NATURAL GAS SERVICES GROUP INC - Quarter Report: 2008 March (Form 10-Q)

form_10-q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-31398

NATURAL GAS SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)

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

2911 SCR 1260

Midland, Texas 79706

(Address of principal executive offices)

(432) 563-3974

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

(Do not check if smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at May 6, 2008
Common Stock, $.01 par value		12,087,500

NATURAL GAS SERVICES GROUP, INC.


Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Condensed Consolidated Balance Sheets	Page 1

Unaudited Condensed Consolidated Income Statements	Page 2

Unaudited Condensed Consolidated Statements of Cash Flows	Page 3

Notes to Unaudited Condensed Consolidated Financial Statements	Page 4

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	Page 10

Item 3. Quantitative and Qualitative Disclosures about Market Risk	Page 15

Item 4. Controls and Procedures	Page 15

Part II - OTHER INFORMATION

Item 1. Legal Proceedings	Page 16

Item 1A. Risk Factors	Page 16

Item 6. Exhibits	Page 17

Signatures	Page 20

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)
	December 31,		March 31,
	2007		2008
ASSETS
Current Assets:
Cash and cash equivalents	$	245	$	2,111
Short-term investments		18,661		14,348
Trade accounts receivable, net of doubtful accounts of $110, both periods		11,322		10,126
Inventory, net of allowance for obsolescence of $273 and $288, respectively		20,769		24,490
Prepaid income taxes		3,584		—
Prepaid expenses and other		641		203
Total current assets		55,222		51,278

Rental equipment, net of accumulated depreciation of $16,810 and $18,454, respectively		76,025		82,175
Property and equipment, net of accumulated depreciation of $4,792 and $5,175, respectively		8,580		8,442
Goodwill, net of accumulated amortization of $325, both periods		10,039		10,039
Intangibles, net of accumulated amortization of $1,145 and $1,224, respectively		3,324		3,245
Other assets		43		32
Total assets	$	153,233	$	155,211

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt and subordinated notes	$	4,378	$	3,378
Line of credit		600		—
Accounts payable		4,072		6,032
Accrued liabilities		3,990		3,762
Current income tax liability		3,525		57
Deferred income		81		877
Total current liabilities		16,646		14,106

Long term debt, less current portion		9,572		8,727
Deferred income tax payable		12,635		14,359
Total liabilities		38,853		37,192

Stockholders’ equity:
Preferred stock, 5,000 shares authorized, no shares outstanding		—		—
Common stock, 30,000 shares authorized, par value $0.01;12,085 and 12,087 shares issued and outstanding, respectively		121		121
Additional paid-in capital		83,460		83,581
Retained earnings		30,799		34,317
Total stockholders' equity		114,380		118,019
Total liabilities and stockholders' equity	$	153,233	$	155,211

See accompanying notes to these condensed consolidated financial statements.

NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED INCOME STATEMENTS (in thousands, except earnings per share) (unaudited)
	Three months ended March 31,
	2007			2008
Revenue:
Sales, net	$	9,506		$	9,626
Rental income		6,940			9,010
Service and maintenance income		266			297
Total revenue		16,712			18,933

Operating costs and expenses:
Cost of sales, exclusive of depreciation stated separately below		6,670			6,393
Cost of rentals, exclusive of depreciation stated separately below		2,735			3,404
Cost of service and maintenance, exclusive of depreciation stated separately below		187			208
Selling, general, and administrative expense		1,200			1,350
Depreciation and amortization		1,717			2,125
Total operating costs and expenses		12,509			13,480

Operating income		4,203			5,453

Other income (expense):
Interest expense		(300	)		(241	)
Other income		352			233
Total other income (expense)		52			(8	)

Income before provision for income taxes		4,255			5,445
Provision for income taxes		1,574			1,928
Net income	$	2,681		$	3,517


Earnings per share:
Basic	$	0.22		$	0.29
Diluted	$	0.22		$	0.29
Weighted average shares outstanding:
Basic		12,061			12,085
Diluted		12,083			12,144

See accompanying notes to these condensed consolidated financial statements.

NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) (unaudited)
	Three Months Ended March 31,
	2007			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,681		$	3,517
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,717			2,125
Deferred taxes		(1,479	)		5,312
Employee stock options expensed		97			95
Gain on sale of property and equipment		(8	)		—
Changes in current assets and liabilities:
Trade and other receivables		2,413			1,196
Inventory and work in progress		(2,333	)		(3,721	)
Prepaid expenses and other		(32	)		438
Accounts payable and accrued liabilities		2,377			1,732
Current tax liability		2,012			(3,468	)
Deferred income		534			796
Other		(42	)		18
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,937			8,040

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(4,040	)		(8,064	)
Purchase of short-term investments		(274	)		(187	)
Redemption of short-term investments		3,000			4,500
Proceeds from sale of property and equipment		33			—
NET CASH USED IN INVESTING ACTIVITIES		(1,281	)		(3,751	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit		—			500
Repayments of long-term debt		(1,908	)		(1,845	)
Repayments of line of credit		—			(1,100	)
Proceeds from exercise of stock options and warrants		109			22
NET CASH USED IN FINANCING ACTIVITIES		(1,799	)		(2,423	)

NET CHANGE IN CASH		4,857			1,866

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,391			245
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,248		$	2,111
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	305		$	290
Income taxes paid	$	999		$	84

See accompanying notes to these condensed consolidated financial statements.

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements present the condensed consolidated results of our company taken from our books and records. In our opinion, such information includes all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at March 31, 2008 and December 31, 2007 and the results of our operations for the three month periods ended March 31, 2008 and March 31, 2007 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC) the accompanying condensed consolidated financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the financial position, results of operations and cash flows for the periods presented.

The results of operations for the three month period ended March 31, 2008 is not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2008.

Unless otherwise noted, amounts reported in tables are in thousands, except per share data and stock option data.

Short-Term investments

Short-term investments consist primarily of government and corporate bonds with original maturities of ninety days to one year.

Revenue recognition

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

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing, in the financial statements, tax positions taken or expected to be taken on a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN No. 48 on January 1, 2007, and its adoption did not have a material impact on our consolidated financial position and results of operations. See Note 6 for additional information regarding income taxes.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, which defers the effective date of SFAS No. 157 for non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those years. We adopted the required provisions of SFAS No. 157 on January 1, 2008 and the adoption did not have a significant impact on our financial statements. See Note 3 for additional information regarding fair value measurements.

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to measure eligible assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 on January 1, 2008 and the adoption did not have a significant impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 141(R) will have a significant impact on our financial statements.

In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (“SFAS No. 160”), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 will have a significant impact on our financial statements.

(2) Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”) using the modified prospective transition method. In addition, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB No. 107”) in March, 2006, which provides supplemental SFAS No. 123(R) application guidance based on the views of the SEC. Under the modified prospective transition method, compensation cost recognized in the quarterly periods ended March 31, 2007 and 2008 included: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of option activity under our 1998 Stock Option plan for the three month period ended March 31, 2008 is presented below.

	Number of Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value
								(in thousands)
Outstanding, December 31, 2007		167,502		$	11.25		7.77	$	1,401

Granted		55,000			20.17
Exercised		(2,500	)		8.84
Forfeited or expired		(3,668	)		11.16

Outstanding, March 31, 2008		216,334		$	13.55		8.12	$	1,792

Exercisable, March 31, 2008		142,332		$	11.04		7.39	$	1,535

We granted options on January 15, 2008 and March 18, 2008. There were no options granted during the three months ended March 31, 2007. The total intrinsic value, or the difference between the exercise price and the market price on the date of exercise, of options exercised during the three months ended March 31, 2008, was approximately $31 thousand. The Company received cash of approximately $22 thousand and realized an income tax benefit of approximately $3 thousand from stock options exercised during the three months ended March 31, 2008.

The following table summarizes information about the options outstanding at March 31, 2008:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Shares		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price

$	0.00 – 5.58		28,000		4.74	$	4.17		28,000	$	4.17

	5.59 – 9.43		60,000		7.22		9.11		60,000		9.11

	9.44 – 15.60		48,334		8.79		14.35		24,334		14.06

	15.61 – 20.48		80,000		9.57		19.67		29,998		18.87

$	0.00 – 20.48		216,334		8.12	$	13.55		142,332	$	11.04

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The summary of the status of the Company’s unvested stock options as of March 31, 2008 and changes during the three months ended March 31, 2008 is presented below.

Unvested stock options:	Shares			Weighted Average Grant Date Fair Value

Unvested at December 31, 2007		41,000		$	9.19

Granted		55,000			9.89
Vested		(19,998	)		13.08
Forfeited		(2,000	)		5.24

Unvested at March 31, 2008		74,002		$	8.76

As of March 31, 2008, there was approximately $610 thousand of unrecognized compensation cost related to unvested options. Such cost is expected to be recognized over a weighted-average period of 1.51 years. Total compensation expense for stock options was $97 thousand and $95 thousand for the three months ended March 31, 2007 and 2008, respectively. An income tax benefit was recognized of approximately $42 thousand and $3 thousand for the three months ended March 31, 2007 and 2008, respectively.

(3) Fair Value Measurement

The financial assets of the company measured at fair value on a recurring basis are cash and cash equivalents and short-term investments. Our cash and cash equivalents and short-term investments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade corporate bonds, and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

The following table sets forth the our cash and cash equivalents and short-term investments which are measure at fair value on a recurring basis by level within the fair value hierarchy. As required by SFAS No. 157, these are classified based on the lowest level of input that is significant to the fair value measurement.

							Assets
(dollars in thousands)	Level 1		Level 2		Level 3		at fair value
Cash and cash equivalents	$	2,111	$	—	$	—	$	2,111
Short-term investments		14,348		—				14,348
Total	$	16,459	$	—	$	—	$	16,459

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(4) Inventory

Inventory, net of allowance for obsolescence of $273 thousand at December 31, 2007 and $288 thousand at March 31, 2008 consisted of the following amounts:

	December 31,		March 31,
	2007		2008

Raw materials	$	17,492	$	20,937
Work in process		3,277		3,553
	$	20,769	$	24,490

(5) Earnings per Share

The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation.

	Three months Ended March 31,
		2007		2008
Numerator:
Net income		$	2,681	$	3,517
Denominator for basic net income per common share:
Weighted average common shares outstanding			12,061		12,085

Denominator for diluted net income per share:
Weighted average common shares outstanding			12,061		12,085
Dilutive effect of stock options and warrants			22		59
Diluted weighted average shares			12,083		12,144

Earnings per common share:
Basic		$	0.22	$	0.29
Diluted		$	0.22	$	0.29

(6) Income Taxes

The Company adopted the provisions of FIN No. 48, on January 1, 2007. As a result of the implementation of FIN No. 48, the Company had no material unrecognized income tax assets or liabilities at the date of adoption nor during the three months ended March 31, 2008.

The Company’s policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the three months ended March 31, 2007 and March 31, 2008, there were no income tax interest and penalty items in the income statement, nor as a liability on the balance sheet.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2004. The Company is not currently involved in any income tax examinations.

(7) Segment Information

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

NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

For the three months ended March 31, 2008:
	Sales		Rental		Service & Maintenance		Corporate			Total
Revenue	$	9,626	$	9,010	$	297	$	—		$	18,933
Operating costs and expenses		6,393		3,404		208		3,475			13,480
Other income/(expense)								(8	)		(8	)
Income before provision for income taxes	$	3,233	$	5,606	$	89	$	(3,483	)	$	5,445
*Segment Assets	$	—	$	—	$	—	$	158,879		$	158,879

For the three months ended March 31, 2007:
	Sales		Rental		Service & Maintenance		Corporate			Total
Revenue	$	9,506	$	6,940	$	266	$	—		$	16,712
Operating costs and expenses		6,670		2,735		187		2,917			12,509
Other income/(expense)								52			52
Income before provision for income taxes	$	2,836	$	4,205	$	79	$	(2,865	)	$	4,255
*Segment Assets	$	—	$	—	$	—	$	140,016		$	140,016

* Management does not track assets by segment

(8) Legal Proceedings

On February 21, 2008, we received notice of a lawsuit filed against us on January 28, 2008 in Montmorency County, Michigan, 26th Circuit Court, Case No. 08-0001901-NZ, styled Dyanna Louise Williams, Plaintiff, v. Natural Gas Services Group, Inc. and Great Lakes Compression Inc., Defendants. In this lawsuit, plaintiff alleges breach of contract, breach of fiduciary duty and negligence. Plaintiff seeks damages in the amount of $100 thousand for lost insurance benefits and an unspecified amount of exemplary damages. As the basis for her claims, plaintiff generally alleges that she is the third party beneficiary of a life insurance policy obtained by her deceased ex-husband through Natural Gas Services Group's insurance program, and that as a result of Natural Gas Service Group's negligence and failure to use due care in processing an application for life insurance prior to her ex-husband's death, she was denied $100 thousand of life insurance proceeds. Plaintiff now seeks to recover $100 thousand from Natural Gas Services Group, plus an unspecified amount of exemplary damages. Due to the early stages of this lawsuit, and the absence of any discovery proceedings, we are unable to accurately predict its outcome, but we intend to file an answer denying all of plaintiff's claims and intend to vigorously contest the plaintiff's claims. We have not established a reserve with respect to plaintiff's claims.

From time to time, we are a party to various other legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flow. Except as discussed herein, we are not currently a party to any other legal proceedings and we are not aware of any other threatened litigation.

**********************

NATURAL GAS SERVICES GROUP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our December 31, 2007 Form 10-K Report filed with the SEC. All amounts reported in tables are in thousands of dollars unless otherwise noted.

Overview

We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are paid monthly in advance and include maintenance of the rented compressors. As of March 31, 2008, we had 1,277 natural gas compressors totaling 171,458 horsepower rented to 106 third parties, compared to 1,001 natural gas compressors totaling 115,336 horsepower rented to 88 third parties at March 31, 2007.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics and particular applications for which compression is sought. Fabrication of compressors involves the purchase by us of engines, compressors, coolers and other components, and then assembling these components on skids for delivery to customer locations. These major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a three to four month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors. However, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases.

We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility, Tulsa, Oklahoma facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

We provide service and maintenance to our customers under written maintenance contracts or on an as required basis in the absence of a service contract. As of March 31, 2008, we had written maintenance agreements with third parties relating to 46 compressors. Maintenance agreements typically have terms of nine months to one year and require payment of a monthly fee.

The oil and gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil and gas producers increase their capital expenditures for drilling, development and production activities. Generally, the increased capital expenditures ultimately result in greater revenues and profits for services and equipment companies.

In general, we expect our overall business activity and revenues to track the level of activity in the natural gas industry, with changes in domestic natural gas production and consumption levels and prices more significantly affecting our business than changes in crude oil and condensate production and consumption levels and prices. We also believe that demand for compression services and products is driven by declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased focus by producers on non-conventional natural gas production, such as coalbed methane, gas shales and tight gas, which typically requires more compression than production from conventional natural gas reservoirs.

Demand for our products and service was strong throughout 2007 and the first quarter of 2008. We believe demand will remain strong throughout 2008 due to high oil and natural gas prices and increased demand for natural gas. Because of these market fundamentals for natural gas, we believe the long-term trend of activity in our markets is favorable. However, these factors could be more than offset by other developments affecting the worldwide supply and demand for natural gas.

NATURAL GAS SERVICES GROUP, INC.

For fiscal year 2008, our forecasted capital expenditures are approximately $35 million, primarily for additions to our compressor rental fleet. We believe that the proceeds from our public offering of common stock in March 2006, together with funds available to us under our bank credit facility and cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2008. We may further require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses. Additional capital may not be available to us when we need it or on acceptable terms.

Results of Operations

Three months ended March 31, 2007, compared to the three months ended March 31, 2008.

The table below shows our revenues and percentage of total revenues of each of our segments for the three months ended March 31, 2007 and March 31, 2008.

	Revenue
	Three months Ended March 31,
	2007				2008
Sales	$	9,506	57	%	$	9,626	51	%
Rental		6,940	41	%		9,010	47	%
Service and Maintenance		266	2	%		297	2	%
Total	$	16,712			$	18,933

Total revenue increased from $16.7 million to $18.9 million, or 13.3%, for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. This was mainly the result of increased rental revenue. Sales revenue increased 1.3%, rental revenue increased 29.8%, and service and maintenance revenue increased 11.7%.

Sales revenue increased from $9.5 million to $9.6 million, or 1.3%, for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.

Rental revenue increased from $6.9 million to $9.0 million, or 29.8%, for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,422 compressor packages in its rental fleet, up from 1,157 units at March 31, 2007. The rental fleet has a utilization of 89.8% as of March 31, 2008.

Service and maintenance revenue increased from $266 thousand to $297 thousand, or 11.7%, for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. This increase is due to increased service in New Mexico and Michigan.

The overall operating margin percentage increased to 28.8% for the three months ended March 31, 2008, from 25.2% for the same period ended March 31, 2007. This is mainly the result of increased sales of compressor units to third parties, parts, rebuilds, and increased margins on our rental fleet activity.

Selling, general, and administrative expense increased from $1.2 million, to $1.4 million or 12.5% for the three months ended March 31, 2008, as compared to the same period ended March 31, 2007. This increase is mainly due to an increase in sales commissions and sales staff and increases in officers salaries.

Depreciation and amortization expense increased from $1.7 million, to $2.1 million or 23.8% for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. This increase was the result of 265 new gas compressor rental units being added to the rental fleet from March 31, 2007 to March 31, 2008, thus increasing the depreciable base.

Other income net of other expense decreased $119 thousand for the three months ended March 31, 2008, compared to the same period ended March 31, 2007. This decrease is mainly the result of decreased balances in our short-term investments.

NATURAL GAS SERVICES GROUP, INC.

Interest expense decreased 19.7% for the three months ended March 31, 2008, compared to the same period ended March 31, 2007, mainly due to decreased loan balances financing rental equipment.

Provision for income tax increased from $1.6 million to $1.9 million, or 22.5%, and is the result of the increase in taxable income.

Critical Accounting Policies and Practices

A discussion of our critical accounting policies is included in the Company's Form 10-K for the year ended December 31, 2007.

Recently Issued Accounting Pronouncements

NATURAL GAS SERVICES GROUP, INC.

Liquidity and Capital Resources

The following represents the Company’s working capital position as of December 31, 2007 and March 31, 2008.

	December 31,		March 31,
	2007			2008

Current Assets:
Cash and cash equivalents	$	245		$	2,111
Short-term investments		18,661			14,348
Trade accounts receivable, net		11,322			10,126
Inventory, net		20,769			24,490
Prepaid income taxes		3,584			—
Prepaid expenses and other		641			203
Total current assets		55,222			51,278

Current Liabilities:
Current portion of long-term debt and subordinated notes		4,378			3,378
Line of credit		600			—
Accounts payable		4,072			6,032
Accrued liabilities		3,990			3,762
Current portion of tax liability		3,525			57
Deferred income		81			877
Total current liabilities		16,646			14,106

Total working capital	$	38,576		$	37,172

Historically, we have funded our operations through public and private offerings of our equity securities, subordinated debt, bank borrowings and cash flow from operations. Proceeds from financing were primarily used to pay debt and to fund the manufacture and fabrication of additional units for our rental fleet of natural gas compressors.

For the three months ended March 31, 2008, we invested $8.0 million in equipment for our rental fleet and service vehicles. We financed this activity with cash flow from operations and cash on hand. In addition, we have repaid $2.9 million of our existing debt.

NATURAL GAS SERVICES GROUP, INC.

Cash flows

At March 31, 2008, we had cash, cash equivalents and short-term investments of $16.5 million compared to $18.9 million at December 31 2007. We had working capital of $37.2 million at March 31, 2008 compared to $38.6 million at December 31, 2007. At March 31, 2008, our total debt was $12.1 million of which $3.4 million was classified as current compared to $14.6 million and $4.4 million, respectively at December 31, 2007. We had positive net cash flow from operating activities of $8.0 million during the first three months of 2008 compared to $7.9 million for the three months of 2007. This was primarily from net income of $3.5 million, a decrease in accounts receivable of $1.2 million and an increase in accounts payable and accrued liabilities of $1.7 million, offset by an increase in inventory of $3.7 million during the three months ended March 31, 2008.

Accounts receivable decreased $1.2 million to $10.1 million at March 31, 2008 as compared to $11.3 million at December 31, 2007, largely reflecting collections during the first quarter.

Inventory increased $3.7 million to $24.5 million as of the quarter ended March 31, 2008, as compared to $20.8 million as of the year ended December 31, 2007. This increase is mainly the result of an increase in raw materials needed to increase production of compressor units for the rental fleet.

Long-term debt decreased $1.8 million to $12.1 million at March 31, 2008, compared to $14.0 million at December 31, 2007. The current portion of long-term debt decreased to $3.4 million at March 31, 2008, compared to $4.4 million at December 31, 2007 due to the final payment of $1.0 million of our subordinated debt on January 3, 2008.

Subordinated Debt-Related Parties

We had subordinated debt, which was included in the current portion of long-term debt. The $3.0 million principal amount of this debt is in the form of promissory notes issued to the three stockholders of SCS, who are currently employees of the Company, as part of the consideration for the acquisition of SCS. The principal of each note is payable in three equal annual installments, which commenced on January 3, 2006. Accrued and unpaid interest on the unpaid principal balance of each note is payable on the same dates as, and in addition to, the installments of principal. To secure payment of these notes, our bank lender issued letters of credit for the benefit of the holders in the aggregate amount $2.0 million. On January 3, 2008, the letter of credit was voided. On January 3, 2008, we paid the third and last installment of the annual payments.

Contractual Obligations and Commitments

We have contractual obligations and commitments that affect our consolidated results of operations, financial condition and liquidity. The following table is a summary of our significant cash contractual obligations:

	Obligation Due in Period (in thousands of dollars)
	2008(1)		2009		2010		2011		2012		Thereafter		Total
Credit facility (secured)	$	2,533	$	3,378	$	3,378	$	2,816	$	—		—	$	12,105
Interest on credit facility(2)		813		591		338		106		—		—		1,848
Facilities and office leases		144		166		85		29		30		44		498
Purchase obligations		—		—		—		—		—		—		—
Total	$	3,490	$	4,135	$	3,801	$	2,951	$	30	$	44	$	14,451

(1)		For the nine months remaining in 2008.
(2)		Assumes no change in the interest rate.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of March 31, 2008, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity, availability of, or requirements for, capital resources.

NATURAL GAS SERVICES GROUP, INC.

Special Note Regarding Forward-Looking Statements

Please refer to and read “Special Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Risk

Our commodity risk exposure is the pricing applicable to oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail their drilling programs, thereby reducing demand for our equipment and services.

Financial Instruments and Debt Maturities

Our financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, bank borrowings, and notes. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair value of the bank borrowings approximate the carrying amounts as of March 31, 2008, and were determined based upon interest rates currently available to us for borrowings with similar terms.

Customer Credit Risk

We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers and seek to minimize exposure to any one customer where other customers are readily available. Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our significant customers, our revenue and results of operations would be adversely affected.

Interest Rate Risk

Our Loan Agreement provides for a fixed interest rate of 7.5% for our term loan facility and our revolving line of credit facility. Consequently, our exposure to interest rates relate primarily to interest earned on short-term investments and paying above market rates, if such rates are below the fixed rate, on our bank borrowings. As of March 31, 2008, we were not using any derivatives to manage interest rate risk.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of certain members of Natural Gas Services Group, Inc’s management, the chief executive officer and the vice-president of accounting evaluated the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of Natural Gas Services Group, Inc. as of the end of the period covered by this report. Based on this evaluation, the chief executive officer and vice-president of accounting concluded that, as of the end of the period covered by this report, Natural Gas Services Group, Inc’s disclosure controls and procedures were effective to ensure that information required to be disclosed by Natural Gas Services Group, Inc. in the reports that it files under the Exchange Act is collected, processed and disclosed within the time periods specified in the SEC’s rules and forms.

NATURAL GAS SERVICES GROUP, INC.

(b) Changes in Internal Controls.

There were no changes in Natural Gas Services Group, Inc’s internal controls during the period covered by this report that have materially affected or are reasonably likely to materially affect Natural Gas Services Group, Inc’s internal controls over financial reporting. In addition, to the knowledge of the chief executive officer and vice-president of accounting there were no changes in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation made by the chief executive officer and the vice-president of accounting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Please refer to and read “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, one of which has been updated as set forth below.

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

As of March 31, 2008, we had an aggregate of approximately $12.1 million of outstanding indebtedness and accounts payable and accrued expenses of approximately $9.8 million. As a result of our significant indebtedness, we might not have the ability to incur any substantial additional indebtedness. The level of our indebtedness could have several important effects on our future operations, including:

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

a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest on our debt, thereby reducing funds available for other purposes; and

our significant leverage could make us more vulnerable to economic downturns.

NATURAL GAS SERVICES GROUP, INC.

Item 6. Exhibits

The following exhibits are filed herewith or incorporated herein by reference, as indicated:

Exhibit No. Description

3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10QSB filed and dated November 10, 2004)

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

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

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

4.3	Form of representative's option for the purchase of common stock (Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.4	Form of representative's option for the purchase of warrants (Incorporated by reference to Exhibit 4.5 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.5

Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the Registrant's From 8-K Report, dated January 3, 2005, as filed with the Securities and Exchange Commission on January 7, 2005)

Executive Compensation Plans and Arrangements (Exhibits 10.1, 10.14, 10.15, 10.16, 10.23, 10.24, 10.26 and 10.27).

10.1	1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated June 20, 2006 on file with the SEC June 26, 2006)

10.2	Form of Series A 10% Subordinated Notes due December 31, 2006 (Incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.3	Form of Five-Year Warrants to Purchase Common Stock (Incorporated by reference to Exhibit 10.9 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.4	Warrants issued to Berry-Shino Securities, Inc. (Incorporated by reference to Exhibit 10.10 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.5	Warrants issued to Neidiger, Tucker, Bruner, Inc. (Incorporated by reference to Exhibit 10.11 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.6	Form of warrant issued in March 2001 for guaranteeing debt (Incorporated by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.7	Form of warrant issued in April 2002 for guaranteeing debt (Incorporated by reference to Exhibit10.13 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.8	First Amended and Restated Loan Agreement between the Registrant and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated March 27, 2003 and filed with the Securities and Exchange Commission on April 14, 2003)

NATURAL GAS SERVICES GROUP, INC.

Exhibit No. Description

10.9	Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended June 30, 2004)

10.10

Second Amended and Restated Loan Agreement, dated November 3, 2003, between the Registrant and Western National Bank (Incorporated by reference to Exhibit 10.20 of the Registrant's Form 10-QSB for the fiscal quarter ended June 30, 2004)

10.11

Securities Purchase Agreement, dated July 20, 2004, between the Registrant and CBarney Investments, Ltd. (Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated July 20, 2004 and filed with the Securities and Exchange Commission on July 27, 2004)

10.12

Stock Purchase Agreement, dated October 18, 2004, by and among the Registrant, Screw Compression Systems, Inc., Paul D. Hensley, Jim Hazlett and Tony Vohjesus (Incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K dated October 18, 2004 and filed with the Securities and Exchange Commission on October 21, 2004)

10.13

Third Amended and Restated Loan Agreement, dated as of January 3, 2005, among Natural Gas Services Group, Inc., Screw Compression Systems, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.14

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

10.15

Employment Agreement between William R. Larkin and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.25 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

10.16

Promissory Note, dated January 3, 2005, in the original principal amount of $2.1 million made by Natural Gas Services Group, Inc. payable to Paul D. Hensley (Incorporated by reference to Exhibit 10.26 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

10.17

Fourth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated March 14, 2005, and filed with the Securities and Exchange Commission on March 18, 2005)

10.18

Modification Agreement, dated as of January 3, 2005, by and between Natural Gas Services Group, Inc. and Western National Bank (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.19

Guaranty Agreement, dated as of January 3, 2005, made by Natural Gas Service Group, Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.20

Guaranty Agreement, dated as of January 3, 2005, made by Screw Compression Systems, Inc., for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.21

Fifth Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K dated January 3, 2006 and filed with the Securities and Exchange Commission January 6, 2006)

10.22

First Modification to Fourth Amended and Restated Loan Agreement (Incorporated by reference Exhibit 10.1 of the Registrant’s Form 8-K dated May 1, 2005 and filed with Securities and Exchange Commission May 13, 2005)

NATURAL GAS SERVICES GROUP, INC.

Exhibit No.

Description

10.23

Employment Agreement between Stephen C. Taylor and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report, dated August 24, 2005, and filed with the Securities and Exchange Commission on August 30, 2005)

10.24

Employment Agreement between James R. Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report, dated June 14, 2005, and filed with the Securities and Exchange Commission on November 14, 2005)

10.25

Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the Registrant’s Form 8-K Report, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.26

Promissory Note, dated January 3, 2005, in the original principal amount of $300 thousand made by Natural Gas Services Group, Inc. payable to Jim Hazlett (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K Report, dated June 14, 2005, and filed with the Securities and Exchange Commission on November 14, 2005)

10.27

Retirement Agreement, dated December 14, 2005, between Wallace C. Sparkman and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report, dated December 14, 2005, and filed with the Securities and Exchange Commission on December 15, 2005)

10.28

Sixth Amended and Restated Loan Agreement, dated as of January 3, 2006 (Incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K, dated January 3, 2006, and filed with the Securities and Exchange Commission on January 6, 2006)

10.29

Guaranty Agreement, dated as of January 3, 2006, and made by Screw Compression Systems, Inc. for the benefit of Western National Bank (Incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K, dated January 3, 2006, and filed with the Securities and Exchange Commission on January 6, 2006)

10.30

Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated October 26, 2006 and filed with the Securities and Exchange Commission on November 1, 2006

14.0	Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

21.0	Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

*31.1

Certifications

*31.2

Certifications

*32.1

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002

*32.2

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

NATURAL GAS SERVICES GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATURAL GAS SERVICES GROUP, INC.


/s/Stephen C. Taylor			/s/ Earl R. Wait
Stephen C. Taylor			Earl R. Wait
President and Chief Executive Officer			Principal Accounting Officer and Treasurer

May 6, 2008

NATURAL GAS SERVICES GROUP, INC.

INDEX TO EXHIBITS

Exhibit No. Description

3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10QSB filed and dated November 10, 2004)

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

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

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

4.3	Form of representative's option for the purchase of common stock (Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.4	Form of representative's option for the purchase of warrants (Incorporated by reference to Exhibit 4.5 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.5

Executive Compensation Plans and Arrangements (Exhibits 10.1, 10.14, 10.15, 10.16, 10.23, 10.24, 10.26 and 10.27).

10.1	1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated June 20, 2006 on file with the SEC June 26, 2006)

10.2	Form of Series A 10% Subordinated Notes due December 31, 2006 (Incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.3	Form of Five-Year Warrants to Purchase Common Stock (Incorporated by reference to Exhibit 10.9 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.4	Warrants issued to Berry-Shino Securities, Inc. (Incorporated by reference to Exhibit 10.10 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.5	Warrants issued to Neidiger, Tucker, Bruner, Inc. (Incorporated by reference to Exhibit 10.11 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.6	Form of warrant issued in March 2001 for guaranteeing debt (Incorporated by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.7	Form of warrant issued in April 2002 for guaranteeing debt (Incorporated by reference to Exhibit10.13 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

10.8	First Amended and Restated Loan Agreement between the Registrant and Western National Bank (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated March 27, 2003 and filed with the Securities and Exchange Commission on April 14, 2003)

10.9	Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended June 30, 2004)

NATURAL GAS SERVICES GROUP, INC.

Exhibit No.

Description

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

NATURAL GAS SERVICES GROUP, INC.

Exhibit No.

Description

10.24

10.25

Stockholders Agreement, dated January 3, 2005 among Paul D. Hensley, Tony Vohjesus, Jim Hazlett and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 4.3 of the Registrant’s Form 8-K Report, dated January 3, 2005, and filed with the Securities and Exchange Commission on January 7, 2005)

10.26

10.27

10.28

10.29

10.30

14.0	Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

21.0	Subsidiaries (Incorporated by reference to Exhibit 21.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

*31.1

Certifications

*31.2

Certifications

*32.1

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002

*32.2

Certification required by Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.