SecProbe.io

CORRESP
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filename1.htm

      Corresp

    January
      23, 2006

    Mr.
      H.
      Roger Schwall

    Assistant
      Director

    Division
      of Corporate Finance

    United
      States Securities and Exchange Commission

    Mail
      Stop
      7010

    Washington,
      DC 20549

            RE:

              Natural
                Gas Systems, Inc.

    Registration
      Statement on Form SB-2

    Filed
      June 6, 2005 and amended October 19, 2005

    File
      No.
      333-125564

    Dear
      Mr.
      Schwall:

    On
      behalf
      of Natural Gas Systems, Inc., a Nevada corporation (the “Company”),
      we
      have enclosed for filing under the Securities Act of 1933 Amendment No. 2 to
      the
      Registration Statement on Form SB-2, Registration No. 333-125564 (the
“Registration
      Statement”),
      including the exhibits thereto, that was initially filed with the Securities
      and
      Exchange Commission (the “Commission”)
      on
      June 6, 2005, and amended by Amendment No. 1 thereto as filed with the
      Commission on October 19, 2005. We have supplementally also enclosed a copy
      of
      Amendment No. 2 that has been marked to show the changes that have been made
      to
      Amendment No. 1. Amendment No. 2 to the Registration Statement includes an
      amended prospectus (the “Prospectus”).

    By
      its
      letter dated November 18, 2005, the staff of the Commission (the “Staff”)
      provided the Company with comments on Amendment No.1. We have set forth below
      the responses of the Company to the Staff’s comments. The numbers of the
      responses set forth below correspond to the numbered comments in the November
      18
      letter from the Staff.:

    Comment
      1: Please provide justification for not naming Mr. James F. George as an
      underwriter.

    We
      have
      amended our document to remove James F. George as a selling
      stockholder.

    Comment
      2: Please expand your response to prior comment 5 regarding Item 310 of
      Regulation SB and accounting for the “reverse merger”.

              a.

              With
                respect to the financial statements we filed relating to the May,
                2004
                merger of Old NGS with a subsidiary of Reality Interactive, Inc.
                (the
                former name of our company), we have revised our note on page F-7,
                and
                deleted references to SAB 2:A.

    As
      to the
      appropriateness of our accounting for our transaction with Reality Interactive
      and the financial statements we filed with the SEC, please be advised that
      Reality Interactive represented that it had no operating assets from 1999
      through the time of the merger. Additional information regarding the parties,
      structure and shares exchanged follows:

        -1-

    On
      May
      26, 2004, Reality Acquisition Corp. (“Reality Sub”), a newly formed wholly owned
      subsidiary of Reality Interactive, Inc., a Nevada corporation ("Reality
      Interactive"), merged with and into Natural Gas Systems, Inc., a Delaware
      corporation ("Old NGS"). As a result of this merger (the "Merger"), Old NGS
      became a wholly owned subsidiary of Reality Interactive. The Merger occurred
      pursuant to an Agreement and Plan of Reorganization dated as of April 12, 2004
      (the "Merger Agreement") among Reality Interactive, Reality Sub, Global
      Marketing Associates, Inc., Dean H. Becker and Old NGS. On April 27, 2004,
      Reality Interactive filed a copy of the Merger Agreement with the Commission
      on
      a Report on Form 8-K/A.

    Reality
      Sub merged with and into Old NGS upon the terms and conditions set forth in
      the
      Merger Agreement and in accordance with the provisions of the Delaware General
      Corporation Law. It was the intention of the parties that the transaction
      qualify as a tax-free reorganization under Section 368(a)(2)(E) of the Internal
      Revenue Code of 1986, as amended. Old NGS was the surviving corporation and
      the
      separate existence of Reality Sub ceased when the Merger became effective.
      Each
      share of Old NGS Common Stock issued and outstanding immediately prior to the
      Merger was converted into one (1) share of Reality Interactive Common Stock.
      All
      such shares of Old NGS Common Stock that were outstanding were automatically
      canceled and ceased to exist. All 1,000 shares of the Common Stock of Reality
      Sub (representing all issued and outstanding shares) were converted into one
      (1)
      share of Common Stock of Old NGS, which is owned by Reality
      Interactive.

    Immediately
      prior to the Merger, Reality Interactive had 7,946,255 outstanding shares of
      common stock and no outstanding shares of preferred stock. Pursuant to the
      Merger, (i) 7,000,000 of the 7,010,000 shares of Reality Interactive common
      stock held by Dean H. Becker, Reality Interactive's President and Chief
      Executive Officer, were cancelled, and (ii) 21,750,001 shares of Reality
      Interactive common stock were issued to the stockholders of Old NGS in exchange
      for 100% of the outstanding shares of common stock of Old NGS. The share
      exchange ratio in the Merger was determined through arms'-length negotiations
      between Reality Interactive and Old NGS. Prior to the Merger, Mr. Becker owned
      approximately 88% of Reality Interactive's outstanding shares.

    Each
      outstanding option or warrant to purchase shares of Old NGS common stock,
      whether or not then exercisable, was converted into an option or a warrant
      to
      purchase an identical number of shares of Reality Interactive common stock
      at a
      price equal to the exercise price of the option or warrant in effect immediately
      prior to the Merger.

    As
      a
      result of the Merger, (i) 22,696,256 shares of Reality Interactive common stock
      were outstanding, 95.8% of which were owned by the former stockholders of Old
      NGS, (ii) control of Reality Interactive was assumed by the former stockholders
      of Old NGS, (iii) the executive officers of Old NGS became the executive
      officers of Reality Interactive, (iv) the Board of Directors of Old NGS became
      the Board of Directors of Reality Interactive and (v) Reality Interactive’s name
      was changed to Natural Gas Systems, Inc, a Nevada corporation.

        -2-

    Based
      on
      these facts and circumstances, especially those described in the immediately
      preceding paragraph above, we concluded that the merger transaction represented,
      in effect, a recapitalization of Old NGS. Accordingly, we accounted for the
      transaction as a “reverse merger”, wherein Old NGS was treated as the accounting
      acquiror and filed financial statements with the SEC reflecting the historical
      financial condition and operating results of Old NGS. No goodwill arose from
      the
      transaction and all transaction costs were expensed as incurred.

    In
      accordance with Rule 310 (c) of Regulation S-B we provided on Form 8-K/A the
      following financial information:

                i.

                Audited
                  revenue and direct operating expenses for an 18 month period, consisting
                  of the nine months ended December 31, 2002 and the nine months
                  ended
                  September, 2003 (date of the acquisition). Revenue and direct operating
                  expense statements accorded purchasers of “oil and gas businesses” were
                  presented in accordance with additional guidance provided by the
                  Division
                  of Corporate Finance at Item IIIC - Financial Statements for Acquired
                  Oil
                  and Gas Producing Properties, since full financial statements were
                  not
                  available or reasonably attainable from the seller.

                ii.

                Audited
                  financial statements of Old NGS from September 23, 2003 (inception),
                  through its old fiscal year ended December 31, 2003.

              b.

              With
                respect to our acquisitions of two groups of producing leasehold
                interests
                in the Tullos Field Area in September 2004 from Atkins Production,
                and
                February 2005 from Chadco, we followed Regulation S-B 310 c., Financial
                Statements of Businesses Acquired or to be Acquired, as follows,
                to
                ascertain whether financial information for these properties was
                required
                to be filed on Form 8-K in accordance with Rule 310 of Regulation
                S-B:

              i.

              For
                the tests at 310-2. i & ii:

                1.

                Our
                  assets at June 30, 2004 were
                  $4,011,065.

                2.

                Our
                  investments in and the total assets we acquired in the Tullos Field
                  Area
                  acquisition from Atkins in September 2004 was $705,790, or 17.6%
                  of our
                  total assets at June 30, 2004 (or 16.3% after additional adjustments
                  to
                  the purchase price described in #4
                  below).

              3.

              Our
                investments in and the total assets we acquired in the Tullos Field
                Area
                acquisition from Chadco in February 2005 was $798,907, or 19.9% of
                our
                total assets at June 30, 2004 (or 16% after additional adjustments
                to the
                purchase price described in #4
                below).

                4.

                Pursuant
                  to the terms of the purchase agreements regarding the property
                  acquisitions described in #2 and 3 above, we are the beneficiary
                  of
                  certain contractual downward adjustments to the purchase prices
                  resulting
                  from proceeds to be received from the State of Louisiana concerning
                  eminent domain proceedings on wellbores located within a state
                  highway
                  expansion. The expected adjustments
                  are:

        -3-

              a.

              A
                $52,667.67* downward adjustment to the Atkins acquisition of September
                of
                2004, or 1.3% of our assets at June 30,
                2004.

                b.

                A
                  $158,000** downward adjustment to the Chadco acquisition of February
                  2005,
                  or 3.9% of our assets at June 30,
                  2004.

              c.

              To
                date, we have received notice from legal counsel that one of the
                Chadco
                well proceedings has been finalized in the amount of $39,500 to our
                interest or .98% of our assets at June 30, 2004, although we have
                not
                received the proceeds as of the date of this
                letter.

    *
      (1/3 of
      2 wells @ $79,000 each)

    **
      (½ of
      4 wells @ $79,000 each)

              ii.

              For
                the test at 310-2.iii:

                1.

                Our
                  loss for the period from September 23, 2003 (inception) to June
                  30, 2004
                  was $1,364,587.

              2.

              Revenue
                and direct operating expenses, including a $36,000 allocation for
                field
                supervision, for the twelve months ended June 30, 2004 for our Tullos
                Field Area acquisition from Atkins in September 2004, was $161,000,
                or
                11.8% of our loss for the period from September 23, 2003 (inception)
                through our year ended June 30,
                2004.

                3.

                By
                  analogy, revenue and direct operating expenses, including field
                  supervision, for the twelve months ended June 30, 2004 for our
                  Tullos
                  Field Area acquisition from Chadco in February 2005 was $186,277,
                  or 13.7%
                  of our loss for the period from September 23, 2003 (inception)
                  through our
                  year end June 30, 2004.

              iii.

              Since
                none of the tests exceeded 20% individually, or 40% in the aggregate,
                no
                financial statements of the acquirees were required to be filed with
                the
                SEC on Form 8-K in accordance with Rule 310 (c) of Regulation
                S-B.

              c.

              With
                respect to Securities Exchange Act of 1934reporting requirements,
                we have
                filed:

                i.

                Financial
                  statements in compliance with Rule 310(a) 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, 2004, reflecting the financial
                  results of Old NGS.

              ii.

              Financial
                statements in compliance with Rule 310(b) for the three months ended
                March
                31, September 30 and December 31, 2004 and for the three months ended
                March 31 and September 30, 2005, reflecting the financial results
                of Old
                NGS.

        -4-

              d.

              With
                respect to Securities Act of 1933 reporting requirements for Amendment
                No.2 to the Registration Statement we are filing on Form SB-2, we
                are
                providing the following financial
                statements:

                i.

                The
                  financial statements provided in accordance with Rule 310(a) above,
                  representing 21 months of audit coverage since inception of the
                  oil and
                  gas operations of Old NGS,

              ii.

              The
                audited revenue and direct operating expense statements we filed
                under
                310(c),

    The
      Staff
      has concluded that the audited statements of revenue and direct operating
      expenses do not fulfill the requirements for reporting in a ’33 Act filing under
      310 (a), due to a “predecessor entity” issue. Based on this conclusion, we have
      reviewed the missing three months of full audit coverage needed for 24 month
      audit coverage suggested by the Staff, and believe it is not meaningful to
      an
      investor’s understanding of our operations, especially given the dilapidated
      condition of the field upon our acquisition as evidenced by the audited
      statement of revenues and direct operating expenses of the Delhi Field acquired
      on September 23, 2003, included in our Form SB-2. In that report, oil and gas
      sales for the period from January 1, 2003 to September 30, 2003 were $148,506,
      resulting in net revenue after direct operating expenses of $6,652. For the
      preceding nine month period ended December 31, 2002, oil and gas sales were
      $64,491, resulting in