger an impairment review include the following:

         o        significant  underperformance  relative to expected historical
                  or projected future operating results;

         o        significant  changes in the manner of our use of the  acquired
                  assets or the strategy for our overall business; and

         o        significant negative industry or economic trends;



                                       20
<PAGE>

         When we determine  that the carrying value of  intangibles,  long-lived
assets and related  goodwill may not be recoverable  based upon the existence of
one or more of the above  indicators of  impairment,  we measure any  impairment
based  on a  projected  discounted  cash  flow  method  using  a  discount  rate
determined by our  management to be  commensurate  with the risk inherent in our
current business model.

         In 2002,  Statement of Financial  Accounting Standards ("FAS") No. 142,
"Goodwill and Other  Intangible  Assets"  became  effective and as a result,  we
ceased to amortize approximately $2.6 million of goodwill as of January 1, 2002.
In lieu of amortization,  we are required to perform an annual impairment review
of our  goodwill.  Based  upon  valuations  in June 2003 and June  2004,  of our
reporting  units with  goodwill,  we did not record an impairment  charge during
either year.

Inventories

         We value our  inventory  at the lower of the  actual  cost to  purchase
and/or  manufacture the inventory or the current  estimated  market value of the
inventory.  We  regularly  review  inventory  quantities  on hand  and  record a
provision  for excess and obsolete  inventory  based  primarily on our estimated
forecast of product demand and production requirements.

Recently Issued Accounting Pronouncements

         On  December  16,  2004,  the FASB  published  FASB  Statement  No. 123
(revised  2004),  Share-Based  Payment.  Statement  123(R)  requiring  that  the
compensation cost relating to share-based payment  transactions be recognized in
financial statements.  That cost will be measured based on the fair value of the
equity or liability instruments issued. Public entities (other than those filing
as small business  issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after June 15, 2005. Public
entities that file as small business issuers will be required to apply Statement
123(R) in the first  interim  or  annual  reporting  period  that  begins  after
December 15, 2005.  Statement 123(R) replaces FASB Statement No. 123, Accounting
for Stock-Based Compensation,  and supersedes APB Opinion No. 25, Accounting for
Stock  Issued  to  Employees.  Statement  123,  as  originally  issued  in 1995,
established   as  preferable  a   fair-value-based   method  of  accounting  for
share-based  payment  transactions  with  employees.   However,  that  Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used.

         Seasonality and Economic Conditions

         Our  sales  are  affected  by the  timing of  planned  development  and
construction projects by energy industry customers.




                                       21
<PAGE>

         We do not believe that inflation had a material impact upon our results
of operations  during the year ended December 31, 2004, or during the year ended
December 31, 2003.

Liquidity and Capital Resources

         We have funded our operations  through public and private  offerings of
our common and preferred  stock,  subordinated  debt, and bank debt. At December
31, 2004, we had cash and cash  equivalents of approximately  $685,000,  working
capital of approximately $640,000 and debt of approximately $13,018,000 of which
approximately  $3,728,000  was  classified  as  current.  We  had  approximately
$4,697,000 of net cash flow from operating  activities  during the twelve months
ending  December 31, 2004.  This was primarily from net income of  approximately
$3,374,000 plus  depreciation and  amortization of approximately  $2,444,000 and
increases in deferred taxes of approximately  $1,120,000,  offset by an increase
in accounts  receivable and inventory of approximately  $1,182,000 and 1,915,000
respectively.

Market Risk

         We significantly rely upon debt financing provided by various financial
institutions.  Most of these instruments contain interest provisions that are at
least a  percentage  point  above  the  published  prime  rate.  This  creates a
vulnerability to us relative to the movement of the prime rate. Should the prime
rate increase,  our cost of funds will increase and affect our ability to obtain
additional  debt.  We have not engaged in any hedging  activities to offset such
risks.

Risk Factors

         You  should  carefully  consider  the  following  risks.  The risks and
uncertainties  described below are not the only ones facing us. Additional risks
and  uncertainties  that are not presently known to us or that we currently deem
immaterial may also impair our business.

         If any of the events  described in the following  risks actually occur,
our business,  financial condition and results of operations could be materially
adversely  affected.  In such case,  the trading  prices of our common  stock or
warrants could decline and you could lose all or part of your investment.

Our  current  debt is large and may  negatively  impact our  current  and future
financial stability.

         As  of  December  31,  2004  we  had  an  aggregate  of   approximately
$13,018,000  of  outstanding  indebtedness  not including  accounts  payable and
accrued  expenses of  approximately  $2,355,000.  As a result of our significant
indebtedness,  we might not have the ability to incur any substantial additional
indebtedness. The level of our indebtedness could have several important effects
on our future operations, including:



                                       22
<PAGE>

         o        our  ability  to  obtain  additional   financing  for  working
                  capital, acquisitions, capital expenditures and other purposes
                  may be limited;

         o        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

         o        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.



         As of December 31, 2004,  our  principal  payments for our debt service
requirements  on a  monthly,  quarterly  and  annual  basis  were  approximately
$312,000,  $936,000,  and  $3,745,000,  respectively.  It is  possible  that our
business will not generate sufficient cash flow from operations to meet our debt
service  requirements  and the  payment of  principal  when due. If this were to
occur, we may be forced to:

         o        sell assets at disadvantageous prices;

         o        obtain additional financing; or

         o        refinance all or a portion of our  indebtedness  on terms that
                  may be very unfavorable to us.

Our current bank loan contains  covenants that limit our operating and financial
flexibility  and, if breached,  could expose us to severe  remedial  provisions.

         Under the terms of the bank loan, we must:

         o        comply with a debt to asset ratio;

         o        maintain minimum levels of tangible net worth;

         o        not exceed specified levels of debt;

         o        comply with a cash flow to fixed charges ratio;

         o        comply with a debt to net worth ratio; and

         o        not incur additional debt over a specified amount.

         Our ability to meet the financial  ratios and tests under our bank loan
can be affected by events beyond our control,  and we may not be able to satisfy
those  ratios  and  tests.  A  breach  under  either  could  permit  the bank to



                                       23
<PAGE>

accelerate  the  debt so that it is  immediately  due and  payable.  No  further
borrowings  would be available under the credit  facility.  If we were unable to
repay the debt, the bank could proceed against our assets.

Approximately 69% of our compressor leases are leased for terms of six months or
less that, if terminated,  would adversely impact our revenue and our ability to
recover our initial equipment costs.

         Approximately  69% of our compressor  leases are for terms of up to six
months.  There is a possibility that these leases could be terminated by lessees
within short  periods of time and that we may not be able to recover the cost of
the compressor for which a lease is terminated.

The  anticipated  revenue  from the  affiliate  of Dominion  Michigan  cannot be
guaranteed.

         In connection with our acquisition of the compression related assets of
Dominion  Michigan,  an  affiliate  of Dominion  Michigan  committed to purchase
compressors  from us or enter  into five  year  leases  of  compressors  with us
totaling  five-thousand  horsepower  an expires  December 31, 2005.  If, for any
reason,  the affiliate does not fulfill this obligation to any material  extent,
our cash flow will be  significantly  reduced  and we may not be able to pay the
principal or interest on our debt as it becomes due.

We rely on one customer for a significant amount of our business and the loss of
this customer could adversely  affect our operating  results and lower the price
of our common stock

         During the years ended December 2004 and 2003,  Dominion  Exploration &
Production,  Inc.  accounted for  approximately  21% and 28% of our consolidated
revenue,  respectively.  The loss of Dominion  Exploration  as a customer  could
cause our  operating  results to fall below market  analysts'  expectations  and
lower the price of our common stock.

We are dependent on a few suppliers for some of our  compressor  components  and
the loss of one of these suppliers could cause a delay in the  manufacturing  of
our compressors and reduce our revenue.

         We currently obtain approximately 20% of our compressor components from
three  suppliers.  We  order  from  these  suppliers  as  needed  and we have no
long-term  contracts  with  any of  these  suppliers.  If any of  these of these
suppliers should curtail its operations or be unable to meet our needs, we would
encounter  delays  in  supplying  our  customers  with   compressors   until  an
alternative  supplier,  if any, could be found. Such delays in our manufacturing
process could reduce our revenue and negatively  impact our  relationships  with
customers.

Decreased oil and gas industry  expenditure  levels would  adversely  affect our
revenue.


                                       24
<PAGE>

         Our revenue is derived  from  expenditures  in the oil and gas industry
which, in turn, are based on budgets to explore for, develop and produce oil and
natural  gas. If these  expenditures  decline,  our  revenue  will  suffer.  The
industry's willingness to explore,  develop and produce depends largely upon the
prevailing view of future oil and gas prices. Many factors affect the supply and
demand for oil and gas and, therefore, influence product prices including:

         o        the level of oil and gas production;

         o        the levels of oil and gas inventories;

         o        the expected cost of developing new reserves;

         o        the cost of producing oil and gas;

         o        the level of drilling activity;

         o        inclement weather;

         o        worldwide economic activity;

         o        regulatory  and other  federal and state  requirements  in the
                  United States;

         o        the  ability  of  the  Organization  of  Petroleum   Exporting
                  Countries to set and maintain production levels and prices for
                  oil;

         o        terrorist activities in the United States and elsewhere;

         o        the cost of developing alternate energy sources;

         o        environmental regulation; and

         o        tax policies.

         If  the  demand  for  oil  and  gas  decreases,  then  demand  for  our
compressors likely will decrease.

The intense  competition in our industry  could result in reduced  profitability
and loss of market share for us.

         We sell or lease our  products  and sell our  services  in  competitive
markets.  In most of our  business  segments,  we  compete  with the oil and gas
industry's  largest  equipment  and  service  providers  who have  greater  name
recognition  than  we  do.  These  companies  also  have  substantially  greater
financial  resources,  larger  operations  and greater  budgets  for  marketing,
research  and  development  than we do.  They may be better  able to  compete in
making  equipment  available  quickly  and more  efficiently,  meeting  delivery
schedules or reducing  prices.  As a result,  we could lose customers and market
share to those  competitors.  These companies may also be better positioned than
us to successfully endure down turns in the oil and gas industry.



                                       25
<PAGE>

         Our operations may be adversely affected if our current  competitors or
new market  entrants  introduce  new  products or services  with better  prices,
features, performance or other competitive characteristics than our products and
services.  Competitive pressures or other factors also may result in significant
price competition that could harm our revenue and our business.

We might be unable to employ adequate  technical  personnel,  which could hamper
our plans for expansion or increase our costs.

         Many of the compressors  that we sell or lease are technically  complex
and often must perform in harsh conditions.  We believe that our success depends
upon our ability to employ and retain a sufficient number of technical personnel
who have the ability to design, utilize, enhance and maintain these compressors.
Our ability to expand our operations  depends in part on our ability to increase
our skilled  labor force.  The demand for skilled  workers is high and supply is
limited. A significant  increase in the wages paid by competing  employers could
result in a  reduction  of our  skilled  labor force or cause an increase in the
wage rates that we must pay or both.  If either of these  events  were to occur,
our cost structure could increase and our operations and growth  potential could
be impaired.

If we do not develop, produce and commercialize new competitive technologies and
products, our revenue may decline.

         The markets for natural gas  compressor  products  and services and for
flare  systems,  ignition  systems  and  components  for  plant  and  production
facilities  are  characterized  by continual  technological  developments.  As a
result,  substantial  improvements in the scope and quality of product  function
and  performance  can occur over a short  period of time.  If we are not able to
develop  commercially  competitive  products  in a timely  manner in response to
changes in technology, our business and revenue may be adversely affected.

         We  may  encounter   financial   constraints   or  technical  or  other
difficulties  that could delay  introduction of new products and services in the
future.  Our  competitors  may introduce new products before we do and achieve a
competitive advantage.

         Additionally,  the time and expense invested in product development may
not result in commercial applications that provide revenue. We could be required
to write  off our  entire  investment  in a new  product  that  does  not  reach
commercial  viability.  Moreover,  we may experience  operating losses after new
products are  introduced  and  commercialized  because of high  start-up  costs,
unexpected manufacturing costs or problems, or lack of demand.

We are  subject  to  extensive  environmental  laws and  regulations  that could
require us to take  costly  compliance  actions  that  could harm our  financial
condition.



                                       26
<PAGE>

         Our manufacturing and maintenance operations are significantly affected
by stringent and complex federal, state and local laws and regulations governing
the  discharge of  substances  into the  environment  or  otherwise  relating to
environmental  protection. In these operations, we generate and manage hazardous
wastes such as solvents,  thinner,  waste paint, waste oil, washdown wastes, and
sandblast material.  We attempt to use generally accepted operating and disposal
practices and, with respect to acquisitions, will attempt to identify and assess
whether there is any environmental risk before completing an acquisition.  Based
on the nature of the industry,  however,  hydrocarbons  or other wastes may have
been disposed of or released on or under properties  owned,  leased, or operated
by us or on or under  other  locations  where  such  wastes  have been taken for
disposal.  The waste on these  properties  may be  subject  to  federal or state
environmental laws that could require us to remove the wastes or remediate sites
where they have been  released.  We could be exposed to  liability  for  cleanup
costs,  natural  resource  and other  damages as a result of our  conduct or the
conduct of, or  conditions  caused by, prior  operators or other third  parties.
Environmental laws and regulations have changed in the past, and they are likely
to change in the future.  If existing  regulatory  requirements  or  enforcement
policies change,  we may be required to make significant  unanticipated  capital
and operating expenditures.

         Any  failure by us to comply  with  applicable  environmental  laws and
regulations  may result in governmental  authorities  taking actions against our
business that could harm our operations and financial condition, including the:

         o        issuance of administrative, civil and criminal penalties;

         o        denial or revocation of permits or other authorizations;

         o        reduction or cessation in operations; and

         o        performance   of  site   investigatory,   remedial   or  other
                  corrective actions.

We  could be  subject  to  substantial  liability  claims  that  could  harm our
financial condition.

         Our products are used in hazardous drilling and production applications
where an accident or a failure of a product can cause personal  injury,  loss of
life,  damage to  property,  equipment  or the  environment,  or  suspension  of
operations.









                                       27
<PAGE>

         While we maintain insurance coverage, we face the following risks under
our insurance coverage:

         o        we may  not  be  able  to  continue  to  obtain  insurance  on
                  commercially reasonable terms;

         o        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;

         o        the  dollar  amount of any  liabilities  may exceed our policy
                  limits; and

         o        we do not maintain  coverage  against the risk of interruption
                  of our business.

         Any claims  made under our policy  will  likely  cause our  premiums to
increase.  Any future  damages  caused by our products or services  that are not
covered  by  insurance,  are in  excess  of  policy  limits  or are  subject  to
substantial  deductibles,  would reduce our earnings and our cash  available for
operations.

Liability to customers under  warranties may materially and adversely affect our
earnings.

         We provide  warranties as to the proper  operation and  conformance  to
specifications  of the  equipment we  manufacture.  Our equipment is complex and
often  deployed  in harsh  environments.  Failure of this  equipment  to operate
properly  or  to  meet  specifications  may  increase  our  costs  by  requiring
additional  engineering  resources  and  services,   replacement  of  parts  and
equipment or monetary  reimbursement to a customer. We have in the past received
warranty claims and we expect to continue to receive them in the future.  To the
extent that we incur substantial  warranty claims in any period, our reputation,
our ability to obtain future  business and our earnings  could be materially and
adversely affected.

Loss of key members of our management  could adversely affect our business while
we attempt to find their replacements.

         We depend on the continued  employment  and  performance  of Wallace C.
Sparkman,  our Chairman,  Stephen C. Taylor our President and Earl R. Wait,  our
Treasurer and Chief Financial Officer,  and other key members of our management.
If any of our key managers  resigns or becomes unable to continue in his present
role and is not adequately replaced, our business operations could be materially
adversely affected.

We are  reliant on our current  customers  for future cash flows and the loss of
one or more of our  current  customers  could  adversely  affect our  results of
operations.

         Our business is dependent  not only on securing new  customers but also
on maintaining current customers.  Dominion  Exploration & Production,  Inc., an
affiliate of Dominion  Resources,  Inc.,  accounted  for  approximately  21% and



                                       28
<PAGE>

approximately 28% of our consolidated revenue during the year ended December 31,
2004 and the year ended December 31, 2003, respectively. The loss of one or more
of our  significant  customers  would have an adverse  effect on our revenue and
results of operations.

Provisions  contained in our  governing  documents  could hinder a change in our
control.

         Our articles of  incorporation  and bylaws contain  provisions that may
discourage acquisition bids and may limit the price investors are willing to pay
for our common  stock and  warrants.  Our articles of  incorporation  and bylaws
provide that:

         o        directors   will  be  elected  for  three-year   terms,   with
                  approximately one-third of the board of directors standing for
                  election each year;

         o        cumulative  voting is not allowed  which limits the ability of
                  minority shareholders to elect any directors;

         o        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

         o        directors may only be removed for cause by holders of not less
                  than 80% of the votes entitled to be cast on the matter.

         Our board of  directors  has the  authority to issue up to five million
shares  of  preferred  stock.  The board of  directors  can fix the terms of the
preferred stock without any action on the part of our shareholders. The issuance
of  shares  of  preferred  stock  may  delay  or  prevent  a change  in  control
transaction.  In addition,  preferred stock could be used in connection with the
board of  director's  adoption of a  shareholders'  rights plan (also known as a
poison  pill),  which  would make it much more  difficult  to effect a change in
control of our company through acquiring or controlling  blocks of stock.  Also,
after  completion of this  offering,  our directors and officers as a group will
continue  to  beneficially  own stock.  Although  this is not a majority  of our
stock,  it confers  substantial  voting power in the  election of directors  and
management  of our  company.  This would make it  difficult  for other  minority
shareholders,  such as the  investors  in this  offering,  to effect a change in
control or otherwise  extend any significant  control over the management of our
company.  This may  adversely  affect the market  price and  interfere  with the
voting and other rights of our common stock.

We must evaluate our intangible assets annually for impairment.

         Our   intangible   assets  are   recorded  at  cost  less   accumulated
amortization  and consist of goodwill  and patent  costs.  Through  December 31,
2001,  goodwill was amortized using the  straight-line  method over 15 years and
patent costs were amortized over 13 to 15 years.



                                       29
<PAGE>

         In June 2001, the Financial Accounting Standards Board issued Statement
of  Financial  Accounting  Standards  No. 142,  "Goodwill  and Other  Intangible
Assets."  FAS  142  provides  that:  1)  goodwill  and  intangible  assets  with
indefinite lives will no longer be amortized;  2) goodwill and intangible assets
with indefinite  lives must be tested for impairment at least  annually;  and 3)
the amortization  period for intangible  assets with finite lives will no longer
be limited to forty years. In the event that we determine our intangible  assets
with indefinite  lives have been impaired,  we must record a write-down of those
assets on our  statement  of  operations  during the period of  impairment.  Our
determination of impairment will be based on various  factors,  including any of
the following factors, if they materialize:

         o        significant  underperformance  relative to expected historical
                  or projected future operating results;

         o        significant  changes in the manner of our use of the  acquired
                  assets or the strategy for our overall business;

         o        significant negative industry or economic trends;

         o        significant decline in our stock price for a sustained period;
                  and

         o        our market capitalization relative to net book value.

         We  adopted  FAS 142 as of January  1,  2002.  Based on an  independent
valuation in July 2002 and June 2003 and an internal  evaluation in June 2004 of
our reporting  units with goodwill,  adoption of FAS 142 did not have a material
adverse  effect  on us in 2003  or  2004.  In the  future  it  could  result  in
impairments  of our  intangible  assets or  goodwill.  We expect to  continue to
amortize our  intangible  assets with finite lives over the same time periods as
previously  used, and we will test our intangible  assets with indefinite  lives
for  impairment at least once each year. In addition,  we are required to assess
the consumptive  life, or longevity,  of our intangible assets with finite lives
and adjust their  amortization  periods  accordingly.  Our net intangible assets
were  recorded on our balance sheet at  approximately  $2,676,000 as of December
31,  2004,  and  we  increased  the  carrying  value  of net  intangible  assets
significantly with the SCS acquisition, which was completed January 3, 2005. Any
impairment  in  future  periods  of  those  assets,  or  a  reduction  in  their
consumptive  lives,  could  materially  and  adversely  affect our  statement of
operations and financial position.

Item 7. FINANCIAL STATEMENTS

         See Financial Statements beginning on page F-1.

Item  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

         None.



                                       30
<PAGE>

Item 8A. CONTROLS AND PROCEDURES

         Under the  supervision  and with the  participation  of our management,
including our chief executive officer and our principal  accounting  officer, we
have evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2004. They have concluded that these  disclosure  controls  provide
reasonable assurance that we can collect, process and disclose,  within the time
periods specified in the Commission's rules and forms, the information  required
to be disclosed in our periodic Exchange Act reports.

         There have been no significant  changes in our internal  controls or in
other factors that could  significantly  affect our internal controls subsequent
to the date of their most recent evaluation.

Item 8B.  Other Information

         None.



















                                       31
<PAGE>

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

         The table below contains  information about our executive  officers and
         directors at March 23, 2005:

         Name                                Age     Position

         Wallace C. Sparkman(5)              74      Director, Chairman
         Wallace O. Sellers(1)(2)(3)         75      Director,
         Charles G. Curtis(1)(2) (3)         72      Director
         William F. Hughes, Jr. (1)(2) (3)   52      Director
         Gene A. Strasheim(1)(2)(3)(4)       63      Director
         Richard L. Yadon(1)(2)(3)           46      Director
         Paul Hensley                        52      Director, President of SCS
         Stephen C. Taylor                   51      President, Chief Executive
                                                     Officer
         Earl R. Wait                        61      Chief Financial Officer and
                                                     Treasurer
         Ronald D. Bingham                   60      Vice President
         S. Craig Rogers                     42      Vice President
         William R. Larkin                   39      Vice President
         Scott W. Sparkman(5)                43      Secretary
         ---------------------

         (1)  Member of our audit committee
         (2)  Member of our compensation committee
         (3)  Member of our nominating committee
         (4)  Gene A.  Strasheim has been  determined by  our Board of Directors
              to be the financial  expert on our audit committee.  Mr. Strasheim
              is  independent  as that  term  is  used in Item 7  (d)(3)(iv)  of
              Schedule 14A under the Exchange Act.
         (5)  Wallace C. Sparkman is the father of Scott W. Sparkman.

         The  Board of  Directors  has been  divided  into  three  classes  with
directors  serving  staggered  three-year  terms.  The terms of Messrs.  Curtis,
Sellers and Strasheim  will expire at the 2005 annual  meeting of  shareholders,
and the terms of Messrs.  Hughes and Sparkman will expire in 2006.  Mr.  Yadon's
term will  expire in 2007.  In January  2005,  Mr.  Hensley was  appointed  as a
director to fill a vacancy on the Board of  Directors,  to hold office until the
2005 annual meeting of shareholders. All officers serve at the discretion of the
Board of Directors.




                                       32
<PAGE>

         Wallace C. Sparkman is one of our founders and has served as a director
since 2003 and as Chairman  of the Board of  Directors  since  March  2005.  Mr.
Sparkman served from April 1993 in various  executive and director  positions in
several subsidiary  companies prior to their merger into the Company on December
31, 2003.  Mr.  Sparkman  served as our interim  President  and Chief  Executive
Officer from March 2004 to January  2005,  when Stephen  Taylor was employed for
the position.  From December 1998 to 2003, Mr.  Sparkman was a consultant to our
Board of Directors.  Mr.  Sparkman  acted as a management  consultant to various
entities and acted as a principal in forming several privately-owned  companies.
Mr.  Sparkman was a co-founder  of Sparkman  Energy  Corporation,  a natural gas
gathering and  transmission  company,  in 1979 and served as its Chairman of the
Board,  President and Chief Executive  Officer until 1985 when ownership control
changed.  From 1968 to 1979, Mr. Sparkman held various  executive  positions and
served as a director  of Tejas Gas  Corporation,  a natural  gas  gathering  and
transmission  company. At the time of his resignation from Tejas Gas Corporation
in 1979, Mr.  Sparkman was President and Chief Executive  Officer.  Mr. Sparkman
has more than 37 years of experience in the energy service industry.

         Wallace O.  Sellers is one of our founders and has served as a director
of Natural Gas Services  Group,  Inc. since December 1998 and as Chairman of our
Board of  Directors  from  December  1998 to March  2005.  Mr.  Sellers  was the
Chairman of the Board of Directors of Great Lakes Compression from February 2001
to December 31, 2003.  Although Mr. Sellers  retired in December 1994, he served
as Vice-Chairman of the Board and Chairman of the Executive Committee of Enhance
Financial Services,  Inc., a financial guaranty reinsurer,  from January 1995 to
2001.  From November 1986 to December 1991 he was President and Chief  Executive
Officer of Enhance. From 1951 to 1986 Mr. Sellers was employed by Merrill Lynch,
Pierce,   Fenner  &  Smith  Incorporated,   an  investment  banker,  in  various
capacities,  including Director of the Municipal and Corporate Bond Division and
Director  of  the  Securities  Research  Division.   Immediately  prior  to  his
retirement  from Merrill Lynch,  he served as Senior Vice President and Director
of Strategic  Development.  Mr. Sellers received a BA degree from the University
of New Mexico,  an MA degree from New York  University and attended the Advanced
Management Program at Harvard  University.  Mr. Sellers is a Chartered Financial
Analyst.

         Charles G. Curtis has been one of our directors since April 2001. Since
1992,  Mr. Curtis has been the President and Chief  Executive  Officer of Curtis
One, Inc.  d/b/a/ Roll Stair, a manufacturer of aluminum and steel mobile stools
and mobile  ladders.  From 1988 to 1992,  Mr. Curtis was the President and Chief
Executive Officer of Cramer, Inc. a manufacturer of office furniture. Mr. Curtis
has a B.S.  degree from the United  States Naval  Academy and a MSAE degree from
the University of Southern California.

         William F. Hughes,  Jr. has been one of our  directors  since  December
2003.  Since 1983,  Mr. Hughes has been co-owner of The Whole  Wheatery,  LLC, a
natural  foods  store  located in  Lancaster,  California.  Mr.  Hughes  holds a
Bachelor of Science degree in Civil  Engineering from the U.S. Air Force Academy
and a Masters of Science in Engineering from UCLA.



                                       33
<PAGE>

         Gene A. Strasheim has served as one of our directors since 2003.  Since
2001,   Mr.   Strasheim   has   been   a   financial   consultant   to   Skyline
Electronics/Products,  a  manufacturer  of  circuit  boards  and large  remotely
controlled  digital  interstate  highway signs. From 1992 to 2001, Mr. Strasheim
was the Chief Financial  Officer of Skyline  Electronics/Products.  From 1985 to
1992, Mr. Strasheim was the Vice  President-Finance  and Treasurer of CF&I Steel
Corporation. Prior to that, Mr. Strasheim was the Vice President-Finance for two
companies and was a partner with Deloitte  Haskins & Sells,  a large  accounting
firm. Mr. Strasheim  practiced as a Certified Public  Accountant in three states
and has a BS degree from the University of Wyoming.

         Richard L. Yadon has served as one of our  directors  since  2003.  Mr.
Yadon is one of the original founders of Rotary and served as advisor to Natural
Gas' Board of Directors  from June 2002 to June 2003.  Since 1981, Mr. Yadon has
owned and operated Yadeco Pipe & Equipment. Since December 1994, he has co-owned
and presided as President of Midland Pipe & Equipment,  Inc. Both  companies are
directly  related to drilling and completion of oil and gas wells in Texas,  New
Mexico, Louisiana and Oklahoma. Since 1981, he has owned Yadon Properties, which
owns and  operates  real estate in  Midland,  Texas.  Mr.  Yadon has 22 years of
experience in the energy service industry.

         Paul D.  Hensley is the  founder and has served as  president  of Screw
Compression  Systems (SCS) from its inception in 1997.  Mr. Hensley has 25 years
of experience in the natural gas  compressor  industry and was the driving force
behind  the  development  and  successful  manufacture  of  SCS's  reciprocating
compressor  product line. Mr. Hensley was appointed as a director of Natural Gas
Services  Group,  Inc.  in  January  2005,  to fill a  vacancy  on the  Board of
Directors.

         Stephen C.  Taylor was  elected  by the Board of  Directors  of NGSG to
assume the position of  President/CEO  in January,  2005.  Immediately  prior to
joining NGSG, Mr. Taylor held the position of General Manager-US  Operations for
Trican  Production  Services,  Inc., a Canadian-based  pressure pumping company,
from 2002 through  2004.  Mr.  Taylor  joined  Halliburton  Resource  Management
(Halliburton  Company's gas compression  rental division) in 1976 and progressed
through numerous  engineering,  sales and operational  positions  throughout the
U.S.  to  be  its   VP-Operations  in  1989.  In  1993  he  transferred  to  the
corporate-entity  of Halliburton  Energy Services and held multiple senior level
management and operational positions,  including extensive  international travel
and  responsibilities.  In 2000 he was elected Sr. VP/Chief Operating Officer of
Enventure Global Technology,  LLC, a joint-venture  company owned by Halliburton
and Shell Oil Company involved in leading-edge  deepwater drilling technologies.
Mr. Taylor  elected early  retirement  from  Halliburton  in 2002 to join Trican
Production  Services,  Inc.  Mr.  Taylor  holds a Bachelor of Science  degree in
Mechanical Engineering from Texas Tech University and an MBA from The University
of Texas in Austin.



                                       34
<PAGE>

         Earl R. Wait has served as our Chief  Financial  Officer since May 2000
and our Treasurer  since 1998.  Mr. Wait was our Chief  Accounting  Officer from
1998  to  May   2000.   Mr.   Wait  was  the   Chief   Financial   Officer   and
Secretary/Treasurer  of Flare King and then  Rotary  from April 1993 to December
31, 2003, the Controller and Assistant Secretary/Treasurer for Hi-Tech from 1994
to 1999, a director of NGE and Rotary from July 1999 to April 2001 and the Chief
Accounting  Officer and Treasurer of Great Lakes  Compression from February 2001
to December 31, 2003. Mr. Wait is a certified  public  accountant with an MBA in
management and has more than 25 years of experience in the energy industry.

         Ronald  D.  Bingham  has  served  as one of our Vice  Presidents  since
December  2003 and was the  President  of Great Lakes  Compression  from 2001 to
December 31,  2003.  From March 2001 to July 2001,  Mr.  Bingham was the General
Manager of Great Lakes Compression. From January 1989 to March 2001, Mr. Bingham
was the District Manager for Waukesha Pearce Industries,  Inc., a distributor of
Waukesha  natural gas engines.  Mr.  Bingham is a member of the Michigan Oil and
Gas Association and received a bachelors degree in Graphic Arts from Sam Houston
State University.

         S. Craig  Rogers has  served as one of our Vice  Presidents  since June
2003. He served as Operations Manager for Rotary from 1995 to December 31, 2003,
and Vice  President of Rotary from April 2002 to December  31, 2003.  From March
1987 to  January  1995,  Mr.  Rogers  was the  Shop  Manager  for  CSI,  a major
manufacturer of natural gas compressors.

         W. Randy Larkin has served as Vice President since October 13, 2003. He
held  various  positions  with  Compressors  Systems,  Inc.  from 1993 until his
employment began with Natural Gas Services Group, Inc. Those positions included:
Manager of  Engineering,  Chief  engineer,  Asset  Manager  and  Regional  Sales
Manager. Mr. Larkin holds a Bachelors Degree in Mechanical  Engineering from the
University of Texas in Austin, Texas.

         Scott W. Sparkman has served as our Secretary  since December 1998. Mr.
Sparkman  was  Executive  Vice-President  of NGE from July 2001 to December  31,
2003,  was a director  of NGE from  December  1998 to  December  31,  2003,  was
Secretary  and Treasurer of NGE from March 1999 to December 31, 2003 and was the
Secretary of Great Lakes  Compression  from  February 2001 to December 31, 2003.
Mr.  Sparkman was one of our directors from 1998 to 2003. Mr. Sparkman served as
the  President  of NGE from  December  1998 to July 2001.  From May 1997 to July
1998,  Mr.  Sparkman  served as Project  Manager and  Comptroller  for  Business
Development  Strategies,  Inc., a designer of internet  websites.  Mr.  Sparkman
received a BBA degree from Texas A&M University.

         All of the officers devote  substantially  all of their working time to
our business.



                                       35
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  our
officers and  directors  and persons who  beneficially  own more than 10% of our
outstanding  common  stock to file  reports  of  beneficial  ownership  with the
Securities and Exchange Commission and to furnish us with copies of the reports.

         Based solely on a review of the Forms 3, 4 and 5 and amendments thereto
furnished  to us for 2004,  no persons who were either one of our  directors  or
officers or who  beneficially  owned more than 10% of our common stock failed to
file on a timely  basis  reports  required  by Section  16(a) of the  Securities
Exchange Act of 1934.

Code of Ethics

         Our Board of  Directors  has  adopted a Code of  Business  Conduct  and
Ethics ("Code"),  which we posted on our web site located at www.ngsgi.com.  You
may also obtain a copy of our Code by  requesting  a copy in writing at 2911 SCR
1260, Midland, Texas 79706 or by calling us at (432) 563-3974.

         Our Code  provides  general  statements of our  expectations  regarding
ethical  standards  that  we  expect  our  directors,  officers  and  employees,
including our Chief Executive Officer and Chief Financial Officer,  to adhere to
while acting on our behalf. Among other things, the Code provides that:

         o        We will comply with all laws, rules and regulations;

         o        Our directors,  officers and employees are to avoid  conflicts
                  of  interest  and are  prohibited  from  competing  with us or
                  personally exploiting our corporate opportunities;

         o        Our  directors,  officers  and  employees  are to protect  our
                  assets and maintain our confidentiality;

         o        We are  committed  to promoting  values of integrity  and fair
                  dealing; and

         o        We are  committed to  accurately  maintaining  our  accounting
                  records under  generally  accepted  accounting  principles and
                  timely filing our periodic reports.

         Our  Code  also  contains  procedures  for  our  employees  to  report,
anonymously or otherwise, violations of the Code.





                                       36
<PAGE>
<TABLE>
<CAPTION>

ITEM 10. EXECUTIVE COMPENSATION

         Executive Compensation

         The following table sets forth  information  regarding the compensation
paid during the years ended December 31, 2004,  2003, and 2002 by us to Wayne L.
Vinson,  Earl R. Wait, Wallace Sparkman,  Craig Rogers,  Randy Larkin, and Scott
Sparkman,  our only officers whose combined salary and bonuses exceeded $100,000
during the year ended December 31, 2004.

                                        Annual                            Long-Term
                                     Compensation                        Compensation
                                     ------------                        ------------
Name
Principal Position          Year      Salary          Bonus     Securities Underlying Options
------------------          ----      ------          -----     -----------------------------
<S>                         <C>     <C>             <C>                  <C>
 Wayne L. Vinson            2004    $ 39,614(1)        -0-                  -0-
 President & CEO            2003    $120,000(2)     $  48,000               -0-
                            2002    $120,000(2)     $  39,452               -0-

 Earl R. Wait               2004    $  90,000       $  40,250               -0-
 Chief Financial Officer    2003    $  90,000       $  41,256               -0-
                            2002    $  90,000       $  29,589             15,000

 Wallace Sparkman           2004    $120,000(3)     $  53,500               -0-
 Director, Chairman

 Scott Sparkman             2004    $ 75,000        $  20,000              3,000
 Secretary                  2003    $ 75,000        $  17,939               -0-
                            2002    $ 75,000        $  25,678               -0-

 William R. Larkin          2004    $ 90,000        $  40,250             12,000
 Vice President             2003    $ 19,288(4)         -0-                 -0-

 S. Craig Rogers            2004    $ 95,000        $  42,750               -0-
 Vice President             2003    $ 88,500        $  37,669               -0-
                            2002    $ 80,000        $  26,301             12,000
</TABLE>
--------------------------
     (1)  Mr. Vinson served as President and Chief  Executive  Officer until his
          death in March 2004.

     (2)  Does not include any compensation  paid to the wife of Wayne L. Vinson
          for her services as our accounts  payable and payroll  clerk for 2004,
          2003 and 2002 and , respectively.

     (3)  Mr. Sparkman served as interim CEO for a portion of 2004.

     (4)  Mr. Larkin was first employed by us on October 13, 2003



                                       37
<PAGE>

         We have  established a bonus  program for our  officers.  At the end of
each of our fiscal  years,  our  compensation  committee  reviews our  operating
history  and  determines  whether  or not  any  bonuses  should  be  paid to our
officers. If so, the Board of Directors determines what amount should be paid to
our officers.  The Board of Directors may  discontinue  the bonus program at any
time.

Option Grants in Last Fiscal Year

         We did not grant any stock  options  in 2004 to Earl R.  Wait,  Wallace
Sparkman, or S. Craig Rogers.  However, we did grant stock options to William R.
Larkin and Scott Sparkman. In the table below, we show certain information about
the stock options granted to Messrs. Larkin and Sparkman.

                                 Option/SAR Grants in Last Fiscal Year
                                           Individual Grants
------------------ -------------- ------------- ------------------ -------------

                   Number of      % of Total
                   Securities     Options/SARS
                   Underlying     Granted to
                   Options/ SARs  Employees in  Exercise or Base   Expiration
Name               Granted (#)    Fiscal Year   Price($/Sh)        Date
------------------ -------------- ------------- ------------------ -------------


William R. Larkin      12,000          32%           $ 7.50         08/16/2014

Scott Sparkman          3,000           8%           $ 7.50         08/16/2014


Aggregated  Option  Exercises  in Last  Fiscal  Year and Fiscal  Year End Option
Values

         The  following  table  sets  forth  information  pertaining  to  option
exercises  by, and fiscal year end option  values of options  held by,  Wayne L.
Vinson,  Earl R. Wait, and S. Craig Rogers,  our only  executive  officers whose
combined salary and bonuses exceeded $100,000 during the year ended December 31,
2003:



                                       38
<PAGE>
<TABLE>
<CAPTION>

                                                             Fiscal Year End Option Values
                                                   Number of Unexercised        Value of Unexercised
                                                   Securities Underlying        In-the-Money Options
                        Shares                  Options at Fiscal Year End       at Fiscal Year End
                       Acquired      Value      --------------------------    -------------------------
Name                 On Exercise    Received     Exercisable/Unexercisable    Exercisable/Unexercisable
----                 -----------    --------    --------------------------    -------------------------
<S>                  <C>            <C>         <C>                           <C>
Wayne L. Vinson                0          0                          0/0                          0/0

Earl R. Wait                   0          0                10,000/15,000              $23,000/$34,500

William R. Larkin              0          0                     0/12,000                    0/$23,160

Scott Sparkman                 0          0                      0/3,000                     0/$5,790

S. Craig Rogers                0          0                 8,000/12,000              $18,400/$27,600
</TABLE>

Compensation of Directors

         Our  directors who are not employees are paid $2,500 per quarter and at
December 31 of each year are issued a five year option to purchase  2,500 shares
of our common stock at the then market value.  On January 3, 2005, we granted an
option  to each of our  non-employee  directors  (other  than Paul  Hensley)  to
purchase  2,500  shares of our common  stock at $9.43 per share,  for serving as
directors  in 2004.  The fair  market  value of our common  stock on the date of
grant was $9.26 per share. The options are exercisable immediately and expire 10
years from the date of grant.  We also  reimburse our directors for  accountable
expenses incurred on our behalf.

1998 Stock Option Plan

         Our 1998 Stock  Option  Plan  provides  for the  issuance of options to
purchase up to 150,000 shares of our common stock. The purpose of the plan is to
attract and retain the best  available  personnel for  positions of  substantial
responsibility and to provide additional  incentive to employees and consultants
and to promote  the success of our  business.  The plan is  administered  by the
Board  of  Directors  and a  compensation  committee  consisting  of two or more
non-employee directors,  if appointed.  At its discretion,  the administrator of
the plan may  determine the persons to whom options may be granted and the terms
upon which such options will be granted.  In addition,  the administrator of the
plan  may  interpret  the  plan and may  adopt,  amend  and  rescind  rules  and
regulations  for its  administration.  At March 23,  2005  options to purchase a
total of 107,000  shares of our common  stock  were  outstanding  under the 1998
Stock Option Plan.

Limitations on Directors' and Officers' Liability

         Our Articles of  Incorporation  provide our officers and directors with
certain  limitations on liability to us or any of our  shareholders  for damages
for breach of fiduciary duty as a director or officer  involving certain acts or
omissions of any such director or officer.

         This  limitation  on  liability  may have the  effect of  reducing  the
likelihood  of  derivative  litigation  against  directors  and officers and may
discourage or deter  shareholders  or management from bringing a lawsuit against
directors  and  officers  for breach of their duty of care even  though  such an
action, if successful, might otherwise have benefited our shareholders and us.



                                       39
<PAGE>

         Our   Articles   of   Incorporation    and   bylaws   provide   certain
indemnification  privileges  to our  directors,  employees,  agents and officers
against  liabilities  incurred  in  legal  proceedings.   Also,  our  directors,
employees, agents or officers who are successful, on the merits or otherwise, in
defense  of any  proceeding  to  which he or she was a party,  are  entitled  to
receive indemnification against expenses, including attorneys' fees, incurred in
connection with the proceeding.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the  foregoing  provisions,  or  otherwise,  we have been advised that in the
opinion of the  Securities  and  Exchange  Commission  such  indemnification  is
against  public  policy as expressed in the  Securities  Act and is,  therefore,
unenforceable.

         We are not aware of any pending litigation or proceeding  involving any
of our directors,  officers,  employees or agents as to which indemnification is
being or may be sought,  and we are not aware of any other pending or threatened
litigation  that  may  result  in  claims  for  indemnification  by  any  of our
directors, officers, employees or agents.




















                                       40
<PAGE>

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
                          RELATED STOCKHOLDER MATTERS

         The following  table sets forth,  as of March 18, 2005,  the beneficial
ownership  of our  common  stock:  (i) by each of our  directors  and  executive
officers;  (ii) by all of our executive  officers and directors as a group;  and
(iii) by all persons known by us to  beneficially  own more than five percent of
our common stock.

                                   Shares of Common Stock   Percent Beneficially
    Name and Address                 Beneficially Owned            Owned
--------------------------------  ------------------------  --------------------

Wallace O. and Naudain Sellers            693,159(1)                10%
P.O. Box 106
6539 Upper York Road
Solebury, PA  18963-0106

Charles G. Curtis                          80,500(2)                 1%
1 Penrose Lane
Colorado Springs, CO  80906

Paul D. Hensley                           426,829                    6%
3005 N. 15th Street
Broken Arrow, OK  74012

William F. Hughes                         247,000(3)                 4%
42921 Normandy Lane
Lancaster, CA  93536

Wallace C. Sparkman                       167,691(4)                 2%
4906 Oakwood Court
Midland, TX  79707

Gene A Strasheim                            8,500(5)                 *
165 Huntington Place
Colorado Springs, CO  80906

Richard L. Yadon                          299,183(6)                 4%
P.O. Box 8715
Midland, TX  79708-8715

Ron L. Bingham                              6,000(7)                 *
P.O. Box 945
Lewiston, MI  49756

W. Randy Larkin                            12,000(8)                 *
5609 Heartland
Midland, TX  79707




                                       41
<PAGE>

S. Craig Rogers                            14,250(9)                 *
14732 Bluestem Ave
Gardendale, TX  79758

Earl R. Wait                               75,520(10)                1%
5102 Teakwood Trace
Midland, TX  79707

Scott W. Sparkman                         519,467(11)                8%
1604 Ventura Ave
Midland, TX  79705

All directors and executive
officers as a group (12 persons)        2,550,099                   38%


RWG Investments LLC                       369,000(12)                5%
5980 Wildwood Drive
Rapid City, SD  57902
--------------------------------  ------------------------  --------------------
*        Less than one percent
(1)      Includes  196,091  shares of common stock owned by the Wallace  Sellers
         Trust dated June 21, 1991,  196,091 shares of common stock owned by the
         Wallace O. Sellers Trust dated June 22, 1971, options to purchase 2,500
         shares of common  stock at $3.88 per share,  options to purchase  2,500
         shares of common  stock at $5.55 per share,  and  options  to  purchase
         2,500  shares of  common  stock at $9.34 per  share,  owned by  Wallace
         Sellers,  158,600 shares owned by Naudain Sellers.  Wallace and Naudain
         Sellers are husband and wife. The trustee of each trust is an unrelated
         third party. Naudain Sellers is a contingent  remainder  beneficiary of
         one trust and a beneficiary during her lifetime of the other.
(2)      Includes  options to purchase 2,500 shares of common stock at $3.88 per
         share,  options to purchase  2,500  shares of common stock at $5.55 per
         share,  options to purchase  2,500  shares of common stock at $9.34 per
         share,  and warrants to purchase 40,000 shares of common stock at $3.25
         per share.
(3)      Includes  180,500  shares of common  stock  and a warrant  to  purchase
         60,000  shares of common  stock at $3.25 per share owned by the William
         and Cheryl Hughes Family  Trust,  an option to purchase  2,500 share of
         common stock at $5.55, and an option to purchase 2,500 shares of common
         stock at $9.34.
(4)      Includes  105,691  shares owned by Diamente  Investments,  LLP, a Texas
         limited  partnership  of which Mr.  Sparkman  is a general  and limited
         partner.
(5)      Includes  options to purchase 2,500 shares of common stock at $5.55 per
         share and options to purchase 2,500 shares of common stock at $9.34 per
         share.
(6)      Included warrants to purchase 9,365 shares of common stock at $2.50 per
         share,  warrants to purchase  5,318 shares of common stock at $3.25 per
         share,  options to purchase  2,500  shares of common stock at $5.55 per
         share and options to purchase 2,500 shares of common stock at $9.34 per
         share.
(7)      Includes an option to purchase  6,000  shares of common  stock at $5.58
         per share.
(8)      Includes an option to purchase  12,000  shares of common stock at $7.50
         per share.
(9)      Includes warrants to purchase 1,125 shares of common stock at $6.25 per
         share and an option to purchase  12,000 shares of common stock at $3.25
         per share that began to vest in April 2003.
(10)     Includes an option to purchase  15,000  shares of common stock at $3.25
         per share that began to vest in April 2003
(11)     Includes an option to purchase  3,000  shares of common  stock at $7.50
         per share that began  vesting in August  2004,  and  475,000  shares of
         common stock and warrants to purchase  21,467 shares of common stock at
         $2.50 per share  owned by Diamond S DGT, a trust of which Mr.  Sparkman
         is a co-trustee and co-beneficiary with his sister.
(12)     Includes a warrant to purchase  15,000  shares of common stock at $6.25
         per share, 245,000 shares of common stock owned by RWG Investments LLC,
         82,000  shares of common  stock owned by G Five  Development  LLC.  RWG
         Investments LLC is a limited  liability company the beneficial owner of
         which is Roland W.  Gentner.  G Five  Development  LLC is a company the
         beneficial owners of which are Roland W. Gentner,  his spouse,  and his
         three sons.



                                       42
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Earl R. Wait and  Wallace C.  Sparkman  have  guaranteed  approximately
$84,000 and $92,000,  respectively,  of debt for us without consideration.  This
debt was  incurred  when we  acquired  vehicles,  equipment  and  software.  The
following schedule provides  information as to the remaining debt balances as of
February 28, 2005:

                                   Balance at           Interest        Maturity
         Guarantor              February 28, 2005           Rate            Date
         ---------              -----------------      ---------     -----------
         Earl Wait                         13,154         10.50%      10/10/2005
         Wallace Sparkman                       0            10%      10/15/2010

         None of the guarantees is still in effect.



ITEM 13. EXHIBITS

         The  following  is a list of all  exhibits  filed as part of this  Form
10-KSB:


Exhibit No.                                Description
-----------                                -----------

   2.1            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 10QSB filed and dated November
                  10, 2004)

   3.2            Bylaws  (Incorporated  by  reference  to  Exhibit  3.4  of the
                  Registrant's   Registration   Statement  on  Form  SB-2,   No.
                  333-88314)

   4.1            Form of warrant  certificate  (Incorporated  by  reference  to
                  Exhibit 4.1 of the Registrant's Registration Statement on Form
                  SB-2, No. 333-88314)

   4.2            Form of warrant agent agreement  (Incorporated by reference to
                  Exhibit 4.2 of the Registrant's Registration Statement on Form
                  SB-2, No. 333-88314)

   4.3            Form  of  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)



                                       43
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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)

   4.6            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, as filed
                  with the  Securities  and  Exchange  Commission  on January 7,
                  2005)

                  Executive  Compensation Plans and Arrangements (Exhibits 10.1,
                  10.24, 10.25, and 10.26)

   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)



                                       44
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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)



                                       45
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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)

   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          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 as filed with the Securities
                  and Exchange Commission on March 18, 2005)




                                       46
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   10.24          Employment  Agreement  between Paul D. Hensley and Natural Gas
                  Services  Group,  Inc.  (Incorporated  by reference to Exhibit
                  10.1 of the  Registrants  form 8-K  Report,  dated  January 3,
                  2005, as filed with the Securities and Exchange  Commission on
                  January 7, 2005)

  *10.25          Employment Agreement between William R. Larkin and Natural Gas
                  Services Group, Inc.

  *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

   *14.0          Code of Ethics

   *21.0          Subsidiaries

   *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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Our principal  accountant  for the fiscal years ended December 31, 2004
and 2003 was HEIN & ASSOCIATES LLP.

Audit Fees

         The aggregate fees billed for professional  services rendered by HEIN &
ASSOCIATES  LLP for the audit of our financial  statements  for our fiscal years
ended  December 31, 2004 and 2003 and the review of the financial  statements in
our Forms  10-QSB for the fiscal  quarters in such fiscal years were $82,172 and
$75,749, respectively. These fees also include update audit procedures performed
by HEIN & ASSOCIATES LLP for the issuance of consents for the inclusion of their
audit  opinions  in various  registration  filings by the company  during  these
years.


                                       47
<PAGE>

Audit Related Fees

         The aggregate fees billed for assurance and related  services by HEIN &
ASSOCIATES  LLP during our fiscal  years ended  December  31, 2004 and 2003 were
approximately $67,000 and $0 respectively. These fees were mainly related to the
audit for the  acquisition  of SCS and  consultation  regarding  Sarbanes  Oxley
internal controls implementation.

Tax Fees

         The aggregate fees billed for professional  services rendered by HEIN &
ASSOCIATES  LLP for our  Fiscal  years  ended  December  31,  2004  and 2003 for
compliance, tax advice and tax planning were $18,330 and $18,391 respectively.

All Other Fees

         No other fees were billed by HEIN & ASSOCIATES  LLP,  during our fiscal
years ended December 31, 2003 and 2004 other than as described above.

Audit Committees Pre-Approval Policies and Procedures

         As  of  March  25,  2004  our  audit   committee  had  not  established
pre-approval  policies  and  procedures  for  the  engagement  of our  principal
accountant to render audit or non-audit  services.  However,  in accordance with
Section 10A(i) of the Exchange Act, our audit  committee,  as a whole,  approves
the engagement of our principal  accountant  prior to the  accountant  rendering
audit or non-audit services.

         Certain rules of the Securities and Exchange Commission provide that an
auditor is not independent of an audit client if the services it provides to the
client  are  not  appropriately  approved,  subject,  however,  to a de  minimus
exception contained in the rules. The audit committee  pre-approved all services
provided by Hein & Associates  LLP in 2004 and the de minimus  exception was not
use

SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.


Date:  March 25, 2005                 NATURAL GAS SERVICES GROUP, INC.
                                      /s/ Stephen C.
                                      Taylor
                                      ------------------------------------------
                                      Stephen C. Taylor, President and Principal
                                      Executive Officer



                                       48
<PAGE>

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:


Signature                                     Title               Date
---------                                     -----               ----

/s/ Charles G. Curtis                        Director             March 25, 2005
-----------------------------
Charles G. Curtis

/s/ William F. Hughes, Jr.                   Director             March 25, 2005
-----------------------------
William F. Hughes, Jr.

/s/ Wallace C. Sparkman                      Director             March 25, 2005
-----------------------------
Wallace C. Sparkman

/s/ Richard L. Yadon                         Director             March 25, 2005
-----------------------------
Richard L. Yadon

/s/ Paul D. Hensley                          Director             March 25, 2005
-----------------------------
Paul D. Hensley








                                       49
<PAGE>

                               INDEX OF EXHIBITS

         The  following  is a list of all  exhibits  filed as part of this  Form
10-KSB:


Exhibit No.                                Description
-----------                                -----------

   2.1            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 10QSB filed and dated November
                  10, 2004)

   3.2            Bylaws  (Incorporated  by  reference  to  Exhibit  3.4  of the
                  Registrant's   Registration   Statement  on  Form  SB-2,   No.
                  333-88314)

   4.1            Form of warrant  certificate  (Incorporated  by  reference  to
                  Exhibit 4.1 of the Registrant's Registration Statement on Form
                  SB-2, No. 333-88314)

   4.2            Form of warrant agent agreement  (Incorporated by reference to
                  Exhibit 4.2 of the Registrant's Registration Statement on Form
                  SB-2, No. 333-88314)

   4.3            Form  of  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)

   4.6            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, as filed
                  with the  Securities  and  Exchange  Commission  on January 7,
                  2005)

                  Executive  Compensation Plans and Arrangements (Exhibits 10.1,
                  10.24, 10.25, and 10.26)



                                       50
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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)

   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)



                                       51
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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)



                                       52
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   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          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 as filed with the Securities
                  and Exchange Commission on March 18, 2005)

   10.24          Employment  Agreement  between Paul D. Hensley and Natural Gas
                  Services  Group,  Inc.  (Incorporated  by reference to Exhibit
                  10.1 of the  Registrants  form 8-K  Report,  dated  January 3,
                  2005, as filed with the Securities and Exchange  Commission on
                  January 7, 2005)

  *10.25          Employment Agreement between William R. Larkin and Natural Gas
                  Services Group, Inc.

  *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

   *14.0          Code of Ethics

   *21.0          Subsidiaries

   *23.1          Consent of HEIN & ASSOCIATES LLP



                                       53
<PAGE>

Exhibit No.                                Description
-----------                                -----------

   *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.


















                                       54
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of Directors
Natural Gas Services Group, Inc.


We have  audited  the  accompanying  consolidated  balance  sheet of Natural Gas
Services Group,  Inc. and Subsidiaries  (the "Company") as of December 31, 2004,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 2004 and 2003. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management  as  well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 2004,  and the results of its operations and its cash flows for the
years  ended  December  31,  2004 and 2003 in  conformity  with  U.S.  generally
accepted accounting principles.




HEIN & ASSOCIATES LLP

Dallas, Texas
February 11, 2005


                                      F-1

<PAGE>
<TABLE>
<CAPTION>

                NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 2004

                                     ASSETS
                                     ------
<S>                                                                     <C>
CURRENT ASSETS:
   Cash and cash equivalents                                            $   685,187
   Trade accounts receivable, net of doubtful accounts of $25,000         1,998,965
   Inventory                                                              4,469,606
   Prepaid expenses and other                                               141,140
                                                                        -----------
                  Total current assets                                    7,294,898

LEASE EQUIPMENT, net of accumulated depreciation of $4,820,774           27,734,030
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,446,141     3,134,167
GOODWILL, net of accumulated amortization of $325,192                     2,589,655
PATENTS, net of accumulated amortization of $164,907                         86,457
RESTRICTED CASH                                                           2,000,000
OTHER ASSETS
                                                                            416,269
                                                                        -----------
                  Total assets                                          $43,255,476
                                                                        ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of long-term debt                                    $ 3,728,048
   Line of credit                                                           549,856
   Accounts payable and accrued liabilities                               2,354,612
   Deferred income                                                           22,128
                                                                        -----------
                  Total current liabilities                               6,654,644

LONG-TERM DEBT, less current portion                                      9,290,209
SUBORDINATED NOTES, net of discount of $89,962                            1,449,299
DEFERRED TAX LIABILITY                                                    2,958,000
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY:
   Preferred stock, 5,000,000 shares authorized, no shares issued
   Common stock, 30,000,000 shares authorized, par value $0.01;
   6,104,269 shares issued and outstanding                                   61,042
   Additional paid-in capital                                            16,355,492
   Retained earnings                                                      6,486,790
                                                                        -----------
                  Total stockholders' equity                             22,903,324
                                                                        -----------
                  Total liabilities and stockholders' equity            $43,255,476
                                                                        ===========
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                      F-2
<PAGE>

                NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                                                       FOR THE YEARS ENDED
                                                           DECEMBER 31,
                                                   ----------------------------
                                                       2004            2003
                                                   ------------    ------------
REVENUE:
   Sales, net                                      $  3,593,376    $  3,865,045
   Service and maintenance income                     1,873,905       1,773,256
   Leasing income                                    10,490,918       7,111,221
                                                   ------------    ------------
              Total revenue                          15,958,199      12,749,522

COSTS OF REVENUE:
   Cost of sales                                      2,556,573       2,859,572
   Cost of service                                    1,357,016       1,243,499
   Cost of leasing                                    3,037,906       1,953,525
                                                   ------------    ------------
              Total costs of revenue                  6,951,495       6,056,596
                                                   ------------    ------------

         GROSS PROFIT                                 9,006,704       6,692,926

OPERATING EXPENSES:
   Selling expenses                                     875,289         678,777
   General and administrative                         1,776,630       1,613,076
   Depreciation and amortization                      2,444,264       1,725,717
                                                   ------------    ------------
              Total operating expenses                5,096,183       4,017,570
                                                   ------------    ------------

INCOME FROM OPERATIONS                                3,910,521       2,675,356

OTHER INCOME (EXPENSE):
   Interest expense                                    (837,486)       (667,122)
   Other income (expense)                             1,440,912          (4,302)
                                                   ------------    ------------
              Total other income (expense)              603,426        (671,424)
                                                   ------------    ------------

INCOME BEFORE PROVISION FOR INCOME TAXES              4,513,947       2,003,932

PROVISION FOR INCOME TAXES:
   Current                                               20,000          25,000
   Deferred                                           1,119,919         671,799
                                                   ------------    ------------
              Total income tax expense                1,139,919         696,799
                                                   ------------    ------------

 NET INCOME                                           3,374,028       1,307,133

 PREFERRED DIVIDENDS                                     53,277         120,941
                                                   ------------    ------------

 NET INCOME AVAILABLE TO COMMON STOCKHOLDERS       $  3,320,751    $  1,186,192
                                                   ============    ============

 NET INCOME PER COMMON SHARE:
   Basic                                           $       0.59    $       0.24
                                                   ============    ============
   Diluted                                         $       0.52    $       0.23
                                                   ============    ============

 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
   Basic                                              5,591,313       4,946,922
   Diluted                                            6,382,777       5,252,531


       See accompanying notes to these consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003


                                              PREFERRED STOCK                  COMMON STOCK
                                        ---------------------------     ---------------------------
                                           SHARES          AMOUNT          SHARES         AMOUNT
                                        ------------    ------------    ------------   ------------
<S>                                     <C>             <C>             <C>            <C>
BALANCES, January 1, 2003                    381,654    $      3,817       4,857,632   $     48,576

Exercise of common stock options
 and warrants                                   --              --           135,549          1,355

Conversion of preferred stock to
 common stock                                (38,000)           (380)         38,000            380

Dividends on preferred stock                    --              --              --             --

Net income                                      --              --              --             --
                                        ------------    ------------    ------------   ------------
BALANCES, January 1, 2004                    343,654           3,437       5,031,181         50,311

Exercise of common stock options
and warrants                                    --              --            79,860            798

Conversion of preferred stock to
common stock                                (343,654)         (3,437)        343,654          3,437

Transaction costs of private placement
 of common stock                                --              --              --             --

Issuance of common stock                        --              --           649,574          6,496

Dividends on preferred stock                    --              --              --             --

Net income                                      --              --              --             --
                                        ------------    ------------    ------------   ------------

BALANCES, December 31, 2004                     --              --      $  6,104,269   $     61,042
                                        ============    ============    ============   ============

                                         ADDITIONAL                        TOTAL
                                          PAID-IN         RETAINED      STOCKHOLDERS'
                                          CAPITAL         EARNINGS         EQUITY
                                        ------------    ------------    ------------

BALANCES, January 1, 2003               $ 10,968,733    $  1,979,847    $ 13,000,973

Exercise of common stock options
 and warrants                                236,642            --           237,997

Conversion of preferred stock to
 common stock                                   --              --              --

Dividends on preferred stock                    --          (120,941)       (120,941)

Net income                                      --         1,307,133       1,307,133
                                        ------------    ------------    ------------
BALANCES, January 1, 2004                 11,205,375       3,166,039      14,425,162

Exercise of common stock options
and warrants                                 245,651            --           246,449

Conversion of preferred stock to
common stock                                    --              --              --

Transaction costs of private placement
 of common stock                             (39,038)           --           (39,038)

Issuance of common stock                   4,943,504            --         4,950,000

Dividends on preferred stock                    --           (53,277)        (53,277)

Net income                                      --         3,374,028       3,374,028
                                        ------------    ------------    ------------

BALANCES, December 31, 2004             $ 16,355,492    $  6,486,790    $ 22,903,324
                                        ============    ============    ============
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                   FOR THE YEARS ENDED DECEMBER 31,
                                                                   --------------------------------
                                                                         2004              2003
                                                                   --------------    --------------
<S>                                                                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                      $    3,374,028    $    1,307,133
   Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                      2,444,264         1,725,717
     Deferred taxes                                                     1,119,919           671,799
     Amortization of debt issuance costs                                   64,956            64,956
     Loss on disposal of assets                                            71,341            18,615
     Changes in current assets:
         Trade and other receivables                                   (1,182,369)         (391,498)
         Inventory                                                     (1,915,367)       (1,078,445)
         Prepaid expenses and other                                       (34,110)           66,272
     Changes in current liabilities:
         Accounts payable and accrued liabilities                       1,283,960           542,790
         Deferred income                                                 (185,087)          173,678
     Other changes                                                       (344,341)          (76,597)
                                                                   --------------    --------------
             Net cash provided by operating activities                  4,697,194         3,024,420

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                 (11,595,811)       (7,881,720)
   Proceeds from sale of property and equipment                            50,123           119,500
   Increase in restricted cash                                         (2,000,000)             --
   Distribution from equity method investment                                --             107,774
   Decrease in lease receivable                                              --             210,512
                                                                   --------------    --------------
             Net cash used in investing activities                    (13,545,688)       (7,443,934)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from lines of credit                                      549,856           300,000
   Proceeds from long-term debt                                         6,592,012         3,478,568
   Repayments of long-term debt                                        (2,588,522)       (2,013,546)
   Repayment of line of credit                                           (300,000)             --
   Dividends on preferred stock                                           (53,277)         (120,941)
   Proceeds from sale of stock and exercise of stock options and
   warrants, net of transaction costs                                   5,157,410           237,997
                                                                   --------------    --------------
             Net cash provided by financing activities                  9,357,479         1,882,078

NET CHANGE IN CASH                                                        508,985        (2,537,436)

CASH, beginning of year                                                   176,202         2,713,638
                                                                   --------------    --------------

CASH, end of year                                                  $      685,187    $      176,202
                                                                   ==============    ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Interest paid                                                   $      775,429    $      667,122
                                                                   ==============    ==============
   Income taxes paid                                               $       31,300    $       35,292
                                                                   ==============    ==============
</TABLE>

       See accompanying notes to these consolidated financial statements.

                                       F-5
<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

     Organization and Principles of Consolidation
     --------------------------------------------
     Natural Gas  Services  Group,  Inc.  (the  "Company" or "NGSG") (a Colorado
     corporation)  was formed on December 18, 1998 for the purposes of combining
     the operations of certain manufacturing, service and leasing entities.

     During  2003,   NGSG  conducted  its   operations   through  the  following
     wholly-owned subsidiaries:

     |X|  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.
     |X|  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.
     |X|  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,   leases,   and  services  natural  gas
          compressors  to  producers  of  oil  and  natural  gas,  primarily  in
          Michigan.

     Effective January 1, 2004, RGS, GLC and NGE were merged into NGSG.

     Cash Equivalents
     ----------------
     For purposes of reporting cash flows, the Company  considers all short-term
     investments  with an original  maturity of three  months or less to be cash
     equivalents.

     Restricted Cash
     ---------------
     The Company has a  Certificate  of Deposit for $2 million  which is used to
     secure certain promissory notes issued in the aggregate principal amount of
     $3 million maturing three years from the date of closing of the acquisition
     of Screw Compression  Systems,  Inc. ("SCS") at January 3, 2005 and secured
     by a letter of credit in the face amount of $2 million.

     Accounts Receivable
     -------------------
     The Company's  trade  receivables  consist of customer  obligations for the
     sale of  compressors  and flare  systems due under  normal  trade terms and
     operating leases for the use of the Company's compressors.  The receivables
     are not  collateralized  except as  provided  for under  lease  agreements.
     However,  the Company requires  deposits of as much as 50% for large custom
     contracts.  The Company extends credit based on management's  assessment of
     the customer's financial condition, receivable aging, customer disputes and
     general business and economic conditions. Management believes the allowance
     for doubtful accounts for trade receivables of $25,000 at December 31, 2004
     is adequate.

     Inventory
     ---------
     Inventory is valued at the lower of cost or market. The cost of inventories
     is  determined  by the  weighted  average  method.  At December  31,  2004,
     inventory consisted of the following:


                                      F-6

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      Raw materials              $3,033,726
                      Work in process             1,435,880
                                                 ----------
                                                 $4,469,606
                                                 ==========

     Property and Equipment
     ----------------------
     Property and equipment are recorded at cost less  accumulated  depreciation
     and  amortization.  Depreciation  and  amortization  are computed using the
     straight-line  method over the estimated useful lives of the assets,  which
     range from five to thirty years.

     Gains and losses  resulting  from sales and  dispositions  of property  and
     equipment are included in current  operations.  Maintenance and repairs are
     charged to operations as incurred.

     Patents
     -------
     The  Company  has  patents  for a flare tip  ignition  device and flare tip
     burner  pilot.   The  costs  of  the  patents  are  being  amortized  on  a
     straight-line basis over nine years, the remaining life of the patents when
     acquired.  Amortization  expense for patents of $27,484 was  recognized for
     each of the years ended  December 31, 2004 and 2003.  Amortization  expense
     for each of the next four years is expected to be $27,484 per year.

     Goodwill
     --------
     Goodwill  represents  the cost in excess of fair value of the  identifiable
     net assets acquired in two acquisitions.  Goodwill was being amortized on a
     straight-line  basis over 20 years, but the Company ceased  amortization of
     goodwill  effective  January  1,  2002  in  accordance  with  Statement  of
     Financial Accounting Standards ("FAS") No. 142.

     FAS 142 requires that goodwill be tested for impairment at least  annually.
     The Company  completed  its most recent test for goodwill  impairment as of
     June, 2004, at which time no impairment was indicated.

     Long-Lived Assets
     -----------------
     The Company's policy is to periodically  review the net realizable value of
     its long-lived  assets,  other than goodwill,  through an assessment of the
     estimated  future  cash  flows  related to such  assets.  In the event that
     assets  are  found  to  be  carried  at  amounts  in  excess  of  estimated
     undiscounted  future  cash  flows,  then the assets  will be  adjusted  for
     impairment to a level  commensurate with a discounted cash flow analysis of
     the underlying  assets.  Based upon its most recent  analysis,  the Company
     believes no impairment of long-lived assets exists at December 31, 2004.

     Advertising Costs
     -----------------
     Advertising costs are expensed as incurred.  Total advertising  expense was
     $37,644 in 2004 and $46,337 in 2003.


                                      F-7
<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Financial Instruments
     ---------------------
     Management  believes that  generally the fair value of the Company's  notes
     payable at December 31, 2004  approximate  their carrying values due to the
     short-term  nature  of the  instruments  or the  use of  prevailing  market
     interest rates.

     Revenue Recognition
     -------------------
     Revenue  from the sales of custom  and  fabricated  compressors,  and flare
     systems is recognized upon shipment of the equipment to customers. Exchange
     and rebuilt  compressor  revenue is  recognized  when both the  replacement
     compressor  has  been  delivered  and  the  rebuild   assessment  has  been
     completed.  Revenue from compressor  service and  retrofitting  services is
     recognized upon providing services to the customer.  Maintenance  agreement
     revenue is recognized as services are rendered. Rental and lease revenue is
     recognized over the terms of the respective lease agreements based upon the
     classification of the lease.  Deferred income represents  payments received
     before a product is shipped.

     Per Share Data
     --------------
     Basic  earnings  per common share is computed  using the  weighted  average
     number of common shares outstanding during the period. Diluted earnings per
     common share is computed  using the weighted  average  number of common and
     common stock equivalent shares outstanding during the period.  Common stock
     equivalent  shares are  excluded  from the  computation  if their effect is
     anti-dilutive. In 2003 anti-dilutive shares related to common stock options
     and warrants and convertible  preferred stock totaled 2,156,154.  There was
     no  anti-dilutive  effect in 2004 since all preferred shares were converted
     to common shares in 2004.

     The  following  table  sets  forth the  computation  of basic  and  diluted
     earnings per share:


                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
                                                            2004         2003
                                                         ----------   ----------
     Numerator:
       Net income                                        $3,374,028   $1,307,133

       Less preferred dividends                              53,277      120,941
                                                         ----------   ----------

       Net income available to common stockholders        3,320,751    1,186,192
                                                         ==========   ==========

     Denominator for basic net income per share:
       Weighted average common shares outstanding         5,591,313    4,946,922
                                                         ==========   ==========

     Denominator for diluted net income per share:
       Weighted average common shares outstanding         5,591,313    4,946,922
       Dilutive effect of stock options and warrants       791,464      305,609
                                                         ----------   ----------
          Diluted weighted average shares                 6,382,777    5,252,531
                                                         ==========   ==========

     Net income per share:
       Basic                                             $     0.59   $     0.24
       Diluted                                           $     0.52   $     0.23



                                      F-8
<PAGE>
<TABLE>
<CAPTION>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Stock-Based Compensation
     ------------------------
     The  Company  accounts  for  stock-based  awards  to  employees  using  the
     intrinsic  value method  described in Accounting  Principles  Board Opinion
     (APB) No. 25,  Accounting  for Stock Issued to  Employees,  and its related
     interpretations.  Accordingly,  no compensation expense has been recognized
     in the  accompanying  consolidated  financial  statements  for  stock-based
     awards to employees or  directors  when the exercise  price of the award is
     equal to or greater  than the quoted  market price of the stock on the date
     of the grant.

     FAS No.  123,  Accounting  for  Stock-Based  Compensation  as  amended  for
     transition  and disclosure by FAS No. 148,  requires  disclosures as if the
     Company had applied the fair value  method to employee  awards  rather than
     the  intrinsic  value  method.  The fair  value of  stock-based  awards  to
     employees is calculated  through the use of option  pricing  models,  which
     were  developed  for use in  estimating  the fair value of traded  options,
     which have no vesting restrictions and are fully transferable. These models
     also  require   subjective   assumptions,   including  future  stock  price
     volatility  and  expected  time  to  exercise,  which  greatly  affect  the
     calculated  values.  The Company's fair value  calculations for awards from
     stock  option  plans in 2003 and 2004  were made  using  the  Black-Scholes
     option  pricing  model with the  following  weighted  average  assumptions:
     expected term, ten years from the date of grant; stock price volatility 44%
     in 2004 and 2003; risk free interest rate of 5.25% in 2004 and 4.0% in 2003
     and no dividends  during the  expected  term as the Company does not have a
     history of paying cash dividends on common stock.

     If the computed fair values of the stock-based awards had been amortized to
     expense  over the vesting  period of the awards,  net income and net income
     per share, basic and diluted, would have been as follows:

                                                                       YEARS ENDED DECEMBER 31,
                                                                    ------------------------------
                                                                         2004             2003
                                                                    -------------    -------------
<S>                                                                 <C>              <C>
    Net income                                                      $   3,374,028    $   1,307,133
    Less preferred dividends                                               53,277          120,941
                                                                    -------------    -------------
    Net income available to common stockholders                         3,320,751        1,186,192
Deduct: Total stock-based employee compensation expense
    determined under air value method for all awards (net of tax)         (38,000)         (39,000)
                                                                    -------------    -------------
Net income, pro forma                                               $   3,282,751    $   1,147,192
                                                                    -------------    -------------
Net income per share:
Basic, as reported                                                  $        0.59    $        0.24
                                                                    =============    =============
Basic, pro forma                                                    $        0.59    $        0.23
                                                                    =============    =============
Diluted, as reported                                                $        0.52    $        0.23
                                                                    =============    =============
Diluted, pro forma                                                  $        0.51    $        0.21
                                                                    =============    =============
Weighted average fair value of options granted during the year      $        4.75    $        3.35
                                                                    =============    =============
</TABLE>


                                      F-9

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Description of Leasing Arrangements
     -----------------------------------
     The  Company's  leasing  operations  principally  consist of the leasing of
     natural gas compressor packages and flare stacks. The leases are classified
     as operating leases. See Note 4.

     Income Taxes
     ------------
     The Company files a consolidated tax return with its subsidiaries. Deferred
     tax assets and liabilities  are recognized for the future tax  consequences
     attributable  to  temporary  differences  between the  financial  statement
     carrying  amounts of assets and liabilities and their respective tax bases,
     and operating losses and tax credit carry-forwards. Deferred tax assets and
     liabilities  are  measured  using  enacted  tax rates  expected to apply to
     taxable  income  in the  years in which  those  temporary  differences  are
     expected to be recovered or settled.

     Use of Estimates
     ----------------
     The preparation of the Company's financial statements in conformity with
     generally accepted accounting principles requires the Company's management
     to make estimates and assumptions that affect the amounts reported in these
     financial statements and accompanying notes. Actual results could differ
     from those estimates. Significant estimates include the valuation of assets
     and goodwill acquired in acquisitions. It is at least reasonably possible
     these estimates could be revised in the near term and the revisions would
     be material.

     Recently Issued Accounting Pronouncements
     -----------------------------------------
     On December 16, 2004,  the FASB  published  FASB Statement No. 123 (revised
     2004),   Share-Based   Payment.   Statement   123(R)   requiring  that  the
     compensation   cost  relating  to  share-based   payment   transactions  be
     recognized in financial statements. That cost will be measured based on the
     fair value of the equity or liability  instruments issued.  Public entities
     (other than those  filing as small  business  issuers)  will be required to
     apply Statement  123(R) as of the first interim or annual  reporting period
     that  begins  after  June 15,  2005.  Public  entities  that  file as small
     business  issuers will be required to apply  Statement  123(R) in the first
     interim or annual  reporting  period that begins  after  December 15, 2005.
     Statement   123(R)   replaces  FASB  Statement  No.  123,   Accounting  for
     Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
     Stock Issued to Employees.  Statement  123, as  originally  issued in 1995,
     established  as  preferable a  fair-value-based  method of  accounting  for
     share-based payment  transactions with employees.  However,  that Statement
     permitted  entities  the  option of  continuing  to apply the  guidance  in
     Opinion 25, as long as the footnotes to financial statements disclosed what
     net income would have been had the preferable  fair-value-based method been
     used.

2.   PROPERTY AND EQUIPMENT
     ----------------------

     Property and equipment consists of the following at December 31, 2004:

     Land and building                                              $ 1,345,740
     Leasehold improvements                                             207,596
     Office equipment and furniture                                     199,860
     Software                                                           143,420
     Machinery and equipment                                            507,010
     Vehicles                                                         2,176,682
     Less accumulated depreciation                                   (1,446,141)
                                                                    -----------
                                                                    $ 3,134,167
                                                                    ===========

     Depreciation  expense for property and equipment and the leased compressors
     described  in Note 4 was  $2,410,780  and  $1,681,232  for the years  ended
     December 31, 2004 and 2003, respectively.


                                      F-10

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.   ACQUISITIONS
     ------------

     On March 31, 2003,  the Company  acquired 28 gas  compressor  packages from
     Hy-Bon Engineering Company,  Inc.  ("Hy-Bon").  The adjusted purchase price
     amounted to  approximately  $2,150,000.  As part of the  purchase  and sale
     agreement, Hy-Bon withdrew as a member of Hy-Bon Rotary Compression, L.L.C.
     ("Joint  Venture")  effective as of January 1, 2003.  The  Company,  as the
     other  member,  retained  all  assets  of the Joint  Venture,  which had an
     unaudited  aggregate value of $346,511 as of December 31, 2002. The Company
     dissolved  the Joint  Venture  and  agreed  not to  operate  under the name
     Hy-Bon.  The  Company  consolidated  the  operations  of the Joint  Venture
     beginning  January 1, 2003 and began  recording  its share of the profit of
     the acquired  interest  beginning April 1, 2003.  Prior to the acquisition,
     the Company had owned a  non-controlling  50% interest in the Joint Venture
     and accounted for it on the equity method.

     On October 18, 2004,  Natural Gas Services Group, Inc. entered into a Stock
     Purchase Agreement with Screw Compression Systems,  Inc., or "SCS", and the
     stockholders  of SCS.  Under this  agreement,  Natural Gas  Services  Group
     agreed to purchase all of the outstanding shares of capital stock of SCS.

     SCS is a privately owned manufacturer of natural gas compressors,  with its
     principal offices located in Tulsa, Oklahoma.

     The  stockholders of SCS will receive,  in  proportionate  shares (based on
     their stock ownership of SCS), total consideration consisting of:

          o    $8 million in cash;
          o    promissory  notes issued by Natural Gas Services 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
          o    609,576 shares of Natural Gas Services  common stock.  All of the
               shares, upon issuance, will be "restricted" securities within the
               meaning of Rule 144 under the Securities Act of 1933, as amended,
               and will bear a legend to that effect.

     This  transaction  was  completed  January 3, 2005 and Natural Gas Services
     Group Inc will begin reporting combined  financial  information with SCS in
     January 2005.

4.   LEASING ACTIVITY
     ----------------

     The  Company  leases  natural  gas  compressor  packages to entities in the
     petroleum industry. The Company's cost and accumulated depreciation for the
     leased  compressors as of December 31, 2004 was $27,734,030 and $4,820,774,
     respectively. These leases are classified as operating leases and generally
     have  original  lease  terms of six months to five years and  continue on a
     month-to-month  basis thereafter.  Future minimum lease payments for leases
     not on a month-to-month basis at December 31, 2004 are as follows:



           Year Ended December 31,
                   2005                                   $   3,292,164
                   2006                                         855,845
                   2007                                         341,955
                   2008                                         178,723
                                                          -------------
                  Total                                   $   4,668,687
                                                          =============


                                      F-11

<PAGE>
<TABLE>
<CAPTION>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   LINE OF CREDIT
     --------------

     The Company has a line of credit with a financial  institution  that allows
     for borrowings up to $750,000, bears interest at the prime rate plus 1% and
     requires  monthly  interest  payments with principal due at maturity on May
     15, 2005. The line of credit is  collateralized by substantially all of the
     assets  of  the  Company.  At  December  31,  2004,  there  was a  $549,856
     outstanding balance on this line of credit.

     The Company  entered  into a new Line of Credit on January 3, 2005 with the
     same  financial  institution  which allows for borrowings up to $2,000,000,
     bears  interest  at the prime rate plus 1% and  requires  monthly  interest
     payments  with  principal  due at maturity on January 1, 2006.  The line of
     credit is collateralized by substantially all of the assets of the Company.
     At December  31,  2004,  there was no  outstanding  balance on this line of
     credit.

     The line of credit and first  three  notes  listed in Note 6 below are with
     the same bank and include certain covenants,  the most restrictive of which
     require the Company to maintain certain working capital, debt to equity and
     cash flow  ratios  and  certain  minimum  net  worth.  The  Company  was in
     compliance with all covenants at December 31, 2004.


6.   LONG-TERM DEBT
     --------------

     Long-term debt at December 31, 2004 consisted of the following:
     <S>                                                                        <C>
     Note payable to a bank,  interest at bank's prime rate plus 1.0% but
       not less than 5.25% (6.25% at December 31, 2004), monthly
       payments of principal of $170,801 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    $  5,300,696

     Note payable to a bank, interest at bank's prime rate plus 1% but not
       less than 5.25% (6.25% at December 31, 2004). This is an
       advance line of credit note for $10,000,000. Interest is payable
       monthly. Principal is due in 60 consecutive payments 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                                         7,133,333

     Note 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                                            182,025

     Various  notes payable to a bank, interest rates ranging from prime
       plus 1% (6.25% at December 31, 2004) to 7.50%                                 176,946

     Capital lease                                                                    13,141

     Other notes payable for vehicles, various terms                                 212,116
                                                                                ------------
     Total                                                                        13,018,257
     Less current portion                                                         (3,728,048)
                                                                                ------------
                                                                                $  9,290,209
                                                                                ============
</TABLE>

                                      F-12

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     Maturities  of long-term  debt based on  contractual  requirements  for the
     years ending December 31 are as follows:

                   2005                             $   3,728,048
                   2006                                 3,615,172
                   2007                                 2,667,228
                   2008                                 1,438,053
                   2009                                 1,439,370
                Thereafter                                130,386
                                                    -------------
                                                    $  13,018,257
                                                    =============

7.   SUBORDINATED NOTES
     ------------------

     In  2001,  the  Company  completed  an  offering  of  units  consisting  of
     subordinated debt and warrants.  The balance of the subordinated  debt, net
     of  unamortized  discount of $89,962,  is  $1,449,299 at December 31, 2004.
     Each unit consists of a $25,000 10% subordinated note due December 31, 2006
     and a five-year  warrant to purchase 10,000 shares of the Company's  common
     stock at $3.25 per  share.  Interest  only is  payable  annually,  with all
     principal  due at maturity.  Warrants to purchase  61,570  shares were also
     granted  on the same  terms to a  placement  agent in  connection  with the
     offering.  Certain stockholders,  officers and directors purchased units in
     the subordinated  debt offering,  (totaling  $259,261 in notes and warrants
     representing   103,704   shares)  on  the  same  terms  and  conditions  as
     non-affiliated  purchasers  in  the  offering.  As of  December  31,  2004,
     warrants were  outstanding from the offering for the purchase of a total of
     548,175 shares.

8.   INCOME TAXES
     ------------

      The provision for income taxes consists of the following:

                                                            2004         2003
                                                         ----------   ----------
     Current provision:
         Federal                                         $     --     $     --
         State                                               20,000       25,000
                                                         ----------   ----------
                                                             20,000       25,000
     Deferred provision:
         Federal                                          1,028,538      592,799
         State                                               91,381       79,000
                                                         ----------   ----------
                                                          1,119,919      671,799
                                                         ----------   ----------

                                                         $1,139,919   $  696,799
                                                         ==========   ==========




                                      F-13

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     The  income  tax  effects  of  temporary  differences  that  give  rise  to
     significant portions of deferred income tax assets and (liabilities) are as
     follows:

                                                        2004           2003
                                                     -----------    -----------
     Deferred income tax assets:
         Net operating loss                          $ 2,669,000    $   727,000
         Other                                             7,000          5,000
                                                     -----------    -----------

               Total deferred income tax assets        2,676,000        732,000
                                                     ===========    ===========
     Deferred income tax liabilities:
         Property and equipment                       (5,483,000)    (2,410,000)
         Goodwill and other intangible assets           (142,000)      (154,000)
         Other                                            (9,000)       (11,000)
                                                     -----------    -----------

               Total deferred income tax liabilities  (5,634,000)    (2,575,000)
                                                     -----------    -----------

               Net deferred income tax liabilities    (2,958,000)   $(1,843,000)
                                                     ===========    ===========

     The effective tax rate differs from the statutory rate as follows:

                                                        2004           2003
                                                     --------------------------
     Statutory rate                                          34%            34%
     State and local taxes                                    3%             5%
     Nontaxable life insurance proceeds                    (12)%           --
     Other                                                  --             (4)%
                                                     --------------------------
     Effective rate                                         25%            35%
                                                     ==========================

     At December 31, 2004, the Company had available  federal net operating loss
     ("NOL")  carryforwards  of approximately  $7,200,000,  which may be used to
     reduce future  taxable  income and expire in 2020 through 2024. The company
     also  had  alternative  minimum  tax  NOL  carryforwards  of  approximately
     $5,000,000.  The  company  has  also  accumulated  charitable  contribution
     carryforwards of $9,000.

9.   STOCKHOLDERS' EQUITY
     --------------------

     Initial Public Offering
     -----------------------
     In October, 2002, the Company closed an initial public offering in which it
     sold  1,500,000  shares of common stock and warrants to purchase  1,500,000
     shares of common  stock for a total of  $7,875,000.  Costs and  commissions
     associated  with  the  offering  totaled   $1,345,830.   The  warrants  are
     exercisable  anytime  through  October  21,  2006 at $6.25  per  share.  In
     connection with this offering, the underwriter received options to purchase
     150,000  shares of common  stock at $6.25 per share and warrants at $0.3125
     per share. The warrants,  if purchased by the underwriter,  will contain an
     exercise  price of $7.81 per share.  The  underwriter's  options  expire in
     October  2007 and  include a  cashless  exercise  provision  utilizing  the
     Company's common stock.

     Conversion
     ----------
     The Company may redeem the warrants upon 30 days' prior written notice at a
     price of $.25 per warrant if the closing  price of our common  stock equals
     or exceeds $10.9375 for 20 consecutive trading days.


                                      F-14

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Warrants
     --------
     In April 2002 and March 2001,  five-year warrants to purchase 16,472 shares
     of common  stock at $3.25 per share and  68,524  shares at $2.50 per share,
     respectively,  were issued to certain  board  members and  stockholders  as
     compensation  for their debt  guarantees.  These warrants were  immediately
     exercisable  and were recorded at their estimated fair values of $42,025 in
     2002 and $23,137 in 2001. All of these warrants remained  outstanding as of
     December 31, 2004.

     Preferred Stock
     ---------------
     The Company has a total of  5,000,000  authorized  preferred  shares,  with
     rights and preferences as designated by the Board of Directors. The Company
     had a private  placement of Series A shares in 2001 and 2002. In connection
     with the offering,  the  underwriter  received  warrants to purchase 38,165
     shares of common  stock at $3.25 per share  through  December 1, 2006.  The
     Series A shares had a cumulative  annual  dividend rate of 10%, when and if
     declared  by the Board of  Directors  payable  thirty days after the end of
     each quarter.  Holders were entitled to one vote per share and the Series A
     shares were convertible into common stock initially at a price of $3.25 per
     share,  subject to  adjustment  based on the market price and various other
     contingencies.  In  addition,  Series A shares  automatically  converted to
     common stock on a one-for-one  basis when the Company's common stock traded
     on a public  exchange  at a price of $6.50 per share or greater  for twenty
     consecutive days. The Series A shares had a liquidation preference of $3.25
     per share plus accrued and unpaid dividends over common stock.

     In 2003,  38,000  Series A shares were  converted  to common  stock.  Total
     Series A shares outstanding at December 31, 2003 were 343,654.

     In accordance  with the  provisions of the  Convertible  Series A Preferred
     Stock,  on March  26,  2004 each  share of  Preferred  Stock  automatically
     converted to one share of Common Stock.  The conversion  occurred after the
     closing  market price of the stock was equal to or higher than $6.50 for 20
     consecutive  trading days.  343,654 Preferred shares were converted at that
     time. Dividends payable at the conversion date were approximately $25,355.

     Common Stock Private Placement
     ------------------------------
     On July 20, 2004, the Company and CBarney Investments,  Ltd. entered into a
     Securities Purchase Agreement. Under this agreement, the Company issued and
     sold  649,574  shares of its common stock to CBarney at $7.69736 per share.
     The per share price was determined by multiplying  (x) $8.747,  the average
     closing market price of the common stock on the American Stock Exchange for
     the  twenty  consecutive  trading  days  ended  July 15,  2004,  times  (y)
     eighty-eight  percent.  The Company  received  aggregate  gross proceeds of
     $5,000,000 and net proceeds of $4,950,000.

10.  STOCK-BASED COMPENSATION
     ------------------------

     Stock Options
     -------------
     In December 1998, the Board of Directors adopted the 1998 Stock Option Plan
     (the  "Plan").  150,000  shares of common  stock  have  been  reserved  for
     issuance under the Plan. All options granted under the Plan will expire ten
     years  after date of grant.  The option  price is to be  determined  by the
     Board of  Directors on date of grant.  The Company has also issued  options
     that are not subject to the Plan.

     In December 2003, the Company granted a total of 12,500 non-qualified stock
     options to its outside  directors to purchase the Company's common stock at
     $5.55 per share any time  through  December  2013.  At December  31,  2004,


                                      F-15
<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     10,000 of these options were outstanding.  Also, in December 2003,  options
     were  granted to  employees  to purchase  15,000  shares of common stock at
     $5.58 per share.  The employee  options vest over three years and expire in
     December 2013.

     In August 2004, options were granted to employees to purchase 38,000 shares
     of common stock at $7.50 per share. The employee options vest over three
     years and expire in December 2014.

     The  following is a summary of activity for the stock  options  outstanding
     for the years ended December 31, 2004 and 2003:

                                     DECEMBER 31, 2004      DECEMBER 31, 2003
                                    --------------------   ---------------------
                                                Weighted                Weighted
                                     Number      Average    Number       Average
                                       Of       Exercise      Of        Exercise
                                     Shares      Price      Shares        Price
                                    --------    --------   ---------    --------

Outstanding, beginning  of year       80,000    $   3.92     161,500    $   2.41

      Canceled or expired               --          --        (9,000)       3.25
      Granted                         38,000        7.50      27,500        5.57
      Exercised                      (11,000)       3.23    (100,000)       2.00
                                    --------    --------   ---------    --------

Outstanding, end of year             107,000    $   3.92     80,000     $   3.92
                                    ========    ========   ========     ========
Exercisable, end of year              46,000    $   5.06     43,000     $   3.68
                                    ========    ========   ========     ========

11.  COMMITMENTS
     -----------

     401(k) Plan
     -----------
     The Company  offers a 401(k) Plan (the "401(k) Plan") to all employees that
     have reached the age of eighteen and have  completed six months of service.
     The  participants  may  contribute  up to 15%  of  their  salary.  Employer
     contributions  are subject to Board discretion and are subject to a vesting
     schedule  of 20% each year  after the first  year and 100% after six years.
     The Company  contributed $60,735 and $77,538 to the 401(k) Plan in 2003 and
     2004, respectively.

     Rented Facilities
     -----------------
     The facility in  Bloomfield,  New Mexico is an  approximately  4,000 square
     foot building that is leased at a current rate of $2,650 per month pursuant
     to a lease that terminates in May 2008. Approximately 1,000 square feet are
     used as office space and approximately  3,000 square feet are used for shop
     space. The facility in Bridgeport,  Texas is an approximately  4,500 square
     foot building that is leased at a current rate of $1,500 per month pursuant
     to a lease that terminates in August 2006.  Approximately 4,000 square feet
     is used as office space and  approximately  500 square feet is used as shop
     space.  Future  rental  payments  under  these  leases for the years  ended
     December 31 are as follows:

                     2005                 $    49,800
                     2006                      43,800
                     2007                      31,800
                     2008                      13,250
                                          -----------
                                          $   138,650
                                          ===========





                                      F-16

<PAGE>
<TABLE>
<CAPTION>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



12.  MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
     ------------------------------------------------

     Sales to two customers in the year ended  December 31, 2004 amounted to 21%
     and 17% respectively of consolidated revenue. Sales to two customers in the
     year ended  December  31,  2003  amounted  to 28% and 10%  respectively  of
     consolidated  revenue. No other single customer accounted for more than 10%
     of the Company's sales in 2003 or 2004. At December 31, 2004, two customers
     accounted for 12% and 10%  respectively,  of the Company's  trade  accounts
     receivable.  The Company generally does not obtain collateral, but requires
     deposits of as much as 50% on large custom contracts.

13.  OTHER INCOME
     ------------

     On March 15, 2004 the  President  and C.E.O.  of the Company,  Mr. Wayne L.
     Vinson,  passed away after a battle with cancer.  The Company held two life
     insurance  policies on him, one for $1,000,000  and one for $500,000,  with
     the Company as the beneficiary. The proceeds of $1,500,000 were recorded as
     other income.

14.  SEGMENT INFORMATION
     -------------------

     FAS No.  131,  Disclosures  About  Segments  of an  Enterprise  and Related
     Information,  establishes  standards for public  companies  relating to the
     reporting of financial and  descriptive  information  about their operating
     segments in financial  statements.  Operating segments are components of an
     enterprise about which separate financial  information is available that is
     evaluated  regularly by chief operating  decision makers in deciding how to
     allocate resources and in assessing performance.

     The Company  identifies  its segments  based upon major revenue  sources as
     follows:


For the year ended December 31, 2004                (in thousands of dollars)

                                             Service &
                                 Sales      Maintenance     Leasing      Corporate        Total
                              -----------   -----------   -----------   -----------    -----------
<S>                           <C>           <C>           <C>           <C>            <C>
Revenue                       $     3,593   $     1,874   $    10,491   $      --      $    15,958
Cost of Sales                       2,556         1,357         3,038          --            6,951
                              -----------   -----------   -----------   -----------    -----------
Gross Margin                  $     1,037   $       517   $     7,453   $      --      $     9,007
Operating Expenses                   --            --            --          (5,096)        (5,096)
Other Income/(Expense)               --            --            --             603            603
                              -----------   -----------   -----------   -----------    -----------
Income before Provision for   $     1,037   $       517   $     7,453   $    (4,493)   $     4,514
Income Taxes
                              ===========   ===========   ===========   ===========    ===========
*Segment Assets               $      --     $      --     $      --     $    43,255    $    43,255
                              ===========   ===========   ===========   ===========    ===========



                                      F-17

<PAGE>

               NATURAL GAS SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the year ended December 31, 2003                (in thousands of dollars)

                                             Service &
                                 Sales      Maintenance     Leasing      Corporate        Total
                              -----------   -----------   -----------   -----------    -----------
Revenue                       $     3,865   $     1,773   $     7,112   $      --      $    12,750
Cost of Sales                       2,860         1,243         1,954          --            6,057
                              -----------   -----------   -----------   -----------    -----------
Gross Margin                  $     1,005   $       530   $     5,158   $      --      $     6,693
Operating Expenses                   --            --            --          (4,018)        (4,018)
Other 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
                              ===========   ===========   ===========   ===========    ===========
</TABLE>


     * Management does not track assets by segment.


15.  SUBSEQUENT EVENTS
     -----------------

     As  described  in Note 3, on  January  3, 2005 the  Company  completed  the
     acquisition of Screw Compression  Systems,  Inc ("SCS"). In connection with
     the  acquisition of SCS, on January 3, 2005 the Company,  as borrower,  and
     SCS, as guarantor, entered into a Third Amended and Restated Loan Agreement
     with Western National Bank (or WNB) for the following purposes:

          o    to facilitate the purchase of SCS
          o    to refinance SCS' existing real estate debt;
          o    to increase  the amount of funds  available  for general  working
               capital purposes;
          o    to modify our existing term loan facility; and
          o    to  reflect  the   availability  of  additional   funds  for  the
               construction of new compressor units for lease and resale.

     The Loan  Agreement  provides for three term loan  facilities,  a revolving
     line of credit facility and an advancing term loan facility. The three term
     loan facilities are evidenced by three separate notes, two of which reflect
     new loans in the original  principal  amounts of $8,000,000 and $1,415,836,
     respectively, and one of which reflects our existing term loan evidenced by
     the $7,521,109 Term Note, as modified by the  Modification  Agreement.  All
     outstanding  principal  under the  $8,000,000  note is due and  payable  on
     January 1, 2012, and all outstanding principal under the $1,415,836 note is
     due and payable on January 1, 2010. The $7,521,109  Term Note evidences our
     existing term loan facility.