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, 2007 filed with the SEC. All dollar amounts reported in tables are in thousands of dollars unless otherwise noted.

Overview

We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are paid monthly in advance and include maintenance of the rented compressors. As of September 30, 2008, we had 1,662 natural gas compressor packages in our rental fleet, of which 1,418 compressors totaling 175,740 horsepower were rented to 110 customers, compared to 1,277 natural gas compressor packages in our rental fleet, of which 1,136 compressors totaling 132,147 horsepower rented to 92 customers at September 30, 2007.

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

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

We provide service and maintenance to our customers under written maintenance contracts or on an as required basis in the absence of a service contract. As of September 30, 2008, we had written maintenance agreements with customers relating to 46 compressors. Maintenance agreements typically have terms of nine months to one year and require payment of a monthly fee.

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

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

Demand for our products and services was strong throughout 2007 and the first nine months of 2008. We continue to believe that the long-term outlook for our business remains favorable, although the present macroeconomic factors, e.g., credit tightening and cash conservation, combined with deteriorating natural gas and oil prices may prove to be a negative factor in the near term.

For fiscal year 2008, our forecasted capital expenditures are approximately $40
- $45 million, primarily for additions to our compressor rental fleet. We believe that the proceeds from our public offering of common stock in March 2006, together with funds available to us under our bank credit facility and cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2008. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses. Additional capital may not be available to us when we need it or on acceptable terms.

Results of Operations

Three months ended September 30, 2007, compared to the three months ended
September 30, 2008.

The table below shows our revenues and percentage of total revenues of each of
our segments for the three months ended September 30, 2007 and September 30,
2008.

                                               Revenue
                                           (in thousands)
                                  Three months Ended September 30,
                                       2007                      2008
Sales                     $     10,574               57 %   $ 13,239   53 %
Rental                           7,857               42 %     11,414   46 %
Service and Maintenance            220                1 %        293    1 %
Total                     $     18,651                      $ 24,946

Total revenue increased from $18.7 million to $25.0 million, or 33.8%, for the three months ended September 30, 2008, compared to the same period ended September 30, 2007. This was mainly the result of increased rental revenue. Sales revenue increased 25.2%, rental revenue increased 45.3%, and service and maintenance revenue increased 33.2%.

Sales revenue increased from $10.6 million to $13.2 million, or 25.2%, for the three months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase is mainly the result of additional 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,
(4) compressor rebuilds and (5) rental unit sales.

Rental revenue increased from $7.9 million to $11.4 million, or 45.3%, for the three months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase was the result of additional units added to our rental fleet and rented to third parties. The company ended the period with 1,662 compressor packages in its rental fleet, up from 1,277 units at September 30, 2007. The rental fleet had a utilization of 85.3% as of September 30, 2008 compared to 89.0% utilization as of September 30, 2007. This utilization decrease partially resulted from units being returned by a major customer that performed routine yearly evaluations of their compressor needs. Also the demand for smaller horsepower units has slowed.

Service and maintenance revenue increased from $220,000 to $293,000, or 33.2%, for the three months ended September 30, 2008, compared to the same period ended September 30, 2007.

The overall operating margin percentage increased to 29.9% for the three months ended September 30, 2008, from 28.1% for the same period ended September 30, 2007. This is mainly the result of increased margins on our rental fleet activity and the increased margin for gas compressor sales activity. 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. Because of the larger margins that we obtain from rentals it is generally our focus is to increase our rental business. Rental margins increased from 60% to 64% for the three months ended September 30, 2008, compared to the same period ended September 30, 2007.

Selling, general, and administrative expense increased from $1.3 million to $1.5 million or 17.4% for the three months ended September 30, 2008, as compared to the same period ended September 30, 2007. This increase is mainly due to an increase in sales commissions on rental equipment and additional sales personnel.

Depreciation and amortization expense increased from $1.9 million to $2.6 million or 35.8% for the three months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase was the result of 385 new gas compressor rental units being added to the rental fleet from September 30, 2007 to September 30, 2008, thus increasing the depreciable base.

Other income net of other expense decreased $325,000 for the three months ended September 30, 2008, compared to the same period ended September 30, 2007. This decrease is mainly the result of decreased balances in our short-term investments.

Interest expense decreased 70.1% for the three months ended September 30, 2008, compared to the same period ended September 30, 2007, 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 increased from $2.0 million to $2.6 million, or 31.3%, and is the result of the increase in taxable income.

Nine months ended September 30, 2007, compared to the nine months ended September 30, 2008.

The table below shows our revenues and percentage of total revenues of each of our segments for the nine months ended September 30, 2007 and September 30, 2008.

                                              Revenue
                                           (in thousands)
                                  Nine months ended September 30,
                                       2007                     2008
Sales                     $     30,239              57 %   $ 32,024   51 %
Rental                          22,019              42 %     30,519   48 %
Service and Maintenance            729               1 %        814    1 %
Total                     $     52,987                     $ 63,357

Total revenue increased from $53.0 million to $63.4 million, or 19.6%, for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This was mainly the result of increased rental revenue. Sales revenue increased 5.9%, rental revenue increased 38.6%, and service and maintenance revenue increased 11.7%.

Sales revenue increased from $30.2 million to $32.0 million, or 5.9%, for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase is mainly the result of additional sales in our Tulsa and Michigan facilities. 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 $22.0 million to $30.5 million, or 38.6%, for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase was the result of additional units added to our rental fleet and rented to customers. The company ended the period with 1,662 compressor packages in its rental fleet, up from 1,277 units at September 30, 2007. The rental fleet had a utilization of 85.3% as of September 30, 2008 compared to 89.0% utilization as of September 30, 2007. This utilization decrease partially resulted from units being returned by a major customer that performed routine yearly evaluations of their compressor needs. Also the demand for smaller horsepower units has slowed.

Service and maintenance revenue increased from $729,000 to $814,000, or 11.7%, for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase is due to increased service in New Mexico and Michigan.

The overall operating margin percentage increased to 28.5% for the nine months ended September 30, 2008, from 25.6% for the same period ended September 30, 2007. 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 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 rental business.

Selling, general, and administrative expense increased from $3.8 million, to $4.4 million or 15.9% for the nine months ended September 30, 2008, as compared to the same period ended September 30, 2007. This increase is mainly due to the increase in commissions on rental equipment, additional sales personnel and an increase in officers' salaries.

Depreciation and amortization expense increased from $5.4 million, to $7.1 million or 30.3% for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This increase was the result of 385 new gas compressor rental units being added to the rental fleet from September 30, 2007 to September 30, 2008, thus increasing the depreciable base.

Other income net of other expense decreased $667,000 for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007. This decrease is mainly the result of decreased balances in our short-term investments.

Interest expense decreased 41.1% for the nine months ended September 30, 2008, compared to the same period ended September 30, 2007, mainly due to decreased principal balances owed under our bank loan facility and a reduction in our interest rates on our term loan and bank line of credit.

Provision for income tax increased from $5.1 million to $6.3 million, or 23.1%, and is the result of the increase in taxable income.

Critical Accounting Policies and Practices

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

Recently Issued Accounting Pronouncements

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

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

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

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

Liquidity and Capital Resources

The following represents the Company's working capital position as of December
31, 2007 and September 30, 2008.

                                      December 31,          September 30,
                                          2007                    2008
                                     (in thousands)          (in thousands)

Current Assets:
Cash and cash equivalents            $           245        $          6,701
Short-term investments                        18,661                       -
Trade accounts receivable, net                11,322                  11,078
Inventory, net                                20,769                  29,270
Prepaid income taxes                           3,584                     377
Prepaid expenses and other                       641                      87
Total current assets                          55,222                  47,513

Current Liabilities:
Current portion of long-term
debt and subordinated notes                    4,378                   3,378
Current portion of line of credit                600                       -
Accounts payable                               4,072                   5,178
Accrued liabilities                            3,990                   5,922
Current portion of tax liability               3,525                     109
Deferred income                                   81                      51
Total current liabilities                     16,646                  14,638

Total working capital                $        38,576        $         32,875

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 nine months ended September 30, 2008, we invested $35.9 million in equipment for our rental fleet and service vehicles. We financed this activity with cash flow from operations, cash on hand and borrowings from our revolving line of credit facility. In addition, we have repaid $4.6 million of our existing debt.

Cash flows

At September 30, 2008, we had cash, cash equivalents and short-term investments of $6.7 million compared to $18.9 million at December 31 2007. We had working capital of $32.9 million at September 30, 2008 compared to $38.6 million at December 31, 2007. At September 30, 2008, our total debt was $17.4 million of which $3.4 million was classified as current compared to $14.6 million and $4.4 million, respectively at December 31, 2007. We had positive net cash flow from operating activities of $20.3 million during the first nine months of 2008 compared to $14.5 million for the first nine months of 2007. The increase was primarily from net income of $11.7 million, an increase in accounts payable and accrued liabilities of $3.0 million, offset by an increase in inventory of $8.5 million during the nine months ended September 30, 2008.

Accounts receivable decreased $244,000 to $11.1 million at September 30, 2008 as compared to $11.3 million at December 31, 2007. This decrease largely reflects the timing of collections during the first nine months of 2008.

Inventory increased $8.5 million to $29.3 million as of September 30, 2008, as compared to $20.8 million as of the year ended December 31, 2007. This increase is mainly the result of additional inventory to stock the service branches and an increase in raw materials to meet our increased production schedule.

Long-term debt increased $3.4 million to $17.4 million at September 30, 2008, compared to $14.6 million at December 31, 2007. This increase is the result of additional borrowing on our bank line of credit to increase our rental fleet offset by the normal debt amortization. The current portion of long-term debt decreased to $3.4 million at September 30, 2008, compared to $4.4 million at December 31, 2007 due to the final payment of $1.0 million of our subordinated debt on January 3, 2008.

Senior Bank Borrowings

On May 16, 2008, we entered into an Eighth Amended and Restated Loan Agreement with Western National Bank, Midland, Texas effective April 1, 2008. This Loan Agreement (1) decreased the interest rate on existing term loan facilities, and
(2) extended and renewed our revolving line of credit facility. Our revolving line of credit and multiple advance term loan facilities are described below.

Revolving Line of Credit Facility. Our revolving line of credit facility allows us to borrow, repay and reborrow funds drawn under this facility. After entering into the Seventh Amended and Restated Loan Agreement, the total amount that we could borrow and have outstanding at any one time is the lesser of $40.0 million or the amount available for advances under a "borrowing base" calculation established by the bank. As of September 30, 2008, the amount available for revolving line of credit advances under our borrowing base was $33.0 million. The amount of the borrowing base is based primarily upon our receivables, equipment and inventory. The borrowing base is redetermined by the bank on a monthly basis. If, as a result of the redetermination of the borrowing base, the aggregate outstanding principal amount of the notes payable to the bank under the Loan Agreement exceeds the borrowing base, we must prepay the principal of the revolving line of credit note in an amount equal to such excess. Interest only on borrowings under our revolving line of credit facility is payable monthly on the first day of each month. All outstanding principal and unpaid interest is due on May 1, 2010. Since April 1, 2008, our interest rate on the revolving line of credit is equal to prime rate minus one quarter of one percent (.25%) but never lower than four percent (4%) nor higher than eight and three quarter percent (8.75%). We had $7 million outstanding as of September 30, 2008 on this revolving line of credit facility, and the interest rate on that date was 4.50%.

$16.9 Million Multiple Advance Term Loan Facility. This multiple advance term loan facility represents the consolidation of our previously existing advancing line of credit and term loan facilities. Reborrowings are not permitted under this facility. Principal under this credit facility is due and payable in 59 monthly installments of $282,000 each, which commenced November 1, 2006 and continuing through September 1, 2011. Since April 1, 2008, our interest rate on the revolving line of credit is equal to prime rate minus one half of one percent (.50%) but never lower than four percent (4%) nor higher than eight and three quarter percent (8.75%). Interest on the unpaid principal balance is due and payable on the same dates as principal payments. All outstanding principal and unpaid interest is due on October 1, 2011. As of September 30, 2008 this term loan facility had a principal balance of $10.4 million, and the interest rate on that date was 4.75%.

Our obligations under the Loan Agreement are secured by substantially all of our . . .