Edgar Filing: NATURAL GAS SYSTEMS INC/NEW

As filed with the Securities and Exchange Commission on October 19, 2005

Reg. No. 333-125564

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

AMENDMENT NO. 1

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

NATURAL GAS SYSTEMS, INC.

(Name of Small Business Issuer in its Charter)

NEVADA 1311 80-0028196
(State of jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)

820 GESSNER
SUITE 1340
HOUSTON, TX 77024
(713) 935-0122
(Address and telephone number of principal executive offices
and principal place of business)

NATURAL GAS SYSTEMS, INC.
820 GESSNER
SUITE 1340
HOUSTON, TX 77024
(713) 935-0122

(Name, address and telephone number of agent for service)
COPY TO:
LAWRENCE SCHNAPP, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION
1801 CENTURY PARK EAST, SUITE 1600
LOS ANGELES, CALIFORNIA 90067
(310) 789-1255

Approximate date of proposed sale to the public: From time to time after the
date this registration statement becomes effective.

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine. The information in this prospectus is not complete and may be
changed. The selling stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 19, 2005

PROSPECTUS

NATURAL GAS SYSTEMS, INC.

6,441,445 Shares of our common stock

This prospectus relates to the sale of up to 5,191,445 shares of our currently
outstanding shares of common stock that are owned by some of our stockholders,
and 1,250,000 shares of our common stock issuable upon the exercise of
outstanding common stock purchase warrants held by some of our warrantholders.
For a list of the selling stockholders, please see "Selling Stockholders." We
are not selling any shares of common stock in this offering and therefore will
not receive any proceeds from this offering. We will, however, receive the
exercise price of the warrants if and when those warrants are exercised by the
selling stockholders. None of the warrants has been exercised as of the date of
this prospectus. We will pay the expenses of registering these shares.

Our common stock is traded in the over-the-counter market and is quoted on the
OTC Bulletin Board under the symbol NGSY. On October 14, 2005, the closing price
of our common stock was $1.60 per share.

The shares included in this prospectus may be offered and sold directly by the
selling stockholders in the open market at prevailing prices or in individually
negotiated transactions, through agents designated from time to time or through
underwriters or dealers. We will not control or determine the price at which a
selling stockholder decides to sell its shares. Brokers or dealers effecting
transactions in these shares should confirm that the shares are registered under
applicable state law or that an exemption from registration is available.

YOU SHOULD UNDERSTAND THE RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK.
BEFORE MAKING AN INVESTMENT, READ THE "RISK FACTORS," WHICH BEGIN ON PAGE 3 OF
THIS PROSPECTUS.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is October 19, 2005.

TABLE OF CONTENTS

Page

PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................3
FORWARD-LOOKING STATEMENTS....................................................11
USE OF PROCEEDS...............................................................11
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................12
BUSINESS......................................................................19
MANAGEMENT....................................................................25
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................32
SELLING STOCKHOLDERS..........................................................33
PLAN OF DISTRIBUTION..........................................................38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................40
DESCRIPTION OF SECURITIES.....................................................40
EXPERTS.......................................................................43
LEGAL MATTERS.................................................................43
WHERE YOU CAN FIND MORE INFORMATION...........................................43
GLOSSARY OF TERMS.............................................................43
INDEX TO FINANCIAL STATEMENTS................................................F-1

YOU SHOULD RELY ONLY ON THE INFORMATION THAT IS CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY IN JURISDICTIONS
WHERE IT IS LEGAL TO SELL THESE SECURITIES. YOU SHOULD ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF
OUR COMMON STOCK. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS MAY HAVE CHANGED SINCE THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS
NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus; it
does not contain all of the information you should consider before investing in
our common stock. You should read the entire prospectus before making an
investment decision, including the information under the headings "Risk
Factors."

All information contained in this prospectus is adjusted to reflect a 40:1
reverse split of our common stock effected in May 2004.

Throughout this prospectus, the terms "we," "us," "our," "our company" and "NGS"
refer to Natural Gas Systems, Inc., a Nevada corporation formerly known as
Reality Interactive, Inc., and, unless the context indicates otherwise, also
includes our wholly-owned subsidiaries.

COMPANY OVERVIEW

Natural Gas Systems, Inc. was formed in late 2003 to acquire established crude
oil and natural gas resources and exploit them through the application of
conventional and specialized technology with the objective of increasing
production, ultimate recoveries, or both. We currently operate in four crude oil
and natural gas fields in the State of Louisiana. Our principal executive
offices are located at 820 Gessner, Suite 1340, Houston, Texas 77024. Our
telephone number is 713-935-0122 and we maintain a website at www.natgas.us.
Information contained on our website does not constitute part of this
prospectus.

In acquiring our crude oil and natural gas properties, we target established,
shallow oil and gas fields or resources, preferably with existing road, pipeline
and storage infrastructure, and reservoirs with low permeability (referred to as
"tight" reservoirs in which oil or gas flow is inhibited). Such reservoirs
typically have low decline rate production and limited drainage areas per well.
Our strategy is to develop incremental value by (i) bringing undrained or
partially drained areas of the reservoirs into production, and (ii) accelerating
existing production by engaging in:

o work-overs to clean sand, water and paraffin from wells,

o re-completions into other reservoirs,

o optimization of production facilities including installation of
compression facilities,

o development and exploitation drilling,

o applying lateral drilling, hydraulic fracturing and other stimulation
methods to older fields that matured prior to the application of these
technologies, and

o selective use of newer technologies, some of which may be unproved, to
locate bypassed resources in mature fields.

The NGS team is broadly experienced in oil and gas operations, development,
acquisitions and financing and follows a strategy of outsourcing most of the
property, corporate administrative and accounting functions.

CORPORATE HISTORY OF REVERSE MERGER

Reality Interactive, Inc. ("Reality"), a Nevada corporation that traded on the
OTC Bulletin Board under the symbol RLYI.OB, and the predecessor of Natural Gas
Systems, Inc., was incorporated on May 24, 1994 for the purpose of developing
technology-based knowledge solutions for the industrial marketplace. On April
30, 1999, Reality ceased business operations, sold substantially all of its
assets and terminated all of its employees. Subsequent to ceasing operations,
Reality explored other potential business opportunities to acquire or merge with
another entity, while continuing to file reports with the SEC.

On May 26, 2004, Natural Gas Systems, Inc., a privately owned Delaware
corporation formed in September 2003 ("Old NGS"), was merged into a wholly owned
subsidiary of Reality. Reality was thereafter renamed Natural Gas Systems, Inc.
and adopted a June 30 fiscal year end. As part of the merger, the officers and
directors of Reality resigned, the officers and directors of Old NGS became the
officers and directors of our company and the crude oil and natural gas business
of Old NGS became that of our company.

THE OFFERING

We are registering 6,441,445 shares of our common stock in order to enable the
holders of those shares to freely re-sell those shares (on the open market or
otherwise) from time to time in the future through the use of this prospectus.
Of these shares, 5,191,445 shares are currently outstanding and were issued in
private transactions and 1,250,000 shares may be issued to selling stockholders
upon their exercise of outstanding warrants issued in private transactions.
Since the foregoing shares and warrants were issued in private, unregistered
transactions, none of the 6,441,445 shares can be freely transferred at this
time by the selling stockholders unless the shares are included in a prospectus,
such as this prospectus, or unless the shares are sold in an exempt transaction
such as a sale that complies with the terms and conditions of Rule 144 under the
Securities Act of 1933.

Common stock offered by the selling stockholders 6,441,445 shares, consisting of 5,191,445 outstanding
shares owned by selling stockholders and 1,250,000
shares issuable to selling stockholders upon exercise
of warrants.

Common stock currently outstanding 24,777,534 shares (1)

Common stock to be outstanding after the offering,
assuming no exercise of the warrants for the shares
covered by this prospectus 24,777,534 shares (1)

Common stock to be outstanding after the offering,
assuming the exercise of all warrants for the shares
covered by this prospectus 26,027,534 shares (1)

OTC Bulletin Board Trading Symbol NGSY

Risk Factors An investment in our common stock involves significant
risks. See "Risk Factors" beginning on page 3.

(1) Does not include (i) up to 2,119,000 shares of our common stock available
for issuance under our 2004 Stock Plan, (ii) up to 1,736,000 shares of our
common stock issuable upon the exercise of options granted under our 2004 Stock
Plan, (iii) up to 510,000 shares of our common stock issuable upon the exercise
of options granted under our 2003 Stock Option Plan, or (iv) up to 1,173,468
shares of our common stock issuable upon exercise of outstanding warrants. This
prospectus covers the resale of 1,250,000 of the shares issuable upon exercise
of some of the foregoing warrants.

RISK FACTORS

An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our company. If any of the
following risks actually occur, our business, financial condition or operating
results and the trading price or value of our securities could be materially
adversely affected.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

WE MAY BE UNABLE TO OBTAIN THE LARGE AMOUNT OF ADDITIONAL CAPITAL THAT WE NEED
TO GROW OUR BUSINESS.

Based on our current estimates of production and current oil and gas prices, and
absent a default causing acceleration of our debt, we currently have sufficient
capital reserves to satisfy our short-term obligations and to fund our
anticipated development activities through December 31, 2005. We will require
more capital or success in our development activities or both to execute
additional acquisitions, fund our development plan beyond 2005, replace our
existing depleting reserves or exploit any technology projects we may develop
from time to time. Additionally, we may encounter unforeseen costs or lower
commodity prices that could also require us to seek additional capital. While we
are exploring various capital raising avenues, we cannot assure you that we will
be able to obtain the capital needed to acquire additional crude oil and natural
gas fields. Further, we have been operating at a loss and intend to increase our
operating expenses and overhead significantly as we expand our acquisitions of
crude oil and natural gas production and expand our field operations staff. The
full and timely development and implementation of our business plan and growth
strategy beyond 2005 will require significant additional resources, and we may
not be able to obtain the funding necessary to implement our growth strategy on
acceptable terms or at all. An inability to obtain such resources would
significantly impair our ability to execute our growth plan or respond to
competitive pressures. Furthermore, our growth strategy may not produce material
revenues even if successfully funded.

We intend to explore a number of options to secure alternative sources of
capital, including the issuance of senior secured debt, volumetric production
payments, subordinated debt, or additional equity, including preferred equity
securities or other equity securities. We have not yet identified the sources
for the additional financing we require and we do not have commitments from any
third parties to provide this financing. We might not succeed, therefore, in
obtaining additional and acceptable financing when we need it or at all. Our
ability to obtain additional capital will also depend on market conditions,
national and global economics and other factors beyond our control. We cannot
assure you that we will be able to implement or capitalize on various financing
alternatives or otherwise obtain required working capital, the need for which is
substantial given our operating loss history. We refer you to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

OUR CURRENT CREDIT FACILITY INCLUDES STRICT FINANCIAL COVENANTS THAT WE MAY BE
UNABLE TO SATISFY.

We recently entered into a credit facility with Prospect Energy Corporation.
This facility is secured by essentially all of our existing and certain future
assets including the common stock of certain subsidiaries. While no principal
payments are required prior to maturity, we are required to meet certain ongoing
financial covenants. The primary covenants include maintaining a minimum ratio
of borrowing base to debt and a minimum ratio of EBITDA (earnings before
interest, income tax and other non-cash charges such as depreciation, depletion
and amortization) to total interest. Our borrowing base is dependent upon our
proved reserves as determined by our outside engineers and the reasonable
satisfaction of Prospect Energy, future operating costs and capital expenditures
and commodity prices. We cannot assure you that, in the future, commodity prices
will not decline, projected reserve increases will be obtained or current proved
reserves will be realized, any one of which could reduce our borrowing base,
which could in turn require us to reduce our outstanding borrowings or prepay
our debt due to an acceleration by our lender. At June 30, 2005, we were in
compliance with our borrowing base covenant.

Under the Prospect facility, we are required to maintain an EBITDA of two times
interest payable, beginning no later than the three month period ending January
31, 2006. Our ability to comply with this requirement is dependent on achieving
certain operating results, especially with respect to our planned drilling
program of proved undeveloped reserves at our Delhi Field that was scheduled to
begin in May 2005. At September 27, 2005, our Delhi drilling program had not yet
begun due to delays caused by casualty repairs sustained by the drilling
contractor for the account of another customer. Due to these delays, we can give
no assurance that the delayed results from this program will provide sufficient
EBITDA to meet the required interest coverage ratio. If such a covenant breach
occurs and is not waived by Prospect, the debt would become immediately due and
payable. Since we do not have sufficient liquid assets to prepay our debt in
full, we would be required to refinance all or a portion of our existing debt or
obtain additional financing. If we were unable to refinance our debt or obtain
additional financing, we would be required to curtail portions of our
development program, sell assets, and/or reduce capital expenditures. Had we
been subject to this requirement on June 30, 2005, we would not have been in
compliance.

Other covenants limit additional borrowings, sales of assets and the
distributions of cash or properties and prohibit the payment of dividends and
the incurrence of liens. The restrictions of the credit facility may have
adverse consequences on our operations and financial results, including our
ability to obtain financing for working capital, capital expenditures, our
development program, purchases of new technology or other purposes. We will be
required to use a substantial portion of our cash flow to make debt service
payments, which will reduce the funds that would otherwise be available for
operations and future business opportunities. A substantial decrease in our
operating cash flow or an increase in our expenses could make it difficult for
us to meet our debt service requirements, thus requiring us to modify operations
which could result in our becoming more vulnerable to downturns in our business
or the economy generally.

Our ability to obtain and service indebtedness will depend on our future
performance and performance of vendors, including our ability to manage cash
flow and working capital and availability of services from vendors, which are in
turn subject to a variety of factors beyond our control. We may not get timely
access to vendor services to allow us to carry out our business plan. Our
business may not generate cash flow at or above anticipated levels or we may not
be able to borrow funds in amounts sufficient to enable us to service
indebtedness, make anticipated capital expenditures or finance our development
program. If we are unable to generate sufficient cash flow from operations or to
borrow sufficient funds in the future to service our debt, we may be required to
curtail portions of our development program, sell assets, reduce capital
expenditures, refinance all or a portion of our existing debt or obtain
additional financing. We may not be able to refinance our debt or obtain
additional financing for many reasons, including restrictions on our ability to
incur debt under our existing debt or installment purchase arrangements, and the
fact that some or all of our assets are currently pledged to secure obligations
under our existing debt or installment purchase arrangements.

OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT FUTURE RESULTS AND
INCREASES THE RISK OF YOUR INVESTMENT.

We commenced our crude oil and natural gas operations in late 2003 and have a
limited operating history. Therefore, we face all the risks common to companies
in their early stages of development, including uncertainty of funding sources,
high initial expenditure levels and uncertain revenue streams, an unproven
business model, and difficulties in managing growth. Our prospects must be
considered in light of the risks, expenses, delays and difficulties frequently
encountered in establishing a new business. Any forward-looking statements in
this prospectus do not reflect any possible effect on us from the outcome of
these types of uncertainty. Since inception, we have incurred significant
losses. We cannot assure you that we will be successful. While members of our
management have previously carried out or been involved with acquisition and
production activities in the crude oil and natural gas industry while employed
by other companies, we cannot assure you that our intended acquisition targets
and development plans will lead to the successful development of crude oil and
natural gas production or additional revenue.

WE MAY BE UNABLE TO CONTINUE LICENSING FROM THIRD PARTIES THE TECHNOLOGIES THAT
WE USE IN OUR BUSINESS OPERATIONS.

As is customary in the crude oil and natural gas industry, we utilize a variety
of widely available technologies in the crude oil and natural gas development
and drilling process. We do not have any patents or copyrights for the
technology we currently utilize. Instead, we license or purchase services from
the holders of such technology, or outsource the technology integral to our
business from third parties. Our commercial success will depend in part on these
sources of technology and assumes that such sources will not infringe on the
propriety rights of others. We cannot be certain whether any third-party patents
will require us to utilize or develop alternative technology or to alter our
business plan, obtain additional licenses, or cease activities that infringe on
third-parties' intellectual property rights. Our inability to acquire any
third-party licenses, or to integrate the related third-party products into our
business plan, could result in delays in development unless and until equivalent
products can be identified, licensed, and integrated. Existing or future
licenses may not continue to be available to us on commercially reasonable terms
or at all. Litigation, which could result in substantial cost to us, may be
necessary to enforce any patents licensed to us or to determine the scope and
validity of third-party obligations.

REGULATORY AND ACCOUNTING REQUIREMENTS MAY REQUIRE SUBSTANTIAL REDUCTIONS IN
PROVEN RESERVES (SEE GLOSSARY) AND LIMITATIONS OF HEDGING.

We review on a periodic basis the carrying value of our crude oil and natural
gas properties under the applicable rules of the various regulatory agencies,
including the SEC. Under these rules, the carrying value of proved reserves of
crude oil and natural gas properties may not exceed the present value of
estimated future net after-tax cash flows from proved reserves, discounted at
10%. Application of this "ceiling" test generally requires pricing future
revenues at the unescalated prices in effect as of the end of our fiscal year
and requires a write down for accounting purposes if the ceiling is exceeded,
even if prices declined for only a short period of time. We may in the future be
required to write down the carrying value of our crude oil and natural gas
properties when crude oil and natural gas prices are depressed or unusually
volatile. Whether we will be required to take such a charge will depend on the
prices for crude oil and natural gas at the end of any fiscal period and the
effect of reserve additions or revisions and capital expenditures during such
period. If a write down is required, it would result in a charge to our earnings
but would not impact our cash flow from operating activities.

In order to reduce our exposure to short-term fluctuations in the price of crude
oil and natural gas and comply with the terms of our credit facility, we have
entered into commodity contracts. These arrangements apply to only a portion of
our production and provide only partial price protection against declines in
crude oil and natural gas prices. Our commodity contracts may expose us to risk
of financial loss in certain circumstances, including instances where production
is less than expected, our customers fail to purchase contracted quantities of
crude oil or natural gas or a sudden, unexpected event materially impacts crude
oil or natural gas prices. In addition, our commodity contracts may limit the
benefit to us of increases in the price of crude oil and natural gas.

WE MAY BE UNABLE TO ACQUIRE AND DEVELOP THE ADDITIONAL OIL AND GAS RESERVES THAT
ARE REQUIRED IN ORDER TO SUSTAIN OUR BUSINESS OPERATIONS.

In general, the volumes of production from crude oil and natural gas properties
decline as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to the extent we acquire properties containing
proved reserves or conduct successful development activities, or both, our
proved reserves will decline. Our future crude oil and natural gas production
is, therefore, highly dependent upon our level of success in finding or
acquiring additional reserves. Under the terms of our current credit facility
with Prospect, our ability to purchase additional oil and gas properties is
limited to a maximum of $100,000 cash on hand as of late September plus the net
proceeds from additional capital raises until we are in compliance with the
interest coverage covenant.

WE ARE SUBJECT TO SUBSTANTIAL OPERATING RISKS THAT MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.

The crude oil and natural gas business involves numerous operating hazards such
as well blowouts, mechanical failures, explosions, uncontrollable flows of crude
oil, natural gas or well fluids, fires, formations with abnormal pressures,
hurricanes, flooding, pollution, releases of toxic gas and other environmental
hazards and risks. We could suffer substantial losses as a result of any of
these events. While we carry general liability, control of well, and operator's
extra expense coverage typical in our industry, we are not fully insured against
all risks incident to our business.

We may not always be the operator of some of our wells. As a result, our
operating risks for those wells and our ability to influence the operations for
these wells will be less subject to our control. Operators of these wells may
act in ways that are not in our best interests. If this occurs, the development
of, and production of crude oil and natural gas from, some wells may not occur
which would have an adverse effect on our results of operations.

THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT US.

We depend to a large extent on the services of certain key management personnel,
including our executive officers, the loss of any of whom could have a material
adverse effect on our operations. In particular, our future success is dependent
upon Robert S. Herlin, our President, for capital raising, sourcing and
evaluating and closing deals, and oversight of development and operations.

THE LOSS OF ANY OF OUR SKILLED TECHNICAL PERSONNEL COULD ADVERSELY AFFECT OUR
BUSINESS.

We depend to a large extent on the services of skilled technical personnel to
operate and maintain our crude oil and natural gas fields. We do not have the
resources to perform all of these services and therefore we outsource our
requirements. Additionally, as our production increases, so does our need for
such services. Generally, we do not have long-term agreements with our drilling
and maintenance service providers. Accordingly, there is a risk that any of our
service providers could discontinue servicing our crude oil and natural gas
fields for any reason. Although we believe that we could establish alternative
sources for most of our operational and maintenance needs, any delay in
locating, establishing relationships, and training our sources could result in
production shortages and maintenance problems, with a resulting loss of revenue
to us. We also rely on third-party carriers for the transportation and
distribution of our production, the loss of any of which could have a material
adverse effect on our operations.

BECAUSE OUR CURRENT GAS PRODUCING FIELD HAS ONLY ONE GAS PIPELINE OUTLET, OUR
BUSINESS WOULD BE ADVERSELY AFFECTED IF WE LOST ACCESS TO THAT OUTLET.

All of our natural gas sales are made via one gas pipeline connection. Our
ability to sell natural gas would be adversely affected if the operators of this
pipeline refused to or were unable to accept our gas. We have had infrequent
sales curtailment due to gas quality issues resulting from operational problems
with our gas treating facility that we believe have been rectified. Our only
alternative in such event would be to permit and construct a new pipeline
connection to a pipeline located several miles from the field and which could
require re-locating our gas treating facility.

WE MAY HAVE DIFFICULTY MANAGING FUTURE GROWTH AND THE RELATED DEMANDS ON OUR
RESOURCES AND MAY HAVE DIFFICULTY IN ACHIEVING FUTURE GROWTH.

We hope to experience rapid growth through acquisitions and development
activity. Any future growth may place a significant strain on our financial,
technical, operational and administrative resources. Our ability to grow will
depend upon a number of factors, including:

o our ability to identify and acquire new development or acquisition
prospects;

o our ability to develop existing properties;

o our ability to continue to retain and attract skilled personnel;

o the results of our development program and acquisition efforts;

o the success of our technologies;

o hydrocarbon prices;

o our ability to successfully integrate new properties; and

o our access to capital.

We can not assure you that we will be able to successfully grow or manage any
such growth.

WE FACE STRONG COMPETITION FROM LARGER CRUDE OIL AND NATURAL GAS COMPANIES.

Our competitors include major integrated crude oil and natural gas companies and
numerous independent crude oil and natural gas companies, individuals and
drilling and income programs. Many of our competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than we have. We may not be able to successfully
conduct our operations, evaluate and select suitable properties and consummate
transactions in this highly competitive environment. Specifically, these larger
competitors may be able to pay more for development projects and productive
crude oil and natural gas properties and may be able to define, evaluate, bid
for and purchase a greater number of properties and prospects than our financial
or human resources permit. In addition, such companies may be able to expend
greater resources on the existing and changing technologies that we believe are
and will be increasingly important to attaining success in our industry.

THE CRUDE OIL AND NATURAL GAS RESERVES INCLUDED IN THIS PROSPECTUS ARE ONLY
ESTIMATES AND MAY PROVE TO BE INACCURATE.

There are numerous uncertainties inherent in estimating crude oil and natural
gas reserves and their estimated values. The reserves discussed in this
prospectus are only estimates that may prove to be inaccurate because of these
uncertainties. Reservoir engineering is a subjective and inexact process of
estimating underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner. Estimates of economically recoverable crude oil and
natural gas reserves depend upon a number of variable factors, such as
historical production from the area compared with production from other
producing areas and assumptions concerning effects of regulations by
governmental agencies, future crude oil and natural gas prices, future operating
costs, severance and excise taxes, development costs and work-over and remedial
costs. Some or all of these assumptions may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of crude oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers but at different times, may vary
substantially. Accordingly, reserve estimates may be subject to downward or
upward adjustment. Actual production, revenue and expenditures with respect to
our reserves will likely vary from estimates, and such variances may be
material. The information regarding discounted future net cash flows included in
this prospectus should not be considered as the current market value of the
estimated crude oil and natural gas reserves attributable to our properties. As
required by the SEC, the estimated discounted future net cash flows from proved
reserves are based on prices and costs as of the date of the estimate, while
actual future prices and costs may be materially higher or lower. Actual future
net cash flows also will be affected by factors such as the amount and timing of
actual production, supply and demand for crude oil and natural gas, increases or
decreases in consumption, and changes in governmental regulations or taxation.
In addition, the 10% discount factor, which is required by the SEC to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with us or the crude oil and
natural gas industry in general.

WE CANNOT MARKET THE CRUDE OIL AND NATURAL GAS THAT WE PRODUCE WITHOUT THE
ASSISTANCE OF THIRD PARTIES.

The marketability of the crude oil and natural gas that we produce depends upon
the proximity of our reserves to, and the capacity of, facilities and
third-party services, including crude oil and natural gas gathering systems,
pipelines, trucking or terminal facilities, and processing facilities. The
unavailability or lack of capacity of such services and facilities could result
in the shut-in of producing wells or the delay or discontinuance of development
plans for properties. A shut-in or delay or discontinuance could adversely
affect our financial condition. In addition, federal and state regulation of
crude oil and natural gas production and transportation could affect our ability
to produce and market our crude oil and natural gas on a profitable basis.

THE TYPES OF RESOURCES WE FOCUS ON HAVE CERTAIN RISKS.

Our business plan focuses on the acquisition and development of shallower, more
complex and/or lower permeability reservoirs. Shallow reservoirs usually have
lower pressure and, necessarily, less hydrocarbons in place, complex reservoirs
are more difficult to analyze and exploit, and low permeability reservoirs
require more wells and stimulation for development and such wells may have low
profit margins.

In addition, the mature fields we currently own have well bores that were
drilled as early as the 1920s. As such, they contain older down-hole equipment
and casing that is more subject to failure than new equipment. The failure of
such equipment or other subsurface failure can result in the complete loss of a
well.

CRUDE OIL AND NATURAL GAS DEVELOPMENT, RE-COMPLETION OF WELLS FROM ONE RESERVOIR
TO ANOTHER RESERVOIR, AND RESTORING WELLS TO PRODUCTION ARE SPECULATIVE
ACTIVITIES AND INVOLVE NUMEROUS RISKS AND SUBSTANTIAL AND UNCERTAIN COSTS.

Our growth will be materially dependent upon the success of our future
development program. Drilling for crude oil and natural gas and re-working
existing wells involve numerous risks, including the risk that no commercially
productive crude oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is substantial and uncertain, and
drilling operations may be curtailed, delayed or cancelled as a result of a
variety of factors beyond our control, including:

o unexpected drilling conditions;

o pressure or irregularities in formations;

o equipment failures or accidents;

o inability to obtain leases on economic terms, where applicable;

o adverse weather conditions;

o compliance with governmental requirements; and

o shortages or delays in the availability of drilling rigs or crews
and the delivery of equipment.

Drilling or re-working is a highly speculative activity. Even when fully and
correctly utilized, modern well completion techniques such as hydraulic
fracturing and lateral drilling do not guarantee that we will find crude oil
and/or natural gas in our wells. Hydraulic fracturing involves pumping a fluid
with or without particulates into a formation at high pressure, thereby creating
fractures in the rock and leaving the particulates in the fractures to ensure
that the fractures remain open, thereby potentially increasing the ability of
the reservoir to produce oil or gas. Lateral drilling involves drilling
horizontally out from an existing vertical well bore, thereby potentially
increasing the area and reach of the well bore that is in contact with the
reservoir. Our future drilling activities may not be successful and, if
unsuccessful, such failure would have an adverse effect on our future results of
operations and financial condition. We cannot assure you that our overall
drilling success rate or our drilling success rate for activities within a
particular geographic area will not decline. We may identify and develop
prospects through a number of methods, some of which do not include lateral
drilling or hydraulic fracturing, and some of which may be unproven. The
drilling and results for these prospects may be particularly uncertain. Our
drilling schedule may vary from our capital budget. The final determination with
respect to the drilling of any scheduled or budgeted prospects will be dependent
on a number of factors, including, but not limited to:

o the results of previous development efforts and the acquisition,
review and analysis of data;

o the availability of sufficient capital resources to us and the other
participants, if any, for the drilling of the prospects;

o the approval of the prospects by other participants, if any, after
additional data has been compiled;

o economic and industry conditions at the time of drilling, including
prevailing and anticipated prices for crude oil and natural gas and
the availability of drilling rigs and crews;

o our financial resources and results;

o the availability of leases and permits on reasonable terms for the
prospects; and

o the success of our drilling technology.

We cannot assure you that these projects can be successfully developed or that
the wells discussed will, if drilled, encounter reservoirs of commercially
productive crude oil or natural gas. There are numerous uncertainties in
estimating quantities of proved reserves, including many factors beyond our
control.

CRUDE OIL AND NATURAL GAS PRICES ARE HIGHLY VOLATILE IN GENERAL AND LOW PRICES
WILL NEGATIVELY AFFECT OUR FINANCIAL RESULTS.

Our revenues, profitability, cash flow, future growth and ability to borrow
funds or obtain additional capital, as well as the carrying value of our
properties, are substantially dependent upon prevailing prices of crude oil and
natural gas. Lower crude oil and natural gas prices also may reduce the amount
of crude oil and natural gas that we can produce economically. Historically, the
markets for crude oil and natural gas have been very volatile, and such markets
are likely to continue to be volatile in the future. Prices for crude oil and
natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for crude oil and natural gas, market
uncertainty and a variety of additional factors that are beyond our control,
including:

o the level of consumer product demand;

o weather conditions;

o domestic and foreign governmental regulations;

o the price and availability of alternative fuels;

o political conditions;

o the foreign supply of crude oil and natural gas; and

o the price of foreign imports and overall economic conditions.

It is impossible to predict future crude oil and natural gas price movements.
Declines in crude oil and natural gas prices may materially adversely affect our
financial condition, liquidity, ability to finance planned capital expenditures
and results of operations.

GOVERNMENT REGULATION AND LIABILITY FOR ENVIRONMENTAL MATTERS MAY ADVERSELY
AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.

Crude oil and natural gas operations are subject to extensive federal, state and
local government regulations, which may be changed from time to time. Matters
subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of crude oil and natural gas wells below actual production capacity
in order to conserve supplies of crude oil and natural gas. There are federal,
state and local laws and regulations primarily relating to protection of human
health and the environment applicable to the development, production, handling,
storage, transportation and disposal of crude oil and natural gas, by-products
thereof and other substances and materials produced or used in connection with
crude oil and natural gas operations. In addition, we may inherit liability for
environmental damages caused by previous owners of property we purchase or
lease. As a result, we may incur substantial liabilities to third parties or
governmental entities. We are also subject to changing and extensive tax laws,
the effects of which cannot be predicted. The implementation of new, or the
modification of existing, laws or regulations could have a material adverse
effect on us.

WE MAY INCUR SIGNIFICANT PENALTIES IF THIS REGISTRATION STATEMENT IS NOT
DECLARED EFFECTIVE OR ITS EFFECTIVENESS IS NOT MAINTAINED.

In May of 2005, under the terms of our private placement of 1,200,000 shares of
our common stock to a European institutional investor Fund, we contemporaneously
entered into a registration rights agreement (the "RRA"). The RRA requires us,
among other things, to obtain and maintain an effective registration statement
with the SEC for this investor's shares, failing which, subjects us to the
payment of penalties not to exceed 1% of the share proceeds, or $30,000, for
each month of non-compliance. Penalties are incurred for each month for which a
registration statement has not become effective, beginning October 6, 2005.
Penalties may also be incurred for any month for which effectiveness has not
been maintained prior to the shares becoming tradable under Rule 144, but in no
event can the penalty cumulatively exceed 8% or $240,000. The registration
statement was not declared effective as of October 6, 2005. Accordingly, we will
be required to make at least one $30,000 payment to this investor. We can give
no assurance that this registration statement will become or be maintained
effective. Accordingly, we have accrued, against our equity account $100,000 for
penalties and other transaction costs which may become due.

RISKS RELATED TO OUR STOCK

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VERY VOLATILE.

Our common stock is thinly traded and the market price has been, and is likely
to continue to be, highly volatile. During the twelve months prior to September
30, 2005, our stock price as traded on the OTC Bulletin Board has ranged from
$1.00 to $3.47. The variance in our stock price makes it extremely difficult to
forecast with any certainty the stock price at which you may be able to buy or
sell shares of our common stock. The market price for our common stock could be
subject to wide fluctuations as a result of factors that are out of our control,
such as:

o actual or anticipated variations in our results of operations;

o naked short selling of our common stock and stock price
manipulation;

o changes or fluctuations in the commodity prices of crude oil and
natural gas;

o general conditions and trends in the crude oil and natural gas
industry; and

o general economic, political and market conditions.

PRESENT MANAGEMENT AND DIRECTORS CURRENTLY CONTROL THE ELECTION OF OUR DIRECTORS
AND ALL OTHER MATTERS SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL.

Our executive officers and directors, in the aggregate, beneficially own
approximately 38% of our outstanding common stock. Further, our Chairman of the
Board, Mr. Laird Q. Cagan, Managing Director of Cagan McAfee Capital Partners,
LLC ("CMCP") currently owns or controls, directly or indirectly, approximately
7.7 million shares (including shares issuable upon the exercise of warrants), or
approximately 31% of our outstanding common stock. Mr. Eric McAfee, also a
Managing Director of CMCP, currently owns or controls, directly or indirectly,
approximately 5.9 million shares (including shares issuable upon the exercise of
warrants), or approximately 24% of our outstanding common stock. Collectively,
these two individuals of CMCP currently own or control, directly or indirectly,
approximately 13.6 million shares (including shares issuable upon the exercise
of warrants), or approximately 54% of our outstanding common stock. As a result,
these holders of our outstanding common stock, if they were to act together,
would be able to exercise control over all matters submitted to our stockholders
for approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets). This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of our company, impede a merger, consolidation,
takeover or other business combination involving our company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of our company, which in turn could have an adverse effect on the market
price of our common stock.

"PENNY STOCK" REGULATIONS MAY RESTRICT THE MARKETABILITY OF OUR COMMON STOCK.

The SEC's regulations generally define "penny stock" to be an OTC Bulletin Board
("OTCBB") stock that has a market price of less than $5.00 per share. Our common
stock may be subject to rules that impose additional sales practice requirements
on broker-dealers who sell these securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000, or annual incomes exceeding $200,000 or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of these securities and have
received the purchaser's prior written consent to the transaction.

Additionally, for any transaction, other than exempt transactions, involving a
penny stock, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability to sell our common stock in the secondary market.

THE MARKET FOR OUR COMMON STOCK IS LIMITED AND MAY NOT PROVIDE ADEQUATE
LIQUIDITY.

Our common stock is currently thinly traded on the OTC Bulletin Board, a
regulated quotation service that displays real-time quotes, last-sale prices,
and volume information in over-the-counter equity securities. As a result, an
investor may find it more difficult to dispose of, or obtain accurate quotations
as to the price of, our securities than if the securities were traded on the
NASDAQ Stock market, or another national exchange. There are a limited number of
active market makers of our common stock. In order to trade shares of our common
stock you must use one of these market makers unless you trade your shares in a
private transaction. In the twelve months prior to September 30, 2005, the
actual trading volume in our common stock ranged from a low of no shares of
common stock traded to a high of over 300,000 shares of common stock traded,
with 107 days exceeding a trading volume of 10,000 shares. On most days, this
trading volume means there is limited liquidity in our shares of common stock.
As of the date of this prospectus, the current three-month average trading
volume is approximately 40,000 shares. Selling our shares is more difficult
because smaller quantities of shares are bought and sold and news media coverage
about us is limited. These factors result in a limited trading market for our
common stock and therefore holders of our stock may be unable to sell shares
purchased should they desire to do so.

IF SECURITIES OR INDUSTRY ANALYSTS DO NOT PUBLISH RESEARCH REPORTS ABOUT OUR
BUSINESS OR IF THEY DOWNGRADE OUR STOCK, THE PRICE OF OUR COMMON STOCK COULD
DECLINE.

Small, relatively unknown companies can achieve visibility in the trading market
through research and reports that industry or securities analysts publish.
However, to our knowledge, no analysts cover our company. The lack of published
reports by independent securities analysts could limit the interest in our
common stock and negatively affect our stock price. We do not have any control
over the research and reports these analysts publish or whether they will be
published at all. If any analyst who does cover us downgrades our stock, our
stock price would likely decline. If any analyst ceases coverage of our company
or fails to regularly publish reports on us, we could lose visibility in the
financial markets, which in turn could cause our stock price to decline.

THE ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK WOULD DILUTE EXISTING
STOCKHOLDERS.

We are authorized to issue up to 100,000,000 shares of common stock. To the
extent of such authorization, our board of directors has the ability, without
seeking stockholder approval, to issue additional shares of common stock in the
future for such consideration as our board may consider sufficient. The issuance
of additional common stock in the future will reduce the proportionate ownership
and voting power of the common stock now outstanding. We are also authorized to
issue up to 5,000,000 shares of preferred stock, the rights and preferences of
which may be designated in series by our board of directors. Such designation of
new series of preferred stock may be made without stockholder approval, and
could create additional securities which would have dividend and liquidation
preferences over the common stock now outstanding. Preferred stockholders could
adversely affect the rights of holders of common stock by:

o exercising voting, redemption and conversion rights to the detriment
of the holders of common stock;

o receiving preferences over the holders of common stock regarding or
surplus funds in the event of our dissolution or liquidation;

o delaying, deferring or preventing a change in control of our
company; and

o discouraging bids for our common stock.

SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.

As of September 15, 2005, we had outstanding 24,777,534 shares of common stock,
of which approximately 23,740,000 shares were "restricted securities" (as that
term is defined in Rule 144 promulgated under the Securities Act of 1933). Other
than the shares being registered for resale by this prospectus, only
approximately 1,036,000 shares are currently freely tradable shares without
further registration under the Securities Act. However, as a result of the
registration of the shares included in this prospectus, an additional 5,191,445
shares of our currently outstanding common stock will be able to be freely sold
on the market, which number will increase to 6,441,445 shares if the warrants
are exercised by the selling stockholders and the underlying 1,250,000 shares
that are included in this prospectus are purchased. Because there currently are
only approximately 1,036,000 freely tradable shares, the release of 5,191,445
additional freely trading shares included in this prospectus onto the market, or
the perception that such shares will or could come onto the market, could have
an adverse affect on the trading price of the stock.

In addition to the shares that are being registered for re-sale under this
prospectus, an additional 18,000,000 shares of restricted stock became eligible
for public resale under Rule 144 as of June 30, 2005. Although Rule 144
restricts the number of shares that any one holder can sell during any
three-month period under Rule 144, because more than one stockholder holds these
restricted shares, a significant number of shares can now be sold under Rule
144. We cannot predict the effect, if any, that sales of the shares included in
the registration statement or subject to Rule 144 sales, or the availability of
such shares for sale, will have on the market prices prevailing from time to
time. Nevertheless, the possibility that substantial amounts of our common stock
may be sold in the public market may adversely affect prevailing market prices
for our common stock and could impair our ability to raise capital through the
sale of our equity securities.

WE DO NOT PLAN TO PAY ANY CASH DIVIDENDS ON OUR COMMON STOCK.

We have not paid any dividends on our common stock to date and do not anticipate
that we will be paying dividends in the foreseeable future. Any payment of cash
dividends on our common stock in the future will be dependent upon the amount of
funds legally available, our earnings, if any, our financial condition, our
anticipated capital requirements and other factors that our board of directors
may think are relevant. However, we currently intend for the foreseeable future
to follow a policy of retaining all of our earnings, if any, to finance the
development and expansion of our business and, therefore, do not expect to pay
any dividends on our common stock in the foreseeable future. Additionally, we
are currently restricted from paying dividends pursuant to the terms of our
credit agreement.

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements, which reflect the views of
our management with respect to future events and financial performance. Certain
of the statements contained in all parts of this document including, but not
limited to, those relating to our acquisition and development plans, the effect
of changes in strategy and business discipline, our project portfolio, future
general and administrative expenses on a per unit of production basis, increases
in wells operated, future growth, expansion and acquisitions, future
exploration, future seismic data (including timing and results), purchase of
technology licenses and their value and application, expansion of operations,
generation of additional prospects, review of outside generated prospects and
acquisitions, additional reserves and reserve increases, enhancement of
visualization and interpretation strengths, expansion and improvement of
capabilities, integration of new technology into operations, credit facilities,
attraction of new members to our exploration team, future compensation programs,
new focus on core areas, new prospects and drilling locations, future capital
expenditures (or funding thereof), sufficiency of future working capital,
borrowings and capital resources and liquidity, projected cash flows from
operations, expectation or timing of reaching payout, outcome, effects or timing
of any legal proceedings, drilling plans, including scheduled and budgeted
wells, the number, timing or results of any wells, the plans for timing,
interpretation and results of new or existing seismic surveys or seismic data,
future production or reserves, future acquisition of leases, lease options or
other land rights and any other statements regarding future operations,
financial results, opportunities, growth, business plans and strategy and other
statements that are not historical facts are forward looking.

These forward-looking statements reflect our current view of future events and
financial performance. When used in this document, the words "budgeted,"
"anticipate," "estimate," "expect," "may," "project," "believe," "intend,"
"plan," "potential" and similar expressions are intended to be among the
statements that identify forward looking statements. These forward-looking
statements speak only as of their dates and should not be unduly relied upon. We
undertake no obligation to update or review any forward-looking statement,
whether as a result of new information, future events, or otherwise. Such
statements involve risks and uncertainties, including, but not limited to, the
numerous risks and substantial and uncertain costs associated with drilling of
new wells, the volatility of crude oil and natural gas prices and the effects of
relatively low prices for our products, conducting successful exploration and
development in order to maintain reserves and revenue in the future, operating
risks of crude oil and natural gas operations, our dependence on key personnel,
our ability to utilize changing technology and the risk of technological
obsolescence, the significant capital requirements of our exploration and
development and technology development programs, governmental regulation and
liability for environmental matters, results of litigation, management of growth
and the related demands on our resources and the ability to achieve future
growth, competition from larger crude oil and natural gas companies, the
potential inaccuracy of estimates of crude oil and natural gas reserve data,
property acquisition risks, and other factors detailed in this document and our
other filings with the SEC. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
will likely vary materially from those indicated. For a discussion of some of
the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the
information under "Risk Factors" beginning on page 3.

You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common stock
means that information contained in this prospectus is correct after the date of
this prospectus. This prospectus is not an offer to sell or solicitation of an
offer to buy these securities in any circumstances under which the offer or
solicitation is unlawful.

USE OF PROCEEDS

We will not receive any proceeds from the sale of our common stock by the
selling stockholders pursuant to this prospectus. However, we will receive the
sale price of any common stock we sell to the selling stockholders upon exercise
by them of their warrants. If warrants to purchase all of the underlying
1,250,000 shares are exercised for cash, we would receive approximately
$1,122,000 of total proceeds. We would expect to use these proceeds, if any, for
general working capital purposes. We have agreed to pay the expenses of
registration of these shares, including specified legal and accounting fees.

MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the OTC Bulletin Board National Association of
Securities Dealers Automated Quotation System under the symbol "NGSY" and its
predecessor symbol "RLYI". Market quotations shown below were reported by Media
General Financial Services and represent prices between dealers, excluding
retail mark-up or commissions, and adjusted for the 40:1 stock split that
occurred on February 5, 2004.

2005 2004 2003
------------- ------------- -------------
Quarter Ended High Low High Low High Low
--------------------- ----- ----- ----- ----- ----- -----
December 31 (through
October 10, 2005,
with Respect to 2005) $2.05 $1.70 $2.30 $1.45 $1.60 $0.64

September 30 $2.05 $1.00 $3.75 $2.05 $2.60 $1.20

June 30 $3.47 $1.32 $4.75 $0.91 $1.80 $0.60

March 31 $2.30 $1.55 $3.25 $0.65 $1.80 $0.20

At August 31, 2005, we had 1,044 shareholders of record. We have never paid a
cash dividend and we do not expect to pay any cash dividends in the foreseeable
future. Earnings, if any, are expected to be reinvested in business activities.
No stock has been repurchased by us since the merger of Old NGS into us in May,
2004.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

On August 3, 2004, shareholders approved the adoption of our 2004 Stock Plan. As
of October 10, 2005, options to purchase 1,736,000 shares had been granted under
the 2004 Stock Plan and 145,000 shares were issued directly under the same plan.
The purpose of the 2004 Stock Plan is to grant equity compensation in the form
of stock grants, options or warrants to purchase our common stock to our
employees and key consultants.

Number of Number of securities
securities to remaining
be issued Weighted-average available for future
upon exercise exercise issuance under
of outstanding price of equity compensation
options, outstanding plans (excluding
warrants and options, warrants securities reflected
Plan category rights(a) and rights(b) in column(a))(c)
-------------- ------------------ --------------------

Equity compensation plans approved by
security holders 2,391,000(1) $1.22 2,119,000

Equity compensation plans not approved by
security holders 1,212,467(2) $1.24 --

Total 3,603,467 $1.22 2,119,000

(1) On May 26, 2004, we, as Reality Interactive, Inc., executed an Agreement and
Plan of Merger with Natural Gas Systems, Inc., a Delaware corporation (the
"Merger"). In connection with the Merger, we assumed the obligations of 600,000
stock options under our newly acquired subsidiary's 2003 Stock Option Plan. As
of October 10, 2005, 510,000 shares remain issuable upon exercise under the 2003
Stock Option Plan and no further options shall be issued thereunder. As of
October 10, 2005, there were 1,736,000 shares of common stock issued or issuable
upon exercise of outstanding options and 145,000 shares issued directly under
the 2004 Stock Plan (88,750 shares of which remain subject to reverse vesting at
October 10, 2005), leaving 2,119,000 shares of common stock available for
issuance.

(2) In addition to assuming certain obligations listed in footnote 1 above, in
connection with the Merger we also assumed outstanding warrants to purchase
319,931 shares of common stock at an exercise price of $1.00, with a seven year
term (warrants). We issued 240,000 of these warrants to CMCP and their assigns
in connection with arranging the merger and 79,921 were issued to Laird Q.
Cagan, Chadbourn Securities and their assigns in connection with capital raising
services. Subsequently, we issued a warrant to purchase 92,536 shares of common
stock to Laird Q. Cagan, Chadbourn Securities and their assigns in connection
with capital raising services , warrants to purchase 262,500 shares of common
stock to Tatum Partners in connection with Mr. Herlin's employment, and a
warrant to purchase 50,000 shares for capital raising services in connection
with the loan agreement with Prospect Energy Corporation; a warrant to purchase
287,500 shares of common stock in connection with Mr. Herlin's employment
agreement with the Company, and a warrant to purchase 200,000 shares in
connection with Mr. Mazzanti's employment agreement with the Company.

DIVIDENDS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

As used herein, the term "three months ended December 31, 2003" refers to our
inception date, September 23, 2003, through December 31, 2003.

RESULTS OF OPERATIONS

We did not commence our crude oil and natural gas operations until October 2003.
Accordingly, our comparative results are limited.

During the twelve months ended June 30, 2005, we generated revenues of
$1,635,187, as compared to $118,158 for the six months ended June 30, 2004 and
$24,229 for the three months ended December 31, 2003, producing net losses of
$2,164,571, $1,027,682 and $336,905 for the same respective periods. Excluding
non-cash compensatory stock expense, our net losses were $1,457,454, $919,068
and $286,505 for the twelve month, six month and three month periods of 2005,
2004 and 2003, respectively. On an annualized basis, our net loss improved 21%,
excluding non-cash compensatory stock expense.

Our results of operations were positively impacted by the following events
during the fiscal year 2005:

o Began our first natural gas sales from our Delhi Field in July 2004,

o Closed two acquisitions of producing properties in the Tullos Field
Area in September 2004 and February 2005.

o Re-completed the Delhi Ut. #184-2 as a gas well with initial
production rate of almost 400 MCFD.

o Re-completed the Delhi Ut. #87-2 as a flowing oil well at an initial
rate of 90 BOPD and 35 MCFD and original reservoir pressure, which
is being produced at a lower rate as described below.

o Completed the first phase of mapping of the Delhi Field and
identified 15 locations to be drilled.

Our revenues have continued to increase substantially each quarter, albeit at a
slower rate of change than anticipated. Specifically, our operating results for
the year ended June 30, 2005 were adversely impacted by the following events:

o The re-completion of the Delhi Ut. #87-2 did not begin production
until April 2005 and encountered mechanical problems in the (65 year
old) well bore that severely reduced production in May and June
2005. Following a series of workovers to repair the damage, we
elected to defer further work and produce the well at a lower rate
of 30-35 BOPD, compared to the initial rate of 90 BOPD, in order to
lower the possibility of further damage. Correspondingly, we
anticipate drilling a replacement well as part of our current
development program that is expected to be higher in structure than
the 87-2 and, therefore, should recover attic reserves that are
otherwise not producible from the 87-2 well.

o Our second most significant oil well, the Delhi Ut. #197-2,
continued to experience constrained production and numerous
non-production days due to sand production. The current production
level of about 10-15 BOPD appears to minimize sand influx and
substantially reduce workover costs and downtime.

o Our most significant gas well, the Delhi Ut. #184-2, suffered
plugging by ash material produced by the formation. Consequently,
the well is producing at a curtailed rate until we initiate a
cleanup and treatment.

o Heavy rains prevented regular lease maintenance and repairs from
January through early April 2005, particularly in our Tullos Field
Area. As the wells in the Tullos Field Area require a high level of
maintenance and repairs, our production was significantly reduced in
those months.

o Extensive rains also prevented most development work in all fields.
Roads could not be built for new locations and existing roads could
not be maintained to allow crude oil trucks to pick up product.

o The high industry demand for workover service rigs resulted in our
losing access to vendor equipment during March and April 2005 due to
the weather and the vendors' moving of inactive equipment to other
parts of the region not so adversely impacted by the weather.

o The properties purchased in the Tullos Field Area were transferred
without the normally available well plats, geological maps and well
histories. Consequently, our development plan for Tullos Field has
been delayed while we reproduce or locate much of this information
necessary to more efficiently produce the wells, collect and dispose
of water and identify precise disposal needs and workover
opportunities.

o Our general and administrative costs have been affected by the
increased costs of Rule 144 stock that required substantial legal
work, recruitment costs, including sign on bonuses, in a tight
market for skilled energy staff, and the relatively high cost of
being a public company in our early stages of growth.

The following remedial actions have been or are planned to be taken:

o We are producing the 87-2 well at a reduced rate to limit the
potential of further mechanical problems while scheduling a
replacement well to be drilled up structure to recover additional
reserves as well.

o We are evaluating alternative lift mechanisms for the Delhi Ut.
#197-2 well that may be more resistant to sand production.

o We are planning to stimulate the 184-2 well following completion of
the first few wells in our drilling program.

o We have nearly completed the reconstruction of the Tullos Field
Area's records and maps.

o We are developing a program of improving the roads and lease
batteries in key areas of the Tullos Field Area and are evaluating
the movement of certain tank batteries to locations more resistant
to rain.

o We are replacing certain high maintenance beam pumps with
submersible pumps in the Tullos Field Area, potentially reducing
maintenance expense and production downtime.

o We have arranged for a local well service company to activate and
dedicate a service rig to our priority use in the Tullos Field Area.

Following is a summary of the progress we have made in both sales volumes and
revenues, net to our interest:

Three months ended
units 12/31/2003 3/31/2004 6/30/2004 9/30/2004 12/31/2004 3/31/2005 6/30/2005
------- ---------- --------- --------- --------- ---------- --------- ---------

Oil & Gas revenues $ $24,229 $48,572 $69,586 $231,167 $365,768 $402,305 $635,948

Oil volumes sold BO 857 1,498 1,934 3,955 5,234 6,545 12,644

Gas volumes sold MMBTU -- -- 110 11,252 15,679 16,378 10,828

Barrels of oil equivalent sold BOE 857 1,498 1,952 5,830 7,847 9,275 14,449

Oil price (excludes price
risk management activities) $BBL $28.29 $32.43 $35.64 $42.66 $47.94 $47.61 $50.78
Gas price (excludes price
risk management activities) $/MMBTU -- -- $5.90 $5.55 $7.32 $6.71 $6.35

Operating cost BOE $92.54 $43.20 $43.17 $26.38 $24.14 $25.97 $24.39

Depreciation, depletion &
amortization ("DD&A") BOE $16.29 $9.06 $14.33 $6.88 $6.88 $6.01 $7.12

Highlights of our performance since beginning our oil and gas operations, as
shown in the table above:

o We have increased revenues for each quarter.

o We have increased sales volumes for each quarter, with average daily
sales increasing from 9 BOEPD during the three months ended December
31, 2003 to 103 BOEPD, net to our interest.

o We have reduced operating costs per BOE.

o We have consistently reduced DD&A, due to lower acquisition costs
per BOE on recent field purchases.

General and administrative expenses increased for the year ended June 30, 2005
to $2,220,780, as compared to $912,761 for the six months ended June 30, 2004
and $239,093 for the three months ended December 31, 2003. Of the amount
incurred in fiscal 2005, $707,117 was due to non-cash charges for stock
compensation expense (largely attributable to the Tatum contract re-negotiation)
as compared to $108,614 of similar non-cash charges for the six months ended
June 30, 2004 and $50,400 for the three months ended December 31, 2003.

Also included in general and administrative expenses for the twelve month period
ended June 30, 2005 and the six months ended June 30, 2004, are significant
costs of being a public company. Such costs include additional audit, tax,
legal, printing, stock transfer, annual proxy statement preparation, merger
expenses and similar costs incurred by public companies. Merger fees and
expenses related to the merger of Old NGS into a subsidiary of Reality amounted
to $370,000 for the six month period ended June 30, 2004. Old NGS was not a
public company until its merger with us in May 2004.

PRODUCT PRICES AND PRODUCTION

Refer to "Markets and Customers", for a discussion of oil and gas prices and
marketing.

Although product prices are key to our ability to operate profitably and to
budget capital expenditures, they are beyond our control and are difficult to
predict. Gas sales are completed on a BTU basis and the gas pipeline measures
the BTU content at the delivery point. The gas produced at the Delhi Field is
high BTU, with over 1100 BTU per cubic foot of gas from the dry gas wells, and
over 1300 BTU in gas associated with the oil wells. Due to the low initial
production volumes, the Company utilizes a J-T gas processing unit that strips
out most of the heavier liquids, in accordance with the sales pipeline criteria.
However, the J-T unit is not as efficient as more costly methods such as
cryogenic separation, thus the sales gas heat content of 1117 BTU per cubic foot
(as of August, 2004) being delivered to the gas sales pipeline is higher than
the standard of 1000 BTU per cubic foot. When gas production volume increases to
a sufficient level, we may switch to a more efficient processing unit.

Increases in oil and natural gas volumes for the twelve months ended June 30,
2005, the six months period ended June 30, 2004 and the three months ended
December 31, 2003 were a result of more months in the period, the successful
workovers and restoration to production of several wells and the acquisitions of
additional producing properties.

Refer to "Significant Properties, Estimated Proved Crude Oil and Natural Gas
Reserves and Future Net Revenues" and "Production, Average Sales Prices and
Average Production Costs" for disclosures regarding reserve values and for a
summary on production, average sales prices and average production costs.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2005, we had $2,548,688 of unrestricted cash and positive working
capital of $2,599,232, as compared to negative working capital of $383,352 at
June 30, 2004, and negative working capital of $360,749 at December 31, 2003.
Our working capital of $2,599,232 at June 30, 2005 was positively impacted by
the funded debt and equity we received under the Prospect Facility and the funds
we received from the sale of our common stock to a European institutional
investor and a number of accredited investors, the proceeds of which were used
to pay off most of our short-term debt and to replenish our working capital.

Cash flow used by our operating activities was $1,077,535 for the twelve months
ended June 30, 2005, as compared to $854,350 used during the six months ended
June 30, 2005 and $247,003 used during the three months ended December 31, 2003.
On an annualized basis, cash flow used by operating activities improved 37% in
fiscal 2005, as compared to the six months ended June 30, 2004. The improvement
was mostly attributable to $735,573 of cash flow provided from field operations
in the twelve months ended June 30, 2005, as compared to $24,405 used in field
operations for the six months ended June 30, 2004.

Cash flow used by investing activities was $2,778,623 for the twelve months
ended June 30, 2005. Of the major investing activities, approximately $1,504,000
was used to acquire oil and gas properties in the Tullos Urania Field Area,
$553,543 was used to develop our oil and gas properties and $560,000 was used to
comply with the debt service reserve account under the Prospect Facility. This
compares to $4,194 used by investing activities during the six months ended June
30, 2004, and $1,805,485 for the three months ended December 31, 2003. Of the
major investing activities in the three months ended December 31, 2003,
$1,290,560 was invested in oil and gas properties, mostly to acquire our Delhi
Field, and $301,835 was used to fund a Site Specific Trust Fund with the state
of Louisiana for future plugging and abandonment related to the acquisition of
our Delhi Field.

During the twelve months ended June 30, 2005, we increased our debt, net of
repayments, by $2,081,511 and replaced short-term debt with long-term debt under
the Prospect Facility. We also raised gross proceeds from equity sales totaling
$4,729,091, of which $3,580,083 was received from the sale of 1,594,200 shares
of our common stock and the issuance of 235,000 shares of our common stock upon
the exercise of options and direct stock awards granted under our 2004 Stock
Plan. The remaining $1,149,008 was raised through the sale of warrants to
Prospect Energy as described under "Common Stock, Options and Warrants" in Note
8 to our consolidated financial statements.

These debt and equity issuances have allowed us to:

o Better match our long-term asset base with a longer term debt
structure, while also relieving our liquidity issues. This is in
sharp contrast to our previous debt structure that was comprised
entirely of short-term debt.

o Further strengthen our balance sheet through sales of additional
equity securities.

o Close the acquisition of additional oil and gas properties in the
Tullos Urania, Colgrade and Crossroads field area where we already
owned existing offset production acquired in September 2004
(together, the "Tullos Field Area"), thus potentially increasing our
cash flow from operations through both increased production and
synergies with our existing properties.

o Initiate further development of our existing oil and gas properties
in accordance with our business plan to exploit known petroleum
resources.

o Continue to seek additional acquisition candidates in accordance
with our business plan.

Our most significant financing transactions included:

o On May 6, 2005, we closed a private placement of 1,200,000 shares of
our common stock with a European institutional investor, at a $2.50
price per share. The gross proceeds to us from this offering were
$3,000,000 before payment of a $240,000 placement fee to Chadbourn
Securities and Laird Q. Cagan, the Chairman of our board of
directors. We also issued Chadbourn Securities and Mr. Cagan
warrants to purchase up to a total of 96,000 shares of our common
stock at a price of $2.50 per share.

o On February 3, 2005, we closed the Prospect Facility and drew down
$3,000,000, and on March 16, 2005 we drew down an additional
$1,000,000 on the total $4,800,000 commitment. The draws were used
to fund the February 2005 acquisition of properties in Louisiana,
costs of the financing, funding of a debt service reserve fund,
repayment of the Bridge Loan, immediate re-development of our
existing properties and for working capital purposes. After taking
into account the effect of the completion of the February 2005
acquisition of properties (see Note 2 to our consolidated financial
statements), the closing of the Prospect Facility and our recent
private placement of common stock described above, and before taking
into account the effect of any new projects or acquisitions, we
believed that our liquidity and anticipated operating cash flows
were sufficient to allow the remaining $800,000 commitment under the
Prospect Facility to expire on May 3, 2005.

Under the terms of the Prospect Facility, we are required to maintain
certain affirmative and negative covenants. At June 30, 2005, we were in
compliance with the terms of the Facility.

Looking forward, we will be required to maintain an EBITDA of 2X interest
payable, beginning no later than the three month period ending January 31,
2006. Our ability to meet this requirement is dependent on achieving
certain operating results, especially with respect to our planned drilling
program of Proved Undeveloped Reserves at our Delhi Field, which was
scheduled to begin in May 2005. As previously mentioned, our Delhi
drilling program has been delayed by casualty repairs sustained by the
drilling contractor for the account of another customer. Due to these
delays, we can give no assurance that the delayed results from this
program will provide sufficient EBITDA to meet our required interest
coverage ratio. If such a covenant breach occurs and is not waived by
Prospect, the debt would become immediately due and payable. Since we do
not have sufficient liquid assets to prepay our debt in full, we would be
required to refinance all or a portion of our existing debt or obtain
additional financing. If we were unable to refinance our debt or obtain
additional financing, we would be required to curtail portions of our
development program, sell assets, and/or reduce capital expenditures. Had
we been subject to this requirement on June 30, 2005, we would not been in
compliance. In addition, the Prospect Facility, as amended, limits our
acquisition of additional oil and gas properties to a maximum of $100,000
plus any new funds raised, until we achieve a trailing three month EBITDA
to interest coverage ratio of 2.0. The limitation does not include any
evaluation costs, so that we may continue to review new projects.

For a summary of the terms of the Prospect Facility, the Prospect Loans
and the Prospect Warrants, see Note 7, Notes Payable, Note 8, Common
Stock, Options and Warrants and Note 18, Subsequent Events, to our
consolidated financial statements.

o During Fiscal 2005, and prior to the closing of the Prospect
Facility, the Chairman of our Board of Directors, Laird Q. Cagan,
loaned us, through a series of advances, $920,000 pursuant to a
secured promissory note bearing interest at 10% per annum (the
"Bridge Loan"), earmarked for our purchase of working interests in
the Tullos Urania Field in Louisiana, working capital and certain
costs related to the closing of the Prospect Facility. After the
closing of the Prospect Facility, we paid off the Bridge Loan in
full in the amount of $953,589, which included accrued interest
thereon.

In accordance with our business objectives, we plan to continue expending
considerable time and effort to secure additional capital in order to acquire
additional oil and gas properties. We cannot assure you that we will be able to
secure such additional financing on terms satisfactory to us or at all, or that
we will be able to identify acquisitions that meet our strategic objectives.

INCREASE IN OPERATING CASH FLOWS

We continue to work on increasing cash flow from operations through our Delhi,
Tullos Urania, Colgrade and Crossroads Fields, thereby spreading our overhead,
including significant expenses of being a public company, over a larger revenue
base. We also expect to continue evaluating additional acquisition candidates
that would increase our cash flows from operations.

SIGNIFICANT PROPERTIES, ESTIMATED PROVED CRUDE OIL AND NATURAL GAS RESERVES, AND
FUTURE NET REVENUES

We engaged W. D. Von Gonten & Co. ("Von Gonten") to prepare independent reports
of our proved reserves as of July 1, 2005, July 1, 2004 and January 1, 2004.

Estimates of reserve quantities and values must be viewed as being subject to
significant change as more data about the properties becomes available. All of
our existing wells are generally mature wells, some of which were originally
drilled as many as 79 years ago. As such, they contain older down-hole equipment
that is more subject to failure than new equipment. The failure of such
equipment or other subsurface failure can result in the complete loss of a well.

The following table sets forth information regarding our proved reserves based
on the assumptions set forth in note 10 to our consolidated financial statements
for the twelve months ended June 30, 2005, where additional reserve information
is provided. The average NYMEX prices used were adjusted for transportation,
market differentials and BTU content of natural gas produced. Amounts do not
include estimates of future Federal and State income taxes.

PROVED RESERVES

ESTIMATED FUTURE
--------------------------------
GAS &
CRUDE OIL NGL(1) $ PER (2) NET REVENUES
------- --------------
AS OF DATE (BBLS) (MCF) BBL MMBTU NET REVENUES DISCOUNTED AT 10%
--------------- ------- ------- ------ ----- ------------ -----------------

July 1, 2005 771,883 732,123 $56.50 $6.98 $24,892,850 $17,479,484

July 1, 2004 238,904 508,800 37.05 6.16 8,121,711 6,320,754

January 1, 2004 240,362 778,700 32.52 6.19 10,065,493 8,119,670

(1) NGL reserves of 5,000 bbls and 7,300 bbls at July 1, 2004 and July 1, 2005,
respectively, are included in the above natural gas volumes, at a 6:1 ratio.

(2) NYMEX prices used for calculating reserves and net revenues in the reports
prepared by W.D. Von Gonten & Co., before adjustments for market, quality and
contract differentials.

PRODUCTION, AVERAGE SALES PRICES AND AVERAGE PRODUCTION COSTS

Our net production quantities and average price realizations per unit for the
fiscal periods are set forth below. Our hedging losses, totaling $102,632 for
oil and $4,280 for natural gas, are included in the prices in the table below:

12 months ended 6 months ended 3 months ended
June 30, 2005 June 30, 2004 December 31, 2003
---------------- ---------------- -----------------
Product Volume* Price Volume* Price Volume* Price
---------- ------- ------ ------- ------ ------- ------
Gas (mcf) 54,137 $6.62 110 $5.90 -- --
Oil (bbls) 27,230 $46.89 3,180 $36.95 857 $28.27

* Natural gas volumes are on an "as-sold" basis, which excludes gas used in
operations of 18,029 MCF's and 13 MCF's, respectively for the twelve month
period ended June 30, 2005 and the six months ended June 30, 2004.

PRODUCTIVE WELLS AND DEVELOPED ACREAGE

Developed acreage at June 30, 2005 totaled 14,155.36 net and gross acres, held
by a unitization agreement or by production. Unitization occurs when more than
one owner of working interests in a given field and reservoir agree to combine
their interests into a single block, each owning a pro rata percentage of the
overall project. Unitization is used to simplify, or enable, comprehensive and
efficient development activity that is common to numerous leases.

GROSS AND NET DEVELOPED ACREAGE

PROPERTY GROSS ACRES NET ACRES
----------------------------- ----------- ---------
Delhi Field 13,636.55 13,636.55
Tullos Field - Sept 2004 Acq 386.04 386.04
Tullos Field - Feb 2005 Acq 132.77 132.77
Total 14,155.36 14,155.36

We own total working interests in 306 net and gross wells consisting of 253
crude oil wells, 3 natural gas wells, 18 water disposal wells and 32 shut-in
wells with uncertain future utility. Following is a table of productive wells
(defined as producing or capable of production) as of June 30, 2005:

Productive Gross and Net Wells

OIL GAS
----------- -----------
State Gross Net Gross Net
----------- ----- --- ----- ---
Louisiana 253 253 3 3
----- --- ----- ---
Total 253 253 3 3
----- --- ----- ---

UNDEVELOPED ACREAGE

All working interest acreage owned by us is held by production or through an
active lease or through the Delhi unitization agreement described above.

DRILLING

During the fiscal years ended December 31, 2003, June 30, 2004 and June 30,
2005, we drilled no new wells.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Accounting for Oil and Gas Property Costs. As more fully discussed in Note 3 to
the consolidated financial statements, the Company (i) follows the full cost
method of accounting for the costs of its oil and gas properties, (ii) amortizes
such costs using the units of production method, and (iii) applies a quarterly
full cost ceiling test. Adverse changes in conditions (primarily oil or gas
price declines) could result in permanent write-downs in the carrying value of
oil and gas properties as well as non-cash charges to operations, but would not
affect cash flows.

Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer
annually estimates 100% of our proved reserves. Reserve engineering is a
subjective process that is dependent upon the quality of available data and the
interpretation thereof. In addition, subsequent physical and economic factors
such as the results of drilling, testing, production and product prices may
justify revision of such estimates. Therefore, actual quantities, production
timing, and the value of reserves may differ substantially from estimates. A
reduction in proved reserves would result in an increase in depreciation,
depletion and amortization ("DD&A") expense.

Estimates of Asset Retirement Obligations. In accordance with SFAS No 143, we
make estimates of future costs and the timing thereof in connection with
recording our future obligations to plug and abandon wells. Estimated
abandonment dates will be revised in the future based on changes to related
economic lives, which vary with product prices and production costs. Estimated
plugging costs may also be adjusted to reflect changing industry experience.
Increases in operating costs and decreases in product prices would increase the
estimated amount of the obligation and increase DD&A expense. Cash flows would
not be affected until costs to plug and abandon were actually incurred.

New Accounting Pronouncements.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R "Shared Based Payment" ("SFAS 123R"). This statement is a revision of
SFAS Statement No. 123 "Accounting for Stock-Based Compensation" and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS 123R addresses all forms of shared based
compensation ("SBP") awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
Under SFAS 123R, SBP awards result in a cost that will be measured at fair value
on the awards' grant date, based on the estimated number of awards that are
expected to vest and will be reflected as compensation cost in the historical
financial statements. This statement is effective for public entities that file
as small business issuers as of the beginning of the first annual reporting
period that begins after December 15, 2005. The Company is in the process of
evaluating whether SFAS No. 123R will have a significant impact of the Company's
overall results of operations or financial position.

This Form prospectus includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements included in this prospectus, other than statements of
historical facts, address matters that the Company reasonably expects, believes
or anticipates will or may occur in the future. Such statements are subject to
various assumptions, risks and uncertainties, many of which are beyond the
control of the Company. Investors are cautioned that any such statements are not
guarantees of future performance and actual results or developments may differ
materially from those described in the forward-looking statements. The Company
bases its forward-looking statements on information currently available and it
undertakes no obligation to update them.

BUSINESS

COMPANY OVERVIEW

Old NGS was privately formed in late 2003 to acquire established crude oil and
natural gas properties and exploit them through the application of conventional
and specialized technology, with the objective of increasing production,
ultimate recoveries, or both. We currently operate in four crude oil and natural
gas producing fields in the State of Louisiana, all of which are referred to as
our Delhi Field or our Tullos Field (Area), with five full time employees and a
small number of independent contractors and service providers operating from our
headquarters in Houston, Texas.

The NGS team is broadly experienced in oil and gas operations, development,
acquisitions and financing, and we follow a strategy of outsourcing most of our
property, corporate administrative and accounting functions. Our principal
executive offices are located at 820 Gessner, Suite 1340, Houston, TX 77024 and
our telephone number at that address is (713) 935-0122. We maintain a website at
www.natgas.us. Information contained on our website does not constitute part of
this prospectus.

Our stock is quoted on the OTC Bulletin Board under the symbol of NGSY.OB.

CORPORATE HISTORY

Reality Interactive, Inc. ("Reality"), a Nevada corporation, was incorporated on
May 24, 1994 for the purpose of developing technology-based knowledge solutions
for the industrial marketplace. On April 30, 1999, this company ceased business
operations, sold substantially all of its assets and terminated all of its
employees. Subsequent to ceasing operations, Reality explored potential business
opportunities to acquire or merge with an entity with existing operations, while
continuing to file reports with the SEC.

On May 26, 2004, Natural Gas Systems, Inc., a privately owned Delaware
corporation formed in September 2003 ("Old NGS"), was merged into a wholly owned
subsidiary of Reality and Reality acquired all the outstanding shares of Old NGS
in exchange for 21,750,001 shares of our common stock and warrants and options
to purchase approximately 903,932 shares of our common stock upon cancellation
of outstanding warrants and options to purchase shares of Old NGS. Reality
thereafter changed its name to Natural Gas Systems, Inc. and adopted a June 30
fiscal year end. As part of the merger, the officers and directors of Reality
resigned and the officers and directors of Old NGS became the officers and
directors of Natural Gas Systems, Inc., and we moved our offices to Houston,
Texas. Immediately prior to the merger, Reality did not conduct any operations
and had minimal assets and liabilities.

BUSINESS ACTIVITIES

NGS seeks to acquire majority working interests of oil and gas resources in
established fields and redevelop those fields through the application of capital
and technology to convert the oil and gas resources into producing reserves. In
acquiring our crude oil and natural gas properties, we target established,
shallow oil and gas fields or resources, preferably with existing road, pipeline
and storage infrastructure, and reservoirs with low permeability (referred to as
"tight" reservoirs in which oil or gas flow is inhibited). Such reservoirs
typically have low decline rate production and limited drainage areas per well.
Our strategy is to develop incremental value by:

o Focusing on established fields with long-lived production from relatively
shallow reservoirs and reservoirs with low permeability, providing us the
following potential advantages:

o Reduced exposure to the risk of whether resources are present.

o Reduced capital expenditures for infrastructure, such as roads,
water handling facilities and pipelines.

o Long-lived properties generally reduce risks from short-term oil and
gas price volatility and spread the cost of acquisitions over more
reserves.

o Reduced technical and operational risks and costs associated with
lower pressures and lower temperatures typically found at shallow
depths.

o The ability to obtain majority working interests, and thus maintain
full control of operations and development often available when
acquiring established fields.

o Accelerating existing production by:

o Bringing shut-in, non-producing wells, back to production.

o Performing workovers to clean sand, water and paraffin from wells.

o Optimizing production facilities, including installation of
compression facilities.

o Bringing un-drained or partially drained areas of the reservoirs into
production by:

o Re-completing into other reservoirs.

o Performing development and exploitation drilling.

o Applying lateral drilling, hydraulic fracturing and other
stimulation methods to older fields that matured prior to the
application of these technologies.

o Selective use of newer technologies, some of which may be unproved,
to locate bypassed resources in mature fields.

Old NGS purchased its first property in September 2003 through the acquisition
of a 100% working interest and an approximate 80% average net revenue interest,
in property and wells located in northeastern Louisiana which we refer to as the
"Delhi Field." Please see "--Properties." This acquisition included the purchase
of six producing wells, one salt water disposal well and 37 shut-in wells with
aggregate average production of approximately 18 barrels of crude oil per day
("BOPD") and no natural gas sales. The Delhi Field encompasses approximately
13,636 acres. We own all working interest rights from the surface to the top of
the Massive Anhydride Formation, which lies below the Tuscaloosa formation in
which our currently producing wells are completed and that are targeted in our
development plan, less and except the Mengel Reservoir, which is being produced
by another operator in a small number of wells.

In September 2004, we completed the acquisition of a 100% working interest and
an approximate 78% average net revenue interest, in producing crude oil wells,
equipment and improvements located in the Tullos Urania, Colgrade and Crossroads
Fields in LaSalle and Winn Parishes, Louisiana, which we refer to collectively
as the "Tullos Field." The purchased assets included approximately 124 oil
wells, nine water disposal wells, and all associated infrastructure, including
water disposal facilities, crude oil and water tanks, flow lines and pumping
units. The purchase included 15 wells without leases, for which we are
attempting to secure new leases.

In early February 2005, we completed the acquisition of a 100% working interest
and an approximate 79% average net revenue interest in similar properties in the
Tullos Field. The purchased assets included approximately 121 oil wells, 8 salt
water disposal wells and associated infrastructure and equipment.

MARKETS AND CUSTOMERS

Marketing of crude oil and natural gas production is influenced by many factors
that are beyond our control, the exact effect of which is difficult to predict.
These factors include changes in supply and demand, market prices, government
regulation and actions of major foreign producers.

Over the past 20 years, crude oil price fluctuations have been extremely
volatile, with crude oil prices varying from $8.50, to in excess of $70 per
barrel. Worldwide factors such as geopolitical, macroeconomic, supply and
demand, refining capacity, petrochemical production and derivatives trading,
among others, influence prices for crude oil. Local factors also influence
prices for crude oil and include regulation and transportation issues unique to
certain producing regions.

Over the past 20 years, domestic natural gas prices have also been volatile,
ranging from $1 to in excess of $13 per MMBTU. The spot market for natural gas,
changes in supply and demand, derivatives trading, pipeline availability, BTU
content of the natural gas and weather patterns, among others, cause natural gas
prices to be subject to significant fluctuations. Due to the practical
difficulties in transporting natural gas, price influences tend to be more
localized for natural gas than for crude oil.

In the U.S. market where we operate, crude oil and gas liquids are readily
transportable and marketable. We sell all of our crude oil production from our
Delhi and Tullos Fields to Plains Marketing L.P., a crude oil purchaser, at
competitive spot field prices. A portion of our crude oil production is subject
to a fixed price contract (excluding basis risk) with Plains Marketing that
began March 1, 2005 for approximately 2,100 barrels per month through May 2006,
and 2,700 barrels per month thereafter through August 31, 2006. Please see
"--Commodity Contracts." We believe that other crude oil purchasers are readily
available.

We currently sell our natural gas liquids to Dufour Petroleum, L.P., a
subsidiary of Enbridge Energy Partners, at a market- competitive price. We
receive an index price based upon the components of the liquids less a charge of
$0.175 per gallon for transportation and fractionation.

All of our current crude oil and natural gas production is located in northern
Louisiana. There is only one natural gas pipeline sales point readily available
in this area, which reduces our leverage in negotiating a more favorable
transportation charge and sales price. The current natural gas sales line is
also a delivery line to customers, downstream of the pipeline's processing and
treating facilities, thus making the pipeline very sensitive to the quality of
natural gas sold into our point of interconnection.

We presently sell a portion of our natural gas under a short-term contract with
Texla Energy Management, Inc., a natural gas marketer/aggregator, at either the
daily cash price or at the monthly index, as elected by us prior to each month.
The balance, a fixed volume of 100 MMBTU per day, is sold at a fixed price of
$6.21 per MMBTU over a fifteen month period beginning March 1, 2005 (see
"Commodity Contracts"). We believe that other natural gas marketers are readily
available. Title to the natural gas passes to the purchaser at the metered
interconnection to the transportation pipeline, where the Index price is reduced
by certain pipeline charges. Natural gas sold from the Delhi Field that is not
subject to the commodity contract referred to above is priced on either a
monthly average index price or a daily cash price as established at the Henry
Hub market, less a $0.215 per MMBTU deduction for the market differential
between Henry Hub and our sales point. All gas sold from the Delhi Field also is
charged $0.0854 per MCF by Gulf South, the pipeline into which we deliver our
gas, for transportation. These costs, along with the costs for natural gas
processing and transportation prior to delivery to the sales point, are deducted
from the natural gas sales receipts before calculation and distribution of
royalties.

In late 2003, we entered into an agreement with Verdisys, Inc., whose name has
been changed to Blast Energy Services, Inc., to provide us with lateral drilling
services based on our projected needs, subject only to adequate advance notice,
at a fixed price not to exceed the lowest price offered to any other customer
for similar services. Although we may find the Blast technology useful, our
business plan does not rely on it. To date, we have used the Blast technology in
only two wells, the results of which were inconclusive.

Since purchasing our Delhi and Tullos Fields, we have expended approximately
$872,614 on development activities through June 30, 2005.

COMMODITY CONTRACTS

In February 2005, we entered into three commodity contracts. The first, with
Plains Marketing L.P., includes the purchase of 70 barrels of crude oil per day
for a 12 month period, including the months of March 2005 through February 2006.
The fixed sale price is based upon the NYMEX WTI (West Texas Intermediate) crude
oil price and requires monthly settlements wherein Plains Marketing delivers a
fixed price of $48.35 per barrel to us before adjustment for the basis
differential between NYMEX price and the contract price. This hedge was extended
for the months of March 2006 through May 2006 at a fixed price of $52.55 per
barrel of oil or 70 barrels of oil per day, and for the months of June 2006
through August 2006 at a fixed price of $64.45 per barrel of oil for 90 barrels
of oil per day. Plains Marketing L.P. is our crude oil purchase and picks up our
production in the field using their trucks.

The second contract is between us and Wells Fargo Bank, N.A. We purchased a
series of price floors, set at a NYMEX WTI price of $38.00 per barrel of crude
oil based upon the arithmetic average of the daily settlement price for the
first nearby month of NYMEX WTI futures, for 2000 barrels of crude oil per month
for March 2006 through February 2007. The cost of the hedge was $3.00 per barrel
of oil.

Our third contract is with Texla Energy Management, Inc., a natural gas marketer
currently purchasing our natural gas production at the Delhi Field. This
contract provides for us to sell 3 MMMBTU of natural gas each month at a fixed
price of $6.21 per MMBTU, before deduction of the $0.0854 per MCF gathering
charge by Gulf South, the owner of the natural gas pipeline into which we
deliver our natural gas from the Delhi Field. This fixed price includes the
basis differential from NYMEX to our sales point on the Gulf South pipeline.

As required under our credit agreement with Prospect Energy, these contracts are
placed in amounts aggregating more than 50% of the production volumes that our
outside petroleum engineers have estimated to occur from our existing proved
developed producing reserves over the next two years. Our credit agreement also
requires us to extend such coverage on a rolling two-year basis through the five
year term of the loan.

COMPETITION

GOVERNMENT REGULATION

Crude oil and natural gas drilling and production operations are regulated by
various Federal, state and local agencies. These agencies issue binding rules
and regulations that carry penalties, often substantial, for failure to comply.
These regulations and rules require monthly, semiannual and annual reports on
production amounts and water disposal amounts, and govern most aspects of
operations, drilling and abandonment, as well as crude oil spills. We anticipate
the aggregate burden of Federal, state and local regulation will continue to
increase, including in the area of rapidly changing environmental laws and
regulations. We also believe that our present operations substantially comply
with applicable regulations. To date, such regulations have not had a material
effect on our operations, or the costs thereof. We do not believe that capital
expenditures related to environmental control facilities or other regulatory
matters will be material in the near term. We cannot predict what subsequent
legislation or regulations may be enacted or what affect it will have on our
operations or business.

EMPLOYEES

We currently operate our properties in the State of Louisiana with a small
number of independent contractors and service providers, administered by our
five full time employees located in our Houston office. Our development
operations in Louisiana are carried out by independent contractors through our
wholly owned subsidiaries, Arkla Petroleum, LLC and Four Star Development
Corporation. Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not experienced work
stoppages, and we believe that our relationship with our employees is good.

PROPERTIES

DELHI FIELD

In late September 2003, Old NGS purchased a 100% working interest and an 80% net
revenue interest in 43 wells in Richland, Franklin and Madison Parishes,
Louisiana, which we refer to as the Delhi Field, by paying $995,000 in cash,
issuing non-interest bearing notes for $1,500,000 and assuming a plugging and
abandonment reclamation liability in the amount of approximately $302,000, in
exchange for the conveyance of all the underlying, unitized leasehold interests.
The notes were collateralized by a first mortgage on the leasehold interests and
were fully repaid by the end of 2004.

The Delhi Field was discovered in the mid-1940's and extensively developed over
the subsequent decades through the drilling and completion of approximately 450
wells, most within the first few years of discovery. According to W. D. Von
Gonten & Co. engineers, the third party reservoir engineering firm that prepares
our reserve reports, the Delhi Field has produced more than 200 million barrels
of crude oil. With respect to natural gas, public records at the State of
Louisiana and studies published by a previous operator indicate that in excess
of 170 billion cubic feet of natural gas has been produced and sold from the
field to date. Beginning in the late 1950's, the field was unitized to conduct a
pressure maintenance water flood project through the injection of water into the
producing reservoir in down dip injection wells. Unitization is the process of
combining multiple leases into a single ownership entity in order to simplify
operations and equitably distribute royalties when common operations are
conducted over multiple leases. Drilling operations resulted in primarily
40-acre spacing across the unit's 13,636 acres. A few wells were drilled below
the targeted Tuscaloosa formation. The water injection pressure maintenance
waterflood did not utilize a more traditional and effective five spot flood
pattern that generally results in a more complete reservoir sweep and oil
recovery.

At the time of acquisition in 2003, production in the Delhi Field averaged
approximately 18 BOPD with no natural gas being sold due to a lack of natural
gas processing and transportation facilities. The best producing well, the
161-36, was immediately lost during a periodic sand wash work-over when water
from a lower reservoir broke through along the casing exterior and into the
producing reservoir. Following the acquisition, we initiated a development
program for the Delhi Field based on re-completion of wells to other reservoirs
and restoring nonproducing wells to producing status. We further refurbished a
gas injection line to serve as our gas gathering line.

In March of 2004, we installed a leased natural gas treating and compression
facility under a one-year operating lease that automatically extends on a
month-to-month basis. The facility, located just north of the Delhi Field on
land provided to us by another oil and gas operator, was necessary to begin
sales of natural gas, which began in July of 2004, thus expanding our revenue
base as contemplated by our original plan for the Delhi Field.

In April 2005, we re-completed the Delhi Ut. #87-2 well to a new reservoir at a
test rate of approximately 90 BOPD and 35 MCFD and no water. The test rate was
constrained by the elective use of a choke to limit potential sand influx.
Subsequently, the well began to produce water while retaining its high pressure.
We commenced a series of workovers to repair a leaking packer and casing leak
that curtailed production from the well during the balance of the quarter, and
determined that the casing immediately below the producing reservoir had
developed mechanical problems. At this time, we have not confirmed that the
water production is coming from the damaged portion of the well bore and not the
producing reservoir, but believe that is the case. As further remedial work
would bear significant risk of further mechanical failure, we have elected to
delay such work until our development drilling program is completed and have
voluntarily curtailed production from the well to lower the risk of additional
mechanical problems.

We earlier reported that our development plan for the Delhi Field would include
five drilling locations and that drilling would begin in the second calendar
quarter of 2005. The contracted drilling rig suffered substantial damage while
on site of another client and was unavailable for use from mid-May 2005 through
late August, thus the anticipated production and revenues from the wells to be
drilled have been delayed correspondingly. The drilling contractor has agreed to
extend the program to a total of seven wells to be drilled consecutively, each
taking about one week to drill and about two weeks to complete using a separate
completion rig that is currently available.

At the end of June 2005, the gross productive rate of the Delhi field was
approximately 60 BOPD and 200 MCFD of natural gas (net of 60 MCFD of shrinkage
discussed below) and 3 barrels of natural gas liquids per day. Natural gas sales
have been about 60 MCFD less than production, as a portion of the produced
natural gas is utilized as compressor, dehydrator and pump engine fuel on site
and a portion is converted into natural gas liquids during the gas treating
process that enables us to sell the gas. Several of our currently shut-in wells
are scheduled to be restored to production through workovers to repair
mechanical problems or through re-completions into new reservoirs and are
anticipated to further increase production in the near term. The seven well
drilling program also is expected to increase the production in the Delhi Field.

In late September, 2005, we entered into an agreement with MTEM, Ltd. to conduct
a multi-transient electromagnetic survey over our Delhi Field. The survey is
intended to measure changes in electrical resistivity as a function of
subsurface depth. In return for agreeing to conduct the first commercial test of
the MTEM technology, we have the right to use of the technology at favorable
price and priority. The field survey is expected to begin in mid-November, 2005.

TULLOS FIELD AREA

On September 3, 2004, through a wholly owned subsidiary, we completed the
acquisition of a 100% working interest and approximately 78% average net revenue
interest in producing and shut-in crude oil wells, water disposal wells,
equipment and improvements located in the Tullos Urania, Colgrade and Crossroads
Fields in LaSalle and Winn Parish, Louisiana, collectively referred to as the
Tullos Field. The purchased assets included 124 completed wells, nine water
disposal wells, and all associated infrastructure, including water disposal
facilities, crude oil and water tanks, flow lines and pumping units. In addition
we acquired 15 crude oil wells that required new leases. Of the purchased wells,
81 were producing and 43 were shut-in due to repair and maintenance
requirements. The purchase price for the acquisition was $725,000, before
adjustment for post-effective date production and expenses.

In early February 2005, we closed the purchase of a 100% working interest and
approximately 80% average net revenue interest in additional properties in the
same Tullos Urania and Colgrade Fields. The purchased assets included 65
producing crude oil wells, 56 shut-in crude oil wells, eight salt water disposal
wells and associated infrastructure and equipment. The purchase price for the
acquisition was $798,907, after post-closing adjustments.

We acquired 418,217 barrels of proved developed reserves through these
acquisitions, as estimated by W.D. Von Gonten & Co. in their report of July 1,
2005.

As of June 30, 2005, the productive rate in the Tullos Field Area was
approximately 115 BOPD. Production in December 2004 through January 2005 was
adversely impacted by a dispute with one of the sellers who was retained as a
contract operator for the period of time following the initial closing and the
assumption of operatorship by our subsidiary, Four Star Development Corporation.
Production in January 2005 through March 2005 was adversely impacted by weather
conditions that limited road access to certain of the leases, including the
trucks of the oil purchaser and well service rigs. Production was further
hampered by lack of access to well service rigs and crews during April 2005 due
to the overall tightness in the oil field service industry, and the lack of
adequate field maps and well records that are normally provided by a selling
operator.

To date, our development work has been focused on reducing producing well
downtime due to mechanical problems, incrementally increasing water disposal
capacity through disposal well repars and maintenance and reproducing the
necessary field recorded and maps. In April of 2005, we began a program to
return wells to active production that had been shut-in for extended periods of
time and increasing overall water disposal capacity through workovers of
existing disposal wells. Other near term projects include gathering natural gas
from the producing wells to power electric generators that will power our
electric pumps in the area. Our development plans are modeled closely on the
operations of an offset operator in the same field that has increased per well
production higher than the historic rate of our properties.

OTHER PROPERTIES

We maintain insurance on our properties and operations for risks and in amounts
customary in the industry. Such insurance includes general liability, excess
liability, control of well, operators extra expense and casualty coverage. Not
all losses are insured, and we retain certain risks of loss through deductibles,
limits and self-retentions. We do not carry lost profits coverage.

We occupy a leased headquarters containing 2,259 square feet in a modern
high-rise office building located in the West Memorial area of Houston, Texas.
In April 2004, we extended our lease for three years with an option for early
termination after 18 months, and the right to use furniture and fixtures without
cost.

For more complete information regarding current year activities, including crude
oil and natural gas production, refer to "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age, background and position held by
each of our executive officers and directors as of September 28, 2005. Directors
are elected for a period of one year and thereafter serve until the next annual
meeting at which their successors are duly elected by the stockholders.

YEAR FIRST
ELECTED
NAME AGE PRINCIPAL OCCUPATION DIRECTOR
-------------------- --- --------------------------------------------------------------------- ----------

Laird Q. Cagan 47 Mr. Cagan has served as our Chairman of the Board and Secretary since 2004
May 2004. Mr. Cagan is a co-founder, and, since 2001, has been
Managing Director, of Cagan McAfee Capital Partners, LLC, a
technology-focused private equity firm in Cupertino, California. He
also serves as President of Cagan Capital, LLC, a merchant bank he
formed in 1990. From 1999 to 2001, he served as Chairman and Chief
Executive Officer of BarterNet Corporation, a worldwide Internet B2B
exchange. Mr. Cagan attended M.I.T. and received a BS and an MS
degree in engineering, and an MBA from Stanford University. He is a
member of the Young Presidents Organization. Please also see
"Certain Relationships and Related Transactions."

Robert S. Herlin 50 Mr. Herlin has been President, Chief Executive Officer and a Director 2004
of our company since May 2004. Prior to the merger of Natural Gas
Systems, Inc. ("Old NGS") into our company, Mr. Herlin served as
President, Chief Executive Officer and Director of Old NGS. He is
responsible for all of our operations, development of our business
model, identifying acquisitions of applicable crude oil and natural
gas properties, developing our operating team and creating,
establishing and maintaining industry partnerships. Mr. Herlin has
more than 21 years of experience in energy transactions, operations
and finance with small independents, larger independents and major
integrated crude oil companies. Since 2003, Mr. Herlin has also
served as a Partner with Tatum CFO, a financial advisory firm that
provides executive officers on a part-time or full-time basis to
clients. From 2001 to 2003, Mr. Herlin served as Senior Vice
President and Chief Financial Officer of Intercontinental Towers
Corporation, an international wireless infrastructure company. From
1997 to 2001, he was employed at Benz Energy, Inc., a crude oil and
natural gas company, most recently as President, CEO and CFO. Mr.
Herlin also serves on the board of directors of Boots and Coots
Group, a crude oil field services company. Mr. Herlin graduated with
honors from Rice University with B.S. and M.E. degrees in chemical
engineering and has an MBA from Harvard University.

John Pimentel 39 Mr. Pimentel has served as a director of our company since May 2004. 2004
Since 2002, Mr. Pimentel has been a principal of Cagan McAfee Capital
Partners, where he is responsible for business development,
investment structuring, and portfolio company management. From 1998
to 2002, he worked with Bain & Company in that firm's Private Equity
Group, and the general consulting practice. From 1993-1996, Mr.
Pimentel served as Deputy Secretary for Transportation for the State
of California. Mr. Pimentel has served as a director of World Waste
Technologies, Inc., a waste technology company, and Pacific Ethanol,
Inc. since early 2004 and since September 2005, Mr. Pimentel has
served as the Chief Executive Officer of World Waste. Mr. Pimentel
has an MBA degree from the Harvard Business School, and a BA degree
from UC Berkeley

YEAR FIRST
ELECTED
NAME AGE PRINCIPAL OCCUPATION DIRECTOR
-------------------- --- --------------------------------------------------------------------- ----------

Gene Stoever (1)(2) 66 Mr. Stoever has served as a director of our company since May 2004. 2004
In 1993, Mr. Stoever retired from KPMG Peat Marwick after 32 years of
service, including 24 years as a partner. Since 1999, he has acted as
an independent consultant for various companies. From 1999 to 2004,
he served as a trustee of the Sterling Diagnostic Imaging and SDI
Liquidating Trust. He also serves as a Director of Exopack, LLC, a
flexible packaging company and Propex Fabricx, Inc., a producer of
primary and secondary carpet backing and manufacturer of
polypropylene synthetic fabrics. Mr. Stoever earned his B.B.A.
degree in accounting with honors from the University of Texas at
Austin, is a Certified Public Accountant in the State of Texas and a
member of the American Institute of CPAs and the Texas Society of
Certified Public Accountants. Mr. Stoever serves as Chairman of our
Audit Committee.

E.J. DiPaolo (1)(2) 52 Mr. DiPaolo has served as a director of our company since May 2004. 2004
Mr. DiPaolo has served as an Energy Advisor to Growth Capital
Partners, L.P., an investment banking company, since 2003. From 2002
to the present, Mr. DiPaolo has served as an independent energy
producer. From 1976 to 2002, Mr. DiPaolo was with Halliburton
Company, most recently as Group Senior Vice President of Global
Business Development, where he was responsible for the management of
overall customer relationships with the companies within
Halliburton's upstream businesses, including Halliburton Energy
Services, Brown and Root Energy Services, and Landmark Graphics and
Wellstream. Previously, Mr. DiPaolo was the North American Regional
Vice President and Far East Regional Vice President for Halliburton,
accountable for the overall operation of Halliburton Energy Services
in those regions. Mr. DiPaolo also serves on the Board of Directors
of Boots and Coots Group, a crude oil field services company, and
Edgen Corporation, a pipe distribution company. He received his
undergraduate degree in agricultural engineering from West Virginia
University in 1976 where he currently serves on the Advisory Board of
the College of Engineering. Mr. DiPaolo serves as Chairman of our
Compensation Committee.

Sterling H. McDonald 56 Mr. McDonald joined Old NGS as Chief Financial Officer in 2003 and N/A
has served as our Chief Financial Officer since the merger of Old NGS
into our company in May 2004. Since joining us, Mr. McDonald has
also been responsible for our administrative functions. From 1999 to
2003, Mr. McDonald acted as an independent consultant and interim
Chief Financial Officer to various companies. From 1997 to 1999, he
served as Chief Financial Officer for PetroAmerican Services, a
subsidiary of an integrated NYSE-traded crude oil and natural gas
company. Previously, he served as Chief Financial Officer of
PetroStar Energy, an exploration and production company, and
Treasurer of Reading and Bates Corporation, a NYSE-traded
international offshore drilling services, exploration and production
company. Mr. McDonald holds an MBA, with highest academic
achievement, from the University of Tulsa.

Daryl. V. Mazzanti 43 Daryl Mazzanti joined our company as our Vice President of Operations N/A
in July, 2005, to lead all of our oil and gas operations. From 1985
to 2005, Mr. Mazzanti was employed by Union Pacific Resources (UPR)
and Anadarko Petroleum (the successor to UPR), where he managed
operational, engineering and geotechnical teams responsible for oil
and gas fields in Texas, Oklahoma, Louisiana, the Rockies and
offshsore GOM. His duties included overseeing up to 1,300 horizontal
wells, optimizing artificial lift methods for a 750 well program and
supervising multi-rig drilling and service programs. Mr. Mazzanti
began his career in 1985 as a Development Engineer with Champlin Oil
(the predecessor to UPR), where he was responsible for drilling,
completion, workover, recompletion, reservoir analysis and surface
facility optimization across Texas and offshore GOM. Mr. Mazzanti
holds a Bachelor of Science in Petroleum Engineering, with
distinction, from the University of Oklahoma at Norman.

(1) Member of our Audit Committee.

(2) Member of our Compensation Committee.

AUDIT COMMITTEE AND COMPENSATION COMMITTEE

In May 2004, our board of directors established an Audit Committee. Our board
has instructed the Audit Committee to meet periodically with our management and
independent accountants to, among other things, review the results of the annual
audit and quarterly reviews and discuss our financial statements, recommend to
our board the independent accountants to be retained, and receive and consider
the accountants' comments as to controls, adequacy of staff and management
performance and procedures in connection with audit and financial controls. The
Audit Committee is also authorized to review related party transactions for
potential conflicts of interest. The Audit Committee is composed of Mr. Gene
Stoever, Chairman, and Mr. E.J. DiPaolo. Each of these individuals is a
non-employee director. Mr. Stoever has been designated as an "audit committee
financial expert" as defined under Item 401(e)(2) of Regulation SB of the
Securities Act of 1933. Messrs. Stoever and DiPaolo are each considered
"independent" directors as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Securities Act.

In addition, our board of directors has established a Compensation Committee,
currently comprised of Mr. DiPaolo, as Chairman, and Mr. Stoever. The
Compensation Committee administers our 2004 Stock Option Plan and negotiates and
approves employment agreements with our executive officers.

EXECUTIVE COMPENSATION

The following table sets forth the compensation for services in all capacities
to our company for the fiscal year ended June 30, 2005, for our Chief Executive
Officer and Sterling McDonald (the "Named Executives"). No other executive
officer earned total annual salary and bonus in excess of $100,000 for fiscal
year ended June 30, 2005:

SUMMARY COMPENSATION TABLE

Annual
Compensation Long Term Compensation Awards
----------------- ----------------------------------------------
Name and Fiscal All other
Principal Position Year* Salary Bonus Options/SARs/Stock Compensation
----------------------- ------ -------- ------- ------------------ ------------

Robert S. Herlin,
President and CEO(1) 2005 $180,000 $-0- 787,500(2) -0-(3)
2004 $90,000 -0- -0-
2003 $48,750 -0- 250,000(4) -0-

Sterling H. McDonald
Treasurer and CFO (1) 2005 $135,000 $50,000 350,000 -0-
2004 $60,000 -0- -0-
2003 $17,000 -0- 250,000(4) -0-

* Fiscal Years 2005, 2004 and 2003 are for the twelve months ended June 30,
2005, the six months ended June 30, 2004 and the period from September 23,
2003 (inception) to December 31, 2003.

(1) Mr. Herlin and Mr. McDonald have served as President and CEO, and
Treasurer and CFO, respectively, of Natural Gas System, Inc. from May 24,
2004. During all periods indicated prior to May 24, 2004, they served in
the same capacities at Old NGS (the private entity that merged with the
publicly traded entity).

(2) Includes incentive stock options to purchase 500,000 shares of common
stock at $1.80 per share, and warrants to purchase 287,500 shares of
common stock at $1.80 per share (fair market value).

(3) NGS has entered in a Resources Agreement with Tatum CFO Partners, LLC in
connection with the employment of Mr. Herlin. This agreement is detailed
under "Employment Agreements" below. Mr. Herlin does not directly share in
compensatory benefits paid to Tatum CFO Partners, LLC.

(4) Options granted in fiscal 2003 under the 2003 Stock Plan of Old NGS,
subsequently assumed by us on the merger date of May 24, 2004.

OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR

The following table sets forth certain information with respect to stock options
granted under our 2004 Stock Plan to the Named Executives during the fiscal year
ended June 30, 2005, stock option exercises during that fiscal year, and the
value of unexercised stock options at that fiscal year's end.

Options/SAR Grants in Fiscal Year 2005

Number of Securities % of Total Exercise
Underlying Options/SARs Granted or Base
Options/SARs to Employees in Price Expiration
Name Granted (#) Period (1) ($/sh) Date
-------------------- -------------------- -------------------- --------- ----------------

Robert S. Herlin 500,000 28% $1.80 April 4, 2015(2)
Robert S. Herlin 287,500 16% $1.80 April 4, 2015(3)
Sterling H. McDonald 350,000 20% $1.80 April 4, 2015(2)

(1) Calculated on the basis of 1,300,000 stock options granted under the 2004
Stock Plan and 487,500 warrants granted to employees during fiscal year
ended June 30, 2005.

(2) These are incentive stock options granted under the 2004 Stock Plan,
subject to four year quarterly vesting and contain certain acceleration
provisions upon change of control or involuntary termination of executive.

(3) These are restricted revocable warrants, subject to eighteen month reverse
vesting and contain certain acceleration provisions upon change of control
or involuntary termination of executive.

EMPLOYMENT AGREEMENTS; CHANGE IN CONTROL AGREEMENTS

Executive Employment Agreement: Robert S. Herlin

On September 23, 2003, Natural Gas Systems, Inc., a Delaware corporation ("Old
NGS"), a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (the
"Company"), entered into an Executive Employment Contract (the "Original Herlin
Employment Contract") with Robert S. Herlin for Mr. Herlin to serve as President
and Chief Executive Officer. Pursuant to the Original Herlin Employment
Contract, Mr. Herlin was granted a stock option to purchase 250,000 shares of
Old NGS common stock with an exercise price equal to $0.001 vesting over four
years, that was to be cancelled when the Company granted warrants to Tatum CFO
Partners, LLP, a provider of contract CFO's and other executive level executives
("Tatum"), in connection with Mr. Herlin's status as a partner of Tatum and
certain other services to be provided by Tatum. In addition, under the Original
Herlin Employment Contract Mr. Herlin received an annual salary of $180,000, an
annual discretionary bonus of up to $180,000, a six month severance package, and
purchased 1,000,000 shares of common stock of Old NGS, with Old NGS having a
repurchase right under a reverse vesting arrangement over 27 months (the "Stock
Purchase Agreement"). The Original Herlin Employment Contract and Stock Purchase
Agreement were assumed by us when our subsidiary merged with Old NGS in May
2004. In addition, the stock options were exchanged in the merger for stock
options exercisable for shares of our common stock.

On April 4, 2005, we entered into an Executive Employment Contract (the "New
Herlin Employment Contract") with Mr. Herlin. The New Herlin Employment Contract
supersedes the Original Herlin Employment Contract. Pursuant to the New Herlin
Employment Contract, Mr. Herlin will continue to serve as our President and
Chief Executive Officer. He will receive an annual salary of $180,000, which
will increase to $210,000 at the end of one year, and a one year severance
package. Mr. Herlin is also eligible to receive an annual discretionary bonus
equal to 100% of his annual salary. As a bonus for fiscal 2004, Mr. Herlin will
retain the 250,000 stock options granted to him under the Original Employment
Agreement. We also entered into a new agreement with Tatum, which supercedes the
original agreement with Tatum and provides for us to grant Tatum a warrant to
purchase 262,500 shares our common stock, exercisable at $0.001 exercisable for
five years. We refer you to "Amended and Restated Agreement with Tatum
Partners."

On April 4, 2005, Mr. Herlin was granted a stock option to purchase 500,000
shares of our common stock, with an exercise price equal to $1.80 that vests
over four years, as well as an additional grant of a warrant to purchase 287,500
shares of our common stock, with an exercise price equal to $1.80 that vests
over eighteen months, both of which have with certain acceleration provisions
based on involuntary termination and change of control.

Amended and Restated Agreement with Tatum Partners.

In September 2003, Old NGS entered into a Resources Agreement with Tatum CFO
Partners, LLP (the "Original Tatum Contract"). The Original Tatum Contract
provided for Tatum to make available to Old NGS the services of its partner,
Robert S. Herlin, and provide access to various Tatum resources in exchange for
sharing of Mr. Herlin's compensation from Old NGS. The Original Tatum Contract
was assumed by us when our subsidiary merged with Old NGS in May 2004.

On April 4, 2005, we executed an Amended and Restated Resources Agreement (the
"Amended and Restated Tatum Contract") with Tatum. Pursuant to the Amended and
Restated Tatum Contract, Tatum will receive $12,000 per year for access to its
services. In addition, we granted Tatum a warrant to purchase 262,500 shares of
our common stock, exercisable at $0.001 per share and exercisable for a period
of five years.

Executive Employment Agreement: Sterling H. McDonald

On November 10, 2003, Old NGS entered into an Executive Employment Contract with
Sterling H. McDonald for Mr. McDonald to serve as Chief Financial Officer (the
"Original McDonald Employment Contract"). The Original McDonald Employment
Contract provided for a grant of a stock option to purchase 250,000 shares of
common stock of Old NGS, with an exercise price of $0.25 that vests over 48
months. In addition, under the Original McDonald Employment Contract Mr.
McDonald received an annual salary of $120,000, an annual discretionary bonus,
and a maximum six month severance package. The Original McDonald Employment
Contract was assumed by us when our subsidiary merged with Old NGS in May 2004.
In addition, the stock options were exchanged in the merger for stock options
exercisable for shares of our common stock.

On April 4, 2005, we entered into an Executive Employment Contract (the "New
McDonald Employment Contract") with Mr. McDonald. The New McDonald Employment
Contract supersedes the Original McDonald Employment Contract, with the
exception that Mr. McDonald retained the stock options under the terms
previously granted. Pursuant to the New McDonald Employment Contract, Mr.
McDonald will continue to serve as our Chief Financial Officer. In addition, Mr.
McDonald will receive an annual salary of $150,000. Mr. McDonald is also
eligible to receive an annual discretionary bonus equal to 75% of his annual
salary, and a six month severance package which may be increased to one year
under conditions related to a change of control. In addition, on April 4, 2005,
Mr. McDonald was granted a stock option to purchase 350,000 shares of our common
stock at an exercise price of $1.80 vesting over four years with certain
acceleration provisions based on involuntary termination and change of control.

Executive Employment Agreement: Daryl V. Mazzanti

On June 23, 2005, we entered into an Executive Employment Contract with Mr.
Daryl V. Mazzanti ("Mazzanti") for Mazzanti to serve as Vice President of
Operations of the Company (the "Employment Contract"). Under the Employment
Contract, Mazzanti will receive an annual salary of $155,000, a discretionary
bonus of up to 75% of his annual salary, and a six month severance package. The
Employment Contract provided for a grant of 350,000 stock options under the
Company's 2004 Stock Plan, exercisable at $1.61 and vesting quarterly over four
years ("Stock Option Agreement"). Further, Mazzanti shall receive a sign on
bonus of 25,000 shares of the Company's common stock vesting over 12 months (and
subject to acceleration upon change of control) under the 2004 Stock Plan (the
"Stock Grant Agreement") and a cash payment of $10,000. In addition, the Company
granted Mazzanti a revocable warrant to purchase 250,000 shares of the Company's
common stock at an exercise price of $1.61, vesting over four years and subject
to revocation upon the non-commencement of certain development projects (the
`Revocable Warrant Agreement").

COMPENSATION OF BOARD OF DIRECTORS

On October 22, 2004, our board approved the grant of options to purchase up to
100,000 shares of common stock with an exercise price of $1.27 per share, to
each of our two independent board members, Messrs. Gene Stoever and Jed DiPaolo.
The options vest annually over a two-year period beginning May 26, 2004, the
date of the directors' election to our board. The independent directors are paid
$3,000 per fiscal quarter for attending board meetings. Mr. Stoever is also paid
$13,000 per year for his services as Chairman of the Audit Committee, and Mr.
DiPaolo is paid $13,000 per year for his services as Chairman of the
Compensation Committee. We also reimburse our non-employee directors for any
direct expenses they incur in their capacity as directors. On August 22, 2005,
we granted options to purchase 28,000 shares of our common stack at $1.10 to
each of our outside Directors, Messrs. DiPaolo and Stoever, vesting one year
from the date of grant.

Laird Q. Cagan, chairman of our board, also earns compensation from our company
through his relationship with our financial advisor, Cagan McAfee Capital
Partners, LLC ("CMCP") and placement agent (Chadbourn Securities, Inc.). In
addition, we reimburse CMCP for the costs of legal services performed by staff
members of CMCP under the direction of our general counsel. Mr. Cagan is also
reimbursed by us for documented travel expenses he incurs from time to time
directly on our behalf. Please see "Certain Relationships and Related
Transactions."

Mr. Pimentel, who also serves on our board, is a principal of CMCP but does not
receive compensation from CMCP in connection with CMCP's services to us.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our articles of incorporation provide that no officer or director shall be
personally liable to our corporation or our stockholders for monetary damages
except as provided pursuant to Nevada law. Our bylaws and articles of
incorporation also provide that we shall indemnify and hold harmless each person
who serves at any time as a director, officer, employee or agent of our company
from and against any and all claims, judgments and liabilities to which such
person shall become subject by reason of the fact that he is or was a director,
officer, employee or agent of our company, and shall reimburse such person for
all legal and other expenses reasonably incurred by him or her in connection
with any such claim or liability. We also have the power to defend such person
from all suits or claims in accord with Nevada law. The rights accruing to any
person under our bylaws and articles of incorporation do not exclude any other
right to which any such person may lawfully be entitled, and we may indemnify or
reimburse such person in any proper case, even though not specifically provided
for by our bylaws or articles of incorporation.

Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of our company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

Based solely upon information made available to us, the following table sets
forth information with respect to the beneficial ownership of our common stock
as of September 15, 2005 by (1) each person who is known by us to beneficially
own more than five percent of our common stock; (2) each director; (3) the Named
Executives; and (4) all executive officers and directors as a group. Shares of
common stock that are subject to outstanding options and warrants that are
presently exercisable or exercisable within 60 days of September 15, 2005 are
deemed to be outstanding for purposes of computing the percentage ownership of
the holder of the options and warrants, but not for any other person. Except as
otherwise indicated, the holders listed below have sole voting and investment
power with respect to all shares of common stock beneficially owned by them,
subject to community property laws where applicable.

NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
----------------------------------------------- -------------------- -------------------

Robert Herlin (2)(3) 1,339,844 5.3%
Sterling McDonald (2)(9) 168,750 *
Laird Q. Cagan (4)(5) 7,688,643 30.7%
John Pimentel (4) 450,000 1.8%
E.J. DiPaolo (2)(6) 50,000 *
Gene Stoever (2)(6) 50,000 *
Eric A. McAfee, P2 Capital LLC , Park Capital
III, and McAfee Capital LLC (4)(7) 5,907,500 23.8%
All executive officers and directors as a group
(seven persons) (3)(5)(6)(7)(8) 9,777,445 38.1%

* Less than 1%

(1) Based on 24,777,534 shares outstanding on September 15, 2005.

(2) Address: c/o Natural Gas Systems, Inc., 820 Gessner, Suite 1340, Houston,
Texas 77024.

(3) Includes (i) 1,000,000 shares directly held by Mr. Herlin; (ii) up to
250,000 shares of our common stock issuable upon exercise of options currently
exercisable (or exercisable within 60 days of the date of September 15, 2005);
and (iii) up to 89,844 shares of our common stock issuable upon exercise of
warrants currently exercisable (or exercisable within 60 days of September 15,
2005). Does not include (i) up to 500,000 shares of our common stock issuable
upon the exercise of options and (ii) up to 197,656 shares of our common stock
issuable upon the exercise of warrants, in each case not exercisable within 60
days of the date of September 15, 2005.

(4) Address: c/o Cagan McAfee, 10600 N. De Anza Blvd., Suite 250, Cupertino,
California 95014.

(5) Includes (i) 6,448,000 shares directly held by Mr. Cagan; (ii) 1,000,000
shares held in trust by Mr. Cagan's two daughters; (iii) currently exercisable
warrants to acquire 158,143 shares of common stock held by Mr. Cagan issued in
connection with services rendered through Chadbourn Securities as our placement
agent; and (iv) currently exercisable warrants to purchase 82,500 shares owned
by Cagan McAfee Capital Partners, LLC ("CMCP"), out of a total of warrants to
purchase 165,000 shares owned by CMCP, an entity in which Mr. Cagan owns a 50%
interest and shares voting and dispositive power.

(6) Includes 50,000 shares of our common stock issuable upon exercise of options
currently exercisable (or exercisable within 60 days of the date of this
prospectus), but excludes up to 50,000 shares of our common stock issuable upon
exercise of options not exercisable within 60 days of the date of September 15,
2005.

(7) Includes (i) 1,000,000 shares directly held by Mr. McAfee, (ii) 2,000,000
shares held by P2 Capital LLC, an entity owned 50% by Marguerite McAfee (Mr.
McAfee's spouse) and 25% by each of Mr. and Mrs. McAfee's minor children (over
which shares Mrs. McAfee holds sole dispositive and voting power), (iii)
2,700,000 shares held by McAfee Capital, LLC, an entity owned 50% by each of Mr.
and Mrs. McAfee (over which shares Mr. and Mrs. McAfee share voting and
dispositive power); (iv) 125,000 shares owned by Berg McAfee Companies, LLC (out
of total of 250,000 shares owned by Berg McAfee Companies, LLC), an entity in
which Mr. McAfee owns a 50% interest and shares voting and dispositive power;
and (v) currently exercisable warrants to purchase 82,500 shares owned by Cagan
McAfee Capital Partners, LLC ("CMCP"), out of a total of warrants to purchase
165,000 shares owned by CMCP, an entity in which Mr. McAfee owns a 50% interest
and shares voting and dispositive power. Mr. McAfee disclaims beneficial
ownership over all of the shares held by P2 Capital LLC and 50% of the shares
held by Berg McAfee. McAfee Capital LLC disclaims beneficial ownership over all
of the shares held by P2 Capital LLC.

(8) Includes stock and incentive options totaling 30,208 shares of common stock
issuable to Daryl Mazzanti, the Company's Vice President of Operations.

(9) Includes up to 168,750 shares of our common stock issuable upon the exercise
of stock options exercisable within 60 days of September 15, 2005.

SELLING STOCKHOLDERS

We are registering our shares of common stock in order to permit the selling
stockholders to offer the shares for resale from time to time. Except for the
ownership of our common stock issued pursuant to a Securities Purchase Agreement
between us and Rubicon Master Fund, or as otherwise set forth below, none of the
selling stockholders have had any material relationship with us within the past
three years.

The table below lists the selling stockholders and other information regarding
the beneficial ownership of our shares of common stock by each of the selling
stockholders. The second column lists the number of shares of our common stock
beneficially owned by each selling stockholder as of September 15, 2005.

In accordance with the terms of registration rights agreements with certain of
the selling stockholders, this prospectus generally covers the resale of 100% of
the securities as of the trading day immediately preceding the date the
registration statement is initially filed with the SEC. The selling stockholders
may sell all, some or none of their shares in this offering. See "Plan of
Distribution."

The following selling stockholders are affiliated with a broker-dealer but are
not themselves broker-dealers (other than James F. George, who is himself a
broker-dealer): Mr. George, Joseph B. Childrey, Linden Growth Partners, L.P.,
Peter Rettman and Richard From. These selling stockholders acquired the
securities covered by this prospectus in the ordinary course of business and, at
the time of their acquisition of these securities, they had no agreements or
understandings with any other broker or other person, whether directly or
indirectly, to distribute these securities.

BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING AFTER OFFERING (1)
---------------------------------- --------------------
NUMBER OF
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES PERCENT OFFERED SHARES PERCENT
---------------------------------------------------------- --------- ------- ------------ --------- -------

Rubicon Master Fund (2) 1,200,000 4.6% 1,200,000 -0- --
Prospect Energy Corporation (3) 1,200,000 4.6% 1,200,000 -0- --
Linden Growth Partners, L.P. (4) 500,000 2.0% 500,000 -0-
Bradley Rotter 299,477 1.2% 299,477 -0- --
Berg McAfee Companies, LLC (5) 250,000 1.0% 250,000 -0- --
Sunrise Foundation Trust (6) 249,667 1.0% 249,667 -0- --
Sobrato 1979 Revocable Trust (7) 200,001 * 200,001 -0- --
Michael Brown Trust dated 6/30/2000 (8) 200,000 * 200,000 -0- --
MLPF&S Custodian FBO Michael L. Peterson, IRRA (9) 200,000 * 200,000 -0- --
Thomas R. Grimm TTEE (10) 200,000 * 200,000 -0- --

Tom Lenner 200,000 * 200,000 -0- --
George Andros 100,000 * 100,000 -0- --
Matthew R. Iwasaka 100,000 * 100,000 -0- --
Pepper Snyder 100,000 * 100,000 -0- --
Barry Fay 75,000 * 75,000 -0- --
Karen P. Christensen 57,500 * 57,500 -0- --
Bill Kemp 55,000 * 55,000 -0- --
Barsema Community Property Trust (11) 50,000 * 50,000 -0- --
Douglas J. Hansen Revocable Trust-dated Feb. 22, 2000 (12) 50,000 * 50,000 -0- --
Ellis Group 50,000 * 50,000 -0- --
James F. George 50,000 * 50,000 -0- --
Joseph B. Childrey 50,000 * 50,000 -0- --
Richard From (13) 50,000 * 50,000 -0- --
Sycamore Capital Partners (14) 45,000 * 45,000 -0- --
Elizabeth A. Reed 40,000 * 40,000 -0- --
Blair Capital, Inc. (15) 35,000 * 35,000 -0- --
Alex & Lisa Jachno 30,000 * 30,000 -0- --
George Myers 40,000 * 40,000 -0- --
R.V. Edwards, Jr 30,000 * 30,000 -0- --
Albert T. & Janice T. Kogura 25,000 * 25,000 -0- --
Andrew Hoffman 25,000 * 25,000 -0- --
David J. Scoffone 25,000 * 25,000 -0- --
Elizabeth Rose (24) 25,000 * 25,000 -0- --
James and Patricia Iwasaka 2000 Living Trust (16) 25,000 * 25,000 -0- --
James E. George 25,000 * 25,000 -0- --
Kranenburg Fund, LP (17) 25,000 * 25,000 -0- --
Larry J. & Kathie L. Magdaleno 25,000 * 25,000 -0- --
Peter Rettman 25,000 * 25,000 -0- --
Venkata S K Kollipara Cust Priya Kollipara UTMA OH (18) 25,000 * 25,000 -0- --
Tony Lao 21,800 * 21,800 -0- --

Bellano Family Trust 20,000 * 20,000 -0- --
Colum McDermott 20,000 * 20,000 -0- --
Ellias & Tina Argyropoulos 20,000 * 20,000 -0- --
Gary B. Laughlin 20,000 * 20,000 -0- --
John G. Fallon 20,000 * 20,000 -0- --
Lakshmana Madala 20,000 * 20,000 -0- --
Ruben Rey & Marie A. Rey 20,000 * 20,000 -0- --
Venkata Kollipara 40,000 * 40,000 -0- --
Venkata S K Kollipara Cust Puneet Kollipara UTMA OH (18) 15,000 * 15,000 -0- --
Armen Arzoomanian 10,000 * 10,000 -0- --
Barbara Sherman 10,000 * 10,000 -0- --
Daniel J. Yates 10,000 * 10,000 -0- --
David A. Desilva 10,000 * 10,000 -0- --
Dr. Sayed M. Yossef 10,000 * 10,000 -0- --
Edward W Muransky Revocable Trust (19) 10,000 * 10,000 -0- --
Henry H. Mauz, Jr 10,000 * 10,000 -0- --
Henry Mauz 10,000 * 10,000 -0- --
Howard Kaplan 10,000 * 10,000 -0- --
James Todd Burkdoll 10,000 * 10,000 -0- --
Joseph W. Brown 10,000 * 10,000 -0- --
Kevin Henning 10,000 * 10,000 -0- --
Lakshmana R. Madala MD Defined Benefits Plan (20) 10,000 * 10,000 -0- --
Mark V. Taylor 10,000 * 10,000 -0- --
Michael Kemp 10,000 * 10,000 -0- --
Rex V. Jobe 10,000 * 10,000 -0- --

Steven A. McIntee 10,000 * 10,000 -0- --
Vandeweghe Living Trust 10,000 * 10,000 -0- --
Michael L. Bowman 7,500 * 7,500 -0- --
Richard Garia 6,700 * 6,700 -0- --
Jim Phillips (21) 6,000 * 6,000 -0- --
Bhargava Ravi 5,000 * 5,000 -0- --
G. Alfred Roensch Trust (22) 5,000 * 5,000 -0- --
James & Bernice Campbell 5,000 * 5,000 -0- --
John J. Burke 5,000 * 5,000 -0- --
Lori Bosi 5,000 * 5,000 -0- --
Mace Matiosian 5,000 * 5,000 -0- --
Martin Hagenson 5,000 * 5,000 -0- --
Robert Bellano (23) 5,000 * 5,000 -0- --
Santuccio Ricciardi 5,000 * 5,000 -0- --
Steven Berglund 5,000 * 5,000 -0- --
Tom Beck 5,000 * 5,000 -0- --
Cynthia Hiatt 3,800 * 3,800 -0- --
Alex & Agafio L. Jachno 3,000 * 3,000 -0- --
Barbara M. LaCosse 3,000 * 3,000 -0- --
Leif Johansson 3,000 * 3,000 -0- --

* Less than 1%

(1) The "Beneficial Ownership After Offering" table assumes that all shares
being offered under this prospectus will be resold by the selling stockholders
after this offering, including all convertible securities.

(2) Pursuant to investment agreements, each of Rubicon Fund Management Ltd., a
company organized under the laws of the Cayman Islands, which we refer to in
this prospectus as Rubicon Fund Management Ltd, and Rubicon Fund Management LLP,
a limited liability partnership organized under the laws of the United Kingdom,
which we refer to in this prospectus as Rubicon Fund Management LLP, Mr. Paul
Anthony Brewer, Mr. Jeffrey Eugene Brummette, Mr. William Francis Callanan, Mr.
Vilas Gadkari, Mr. Robert Michael Greenshields and Mr. Horace Joseph Leitch III
share all investment and voting power with respect to the securities held by
Rubicon Master Fund. Mr. Brewer, Mr. Brummette, Mr. Callanan, Mr. Gadkari, Mr.
Greenshields and Mr. Leitch control both Rubicon Fund Management Ltd and Rubicon
Fund Management LLP. Each of Rubicon Fund Management Ltd, Rubicon Fund
Management LLP, Mr. Brewer, Mr. Brummette, Mr. Callanan, Mr. Gadkari, Mr.
Greenshields and Mr. Leitch disclaim beneficial ownership of these securities.

(3) Represents shares of common stock issuable upon exercise of warrants issued
in connection with the Prospect Facility. John F. Berry has voting and
investment control of these securities. These five year warrants give Prospect
the right to purchase up to 600,000 shares of our common stock at an exercise
price of $0.75 per share, and to purchase up to an additional (i) 400,000 shares
of our common stock at an exercise price of $0.75 per share, and 200,000 shares
of our common stock at an exercise price of $1.36 (collectively (i) and (ii) are
the "revocable warrants"); provided that the revocable warrants are subject to
cancellation by us prior to their exercise if we meet certain operating cash
flow targets.

(4) Paul J. Coviello has voting and investment control of these securities.

(5) Mr. Eric A. McAfee is a founder and major stockholder of our company (see
"Security Ownership of Certain Beneficial Owners and Management") and has voting
and investment control of these securities. Mr. McAfee has represented to us
that he is a 50% owner of Berg McAfee Companies, LLC, which owns approximately
30% of the shares of Verdisys, Inc. a company for which Mr. McAfee previously
served as Vice Chairman of the Board. We paid $130,000 to Verdisys during
calendar year 2003 for horizontal drilling services, and $25,960 to Verdisys
during 2004. In 2004, Mr. McAfee resigned from the Board of Directors of
Verdisys, but continues to hold shares in both Verdisys and our company. Mr.
McAfee is also a Managing Director of CMCP, which has acted as a financial
consultant to our company. During fiscal 2003, we paid CMCP $32,500 as monthly
retainers. During the six months ended June 30, 2004, we paid CMCP $30,000 as
monthly retainers and recorded an additional $150,000 for accrued but unpaid
retainers. During the nine months ended March 31, 2005, we paid CMCP $15,000 as
monthly retainers and recorded an additional $120,000 for accrued but unpaid
retainers. In May 2005 we paid CMCP $180,000 for accrued but unpaid monthly
retainers. In May 2004 we issued CMCP seven-year warrants to purchase up to
165,000 shares of our common stock as additional compensation for arranging the
merger of Old NGS into our company. These warrants have an exercise price of
$1.00 per share.

(6) Nathan Low and Lisa Low share voting and investment control of these
securities.

(7) John A. Sobrato has voting and investment control of these securities.

(8) Michael Brown has voting and investment control of these securities.

(9) Michael L. Peterson has voting and investment control of these securities.

(10) Thomas R. Grimm has voting and investment control of these securities.

(11) Dennis Barsema and Stacey Barsema share voting and investment control of
these securities.

(12) Douglas J. Hansen has voting and investment control of these securities.

(13) Represents shares sold to Richard From by CMCP at a nominal price in
connection with consulting services performed for CMCP. We agreed to register
these shares in consideration for various consulting services performed by Mr.
From for us.

(14) Represents warrants to purchase 45,000 shares issued to Sycamore Capital
Partners in connection with consulting services performed for us. Robert T Scott
has voting and investment control over these securities.

(15) Neil C. Sullivan has voting and investment control of these securities.

(16) James T. Iwasaka has voting and investment control of these securities.

(17) Kranenburg Capital Management, LLC is a company controlled by: Philip
Kranenburg, Peter Falk, Julianna Falk and Fred Bauthier, who have voting and
investment control of these securities.

(18) Venkata Kollipara has voting and investment control of these securities.

(19) Edward W. Muransky has voting and investment control of these securities.

(20) Lakshmana Madala has voting and investment control of these securities.

(21) Represents 6,000 shares purchased by Jim Phillips from Laird Q. Cagan at a
nominal price in connection with consulting services performed for Mr. Cagan.

(22) Represents 5,000 shares sold to G. Alfred Roensch Trust by CMCP at a
nominal price in connection with consulting services performed for CMCP. We
agreed to register these shares in consideration for various consulting services
performed by Mr. Roensch for us. Mr. Roensch has voting and investment control
of these securities.

(23) Represents warrants to purchase 5,000 shares issued to Robert Bellano in
connection with consulting services performed for us.

(24) Elizabeth Rose is the mother of Laird Q. Cagan, Chairman of our board of
directors.

RELATIONSHIPS WITH SELLING STOCKHOLDERS

All stockholders, other than as disclosed in the footnotes above, are investors
who acquired their securities from us in one or more private placements of
common stock and who have had no position, office, or other material
relationship (other than as purchasers of securities) with us or any of our
affiliates within the past three years.

The information in the above table is as of the date of this prospectus.
Information concerning the selling stockholders may change from time to time and
any such changed information will be described in supplements to this prospectus
if and when necessary.

PLAN OF DISTRIBUTION

We are registering shares of our common stock to permit the resale of these
shares of our common stock by the holders of such shares of our common stock
from time to time after the date of this prospectus. We will not receive any of
the proceeds from the sale by the selling stockholders of the shares of our
common stock, other than the sale price of any common stock we sell to selling
stockholders upon the exercise of their warrants. We will bear all fees and
expenses incident to our obligation to register the shares of our common stock.

The selling stockholders may sell all or a portion of the shares of our common
stock owned by them and offered hereby from time to time directly or through one
or more underwriters, broker-dealers or agents. If the shares of our common
stock are sold through underwriters or broker-dealers, the selling stockholders
will be responsible for underwriting discounts or commissions or agent's
commissions. The shares of our common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,

o on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;

o in the over-the-counter market;

o in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

o through the writing of options, whether such options are listed on an
options exchange or otherwise;

o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;

o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;

o an exchange distribution in accordance with the rules of the applicable
exchange;

o privately negotiated transactions;

o short sales; (provided that no short sales shall occur prior to the
effectiveness of this registration statement of which this prospectus
forms a part)

o sales pursuant to Rule 144;

o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;

o a combination of any such methods of sale; and

o any other method permitted pursuant to applicable law.

If the selling stockholders effect such transactions by selling shares of our
common stock to or through underwriters, broker-dealers or agents, such
underwriters, broker-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of the shares of our common stock for whom they may
act as agent or to whom they may sell as principal (which discounts, concessions
or commissions as to particular underwriters, broker-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the shares of our common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers or others,
which may in turn engage in short sales of the shares of our common stock in the
course of hedging in positions they assume. The selling stockholders may also
sell shares of our common stock short and deliver shares of our common stock
covered by this prospectus to close out short positions and to return borrowed
shares in connection with such short sales. The selling stockholders may also
loan or pledge shares of our common stock to broker-dealers or others that in
turn may sell such shares.

The selling stockholders may pledge or grant a security interest in some or all
of the shares of our common stock owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of our common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933, amending, if necessary, the
list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus. The
selling stockholders also may transfer and donate the shares of our common stock
in other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus, including, without limitation, with respect to shares being
sold by Rubicon Master Fund, in accordance with Section 2(f) of the Securities
Purchase Agreement.

The selling stockholders and any broker-dealer participating in the distribution
of the shares of our common stock may be deemed to be "underwriters" within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the shares of our common stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of our common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
stockholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.

Under the securities laws of some states, the shares of our common stock may be
sold in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of our common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.

We cannot assure you that any selling stockholder will sell any or all of the
shares of our common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.

The selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of our common stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of our
common stock to engage in market-making activities with respect to the shares of
our common stock. All of the foregoing may affect the marketability of the
shares of our common stock and the ability of any person or entity to engage in
market-making activities with respect to the shares of our common stock.

We will pay all expenses of the registration of the shares of our common stock
pursuant to various registration rights agreements, including, without
limitation, SEC filing fees and expenses of compliance with state securities or
"blue sky" laws; provided, however, that a selling stockholder will pay all
underwriting discounts and selling commissions, if any. We will indemnify the
selling stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholders specifically for use in this prospectus, in
accordance with the applicable registration rights agreements, or we may be
entitled to contribution.

Once sold under the shelf registration statement, of which this prospectus forms
a part, the shares of our common stock will be freely tradable in the hands of
persons other than our affiliates.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Laird Q. Cagan, the Chairman of our Board of Directors, is a Managing Director
of Cagan McAfee Capital Partners, LLC ("CMCP"). CMCP performs financial advisory
services for us pursuant to a written agreement and is paid a monthly retainer
of $15,000. In addition, Mr. Cagan is a registered representative of Chadbourn
Securities, Inc. ("Chadbourn"), our non-exclusive placement agent for private
financings. Pursuant to the Agreement between Mr. Cagan, Chadbourn and us, we
pay a cash fee equal to 8% of gross equity proceeds and warrants equal to 8% of
the shares placed by CMCP. During 2003, we expensed and paid CMCP $32,500 for
monthly retainers.

In connection with the founding of the Company, 18,000,000 shares of Old NGS
common stock were directly and indirectly purchased by various parties as
founder's shares, including, 1,000,000 shares by Robert S. Herlin as an
incentive to perform as the Company's President and CEO; 1,000,000 shares by
Liviakis Financial Communications, Inc., the Company's investor relations firm;
7,500,000 shares by Laird Q. Cagan, the Company's Chairman and Managing Director
of CMCP; and 5,700,000 by Eric M. McAfee, Managing Director of CMCP, and 450,000
by John Pimentel, a member of the Company's Board of Directors.

During the six months ended June 30, 2004 we expensed $90,000 in monthly
retainers to CMCP, $60,000 of which remained unpaid at June 30, 2004, and
charged $80,000 to stockholder's equity as a reduction of the proceeds from
common stock sales in the amount of $1,000,000. The $80,000 paid to Chadbourn
Securities and Laird Q. Cagan was for commissions from the sale of our common
stock. Also during the six months ended June 30, 2004 we issued warrants to
purchase 319,932 shares of Common Stock to CMCP, Chadbourn Securities and Laird
Q. Cagan and their assigns in connection with arranging the merger, (240,000
warrants) and placement of 999,145 common shares (79,932 warrants). These
warrants have a $1.00 exercise price and a seven year term.

During the fiscal year ended June 30, 2005, we issued warrants to purchase
91,359 and 5,427 shares of common stock to Laird Q. Cagan and Chadbourn
Securities, Inc., respectively, in connection with capital raising services.
During the same period, we paid $257,890 cash commissions to Laird Q. Cagan and
Chadbourn Securities, Inc., in connection with capital raising activities.
Further, during fiscal year ended June 30, 2005, the Company expensed and paid
CMCP $180,000 for monthly retainers earned in fiscal 2005, and paid $60,000 for
monthly retainers earned, but unpaid, during fiscal 2004.

Also during fiscal 2005, from August through December, 2004, Mr. Cagan loaned
us, through a series of advances, $920,000, pursuant to a secured promissory
note bearing interest at 10% per annum and a 5% origination fee (the "Bridge
Loan") earmarked for our purchase of working interests in the Tullos Urania
Field in Louisiana, working capital and certain costs related to the closing of
the Prospect Facility. On February 15, 2005, we repaid the Bridge Loan, totaling
$953,589 with accrued interest, in full.

Eric McAfee, also a Managing Director of Cagan McAfee Capital Partners, has
served as Vice Chairman of the Board of Verdisys, Inc., the provider of certain
horizontal drilling services to the Company. Subsequently in 2004, Mr. McAfee
resigned from the Board of Directors of Verdisys, but continues to hold shares
in both companies. Mr. McAfee has represented to the Company that he is also a
50% owner of Berg McAfee Companies, LLC, which owns approximately 30% of
Verdisys, Inc. NGS paid $130,000 to Verdisys (Blast Energy) during 2003 and
$25,960 during 2004 for horizontal drilling services.

DESCRIPTION OF SECURITIES

We are presently authorized to issue 100,000,000 shares of $.001 par value
common stock and 5,000,000 shares of $0.001 par value preferred stock. As of
September 15, 2005, we had 24,777,534 shares of common stock issued and
outstanding and no preferred stock issued and outstanding.

COMMON STOCK

The holders of our common stock are entitled to equal dividends and
distributions per share with respect to our common stock when, as and if
declared by our board of directors from funds legally available therefor. No
holder of any shares of our common stock has a preemptive right to subscribe for
any of our securities, nor are any of our common shares subject to redemption or
convertible into other securities. Upon liquidation, dissolution or winding-up
of our company, and after payment of creditors and preferred stockholders, if
any, our remaining assets will be divided pro rata on a share-for-share basis
among the holders of our shares of common stock. All shares of our common stock
now outstanding are fully paid, validly issued and non-assessable. Each share of
our common stock is entitled to one vote with respect to the election of any
director or any other matter upon which stockholders are required or permitted
to vote.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

In connection with the Merger, we assumed the obligations of 600,000 stock
options under our newly acquired subsidiary's 2003 Stock Option Plan. No further
shares will be issued under the 2003 Stock Option Plan. On August 2, 2004, our
stockholders approved the adoption of our 2004 Stock Plan, under which 4,000,000
shares are authorized for issuance. We adopted an equity incentive plan, the
2004 Stock Plan, pursuant to which we are authorized to grant options,
restricted stock and stock appreciation rights to purchase up to 4,000,000
shares of our common stock to our employees, officers, directors, consultants
and other agents and advisors. Our wholly owned subsidiary, Natural Gas Systems,
Inc., a Delaware corporation ("Old NGS"), also adopted a Stock Option Plan in
2003. The 2003 Stock Option Plan was adopted prior to the consummation of the
merger with Old NGS so as to enable us to issue in connection with the merger
options to purchase our common stock in exchange for all of the stock options
that were outstanding under Old NGS's option plan. Awards under the plan may
consist of stock options (both non- qualified options and options intended to
qualify as "Incentive Stock Options" under Section 422 of the Internal Revenue
Code of 1986, as amended), restricted stock awards and stock appreciation
rights.

We currently have outstanding options under our 2003 Stock Option Plan to
purchase 510,000 shares of our common stock. We currently have outstanding
options and grants under our 2004 Stock Plan to purchase 1,881,000 shares of our
common stock, leaving 2,119,000 shares of common stock available for issuance
under the 2004 Stock Plan.

PREFERRED STOCK

Under our articles of incorporation, our board of directors has the power,
without further action by the holders of our common stock, to designate the
relative rights and preferences of our preferred stock, and to issue our
preferred stock in one or more series as designated by our board of directors.
The designation of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of our
common stock or our preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of our company without further stockholder action and may adversely
affect the rights and powers, including voting rights, of the holders of our
common stock.

REGISTRATION RIGHTS

Under the terms of the private placements that we completed in 2003, 2004 and
January 2005, we are required under certain conditions to register certain
shares of our common stock and certain shares of our common stock that may be
issued in the future upon exercise of the warrants that were acquired by the
investors in those offerings. In addition, in May of 2005, under the terms of
our private placement of 1,200,000 shares of our common stock with a European
institutional investor, we contemporaneously entered into a registration rights
agreement (the "RRA"). The RRA requires us, among other things, to obtain and
maintain an effective registration statement with the SEC for this investor's
shares, failing which, subjects us to the payment of penalties not to exceed 1%
of the share proceeds, or $30,000, for each month of non-compliance. Penalties
are incurred for each month for which a registration statement has not become
effective, beginning October 6, 2005. Penalties may also be incurred for any
month for which effectiveness has not been maintained prior to the shares
becoming tradable under Rule 144, but in no event can the penalty cumulatively
exceed 8% or $240,000. The registration statement was not declared effective as
of October 6, 2005. Accordingly, we will be required to make at least one
$30,000 payment to this investor. We can give no assurance that this
registration statement will become or be maintained effective. Accordingly, we
have accrued, against our equity account $100,000 for penalties and other
transaction costs which may become due.

We are required to use our reasonable best efforts to maintain the effectiveness
of the registration statement of which this prospectus is a part until the first
anniversary of its effectiveness or until all of the registered shares have been
sold, whichever comes first, except that we will be permitted to suspend the use
of the registration statement during certain periods under certain
circumstances. We will bear all registration expenses, other than underwriting
discounts and commissions.

In connection with various consulting services, we also agreed to register the
71,000 shares of our common stock held by Demetri Argyropoulos, Richard From, G.
Alfred Roensch Trust and Jim Phillips. This prospectus includes the shares that
we are obligated to register under the foregoing registration rights agreements.

SHARES ELIGIBLE FOR FUTURE SALE

As of September 30, 2005, we had 24,777,534 shares of common stock outstanding.
That number does not include (i) the 2,246,000 shares that are reserved for
issuance under outstanding options that may be issued if and when the options
are exercised, or (ii) the 2,423,467 shares and that may be issued upon the
exercise of warrants, of which 1,250,000 are included in this prospectus.

Freely Tradable Shares After This Offering. As of May 20, 2005, only 1,036,255
of our 24,777,534 outstanding shares were free trading shares. However, upon the
registration of the 5,191,445 currently outstanding shares covered by this
prospectus, and the exercise and sale of the 1,250,000 warrant shares included
in this prospectus, all of these 6,441,445 shares will also be freely tradable
without restriction or limitation under the Securities Act. As a result, after
the completion of this offering, assuming the exercise of warrants to purchase
1,250,000 shares of our common stock, there will be a total of 7,477,600 shares
of our common stock that will be tradable without restriction under the
Securities Act, in addition to any restricted shares sold under Rule 144. Other
than these 7,477,600 shares, the remaining 17,299,834 shares are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act.

Rule 144. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, including persons who may be deemed our
"affiliates," as that term is defined under the Securities Act, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares (approximately 247,776
shares if the outstanding warrants and options are not exercised, or
approximately 285,275 shares if all warrant shares included in the prospectus
are exercised) or the average weekly trading volume of shares during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the company. A person who has not been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned his shares for at least two years, would be entitled under Rule 144(k) to
sell such shares without regard to any manner of sale or volume limitations
under Rule 144.

Of the "restricted shares" currently outstanding, nearly all shares (over 23
million) are currently eligible for public resale under Rule 144. The sale, or
availability for sale, of substantial amounts of our common stock could, in the
future, adversely affect the market price of our common stock and could impair
our ability to raise additional capital through the sale of our equity
securities or debt financing. The future availability of Rule 144 to our holders
of restricted securities would be conditioned on, among other factors, the
availability of certain public information concerning our company.

Form S-8 Registration of Options. We intend to file a registration statement on
Form S-8 covering the shares of our common stock that have been issued or
reserved for issuance under our stock option plan, which would permit the resale
of such shares in the public marketplace.

TRANSFER AGENT

Our transfer agent currently is Continental Stock Transfer, 17 Battery Park, New
York, NY 10004.

EXPERTS

The Company's financial statements for the twelve month period ended June 30,
2005, the six month period ended June 30, 2004 and the period from September 23,
2003 (inception) to December 31, 2003, and the Statements of Revenues and Direct
Operating Expenses of the Delhi Field for the period from January 1, 2003 to
September 23, 2003 and for the nine-month period ended December 31, 2002,
included in this prospectus have been audited by Hein & Associates, LLP to the
extent and for the periods indicated in their report thereon. Such financial
statements have been included in this prospectus and registration statement in
reliance upon the report of Hein & Associates, LLP and upon the authority of
such firm as experts in auditing and accounting.

Oil and gas reserve quantities and future net revenues information included in
this prospectus and registration statement were extracted from reports prepared
by W. D. Von Goten & Co., independent petroleum engineers.

LEGAL MATTERS

Troy & Gould Professional Corporation, Los Angeles, California, has rendered an
opinion with respect to the validity of the shares of our common stock covered
by this prospectus.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the information and periodic reporting requirements of the
Exchange Act, and, in accordance with that act, file periodic reports, proxy
statements and other information with the SEC. The periodic reports, proxy
statements and other information filed by us are available for inspection and
copying at prescribed rates at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information about the operation of the SEC's Public Reference Room. The
SEC also maintains an Internet site that contains all reports, proxy statements
and other information that we file electronically with the SEC. The address of
that website is http://www.sec.gov.

We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock offered under this prospectus. The
registration statement, including the exhibits to the registration statement,
contains additional information about us and the common stock offered by this
prospectus. The rules and regulations of the SEC allow us to omit from this
prospectus certain information that is included in the registration statement.
For further information about us and our common stock, you should review the
registration statement and the exhibits filed with the registration statement.

GLOSSARY OF TERMS

GLOSSARY OF SELECTED PETROLEUM TERMS

The following abbreviations and definitions are terms commonly used in the crude
oil and natural gas industry and throughout this prospectus:

"BBL" A standard measure of volume for crude oil and liquid petroleum products.
One barrel equals 42 U.S. gallons.

"BCF" Billion cubic feet of natural gas at standard conditions (see MCF).

"BOE" Barrels of crude oil equivalent. Calculated by converting 6 MCF of natural
gas to 1 BBL of crude oil.

"BTU" or "British Thermal Unit" The standard unit of measure of energy equal to
the amount of heat required to raise the temperature of one pound of water 1
degree Fahrenheit. One BBL of crude is typically 5.8 MMBTU, and one standard MCF
is typically 1 MMBTU. 1 MMBTU is one million BTU, and 1 MMMBTU is one billion
BTU.

"FIELD" An area consisting of one or more reservoirs all grouped on or related
to the same geologic feature.

"GROSS WELL" The total number of wells participated in, regardless of the amount
of working interest owned. (See net wells).

"MBOE" One thousand barrels of crude oil equivalent.

"MCF" One thousand cubic feet of natural gas at standard conditions, being
approximately sea level pressure and 60 degrees Fahrenheit temperature. Standard
pressure in the state of Louisiana is deemed to be 15.025 psi by regulation but
varies in other states. 1 MMCF is one million cubic feet of natural gas.

"NET WELLS" The aggregate fractional working interests owned, e.g., a 20%
working interest in each of 5 gross wells equals one net well. (See Gross Well).

"NGL" Natural gas liquids, being the combination of ethane, propane, butane and
natural gasolines that can be removed from natural gas through processing,
typically through refrigeration plants that utilize low temperatures, or through
J-T plants that utilize compression, temperature reduction and expansion to a
lower pressure.

"NYMEX" New York Mercantile Exchange.

"PERMEABILITY" The measure of ease with which petroleum can move through a
reservoir.

"POROSITY" The relative volume of the pore space compared to the total bulk
volume of the reservoir.

"PREPARED" As used in the context of our reserve reports, refers to the process
used by W. D. Von Gonten and Co. to independently estimate future reserves and
revenues attributable to our oil and gas interests, base on W. D. Von Gonten and
Co.'s professional expertise as petroleum engineers.

"PROVED RESERVES" The estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e. prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions. A complete definition of reserves can
be found in Regulation S-X, Subsection 4-10 (a). Proved Developed Producing
reserves are proved reserves that are currently producing.

"ROYALTY OR ROYALTY INTEREST" The mineral owner's share of crude oil or natural
gas production (typically 1/8, 1/6 or 1/4), free of costs, but subject to
severance taxes unless the lessor is a government. In certain circumstances, the
royalty owner bears a proportionate share of the costs of making the natural gas
saleable, such as processing, compression and gathering.

"PSI" Pounds per square inch, a measure of pressure.

"SHUT-IN WELL" A well that is not on production, but has not been plugged and
abandoned. Wells may be shut-in in anticipation of future utility as a producing
well, plugging and abandonment or other use.

"PV-10" The present value of estimated future net revenues computed by applying
current prices of oil and gas reserves (with consideration of price changes only
to the extent provided by contractual arrangements) to estimated future
production of proved oil and gas reserves as of the date of the latest balance
sheet presented, less estimated future expenditures (based on current costs to
be incurred in developing and producing the proved reserves computed using a
discount factor of ten percent and assuming continuation of existing economic
conditions.

"STANDARDIZED MEASURE" An estimate of future net reserves from a property, is
calculated in the same exact same fashion as a PV-10 value, except that the
projected revenue stream is adjusted to account for the estimated amount of
federal income tax that must be paid.

"WORKING INTEREST" The interest in the crude oil and natural gas in place which
is burdened with the cost of development and operation of the property. Also
referred to as the operating interest.

"WORK-OVER" A remedial operation on a completed well to restore, maintain or
improve the well's production.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of June 30, 2005, June 30, 2004 and December 31,
2003

Consolidated Statements of Operations for the Twelve Months ended June 30, 2005,
the Six Months ended June 30, 2004 and the period from September 23, 2003
(inception) to December 31, 2003

Consolidated Statements of Stockholders' Equity for the Twelve Months ended June
30, 2005, the Six Months ended June 30, 2004 and the period from September 23,
2003 (inception) to December 31, 2003

Consolidated Statements of Cash Flows for the Twelve Months ended June 30, 2005,
Six Months ended June 30, 2004 and the period from September 23, 2003
(inception) to December 31, 2003

F-1

Notes to Consolidated Financial Statements

NATURAL GAS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

June 30, 2005 June 30, 2004 December 31, 2003
------------- ------------- -----------------

Assets

Current Assets:
Cash $ 2,548,688 $ 367,831 $ 830,312
Accounts receivable, trade 300,761 24,387 56,837
Inventories 222,470 115,859 109,216
Prepaid expenses 84,304 69,067 25,930
Retainers and deposits 56,335 5,000 210,000
------------- ------------- -----------------
Total current assets 3,212,558 582,144 1,232,295

Oil & Gas properties - full cost 5,276,303 3,075,438 2,971,468
Oil & Gas properties - not amortized 61,887 105,225 --

Less: accumulated depletion (313,391) (55,509) (13,960)
------------- ------------- -----------------
Net oil & gas properties 5,024,799 3,125,154 2,957,508

Furniture, fixtures and equipment, at cost 12,113 3,091 3,091

Less: accumulated depreciation (3,401) (1,159) (386)
------------- ------------- -----------------

Net furniture, fixtures, and equipment 8,712 1,932 2,705

Restricted deposits 863,089 301,835 301,835
Other assets 356,066 -- --
------------- ------------- -----------------
Total assets $ 9,465,224 $ 4,011,065 $ 4,494,343
============= ============= =================

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable $ 240,389 $ 139,188 $ 114,188
Accrued liabilities 176,470 50,073 41,118
Registration costs 100,000 0 0
Notes payable, current 6,754 776,235 1,500,000
Discount on notes payable 0 0 (62,927)
Royalties payable 89,713 0 665
------------- ------------- -----------------
Total current liabilities 613,326 965,496 1,593,044

Long term liabilities:
Notes payable 4,000,000 0 0
Discount on notes payable (1,093,452) 0 0
Asset retirement obligations 433,250 311,442 305,004
------------- ------------- -----------------
Total liabilities 3,953,124 1,276,938 1,898,048

Stockholders' equity:
Common Stock, par value $0.001 per share;
100,000,000 shares authorized, 24,774,606,
22,945,406 and 21,772,362 issued and
outstanding as of June 30, 2005, June 30, 2004,
and December 31, 2003, respectively 24,774 22,945 21,772
Additional paid-in capital 9,611,767 4,453,905 3,398,178
Deferred stock based compensation (595,283) (378,136) (486,750)
Accumulated deficit (3,529,158) (1,364,587) (336,905)
------------- ------------- -----------------
Total stockholders' equity 5,512,100 2,734,127 2,596,295
------------- ------------- -----------------
Total liabilities and stockholders' equity $ 9,465,224 $ 4,011,065 $ 4,494,343
============= ============= =================

See accompanying notes to consolidated financial statements.

F-2

NATURAL GAS SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

For the Period from
Twelve Months September 23,2003
Ended Six Months Ended (inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------- ---------------- -------------------

Revenues:
Oil sales $ 1,335,288 $ 117,509 $ 24,229
Gas sales 358,433 649 --
Price risk management activities (58,534) -- --
------------- ---------------- -------------------
Total revenues 1,635,187 118,158 24,229

Expenses:
Operating costs 874,876 134,420 76,303
Production taxes 68,386 14,581 3,002
Depreciation, depletion and amortization 260,124 41,549 13,960
Reverse merger fees and expenses -- 370,000 --
General and administrative (includes
non-cash stock-based compensation expense of
$707,117, $108,614 and $50,400 the periods
ending June 30, 2005, June 30, 2004 and
December 31, 2003, respectively.) 2,220,780 542,761 239,093
------------- ---------------- -------------------
Total expenses 3,424,166 1,103,311 332,358
------------- ---------------- -------------------
Loss from operations (1,788,979) (985,153) (308,129)

Other revenues and expenses:
Interest income 11,709 4,093 1,148
Interest expense (387,301) (46,622) (29,924)
------------- ---------------- -------------------
Total other revenues and expenses (375,592) (42,529) (28,776)
------------- ---------------- -------------------
Net loss $ (2,164,571) $ (1,027,682) $ (336,905)
============= ================ ===================

Loss per common share:
basic and diluted $ (0.09) $ (0.05) $ (0.02)
============= ================ ===================
Weighted average number of common shares,
basic and diluted 23,533,922 22,057,614 20,091,720
============= ================ ===================

See accompanying notes to consolidated financial statements.

F-3

NATURAL GAS SYSTEMS, INC. AND SUBIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the twelve months ended June 30, 2005, the six months ended June 30, 2004
and the Period from September 23, 2003 (Inception) to December 31, 2003

Additional Deferred Total
Paid-in Stock Based Accumulated Stockholders'
Shares Dollars Capital Compensation Deficit Equity
---------- ------- ----------- ------------ ----------- -------------

Balances, September 23, 2003 -- $ -- $ -- $ -- $ -- $ --

Sales of common stock 21,772,362 21,772 2,861,028 -- -- 2,882,800
Stock-based compensation -- -- 537,150 (486,750) -- 50,400
Net loss -- -- -- -- (336,905) (336,905)
Balances, December 31, 2003 21,772,362 21,772 3,398,178 (486,750) (336,905) 2,596,295

Sales of common stock before merger 923,377 923 825,977 -- -- 826,900
Sales of common stock 249,667 250 229,750 -- -- 230,000
Deferred compensation -- -- -- 108,614 -- 108,614
Net loss -- -- -- -- (1,027,682) (1,027,682)
Balances, June 30, 2004 22,945,406 22,945 4,453,905 (378,136) (1,364,587) 2,734,127

Sales of common stock 1,829,200 1,829 4,502,517 -- -- 4,504,346
Fair value of warrants issued with debt -- -- 1,149,008 -- -- 1,149,008
Transaction and registration costs -- -- (493,663) -- -- (493,663)
Deferred compensation -- -- -- (217,147) -- (217,147)
Net loss -- -- -- -- (2,164,571) (2,164,571)
Balances, June 30, 2005 24,774,606 $24,774 $ 9,611,767 $ (595,283) $(3,529,158) $ 5,512,100

See accompanying notes to consolidated financial statements.

F-4

NATURAL GAS SYSTEMS, INC. AND SUBIDIARIES
Consolidated Statements of Cash Flows

For the Period from
September 23, 2003
Twelve Months Ended Six Months Ended (inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Cash flows from operating activities:
Net loss $ (2,164,571) $ (1,027,682) $ (336,905)

Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depletion 257,882 41,549 13,960
Depreciation 2,242 773 386
Non-cash stock-based compensation expense 707,117 108,614 50,400
Accretion of asset retirement obligations 21,824 6,438 3,169
Accretion of debt discount and non-cash interest 78,882 -- 29,924
Changes in assets and liabilities:
Accounts receivable, trade (276,374) 32,450 (28,762)
Inventories (106,611) (6,643) (109,216)
Accounts payable 101,201 24,999 114,188
Royalties payable 89,713 -- --
Accrued liabilities 226,397 8,289 41,783
Prepaid expenses (15,237) (43,137) (25,930)
Net cash used by operating activities (1,077,535) (854,350) (247,003)
Cash flows from investing activities:
Capital expenditures for oil and gas properties (2,057,543) (209,194) (1,290,560)
Capital expenditures for furniture, fixtures and
equipment (9,022) -- (3,090)
Restricted deposits and retainers (612,589) 205,000 (511,835)
Other assets (99,469) -- --
------------------- ---------------- -------------------
Net cash used in investing activities (2,778,623) (4,194) (1,805,485)
Cash flow from financing activities:
Payments on notes payable (1,725,167) (710,327) --
Proceeds from notes payable 3,806,678 49,490 --
Deferred financing costs (279,924) -- --
Proceeds from issuance of common stock and fair
value of warrants issued with debt 4,729,091 1,056,900 2,882,800
Transaction and registration costs (493,663) -- --
------------------- ---------------- -------------------
Net cash provided by financing activities 6,037,015 396,063 2,882,800
------------------- ---------------- -------------------
Increase (decrease) in cash and cash equivalents 2,180,857 (462,481) 830,312
Cash and cash equivalents, beginning of period 367,831 830,312 --
------------------- ---------------- -------------------
Cash and cash equivalents, end of period $ 2,548,688 $ 367,831 $ 830,312
=================== ================ ===================

Supplemental disclosure of cash flow information:
Interest paid $ 308,419 $ 46,622 $ --
Income taxes paid $ -- $ -- $ --

Non-cash transactions:
Seller note issued to acquire properties, net of discount $ -- $ -- $ 1,407,049
Assumption of asset retirement obligations $ 99,984 $ -- $ 301,835

See accompanying notes to consolidated financial statements.

F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005

NATURAL GAS SYSTEMS, INC. AND SUBSIDIARIES

1. Company's Business

Reality Interactive, Inc. (" Reality "), a Nevada corporation that traded on the
OTC Bulletin Board under the symbol RLYI.OB, and the predecessor of Natural Gas
Systems, Inc., was incorporated on May 24, 1994 for the purpose of developing
technology-based knowledge solutions for the industrial marketplace. On April
30, 1999, Reality ceased business operations, sold substantially all of its
assets and terminated all of its employees. Subsequent to ceasing operations,
Reality explored other potential business opportunities to acquire or merge with
another entity, while continuing to file reports with the SEC. During the two
years prior to May 26, 2004, Reality represented that it had not conducted any
operations and had minimal assets and liabilities.

On May 26, 2004, Natural Gas Systems, Inc., a privately owned Delaware
corporation formed in September of 2003 (" Old NGS "), was merged into a wholly
owned subsidiary of Reality and Reality changed its name to Natural Gas Systems,
Inc. On the effective date of the merger, Laird Q. Cagan was elected as Chairman
of the Board of Directors of Reality and Robert S. Herlin and Sterling H.
McDonald, the CEO and CFO of Old NGS, were elected CEO and CFO of Reality,
respectively. The corporation was renamed Natural Gas Systems, Inc. ("we", "us",
"our", "our company", "Company" or "NGS") and adopted a June 30 fiscal year end.

Headquartered in Houston, Texas, Natural Gas Systems, Inc. is a petroleum
company engaged primarily in the acquisition, exploitation and development of
properties for the production of crude oil and natural gas from underground
reservoirs. NGS acquires established oil and gas properties and exploits them
through the application of conventional and specialized technology to increase
production, ultimate recoveries, or both. At June 30, 2005, NGS conducted
operations through its 100% working interest in the Delhi, Tullos Urania,
Crossroads, and Colgrade fields in Louisiana. Tullos Urania, Crossroad and
Colgrade are referred to collectively herein as the "Tullos Field (Area)".

All regulatory filings and other historical information prior to May 26, 2004
apply to Reality, the predecessor of the Company. NGS trades on the OTC Bulletin
Board under the symbol NGSY.OB. All stock information is adjusted to reflect
Reality's 40:1 reverse stock split effected prior to the merger with NGS.

2. Significant Risks and Uncertainties

Preparation of the Company's financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and contingencies as of the balance sheet date, and the reported
amount of revenues and expenses during the reporting period. On an ongoing
basis, management reviews its estimates, including those related to litigation,
environmental liabilities, income taxes, abandonment costs and the determination
of proved reserves. Changes in circumstances may result in revised estimates and
actual results may differ from those estimates.

The Company's business makes it vulnerable to changes in crude oil and natural
gas prices. Such prices have been volatile in the past and can be expected to be
volatile in the future. This volatility can dramatically affect cash flows and
proved reserves, since price declines reduce the estimated quantity of proved
reserves and increase annual amortization expense (which is based on proved
reserves), or could potentially result in an impairment charge. Other risks
related to proved reserves, revenues, and cash flows include the Company's
current reliance on the concentration of a few wells. The reserve report dated
July 1, 2005, identified twelve wells that make up approximately 60% of the
Company's PV-10 proved reserves, as compared to six wells at July 1, 2004. For
the production month of June 2005, approximately 29% of the Company's production
was derived from three wells, as compared to 85% in June 2004.

3. Summary of Significant Accounting Policies

Principles of Consolidation -- The consolidated financial statements include the
Company and its subsidiaries. All material inter-company accounts and
transactions have been eliminated.

Oil and Gas Properties and Furniture, Fixtures and Equipment --The Company
follows the full cost method of accounting for its investments in oil and
natural gas properties. All costs incurred in the acquisition, exploration and
development of oil and natural gas properties, including unproductive wells, are
capitalized. Proceeds from the sale of oil and natural gas properties are
credited to the full cost pool, unless the sale involves a significant quantity
of reserves, in which case a gain or loss is recognized. Under the rules of the
Securities and Exchange Commission ("SEC") for the full cost method of
accounting, the net carrying value of oil and natural gas properties is limited
to the sum of the present value (10% discount rate) of the estimated future net
cash flows from proved reserves based on current prices as of the balance sheet
date, and excluding future cash outflows associated with settling asset
retirement obligations, plus the lower of cost or estimated fair market value of
unproved properties adjusted for related income tax effects.

Capitalized costs of proved oil and natural gas properties are depleted on a
unit of production method using proved oil and natural gas reserves. Costs
depleted include net capitalized costs subject to depletion and estimated future
dismantlement, restoration and abandonment costs.

F-6

The costs of certain unevaluated leasehold acreage and wells being drilled are
not being amortized. Costs not being amortized are periodically assessed for
possible impairments or reductions in value. If a reduction of value has
occurred, the amount of the impairment is transferred to costs being amortized.

Equipment, which includes computer equipment, hardware and software and
furniture and fixtures, is recorded at cost and is generally depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from two to five years.

Repairs and maintenance are charged to expense as incurred.

Statement of Cash Flows -- For purposes of the statements of cash flows, cash
equivalents include highly liquid financial instruments with maturities of three
months or less as of the date of purchase.

Concentrations of Credit Risk -- Financial instruments which potentially expose
the Company to concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customer base includes multiple purchasers of our oil
and gas products. Although the Company is directly affected by the well-being of
the oil and gas industry, management does not believe a significant credit risk
exists at June 30, 2005.

Revenue Recognition --The Company recognizes oil and natural gas revenues from
its interests in producing wells as oil and natural gas is sold. As a result,
the Company accrues revenues related to production sold for which the Company
has not received payment.

Accounts Receivable, trade - Accounts receivable, trade consists of
uncollateralized accrued oil and gas revenues due under normal trade terms,
generally requiring payment within 30 days of production. Management reviews
receivables periodically and reduces the carrying amount by a valuation
allowance that reflects management's best estimate of the amount that may not be
collectible. As of June 30, 2005 and 2004, the valuation allowance was $0.

Accounting for Reverse Merger -- The Company accounted for its reverse-merger in
accordance with Staff Accounting Bulletin ("SAB") Topic 2A. Generally, the staff
of the Division of Corporate Finance considers reverse-mergers into public
shells to be capital transactions in substance, rather than business
combinations. That is, the transaction is equivalent to the issuance of stock by
the private company for the net monetary assets of the shell corporation,
accompanied by a recapitalization.

Under this treatment, post reverse-acquisition comparative historical financial
statements are those of the "legal acquiree" (i.e., the "accounting acquirer"),
with appropriate disclosure concerning the change in the capital structure
effected at the acquisition date. In the Company's case, the historical
financial statements are those of the oil and gas operations of Old NGS, and the
Consolidated Statement Of Changes in Stockholder's Equity reflects the activity
of Old NGS prior to the merger. All share and per share amounts have been
adjusted to reflect the conversion ratio of shares exchanged between Reality and
Old NGS.

Also, in accordance with SAB Topic 2A, transaction costs incurred for the
reverse-merger, such as legal fees, investment banking fees and the like, may be
charged directly to equity only to the extent of the cash received, while all
costs in excess of cash received should be charged to expense. Accordingly,
since no cash was received, $370,000 in transaction fees was expensed in the
Company's financial statements.

Stock Options --SFAS 123, "Accounting for Stock-Based Compensation," as amended
by SFAS 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure," established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25").

Fair Value of Financial Instruments --Our financial instruments consist of cash
and cash equivalents, accounts receivable, accounts payable, notes payable and
seller 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 notes payable to
Prospect Energy approximates the carrying value of the notes as the effective
interest rates applicable to the notes approximates current rates available to
us for comparable financing arrangements. The fair values of the seller notes
approximate their carrying amounts as of June 30, 2004, based upon interest
rates then available to us for borrowings with similar terms.

Income taxes - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due, if any,
plus net deferred taxes related primarily to differences between basis of assets
and liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized.

Accounting for Price Risk Management activities - The Company enters into
certain financial derivative contracts utilized for non-trading purposes to
minimize the impact of market price fluctuations on contractual commitments and
forecasted transactions related to its oil and gas production. The Company
follows the provisions of the Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
for the accounting of its hedge transactions. SFAS No. 133 establishes
accounting and reporting standards requiring that all derivatives instruments be
recorded in the consolidated balance sheet as either as an asset or liability
measured at fair value and requires that the changes in the fair value be
recognized currently in the earnings unless specific hedge accounting criteria
is met.

F-7

Upon adoption, the Company did not have any financial derivative contracts
utilized for non-trading purposes. Thus, the adoption of SFAS No. 133 had no
impact upon the Company. The Company has entered into certain over-the-counter
contracts to hedge the cash flow of part of the 2005 forecasted sale of oil and
gas production. The Company will not elect to document and designate these as
hedges. Thus, the changes in the fair value of these over-the-counter contracts
will be reflected in the earnings in the period in which they occur.

New Accounting Pronouncements - In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123R "Shared Based Payment" ("SFAS 123R").
This statement is a revision of SFAS Statement No. 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. SFAS 123R
addresses all forms of shared based compensation ("SBP") awards, including
shares issued under employee stock purchase plans, stock options, restricted
stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a
cost that will be measured at fair value on the awards' grant date, based on the
estimated number of awards that are expected to vest and will be reflected as
compensation cost in the historical financial statements. This statement is
effective for public entities that file as small business issuers as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. The Company is in the process of evaluating whether SFAS No.
123R will have a significant impact of the Company's overall results of
operations or financial position.

4. Acquisitions

In September 2003, Old NGS completed the acquisition of a 100% working interest
in the Delhi Field. The acquisition closed on September 25, 2003, whereby Old
NGS paid $995,000 in cash, issued a purchase money mortgage for $1,500,000 (See
Note 7, Notes Payable, for a description of the mortgage) and assumed a plugging
and abandonment reclamation liability in the amount of approximately $302,000
(see Note 5, Asset Retirement Obligations), in exchange for the conveyance of
all the underlying leasehold interests. In addition to the mortgage, the
property is burdened by an aggregate 20% royalty interest.

On May 26, 2004, Reality Interactive, Inc., a publicly traded Nevada corporation
("Reality"), executed an Agreement and Plan of Merger with Natural Gas Systems,
Inc., a private Delaware corporation ("Old NGS"), whereby the shareholders of
Old NGS received 21,749,478 shares of common stock of Reality, in exchange for
all of the 21,749,748 shares of Old NGS common stock then outstanding. The
operations and management of Old NGS became our own, and Reality's name was
changed to Natural Gas Systems, Inc., a Nevada corporation (the "Company" or
"NGS"). Immediately prior to the closing of the merger, Reality had virtually no
operations, assets or liabilities.

On September 2, 2004, we purchased a 100% working interest in approximately 81
producing oil wells, 8 salt water disposal wells and 54 shut-in wells located in
La Salle and Winn Parishes, Louisiana. The purchase included leases covering
386.04 gross and net acres, and fee ownership of 2.33 acres around certain of
the wells. Fourteen of the 54 shut-in wells will require a new lease prior to
restoration of production. The purchase price was $725,000 less approximately
$20,000 in closing adjustments to reflect an effective date of July 1, 2004,
paid in cash, part of which was provided by the Bridge Loan described under Note
5. The acquisition was accounted for under the purchase method of accounting. No
goodwill arose from the purchase. Revenue and expense from the property was
recognized beginning September 1, 2004.

On February 3, 2005, we completed the purchase of a 100% working interest in
certain leases with approximately 65 producing oil wells, 9 salt water disposal
wells and 56 shut-in wells located in the Tullos Urania and Colgrade Fields in
La Salle and Winn Parishes, Louisiana. Four of the 56 shut-in wells required a
new lease prior to restoration of production. The purchase price was $812,733
less post-closing adjustments to reflect an effective date of December 1, 2004,
paid in cash. The acquisition was accounted for under the purchase method of
accounting. No goodwill arose from the purchase. Revenue and expense from the
property is recognized beginning February 1, 2005.

We believe that the foregoing property acquisitions are consistent with our
strategic business plan to acquire established oil and gas properties in order
to exploit them through the application of conventional and specialized
technology to increase production, ultimate recoveries, or both.

5. Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that an asset retirement obligation ("ARO")
associated with the retirement of a tangible long-lived asset be recognized as a
liability in the period in which a legal obligation is incurred and becomes
determinable, with an offsetting increase in the carrying amount of the
associated asset. The cost of the tangible asset, including the initially
recognized ARO, is depleted such that the cost of the ARO is recognized over the
useful life of the asset. The ARO is recorded at fair value, and accretion
expense will be recognized over time as the discounted liability is accreted to
its expected settlement value. The fair value of the ARO is measured using
expected future cash outflows discounted at the Company's credit-adjusted
risk-free interest rate. Fair value, to the extent possible, should include a
market risk premium for unforeseeable circumstances. Inherent in the fair value
calculation of ARO are numerous assumptions and judgments including the ultimate
settlement amounts, inflation factors, credit adjusted discount rates, timing of
settlement, and changes in the legal, regulatory, environmental, and political
environments. To the extent future revisions to these assumptions impact fair
value of the existing ARO liability, a corresponding adjustment is made to the
oil and gas property balance.

F-8

When an oil or gas property ceases economic production, we dismantle and remove
all surface equipment, plug the wells and restore the property's surface in
accordance with various regulations and agreements before abandoning the
property. The state of Louisiana requires operators of oil and gas properties to
secure plugging, abandonment and reclamation liabilities with financial
collateral in favor of the state. In the case of the Delhi Field, the previous
owner had established a Site Specific Trust Fund (SSTA Account) that is
considered a fully funded liability by the state of Louisiana. Pursuant to our
agreement to purchase the Delhi Field in September of 2003, we agreed to replace
the seller's collateral on the SSTA Account within 120 days of closing. During
the six months ended June 30, 2004, we replaced the seller's collateral by
posting a letter of credit in the face amount of $301,835, fully collateralized
by a certificate of deposit issued on Wells Fargo Bank. These restricted cash
equivalents are carried as "Other Assets" in our balance sheet.

In accordance with FAS 143, we recorded an estimated asset retirement obligation
("ARO") for our Delhi Field of approximately $302,000, of which $274,000 relates
to the Company's wells and $28,000 relates to wells operated by us for a third
party. Accordingly, we recorded an asset retirement obligation in the amount of
$302,000, with an offsetting $274,000 charge to the full cost pool and a $28,000
receivable due from the 3rd party at December 31, 2003. The receivable was
collected during the six months ended June 30, 2004.

With respect to our property acquisitions in the Tullos Field Area in late 2004
and early 2005, we recorded an estimated combined ARO liability totaling $99,984
based on the assessment we made during our fourth quarter of fiscal 2005.

The following table describes the change in our asset retirement obligations for
the periods from September 23, 2003 (inception) to June 30, 2005:

Asset retirement obligation at September 23, 2003 $301,835
Accretion expense for 2003 3,169
Asset retirement obligation at December 31, 2003 305,004
Accretion expense for 2004 6,438
Asset retirement obligation at June 30, 2004 311,442
Asset retirement costs in 2005 99,984
Accretion expense for 2005 21,824
Asset retirement obligation at June 30, 2005 $433,250

6. Oil and Gas Properties

Depletion expense for the period from September 23, 2003 (inception) to December
31, 2003, the six months ended June 30, 2004 and the twelve months ended June
30, 2005 totaled $13,960, $41,549 and $257,882, respectively. During 2003, no
costs were excluded from amortization. As of June 30, 2004 and June 30, 2005,
$105,225 and $61,887 of costs, respectively, were not being amortized.

7. Notes Payable

The following table sets forth the Company's notes payable balances as of the
dates indicated:

Borrowing June 30, 2005 June 30, 2004 December 31, 2003
------------------------------------------ ------------- ------------- -----------------

Delhi Mortgage Notes $ -- $ 732,807 $ 1,436,973
AICCO Insurance Premium Loan -- 43,428 --
Cananwill Insurance Premium Loan (current) 6,754 -- --
Prospect Energy 5-Year Note 2,906,548 -- --
Bridge Loan by our Chairman of the Board -- -- --
Herlin Loan -- -- --
Total outstanding $ 2,913,302 $ 776,235 $ 1,436,973

DELHI MORTGAGE NOTES: In September 2003, we issued $1,500,000 of notes payable
in connection with our acquisition of the Delhi Field. The notes were
collateralized by a first mortgage on our Delhi Field and were payable to the
sellers in twelve equal monthly installments beginning on January 30, 2004 and
ending December 2004. Although the notes did not bear any interest, we imputed
interest at 8% per annum, thus resulting in an initial recorded principal amount
of $1,407,049. The Delhi Mortgage Notes were paid from a combination of loan
proceeds from Bridge Loans and the Company's cash flow.

AICCO LOAN: In May 2004, we borrowed $49,490 to finance 70% of our Director and
Officer's liability insurance premiums. The loan required eight level
mortgage-amortizing payments in the amount of $6,350 per month, including 7%
interest per annum. At June 30, 2005, there were no outstanding amounts owed
under the AICCO Loan.

CANANWILL LOAN: In October 2004, we borrowed $33,186 to finance 80% of our
General Liability, Casualty and Well Control insurance premiums. The loan
required ten level payments in the amount of $3,399 per month, including 5.25%
interest per annum. At June 30, 2005, $6,754 was owed under the Cananwill
Insurance Premium Loan.

F-9

BRIDGE LOAN: From August through December, 2004, Laird Q. Cagan, our Chairman
and a major stockholder, loaned us, through a series of advances, $920,000,
pursuant to a secured note bearing interest at 10% per annum and a 5%
origination fee (the "Bridge Loan") earmarked for our purchase of working
interests in the Tullos Urania Field in Louisiana, working capital and certain
costs related to the closing of the Prospect Facility described below. On
February 15, 2005, we repaid the Bridge Loan, totaling $953,589 with accrued
interest, in full.

HERLIN LOAN: In December, 2004, Mr. Herlin advanced us $3,000 for working
capital, with interest payable at 10% per annum. At June 30, 2005, there were no
amounts outstanding under the Herlin Loan.

PROSPECT FACILITY: On February 3, 2005, we closed the "Prospect Facility" (or
"Facility") and drew down $3,000,000, and on March 16, 2005 we drew down an
additional $1,000,000 on the total $4,800,000 commitment. The draws were used to
fund the February 2005 acquisition of properties in Louisiana, costs of the
financing, funding of a debt service reserve fund, repayment of the Bridge Loan,
immediate re-development of our existing properties and for working capital
purposes. After taking into account the effect of the completion of the February
2005 acquisition of properties (see Note 2 to our consolidated financial
statements), the closing of the Prospect Facility and our recent private
placement of common stock described below, and before taking into account the
effect of any new projects or acquisitions, we believed that our current
liquidity and anticipated operating cash flows were sufficient to allow the
remaining $800,000 commitment under the Facility to expire on May 3, 2005.

At June 30, 2005, we owed $2,906,548 on the Prospect Facility, including the
accreted discount through such date. At maturity or, exclusive of any prepayment
penalty, on early prepayment, the total amount owed under the Facility will be
$4,000,000 due to accretion of the original issue discount, which is described
below.

Under the terms of the Prospect Facility, each advance required us to issue two
securities, a debt security and an equity security (in the form of irrevocable
and revocable warrants) as follows:

(i) The debt securities issued under the Facility (the "Prospect Loan(s)") are
secured by all of our assets, bear an initial interest rate of 14% per annum
payable in arrears on the "face" (the par or matured amount of the loan), mature
on February 2, 2010 and do not require principal payments until the end of the
term. The loans are subject to voluntary prepayment premiums equal to 9% of the
face amount as of August 3, 2005, declining .5% for each three month period,
thereafter. For each draw under the Facility, we recorded a loan with an imputed
discount equivalent to the value of the Prospect Warrants described below.
Through June 30, 2005, we had drawn $4,000,000 under the Facility, crediting
$2,850,992 (net of the discount described below) to the Prospect Loan. The fair
value of the Prospect Warrants of $1,149,008 was recorded as a discount on the
Prospect Loans with a corresponding credit to additional paid-in capital for the
Prospect Warrants. The discount is accreted as additional loan interest expense
using the interest rate method over the five-year life of the loan, yielding an
annual effective interest rate of 27.26% and 24.87% for the first and second
Prospect Loans, respectively.

(ii) The equity securities issued under the Facility consisted of irrevocable
and revocable warrants (the "Prospect Warrants"). An irrevocable warrant to
purchase one share of our common stock was issued to Prospect for each $6.666667
drawn under the Facility, and a revocable warrant to purchase one share of our
common stock was issued for each $10 drawn under the Facility. Through June 30,
2005 we had issued to Prospect Energy irrevocable warrants to acquire up to
600,000 shares of common stock exercisable over a five-year term at a price of
$0.75 per common share, and revocable warrants to acquire up to 400,000 shares
of common stock on the same terms, except that the revocable warrants will be
automatically canceled if we attain certain financial targets by the end of
February 2006, and such revocable warrants cannot be exercised prior to such
date. As described under the Prospect Loan above, the Prospect Warrants have
been credited to additional paid-in capital in the amount of $1,149,008, based
on their estimated fair value. The holder of the shares of common stock
underlying the Prospect Warrants is the beneficiary of a registration rights
agreement. Terms of the registration rights agreement and assumptions underlying
fair value of the warrants are described in Note 8, "Common Stock, Stock Options
and Warrants".

Among other restrictions and subject to certain exceptions, the Prospect
Facility restricts us from creating liens, entering into certain types of
mergers or consolidations, incurring additional indebtedness, the payment of
dividends, changing the character of our business, or engaging in certain types
of transactions. The Prospect Loan agreement also requires us to maintain
specified financial ratios, including a 1.5:1 ratio of borrowing base to debt
and, commencing not later than the three months ended January 31, 2006, a 2.0:1
ratio of EBITDA (earnings before interest, income tax and other non-cash charges
such as depreciation, depletion and amortization) to interest.

At June 30, 2005, we were in compliance with the terms of the Facility. At May
31, 2005, we had however, not maintained a required performance milestone, thus
causing us to increase our restricted cash account under the terms of the
Facility from $300,000 to $560,000. The increased amount is reflected as
restricted deposits in our balance sheet at June 30, 2005, although transfer of
the additional $260,000 is pending our receipt of further instructions from
Prospect.

Looking forward, we are required to maintain an EBITDA to interest payable
coverage of 2:1, beginning no later than the three month period ending January
31, 2006, in order to maintain compliance. Our ability to comply with this
requirement is dependent on achieving certain operating results, especially with
respect to our planned drilling program of proved undeveloped reserves at our
Delhi Field beginning in May 2005. At September 27, 2005, our Delhi drilling
program had not yet begun due to delays caused by casualty repairs sustained by
the drilling contractor for the account of another customer. Due to these
delays, we can give no assurance that the delayed results from this program will
provide sufficient EBITDA to meet the required interest coverage ratio. If such
a covenant breach occurs and is not waived by Prospect, the debt would become
immediately due and payable. Since we do not have sufficient liquid assets to
prepay our debt in full, we would be required to refinance all or a portion of
our existing debt or obtain additional financing. If we were unable to refinance
our debt or obtain additional financing, we would be required to curtail
portions of our development program, sell assets, and/or reduce capital
expenditures. Had we been subject to this requirement on June 30, 2005, we would
not have been in compliance.

F-10

8. Common Stock, Stock Options and Warrants

Common Stock

From September 23, 2003 (Inception) through December 31, 2003, Old NGS issued
18,000,000 common shares as founder's capital at $0.001 per share, and sold
2,864,600 of its $0.001 par value common shares at $1.00 per share through a
private equity offering to accredited investors. At December 31, 2003, Reality
had issued and outstanding 256,598 shares of its $0.001 par value common stock.

From January 1, 2004, up to, but not including, the merger closing on May 26,
2004, Reality issued 689,663 of its $0.001 par value common shares, net of
cancellations and redemptions. During the same period in 2004, Old NGS sold
884,878 of its $0.001 par value common shares to accredited investors for
$886,900 gross proceeds, less $60,000 in commissions equal to 8% of the gross
cash proceeds and the issuance of 7 year term warrants equal to 8% of the shares
issued, for the account of Chadbourn Securities, Inc. and Laird Q. Cagan, an
affiliate of the Company as described in Note 9, "Related Party Transactions".

At the closing of the merger on May 26, 2004, Reality issued 21,749,478 of its
$0.001 par value common shares in exchange for all of the 21,749,478 issued and
outstanding $0.001 par value common shares of Old NGS.

Subsequent to the merger closing through June 30, 2004, we sold 249,667 shares
of our $0.001 par value common shares for gross proceeds of $250,000, less
$30,000 in commissions and the same warrant structure described above for the
account of Chadbourn Securities, Inc. and Laird Q. Cagan.

During the twelve months ended June 30, 2005, we raised gross proceeds of
$4,729,091 from the sale of our common stock, warrants to purchase our common
stock and direct stock grants, less placement fees of $257,840 to Chadbourn
Securities and Laird Q. Cagan and warrants to purchase 108,536 shares. In
addition, we also paid $32,659 to unrelated third parties as finder's fees. Of
the total, $3,580,083 was received from the sale of 1,594,200 shares of our
common stock and the issuance of 235,000 shares of our common stock upon the
exercise of options and direct stock awards granted under our 2004 Stock Plan.
The remaining $1,149,008 was raised through the sale of warrants to Prospect
Energy as described in Note 7, "Notes Payable".

Options and Warrants issued to Employees

2003 Stock Option Plan

Old NGS adopted a stock option plan in 2003 (the "2003 Plan"). The purpose of
the 2003 Plan was to offer selected individuals an opportunity to acquire a
proprietary interest in the success of Old NGS, or to increase such interest, by
purchasing shares of the Old NGS common stock. The 2003 Plan provided both for
the direct award or sale of shares and for the grant of options to purchase
shares in an aggregate amount not to exceed 4,000,000 shares. Options granted
under the Plan included non-statutory options as well as incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code. Of the
options to purchase 600,000 shares granted under the 2003 Plan by Old NGS, all
were assumed by Reality Interactive, Inc., predecessor to the Company. Of these,
options to purchase 250,000 shares were granted to each of Messrs. Herlin and
McDonald. These options were accounted for under APB 25, giving rise to $437,250
of expense, spread over a four year vesting schedule.

2004 Stock Plan

On August 3, 2004, we adopted our 2004 Stock Plan (the "2004 Plan"). The purpose
of the 2004 Plan is to offer selected individuals an opportunity to acquire a
proprietary interest in our success, or to increase such interest, by purchasing
our shares of common stock. The 2004 Plan provides both for the direct award or
sale of shares and for the grant of options or warrants to purchase shares in an
aggregate amount not to exceed 4,000,000 shares. Options granted under the 2004
Plan may include non-statutory options as well as incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code.

No options were issued during the six months ended June 30, 2004. However, an
aggregate 200,000 options had been authorized, but not issued, to two members of
our Board of Directors, Messrs. DiPaolo and Stoever.

During the twelve months ended June 30, 2005, there were 1,500,000 shares of
common stock issued or issuable upon exercise of outstanding options, and 25,000
shares issued directly under the 2004 Stock Plan to employees, all subject to
various vesting requirements, leaving 2,305,000 shares of common stock available
for issuance under the 2004 Stock Plan, after taking into account awards to
non-employees totaling 170,000 shares. Of these awards, options to purchase
100,000 shares were issued to each of our directors, E.J. DiPaolo and Gene
Stoever, in consideration for their services; options to purchase 500,000,
350,000, 350,000 and 100,000 shares were granted to Messrs. Herlin, McDonald,
Mazzanti and Joe; and a direct stock grant of 25,000 shares was made to Mr.
Mazzanti. All of these options and grants were accounted for under APB 25,
giving rise to $44,000 of expense spread over a two year vesting period for
Messrs. Stoever and DiPaolo, and $40,225 of expense spread over a one year
vesting period for Mr. Mazzanti.

F-11

Non-Plan Warrants to Employees

During the twelve months ended June 30, 2005, Mr. Herlin was granted revocable
warrants to purchase 287,500 of common stock, and Mr. Mazzanti was granted
revocable warrants to purchase 200,000 shares. These warrants were accounted for
under APB 25, and gave rise to no Company expense during fiscal 2005, because
the exercise price of Mr. Herlin's warrants exceeded fair value of the stock at
June 30, 2005, and vesting of Mr. Mazzanti's warrants is based on a future
specified event that has not yet occurred.

A reconciliation of reported loss as if the Company used the fair value method
of accounting for stock-based compensation computed under FASB 123 as compared
to the compensation expense we recorded under APB 25 follows:

For the Period from
September 23, 2003
Twelve Months ended Six Months ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Pro forma impact of Fair Value Method (SFAS 148):
Net loss attributable to common stockholders, as reported ($2,164,571) ($1,027,682) ($336,905)
Plus share based compensation expense determined under APB 25 131,313 108,614 50,400
Less compensation expense determined under Fair Value Method (359,457) (110,978) (51,858)
------------------- ---------------- -------------------
Pro forma net loss attributable to common stockholders ($2,392,715) ($1,030,046) ($338,363)

Loss per share (basic & diluted):
As reported ($0.09) ($0.05) ($0.02)
Pro Forma ($0.10) ($0.05) ($0.02)
Weighted average Black-Scholes fair value assumptions:
Risk free interest rate 4.18%-4.93% 2.50% 2.50%
Expected life 3-4 years 3 years 3 years
Expected volatility 104%-130% 131.0% 131.0%
Expected dividend yield 0.0% 0.0% 0.0%

Fair values were estimated at the date of grants using the Black-Scholes options
pricing model, based on the assumptions above. For purposes of the pro forma
disclosures, the estimated fair value is amortized to expense over the awards'
vesting period. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a single measure of the fair value of its employee stock
options. At June 30, 2005, 2,305,000 shares were available for grant under the
plans.

A summary of option and warrant transactions issued to employees for the period
from September 23, 2003 (inception) to June 30, 2005 follows:

Weighted
Weighted Weighted average
average average Remaining
Number of Exercise Grants Date Contractual
Shares Price Fair Value Life
--------- -------- ----------- -----------

For the Period from September 23, 2003
(Inception) to December 31, 2003
Granted 500,000 $0.13 $0.94
Exercised 0 --
Canceled 0 --

Outstanding at December 31, 2003 500,000 $0.13 9.8 years

Six months ended June 30, 2004
Granted 0
Exercised 0
Canceled 0

Outstanding at June 30, 2004 500,000 $0.13 9.3 years

Twelve months ended June 30, 2005
Granted 2,012,500* $1.67 $1.31*
Exercised 0
Canceled 0

Outstanding at June 30, 2005 2,512,500 $1.37 9.4 years

* Mr. Mazzanti's revocable warrants to purchase 200,000 shares are included in
the number of shares granted, but have not been used to calculate the weighted
average grants date fair value since the award is contingent on a specified
future event.

These options and warrants vest during the following fiscal years ended June 30
as follows: Vested at June 30, 2005 - 303,125; 2006 - 696,875; 2007 - 571,875;
2008 - 493,750 and 2009 - 446,875.

F-12

Options, Warrants and Grants to Non-Employees

At June 30, 2005, outstanding warrants and options, excluding employees, to
purchase the Company's $0.001 par value common shares were as follows:

Warrants and Options Outstanding
(Excluding Employees)

Range of Outstanding at Exercisable
Holder Exercisable Prices June 30, 2005 June 30, 2005
------------------ -------------- -------------

Cagan McAfee Capital Partners, LLC $1.00 $1.00 165,000 165,000
Chadbourn Securities, Inc. $1.50 $2.50 8,574 8,574
Laird Q. Cagan $1.00 $2.50 142,143 142,143
Tatum Partners $.001 $0.001 262,500 262,500
Prospect Energy $0.75 $0.75 1,000,000 600,000
Steve Lee (counsel to the Company) $.001 $1.80 60,000 10,000
Other $1.00 $2.00 146,750 146,750
------------------ -------------- -------------
Total 1,784,967 1,334,967

As of June 30, 2004, we issued warrants to purchase 240,000 shares of common
stock to Cagan McAfee Capital Partners and their assigns in connection with
arranging the merger, options to purchase 100,000 shares of common stock to
Steve Lee under the 2003 Stock Plan (90,000 of which have been exercised) and a
warrant to purchase 79,931 share of common stock in connection with Cagan
McAfee's capital raising services, of which warrants to purchase 66,784 and
3,147 shares of common stock were issued to Laird Q. Cagan and Chadbourn
Securities, Inc., respectively. Mr. Lee's award gave rise to $99,900 of fair
value expense under SFAS 123 over the one year vesting period, using the
Black-Scholes model with the following assumptions: Volatility - 131%, Risk Free
Rate - 5.0%, Estimated Term - 3 years, and Dividends - 0.

During fiscal year ended June 30, 2005, we issued warrants to purchase 142,536
shares of common stock in connection with capital raising services, of which we
issued warrants to purchase 75,359 and 5,427 shares of common stock to Laird Q.
Cagan and Chadbourn Securities, Inc., 61,750 to third parties and options to
purchase 50,000 shares to Steve Lee under the 2004 Stock Plan.

During the fiscal year ended June 30, 2005, we also made a direct stock grant
for 120,000 shares to Liviakis Communications (excluded from the table above)
for investor relations services and issued options to purchase 50,000 shares of
our stock to Mr. Lee under our 2004 Plan. Mr. Lee's grant gives rise to $67,519
of fair value expense under SFAS 123, to be spread over a four year vesting
schedule. Fair value was derived using the Black-Scholes model using the
following assumptions: Volatility - 110%, Risk Free Rate - 4.18%, Estimated Term
- 4 years, and Dividends - 0. The Liviakis stock grant gives rise to $263,880 of
expense, spread over a one year vesting schedule, beginning monthly in April
2005. The fair value of the Liviakis grant under SFAS 123 was equivalent to the
fair value of our stock on the date of grant.

Also during the fiscal year ended 2005, we issued warrants to purchase 1,000,000
shares under the Prospect Facility, recording fair value in the amount of
$1,149,008 using the Black-Scholes model, using the following assumptions:
Volatility - 102.8%, Risk Free Rate - 4.93%, Estimated Term - 3 years, Dividend
- 0. Certain of these warrants will not vest if the Company reaches certain
financial thresholds. As a result, those warrants were discounted in determining
fair value. Finally, we issued warrants to purchase 262,500 shares to Tatum
Partners, recognizing $432,976 of SFAS 123 fair value expense in the current
year, wherein fair value was equal to intrinsic value since there was no time
value associated with the grant.

F-13

Registration Rights

Under the terms of our private placement of 1,200,000 shares of our common stock
with the Rubicon Fund on May 6, 2005, we contemporaneously entered into a
registration rights agreement (the "RRA"). The RRA requires us, among other
things, to obtain and maintain an effective registration statement with the SEC
for Rubicon's shares, failing which, subjects us to the payment of penalties not
to exceed 1% of the share proceeds, or $30,000, for each month of
non-compliance. Penalties are incurred for each month for which a registration
statement has not become effective, beginning October 6, 2005. Penalties may
also be incurred for any month for which effectiveness has not been maintained
prior to the shares becoming tradable under Rule 144, but in no event can the
penalty cumulatively exceed 8% or $240,000. The SEC is currently reviewing the
registration statement we filed June 6, 2005 on Form SB-2, and we can give no
assurance that our registration statement will become or be maintained effective
after October 6, 2005. Accordingly, we have accrued, against our equity account
$100,000 for penalties and other transaction costs which may become due.

We have also entered into other registration rights agreements, the effect of
which gives the holders the right to "piggyback" their shares, from time to
time, as we register other shares.

9. Related Party Transactions

During the six months ended June 30, 2004 we expensed $90,000 in monthly
retainers, $60,000 of which remained unpaid at June 30, 2004, and charged
$80,000 to stockholder's equity as a reduction of the proceeds from common stock
sales in the amount of $1,000,000. The $80,000 paid to Chadbourn Securities and
Laird Q. Cagan was for commissions from the sale of our common stock. Also
during the six months ended June 30, 2004 we issued warrants to purchase 319,932
shares of Common Stock to CMCP, Chadbourn Securities and Laird Q. Cagan and
their assigns in connection with arranging the merger, (240,000 warrants) and
placement of 999,145 common shares (79,932 warrants). These warrants have a
$1.00 exercise price and a seven year term.

10. Supplemental Oil and Gas Disclosures (unaudited)

Costs Incurred in Oil and Gas Producing Activities

For the Period From
September 23, 2003
Twelve Months Ended Six Months Ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Property acquisition costs:
Proved $1,554,149 $6,855 $2,363,716
P&A liability assumed 99,984 0 273,760
Unproved 61,887 105,225 0
Exploration costs 0 0 0
Development costs 441,508 97,114 333,992
------------------- ---------------- -------------------
Total property acquisition costs $2,157,528 $209,194 $2,971,468
=================== ================ ===================

F-14

Results of Operations for Oil and Gas Producing Activities

For the Period From
September 23, 2003
Twelve Months Six Months Ended (Inception) to
Ended June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Oil and gas sales $1,635,187 $118,158 $24,229
Production costs (874,876) (134,420) (76,303)
Production taxes (68,386) (14,581) (3,002)
Depletion (257,882) (41,549) (13,960)
------------------- ---------------- -------------------
Results of operations for oil and gas producing
activities (excluding corporate overhead and financing costs) $434,043 ($72,392) ($69,036)
=================== ================ ===================

Proved Developed and Undeveloped Reserves Prepared by W.D. Von Gonten & Co.
Petroleum Engineers

The following table sets forth the net proved reserves of the Company as of July
1, 2005, and the changes therein for the periods from September 23, 2003
(inception) to July 1, 2005. The reserve information was prepared by W.D. Von
Gonten & Co., independent petroleum engineers. All of the Company's oil and gas
producing activities are located in the United States.

Oil (bbls) Gas (mcf)
---------- ---------
September 23, 2003 -- --
Purchases of minerals in place 241,219 778,700
Extensions and discoveries -- --
Revisions -- --
Production (857) --
Sales of minerals in place -- --

December 31, 2003 240,362 778,700
Purchases of minerals in place -- --
Extensions and discoveries 76,412 293,419
Revisions (74,060) (563,440)
Production (3,180) (123)
Sales of minerals in place -- --

July 1, 2004 (1) 239,534 508,556
Purchases of minerals in place (2) 418,217 --
Extensions and discoveries 242,340 330,023
Revisions (100,978) (34,290)
Production (27,230) (72,166)
Sales of minerals in place -- --

July 1, 2005 (3) 771,883 732,123

Proved developed reserves:
December 31, 2003 240,400 778,700
July 1, 2004 (4) 238,900 508,556
July 1, 2005 (5) 540,360 396,600

------------
(1) During fiscal 2004, of the 270,000 MCF downward revision in our proved
natural gas reserves, net of extensions and discoveries, a 300,000 MCF downward
revision was due to the reclassification of our Delhi 208-1 well from proved to
probable reserve status, based on new well information that decreased the
probability of recovery below the threshold required for proved reserves. Proved
natural gas reserve quantities include 5,000 BBL of NGL's, converted at 6 MCF
per BBL at July 1, 2004.

(2) Proved developed reserves acquired in the Tullos Field Area during fiscal
2005.

(3) During fiscal 2005, the preponderance of our proved crude oil and natural
gas extensions and discoveries were due to the addition of eight proved
undeveloped reserve locations (PUDs), resulting from a six month geological
study performed by an outside geologist we engaged to review approximately 20%
of our Delhi Field. Proved crude oil additions more than exceeded the downgrade
of our acquired Tullos reserves, resulting from poor performance related to bad
weather, lack of service equipment and lack of repairs and maintenance by the
seller in the months immediately preceding our acquisition. Elimination of our
Delhi 210-2 well was primarily offset by a decrease in the estimate of fuel use.
Proved natural gas reserve quantities include 7,300 BBL of NGL's, converted at 6
MCF per BBL at July 1, 2005.

(4) At July 1, 2004, our proved developed natural gas reserves include 5,000 BBL
of NGL, converted at 6 MCF per BBL.

(5) During fiscal 2005, our proved developed natural gas reserves were revised
downward due to the loss of our Delhi 210-2 well due to bad casing. At July 1,
2005, our proved developed natural gas reserves included 3,500 BBL of NGL,
converted at 6 MCF per BBL.

F-15

Standardized Measure of Discounted Future Net Cash Flows at December 31, 2003,
June 30, 2004 and June 30, 2005

The information that follows has been developed pursuant to SFAS No. 69 and
utilizes reserve and production data prepared by independent petroleum
consultants. Reserve estimates are inherently imprecise and estimates of new
discoveries are less precise than those of producing oil and natural gas
properties. Accordingly, these estimates are expected to change as future
information becomes available.

The estimated discounted future net cash flows from estimated proved reserves
are based on prices and costs as of the date of the estimate unless such prices
or costs are contractually determined at such date. Actual future prices and
costs may be materially higher or lower. Actual future net revenues also will be
affected by factors such as actual production, supply and demand for oil and
natural gas, curtailments or increases in consumption by natural gas purchasers,
changes in governmental regulations or taxation and the impact of inflation on
costs. Future income tax expense has been reduced for the effect of available
net operating loss carryforwards.

For the Period From
September 23, 2003
Twelve Months Ended Six Months Ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Future cash inflows $46,841,246 $11,549,850 $13,318,169
Future production costs (20,028,389) (2,978,139) (2,895,677)
Future development costs (1,920,000) (450,000) (357,000)
Future income taxes (6,036,000) (1,465,000) (2,412,000)
Future net cash flows $18,856,857 6,656,711 7,653,492
------------------- ---------------- -------------------
10% annual discount (5,615,779) (1,476,100) (1,479,544)
------------------- ---------------- -------------------
Standardized Measure $13,241,078 $5,180,611 $6,173,948
=================== ================ ===================

Changes in Standardized Measure

The following table sets forth the changes in standardized measure of discounted
future net cash flows for the period from September 23, 2003 (inception) to
December 31, 2003, the six months ended June 30, 2004 and the twelve months
ended June 30, 2005:

For the Period From
September 23, 2003
Twelve Months Ended Six Months Ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Standardized Measure, beginning 5,180,611 6,173,948 --

Net change in income taxes (3,209,706) 737,006 (1,945,722)

Oil and gas sales, net of costs (691,925) 30,843 51,065

Discoveries and extensions 7,131,907

Purchase of minerals in place 4,780,920 -- 8,068,605

Changes in prices and costs 3,285,724 82,230 --

Change in developments costs (1,045,275) (84,042) --

Accretion of discount 518,061 308,697 --

Revisions of estimates (2,670,979) (2,131,318) --

Other (38,260) 63,247 --
------------------- ---------------- -------------------
Standardized Measure, ending 13,241,078 5,180,611 6,173,948

F-16

11. Restricted Deposits

At June 30, 2005, Restricted deposits includes $301,835 securing a letter of
credit posted with the State of Louisiana for future plugging and abandonment
liabilities related to the Delhi Field, and $560,000 related to the debt service
reserve under the Prospect Facility.

Of these amounts, $201,835 and $200,000 exceed FDIC insurance limits in
depository accounts at Wells Fargo Bank and AmSouth Bank, respectively.

12. Income Taxes

The tax effect of significant temporary differences representing deferred tax
assets and liabilities at December 31, 2003, June 30, 2004 and June 30, 2005 are
as follows:

June 30, 2005 June 30, 2004 December 31, 2003
------------- ------------- -----------------

Oil and gas properties ($178,144) ($69,389) ($113,558)
Basis in subsidiary stock 125,800 0 0
Other (10,159) 0 0
Net operating loss carryforwards 6,324,900 366,425 228,043
Valuation allowance (6,262,397) (297,036) (114,485)
------------- ------------- -----------------

Net deferred tax asset $0 $0 $0
============= ============= =================

The increase in the valuation allowance during fiscal 2003, 2004 and 2005 of
$114,485, $182,551 and $5,965,361 respectively, is the result of net tax losses
incurred during the year. The increase in the valuation allowance in fiscal 2005
is mostly attributable to the recognition of Reality's NOL carryforwards from
prior years, in addition to current year net tax loss. Reality's NOL
carryforwards had not been previously recognized as the tax impact of the
transaction described in the Note 1 was not resolved until fiscal year 2005.

As of June 30, 2005, we have net operating loss carryforwards of approximately
$18,603,000 that will expire in 2023, 2024 and 2025. Future utilization of the
net operating loss carryforwards and other tax attributes, absent a change in
law, will be significantly limited by changes in the ownership of the Company in
May 2004 under section 382 of the Internal Revenue Code.

The following is a reconciliation of the Company's expected income tax expense
(benefit) based on statutory rates to the actual expense (benefit):

For the Period From
September 23, 2003
Twelve Months Ended Six Months Ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Income taxes (benefit) at
US statutory rate ($735,954) ($349,412) ($114,548)
Non-deductible amortization and expenses -- 165,141 62
Deferred Stock Compensation and
non-deductible expenses 240,860 -- --
Deferred tax asset
valuation allowance adjustment 495,094 182,551 114,485
Net operating losses -- -- --
Other 0 1,720 1
------------------- ---------------- -------------------

F-17

13. Leases

The Company is obligated for operating lease payments related to the Company's
headquarters in Houston, Texas, and a gas processing plant servicing the
Company's Delhi Field. Minimum lease payments are as follows:

Fiscal 2006: $42,921
Fiscal 2007: $33,980
Total $76,901

Lease expense was $121,799 for the twelve months ended June 30, 2005; $44,770
for the six months ended June 30, 2004 and $8,541 for the three months ended
December 31, 2003.

14. Liquidity

As of June 30, 2005, we had $2,548,688 of unrestricted cash and positive working
capital of $2,599,232, versus negative working capital of $383,352 at June 30,
2004, and negative working capital of $360,749 at December 31, 2003. Also at
June 30, 2005, the PV10 value of our proved oil and gas reserves to the face
value of our debt was over 4:1.

Nevertheless, our net losses totaling $2,164,571, $1,027,682 and $336,905 for
the twelve months ended June 30, 2005, the six months ended June 30, 2004 and
the period from September 23 (inception) to December 31, 2003, respectively, and
our requirement to maintain an EBITDA to interest payable coverage of 2:1,
beginning no later than the three month period ending January 31, 2006 under the
Prospect Facility, raises questions about our liquidity. Although our net cash
losses have narrowed on an annualized basis, our ability to comply with the
EBITDA to interest coverage ratio is dependent on achieving certain operating
results, especially with respect to our planned drilling program of proved
undeveloped reserves at our Delhi Field beginning in May 2005. At September 27,
2005, our Delhi drilling program had not yet begun, due to delays caused by
casualty repairs sustained by the drilling contractor for the account of another
customer. Due to these delays, we can give no assurance that the delayed results
from this program will provide sufficient EBITDA to meet the required interest
coverage ratio. If such a covenant breach occurs and is not waived by Prospect,
the debt would become immediately due and payable. Since we do not have
sufficient liquid assets to prepay our debt in full, we would be required to
refinance all or a portion of our existing debt or obtain additional financing.
If we were unable to refinance our debt or obtain additional financing, we would
be required to curtail portions of our development program, sell assets, and/or
reduce capital expenditures. Had we been subject to this requirement on June 30,
2005, we would not have been in compliance.

We are currently addressing these issues by taking actions to expedite the
repair and mobilization of the drilling rig that is causing the delay in our
proved undeveloped reserve drilling program, possibly adding to the expense of
our contract. Alternatively, it may be necessary for us to seek another rig,
although we can give no assurance that one will be available within our
timeframe, given tight industry supplies. We have also obtained covenant relief
from Prospect as discussed under Note 18, "Subsequent Events."

15. Loss per Share

The following table sets forth the computation of basic and diluted loss per
share:

For the Period From
September 23, 2003
Twelve Months Ended Six Months Ended (Inception) to
June 30, 2005 June 30, 2004 December 31, 2003
------------------- ---------------- -------------------

Numerator:

Net loss applicable to common stockholders ($2,164,571) ($1,027,682) ($336,905)
Plus income impact of assumed conversions:
Preferred Stock dividends N/A N/A N/A
Interest on convertible subordinated notes N/A N/A N/A

------------------- ---------------- -------------------
Net loss applicable to common stockholders plus
assumed conversions (2,164,571) (1,027,682) (336,905)
=================== ================ ===================

Denominator: 23,533,922 22,057,614 20,091,720

Affect of potentially dilutive common shares:
Warrants N/A N/A N/A
Employee and director stock options N/A N/A N/A
Convertible preferred stock N/A N/A N/A
Convertible subordinated notes N/A N/A N/A
Redeemable preferred stock N/A N/A N/A
Denominator for dilutive earnings per share -
weighted average shares
Outstanding and assumed conversions 23,533,922 22,057,614 20,091,720

Loss per common share:
Basic and diluted ($0.09) ($0.05) ($0.02)
=================== ================ ===================

Shares issuable from securities that could
potentially dilute earnings per share in the
future that were not included in the
computation of loss per share because their
effect was anti-dilutive: 4,222,468 919,932 600,000

F-18

16. Commodity Hedging

As required under our credit agreement with Prospect Energy, we have placed
price risk contracts aggregating more than 50% of the production volumes that
our outside petroleum engineers have estimated to occur from our existing proved
developed producing reserves over the next two years. The Prospect Facility also
requires us to extend such coverage on a rolling two-year basis through the five
year term of the Facility.

As a part of this program, we purchased a series of price floors from Wells
Fargo Bank, set at a NYMEX WTI price of $38.00 per barrel of crude oil based
upon the arithmetic average of the daily settlement price for the first nearby
month of NYMEX WTI futures, for 2,000 barrels of crude oil per month for March
2006 through February 2007. The cost of the hedge was $3.00 per barrel of oil.
In accordance with SFAS No. 133, we have recorded these derivative puts at cost,
and have marked them to market at the end of each month. Through June 30, 2005,
$58,534 has been marked to market and expensed, leaving a remaining asset of
$13,466.

These derivatives are in addition to future forward delivery contracts we
entered into with Plains Marketing L.P., to complete our requirements under the
Prospect Facility.

17. Major Customers

All of our crude oil is currently sold to Plains Marketing L.P., all of our
natural gas is currently being sold to Texla Energy Management, Inc. and all of
our natural gas liquids are currently sold to a subsidiary of Enbridge Energy
Partners LP.

18. Subsequent Events

Effective September 22, 2005, we entered into an amendment to the Prospect
Facility, thereby obtaining covenant relief with respect to our obligation to
maintain an EBITDA to interest payable coverage ratio of 2:1. The amendment
changes our compliance date to begin not later than the three months ended
January 31, 2006, as compared to October 31, 2005 under the original terms of
the agreement. This amendment was effected in order to allow us to proceed with
the delayed drilling program of proved undeveloped reserve locations in our
Delhi Field, the results of which we are relying on to achieve the required
EBITDA coverage ratio. As explained earlier, the drilling program has been
delayed due to a casualty sustained to the contracted rig, while demobilizing
from a previous customer. In exchange for the amendment, we have issued to
Prospect revocable warrants to purchase 200,000 shares of our common stock,
exercisable at $1.36 per share over five years. The warrants will be
automatically revoked in the event we achieve $200,000 in EBITDA, as defined,
for any one month period through April 30, 2006. We also agreed to limit our
acquisitions of additional oil and gas properties to a maximum of $100,000 plus
any new funds raised, until we achieve a trailing three month EBITDA to interest
coverage ratio of 2.0. The limitation does not include any evaluation costs, so
that we may continue to review new projects. For additional details, the
amendment to the Loan Agreement and the Revocable Warrant Agreement are attached
to our Form 10-K for the year ended June 30, 2005, as Exhibits 10.30 and 10.31,
respectively.

All of our oil and gas assets are located in northern Louisiana. On August 29,
2005, the center of Hurricane Katrina, a Category 5 storm, came onshore just
east of New Orleans, Louisiana. None of our oil and gas property suffered
casualty loss from this storm, as the area was minimally affected by rains off
of the west side of Katrina as she progressed inland veering to the east. It is
possible, however, that in the aftermath of the storm we may become subject to
supply chain disruptions affecting the availability of fuel, power, supplies and
the like at any time, although we have not experienced any of these disruptions
to date.

F-19

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Natural Gas Systems, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Natural Gas
Systems, Inc. as of June 30, 2005, June 30, 2004 and December 31, 2003 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the twelve months ended June 30, 2005, the six months ended June 30,
2004 and the period from September 23, 2003 (inception) to December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Natural
Gas Systems, Inc. and subsidiaries as of June 30, 2005, June 30, 2004 and
December 31, 2003, and the consolidated results of their operations and their
cash flows for each of the periods then ended, and the period from September 23,
2003 (inception) to December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 14 to the financial statements, the Company has sustained
losses since inception and has a requirement under its debt facility to meet a
prescribed interest coverage ratio beginning with the three month period ended
January 31, 2006. At the present time, the Company is not generating sufficient
cash flow from operations to meet the required interest coverage ratio. If the
Company does not meet the interest coverage ratio, the debt holder has the right
to cause the outstanding debt of $4,000,000 to become immediately due and
payable. At the present time, the Company does not have the resources to pay off
the debt in the event it becomes immediately due and payable.

HEIN & ASSOCIATES LLP

Houston, Texas
August 27, 2005, except for the first paragraph in Note 18 as to which the date
is September 27, 2005.

F-20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Natural Gas Systems, Inc.

We have audited the accompanying statements of revenues and direct operating
expenses of the Delhi Field acquired on September 23, 2003, for the period from
January 1, 2003 to September 23, 2003 and for the nine-month period ended
December 31, 2002. The statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the statements based
on our audits.

In our opinion, the statements referred to above present fairly, in all material
respects, the direct operating revenues and direct operating expenses of the
Delhi Field acquired on September 23, 2003, for the period from January 1, 2003
to September 23, 2003 and for the nine-month period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America.

Hein & Associates LLP
Houston, Texas

July 30, 2004

F-21

NATURAL GAS SYSTEMS, INC.

STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF THE DELHI FIELD
ACQUIRED ON SEPTEMBER 23, 2003

FOR THE
PERIOD FROM FOR THE
JANUARY 1, NINE-MONTH
2003 TO PERIOD ENDED
SEPTEMBER 23, DECEMBER 31,
2003 2002
------------- -------------
OIL AND GAS SALES $ 148,506 $ 64,491
DIRECT OPERATING EXPENSES 141,854 55,202
------------- -------------

NET REVENUE $ 6,652 $ 9,289
============= =============

NATURAL GAS SYSTEMS, INC.

NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

1. BASIS OF PREPARATION

The accompanying historical summaries of revenues and direct operating expenses
relate to the operations of the Delhi Field oil and gas properties acquired by
Natural Gas Systems, Inc. (the "Company") on September 23, 2003 from Delta
Exploration and Development Co. and Camark Production Co. The properties were
acquired for $1,000,000 in cash and an interest-free note payable in the amount
of $1,495,000.

Revenues are recorded when the Company's share of oil or natural gas and related
liquids are sold. Direct operating expenses are recorded when the related
liability is incurred. Direct operating expenses include lease operating
expenses, ad valorem taxes and production taxes. Depreciation and amortization
of oil and gas properties, general and administrative expenses and income taxes
have been excluded from operating expenses in the accompanying historical
summaries because the amounts would not be comparable to those resulting from
proposed future operations.

The historical summaries presented herein were prepared for the purpose of
complying with the financial statement requirements of a business acquisition to
be filed on Form 8-K as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.

F-22

2. SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)

Proved oil and gas reserves consist of those estimated quantities of crude oil,
natural gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions.

The following estimates of proved reserves have been made by independent
engineers, based on the 80% net revenue interest purchased by the Company. The
estimated net interest in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.

The changes in proved reserves of the Delhi Field properties acquired on
September 23, 2003 for the period from January 1, 2003 to September 23, 2003 and
for the nine months ended December 31, 2002 are set forth below.

NATURAL GAS

OIL (THOUSAND
(BARRELS) CUBIC FEET)
--------- -----------
Reserves at April 1, 2002 248,074 778,700
Production (2,461) --
Revisions, extensions and discoveries -- --
--------- -----------
Reserves at January 1, 2003 245,613 778,700
Production (4,394) --
Revisions, extensions and discoveries -- --
--------- -----------
Reserves at September 23, 2003 241,219 778,700
========= ===========

The standardized measure of discounted estimated future net cash flows related
to proved oil and gas reserves as of September 23, 2003 and December 31, 2002 is
as follows:

SEPTEMBER 23, 2003 DECEMBER 31, 2002
------------------ -----------------

Future cash inflows $ 11,097,902 $ 11,437,004
Future production costs (2,892,314) (3,054,627)
Future development costs (357,000) (357,000)
Future income taxes (1,658,000) (1,718,000)
------------------ -----------------
Future net cash flows 6,190,588 6,307,377
10% annual discount (1,290,548) (1,669,865)
------------------ -----------------
Standardized measure of discounted future net cash flows $ 4,900,040 $ 4,637,512
================== =================

The primary changes in the standardized measure of discounted estimated future
net cash flows for the period from January 1, 2003 to September 23, 2003 and for
the nine-month period ended December 31, 2002, were as follows:

2003 2002
----------- -----------

Beginning of period $ 4,637,512 $ 3,254,254
Sales of oil and gas produced, net of production costs (6,652) (9,289)
Effect of change in prices (267,891) 1,846,310
Accretion of discount 463,751 325,425
Net change in income taxes 47,492 (609,524)
Revision of estimates and other 25,828 (169,664)
----------- -----------
End of period $ 4,900,040 $ 4,637,512
=========== ===========

F-23

Estimated future cash inflows are computed by applying year-end prices of oil
and gas to year-end quantities of proved reserves. Estimated future development
and production costs are determined by estimating the expenditures to be
incurred in developing and producing the proved oil and gas reserves at the end
of the year, based on period-end costs and assuming continuation of existing
economic conditions. Estimated future income tax expense is calculated by
applying year-end statutory tax rates to estimated future pre-tax net cash flows
related to proved oil and gas reserves, less Natural Gas Systems' tax basis of
the properties involved as if the purchase had occurred at April 1, 2002.

The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and as such, do not necessarily reflect
the Company's expectations of actual revenues to be derived from those reserves
nor their present worth. The limitations inherent in the reserve quantity
estimation process are equally applicable to the standardized measure
computations since these estimates are the basis for the valuation process.

On September 23, 2003, Natural Gas Systems, Inc. (the "Company") acquired
interests in the Delhi Field for considering of $2,495,000. Unaudited pro forma
financial statements have not been prepared to demonstrate the effect on the
Company's financial position and results of operations as if the properties had
been acquired on December 31, 2002 (with respect to the pro forma balance sheet)
and at January 1, 2003 and April 1, 2002 (with respect to the pro forma
statements of income) because the Company did not exist prior to September 23,
2003.

F-24

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our Articles of Incorporation provide that no officer or director shall be
personally liable to our corporation or our stockholders for monetary damages
except as provided pursuant to Nevada law. Our bylaws and Articles of
Incorporation also provide that we shall indemnify and hold harmless each person
who serves at any time as a director, officer, employee or agent of our company
from and against any and all claims, judgments and liabilities to which such
person shall become subject by reason of the fact that he is or was a director,
officer, employee or agent of our company, and shall reimburse such person for
all legal and other expenses reasonably incurred by him or her in connection
with any such claim or liability. We also have the power to defend such person
from all suits or claims in accord with Nevada law. The rights accruing to any
person under our bylaws and Articles of Incorporation do not exclude any other
right to which any such person may lawfully be entitled, and we may indemnify or
reimburse such person in any proper case, even though not specifically provided
for by our bylaws or Articles of Incorporation.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

We estimate that expenses in connection with the distribution described in this
registration statement (other than brokerage commissions, discounts or other
expenses relating to the sale of the shares by the selling stockholders) will be
as set forth below. We will pay all of the expenses with respect to the
distribution, and such amounts, with the exception of the Securities and
Exchange Commission registration fee, are estimates.

SEC registration fee............................................. $ 1,495
Accounting fees and expenses..................................... 30,000
Legal fees and expenses.......................................... 60,000
Printing and related expenses.................................... 12,000
Transfer agent fees and expenses................................. 1,000
Registration Rights Penalty...................................... 60,000

Total............................................................ $164,495

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

On September 23, 2003, Natural Gas Systems, Inc., a Delaware corporation ("Old
NGS"), a subsidiary of Natural Gas Systems, Inc., a Nevada corporation (our
"company"), issued 18,000,000 million shares to various founders. Included in
this issuance, Mr. Herlin also purchased 1,000,000 shares of common stock
(included in the issuance of 18,000,000 shares above) of Old NGS at a price of
$.001 per share, with Old NGS having a repurchase right under a reverse vesting
arrangement over 27 months. We issued and sold the foregoing securities pursuant
to an exemption from registration provided by Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933.

Old NGS also granted on September 23, 2003 stock options to purchase 350,000
shares of Old NGS common stock at an exercise price of $0.001 per share. Of
these options, Robert S. Herlin was granted a stock option to purchase up to
250,000 shares of Old NGS common stock at an exercise price of $0.001 per share,
vesting over four years, pursuant to Mr. Herlin's executive employment
agreement. In addition, a stock option of 100,000 shares was granted to Mr. Lee,
the company's corporate counsel. These securities were issued pursuant to an
exemption from registration provided by Rule 701 of the Securities Act of 1933,
as amended..

On November 10, 2003, Old NGS granted Sterling McDonald a stock option to
purchase up to 250,000 shares of common stock of Old NGS at an exercise price of
$0.25 per share, vesting over 48 months, pursuant to Mr. McDonald's executive
employment agreement. We issued and sold the foregoing securities pursuant to an
exemption from registration provided by Rule 701 of the Securities Act of 1933,
as amended.

In early 2004, Old NGS issued 3,000,000 shares of our common stock at a price of
$1.00 per share to approximately 100 accredited investors. We issued and sold
the foregoing securities pursuant to an exemption from registration provided by
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933. In May
2004, we sold 749,478 shares of our common stock at a price of $1.00 per share
(net of warrants exercised at $0.01 per share) to three accredited investors We
issued and sold the foregoing securities pursuant to an exemption from
registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933. In connection with this two offerings, we paid a
placement agent fee to Chadbourn Securities, Inc., an NASD broker dealer, and
Laird Q. Cagan, chairman of our board of directors and a registered
representative of Chadbourn Securities, Inc., and their assigns (collectively,
the "Placement Agent") comprised of seven-year warrants to acquire up to 79,931
shares of our common stock at an exercise price of $1.00 per share, and cash in
the amount of $60,000.

II-1

In 2004, we, as Reality Interactive, Inc., issued our then-president 7,000,000
shares of our common stock for services rendered valued at $7,000. We issued and
sold the foregoing securities pursuant to an exemption from registration
provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933. In 2004, we, as Reality Interactive, Inc., also issued a total of 695,000
shares of our common stock upon conversion of $230,000 of indebtedness. We
issued and sold the foregoing securities pursuant to an exemption from
registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933.

On May 26, 2004, we, as Reality Interactive, Inc., entered into a merger with
Old NGS whereby the shareholders of Old NGS received 21,749,478 shares of our
common stock in exchange for all of the 21,749,748 shares of Old NGS common
stock then outstanding. All stock options of Old NGS were exchanged in the
merger for stock options exercisable for shares of our common stock. The
operations and management of Old NGS became our own, and we changed our name to
Natural Gas Systems, Inc. All of the shareholders of Old NGS were accredited
investors. In connection with consulting services related to the merger, we
issued seven-year warrants to acquire up to 240,000 shares of our common stock
at an exercise price of $1.00 per share (including 165,000 warrants to Cagan
McAfee Capital Partners, an entity 50% owned and controlled by the Company's
chairman, Laird Q. Cagan, and cash in the amount of $300,000. We issued and sold
the foregoing securities pursuant to an exemption from registration provided by
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.

In June 2004, we sold 249,667 shares of our common stock at a price of $1.00 per
share (net of warrants exercised at $0.01 per share) to one accredited investor.
We issued and sold the foregoing securities pursuant to an exemption from
registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933. In connection with this offering, we paid our Placement
Agent $20,000.

In July 2004, we sold 200,000 shares of our common stock at a price of $1.50 per
share (net of warrants exercised at $0.01 per share) to one accredited investor.
We issued and sold the foregoing securities pursuant to an exemption from
registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933. In connection with this two offerings, we paid our
Placement Agent seven-year warrants to acquire up to 12,536 shares of our common
stock at an exercise price of $1.50 per share.

During the nine months ended March 31, 2005, Mr. Cagan loaned us, through a
series of advances, $920,000 pursuant to a secured promissory note bearing
interest at 10% per annum. We issued and sold the foregoing security pursuant to
an exemption from registration provided by Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933.

On October 22, 2004, our board of directors approved the grant of options to
purchase up to 100,000 shares of our common stock at an exercise price of $1.27
per share, to each of our two independent board members, Messrs. Gene Stoever
and Jed DiPaolo. The options vest annually over a two-year period beginning May
26, 2004, the date of the directors' election to our board. We issued and sold
the foregoing securities pursuant to an exemption from registration provided by
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.

On April 4, 2005, as compensation for services, we effectuated a grant to: (i)
Tatum Partners of a warrant to purchase up to 262,500 shares of our common stock
at an exercise price of $.001 per share, (ii) Robert S. Herlin, our president
and chief executive officer, of a stock option to purchase up to 500,000 shares
of our common stock at an exercise price of $1.80 per share and a warrant to
purchase up to 287,500 shares of our common stock at an exercise price of $1.80
per share and (iii) Sterling McDonald, our chief financial officer, of a stock
option to purchase up to 350,000 shares of our common stock at an exercise price
of $1.80 per share. In addition, options to purchase 150,000 shares of Company
common stock, with an exercise price equal to $1.80 were granted to a key
employee and independent contractor. We granted the foregoing securities
pursuant to an exemption from registration provided by Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933.

From October 2004 to February 2005, we sold a total of 139,400 Units, at a price
of $2.00 per Unit, to a total of 11 investors. All investors were accredited
investors. Each Unit consisted of one share of our common stock and warrants to
acquire up to one-third of a share of our common stock at an exercise price of
$0.01 per share. All of the Warrants were immediately exercised, resulting in
the issuance by us of an additional 54,800 shares of our common stock. In
connection with this offering, we paid a fee to the Placement Agent comprised of
seven-year warrants to acquire up to 12,536 shares of our common stock at an
exercise price of $1.50 per share, and cash in the amount of $17,840. We issued
and sold the foregoing securities pursuant to an exemption from registration
provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933.

On October 20, 2004, we entered into a Stock Purchase Agreement with Seaside
Investments PLC ("Seaside"). The Seaside agreement provided for the issuance by
NGS to Seaside of 1,000,000 shares of NGS common stock ("NGS Common Stock") in
exchange for up to 1,484,031 ordinary shares of Seaside ("Seaside Ordinary
Shares"). The Seaside Agreement and related Escrow Agreement provided for the
shares of NGS Common Stock and the Seaside Ordinary Shares to be placed in
escrow pending the satisfaction of certain closing conditions, including the
admission of the Seaside Ordinary Shares for listing on the London Stock
Exchange (the "Seaside Listing"). The Seaside Agreement provided that in the
event the Seaside Listing was not obtained by October 30, 2004, we would have
the option to terminate the Seaside Agreement, in which case the Seaside
Ordinary Shares and the shares of NGS Common Stock would be returned to Seaside
and NGS, respectively. As of October 30, 2004, the Seaside Listing had not been
obtained, and on November 12, 2004, NGS notified Seaside that, effective as of
that date, NGS was terminating the Seaside Agreement. Accordingly, the shares of
NGS Common Stock placed in escrow have been cancelled by NGS. We issued and sold
the foregoing securities pursuant to an exemption from registration provided by
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.

II-2

On February 2, 2005, we entered into a senior secured loan agreement (the "Loan
Agreement") with Prospect Energy Corporation ("Prospect") providing for
borrowings by us of up to $4.8 million (the "Secured Loan"). On February 3,
2005, we borrowed $3.0 million under the Loan Agreement. The Secured Loan bears
interest at an annual rate equal to the greater of (a) 14% and (b) the Treasury
Rate plus 9%, with interest payable in arrears on the last day of each month.
The Secured Loan is due in full on February 2, 2010. Pursuant to the terms of
the Loan Agreement, we were required to (i) pay Prospect a $96,000 cash fee,
(ii) reimburse Prospect for its legal fees incurred in connection with the
transaction, and (iii) issue Prospect five-year warrants to purchase up to
450,000 shares of our common stock at an exercise price of $0.75 per share, and
"revocable warrants" to purchase up to an additional 300,000 shares of our
common stock at an exercise price of $0.75 per share. The revocable warrants are
subject to cancellation by us prior to their exercise if we meet and maintain
certain operating cash flow targets. On March 16, 2005, we borrowed an
additional $1.0 million under the Loan Agreement and issued additional warrants
and "revocable warrants" to Prospect (to purchase up to 150,000 shares and
100,000 shares, respectively). In connection with the Secured Loan, we also paid
a third-party consultant a $30,000 cash fee and issued such party warrants to
acquire up to 50,000 shares of our common stock at an exercise price of $2.00
per share. We issued and sold the foregoing securities pursuant to an exemption
from registration provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933.

In May 2005, we sold 1,200,000 shares of our common stock at a price of $2.50
per share, to one accredited investor. In connection with this offering, we paid
a fee to the Placement Agent comprised of seven-year warrants to acquire up to
96,000 shares of our common stock at an exercise price of $2.50 per share, and
cash in the amount of $240,000. We issued and sold the foregoing securities
pursuant to an exemption from registration provided by Rule 506 of Regulation D
and Section 4(2) of the Securities Act of 1933.

On May 5, 2005, we issued 120,000 shares of our common stock to Liviakis
Financial Communications, our investor relations firm, at a purchase price of
$.001 per share, as additional compensation for services rendered to us. The
shares are subject to monthly vesting over a 12 month period. We issued and sold
the foregoing securities pursuant to an exemption from registration provided by
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933.

On June 23, 2005, as compensation for services, we effectuated a grant to Daryl
Mazzanti, our vice president of operations, a stock option to purchase up to
350,000 shares of our common stock at an exercise price of $1.61 per share, a
direct stock grant of 25,000 shares and a revocable warrant to purchase up to
250,000 shares of our common stock at an exercise price of $1.61 per share. On
August 8, 2005, as compensation for services, we effectuated a grant to David
Joe of a stock option to purchase up to 100,000 shares of our common stock at an
exercise price of $1.36 per share. On August 22, 2005, as compensation for
services, we effectuated a grant to (i) Gene Stoever, a member of the board, of
a stock option to purchase up to 28,000 shares of our common stock at an
exercise price of $1.10 per share; (ii) E.J. DiPaolo, a member of the board, a
stock option to purchase up to 28,000 shares of our common stock at an exercise
price of $1.10 per share, and (iii) Cindy Sullivan a stock option to purchase up
to 30,000 shares of our common stock at an exercise price of $1.10 per share. We
granted the foregoing securities pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act of 1933..

Effective September 22, 2005, in exchange for amending the Loan Agreement, dated
February 2, 2005, we granted Prospect Energy Corporation certain revocable
warrants to purchase up to 200,000 shares at an exercise price of $1.36. We
granted the foregoing securities pursuant to an exemption from registration
provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act of
1933.

ITEM 27. EXHIBITS

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------

3.1 Articles of Incorporation (15)

3.2 Certificate of Amendment to Articles of Incorporation (15)

3.3 Certificate of Amendment to Articles of Incorporation (12)

3.4 Articles of Merger (12)

3.5 Amended Bylaws (12)

4.1 Specimen form of the Company's Common Stock Certificate (12)

5.1 Opinion of Troy & Gould Professional Corporation (12)

10.1 Securities Purchase Agreement dated as of May 6, 2005, by and between
the Company and Rubicon Master Fund (2)

10.2 Registration Rights Agreement dated as of May 6, 2005, by and between
the Company and Rubicon Master Fund (2)

10.3 Amendment to Consulting Agreement, dated as of May 4, 2005, by and
between the Company and Liviakis Financial Communications, Inc. (2)

10.4 Stock Grant Agreement, dated as of May 4, 2005, by and between the
Company and Liviakis Financial Communications, Inc. (2)

10.5 Executive Employment Agreement, Robert S. Herlin, dated April 4, 2005
(3)

II-3

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.6 Herlin Stock Option Agreement, dated April 4, 2005 (3)

10.7 Herlin Warrant Agreement, dated April 4, 2005 (3)

10.8 Amended and Restated Tatum Resources Agreement, dated April 4, 2005
(3)

10.9 Tatum Warrant Agreement, dated April 4, 2005 (3)

10.10 Executive Employment Agreement, Sterling H. McDonald, dated April 4,
2005 (3)

10.11 McDonald Stock Option Agreement, dated April 4, 2005 (3)

10.12 Certificate of Draw Request, dated as of February 16, 2005, between
the Company and Prospect Energy Corporation ("Prospect") (4)

10.13 Loan Agreement, dated as of February 2, 2005, between the Company and
Prospect (5)

10.14 Mortgage, Collateral Assignment, Security Agreement and Financing
Statement by NGS Sub. Corp., dated as of February 2, 2005 (5)

10.15 Company Promissory Note in favor of Prospect (5)

10.16 Security Agreement, dated as of February 2, 2005, between NGS Sub.
Corp. and Prospect (5)

10.17 Security Agreement, dated as of February 2, 2005, between Natural Gas
Systems, Inc., a Delaware corporation, and Prospect (5)

10.18 Guaranty Agreement, dated as of February 2, 2005, by Natural Gas
Systems, Inc., a Delaware corporation, NGS Sub. Corp., Arkla
Petroleum, L.L.C. and Four Star Development Corporation, in favor of
Prospect (5)

10.19 Warrant Agreement, dated as of February 2, 2005, between the Company
and Prospect (5)

10.20 Company Common Stock Purchase Warrant in favor of Prospect, dated as
of February 2, 2005 (5)

10.21 Revocable Warrant Agreement, dated as of February 2, 2005, between
the Company and Prospect (5)`

10.22 Company Revocable Common Stock Purchase Warrant in favor of Prospect,
dated as of February 2, 2005 (5)

10.23 Registration Rights Agreement, dated as of February 2, 2005, between
the Company and Prospect (5)

10.24 Definitive Asset Purchase Agreement, dated as of February 2, 2005, by
and between Chadco, Inc., Alan Chadwick McCartney, Sonya Lynn McCarty
McCartney and NGS Sub. Corp. (5)

10.25 Amendment to Secured Promissory Note - Laird Q. Cagan, dated
September 20, 2004 (6)

10.26 Form of Subscription Agreement (7)

10.27 Form of Registration Rights Agreement (7)

10.28 Asset Purchase Agreement for Delhi Field, dated September 24, 2003
(8)

10.29 Asset Purchase Agreement for Tullos Field, dated September 3, 2004
(8)

10.30 Engagement Agreement - Cagan McAfee Capital Partners, LLC, dated
September 23, 2003 (8)

10.31 Addendum to Engagement Agreement - Cagan McAfee Capital Partners,
LLC, dated May 5, 2004 (8)

10.32 Lateral Drilling Services Agreement - Verdisys, Inc., January 27,
2004 (8)

10.33 Secured Promissory Note - Laird Q. Cagan, dated August 10, 2004 (8)

10.35 Agreement and Plan of Reorganization dated as of April 12, 2004 among
Reality Interactive, Inc., Reality Acquisition Corp., Global
Marketing Associates, Inc., Dean H. Becker and the Company (9)

10.36 Plains Marketing Agreement (12)

II-4

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.37 2004 Stock Plan (10)

10.38 2003 Stock Option Plan (10)

10.39 Amendment to Prospect Loan Agreement, dated September 27, 2005,
between the Company and Prospect (11)

10.40 Revocable Warrant Agreement , dated as of September 27, 2005, between
the Company and Prospect (11)

10.41 Master Services Agreement, dated September 29, 2005, between NGS
Technologies, Inc., our wholly-owned subsidiary, and MTEM, LTD. (13)

10.42 Executive Employment Agreement, Daryl M. Mazzanti, dated June 23,
2005 (14)

10.43 Stock Option Agreement, dated June 23, 2005 (14)

10.44 Stock Option Grant Agreement, dated June 23, 2005 (14)

10.45 Revocable Warrant Agreement, dated June 23, 2005 (14)

21.1 List of Subsidiaries (11)

23.1 Consent of Hein & Associates, LLP, independent auditors (12)

23.2 Consent of Troy & Gould Professional Corporation (reference is made
to Exhibit 5.1) (12)

23.3 Consent of W. D. Von Gonten & Co. (12)

24.1 Power of Attorney (reference is made to signature page) (1)

------------

(1) Previously filed herewith as an exhibit to this registration statement.

(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on May 11, 2005, which exhibit is hereby incorporated herein by reference.

(3) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on April 8, 2005, which exhibit is hereby incorporated herein by reference.

(4) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on March 21, 2005, which exhibit is hereby incorporated herein by reference.

(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on February 8, 2005, which exhibit is hereby incorporated herein by reference.

(6) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB on November 17, 2004, which exhibit is hereby incorporated herein by
reference.

(7) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on October 26, 2004, which exhibit is hereby incorporated herein by reference.

(8) Previously filed as an exhibit to the Company's Report on Form 10-KSB on
September 28, 2004, which exhibit is hereby incorporated herein by reference.

(9) Previously filed as an exhibit to the Company's Current Report on Form 8-K/A
on April 27, 2004, which exhibit is hereby incorporated herein by reference.

(10) Previously filed as an exhibit to the Company's Definitive Information
Statement on Schedule 14C, which exhibit is hereby incorporated by reference.

(11) Previously filed as an exhibit to the Company's Report on Form 10-KSB on
September 28, 2005, which exhibit is hereby incorporated herein by reference.

(12) Filed herewith.

(13) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on October 7, 2005, which exhibit is hereby incorporated herein by reference.

(14) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on June 29, 2005, which exhibit is incorporated herein by reference.

(15) Previously filed as an exhibit to the Company's Current Report on Form 8-K
on February 7, 2002, which exhibit is hereby incorporated herein by reference.

II-5

ITEM 28. UNDERTAKINGS

B. Rule 415 Offering

We hereby undertake:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933.

(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Company pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.

(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.

C. Request for Acceleration of Effective Date

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.

II-6

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in Houston, Texas, on
October 17, 2005.

NATURAL GAS SYSTEMS, INC.

By: /s/ Robert S. Herlin
-------------------------------------
Robert S. Herlin, President

Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.

SIGNATURE TITLE DATE

By: /s/ Robert S. Herlin President (principal executive October 17, 2005
------------------------ officer) and Chief Executive
Robert S. Herlin Officer and Director

By: * Chairman of the Board October 17, 2005
------------------------
Laird Q. Cagan

By: * Chief Financial Officer October 17, 2005
------------------------ (principal financial and
Sterling McDonald accounting officer)

By: * Director October 17, 2005
------------------------
John Pimentel

By: Director
------------------------
E.J. DiPaolo

By: * Director October 17, 2005
------------------------
Gene Stoever

* By: /s/ Robert S. Herlin
---------------------
Robert S. Herlin
Attorney-in-fact

II-7

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
3.1 Articles of Incorporation (15)

3.2 Certificate of Amendment to Articles of Incorporation (15)

3.3 Certificate of Amendment to Articles of Incorporation (12)

3.4 Articles of Merger (12)

3.5 Amended Bylaws (12)

4.1 Specimen form of the Company's Common Stock Certificate (12)

5.1 Opinion of Troy & Gould Professional Corporation (12)

10.1 Securities Purchase Agreement dated as of May 6, 2005, by and between
the Company and Rubicon Master Fund (2)

10.2 Registration Rights Agreement dated as of May 6, 2005, by and between
the Company and Rubicon Master Fund (2)

10.3 Amendment to Consulting Agreement, dated as of May 4, 2005, by and
between the Company and Liviakis Financial Communications, Inc. (2)

10.4 Stock Grant Agreement, dated as of May 4, 2005, by and between the
Company and Liviakis Financial Communications, Inc. (2)

10.5 Executive Employment Agreement, Robert S. Herlin, dated April 4, 2005
(3)

10.6 Herlin Stock Option Agreement, dated April 4, 2005 (3)

10.7 Herlin Warrant Agreement, dated April 4, 2005 (3)

10.8 Amended and Restated Tatum Resources Agreement, dated April 4, 2005
(3)

10.9 Tatum Warrant Agreement, dated April 4, 2005 (3)

10.10 Executive Employment Agreement, Sterling H. McDonald, dated April 4,
2005 (3)

10.11 McDonald Stock Option Agreement, dated April 4, 2005 (3)

10.12 Certificate of Draw Request, dated as of February 16, 2005, between
the Company and Prospect Energy Corporation ("Prospect") (4)

10.13 Loan Agreement, dated as of February 2, 2005, between the Company and
Prospect (5)

10.14 Mortgage, Collateral Assignment, Security Agreement and Financing
Statement by NGS Sub. Corp., dated as of February 2, 2005 (5)

10.15 Company Promissory Note in favor of Prospect (5)

10.16 Security Agreement, dated as of February 2, 2005, between NGS Sub.
Corp. and Prospect (5)

II-8

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.17 Security Agreement, dated as of February 2, 2005, between Natural Gas
Systems, Inc., a Delaware corporation, and Prospect (5)

10.19 Warrant Agreement, dated as of February 2, 2005, between the Company
and Prospect (5)

10.20 Company Common Stock Purchase Warrant in favor of Prospect, dated as
of February 2, 2005 (5)

10.21 Revocable Warrant Agreement, dated as of February 2, 2005, between
the Company and Prospect (5)`

10.22 Company Revocable Common Stock Purchase Warrant in favor of Prospect,
dated as of February 2, 2005 (5)

10.23 Registration Rights Agreement, dated as of February 2, 2005, between
the Company and Prospect (5)

10.24 Definitive Asset Purchase Agreement, dated as of February 2, 2005, by
and between Chadco, Inc., Alan Chadwick McCartney, Sonya Lynn McCarty
McCartney and NGS Sub. Corp. (5)

10.25 Amendment to Secured Promissory Note - Laird Q. Cagan, dated
September 20, 2004 (6)

10.26 Form of Subscription Agreement (7)

10.27 Form of Registration Rights Agreement (7)

10.28 Asset Purchase Agreement for Delhi Field, dated September 24, 2003
(8)

10.29 Asset Purchase Agreement for Tullos Field, dated September 3, 2004
(8)

10.30 Engagement Agreement - Cagan McAfee Capital Partners, LLC, dated
September 23, 2003 (8)

10.31 Addendum to Engagement Agreement - Cagan McAfee Capital Partners,
LLC, dated May 5, 2004 (8)

10.32 Lateral Drilling Services Agreement - Verdisys, Inc., January 27,
2004 (8)

10.33 Secured Promissory Note - Laird Q. Cagan, dated August 10, 2004 (8)

10.35 Agreement and Plan of Reorganization dated as of April 12, 2004 among
Reality Interactive, Inc., Reality Acquisition Corp., Global
Marketing Associates, Inc., Dean H. Becker and the Company (9)

10.36 Plains Marketing Agreement (12)

II-9

EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.37 2004 Stock Plan (10)

10.38 2003 Stock Option Plan (10)

10.39 Amendment to Prospect Loan Agreement, dated September 27, 2005,
between the Company and Prospect (11)

10.40 Revocable Warrant Agreement , dated as of September 27, 2005, between
the Company and Prospect (11)

10.41 Master Services Agreement, dated September 29, 2005, between NGS
Technologies, Inc., our wholly-owned subsidiary, and MTEM, LTD. (13)

10.42 Executive Employment Agreement, Daryl M. Mazzanti, dated June 23,
2005 (14)

10.43 Stock Option Agreement, dated June 23, 2005 (14)

10.44 Stock Option Grant Agreement, dated June 23, 2005 (14)

10.45 Revocable Warrant Agreement, dated June 23, 2005 (14)

21.1 List of Subsidiaries (11)

23.1 Consent of Hein & Associates, LLP, independent auditors (12)

23.2 Consent of Troy & Gould Professional Corporation (reference is made
to Exhibit 5.1) (12)

23.3 Consent of W. D. Von Gonten & Co. (12)

24.2 Power of Attorney (reference is made to signature page) (1)