##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
 Commission File No. 0-12185
 NGAS Resources, Inc.
 (Exact name of registrant as specified in its charter)
 Province of British Columbia
(State or other jurisdiction of
incorporation or organization)
    
    Not Applicable
(I.R.S. Employer
Identification No.)120 Prosperous Place, Suite 201
Lexington, Kentucky
(Address of principal executive offices)
    
    40509-1844
(Zip Code)
 Registrants telephone number, including area code: (859) 263-3948
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o  o þ
  Title of Class
    
    Outstanding at August 1, 2006Common Stock
    
    21,505,215




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##### 



NGAS Resources, Inc.
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Condensed Consolidated Balance Sheets  June 30, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statement of Operations  Three months and six months ended
June 30, 2006 and 2005
    
    
    2Condensed Consolidated Statement of Cash Flows  Three months and six month ended
June 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 4. Submission of Matters to Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2
  
 Forward-Looking Statements
  
 Additional Information




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash
    
    $
    6,840,125
    
    
    $
    23,944,252Accounts receivable
    
    
    9,979,307
    
    
    
    6,883,700Prepaid expenses and other current assets
    
    
    899,678
    
    
    
    3,161,847Loans to related parties
    
    
    7,058
    
    
    
    26,235Total current assets
    
    
    17,726,168
    
    
    
    34,016,034Bonds and deposits
    
    
    443,695
    
    
    
    432,695Oil and gas properties
    
    
    137,869,984
    
    
    
    105,785,340Property and equipment
    
    
    3,121,779
    
    
    
    2,934,169Loans to related parties
    
    
    261,138
    
    
    
    264,377Deferred financing costs
    
    
    2,184,967
    
    
    
    2,377,791Other non-current assets
    
    
    1,411,820
    
    
    
    650,000Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    163,332,728
    
    
    $
    146,773,583LIABILITIESCurrent liabilities:Accounts payable
    
    $
    8,092,070
    
    
    $
    5,439,437Accrued liabilities
    
    
    6,639,610
    
    
    
    5,788,554Customers drilling deposits
    
    
    2,897,426
    
    
    
    23,627,975Long term debt, current portion
    
    
    24,000
    
    
    
    24,000Total current liabilities
    
    
    17,653,106
    
    
    
    34,879,966Future income taxes
    
    
    5,903,878
    
    
    
    3,881,755Long term debt
    
    
    64,177,497
    
    
    
    34,947,905Deferred compensation
    
    
    1,128,172
    
    
    
    836,568Total liabilities
    
    
    88,862,653
    
    
    
    74,546,194SHAREHOLDERS EQUITYCommon stock, no par value, 100,000,000 shares authorized,
21,472,942 shares issued (2005  21,357,628)
    
    
    82,949,847
    
    
    
    82,371,18921,100 shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in
capital  options and warrants
    
    
    3,235,570
    
    
    
    2,743,806Contributed surplus
    
    
    1,572,500
    
    
    
    1,748,9269,185 shares to be issued
    
    
    45,925
    
    
    
    45,92587,780,212
    
    
    
    86,886,216Accumulated deficit
    
    
    (13,310,137
    )
    
    
    (14,658,827
    )Total shareholders equity
    
    
    74,470,075
    
    
    
    72,227,389Total liabilities and shareholders equity
    
    $
    163,332,728
    
    
    $
    146,773,583
 See accompanying notes.
 1




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUEContract drilling
    
    $
    11,029,274
    
    
    $
    7,639,000
    
    
    $
    31,440,774
    
    
    $
    24,316,000Oil and gas production
    
    
    5,935,783
    
    
    
    3,507,703
    
    
    
    12,139,967
    
    
    
    6,383,491Gas transmission and compression
    
    
    1,374,585
    
    
    
    289,016
    
    
    
    2,078,156
    
    
    
    746,474Total revenue
    
    
    18,339,642
    
    
    
    11,435,719
    
    
    
    45,658,897
    
    
    
    31,445,965DIRECT EXPENSESContract drilling
    
    
    7,840,559
    
    
    
    6,618,260
    
    
    
    24,543,489
    
    
    
    18,988,065Oil and gas production
    
    
    1,529,940
    
    
    
    890,694
    
    
    
    2,983,408
    
    
    
    1,649,515Gas transmission and compression
    
    
    541,869
    
    
    
    235,084
    
    
    
    1,174,298
    
    
    
    627,868Total direct expenses
    
    
    9,912,368
    
    
    
    7,744,038
    
    
    
    28,701,195
    
    
    
    21,265,448OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,164,516
    
    
    
    2,511,910
    
    
    
    7,638,908
    
    
    
    6,018,735Options, warrants and deferred compensation
    
    
    419,787
    
    
    
    239,090
    
    
    
    848,534
    
    
    
    491,698Depreciation, depletion and amortization
    
    
    1,964,578
    
    
    
    1,001,533
    
    
    
    3,502,490
    
    
    
    2,048,088Interest expense
    
    
    1,089,070
    
    
    
    555,001
    
    
    
    1,689,453
    
    
    
    1,063,754Interest income
    
    
    (101,524
    )
    
    
    (48,386
    )
    
    
    (219,884
    )
    
    
    (86,126
    )Other, net
    
    
    86,440
    
    
    
    (21,184
    )
    
    
    127,388
    
    
    
    (164,916
    )Total other expenses
    
    
    6,622,867
    
    
    
    4,237,964
    
    
    
    13,586,889
    
    
    
    9,371,233INCOME (LOSS) BEFORE INCOME TAXES
    
    
    1,804,407
    
    
    
    (546,283
    )
    
    
    3,370,813
    
    
    
    809,284FUTURE INCOME TAXEXPENSE (BENEFIT)
    
    
    1,081,454
    
    
    
    (10,631
    )
    
    
    2,022,123
    
    
    
    607,870NET INCOME (LOSS)
    
    $
    722,953
    
    
    $
    (535,652
    )
    
    $
    1,348,690
    
    
    $
    201,414NET INCOME (LOSS) PER SHAREBasic
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.01Diluted
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.01WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    21,456,828
    
    
    
    16,005,158
    
    
    
    21,417,395
    
    
    
    15,848,386Diluted
    
    
    22,919,707
    
    
    
    16,005,158
    
    
    
    23,072,192
    
    
    
    16,749,736
 See accompanying notes.
 2




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005OPERATING ACTIVITIESNet income (loss)
    
    $
    722,953
    
    
    $
    (535,652
    )
    
    $
    1,348,690
    
    
    $
    201,414Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Incentive bonus paid in common shares
    
    
    
    
    
    
    
    
    
    
    291,032
    
    
    
    217,026Compensation from options and warrants
    
    
    419,787
    
    
    
    239,090
    
    
    
    848,534
    
    
    
    491,698Contract settlement paid in common shares
    
    
    
    
    
    
    (4,425
    )
    
    
    
    
    
    
    (4,425
    )Depreciation, depletion and amortization
    
    
    1,964,578
    
    
    
    1,001,533
    
    
    
    3,502,490
    
    
    
    2,048,088Write-down of investment
    
    
    
    
    
    
    55,454
    
    
    
    
    
    
    
    55,454Gain on sale of assets
    
    
    4,015
    
    
    
    
    
    
    
    22,973
    
    
    
    (12,568
    )Future income taxes (benefit)
    
    
    1,081,454
    
    
    
    (10,631
    )
    
    
    2,022,123
    
    
    
    607,870Changes in assets and liabilitiesAccounts receivable
    
    
    (2,897,966
    )
    
    
    (1,670,147
    )
    
    
    (3,095,607
    )
    
    
    (2,195,382
    )Prepaid expenses and other current assets
    
    
    653,388
    
    
    
    (937,893
    )
    
    
    2,262,169
    
    
    
    (934,913
    )Other non-current assets
    
    
    62,124
    
    
    
    
    
    
    
    (761,820
    )
    
    
    Accounts payable
    
    
    1,118,653
    
    
    
    (276,962
    )
    
    
    2,652,633
    
    
    
    981,482Accrued liabilities
    
    
    (1,953,700
    )
    
    
    (138,397
    )
    
    
    851,056
    
    
    
    2,229,121Customers drilling deposits
    
    
    (4,901,949
    )
    
    
    8,257,125
    
    
    
    (20,730,549
    )
    
    
    7,282,724Net cash provided by (used in) operating activities
    
    
    (3,726,663
    )
    
    
    5,979,095
    
    
    
    (10,786,276
    )
    
    
    10,967,589INVESTING ACTIVITIESProceeds from sale of assets
    
    
    4,443
    
    
    
    
    
    
    
    4,443
    
    
    
    273,600Purchase of property and equipment
    
    
    (164,950
    )
    
    
    (684,001
    )
    
    
    (489,692
    )
    
    
    (729,103
    )Increase in bonds and deposits
    
    
    (10,000
    )
    
    
    (161,650
    )
    
    
    (11,000
    )
    
    
    (247,045
    )Additions to oil and gas properties, net
    
    
    (9,523,333
    )
    
    
    (6,651,534
    )
    
    
    (35,044,644
    )
    
    
    (13,903,954
    )Net cash used in investing activities
    
    
    (9,693,840
    )
    
    
    (7,497,185
    )
    
    
    (35,540,893
    )
    
    
    (14,606,502
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    1,775
    
    
    
    29,980
    
    
    
    22,416
    
    
    
    123,803Proceeds from issuance of common shares
    
    
    119,570
    
    
    
    245,860
    
    
    
    287,626
    
    
    
    1,494,636Payments of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (75,000
    )
    
    
    (451,496
    )Proceeds from issuance of long term debt
    
    
    11,021,067
    
    
    
    
    
    
    
    29,000,000
    
    
    
    6,168,696Payments of long term debt
    
    
    (6,000
    )
    
    
    (14,338
    )
    
    
    (12,000
    )
    
    
    (99,667
    )Net cash provided by financing activities
    
    
    11,136,412
    
    
    
    261,502
    
    
    
    29,223,042
    
    
    
    7,235,972Change in cash
    
    
    (2,284,091
    )
    
    
    (1,256,588
    )
    
    
    (17,104,127
    )
    
    
    3,597,059Cash, beginning of period
    
    
    9,124,216
    
    
    
    16,703,019
    
    
    
    23,944,252
    
    
    
    11,849,372Cash, end of period
    
    $
    6,840,125
    
    
    $
    15,446,431
    
    
    $
    6,840,125
    
    
    $
    15,446,431SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,126,537
    
    
    $
    582,097
    
    
    $
    1,793,203
    
    
    $
    1,107,061Income taxes paid
    
    
    
    
    
    
    130,000
    
    
    
    
    
    
    
    130,000SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIESCommon shares issued upon conversion of notes
    
    
    
    
    
    
    535,464
    
    
    
    
    
    
    
    620,464
 See accompanying notes.
 3




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##### Table of Contents



NGAS Resources, Inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1. Summary of Significant Accounting Policies
 General
 Basis of Presentation
 Change in Accounting Principles .
 Estimates
 Reclassifications and Adjustments
 Note 2. Oil and Gas Properties
  June 30, 2006
    
    
    December 31,Accumulated
    
    
    2005Cost
    
    
    DD&A
    
    
    Net
    
    
    NetProved oil and gas properties
    
    $
    104,231,397
    
    
    $
    (9,531,254
    )
    
    $
    94,700,143
    
    
    $
    83,567,982Unproved oil and gas properties
    
    
    3,045,144
    
    
    
    
    
    
    
    3,045,144
    
    
    
    2,434,814Gathering lines and well equipment
    
    
    41,765,806
    
    
    
    (1,641,109
    )
    
    
    40,124,697
    
    
    
    19,782,544Total oil and gas properties
    
    $
    149,042,347
    
    
    $
    (11,172,363
    )
    
    $
    137,869,984
    
    
    $
    105,785,340
 4




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##### Table of Contents



Note 3. Property and Equipment
  June 30, 2006
    
    
    December 31,Accumulated
    
    
    2005Cost
    
    
    Depreciation
    
    
    Net
    
    
    NetLand
    
    $
    12,908
    
    
    $
    
    
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    48,350
    
    
    
    (7,768
    )
    
    
    40,582
    
    
    
    29,777Machinery and equipment
    
    
    2,458,404
    
    
    
    (653,771
    )
    
    
    1,804,633
    
    
    
    1,833,591Office furniture and fixtures
    
    
    122,459
    
    
    
    (41,907
    )
    
    
    80,552
    
    
    
    50,830Computer and office equipment
    
    
    516,572
    
    
    
    (260,502
    )
    
    
    256,070
    
    
    
    271,420Vehicles
    
    
    1,376,367
    
    
    
    (449,333
    )
    
    
    927,034
    
    
    
    735,643Total property and equipment
    
    $
    4,535,060
    
    
    $
    (1,413,281
    )
    
    $
    3,121,779
    
    
    $
    2,934,169
 Note 4. Deferred Financing Costs
  Note 5. Goodwill
  Note 6. Customer Drilling Deposits
  Note 7. Long Term Debt
 Convertible Notes
 5




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##### Table of Contents



Credit Facility
 Acquisition Debt
 Total Long Term Debt and Maturities
 Principal Amount OutstandingJune 30,
    
    
    December 31,2006
    
    
    2005Total long term debt (including current portion)(1)
    
    $
    64,201,497
    
    
    $
    34,971,905Less current portion
    
    
    24,000
    
    
    
    24,000Total long term debt(1)
    
    $
    64,177,497
    
    
    $
    34,947,905
 Maturities of Debt
 Remainder of 2006
    
    $
    12,0002007
    
    
    29,024,0002008
    
    
    24,0002009
    
    
    24,0002010 and thereafter
    
    
    35,117,497
 
 (1)
    
    Reflects allocations of $2,153,321 at June 30, 2006 and $2,394,913 at December 31, 2005
from our 6% convertible notes in the principal amount of $37,000,000 based on equity
components of their conversion features and related warrants. 6




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##### Table of Contents



Note 8. Capital Stock
 Preferred Shares
 Common Shares
 Number ofShares
    
    
    AmountCommon Shares IssuedBalance, December 31, 2004
    
    
    15,605,208
    
    
    $
    54,929,887Issued to employees as incentive bonus
    
    
    154,415
    
    
    
    900,856Issued upon exercise of stock options and warrants
    
    
    2,143,527
    
    
    
    10,983,938Issued upon conversion of convertible notes
    
    
    3,439,478
    
    
    
    15,466,208Issued for contract settlement
    
    
    15,000
    
    
    
    90,300Balance, December 31, 2005
    
    
    21,357,628
    
    
    
    82,371,189Issued to employees as incentive bonus
    
    
    38,315
    
    
    
    291,032Issued upon exercise of stock options and warrants
    
    
    76,999
    
    
    
    287,626Balance, June 30, 2006
    
    
    21,472,942
    
    
    $
    82,949,847Paid In
Capital  Options and WarrantsBalance, December 31, 2004
    
    
    
    
    
    $
    1,796,504Recognized
    
    
    
    
    
    
    1,452,410Exercised
    
    
    
    
    
    
    (505,108
    )Balance, December 31, 2005
    
    
    
    
    
    
    2,743,806Recognized
    
    
    
    
    
    
    556,930Accreted(1)
    
    
    
    
    
    
    (65,166
    )Balance, June 30, 2006
    
    
    
    
    
    $
    3,235,570Contributed SurplusBalance, December 31, 2004
    
    
    
    
    
    $
    Allocated
    
    
    
    
    
    
    1,748,926Balance, December 31, 2005
    
    
    
    
    
    
    1,748,926Accreted(1)
    
    
    
    
    
    
    (176,426
    )Balance, June 30, 2006
    
    
    
    
    
    $
    1,572,500Common Shares to be IssuedBalance, December 31, 2004
    
    
    10,070
    
    
    $
    50,350Contract settlement paid in cash in lieu of common shares
    
    
    (885
    )
    
    
    (4,425
    )Balance, June 30, 2006 and December 31, 2005
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects accretion of the equity components allocated to our 6% convertible notes and
related warrants in 2005. Stock Options and Awards
 7




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##### Table of Contents



Weighted AverageIssued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2004
    
    
    2,385,000
    
    
    
    370,000
    
    
    $
    3.58Issued(1)
    
    
    860,000
    
    
    
    
    
    
    
    6.71Exercised
    
    
    (260,000
    )
    
    
    
    
    
    
    1.43Balance, December 31, 2005
    
    
    2,985,000
    
    
    
    571,250
    
    
    
    4.67Vested
    
    
    
    
    
    
    146,250
    
    
    
    4.03Exercised
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    4.03Balance, June 30, 2006
    
    
    2,975,000
    
    
    
    707,500
    
    
    
    4.67
 
 (1)
    
    Vesting in increments from July 1, 2006 through February 25, 2009.  Options Issued and Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    Exerciseor Range
    
    Number
    
    Life (years)
    
    Price
    
    Number
    
    Price$
    
    
    
    
    1.02
    
    
    
    145,000
    
    
    
    1.51
    
    
    $
    1.02
    
    
    
    145,000
    
    
    $
    1.024.03
    
    
    
    4.09
    
    
    
    1,970,000
    
    
    
    3.22
    
    
    
    4.05
    
    
    
    562,500
    
    
    
    4.066.02
    
    
    
    7.04
    
    
    
    860,000
    
    
    
    4.05
    
    
    
    6.71
    
    
    
    
    
    
    
    2,975,000
    
    
    
    
    
    
    
    
    
    
    
    707,500
  Common Stock Purchase Warrants
 Weighted AverageIssued
    
    Exercisable
    
    Exercise PriceBalance, December 31 2004
    
    
    2,422,055
    
    
    
    2,422,055
    
    
    $
    4.96Issued in financing transactions(1)
    
    
    945,809
    
    
    
    
    
    
    
    13.04Exercised
    
    
    (1,883,527
    )
    
    
    
    
    
    
    5.37Expired
    
    
    (169,954
    )
    
    
    
    
    
    
    2.91Balance, December 31, 2005
    
    
    1,314,383
    
    
    
    1,314,383
    
    
    
    10.46Exercised
    
    
    (66,999
    )
    
    
    
    
    
    
    3.69Balance, June 30, 2006
    
    
    1,247,384
    
    
    
    1,247,384
    
    
    
    10.83
 
 (1)
    
    Expiring August 11, 2006. 8




---



##### Table of Contents



Note 9. Income (Loss) Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Diluted EPS
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net income (loss) as reported for basic EPS
    
    $
    722,953
    
    
    $
    (535,652
    )
    
    $
    1,348,690
    
    
    $
    201,414Adjustments to income for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    722,953
    
    
    $
    (535,652
    )
    
    $
    1,348,690
    
    
    $
    201,414Denominator:Weighted average shares for basic EPS
    
    
    21,456,828
    
    
    
    16,005,158
    
    
    
    21,417,395
    
    
    
    15,848,386Effect of dilutive securities:Stock options
    
    
    1,277,449
    
    
    
    
    
    
    
    1,444,601
    
    
    
    633,686Warrants
    
    
    185,430
    
    
    
    
    
    
    
    210,196
    
    
    
    267,664Adjusted weighted average shares and
assumed conversions for diluted EPS
    
    
    22,919,707
    
    
    
    16,005,158
    
    
    
    23,072,192
    
    
    
    16,749,736Basic EPS
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.01Diluted EPS
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.01
 Note 10. Segment Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Oil and gas development
    
    $
    18,339,642
    
    
    $
    11,435,719
    
    
    $
    45,658,897
    
    
    $
    31,445,965Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    18,339,642
    
    
    
    11,435,719
    
    
    
    45,658,897
    
    
    
    31,445,965DD&A:Oil and gas development
    
    
    1,810,080
    
    
    
    902,232
    
    
    
    3,196,825
    
    
    
    1,865,542Corporate
    
    
    154,498
    
    
    
    99,301
    
    
    
    305,665
    
    
    
    182,546Total
    
    
    1,964,578
    
    
    
    1,001,533
    
    
    
    3,502,490
    
    
    
    2,048,088Interest expense:Oil and gas development
    
    
    534,070
    
    
    
    259,191
    
    
    
    579,453
    
    
    
    525,290Corporate
    
    
    555,000
    
    
    
    295,810
    
    
    
    1,110,000
    
    
    
    538,464Total
    
    
    1,089,070
    
    
    
    555,001
    
    
    
    1,689,453
    
    
    
    1,063,754Net income (loss):Oil and gas development
    
    
    1,561,882
    
    
    
    6,591
    
    
    
    3,032,535
    
    
    
    1,155,926Corporate
    
    
    (838,929
    )
    
    
    (542,243
    )
    
    
    (1,683,845
    )
    
    
    (954,512
    )Total
    
    
    722,953
    
    
    
    (535,652
    )
    
    
    1,348,690
    
    
    
    201,414Capital expenditures:Oil and gas development
    
    
    9,647,046
    
    
    
    7,164,534
    
    
    
    35,411,913
    
    
    
    14,450,781Corporate
    
    
    41,237
    
    
    
    171,001
    
    
    
    122,423
    
    
    
    182,276Total
    
    $
    9,688,283
    
    
    $
    7,335,535
    
    
    $
    35,534,336
    
    
    $
    14,633,057
 9




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##### Table of Contents



June 30,
    
    
    December 31,2006
    
    
    2005Identifiable assets:Oil and gas development
    
    $
    159,892,800
    
    
    $
    126,590,249Corporate
    
    
    3,439,928
    
    
    
    20,183,334Total
    
    $
    163,332,728
    
    
    $
    146,773,583
 Note 11. Commitments
  Commercial CommitmentsOperating
    
    
    OtherYear
    
    Leases
    
    
    Commitments
    
    
    TotalRemainder of 2006
    
    $
    299,959
    
    
    $
    240,000
    (1)
    
    $
    539,9592007
    
    
    601,498
    
    
    
    
    
    
    
    601,4982008
    
    
    292,289
    
    
    
    100,000
    (2)
    
    
    392,2892009
    
    
    195,000
    
    
    
    2,045,000
    (2)
    
    
    2,240,0002010 and thereafter
    
    
    97,500
    
    
    
    
    
    
    
    97,500Total
    
    $
    1,486,246
    
    
    $
    2,385,000
    
    
    $
    3,871,246
 
 (1)
    
    Reflects obligations under a guaranty for a limited liability company in which we
previously held a minority interest.(2)
    
    Reflects commitments under a purchase contract for an airplane. Note 12. Recent Accounting Standards
 FIN No. 47
 SFAS No. 19 and FSP No. 19-1
 SFAS No. 154
 10




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##### Table of Contents



EITF No. 04-5
 EITF No. 04-10
 EITF No. 05-2
 FERC Pronouncement
 EITF No. 05-8
 FSP No. 123(R)-4
 FIN No. 48
 11




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##### Table of Contents



NGAS Resources, Inc.
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Strategy
  
    
    Acceleration of Drilling Operations. Development drilling is our
mainstay for production and reserve growth. We drilled 155 gross (44.3040 net) wells
through our drilling programs in 2005. During the first six months of 2006, we drilled an
additional 128 gross (30.3779 net) wells. See Drilling Operations. We believe that our
long and successful operating history and proven ability to drill a large number of wells
year after year have positioned us as a leading player in the Appalachian basin. Over the
next few years, we plan to continue our focus on developing our Leatherwood field, where we
drilled 59 wells in the first six months of 2006 and have identified
over 550 additional
drilling locations. We are also pursuing opportunities to capitalize on our teams
experience and diversify our asset base through targeted expansion in other gas basins.
    
    Drilling Program Financings. Our ability to attract outside capital
through our drilling programs has enabled us to capitalize on natural gas development
opportunities and long range pricing expectations for this commodity. Beginning this year,
we have changed the structure of our new drilling programs from turnkey to cost-plus
pricing, with a view to reducing our exposure to price volatility for drilling services,
equipment and steel casing requirements. In the first quarter of 2006, we launched a
drilling program to participate with our joint venture partner in up to 60 natural gas
wells on its acreage in Jackson and Roane Counties, West Virginia. Our second program this
year will participate in up to 12 horizontal wells planned for our CBM project in the
Arkoma basin. During the balance of the year, we plan to sponsor a drilling program for at
least 85 additional wells on our core Appalachian properties. We anticipate contributing
total program capital up to 75% for Leatherwood development, 60% for drilling initiatives
in Amvest and Martins Fork, 25% in Straight Creek and 20% in our Fonde field.
 12




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##### Table of Contents




    
    Acquisition of Additional Drilling Prospects. We follow a disciplined
capital allocation process in selecting opportunities to build our substantial inventory of
drilling prospects that meet our criteria for predictable, long-lived reserves. During the
fourth quarter of 2005, we acquired a significant position in approximately 14,000 acres of
CBM properties in the Arkoma basin within Leflore County, Oklahoma and Sebastian County,
Arkansas. We also initiated an exploratory play during 2005 in the Illinois basin on
acquired tracts spanning approximately 15,500 acres within Breckinridge, Grayson, Hardin,
Meade and Ohio Counties in western Kentucky. We plan to continue capitalizing on
opportunities to assemble or acquire large tracts with significant unproved gas development
potential. Our goal is to consolidate our position in the Appalachian basin, while also
diversifying our inventory of drilling prospects in other basins that offer attractive
natural gas and CBM plays.
    
    Repeatable Drilling. As of June 30, 2006, we had interests in a total of
943 wells, with an inventory of over 1,100 additional drilling locations. Most of our wells
are drilled to relatively shallow total depths up to 5,000 feet, generally encountering
several predictable natural gas pay zones. We focus on repeatable prospects to reduce
drilling risks, as reflected in our success rate. Historically, over 99% of our wells have
been completed as producers. The primary pay zone for most of our Appalachian wells is the
Devonian shale formation. This is considered an unconventional target due to its low
porosity and permeability. To be productive, natural fracturing must be present and
generally must be enhanced by effective acidizing or other fracturing treatment. While
this typically results in modest initial volumes and pressures, it also accounts for the
low annual decline rates demonstrated by our wells in the region, many of which are
expected to produce for 25 years or more. We recently implemented initiatives to leverage
our core expertise with evolving technologies in horizontal drilling, which may provide
advantages in extracting this type of tight gas. The initial programs are being conducted
in the Arkoma basin for accelerated CBM recovery and on recently acquired acreage in the
Illinois basin to test the New Albany shale formation, which has similar geologic
characteristics to the Devonian shale in the Appalachian basin.
    
    Extension of Gas Gathering Systems. We construct and operate gas
gathering facilities to connect our wells to interstate pipelines with access to major east
coast natural gas markets. In addition to generating gas transmission and compression
revenues, our 100% ownership of these systems gives us control over third-party access,
providing competitive advantages in acquiring and developing nearby acreage. As of June
30, 2006, our gas gathering facilities spanned 368 miles, including 140 miles installed
during 2005 and 57 miles in the first six months of 2006, in addition to 116 miles of the
Stone Mountain open-access system acquired from Duke Energy Gas Services, LLC (Duke
Energy). See Recent Initiatives below. The recent extensions to our gathering systems
include a 23-mile, eight-inch steel line for connecting our wells in the Leatherwood field
and a 16-mile, six-inch line that connects them to the Stone Mountain system. As of the
date of this report, we have a total of 134 wells producing to sales in Leatherwood and an
additional 48 wells awaiting connection. With this infrastructure now in place, we expect
to bring current and future Leatherwood wells on line soon after completion.
    
    Purchase of Producing Properties. The purchase of third party production
offers a means in addition to drilling for accelerating our growth, while continuing to
capitalize on our operating experience. Our acquisition criteria for producing properties
include reserve life, profit enhancement potential, existing infrastructure, geographic
concentration and working interest levels permitting operation of acquired properties. In
the fourth quarter of 2005, we acquired a 25% interest in producing properties within the
Arkoma basin, with an estimated 7.0 Bcf of proved CBM reserves, at an acquisition price of
$1.63 per Mcfe. We continuously evaluate opportunities to acquire producing properties
meeting our criteria for long-lived reserves in targeted geographic areas.
 Recent Initiatives
 Gathering System Acquisition
 13




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##### Table of Contents



Property Acquisition
 Williston Basin Leasing Initiative
 Regional Advantages
  Drilling Operations
 Drilling Program Structure
 Drilling Program Investments
 14




---



##### Table of Contents



Drilling Program Benefits
 
    
    Based on our 30% capital investment in our largest 2005 drilling programs, we
control a drilling budget over three times greater than we could support on our own. This
helps us compete for attractive properties by increasing our drilling commitments. It also
leverages our buying power for drilling services and materials, contributing to lower
overall development costs.
    
    Aggregating our capital with private investors in our drilling programs enables
us to maintain a larger and more capable staff than we could otherwise support if we were
operating solely for our own account.
    
    Accelerating the pace of development activities through our drilling programs
expands the production capacity we can make available to gas purchasers, contributing to
higher and more stable sales prices for our production.
    
    By conducting drilling operations on our undeveloped prospects through specially
tailored drilling programs and retaining larger ownership interests, we expand our
inventory of developmental locations with lower risk profiles for subsequent programs,
while adding to our proved reserves, both developed and undeveloped.
    
    Our drilling program strategy substantially increases the number of wells we
could drill solely for our own account, diversifying the risks of drilling operations.
 Participation Rights
 Drilling Results
 Development Wells
    
    Exploratory WellsProductive
    
    Dry
    
    Productive
    
    DryGross
    
    Net
    
    Gross
    
    Gross
    
    Net
    
    GrossSix months ended June 30, 2006
    
    
    98
    
    
    
    23.3459
    
    
    
    
    
    
    
    30
    
    
    
    7.0320
    
    
    
    Year ended December 31, 2005
    
    
    151
    
    
    
    43.1590
    
    
    
    
    
    
    
    4
    
    
    
    1.1450
    
    
    
    
 15




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##### Table of Contents



Production Volumes and Sales Prices
 Six Months Ended
    
    Year EndedJune 30,
    
    December 31,2006
    
    2005
    
    2005Production volumes:Oil (Bbl)
    
    
    18,463
    
    
    
    15,442
    
    
    
    39,959Natural gas (Mcf)
    
    
    1,282,497
    
    
    
    741,237
    
    
    
    1,583,922Equivalents (Mcfe)
    
    
    1,393,273
    
    
    
    833,889
    
    
    
    1,823,673Average sales price:Natural gas (per Mcf)
    
    $
    8.56
    
    
    $
    7.63
    
    
    $
    9.02Oil (per Bbl)
    
    
    58.05
    
    
    
    44.37
    
    
    
    48.36
 Results of Operations  Three Months Ended June 30, 2006 and 2005
 Revenues
 Three Months Ended June 30,% of
    
    
    
    
    
    
    %2006
    
    
    Revenue
    
    
    2005
    
    
    ChangeContract drilling
    
    $
    11,029,274
    
    
    
    60
    %
    
    $
    7,639,000
    
    
    
    44
    %Oil and gas production
    
    
    5,935,783
    
    
    
    32
    
    
    
    3,507,703
    
    
    
    69Gas transmission and compression
    
    
    1,374,585
    
    
    
    8
    
    
    
    289,016
    
    
    
    376Total
    
    $
    18,339,642
    
    
    
    100
    %
    
    $
    11,435,719
    
    
    
    60
   16




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##### Table of Contents



Expenses
 Three Months Ended June 30,2006
    
    
    Margin
    
    
    2005
    
    
    MarginContract drilling
    
    $
    7,840,559
    
    
    
    29
    %
    
    $
    6,618,260
    
    
    
    13
    %Oil and gas production
    
    
    1,529,940
    
    
    
    74
    
    
    
    890,694
    
    
    
    75Gas transmission and compression
    
    
    541,869
    
    
    
    61
    
    
    
    235,084
    
    
    
    19Total direct expenses
    
    
    9,912,368
    
    
    
    46
    
    
    
    7,744,038
    
    
    
    32
 % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    
    3,164,516
    
    
    
    17
    %
    
    
    2,511,910
    
    
    
    22
    %Options, warrants and deferred compensation
    
    
    419,787
    
    
    
    2
    
    
    
    239,090
    
    
    
    2Depreciation, depletion and amortization
    
    
    1,964,578
    
    
    
    11
    
    
    
    1,001,533
    
    
    
    9Interest expense, net of interest income
    
    
    987,546
    
    
    
    5
    
    
    
    506,615
    
    
    
    4Other, net
    
    
    86,440
    
    
    
    
    
    
    
    (21,184
    )
    
    
    N/ATotal other expenses
    
    $
    6,622,867
    
    
    
    
    
    
    $
    4,237,964
      17




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##### Table of Contents



Net Income and EPS
 Results of Operations  Six Months Ended June 30, 2006 and 2005
 Revenues
 Six Months Ended June 30,% of
    
    
    
    
    
    
    %2006
    
    
    Revenue
    
    
    2005
    
    
    ChangeContract drilling
    
    $
    31,440,774
    
    
    
    69
    %
    
    $
    24,316,000
    
    
    
    29
    %Oil and gas production
    
    
    12,139,967
    
    
    
    27
    
    
    
    6,383,491
    
    
    
    90Gas transmission and compression
    
    
    2,078,156
    
    
    
    4
    
    
    
    746,474
    
    
    
    178Total
    
    $
    45,658,897
    
    
    
    100
    %
    
    $
    31,445,965
    
    
    
    45
    18




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##### Table of Contents



Expenses
 Six Months Ended June 30,2006
    
    
    Margin
    
    
    2005
    
    
    MarginContract drilling
    
    $
    24,543,489
    
    
    
    22
    %
    
    $
    18,988,065
    
    
    
    22
    %Oil and gas production
    
    
    2,983,408
    
    
    
    75
    
    
    
    1,649,515
    
    
    
    74Gas transmission and compression
    
    
    1,174,298
    
    
    
    43
    
    
    
    627,868
    
    
    
    16Total direct expenses
    
    
    28,701,195
    
    
    
    37
    
    
    
    21,265,448
    
    
    
    32
 % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    
    7,638,908
    
    
    
    17
    %
    
    
    6,018,735
    
    
    
    19
    %Options, warrants and deferred compensation
    
    
    848,534
    
    
    
    2
    
    
    
    491,698
    
    
    
    2Depreciation, depletion and amortization
    
    
    3,502,490
    
    
    
    8
    
    
    
    2,048,088
    
    
    
    7Interest expense, net of interest income
    
    
    1,469,569
    
    
    
    3
    
    
    
    977,628
    
    
    
    3Other, net
    
    
    127,388
    
    
    
    
    
    
    
    (164,916
    )
    
    
    N/ATotal other expenses
    
    $
    13,586,889
    
    
    
    
    
    
    $
    9,371,233
     19




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##### Table of Contents



Net Income and EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
 20




---



##### Table of Contents



21




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Operating Leases
    
    
    Other
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    Commitments
    
    
    DebtRemainder of 2006
    
    $
    190,413
    
    
    $
    109,546
    
    
    $
    299,959
    
    
    $
    240,000
    (1)
    
    $
    12,0002007
    
    
    380,826
    
    
    
    220,672
    
    
    
    601,498
    
    
    
    
    
    
    
    29,024,0002008
    
    
    273,900
    
    
    
    18,389
    
    
    
    292,289
    
    
    
    100,000
    (2)
    
    
    24,0002009
    
    
    195,000
    
    
    
    
    
    
    
    195,000
    
    
    
    2,045,000
    (2)
    
    
    24,0002010 and thereafter
    
    
    97,500
    
    
    
    
    
    
    
    97,500
    
    
    
    
    
    
    
    35,117,497Total
    
    $
    1,137,639
    
    
    $
    348,607
    
    
    $
    1,486,246
    
    
    $
    2,385,000
    
    
    $
    64,201,497
 
 (1)
    
    Reflects obligations under a guaranty for a limited liability company in which we
previously held a minority interest.(2)
    
    Reflects commitments under a purchase contract for an airplane. Critical Accounting Policies and Estimates
 General
 Allowance for Doubtful Accounts .
 Impairment of Long-Lived Assets .
 Forward Looking Statements and Risk Factors
  22




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
  VotesNominee
    
    Votes For
    
    WithheldWilliam S. Daugherty
    
    
    18,778,854
    
    
    
    126,450Charles L. Cotterell
    
    
    18,730,543
    
    
    
    174,661James K. Klyman
    
    
    18,737,406
    
    
    
    167,898Thomas F. Miller
    
    
    18,745,104
    
    
    
    160,200
  Votes
    
    BrokerProposal
    
    Votes For
    
    Against
    
    NonvotesFixing the size of the board of
directors at four members
    
    
    18,745,117
    
    
    
    160,127
    
    
    
    Ratification of the appointment of
independent public accountants
    
    
    6,284,985
    
    
    
    413,268
    
    
    
    12,207,052Approval of common stock issuance
under notes and warrants
    
    
    18,717,835
    
    
    
    187,469
    
    
    
    
 23




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description of Exhibit3.1
    
    Notice of Articles, certified on June 3, 2004 by the Registrar of Corporations under the
British Columbia Business Corporations Act (incorporated by reference to Exhibit 3.1 to
current report on Form 8-K [File No. 0-12185], filed June 29, 2004).3.2
    
    Alteration to Notice of Articles, certified on June 25, 2004 by the Registrar of
Corporations under the British Columbia Business Corporations Act (incorporated by reference
to Exhibit 3.2 to current report on Form 8-K [File No. 0-12185], filed June 29, 2004).3.3
    
    Articles dated June 25, 2004, as amended and restated for corporate transition under the
British Columbia Business Corporations Act (incorporated by reference to Exhibit 3.3 to
current report on Form 8-K [File No. 0-12185], filed June 29, 2004).10.1
    
    1997 Stock Option Plan (incorporated by reference to Exhibit 10[a] to annual report on Form
10-KSB [File No. 0-12185] for the year ended December 31, 2002).10.2
    
    2001 Stock Option Plan (incorporated by reference to Exhibit 10[b] to annual report on Form
10-KSB [File No. 0-12185] for the year ended December 31, 2002).10.3
    
    2003 Incentive Stock and Stock Option Plan (incorporated by reference to Exhibit 10.3 to
quarterly report on Form 10-QSB [File No. 0-12185] for the quarter ended March 31, 2004).10.4
    
    Asset Purchase and Sale Agreement dated as of January 17, 2006 among Duke Energy Gas
Services, LLC, NGAS Gathering, LLC and Daugherty Resources, Inc. (incorporated by reference
to Exhibit 10.1 to current report on Form 8-K [File No. 0-12185] dated January 19, 2006).10.5
    
    Securities Purchase Agreement dated as of December 13, 2005 among NGAS Resources, Inc. and
the investors named therein (incorporated by reference to Exhibit 10.1 to current report on
Form 8-K [File No. 0-12185] dated December 14, 2005).10.6
    
    Form of 6% convertible notes issued pursuant to the Securities Purchase Agreement dated as
of December 13, 2005 among NGAS Resources, Inc. and the investors named therein (incorporated
by reference to Exhibit 10.2 to current report on Form 8-K [File No. 0-12185] dated December
14, 2005).10.7
    
    Form of common stock purchase warrant dated December 14, 2005 (incorporated by reference to
Exhibit 10.3 to current report on Form 8-K [File No. 0-12185] dated December 14, 2005).10.8
    
    Form of Change of Control Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.9 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended March 31, 2004).10.9
    
    Form of Indemnification Agreement dated as of February 25, 2004 (incorporated by reference
to Exhibit 10.10 to quarterly report on Form 10-QSB [File No. 0-12185] for the quarter ended
March 31, 2004).10.10
    
    Form of Long Term Incentive Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.11 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended March 31, 2004).11.1
    
    Computation of Earnings Per Share (included in Note 10 to the accompanying condensed
consolidated financial statements)
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit21.0
    
    Subsidiaries (incorporated by reference to Exhibit 21.1 to annual report on Form 10-K [File
No. 0-12185] for the year ended December 31, 2005).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  NGAS Resources, Inc.Date: August 8, 2006
    
    By:
    
    /s/ William S. Daugherty

William S. DaughertyChief Executive Officer(Duly Authorized Officer)(Principal Executive Officer)
 25