**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 March 31, 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** **Not Applicable****(State or other jurisdiction of** **(I.R.S. Employer****incorporation or organization)** **Identification No.)**   **120 Prosperous Place, Suite 201**  **Lexington, Kentucky** **40509-1844****(Address of principal executive offices)** **(Zip Code)****Registrant’s telephone number, including area code: (859) 263-3948**(Former name or former address, if changed since the last report)     Indicate by check mark if the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Act during the past 12 months and (2) has been subject to those filingrequirements for the past 90 days. Yes  þ  No  o     Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer(each as defined in Rule 12b-2) or a non-accelerated filer.Large accelerated filer  o                     Accelerated filer  þ                       Non-accelerated filer  o     Indicate by check mark if the registrant is a shellcompany (as defined in Rule 12b-2). Yes  o  No  þNumber of shares outstanding of each of the registrant’s classes of common equity, as of thelatest practicable date.   **Title of Class** **Outstanding at May 1, 2006****Common Stock** **21,447,701**  
 

 
**NGAS Resources, Inc.****INDEX**       **Page****Part I. Financial Information**         ***Item 1. Financial Statements*****:**         Condensed Consolidated Balance Sheets – March 31, 2006 (unaudited) and December 31, 2005   1      Condensed Consolidated Statement of Operations – Three months ended March 31, 2006 and 2005   2      Condensed Consolidated Statement of Cash Flows – Three months ended March 31, 2006 and 2005   3      Notes to Condensed Consolidated Financial Statements   4      ***Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations***  14      ***Item 3. Quantitative and Qualitative Disclosures about Market Risk***  20      ***Item 4. Controls and Procedures***  20      **PART II. OTHER INFORMATION**         ***Item 6. Exhibits***  21  **Forward-Looking Statements**     Some matters discussed in this report are prospective and constitute forward-lookingstatements within the meaning of the Private Litigation Reform Act of 1995 that involve risks anduncertainties. Other than statements of historical fact, all statements that address our futureactivities, events, outcomes and other matters we plan, expect, budget, intend or estimate (andother similar expressions) are forward-looking statements. While we believe these forward-lookingstatements are based on reasonable assumptions, they involve known and unknown risks, uncertaintiesand other factors that may cause future results to differ materially from those discussed orimplied in this report. Additional information about issues that could cause actual results todiffer from our forward-looking statements is provided in our annual report on Form 10-K for theyear ended December 31, 2005. **Additional Information**     We file annual, quarterly and other reports and information with the Securities ExchangeCommission. Promptly after their filing, we provide access to these reports without charge on ourwebsite at www.ngas.com.
 

 
**NGAS Resources, Inc.****CONDENSED CONSOLIDATED BALANCE SHEETS****(Unaudited)**           **March 31,**  **December 31,**   **2006**  **2005** ASSETS        Current assets:        Cash  $9,124,216  $23,944,252 Accounts receivable   7,081,341   6,883,700 Prepaid expenses and other current assets   1,553,066   3,161,847 Loans to related parties   7,014   26,235        Total current assets   17,765,637   34,016,034          Bonds and deposits   433,695   432,695 Oil and gas properties   130,031,651   105,785,340 Property and equipment   3,109,281   2,934,169 Loans to related parties   262,957   264,377 Deferred financing costs   2,320,551   2,377,791 Other non-current assets   1,473,944   650,000 Goodwill   313,177   313,177                 Total assets $155,710,893  $146,773,583                 LIABILITIES        Current liabilities:        Accounts payable   6,973,417   5,439,437 Accrued liabilities   8,593,310   5,788,554 Customers’ drilling deposits   7,799,375   23,627,975 Long term debt, current portion   24,000   24,000        Total current liabilities   23,390,102   34,879,966          Future income taxes   4,822,424   3,881,755 Long term debt   53,041,634   34,947,905 Deferred compensation   982,370   836,568                 Total liabilities   82,236,530   74,546,194                 SHAREHOLDERS’ EQUITY        Common stock, no par value, 100,000,000 shares authorized,21,435,942 shares issued (2005 – 21,357,628)   82,830,277   82,371,189 21,100 shares held in treasury, at cost   (23,630)  (23,630)Paid-in capital – options and warrants   2,994,168   2,743,806 Contributed surplus   1,660,713   1,748,926 9,185 shares to be issued   45,925   45,925           87,507,453   86,886,216 Accumulated deficit   (14,033,090)  (14,658,827)                Total shareholders’ equity   73,474,363   72,227,389                 Total liabilities and shareholders’ equity $155,710,893  $146,773,583        *See accompanying notes.*
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**NGAS Resources, Inc.****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**           **Three Months Ended**   **March 31,**   **2006**  **2005** REVENUE        Contract drilling  $20,411,500  $16,677,000 Oil and gas production   6,204,184   2,875,788 Gas transmission and compression   703,571   457,458        Total revenue   27,319,255   20,010,246                 DIRECT EXPENSES        Contract drilling   16,702,930   12,369,805 Oil and gas production   1,453,468   758,821 Gas transmission and compression   632,429   392,784        Total direct expenses   18,788,827   13,521,410                 OTHER EXPENSES (INCOME)        Selling, general and administrative   4,474,392   3,506,825 Options, warrants and deferred compensation   428,747   252,608 Depreciation, depletion and amortization   1,537,912   1,046,555 Interest expense   600,383   508,753 Interest income   (118,360)  (37,740)Other, net   40,948   (143,732)       Total other expenses   6,964,022   5,133,269                 INCOME BEFORE INCOME TAXES   1,566,406   1,355,567                 FUTURE INCOME TAX EXPENSE   940,669   618,501                 NET INCOME  $625,737  $737,066                 Basic  $0.03  $0.05        Diluted  $0.03  $0.04                 WEIGHTED AVERAGE COMMONSHARES OUTSTANDING        Basic   21,377,525   15,689,872        Diluted   23,177,078   17,463,618        *See accompanying notes.*
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**NGAS Resources, Inc.****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**           **Three Months Ended**   **March 31,**   **2006**  **2005** OPERATING ACTIVITIES        Net income  $625,737  $737,066 Adjustments to reconcile net income tonet cash provided by (used in) operating activities:        Incentive bonus paid in common shares   291,032   217,026 Compensation from options and warrants   428,747   252,608 Depreciation, depletion and amortization   1,537,912   1,046,555 Gain on sale of assets   18,958   (12,568)Future income taxes   940,669   618,501 Changes in assets and liabilities:        Accounts receivable   (197,641)  (525,235)Prepaid expenses and other current assets   1,608,781   2,980 Accounts payable   1,533,980   1,258,444 Accrued liabilities   2,804,756   2,367,518 Customers’ drilling deposits   (15,828,600)  (974,401)Other non-current assets   (823,944)  —        Net cash provided by (used in) operating activities   (7,059,613)  4,988,494                 INVESTING ACTIVITIES        Proceeds from sale of assets   —   273,600 Purchase of property and equipment   (324,742)  (45,102)Increase in bonds and deposits   (1,000)  (85,395)Additions to oil and gas properties, net   (25,521,311)  (7,252,420)       Net cash used in investing activities   (25,847,053)  (7,109,317)                FINANCING ACTIVITIES                 Decrease in loans to related parties   20,641   93,823 Proceeds from issuance of common shares   168,056   1,248,776 Payments of deferred financing costs   (75,000)  (451,496)Proceeds from issuance of long term debt   17,978,933   6,168,696 Payments of long term debt   (6,000)  (85,329)       Net cash provided by financing activities   18,086,630   6,974,470           Change in cash   (14,820,036)  4,853,647 Cash, beginning of period   23,944,252   11,849,372        Cash, end of period  $9,124,216  $16,703,019                 SUPPLEMENTAL DISCLOSURE        Interest paid  $666,000  $524,964 Income taxes paid   —   — SUPPLEMENTAL SCHEDULE OF NONCASHINVESTING AND FINANCING ACTIVITIES        Common shares issued upon conversion of notes   —   85,000 *See accompanying notes.*
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**NGAS Resources, Inc.****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)*****Note 1. Summary of Significant Accounting Policies***     (a) *General*. Our accounting policies are described in Note 1 to the consolidatedfinancial statements in our annual report on Form 10-K for the year ended December 31, 2005.Except as noted below, our accounting policies and their method of application in the accompanyingcondensed consolidated financial statements are consistent with those described in the annualreport.     (b) *Basis of Presentation*. The accompanying condensed consolidated financialstatements include the accounts of NGAS Resources, Inc., our direct and indirect wholly ownedsubsidiaries and our proportionate share of the assets, liabilities, income and expenses of oursponsored drilling programs. References to the “Company,” “we,” “our” or “us” include all of thoseaccounts and interests. These interim consolidated financial statements are unaudited but reflectall normal recurring adjustments that, in the opinion of our management, are necessary to fairlypresent our financial position at March 31, 2006 and results of operations and cash flows for thethree months ended March 31, 2006 and 2005. All material inter-company accounts and transactionsfor the periods presented in these interim consolidated financial statements have been eliminatedon consolidation.     (c) *Change in Accounting Principles**.*We are organized at the holding company levelunder the laws of British Columbia, which previously required us to prepare our consolidatedfinancial statements in accordance with accounting principles generally accepted in Canada(“Canadian GAAP”). Recent changes in those laws now permit publicly held U.S. reporting companiesto elect accounting principles generally accepted in the United States (“U.S. GAAP”) and engageU.S. auditors. We made this election, beginning in 2006. Our adoption of U.S. GAAP did not have amaterial effect on our reported financial condition or results for prior periods and did notrequire any restatement of previously issued financial statements, which include reconciliationsbetween items with different treatment under Canadian and U.S. GAAP. See Note 9 – ComprehensiveIncome.     (d) *Estimates*. The preparation of financial statements in conformity with U.S. GAAPrequires our management to make estimates and assumptions that affect the amounts reported in theinterim consolidated financial statements and accompanying notes. Actual results could differ fromthose estimates.     (d) *Reclassifications and Adjustments*. Certain amounts reported in the condensedconsolidated financial statements for the interim period in 2005 have been reclassified to conformwith the presentation in the current period.***Note 2. Oil and Gas Properties***     All of our oil and gas development and producing activities are conducted within thecontinental United States. Capitalized costs and accumulated depreciation, depletion andamortization (“DD&A”) for these activities are summarized below.                   **March 31, 2006**  **December 31,**       **Accumulated**      **2005**   **Cost**  **DD&A**  **Net**  **Net** Proved oil and gas properties  $96,897,985  $(7,726,743) $89,171,242  $83,567,982 Unproved oil and gas properties   2,679,341   —   2,679,341   2,434,814 Gathering lines and well equipment   39,941,688   (1,760,620)  38,181,068   19,782,544                               Total oil and gas properties $139,519,014  $(9,487,363) $130,031,651  $105,785,340              
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***Note 3. Property and Equipment***     The following table presents the capitalized costs and accumulated depreciation for ourproperty and equipment as of March 31, 2006 and December 31, 2005.                   **March 31, 2006**  **December 31,**       **Accumulated**      **2005**   **Cost**  **Depreciation**  **Net**  **Net** Land  $12,908  $—  $12,908  $12,908 Building improvements   36,134   (6,961)  29,173   29,777 Machinery and equipment   2,417,546   (600,706)  1,816,840   1,833,591 Office furniture and fixtures   122,459   (37,973)  84,486   50,830 Computer and office equipment   506,587   (236,997)  269,590   271,420 Vehicles   1,299,319   (403,035)  896,284   735,643                               Total property and equipment  $4,394,953  $(1,285,672) $3,109,281  $2,934,169              ***Note 4. Deferred Financing Costs***     Financing costs for our convertible note private placements and secured bank loans areinitially capitalized and amortized at rates based on the stated terms of the underlying debtinstruments. Upon conversion of convertible notes, the principal amount converted is added toequity, net of a proportionate amount of the original financing costs. Unamortized deferredfinancing costs for outstanding notes and bank loans aggregated $2,320,551 at March 31, 2006 and$2,377,791 at December 31, 2005, net of accumulated amortization totaling $510,976 and $378,736,respectively.***Note 5. Goodwill***     Goodwill of $1,789,564 was recorded in connection with our acquisition of Daugherty Petroleum,Inc. in 1993 and was amortized over ten years on a straight-line basis until 2002, when we adoptedthe Canadian equivalent of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets.” Under the adopted standard, goodwill is no longer amortized but isinstead tested for impairment at least annually. Our annual analyses indicated that no impairmentcharges were required. Accordingly, accumulated amortization of goodwill remained at $1,476,387 asof March 31, 2006 and December 31, 2005, with unamortized goodwill of $313,177.***Note 6. Customer Drilling Deposits***     We sponsor and manage drilling programs to participate in our drilling initiatives, in whichwe maintain non-promoted interests ranging from 20.8% to 66.7%. Historically, drilling operationswere conducted under turnkey contracts with our sponsored drilling programs, requiring us to drilland complete wells at specified prices and entitling us to any surplus if the contract priceexceeds our costs. In 2006, we changed the structure of our new drilling programs from turnkeypricing to cost plus, with a view to reducing our exposure to price volatility for drillingservices, equipment and steel casing requirements. Under both structures, net proceeds receivedunder drilling contracts with sponsored programs are recorded as customers’ drilling deposits atthe time of receipt. We recognize revenues from drilling operations on the completed contractmethod as the wells are drilled, rather than when funds are received. Customer drilling depositsaggregating $7,799,375 at March 31, 2006 and $23,627,975 at December 31, 2005 represent unapplieddrilling contract payments for wells that were not yet drilled as of the balance sheet dates.***Note 7. Long Term Debt***     (a) *Convertible Notes*. We issued several series of convertible notes in privateplacements to finance part of our drilling and acquisition activities. During 2005, the notes ofall prior series were converted by their holders, either voluntarily or in response to ourredemption calls, resulting in our issuance of 3,439,478 common shares
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during the year. In December 2005, we completed an institutional private placement of a newseries of 6% convertible notes due December 15, 2010 in the aggregate principal amount of $37million and related common stock purchase warrants, all of which remained outstanding at March 31,2006, with a conversion price of $14.34 and an exercise price of $13.04 per share. See Note 8 –Capital Stock.     The conversion price of the notes and exercise price of the warrants are subject to adjustmentfor certain dilutive issuances of common stock. The purchase agreement for the notes also providesholders with certain participation rights in future financing transactions and provides for us touse our best efforts to obtain shareholder approval at our next annual meeting for issuance of thecommon shares underlying the notes and warrants. If a holder elects to convert a note before thesecond anniversary of the issuance date, unless the prevailing market price of our common stockexceeds 160% of the conversion price, the holder will be entitled to a payment equal to thedifference between two years’ interest on the converted note and the interest already paid on thenote, payable at our option in cash or in common shares. After that date, if the prevailing marketprice of the common stock exceeds 160% of the conversion price, we may redeem any unconverted notesat a redemption price equal to their principal amount plus accrued and unpaid interest. Any notesthat are neither redeemed nor converted prior to maturity will be repayable in cash or in commonshares. Any common shares issued for interest payments on converted notes or upon redemption attheir maturity will generally be valued for that purpose at 92.5% of their prevailing market price.     (b) *Credit Facility*. We maintain a credit facility with KeyBank NA with a scheduledmaturity date of July 31, 2007. Borrowings of $15 million under the facility were repaid in thefourth quarter of 2005. The facility was expanded in the first quarter of 2006 to increase themaximum credit and borrowing base to $75 million and $35 million, respectively, and to reduce theinterest rate for borrowings under the facility from 1% to 0.875% above the bank’s prime rate,amounting to 8.625% at March 31, 2006. As of that date, our outstanding borrowings under thefacility aggregated $17,978,933. The facility is secured by liens on all corporate assets,including a first mortgage on oil and gas interests and pipelines, as well as an assignment ofmajor production and transportation contracts.     (c) *Acquisition Debt*. We issued a note for $854,818 to finance our 1986 acquisitionof mineral property on Unga Island, Alaska. The debt is repayable without interest in monthlyinstallments of $2,000 and is secured by liens on the acquired property, buildings and equipment.Although the acquisition agreement provides for royalties at 4% of net smelter returns or otherproduction revenues, the property has remained inactive. The remaining acquisition debt was$360,818 at March 31, 2006 and $366,818 at December 31, 2005.     (d) *Total Long Term Debt and Maturities*. The following tables summarize our totallong term debt at March 31, 2006 and December 31, 2005 and the principal payments due each yearthrough 2010 and thereafter.           **Principal Amount Outstanding**   **March 31,**  **December 31,**   **2006**  **2005** Total long term debt (including current portion)(1) $53,065,634  $34,971,905 Less current portion   24,000   24,000                 Total long term debt(1) $53,041,634  $34,947,905                 **Maturitiesof Debt**                 Remainder of 2006  $18,000     2007   18,002,933     2008   24,000     2009   24,000     2010 and thereafter   34,996,701      (1) Reflects allocations of $2,274,117 at March 31, 2006 and $2,394,913 at December 31, 2005from our 6% convertible notes in the principal amount of $37,000,000 based on equitycomponents of their conversion features and related warrants.
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***Note 8. Capital Stock***     (a) *Preferred Shares*. We have 5,000,000 authorized shares of preferred stock, none ofwhich were outstanding at March 31, 2006 or December 31, 2005.     (b) *Common Shares*. The following tables reflect transactions involving our commonstock during the periods presented.           **Number of**      **Shares**  **Amount** Common Shares Issued        Balance, December 31, 2004   15,605,208  $54,929,887 Issued to employees as incentive bonus   154,415   900,856 Issued upon exercise of stock options and warrants   2,143,527   10,983,938 Issued upon conversion of convertible notes   3,439,478   15,466,208 Issued for contract settlement   15,000   90,300        Balance, December 31, 2005   21,357,628   82,371,189 Issued to employees as incentive bonus   38,315   291,032 Issued upon exercise of stock options and warrants   39,999   168,056        Balance, March 31, 2006   21,435,942  $82,830,277                 Paid In Capital – Options and Warrants        Balance, December 31, 2004      $1,796,504 Recognized       1,452,410 Exercised       (505,108)        Balance, December 31, 2005       2,743,806 Recognized       282,945 Accreted(1)      (32,583)        Balance, March 31, 2006      $2,994,168                  Contributed Surplus        Balance, December 31, 2004      $— Allocated       1,748,926         Balance, December 31, 2005       1,748,926 Accreted(1)      (88,213)        Balance, March 31, 2006      $1,660,713                  Common Shares to be Issued        Balance, December 31, 2004   10,070  $50,350 Contract settlement paid in cash in lieu of common shares   (885)  (4,425)       Balance, March 31, 2006 and December 31, 2005   9,185  $45,925         (1) Reflects accretion of the equity components allocated to our 6% convertible notes andrelated warrants in 2005.     (c) *Stock Options and Awards*. We maintain three stock plans for the benefit ofour directors, officers, employees and, in the case of the second and third plans, certainconsultants or advisors. The plans provide for the grant of options to purchase up to 3,600,000common shares and, in the case of our most recent plan, either stock awards or options for anaggregate of up to 4,000,000 common shares. Option grants under all the plans must be atprevailing market prices and may be subject to vesting requirements over a period of up to tenyears from the date of grant. Stock awards under the third plan may be subject to vestingconditions and trading restrictions specified at the time of grant. During 2005 and the firstthree months of 2006, stock awards and option grants were made under the third plan for a total of834,415 shares and 38,315 shares, respectively. The following table shows transactions in stockoptions during 2005 and the first three months of 2006.
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                       **Weighted Average**  **Issued** **Exercisable** **Exercise Price**Balance, December 31, 2004   2,385,000   370,000  $3.58 Issued(1)  860,000       6.71 Exercised   (260,000)      1.43              Balance, December 31, 2005   2,985,000   571,250   4.67 Vested   —   146,250   4.03              Balance, March 31, 2006   2,985,000   717,500   4.67               (1) Vesting in increments from July 1, 2006 through February 25, 2009.     At March 31, 2006, the exercise prices of options outstanding under our stock optionplans ranged from $1.02 to $7.04 per share, and their weighted average remaining contractual lifewas 3.63 years. The following table provides additional information on the terms of stock optionsoutstanding at March 31, 2006.                         **Options Issued and Outstanding** **Options Exercisable**          **Weighted** **Weighted**     **Weighted****Exercise**     **Average** **Average**     **Average****Price**     **Remaining** **Exercise**     **Exercise****or Range** **Number** **Life (years)** **Price** **Number** **Price**$  1.02   145,000   1.76  $1.02   145,000  $1.02 4.03  4.09   1,980,000   3.47   4.05   572,500   4.07 6.02  7.04   860,000   4.30   6.71   —   —                                 2,985,000           717,500   4.67                               In accounting for stock options, we apply the fair value recognition provisions of SFAS No.123(R), “Share-Based Payment,” which we adopted retroactively under its Canadian GAAP equivalent in2004. We use the Black-Scholes pricing model to determine the fair value of each stock option atthe grant date, and we recognize the compensation cost ratably over the vesting period. For theperiods presented in the interim consolidated financial statements, the fair value estimates foreach option grant assumed a risk free interest rate ranging from 4.5% to 6%, no dividend yield, atheoretical volatility ranging from 0.30 to 0.85 and an expected life ranging from six months tofive years based on the option’s vesting provisions. This resulted in non-cash charges for optionsand warrants of $282,945 and $143,570 in the interim periods of 2006 and 2005, respectively.     (d) *Common Stock Purchase Warrants*. We have issued common stock purchase warrants invarious financing transactions. The exercise prices of warrants outstanding at March 31, 2006ranged from $1.75 to $13.04 per share, and their weighted average remaining contractual life was0.40 years. The following table shows transactions in stock options during 2005 and the firstthree months of 2006.                       **Weighted Average**  **Issued** **Exercisable** **Exercise Price**Balance, December 31 2004   2,422,055   2,422,055  $4.96 Issued in financing transactions(1)  945,809       13.04 Exercised   (1,883,527)      5.37 Expired   (169,954)      2.91              Balance, December 31, 2005   1,314,383   1,314,383   10.46 Exercised   (39,999)      4.20              Balance, March 31, 2006   1,274,384   1,274,384   10.66               (1) Expiring August 11, 2006.
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***Note 9. Comprehensive Income***     Comprehensive income represents changes in equity during the reporting period, includingcharges directly to equity that are excluded from net income. For 2005 and the three months endedMarch 31, 2006, we had no transactions or events resulting in comprehensive income items.***Note 10. Income Per Share***     The following table shows the computation of basic and diluted earnings per share (“EPS”) forthe reporting periods. For the interim period in 2005, the assumed exercise of outstanding stockoptions and warrants and the assumed conversion of outstanding convertible notes would have adilutive effect on EPS because their exercise or conversion prices were below the average marketprice of the common shares for the period. For the three months ended March 31, 2006, the assumedexercise of outstanding stock options and warrants would be dilutive for the same reason, but theassumed conversion of outstanding convertible notes would be anti-dilutive because interest pershare on the underlying common shares exceeded EPS for the period.           **Three Months Ended**   **March 31,**   **2006**  **2005** Numerator:        Net income as reported for basic EPS $625,737  $737,066 Adjustments to income for diluted EPS(1)  —   20,061        Net income for diluted EPS $625,737  $757,127                 Denominator:        Weighted average shares for basic EPS  21,377,525   15,689,872 Effect of dilutive securities:        Stock options  1,584,900   661,908 Warrants  214,653   270,936 Convertible notes  —   840,902        Adjusted weighted average shares and assumed conversions for dilutive EPS  23,177,078   17,463,618                 Basic EPS  $0.03  $0.05        Diluted EPS  $0.03   0.04         (1) Reflects interest expense associated with convertible notes.***Note 11. Segment Information***     We have two reportable segments based on management responsibility and key businessoperations. The following table presents summarized financialinformation on these business segments.           **Three Months Ended**   **March 31,**   **2006**  **2005** **Revenue:**        Oil and gas development  $27,319,255  $20,010,246 Corporate   —   —        Total   27,319,255   20,010,246        **DD&A:**        Oil and gas development   1,386,745   963,310 Corporate   151,167   83,245        Total   1,537,912   1,046,555        
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           **Three Months Ended**   **March 31,**   **2006**  **2005** **Interest expense:**        Oil and gas development   45,383   266,099 Corporate   555,000   242,654        Total   600,383   508,753        **Net income (loss):**        Oil and gas development   1,470,653   1,149,335 Corporate   (844,916)  (412,269)       Total   625,737   737,066        **Capital expenditures:**        Oil and gas development   25,764,868   7,286,247 Corporate   81,185   11,275        Total  $25,846,053  $7,297,522                   **March 31,**  **December 31,**   **2006**  **2005** **Identifiable assets:**        Oil and gas development $149,755,469  $126,590,249 Corporate  5,955,424   20,183,334        Total $155,710,893  $146,773,583        ***Note 12. Commitments***     The following table shows our contractual obligations as of March 31, 2006 under leases forfield equipment and instruments governing our other commercial commitments. Our lease rentalexpenses were $293,876 for the three months ended March 31, 2006 and $704,597 for the year endedDecember 31, 2005.               **Commercial Commitments**   **Operating**  **Other**    **Year** **Leases**  **Commitments**  **Total** Remainder of 2006  $449,596  $240,000(1) $689,596 2007   601,498   —   601,498 2008   292,289   100,000(2)  392,289 2009   195,000   2,045,000(2)  2,240,000 2010 and thereafter   97,500   —   97,500                        Total  $1,635,883  $2,385,000  $4,020,883            (1) Reflects obligations under a guaranty for a limited liability company in which wepreviously held a minority interest. (2) Reflects commitments under a purchase contract for an airplane.***Note 13. Recent Accounting Standards***     FIN No. 47. In March 2005, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations,” toclarify when sufficient information would be available to reasonably estimate the timing and costof performing a conditional asset retirement obligation. Our asset retirement obligations relateprimarily to the abandonment of oil and gas wells, and our treatment of these obligations isconsistent with FIN No. 47.     SFAS No. 19 and FSP No. 19-1. In April 2005, FASB Staff Position (“FSP”) No. 19.1 wasissued to amend the guidance for suspended well costs in SFAS No. 19, “Financial Accounting andReporting by Oil and Gas Producing Companies.” The FSP addresses circumstances that permitcontinued capitalization of exploratory drilling costs beyond one year. In general, the one-yearlimitation may be exceeded for an exploratory well only if
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sufficient reserves have been found to justify its completion and sufficient progress has beenmade in assessing the reserves as well as the economic and operating viability of the project. TheFSP is effective for the first reporting period beginning after April 4, 2005. We have foundproved reserves for all exploratory wells drilled during the periods presented in the condensedconsolidated financial statements within one year after completion of drilling and therefore havenot expensed any exploratory drilling costs for those wells.     SFAS No. 154. SFAS No. 154, “Accounting Changes and Error Corrections,” was issued inJune 2005, effective for accounting changes and correction of errors made in fiscal years beginningafter December 15, 2005. It generally requires retrospective application for voluntary changes inaccounting principles as well as changes required by accounting pronouncements. We adopted SFASNo. 154 on January 1, 2005. In August 2005, we amended our annual report on Form 10-KSB for theyear ended December 31, 2004 and our quarterly report on Form 10-Q for the quarter ended March 31,2005 to reflect two adjustments to the consolidated financial statements included in the reports.In the consolidated statements of operations, we eliminated the line item for gross profit, and inthe consolidated statements of cash flows, reported changes in subscriptions receivable during 2004were eliminated from operating activities and added to financing activities as proceeds fromissuance of common stock during the year in proportion to the subscription amounts received.     EITF No. 04-5. In June 2005, the FASB ratified the EITF No. 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.” It creates a presumption thegeneral partner in a limited partnership controls the partnership and must consolidate thepartnership on its financial statements, effective for reporting periods beginning after December15, 2005. The presumption of control and consolidation may be overcome if the limited partnershave substantive participating rights or have the ability to effectively liquidate the partnership.We have evaluated the applicability of this guidance to our sponsored drilling programs and do notbelieve it will have a material impact on our consolidated financial statements.     EITF No. 04-10. In June 2005, the FASB ratified Emerging Issues Task Force (“EITF”)Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet theQuantitative Thresholds.” The consensus is effective for fiscal years ending after September 15,2005 and has not had a material effect on our presentation of reportable operating segments.     EITF No. 05-2. In June 2005, the FASB ratified EITF Issue No. 05-2, “The Meaning ofConventional Convertible Debt Instrument.” The consensus is to be applied prospectively for newinstruments entered into or modified in periods beginning after June 29, 2005. We have a series ofconvertible notes issued after that date and have recorded the notes as conventional convertibledebt under this EITF. If we were to modify these notes, an evaluation of the terms of theinstruments would be required after the modification to determine if they would remain conventionalconvertible debt instruments.     FERC Pronouncement. In June 2005, the Federal Energy Regulatory Commission (“FERC”)issued an order, “Accounting for Pipeline Assessment Cost,” to be effective January 1, 2006. Theorder requires companies to expense certain assessment costs, even if they were historicallycapitalized. This has not had a material affect on our consolidated financial statements.     EITF No. 05-8. In September 2005, the FASB ratified EITF Issue No. 05-8, “Income TaxConsequences of Issuing Convertible Debt with a Beneficial Conversion Feature.” The consensusrequires a portion of convertible debt proceeds reflecting the intrinsic value of the beneficialconversion feature to be allocated to equity and recognized as a discount on the debt. The debtdiscount is accreted from the issuance date to the scheduled maturity date. The consensus is to beapplied retrospectively to instruments with a beneficial conversion feature for periods beginningafter December 15, 2005. We have applied this EITF in accounting for our 6% convertible notesissued in December 2005.
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**NGAS Resources, Inc.****Item 2.****MANAGEMENT’S DISCUSSION AND ANALYSIS OF**