##### 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, 2008
 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
    
    Smaller reporting company o
 o þ
  Title of Class
    
    Outstanding at August 4, 2008Common Stock
    
    26,483,646




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##### 



NGAS Resources, Inc.
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Condensed Consolidated Balance Sheets  June 30, 2008 (unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statement of Operations  Three months and six months ended
June 30, 2008 and 2007
    
    
    2Condensed Consolidated Statement of Cash Flows  Three months and six months ended
June 30, 2008 and 2007
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21Part II. Other InformationItem 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 6. Exhibits
    
    
    22Exhibit 10.6Exhibit 10.7Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  ADDITIONAL INFORMATION
 www.ngas.com NGAS we our us Dth Mcf Bcf Mcfe Bcfe




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash
    
    $
    1,637,832
    
    
    $
    2,816,678Accounts receivable
    
    
    11,646,423
    
    
    
    7,909,943Prepaid expenses and other current assets
    
    
    388,164
    
    
    
    505,778Loans to related parties
    
    
    7,750
    
    
    
    7,654Total current assets
    
    
    13,680,169
    
    
    
    11,240,053Bonds and deposits
    
    
    570,945
    
    
    
    535,445Oil and gas properties
    
    
    204,718,859
    
    
    
    183,823,702Property and equipment
    
    
    3,531,425
    
    
    
    3,689,636Loans to related parties
    
    
    246,637
    
    
    
    249,410Deferred financing costs
    
    
    1,571,810
    
    
    
    1,706,852Other non-current assets
    
    
    
    
    
    
    3,242,790Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    224,633,022
    
    
    $
    204,801,065LIABILITIESCurrent liabilities:Accounts payable
    
    $
    7,354,493
    
    
    $
    6,649,809Accrued liabilities
    
    
    3,863,302
    
    
    
    3,655,684Customer drilling deposits
    
    
    1,630,304
    
    
    
    2,857,806Deferred compensation
    
    
    2,165,696
    
    
    
    Long term debt, current portion
    
    
    24,000
    
    
    
    388,856Total current liabilities
    
    
    15,037,795
    
    
    
    13,552,155Deferred income taxes
    
    
    11,454,793
    
    
    
    9,218,770Long term debt
    
    
    95,416,022
    
    
    
    80,160,915Deferred compensation
    
    
    
    
    
    
    1,960,020Total liabilities
    
    
    121,908,610
    
    
    
    104,891,860SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000 Preferred shares100,000,000 Common sharesIssued:26,480,646 Common shares (2007  26,136,064)
    
    
    110,301,403
    
    
    
    108,842,52621,100 Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    3,332,453
    
    
    
    3,484,148Contributed surplus
    
    
    866,796
    
    
    
    1,043,222To be issued:9,185 Common shares
    
    
    45,925
    
    
    
    45,925114,522,947
    
    
    
    113,392,191Deficit
    
    
    (11,798,535
    )
    
    
    (13,482,986
    )Total shareholders equity
    
    
    102,724,412
    
    
    
    99,909,205Total liabilities and shareholders equity
    
    $
    224,633,022
    
    
    $
    204,801,065
 See accompanying notes.
 1




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NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007REVENUEContract drilling
    
    $
    7,625,356
    
    
    $
    7,459,704
    
    
    $
    14,227,474
    
    
    $
    16,704,923Oil and gas production
    
    
    11,179,620
    
    
    
    6,730,947
    
    
    
    19,669,054
    
    
    
    13,483,179Gas transmission, compression
and processing
    
    
    2,536,560
    
    
    
    1,887,039
    
    
    
    5,094,652
    
    
    
    3,834,980Total revenue
    
    
    21,341,536
    
    
    
    16,077,690
    
    
    
    38,991,180
    
    
    
    34,023,082DIRECT EXPENSESContract drilling
    
    
    5,756,997
    
    
    
    5,919,020
    
    
    
    10,876,846
    
    
    
    13,099,737Oil and gas production
    
    
    3,107,095
    
    
    
    1,799,186
    
    
    
    5,872,050
    
    
    
    3,482,200Gas transmission, compression
and processing
    
    
    957,548
    
    
    
    779,843
    
    
    
    2,047,794
    
    
    
    1,879,436Impairment of oil and gas assets
    
    
    
    
    
    
    964,000
    
    
    
    
    
    
    
    964,000Total direct expenses
    
    
    9,821,640
    
    
    
    9,462,049
    
    
    
    18,796,690
    
    
    
    19,425,373OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,442,094
    
    
    
    3,042,364
    
    
    
    6,730,577
    
    
    
    7,064,246Options, warrants and deferred compensation
    
    
    234,803
    
    
    
    329,177
    
    
    
    372,482
    
    
    
    670,300Depreciation, depletion and amortization
    
    
    3,261,192
    
    
    
    2,361,176
    
    
    
    6,132,952
    
    
    
    4,667,646Bad debt expense
    
    
    59,000
    
    
    
    
    
    
    
    406,840
    
    
    
    Interest expense
    
    
    1,355,643
    
    
    
    1,534,216
    
    
    
    2,681,613
    
    
    
    2,758,972Interest income
    
    
    (9,093
    )
    
    
    (49,689
    )
    
    
    (78,803
    )
    
    
    (133,743
    )Other, net
    
    
    34,632
    
    
    
    45,156
    
    
    
    28,355
    
    
    
    137,905Total other expenses
    
    
    8,378,271
    
    
    
    7,262,400
    
    
    
    16,274,016
    
    
    
    15,165,326INCOME (LOSS) BEFORE INCOME TAXES
    
    
    3,141,625
    
    
    
    (646,759
    )
    
    
    3,920,474
    
    
    
    (567,617
    )INCOME TAX EXPENSE
    
    
    1,620,363
    
    
    
    113,665
    
    
    
    2,236,023
    
    
    
    447,071NET INCOME (LOSS)
    
    $
    1,521,262
    
    
    $
    (760,424
    )
    
    $
    1,684,451
    
    
    $
    (1,014,688
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    (0.05
    )Diluted
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    (0.05
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    26,346,506
    
    
    
    21,798,607
    
    
    
    26,291,159
    
    
    
    21,794,843Diluted
    
    
    27,344,529
    
    
    
    21,798,607
    
    
    
    27,015,161
    
    
    
    21,794,843
 See accompanying notes.
  2




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NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    1,521,262
    
    
    $
    (760,424
    )
    
    $
    1,684,451
    
    
    $
    (1,014,688
    )Adjustments to reconcile net income to
net cash used in operating activities:Incentive bonus paid in common shares
    
    
    
    
    
    
    3,010
    
    
    
    31,570
    
    
    
    3,010Compensation from options and warrants
    
    
    234,803
    
    
    
    329,177
    
    
    
    372,482
    
    
    
    670,300Depreciation, depletion and amortization
    
    
    3,261,192
    
    
    
    2,361,176
    
    
    
    6,132,952
    
    
    
    4,667,646Bad debt expense
    
    
    59,000
    
    
    
    
    
    
    
    406,840
    
    
    
    Impairment of oil and gas assets
    
    
    
    
    
    
    964,000
    
    
    
    
    
    
    
    964,000Gain (loss) on sale of assets
    
    
    981
    
    
    
    84,061
    
    
    
    (355
    )
    
    
    78,141Deferred income taxes
    
    
    1,620,363
    
    
    
    113,665
    
    
    
    2,236,023
    
    
    
    447,071Changes in assets and liabilitiesAccounts receivable
    
    
    (2,987,214
    )
    
    
    (1,488,709
    )
    
    
    (4,143,320
    )
    
    
    1,143,657Prepaid expenses and other current assets
    
    
    574,348
    
    
    
    209,907
    
    
    
    117,614
    
    
    
    242,620Other non-current assets
    
    
    
    
    
    
    (340,696
    )
    
    
    3,242,790
    
    
    
    (867,958
    )Accounts payable
    
    
    (1,633,082
    )
    
    
    427,672
    
    
    
    704,684
    
    
    
    (2,627,850
    )Accrued liabilities
    
    
    78,814
    
    
    
    183,012
    
    
    
    207,618
    
    
    
    (479,161
    )Customers drilling deposits
    
    
    (1,396,787
    )
    
    
    (1,072,504
    )
    
    
    (1,227,502
    )
    
    
    (7,305,772
    )Net cash provided by operating activities
    
    
    1,333,680
    
    
    
    1,013,347
    
    
    
    9,765,847
    
    
    
    (4,078,984
    )INVESTING ACTIVITIESProceeds from sale of assets
    
    
    26,500
    
    
    
    7,500
    
    
    
    38,700
    
    
    
    34,700Purchase of property and equipment
    
    
    (149,214
    )
    
    
    (476,103
    )
    
    
    (304,501
    )
    
    
    (986,504
    )Change in bonds and deposits
    
    
    39,500
    
    
    
    (12,000
    )
    
    
    (35,500
    )
    
    
    (37,000
    )Additions to oil and gas properties, net
    
    
    (13,228,191
    )
    
    
    (14,708,038
    )
    
    
    (26,325,157
    )
    
    
    (25,524,179
    )Net cash used in investing activities
    
    
    (13,311,405
    )
    
    
    (15,188,641
    )
    
    
    (26,626,458
    )
    
    
    (26,512,983
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    739
    
    
    
    1,867
    
    
    
    2,677
    
    
    
    3,710Proceeds from issuance of common shares
    
    
    1,006,806
    
    
    
    
    
    
    
    1,108,806
    
    
    
    40,300Payments of deferred financing costs
    
    
    (29,250
    )
    
    
    
    
    
    
    (143,543
    )
    
    
    Proceeds from issuance of long term debt
    
    
    11,000,000
    
    
    
    15,000,000
    
    
    
    16,740,000
    
    
    
    19,000,000Payments of long term debt
    
    
    (6,000
    )
    
    
    (6,000
    )
    
    
    (2,026,175
    )
    
    
    (12,000
    )Net cash provided by financing activities
    
    
    11,972,295
    
    
    
    14,995,867
    
    
    
    15,681,765
    
    
    
    19,032,010Change in cash
    
    
    (5,430
    )
    
    
    820,573
    
    
    
    (1,178,846
    )
    
    
    (11,559,957
    )Cash, beginning of period
    
    
    1,643,262
    
    
    
    2,051,447
    
    
    
    2,816,678
    
    
    
    14,431,977Cash, end of period
    
    $
    1,637,832
    
    
    $
    2,872,020
    
    
    $
    1,637,832
    
    
    $
    2,872,020SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,353,635
    
    
    $
    1,526,408
    
    
    $
    2,681,318
    
    
    $
    2,757,452Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 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 NGAS U.S. GAAP
 Basis of Presentation DPI Company we our us
 Estimates .
 Note 2. Oil and Gas Properties
 Capitalized Costs and DD&A DD&A
 June 30,
    
    
    December 31,2008
    
    
    2007Proved oil and gas properties
    
    $
    168,091,230
    
    
    $
    148,981,923Unproved oil and gas properties
    
    
    4,416,921
    
    
    
    3,876,721Gathering facilities and well equipment
    
    
    62,046,645
    
    
    
    55,370,995234,554,796
    
    
    
    208,229,639Accumulated DD&A
    
    
    (29,835,937
    )
    
    
    (24,405,937
    )Net oil and gas properties and equipment
    
    $
    204,718,859
    
    
    $
    183,823,702
  4




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##### Table of Contents



Suspended Well Costs Accounting for Suspended Well
Costs
 Note 3. Property and Equipment
  June 30,
    
    
    December 31,2008
    
    
    2007Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    60,340
    
    
    
    58,051Machinery and equipment
    
    
    3,275,162
    
    
    
    3,170,601Office furniture and fixtures
    
    
    173,275
    
    
    
    168,217Computer and office equipment
    
    
    612,670
    
    
    
    578,317Vehicles
    
    
    1,925,073
    
    
    
    1,869,5516,059,428
    
    
    
    5,857,645Accumulated depreciation
    
    
    (2,528,003
    )
    
    
    (2,168,009
    )Net other property and equipment
    
    $
    3,531,425
    
    
    $
    3,689,636
 Note 4. Deferred Financing Costs
  Note 5. Goodwill
 SFAS Goodwill and Other Intangible Assets
 Note 6. Customer Drilling Deposits
   5




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##### Table of Contents



Note 7. Long Term Debt
 Convertible Notes
 Credit Facility
 Equipment Loan
 Acquisition Debt
 Total Long Term Debt and Maturities
 Principal Amount OutstandingJune 30,
    
    
    December 31,2008
    
    
    2007Total long term debt (including current portion)(1)
    
    $
    95,440,022
    
    
    $
    80,549,771Less current portion
    
    
    24,000
    
    
    
    388,856Total long term debt(1)
    
    $
    95,416,022
    
    
    $
    80,160,915Maturities of DebtRemainder of 2008
    
    $
    12,0002009
    
    
    24,0002010
    
    
    36,157,204
    (1)2011
    
    
    59,024,0002012 and thereafter
    
    
    222,818
 
 (1)
    
    Excludes allocations of $866,796 at June 30, 2008 and $1,043,222 at December 31, 2007 from
our 6% convertible notes in the principal amount of $37,000,000 based on equity components of
their conversion features and related warrants, which expired unexercised in 2006.  6




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##### Table of Contents



Note 8. Capital Stock
 Preferred Shares
 Common Shares
 Number ofShares
    
    
    AmountCommon Shares IssuedBalance, December 31, 2006
    
    
    21,788,551
    
    
    $
    84,531,832Issued in registered direct placement
    
    
    4,200,000
    
    
    
    23,687,955Issued as stock awards under incentive plan
    
    
    10,430
    
    
    
    61,010Issued upon exercise of stock options and warrants
    
    
    137,083
    
    
    
    561,729Balance, December 31, 2007
    
    
    26,136,064
    
    
    
    108,842,526Issued to employees as incentive bonus
    
    
    7,000
    
    
    
    31,570Issued upon exercise of stock options
    
    
    337,582
    
    
    
    1,427,307Balance, June 30, 2008
    
    
    26,480,646
    
    
    $
    110,301,403Paid In Capital  Options and WarrantsBalance, December 31, 2006
    
    
    
    
    
    $
    3,073,287Recognized
    
    
    
    
    
    
    529,062Exercised
    
    
    
    
    
    
    (118,201
    )Balance, December 31, 2007
    
    
    
    
    
    
    3,484,148Recognized
    
    
    
    
    
    
    166,806Exercised
    
    
    
    
    
    
    (318,501
    )Balance, June 30, 2008
    
    
    
    
    
    $
    3,332,453Contributed SurplusBalance, December 31, 2006
    
    
    
    
    
    $
    1,396,074Accreted(1)
    
    
    
    
    
    
    (352,852
    )Balance, December 31, 2007
    
    
    
    
    
    
    1,043,222Accreted(1)
    
    
    
    
    
    
    (176,426
    )Balance, June 30, 2008
    
    
    
    
    
    $
    866,796Common Shares to be IssuedBalance, June 30, 2008 and December 31, 2007
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects accretion of the equity components allocated to our 6% convertible notes and related
warrants issued in 2005.  7




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##### Table of Contents



Stock Options and Awards
 Weighted AverageStock Options
    
    Issued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2006
    
    
    2,815,000
    
    
    
    945,833
    
    
    $
    4.68Vested
    
    
    
    
    
    
    920,833
    
    
    
    6.03Exercised
    
    
    (127,083
    )
    
    
    (127,083
    )
    
    
    3.17Forfeited
    
    
    (6,667
    )
    
    
    
    
    
    
    6.02Balance, December 31, 2007
    
    
    2,681,250
    
    
    
    1,739,583
    
    
    
    4.75Granted
    
    
    640,000
    
    
    
    
    
    
    
    6.51Exercised
    
    
    (337,582
    )
    
    
    (337,582
    )
    
    
    3.28Balance, June 30, 2008
    
    
    2,983,668
    
    
    
    1,402,001
    
    
    
    5.29
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    Exerciseor Range
    
    
    
    
    Number
    
    
    Life (years)
    
    
    Price
    
    
    Number
    
    
    Price$
    4.03
    
    
    
    4.09
    
    
    
    
    
    1,560,000
    
    
    
    1.31
    
    
    $
    4.05
    
    
    
    760,000
    
    
    $
    4.066.02
    
    
    
    7.04
    
    
    
    
    
    1,423,668
    
    
    
    2.85
    
    
    
    6.66
    
    
    
    642,001
    
    
    
    6.942,983,668
    
    
    
    
    
    
    
    
    
    
    
    1,402,001
 Share-Based Payment
 Common Stock Purchase Warrants
  8




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##### Table of Contents



Note 9. Income (Loss) Per Share
 EPS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss) as reported for basic EPS
    
    $
    1,521,262
    
    
    $
    (760,424
    )
    
    $
    1,684,451
    
    
    $
    (1,014,688
    )Adjustments to income for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    1,521,262
    
    
    $
    (760,424
    )
    
    $
    1,684,451
    
    
    $
    (1,014,688
    )Denominator:Weighted average shares for basic EPS
    
    
    26,346,506
    
    
    
    21,798,607
    
    
    
    26,291,159
    
    
    
    21,794,843Effect of dilutive securities  stock options
    
    
    998,023
    
    
    
    
    
    
    
    724,002
    
    
    
    Adjusted weighted average shares and
assumed conversions for diluted EPS
    
    
    27,344,529
    
    
    
    21,798,607
    
    
    
    27,015,161
    
    
    
    21,794,843Basic EPS
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    (0.05
    )Diluted EPS
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    (0.05
    )
 Note 10. Segment Information
 Disclosure about
Segments of an Enterprise and Related Information
 Note 11. Commitments
  Operating
    
    
    OtherYear
    
    Leases
    
    
    Commitments(1)
    
    
    TotalRemainder of 2008
    
    $
    1,165,555
    
    
    $
    340,000
    
    
    $
    1,505,5552009
    
    
    2,250,846
    
    
    
    2,045,000
    
    
    
    4,295,8462010
    
    
    2,182,717
    
    
    
    
    
    
    
    2,182,7172011
    
    
    1,976,039
    
    
    
    
    
    
    
    1,976,0392012 and thereafter
    
    
    920,725
    
    
    
    
    
    
    
    920,725Total
    
    $
    8,495,882
    
    
    $
    2,385,000
    
    
    $
    10,880,882
 
 (1)
    
    Reflects (i) obligations of $240,000 under a guaranty secured by a certificate of deposit
provided for bank debt of a limited liability company in which DPI previously held an interest
and (ii) commitments under a purchase contract for an airplane. Note 12. Recent Accounting Standards
 SFAS No. 162 The Hierarchy of Generally
Accepted Accounting Principles The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles
  9




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##### Table of Contents



SFAS No. 161 Disclosures About
Derivative Instruments and Hedging Activities
 FSP No. 157-2 Effective Date of
FASB Statement No. 157,
 SFAS No. 160 Noncontrolling
Interests in Consolidated Financial Statements
 SFAS No. 141(R) Business
Combinations
 EITF 07-1 EITF Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal Versus Net as an Agent
 Note 13. Subsequent Event
   10




---



##### Table of Contents



NGAS Resources, Inc.
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Strategy
  
    
    Growth through the Drillbit. Development drilling is our mainstay for
production and reserve growth. During the first six months of 2008, we participated in
110 gross (55.2 net) wells, compared to 106 gross (45.5 net) wells in the same period
last year. This reflects the evolution of our business model for accelerating organic
growth by retaining all of our available working interest in wells drilled on operated
properties in the Appalachian and Illinois Basins, which averaged 95% in the first half
of 2008, compared to 56% for the prior year. We implemented this shift in our
development strategy late in 2007, and most of our higher net interest wells were
awaiting connection at year end. Our growth strategy during 2008 is focused on
increasing our acreage position in targeted areas and taking advantage of horizontal
drilling opportunities on core properties. To capitalize on those opportunities, we
have a 2008 capital budget of $50 million for drilling initiatives and related
infrastructure build-outs.
 
    
    Horizontal Drilling Initiatives. The value proposition for many of our
Appalachian properties may be enhanced by horizontal drilling. While substantially
more expensive, horizontal drilling may improve overall returns on investment by
increasing recovery volumes and rates, limiting the number of wells necessary to
develop an area through conventional drilling and reducing the costs and surface
disturbances of multiple vertical wells. We have focused these initiatives in our
Leatherwood field, where we completed five horizontal wells in the first half of 2008,
with an additional four wells at various stages of completion through the date of this
report. Each of our horizontal wells has a single lateral leg up to 3,500 feet through
the lower Huron section of the Devonian shale, which is present throughout most of our
operating areas. For the first month in production, the five completed wells had an
average flow rate 351 Mcf per day. We are encouraged by these results and plan to
drill a total of twenty horizontal wells by year end, including our first New Albany
shale horizontal well in our Haleys Mill field.
 
    
    Enhancement of Field-Wide Infrastructure. We construct and operate
field-wide gas gathering facilities to provide compression, connection and local
distribution capabilities for most of our Appalachian production. Because we control
third-party access to these facilities, they provide us with competitive advantages in
acquiring and developing nearby acreage. We continually upgrade this infrastructure to
keep pace with our expanding production base. Recent additions include 43 miles of
gathering lines installed during the first half of 2008, including infrastructure for
producing our New Albany shale project in western Kentucky, which is scheduled to go on
line in August 2008. We also completed facilities to provide deliverability from our
Fonde field through a 14-mile, six-inch steel line to our midstream system.
Historically, production in Fonde had been limited by pipeline capacity
constraints. Completion of our new facilities has enabled us to begin connecting a
backlog of wells drilled in Fonde over the last several years and open nearly
50,000 acres for future development in this field.
  11




---



##### Table of Contents




    
    Investment in Midstream Assets. We own and operate a strategically located
open-access gas gathering system spanning 116 miles in southeastern Kentucky and
southwestern Virginia. We acquired this midstream system in 2006 through our NGAS
Gathering subsidiary and augmented the system through two high-pressure lateral
upgrades for connections to our field-wide gathering facilities, plus a recently
completed processing plant for liquids extraction. We currently deliver all our
production from the Leatherwood, Straight Creek, Fonde and SME fields to the interstate
pipeline network through the NGAS Gathering system. As of June 30, 2008, the system
had daily gross throughput of over 21,300 Dth, including third-party deliveries. In
addition to generating gas transmission and processing revenues from third-party
throughput and cost savings for our own Appalachian production, ownership of these
midstream assets gives us control over gas flow from our connected fields and enhances
our competitive position in the region.
 
    
    Development of Additional Drilling Prospects. We follow a disciplined
capital allocation process in selecting opportunities to expand our substantial
inventory of drilling prospects that meet our criteria for predictable, long-lived
reserves. Our goal is to consolidate our position in the Appalachian Basin, while
diversifying our asset base with similar unconventional plays outside the basin. As
part of this strategy, we are aggressively developing our New Albany shale play in the
Haleys Mill field, which is situated within the southcentral portion of the Illinois
Basin in western Kentucky. We have also begun drilling operations on our Licking River
prospect, where we have development rights and a 50% interest in currently constrained
gathering infrastructure for a project spanning six counties in eastern Kentucky.
Through the date of this report, we have drilled six wells in Licking River and a total
of 33 wells in Haleys Mill, including the top hole section of our first horizontal
well in this field. We plan to continue developing these prospects and evaluating
other opportunities to assemble or participate in similar unconventional plays with
significant reserve potential.
 
    
    Purchase of Producing Properties. The purchase of third-party production
offers a means in addition to drilling for capitalizing on our operating experience and
accelerating our growth. 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.
Based on those criteria, we believe our mature drilling programs present attractive
acquisition candidates, providing opportunities to increase our interest in producing
wells that we operate for sponsored programs on our core Appalachian properties, while
also generating administrative efficiencies and simplifying our capital structure.
Beginning in June 2008, we launched a project to purchase the interests of outside
investors in the assets of targeted programs in all-cash transactions based on
independent reserve estimates that give effect to our working interests and
reversionary interests in the properties.
 Drilling Operations
 General
 Geological Factors
  12




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##### Table of Contents



Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    GrossYear ended December 31, 2007
    
    
    211
    
    
    
    76.1508
    
    
    
    
    
    
    
    6
    
    
    
    6.0000
    
    
    
    Six months ended
June 30, 2008
    
    
    104
    
    
    
    49.4104
    
    
    
    
    
    
    
    6
    
    
    
    5.8125
    
    
    
    
  Participation Rights
 Producing Activities
 Regional Advantages
 Oil and Gas Production
  13




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    June 30,
    
    
    December 31,2008
    
    
    2007
    
    
    2008
    
    
    2007
    
    
    2007Production volumes:Natural gas (Mcf)
    
    
    764,530
    
    
    
    675,001
    
    
    
    1,508,528
    
    
    
    1,359,650
    
    
    
    2,950,690Oil (Bbl)
    
    
    14,994
    
    
    
    15,731
    
    
    
    28,482
    
    
    
    31,341
    
    
    
    57,738Natural gas liquids (gallons)
    
    
    1,094,547
    
    
    
    54,506
    
    
    
    1,728,682
    
    
    
    95,839
    
    
    
    154,797Equivalents (Mcfe)
    
    
    950,268
    
    
    
    774,155
    
    
    
    1,830,682
    
    
    
    1,556,084
    
    
    
    3,310,665Average sales prices:Natural gas (per Mcf)
    
    $
    9.88
    
    
    $
    8.54
    
    
    $
    9.21
    
    
    $
    8.58
    
    
    $
    8.19Oil (per Bbl)
    
    
    115.54
    
    
    
    56.44
    
    
    
    103.67
    
    
    
    53.95
    
    
    
    64.97Natural gas liquids (per gallon)
    
    
    1.73
    
    
    
    1.43
    
    
    
    1.64
    
    
    
    1.28
    
    
    
    1.41
 Results of Operations  Three Months Ended June 30, 2008 and 2007
 Revenues
 Three Months Ended June 30,% of
    
    
    
    
    
    
    %2008
    
    
    Revenue
    
    
    2007
    
    
    ChangeRevenue:Contract drilling
    
    $
    7,625,356
    
    
    
    36
    %
    
    $
    7,459,704
    
    
    
    2
    %Oil and gas production
    
    
    11,179,620
    
    
    
    52
    
    
    
    6,730,947
    
    
    
    66Gas transmission, compression and processing
    
    
    2,536,560
    
    
    
    12
    
    
    
    1,887,039
    
    
    
    34Total
    
    $
    21,341,536
    
    
    
    100
    %
    
    $
    16,077,690
    
    
    
    33
      14




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##### Table of Contents



Expenses
 Three Months Ended June 30,2008
    
    
    Margin
    
    
    2007
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    5,756,997
    
    
    
    25
    %
    
    $
    5,919,020
    
    
    
    21
    %Oil and gas production
    
    
    3,107,095
    
    
    
    72
    
    
    
    1,799,186
    
    
    
    73Gas transmission, compression and processing
    
    
    957,548
    
    
    
    62
    
    
    
    779,843
    
    
    
    59Impairment of oil and gas assets
    
    
    
    
    
    
    
    
    
    
    964,000
    
    
    
    N/ATotal direct expenses
    
    
    9,821,640
    
    
    
    54
    
    
    
    9,462,049
    
    
    
    41% Revenue

    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    3,442,094
    
    
    
    16
    %
    
    
    3,042,364
    
    
    
    19
    %Options, warrants and deferred compensation
    
    
    234,803
    
    
    
    1
    
    
    
    329,177
    
    
    
    2Depreciation, depletion and amortization
    
    
    3,261,192
    
    
    
    15
    
    
    
    2,361,176
    
    
    
    15Bad debt expense
    
    
    59,000
    
    
    
    
    
    
    
    
    
    
    
    N/AInterest expense, net of interest income
    
    
    1,346,550
    
    
    
    6
    
    
    
    1,484,527
    
    
    
    9Other, net
    
    
    34,632
    
    
    
    
    
    
    
    45,156
    
    
    
    Total other expenses
    
    $
    8,378,271
    
    
    
    
    
    
    $
    7,262,400
     SG&A
  15




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##### Table of Contents



DD&A
    Net Income and EPS EPS
 Results of Operations  Six Months Ended June 30, 2008 and 2007
 Revenues
 Six Months Ended June 30,% of
    
    
    
    
    
    
    %2008
    
    
    Revenue
    
    
    2007
    
    
    ChangeRevenue:Contract drilling
    
    $
    14,227,474
    
    
    
    37
    %
    
    
    16,704,923
    
    
    
    (15
    )%Oil and gas production
    
    
    19,669,054
    
    
    
    50
    
    
    
    13,483,179
    
    
    
    46Gas transmission, compression and processing
    
    
    5,094,652
    
    
    
    13
    
    
    
    3,834,980
    
    
    
    33Total
    
    $
    38,991,180
    
    
    
    100
    %
    
    $
    34,023,082
    
    
    
    15
    16




---



##### Table of Contents



Expenses
 Six Months Ended June 30,2008
    
    
    Margin
    
    
    2007
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    10,876,846
    
    
    
    24
    %
    
    
    13,099,737
    
    
    
    22
    %Oil and gas production
    
    
    5,872,050
    
    
    
    70
    
    
    
    3,482,200
    
    
    
    74Gas transmission, compression and processing
    
    
    2,047,794
    
    
    
    60
    
    
    
    1,879,436
    
    
    
    51Impairment of oil and gas assets
    
    
    
    
    
    
    
    
    
    
    964,000
    
    
    
    N/ATotal direct expenses
    
    
    18,796,690
    
    
    
    52
    
    
    
    19,425,373
    
    
    
    43% Revenue
    

    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    6,730,577
    
    
    
    17
    
    
    
    7,064,246
    
    
    
    21
    %Options, warrants and deferred compensation
    
    
    372,482
    
    
    
    1
    
    
    
    670,300
    
    
    
    2Depreciation, depletion and amortization
    
    
    6,132,952
    
    
    
    16
    
    
    
    4,667,646
    
    
    
    14Bad debt expense
    
    
    406,840
    
    
    
    1
    
    
    
    
    
    
    
    N/AInterest expense, net of interest income
    
    
    2,602,810
    
    
    
    7
    
    
    
    2,625,229
    
    
    
    8Other, net
    
    
    28,355
    
    
    
    
    
    
    
    137,905
    
    
    
    Total other expenses
    
    $
    16,274,016
    
    
    
    
    
    
    $
    15,165,326
      17




---



##### Table of Contents



Net Income and EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
  18




---



##### Table of Contents



DPI
    Forward Looking Statements and Risk Factors
  Contractual Obligations and Commercial Commitments
  Operating Leases
    
    
    Other
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    Commitments(1)
    
    
    DebtRemainder of 2008
    
    $
    1,043,169
    
    
    $
    122,386
    
    
    $
    1,165,555
    
    
    $
    340,000
    
    
    $
    12,0002009
    
    
    2,003,982
    
    
    
    246,864
    
    
    
    2,250,846
    
    
    
    2,045,000
    
    
    
    24,0002010
    
    
    1,934,902
    
    
    
    247,815
    
    
    
    2,182,717
    
    
    
    
    
    
    
    36,157,204
    (2)2011
    
    
    1,723,650
    
    
    
    252,389
    
    
    
    1,976,039
    
    
    
    
    
    
    
    59,024,0002012 and thereafter
    
    
    643,397
    
    
    
    277,329
    
    
    
    920,725
    
    
    
    
    
    
    
    222,818Total
    
    $
    7,349,099
    
    
    $
    1,146,783
    
    
    $
    8,495,882
    
    
    $
    2,385,000
    
    
    $
    95,440,022
 
 (1)
    
    Reflects (i) obligations of $240,000 under a guaranty secured by a certificate of deposit
provided for bank debt of a limited liability company in which we previously held an interest
and (ii) commitments under a purchase contract for an airplane.(2)
    
    Excludes an allocation of $866,796 from our 6% convertible notes in the principal amount of
$37,000,000 based on equity components of their conversion features. 19




---



##### Table of Contents



Critical Accounting Policies and Estimates
 General
 Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Commodity Price Risk
   20




---



##### Table of Contents



Financial Market Risks
 Interest Rate Risk
 Foreign Market Risk
 
 Item 4. Controls and Procedures
 Managements Responsibility for Financial Statements
  Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
 Changes in Internal Control over Financial Reporting
   21




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
  VotesNominee
    
    Votes For
    
    
    WithheldWilliam S. Daugherty
    
    
    19,237,447
    
    
    
    1,847,471James K. Klyman
    
    
    19,107,072
    
    
    
    1,977,846Thomas F. Miller
    
    
    19,204,193
    
    
    
    1,880,725
  VotesProposal
    
    Votes For
    
    
    AgainstRatification of independent auditors
    
    
    19,313,533
    
    
    
    1,771,385Fixing the size of the board
    
    
    18,139,804
    
    
    
    2,945,114
  
 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 June 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
    
    
    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).
  22




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.6
    
    
    Amended and Restated Credit Agreement dated as of May 30, 2008 among NGAS Resources, Inc.,
Daugherty Petroleum, Inc. and KeyBank National Association, as agent for the lenders named
therein.10.7
    
    

Amendment No. 1 dated as of August 4, 2008 to Amended and Restated Credit Agreement dated
as of May 30, 2008 among NGAS Resources, Inc., Daugherty Petroleum, Inc. and KeyBank National
Association, as agent for the lenders named therein.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 June 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
June 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 June 31, 2004).10.11
    
    
    Form of general partnership agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.11 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.12
    
    
    Form of limited partnership agreement with sponsored investment partnerships (incorporated
by reference to Exhibit 10.12 to amended annual report on Form 10-K/A [File No. 0-12185] for
the year ended December 31, 2006).10.13
    
    
    Form of assignment of drilling rights with sponsored drilling programs (incorporated by
reference to Exhibit 10.13 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.14
    
    
    Form of drilling and operating agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.14 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).11.1
    
    
    Computation of Earnings Per Share (included in Note 9 to the accompanying consolidated
financial statements).21.0
    
    
    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, 2006).31.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.
  23




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##### Table of Contents



SIGNATURES
  NGAS Resources, Inc.Date: August 7, 2008
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)  24




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##### Table of Contents



EXHIBIT INDEX
 10.6
    
    
    Amended and Restated Credit Agreement dated as of May 30, 2008 among NGAS Resources, Inc.,
Daugherty Petroleum, Inc. and KeyBank National Association, as agent for the lenders named
therein.10.7
    
    
    Amendment No. 1 dated as of August _____, 2008 to Amended and Restated Credit Agreement dated
as of May 30, 2008 among NGAS Resources, Inc., Daugherty Petroleum, Inc. and KeyBank National
Association, as agent for the lenders named therein.11.1
    
    
    Computation of Earnings Per Share (included in Note 9 to the accompanying consolidated
financial statements).31.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.
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