Natural Gas Services 10Q 2007 Q2 Quarterly report

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 June 30, 2007

( ) 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

(Issuer’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, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer x

Non Accelerated Filer 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 equity, as of the latest practicable date.

Class		Outstanding at August 06, 2007
Common Stock, $.01 par value		12,071,666

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 9

Item 3. Quantitative and Qualitative Disclosures about Market Risk	Page 14

Item 4. Controls and Procedures	Page 14

Part II - OTHER INFORMATION

Item 1. Legal Proceedings	Page 15

Item 1A. Risk Factors	Page 15

Item 4. Submission of Matters to a Vote of Security Holders	Page 15

Item 6. Exhibits	Page 16

Signatures	Page 19

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NATURAL GAS SERVICES GROUP, INC.

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for per share amounts)

(unaudited)

	December 31, 2006		June 30, 2007
ASSETS
Current Assets:
Cash and cash equivalents	$	4,391	$	2,536
Short-term investments		25,052		24,102
Trade accounts receivable, net of doubtful accounts of $110		8,463		9,458
Inventory, net of allowance for obsolescence of $347		16,943		20,057
Prepaid expenses and other		321		428
Total current assets		55,170		56,581

Rental equipment, net of accumulated depreciation of $11,320 and $13,877, respectively		59,866		65,679
Property and equipment, net of accumulated depreciation of $3,679 and $4,249, respectively		6,714		6,539
Goodwill, net of accumulated amortization $325		10,039		10,039
Intangibles, net of accumulated amortization of $819 and $981, respectively		3,650		3,488
Other assets		113		68
Total assets	$	135,552	$	142,394

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt	$	3,442	$	3,378
Current portion subordinated notes-related parties		1,000		1,000
Accounts payable		2,837		4,953
Accrued liabilities		2,077		2,931
Current portion of tax liability		1,056		1,524
Deferred income		225		689
Total current liabilities		10,637		14,475

Long-term debt, less current portion		12,950		11,261
Subordinated notes-related parties, less current portion		1,000		—
Deferred income tax payable		9,764		9,806
Total liabilities		34,351		35,542

Stockholders Equity:
Common stock, 30,000 shares authorized, par value $0.01; 12,046 and 12,072 shares issued and outstanding, respectively		120		121
Additional paid-in capital		82,560		82,883
Retained earnings		18,521		23,848
Total stockholders’ equity		101,201		106,852
Total liabilities and stockholders’ equity	$	135,552	$	142,394

See accompanying notes to these condensed consolidated financial statements.

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NATURAL GAS SERVICES GROUP, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(in thousands, except earnings per share)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2006			2007			2006			2007
Revenue:
Sales, net	$	9,636		$	10,159		$	17,629		$	19,665
Service and maintenance income		262			243			540			509
Rental income		5,560			7,222			10,867			14,162
Total revenue		15,458			17,624			29,036			34,336

Operating costs and expenses:
Cost of sales, exclusive of depreciation stated separately below		8,402			7,292			14,121			13,962
Cost of service and maintenance, exclusive of depreciation stated separately below		206			137			397			324
Cost of rentals, exclusive of depreciation stated separately below		2,193			2,989			4,273			5,724
Selling expense		325			220			627			398
General and administrative expense		1,049			1,042			2,015			2,064
Depreciation and amortization		1,371			1,810			2,638			3,527
Total operating costs and expenses		13,546			13,490			24,071			25,999

Operating income		1,912			4,134			4,965			8,337

Other income (expense):
Interest expense		(423	)		(298	)		(923	)		(598	)
Other income		428			364			568			716
Total other income (expense)		5			66			(355	)		118

Income before provision for income taxes		1,917			4,200			4,610			8,455

Provision for income taxes		709			1,554			1,706			3,128

Net income		1,208			2,646			2,904			5,327

Earnings per share:
Basic	$	0.10		$	0.22		$	0.27		$	0.44
Diluted	$	0.10		$	0.22		$	0.27		$	0.44
Weighted average shares outstanding:
Basic		11,947			12,063			10,812			12,065
Diluted		12,038			12,091			10,882			12,087

See accompanying notes to these condensed consolidated financial statements.

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NATURAL GAS SERVICES GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

(unaudited)

	Six Months Ended June 30,
	2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,904		$	5,327
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,638			3,527
Deferred taxes		1,048			42
Employee stock options expensed		146			194
Gain on sale of property and equipment		—			(9	)
Changes in current assets and liabilities:
Trade and other receivables		(55	)		(995	)
Inventory and work in progress		(2,860	)		(3,114	)
Prepaid expenses and other		175			(107	)
Accounts payable and accrued liabilities		1,830			2,970
Current tax liability		—			468
Deferred income		(103	)		464
Other		5			4
NET CASH PROVIDED BY OPERATING ACTIVITIES		5,728			8,771

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(13,477	)		(9,011	)
Purchase of short-term investments		(38,988	)		(2,050	)
Redemption of short-term investments		5,700			3,000
Proceeds from sale of assets		—			34
NET CASH USED IN INVESTING ACTIVITIES		(46,765	)		(8,027	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit		838			—
Repayments of long-term debt		(7,732	)		(2,753	)
Repayments of line of credit		(1,081	)		—
Proceeds from exercise of stock options and warrants		97			154
Proceeds from sale of stock, net of transaction costs		47,163			—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		39,285			(2,599	)

NET CHANGE IN CASH		(1,752	)		(1,855	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,271			4,391
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,519		$	2,536

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	879		$	496
Income taxes paid	$	658		$	2,683

See accompanying notes to these condensed consolidated financial statements.

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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 June 30, 2007 and June 30, 2006 and the results of our operations for the three and six month periods ended June 30, 2007 and June 30, 2006 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/A for the year ended December 31, 2006 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 and six month periods ended June 30, 2007 is not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2007.

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 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 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 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 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 5 for additional information regarding income taxes.

In September 2006, the FASB issued SFAS No 157, Fair Value Measurements, 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. The Company is currently evaluating the impact of adopting this Statement.

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 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 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting this Statement.

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NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(2) Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard 123(R) “Share-Based Payment” (“SFAS 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 107”) in March, 2006, which provides supplemental SFAS 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 June 30, 2006 and 2007 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 123(R).

A summary of stock option activity under the plan as of June 30, 2007 and changes during the six months ended June 30, 2007 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, 2006		174,170		$	9.63		8.22	$	744

Granted		—			—
Exercised		(20,500	)		5.61
Forfeited or expired		(3,000	)		14.22

Outstanding, June 30, 2007		150,670		$	10.09		7.92	$	1,174

Exercisable, June 30, 2007		97,832		$	9.06		7.46	$	863

No stock options were granted during the six months ended June 30, 2006 and 2007. The total intrinsic value or the difference between the exercise price and the market price on the date of exercise, of stock options exercised during the three and six months ended June 30, 2007, were approximately $31 thousand and $170 thousand, respectively. The Company received cash from the exercise of stock options of approximately $46 thousand and $115 thousand during the three and six months ended June 30, 2007, respectively. The Company realized an income tax obligation of approximately $65 thousand and $24 thousand from stock options exercised during the three and six months ended June 30, 2007, respectively.

The following table summarizes information about the stock options outstanding at June 30, 2007:

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

$	0.00 – 5.58		28,000		5.49	$	4.17		28,000	$	4.17
	5.59 – 9.43		68,670		7.86		8.91		47,332		9.00
	9.44 – 16.96		54,000		9.26		14.65		22,500		15.26

$	0.00 - 16.96		150,670		7.92	$	10.09		97,832	$	9.06

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NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the Company’s unvested stock options as of June 30, 2007 and changes during the six months ended June 30, 2007 is presented below.

	Number of Stock Options			Weighted Average Grant Date Fair Value

Unvested at December 31, 2006		85,838		$	9.32

Granted		—			—
Vested		(30,000	)		11.17
Forfeited		(3,000	)		5.24

Unvested at June 30, 2007		52,838		$	8.50

As of June 30, 2007, there was approximately $316 thousand of unrecognized compensation cost related to unvested stock options. Such cost is expected to be recognized over a weighted-average period of one year. Total compensation expense for stock options was $73 thousand and $97 thousand for the three months ended June 30, 2006 and 2007, respectively. Total compensation expense for stock options was $146 thousand and $194 thousand for the six months ended June 30, 2006 and 2007, respectively. An income tax benefit was recognized of approximately $27 thousand and $36 thousand for the three months ended June 30, 2006 and 2007, respectively. An income tax benefit was recognized of approximately $54 thousand and $72 thousand for the six months ended June 30, 2006 and 2007, respectively.

(3) Inventory

Inventory, net of allowance for obsolescence of $347 thousand at December 31, 2006 and June 30, 2007, consisted of the following amounts:

	December 31,		June 30,
	2006		2007

Raw materials	$	12,154	$	15,081
Finished goods		1,084		772
Work in process		3,705		4,204
	$	16,943	$	20,057

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NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(4) Earnings per Share

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

	Three months Ended June 30,				Six months Ended June 30,
	2006		2007		2006		2007
Numerator:
Net income	$	1,208	$	2,646	$	2,904	$	5,327
Denominator for basic net income per common share:
Weighted average common shares outstanding		11,947		12,063		10,812		12,065

Denominator for diluted net income per share:
Weighted average common shares outstanding		11,947		12,063		10,812		12,065
Dilutive effect of stock options and warrants		91		28		70		22
Diluted weighted average shares		12,038		12,091		10,882		12,087

Earnings per common share:
Basic	$	0.10	$	0.22	$	0.27	$	0.44
Diluted	$	0.10	$	0.22	$	0.27	$	0.44

(5) Income Taxes

The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation FIN 48, the Company had no material unrecognized income tax assets or liabilities at the date of adoption nor during the three and six months ended June 30, 2007.

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 and six months ended June 30, 2007, 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 2003. The Company is not currently involved in any income tax examinations.

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NATURAL GAS SERVICES GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(6) Segment Information

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

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

For the three months ended June 30, 2007:
	Sales		Service & Maintenance		Rental		Corporate			Total
Revenue	$	10,159	$	243	$	7,222		-		$	17,624
Operating costs and expenses		7,292		137		2,989		3,072			13,490
Operating income	$	2,867	$	106	$	4,233	$	(3,072	)	$	4,134
*Segment Assets	$	-	$	-	$	-	$	142,394		$	142,394

For the three months ended June 30, 2006:
	Sales		Service & Maintenance		Rental		Corporate			Total
Revenue	$	9,636	$	262	$	5,560		-		$	15,458
Operating costs and expenses		8,402		206		2,193		2,745			13,546
Operating income	$	1,234	$	56	$	3,367	$	(2,745	)	$	1,912
*Segment Assets	$	-	$	-	$	-	$	131,476		$	131,476

For the six months ended June 30, 2007:
	Sales		Service & Maintenance		Rental		Corporate			Total
Revenue	$	19,665	$	509	$	14,162		-		$	34,336
Operating costs and expenses		13,962		324		5,724		5,989			25,999
Operating income	$	5,703	$	185	$	8,438	$	(5,989	)	$	8,337
*Segment Assets	$	-	$	-	$	-	$	142,394		$	142,394

For the six months ended June 30, 2006:
	Sales		Service & Maintenance		Rental		Corporate			Total
Revenue	$	17,629	$	540	$	10,867		-		$	29,036
Operating costs and expenses		14,121		397		4,273		5,280			24,071
Operating income	$	3,508	$	143	$	6,594	$	(5,280	)	$	4,965
*Segment Assets	$	-	$	-	$	-	$	131,476		$	131,476

* Management does not track assets by segment

(7) Legal Proceedings

From time to time, we are a party to various legal proceedings in the ordinary course of our business. We are not currently a party to any material pending legal proceedings. We have not been a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding.

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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, 2006 Form 10-K/A 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 June 30, 2007, we had 1,058 natural gas compressors totaling 123,276 horsepower rented to 96 third parties, compared to 870 natural gas compressors totaling 97,837 horsepower rented to 74 third parties at June 30, 2006.

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 natural 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 June 30, 2007, 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 2006 and the first half of 2007. We believe demand will remain strong throughout the remainder of 2007 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.

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NATURAL GAS SERVICES GROUP, INC.

For fiscal year 2007, our forecasted capital expenditures are $27 to $32 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 the remainder of 2007. 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 June 30, 2006, compared to the three months ended June 30, 2007.

The table below shows our revenues and percentage of total revenues of each of our segments for the three months ended June 30, 2006 and June 30, 2007.

	Revenue
	Three months Ended June 30,
	2006				2007
Sales	$	9,636	62	%	$	10,159	58	%
Service and Maintenance		262	2	%		243	1	%
Rental		5,560	36	%		7,222	41	%
Total	$	15,458	100	%	$	17,624	100	%

Total revenue increased from $15.5 million to $17.6 million, or 14.0%, for the three months ended June 30, 2007, compared to the same period ended June 30, 2006. This was mainly the result of increased rental revenue and additional compressor sales. Rental revenue increased 29.9%, sales revenue increased 5.4% offset by a decrease in service and maintenance revenue of 7.3%.

Rental revenue increased from $5.6 million to $7.2 million, or 29.9%, for the three months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,208 compressor packages in its rental fleet, up from 990 units at June 30, 2006. The rental fleet has a utilization of 87.6% as of June 30, 2007.

Sales revenue increased from $9.6 million to $10.2 million, or 5.4%, for the three months ended June 30, 2007, compared to the same period ended June 30, 2006. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.

Service and maintenance revenue decreased from $262 thousand to $243 thousand, or 7.3%, for the three months ended June 30, 2007, compared to the same period ended June 30, 2006.

The overall operating margin percentage increased to 23.5% for the three months ended June 30, 2007, from 12.4% for the same period ended June 30, 2006. This was mainly the result of the changes in the margins for equipment and parts sales which averaged only 12.8% for the second quarter of 2006 compared to 28.2% in second quarter of 2007.

Selling expense decreased from $325 thousand to $220 thousand or 32.3% for the three months ended June 30, 2007, as compared to the same period ended June 30, 2006. This decrease is the result of decreased commissions and salaries from personnel changes to our sales force and increased sales to long-term customers.

General and administrative expenses remained flat at $1.0 million or a .7% change for the three months ended June 30, 2007, as compared to the same period ended June 30, 2006.

Depreciation and amortization expense increased from $1.4 million, to $1.8 million or 32.0% for the three months ended June 30, 2007, as compared to the same period ended June 30, 2006. This increase is the result of 218 new gas compressor rental units added to the rental fleet from June 30, 2006 to June 30, 2007, thus increasing the depreciable base.

Other income net of other expense decreased $64 thousand for the three months ended June 30, 2007, compared to the same period ended June 30, 2006. This decrease is mainly the result of reduced interest income from our short-term investments.

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NATURAL GAS SERVICES GROUP, INC.

Interest expense decreased 29.6% for the three months ended June 30, 2007, compared to the same period ended June 30, 2006, mainly due to decreased loan balances financing rental equipment.

Provision for income tax increased from $709 thousand, to $1.6 million or 119.2%, for the three months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase is the result of the increase in taxable income.

Six months ended June 30, 2006, compared to the six months ended June 30, 2007.

The table below shows our revenues and percentage of total revenues of each of our segments for the six months ended June 30, 2006 and June 30, 2007.

	Revenue
	Six months Ended June 30,
	2006				2007
Sales	$	17,629	61	%	$	19,665	57	%
Service and Maintenance		540	2	%		509	2	%
Rental		10,867	37	%		14,162	41	%
Total	$	29,036	100	%	$	34,336	100	%

Total revenue increased from $29.0 million to $34.3 million, or 18.3%, for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. This was mainly the result of increased rental revenue and additional compressor sales. Rental revenue increased 30.3%, sales revenue increased 11.5% and offset by a decrease in service and maintenance revenue of 5.7%.

Rental revenue increased from $10.9 million to $14.2 million, or 30.3%, for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,208 compressor packages in its rental fleet, up from 990 units at June 30, 2006. The rental fleet has a utilization of 87.6% as of June 30, 2007.

Sales revenue increased from $17.6 million to $19.7 million, or 11.5%, for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.

Service and maintenance revenue decreased from $540 thousand to $509 thousand, or 5.7%, for the six months ended June 30, 2007, compared to the same period ended June 30, 2006.

The overall operating margin percentage increased to 24.3% for the six months ended June 30, 2007, from 17.1% for the same period ended June 30, 2006. This was mainly the result of the changes in margins for equipment and parts sales which averaged only 19.9% for the second quarter of 2006 compared to 29.0% in second quarter of 2007.

Selling expense decreased from $627 thousand, to $398 thousand or 36.5% for the six months ended June 30, 2007, as compared to the same period ended June 30, 2006. This decrease is the result of decreased commissions and salaries from personnel changes to our sales force and increased sales to long-term customers.

General and administrative expenses increased from $2.0 million, to $2.1 million or 2.4% for the six months ended June 30, 2007, as compared to the same period ended June 30, 2006. This increase is the result of increased Sarbanes-Oxley expenses offset by a decrease in officer salaries and bonuses.

Depreciation and amortization expense increased 33.7% from $2.6 million, to $3.5 million for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase was the result of 218 new gas compressor rental units being added to the rental fleet from June 30, 2006 to June 30, 2007, thus increasing the depreciable base.

Other income net of other expense increased by $148 thousand for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase is mainly the result of additional interest income from our short-term investment account.

Interest expense decreased 35.2% for the six months ended June 30, 2007, compared to the same period ended June 30, 2006, mainly due from amortization of loan balances financing rental equipment.

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Provision for income tax increased from $1.7 million to $3.1 million or 83.4% for the six months ended June 30, 2007, compared to the same period ended June 30, 2006. This increase 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/A for the year ended December 31, 2006. There have been no significant changes in the six months ended June 30, 2007.

Recently Issued Accounting Pronouncements

Liquidity and Capital Resources

The following represents the Company’s working capital position as of December 31, 2006 and June 30, 2007.

	December 31, 2006		June 30, 2007
Current Assets:
Cash & cash equivalents	$	4,391	$	2,536
Short-term investments		25,052		24,102
Trade accounts receivable		8,463		9,458
Inventory		16,943		20,057
Prepaid expenses and other		321		428
Total current assets	$	55,170	$	56,581

Current Liabilities:
Current portion of long-term debt	$	4,442	$	4,378
Accounts payable & accrued liabilities		4,914		7,884
Current portion of tax liability		1,056		1,524
Deferred income		225		689
Total current liabilities	$	10,637	$	14,475

Total working capital	$	44,533	$	42,106

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 of financings 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 six months ended June 30, 2007, we invested $9.0 million in equipment for our rental fleet and service vehicles. We financed this activity with cash flow from operations and public offering proceeds. In addition, we have repaid $2.8 million of our existing debt.

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Cash flows

At June 30, 2007, we had cash, cash equivalents and short-term investments of $26.6 million compared to $29.4 million at December 31 2006. We had working capital of $42.1 million at June 30, 2007 compared to $44.5 million at December 31, 2006. At June 30, 2007, our total debt was $15.6 million of which $4.4 million was classified as current compared to $18.4 million and $4.4 million, respectively at December 31, 2006. We had positive net cash flow from operating activities of $8.8 million during the first six months of 2007 compared to $5.7 million for the first six months of 2006. This was primarily from net income of $5.3 million and an increase in accounts payable and accrued liabilities of $3.0 million, offset by an increase in inventory of $3.1 million and the add back of depreciation and amortization of $3.5 million during the six months ended June 30, 2007.

Accounts receivable increased $995 thousand to $9.5 million at June 30, 2007 as compared to $8.5 million at December 31, 2006. At the end of the second quarter of 2007, the average of aged accounts receivable increased to 51 days outstanding compared to 49 days outstanding at the end of year December 31, 2006.

Inventory increased $3.1 million to $20.1 million as of June 30, 2007, as compared to $16.9 million as of December 31, 2006. This increase is mainly the result of an increase in raw materials and work in progress associated with several custom compressor units and increased production of rental units.

Long-term debt decreased $2.8 million to $15.6 million at June 30, 2007, compared to $18.4 million at December 31, 2006. The current portion of long-term debt remained at $4.4 million for both June 30, 2007 and December 31, 2006.

Subordinated Debt-Related Parties

We have subordinated debt which is 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 February 3, 2007, the face amount of the letter of credit was reduced by one-half and is currently $1.0 million. On January 3, 2007, we paid the second installment of the annual payments in the amount of $1.0 million in principal. The current balance of these notes is $1.0 million.

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)
	2007⁽¹⁾		2008		2009		2010		2011		Thereafter		Total
Credit facility (secured)	$	1,689	$	3,378	$	3,378	$	3,378	$	2,816		-	$	14,639
Interest on credit facility⁽²⁾		549		885		591		338		106		-		2,469
Subordinated debt		-		1,000		-		-		-		-		1,000
Facilities and office leases		82		63		15		14		15		38		227
Purchase obligations		-		-		-		-		-		-		-
Total	$	2,320	$	5,326	$	3,984	$	3,730	$	2,937	$	38	$	18,335

(1)		For the six months remaining in 2007.
(2)		Assumes no change in the interest rate.

Merger and Consolidation-Screw Compression Systems, Inc.

On June 25, 2007, we entered into Articles of Merger with our wholly subsidiary, Screw Compressors Systems Inc (SCS). On June 30,2007, all of the issued and outstanding shares of common stock of SCS, all of which were held by the Company, were cancelled without consideration and SCS was merged into the Company. The purpose of the merger was to consolidate and simplifyour internal accounting and tax reporting functions.

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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 June 30, 2007, the off-balance sheet arrangements and transactions that we have entered into include an un-drawn letter of credit and operating lease agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of, or requirements for, capital resources.

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/A for the fiscal year ended December 31, 2006.

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 June 30, 2007, 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.

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.

(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.

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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/A for the fiscal year ended December 31, 2006, 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 June 30, 2007, we had an aggregate of approximately $15.6 million of outstanding indebtedness, not including outstanding letters of credit in the aggregate face amount of $1.0 million, and accounts payable and accrued expenses of approximately $7.9 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.

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 June 30, 2007, we were not using any derivatives to manage interest rate risk.

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of stockholders was held on June 19, 2007. At the meeting, the following three individuals were elected to serve as directors of Natural Gas Services Group, Inc. until the 2010 annual meeting of stockholders and until their respective successors are duly qualified and elected: (1) John W. Chisholm, (2) Paul D. Hensley, and (3) Richard L. Yadon. Set forth below is a tabulation of votes with respect to each nominee for director.

Name	Votes Cast For	Votes Withheld
John W. Chisholm	10,997,440	412,334
Paul D. Hensley	11,300,269	109,505
Richard L. Yadon	10,908,290	501,484

The stockholders voted upon and approved the reappointment of Hein & Associates, LLP as independent auditors for the year ending December 31, 2007. Set forth below is a tabulation of votes with respect to the reappointment of Hein & Associates, LLP:

Votes For	Votes Against	Votes Abstained	Non Votes
11,120,478	276,763	12,533	-

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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)

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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)

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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.

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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

August 7, 2007

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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)

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Exhibit No.

Description

10.10

10.11

10.12

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

10.17

10.18

10.19

10.20

10.21

10.22

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)

Table of Contents

NATURAL GAS SERVICES GROUP, INC.

Exhibit No.

Description

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

10.27

10.28

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

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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Natural Gas Services (NGS) 10-Q2007 Q2 Quarterly report

Content analysis