The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.

Overview

We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are paid monthly in advance and include maintenance of the rented compressors. As of June 30, 2009, we had 1,345 natural gas compressors totaling 168,381 horsepower rented to 99 third parties compared to 1,388 natural gas compressors totaling 168,355 horsepower rented to 108 third parties at June 30, 2008.

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

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

We provide service and maintenance to our customers under written maintenance contracts or on an as required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.

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

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

Demand for our products and services was strong throughout previous years but began to decline in the first quarter of 2009 and will most likely continue to decline for the remainder of the year due to lower oil and natural gas prices and decreased demand for natural gas. However, we believe the long-term trend in our markets is favorable.

For fiscal year 2009, our forecasted capital expenditures will be directly dependent upon our customers' compression requirements and are not anticipated to exceed our internally generated cash flows. Any required capital will be for additions to our compressor rental fleet and/or addition or replacement of service vehicles. We believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses, although that capital may not be available to us when we need it or on acceptable terms.

Results of Operations

Three months ended June 30, 2008, compared to the three months ended June 30,
2009.

The table below shows our revenues and percentage of total revenues of each of
our segments for the three months ended June 30, 2008 and June 30, 2009.

                                         Revenue
                                     (in thousands)
                               Three months ended June 30,
                                 2008                2009
Sales                     $     9,159    47 %   $  4,599   27 %
Rental                         10,095    52 %     11,969   72 %
Service and Maintenance           224     1 %        189    1 %
Total                     $    19,478           $ 16,757

Total revenue decreased from $19.5 million to $16.8 million, or 14.0%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of increased rental revenue offset by decreased sales revenue. Sales revenue decreased 49.8%, rental revenue increased 18.6%, and service and maintenance revenue decreased 15.6%.

Sales revenue decreased from $9.2 million to $4.6 million, or 49.8%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is the result of lower demand for our products due to industry declines in capital expenditures which resulted in fewer compressor unit sales to third parties from our Tulsa and Michigan operations. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts, and (4) compressor rebuilds.

Rental revenue increased from $10.1 million to $12.0 million, or 18.6%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,771 compressor packages in its rental fleet, up from 1,546 units at June 30, 2008. The rental fleet had a utilization of 75.9% as of June 30, 2009 compared to 89.8% utilization as of June 30, 2008. This utilization decrease partially resulted from units being returned by a major customer that performed a routine yearly evaluation of compressor needs. Additionally, the demand for smaller horsepower units has slowed due to the decline of natural gas commodity prices.

The overall operating margin percentage increased to 27.6% for the three months ended June 30, 2009, from 26.4% for the same period ended June 30, 2008. This is mainly the result of higher margins received in our rental segment. The overall margin is affected by the product mix between rental and sales, and since our rental margin is higher and rentals increased during the period, the overall margin moved higher.

Selling, general, and administrative expense increased from $1.5 million to $1.7 million or 11.4% for the three months ended June 30, 2009 as compared to the same period ended June 30, 2008. This increase is mainly due to an increase in: (1) stock option expenses, (2) sales salaries expenses, related to additional salespeople in the Houston since several Oil and Gas Companies are Headquartered there, and (3) additional commission on rentals.

Depreciation and amortization expense increased from $2.4 million to $2.9 million or 24.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing the depreciable base.

Other income, net of other expense, decreased $200,000 for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments generating less interest income.

Interest expense decreased 20.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility and a reduction in our interest rate on our term loan and bank line of credit.

Provision for income tax decreased from $1.8 million to $1.5 million, or 12.2%, and is the result of the decrease in taxable income.

Six months ended June 30, 2008, compared to the six months ended June 30, 2009.

The table below shows our revenues and percentage of total revenues of each of our segments for the six months ended June 30, 2008 and June 30, 2009.

                                        Revenue
                                    (in thousands)
                               Six months ended June 30,
                                2008               2009
Sales                     $   18,785   49 %   $ 11,528   32 %
Rental                        19,105   50 %     24,757   67 %
Service and Maintenance          521    1 %        497    1 %
Total                     $   38,411          $ 36,782

Total revenue decreased from $38.4 million to $36.8 million, or 4.2%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of a 38.6% decrease in sales revenue, offset by an increase in rental revenue of 29.6%, and service and maintenance revenue decreased 4.6%.

Sales revenue decreased from $18.8 million to $11.5 million, or 38.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is the result of lower demand for our products due to an industry slowdown which resulted in fewer compressor unit sales to third parties from our Tulsa and Michigan operations. Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.

Rental revenue increased from $19.1 million to $24.8 million, or 29.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of additional units added to our rental fleet and rented to customers. The company ended the period with 1,771 compressor packages in its rental fleet, up from 1,546 units at June 30, 2008. The rental fleet has a utilization of 75.9% as of June 30, 2009.

The overall operating margin percentage increased to 29.1% for the six months ended June 30, 2009, from 27.6% for the same period ended June 30, 2008. This is mainly the result of increased margins of our rental fleet activity. The overall margin is also affected by the product mix between rental and sales, since our rental margin is higher and rentals increased, as a percentage of revenue, during the period the overall margin moved higher. Because of the larger margins that we obtain from rentals it is generally our focus to increase our rentals business.

Selling, general, and administrative expense increased from $2.8 million, to $3.2 million, or 14.0%, for the six months ended June 30, 2009, as compared to the same period ended June 30, 2008. This increase is mainly due to an increase in stock option expenses, and sales salaries expenses and commissions on rental equipment.

Depreciation and amortization expense increased from $4.5 million, to $5.9 million, or 31.3%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This increase was the result of 225 new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing the depreciable base.

Other income net of other expense decreased $480,000 for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments.

Interest expense decreased 27.7% for the six months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility.

Provision for income tax decreased from $3.7 million to $3.6 million, or 2.4%, and is the result of the decrease in taxable income.

Critical Accounting Policies and Practices

A discussion of our critical accounting policies is included in the Company's Form 10-K for the year ended December 31, 2008.

Recently Issued Accounting Pronouncements

On January 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements," (SFAS 157) as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to nonfinancial assets and nonfinancial liabilities had no impact on our consolidated financial statements. The provisions of SFAS 157 will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of SFAS 157.

On January 1, 2009, we adopted SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51," (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent's equity; consolidated net income to be reported at amounts inclusive of both the parent's and noncontrolling interest's shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of SFAS 160 had no impact on our consolidated financial statements.

On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combination (SFAS 141R), and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, this statement requires acquisition related costs to be expensed in the period in which the costs were incurred and the services are received instead of including such costs as part of the acquisition price. SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. The adoption of SFAS No. 141(R) had no impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS 165 for the quarter ending June 30, 2009. The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.

Liquidity and Capital Resources

Our working capital positions as of December 31, 2008 and June 30, 2009 are set
forth below.

                                      December 31,          June 30,
                                          2008                2009
                                     (in thousands)      (in thousands)

Current Assets:
Cash and cash equivalents           $         1,149    $          11,687
Short-term investments                        2,300                    -
Trade accounts receivable, net               11,321                5,799
Inventory, net                               31,931               27,445
Prepaid income taxes                            244                  801
Prepaid expenses and other                       87                  231
Total current assets                         47,032               45,963

Current Liabilities:
Current portion of long-term debt             3,378                3,378
Accounts payable                              8,410                1,189
Accrued liabilities                           3,987                1,925
Current portion of tax liability                110                   99
Deferred income                                  38                  281
Total current liabilities                    15,923                6,872

Total working capital               $        31,109    $          39,091

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

For the six months ended June 30, 2009, we invested $7.2 million in equipment for our rental fleet, upgrades in emission control, and service vehicles. We financed this activity with cash flow from operations and cash on hand. In addition, we have repaid $1.7 million of our existing debt.

Cash flows

At June 30, 2009, we had cash and cash equivalents of $11.7 million compared to $1.1 million at December 31, 2008. We had working capital of $39.1 million at June 30, 2009 compared to $31.1 million at December 31, 2008. At June 30, 2009, our total debt was $14.9 million of which $3.4 million was classified as current compared to $16.6 million and $3.4 million, respectively at December 31, 2008. We had positive net cash flow from operating activities of $16.9 million during the first six months of 2009 compared to $13.4 million for the first six months of 2008. The cash flow from operations of $16.9 million was primarily the result of the net income of $6.7 million and the non cash items of depreciation and taxes of $9.5 million.

Accounts receivable decreased $5.5 million to $5.8 million at June 30, 2009 as compared to $11.3 million at December 31, 2008. This decrease largely reflects the timing of collections and a slowdown in compressor unit sales during the first six months of 2009.

Inventory decreased $4.5 million to $27.4 million as of June 30, 2009 as compared to $31.9 million as of the year ended December 31, 2008. This decrease is mainly the result of our decreased manufacturing activity.

Long-term debt decreased $1.7 million to $14.9 million at June 30, 2009, compared to $17.0 million at December 2008. This decrease is mainly the result of the normal debt amortization. The current portion of long-term debt remained flat at $3.4 million at June 30, 2009 compared to December 31, 2008.

Recession strategy

For the quarter ended June 30, 2009, our overall plan during the downturn in the economy is to reduce expenses in line with the lower anticipated activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and reduce bank borrowing. Capital expenditures for the remainder of the year are not to exceed our internal cash generating capacity. We believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses. We currently have a $40 million dollar bank line of credit with an available balance of $33 million.

Senior Bank Borrowings

Revolving Line of Credit Facility. As of June 30, 2009, the amount available for revolving line of credit advances was $33.0 million. The amount we could borrow is determined by a borrowing base calculation and is based primarily upon our receivables, equipment and inventory. We had $7.0 million outstanding as of June 30, 2009 on this revolving line of credit facility, and the interest rate on that date was 4.00%.

$16.9 Million Multiple Advance Term Loan Facility. As of June 30, 2009 this term loan facility had a principal balance of $7.8 million, and the interest rate on that date was 4.00%.

As of June 30, 2009, we were in compliance with all covenants in our Loan Agreement. A default under our bank credit facility could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would have a material adverse effect on our liquidity, financial position and operations.

As of June 30, 2009, we had a long-term liability of $275,000 to Midland Development Corporation. This amount is to be recognized as income contingent upon certain staffing requirements in the future. In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor. Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years. The $300,000 payment we received is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled. The long-term liability remaining as of June 30, 2009 was $287,000.

On June 16, 2009, at our annual meeting of shareholders, our shareholders approved a proposed amendment to our 1998 Stock Option Plan (the "Plan") to add an additional 200,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 750,000 shares of common stock under the Plan.

Also on June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit Plan. A total of 300,000 shares of Company common stock are reserved for issuance under the restricted stock plan.

Contractual Obligations and Commitments

We have contractual obligations and commitments that affect our consolidated
results of operations, financial condition and liquidity. The following table is
a summary of our significant cash contractual obligations:
                                                     Obligation Due in Period
                                                    (in thousands of dollars)
Cash Contractual
Obligations         2009(1)        2010         2011         2012         2013         Thereafter       Total
Term loan
facility
(secured)         $   1,689     $  3,378      $ 2,816      $     -      $    -       $          -     $  7,883
Interest on term
loan facility(2)        144          186           52            -           -                  -          382
Line of credit
(secured)                          7,000            -            -           -                  -        7,000
Interest on line
of credit(3)            140           93            -            -           -                  -          233
Purchase
obligations             880          956          956          956         814                  -        4,562
Other long term
debt                      -            -            -            -           -                562          562
Facilities and
office leases           231          356          257          233         166                 17        1,260
 Total            $   3,084     $ 11,969      $ 4,081      $ 1,189      $  980      $         579     $ 21,882

. . .