Exterran Energy (HC) 10-K 2006 FY Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to          .

Commission fileno. 1-13071

Hanover Compressor Company

(Exact name of registrant as specified in its charter)

Delaware	76-0625124
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
12001 North Houston Rosslyn, Houston, Texas 77086 (Address of principal executive offices, zip code)

Registrant’s telephone number, including area code:

(281) 447-8787

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange in Which Registered
Common Stock, $.001 par value	New York Stock Exchange
8.625% Senior Notes due 2010	New York Stock Exchange
9.0% Senior Notes due 2014	New York Stock Exchange
7.5% Senior Notes due 2013	New York Stock Exchange

Securities registered pursuant to 12(g) of the Act:

Title of class: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     Noo

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  Large accelerated filer þ     Accelerated filero     
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o     No þ

The aggregate market value of the Common Stock of the registrant held by non-affiliates as of June 30, 2006 was $1,298,648,000. For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes. With respect to persons holding more that 5% of our outstanding voting shares and common stock, we have relied upon statements filed by such persons on or prior to June 30, 2006 pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended.

Number of shares of the Common Stock of the registrant outstanding as of February 20, 2007: 104,597,156 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2007 Meeting of Stockholders to be held in 2007, which is expected to be filed with the Securities and Exchange Commission within 120 days after December 31, 2006, are incorporated by reference into Part III.

HANOVER COMPRESSOR COMPANY

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	27
Item 3.	Legal Proceedings	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
Item 9A.	Controls and Procedures	56
Item 9B.	Other Information	56
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	57
Item 11.	Executive Compensation	59
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	59
Item 13.	Certain Relationships and Related Transactions, and Director Independence	60
Item 14.	Principal Accounting Fees and Services	60
PART IV
Item 15.	Exhibits, Financial Statement Schedules	61
SIGNATURES		67
Letter to Executive Relating to Employment Benefits
Letter to Executive Relating to Employment Benefits
Computation of Ratio of Earnings to Fixed Charges
List of Subsidiaries
Consent of PricewaterhouseCoopers LLP
Certification of CEO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Annual Report onForm 10-K are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe”, “anticipate”, “expect”, “estimate” or words of similar import. Similarly, statements that describe our future plans, objectives or goals or future revenues or other financial metrics are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those anticipated as of the date of this report. These risks and uncertainties include:

•  our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment;

•  a prolonged substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas production and processing equipment;

•  reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;

•  changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, kidnappings, the taking of property without fair compensation and legislative changes;

•  changes in currency exchange rates;

•  the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;

•  ability to obtain components used to fabricate our products;

•  our inability to implement certain business objectives, such as:

•  international expansion,

•  ability to timely and cost-effectively execute integrated projects,

•  integrating acquired businesses,

•  generating sufficient cash,

•  accessing the capital markets, and

•  refinancing existing or incurring additional indebtedness to fund our business;

•  our inability to consummate the proposed merger with Universal Compression Holdings, Inc.;

•  changes in governmental safety, health, environmental and other regulations, which could require us to make significant expenditures; and

•  our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our substantial debt.

Other factors in addition to those described in thisForm 10-K could also affect our actual results. You should carefully consider the risks and uncertainties described above and those discussed in Item 1 “Business” and in Item 1A “Risk Factors” of thisForm 10-K in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of thisForm 10-K. Except as otherwise required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of thisForm 10-K or to reflect the

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occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC after the date of thisForm 10-K. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

Item 1.   Business

General

Hanover Compressor Company, together with its subsidiaries (“we”, “us”, “our”, “Hanover”, or the “Company”), is a global market leader in the full service natural gas compression business and is also a leading provider of service, fabrication and equipment for oil and natural gas production, processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Hanover was founded as a Delaware corporation in 1990, and has been a public company since 1997. Our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, and oilfield power generation services, primarily to our U.S. and international customers as a complement to our compression services. In addition, through our subsidiary, Belleli Energy S.r.l. (“Belleli”), we provide engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms, primarily for use in Europe and the Middle East.

Substantially all of our assets are owned and our operations are conducted by our wholly-owned subsidiary, Hanover Compression Limited Partnership (“HCLP”).

We are a provider of rental natural gas compression equipment and services in the United States with 5,594 of our rental units in the United States having an aggregate capacity of approximately 2,447,000 horsepower at December 31, 2006. In addition, we operate 805 of our units internationally with an aggregate capacity of approximately 891,000 horsepower at December 31, 2006. As of December 31, 2006, approximately 73% of our natural gas compression horsepower was located in the United States and approximately 27% was located elsewhere, primarily in Latin America.

Our products and services are essential to the production, processing, transportation and storage of natural gas and are provided primarily to energy producers and distributors of oil and natural gas. Our geographic business unit operating structure, technically experienced personnel and high-quality compressor fleet have allowed us to successfully provide reliable and timely customer service.

Proposed Merger

On February 5, 2007, we entered into an Agreement and Plan Merger with Universal Compression Holdings, Inc., a Delaware corporation (“Universal”), Iliad Holdings, Inc., a Delaware corporation (“Iliad”), Hector Sub, Inc., a Delaware corporation (“Hanover Merger Sub”), and Ulysses Sub, Inc., a Delaware corporation (“Universal Merger Sub”). Iliad is a newly formed, wholly owned direct subsidiary of Universal, and Hanover Merger Sub and Universal Merger Sub are direct wholly owned subsidiaries of Iliad. If the transactions contemplated by the merger agreement are consummated, Hanover and Universal will become direct wholly owned subsidiaries of Iliad, and the stockholders of Hanover and Universal will become stockholders of Iliad.

Hanover and Universal have each made customary representations, warranties and covenants in the merger agreement, including, among others, covenants to conduct their businesses in the ordinary course between the execution of the merger agreement and the consummation of the mergers and covenants not to engage in certain kinds of transactions during that period. We have agreed with Universal to certain exceptions to the limitations contained in these covenants, including (1) permitting us to redeem or partially redeem from

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time to time our 7.25% Convertible Junior Subordinated Debentures due 2029 and (2) commencing on September 1, 2007, permitting us to repurchase in the open market up to $100 million aggregate principal amount of our outstanding 4.75% Convertible Senior Notes due 2008, subject to certain limitations. In addition, Hanover and Universal have made certain additional customary covenants to one another, including, among others, covenants, subject to certain exceptions, (A) not to solicit proposals relating to alternative business combination transactions, (B) not to enter into discussions concerning, or provide confidential information in connection with, alternative business combination transactions, (C) to cause stockholder meetings to be held to consider approval of the mergers and the other transactions contemplated by the merger agreement and (D) for our respective Boards of Directors to recommend adoption of the merger agreement by our respective stockholders.

Investors are cautioned that the representations, warranties and covenants included in the merger agreement were made by Hanover and Universal to each other. These representations, warranties and covenants were made as of specific dates and only for purposes of the merger agreement and are subject to important exceptions and limitations, including a contractual standard of materiality different from that generally relevant to investors, and are qualified by information in confidential disclosure schedules that the parties exchanged in connection with the execution of the agreement. In addition, the representations and warranties may have been included in the merger agreement for the purpose of allocating risk between us and Universal, rather than to establish matters as facts. The merger agreement is described in thisForm 10-K and has been filed with the SEC only to provide investors with information regarding its terms and conditions, and, except for its status as a contractual document that establishes and governs the legal relationship among the parties thereto with respect to the mergers, not to provide any other factual information regarding us, Universal or our respective businesses or the actual conduct of our respective businesses during the pendency of the merger agreement. Investors are not third-party beneficiaries under the merger agreement and should not rely on the representations and warranties in the merger agreement as characterizations of the actual state of facts about us or Universal. Furthermore, investors should not rely on the covenants in the merger agreement as actual limitations on our business, because we may take certain actions that are either expressly permitted in the confidential disclosure letters to the merger agreement or as otherwise consented to by Universal, which consent may be given without prior notice to the public.

Consummation of the transactions contemplated by the merger agreement is subject to certain conditions that are set forth in the merger agreement. For more information about the terms of the merger agreement, see Note 24 to the Notes to Consolidated Financial Statements in Item 15 of thisForm 10-K.

Industry Trends

We compete in the market for transportable natural gas compression units of up to 4,735 horsepower. The rental segment of that market has experienced significant growth over the past decade due to, among other things, the improved productivity of compressors leased from specialists such as Hanover and an increase in demand for energy. We believe that outsourcing provides the customer greater financial and operating flexibility by minimizing the customer’s investment in equipment and enabling the customer to more efficiently resize their compression capabilities to meet changing reservoir conditions. In addition, we believe that outsourcing typically provides the customer with more timely and technically proficient service and maintenance, which often reduces operating costs. Nevertheless, a significant percentage of installed gas compression equipment continues to be purchased by the customer, rather than rented. Demand for both the purchase and rental of natural gas compression equipment continues to be driven by (1) an increase in natural gas prices, (2) the increased demand for natural gas, (3) the continued aging of the natural gas reserve base and the attendant decline of wellhead pressures, and (4) the discovery of new reserves and development of unconventional reservoir. However, because the majority of oil and gas reserves are located outside of the United States, we believe that international markets will be a primary source of our growth opportunities in the years to come.

We believe growth opportunities for our products exist due to (1) increasing worldwide energy consumption leading to new refinery investments, new uses of coal (coal gasification process) and new processes for gas (gas to liquids process) which benefits us through our subsidiary, Belleli, (2) implementation of

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international environmental and conservation laws prohibiting the flaring of natural gas, which increases the need for gathering systems, (3) outsourcing by energy producers and processors, (4) the environmental soundness, economy and availability of natural gas as an alternative energy source, (5) continued aging of the worldwide natural gas reserve base and the attendant decline of wellhead pressures and (6) increased use of our products for reinjection in oilfield maintenance and the stripping of natural gas liquids from production streams. The rental compression business is capital intensive, and our ability to take advantage of these growth opportunities may be limited by our ability to raise capital to fund expansion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Item 7 of thisForm 10-K and “Risk Factors” in Item 1A of thisForm 10-K.

Notable Events in 2006

In February 2006, we sold our U.S. amine treating rental assets to Crosstex Energy Services L.P. (“Crosstex”) for approximately $51.5 million and recorded a pre-tax gain of $28.4 million that is included in gain on sale of business and other income on the accompanying Consolidated Statements of Operations in Item 15 of thisForm 10-K. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Our U.S. amine treating rental assets had revenues of approximately $7.6 million in 2005. Because Hanover leased back from Crosstex one of the facilities sold in this transaction, approximately $3.3 million of additional gain was deferred into future periods. We also entered into a three-year strategic alliance with Crosstex.

The assets used in our fabrication facility in Canada, which was part of our Production and Processing Fabrication - Surface Equipment segment, were sold in May 2006 as part of management’s plan to improve overall operating efficiency in this line of business. The Canadian assets were sold for approximately $10.1 million and we recorded a pre-tax gain of approximately $8.0 million as a result of the transaction as gain on sale of business and other income on the accompanying Consolidated Statements of Operations in Item 15 of thisForm 10-K. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144.

In March 2006, we completed a public offering of $150 million aggregate principal amount of 7.5% Senior Notes due 2013. We used the net proceeds from the offering of $146.6 million, together with borrowings under our bank credit facility, to redeem our 11% Zero Coupon Subordinated Notes due March 31, 2007. We paid approximately $242 million to redeem our 11% Zero Coupon Subordinated Notes, including $5.9 million related to the call premium. The $5.9 million related to the call premium has been classified as debt extinguishment costs on the accompanying Consolidated Statements of Operations in Item 15 of thisForm 10-K.

During 2006, we recorded pre-tax income in the U.S. and therefore were able to realize the benefit from net operating loss carryforwards and capital loss carryforwards that previously we had provided a valuation allowance against. In addition, during the fourth quarter of 2006, we recorded a benefit for the reversal of $10.2 million of the valuation allowance on our net deferred tax assets in the U.S., which is recorded as a reduction to our provision for income taxes. This reversal is the result of our conclusion, in the fourth quarter of 2006, that it is more likely than not that we will realize the benefit from the associated net deferred tax assets. As a result, our 2006 tax provision benefited from approximately $36.2 million in valuation allowances that were reversed.

In December 2006 and February 2007, we announced irrevocable calls for redemption in the first quarter of 2007 of a portion of our 7.25% Convertible Junior Subordinated Notes due 2029 (“Jr. TIDES Notes”). All of the Jr. TIDES Notes are owned by Hanover Compressor Capital Trust, a Delaware business trust (the “Trust”) and the Trust is required to use the proceeds to redeem its 7.25% Convertible Preferred Securities (“TIDES Preferred Securities”) and its 7.25% Convertible Common Securities (“TIDES Common Securities”). Hanover owns all of the TIDES Common Securities. Of the $49 million of TIDES Preferred Securities called in the aggregate, $1.4 million was converted in December 2006 into 0.1 million shares of our common stock and the remainder has been or will be converted or redeemed in the first quarter of 2007.

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Industry Overview

Natural Gas Compression

Typically, compression is required at several intervals of the natural gas production cycle: at the wellhead, at the gathering lines, into and out of gas processing facilities, into and out of storage and throughout the transportation systems.

Over the life of an oil or gas well, natural reservoir pressure and deliverability typically decline as reserves are produced. As the natural reservoir pressure of the well declines below the line pressure of the gas gathering or pipeline system used to transport the gas to market, gas no longer flows naturally into the pipeline. It is at this time that compression equipment is applied to economically boost the well’s production levels and allow gas to be brought to market.

In addition to such wellhead and gas field gathering activities, natural gas compressors are used in a number of other applications, most of which are intended to enhance the productivity of oil and gas wells, gas transportation lines and processing plants. Compressors are used to increase the efficiency of a low capacity gas field by providing a central compression point from which the gas can be removed and injected into a pipeline for transmission to facilities for further processing. As gas is transported through a pipeline, compression equipment is applied to allow the gas to continue to flow in the pipeline to its destination. Additionally, compressors are used to re-inject associated gas to lift liquid hydrocarbons and thereby increase the rate of crude oil production from oil and gas wells. Furthermore, compression enables gas to be stored in underground storage reservoirs for subsequent extraction during periods of peak demand. Finally, compressors are often used in combination with oil and gas production and processing equipment to process and refine oil and gas into higher value added and more marketable energy sources, as well as used in connection with compressed natural gas vehicle fueling facilities providing an alternative to gasoline.

Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or change their compressor units to optimize the well production or pipeline efficiency. Due to the technical nature of the equipment, a dedicated local parts inventory, a diversified fleet of natural gas compressors and a highly trained staff of field service personnel are necessary to perform such functions in the most economic manner.

Natural gas compressor fabrication involves the design, fabrication and sale of compressors to meet the unique specifications dictated by the well pressure, production characteristics and the particular applications for which compression is sought. Compressor fabrication is essentially an assembly operation in which an engine, compressor, control panel, cooler and necessary piping are attached to a frame called a “skid.” A fabricator typically purchases the various compressor components from third-party manufacturers, but employs its own engineers and labor force to design and fabricate compressor packages.

In order to meet customers’ needs, gas compressor fabricators typically offer a variety of services to their customers, including:

•  engineering, fabrication and assembly of the compressor package;

•  installation and testing of the package;

•  ongoing performance review to assess the need for a change in compression; and

•  periodic maintenance and replacement parts supply.

Production and Processing Equipment

Crude oil and natural gas are generally not marketable as produced at the wellhead and must be processed or treated before they can be transported to market. Production and processing equipment is used to separate and treat oil and gas as it is produced to achieve a marketable quality of product. Production processing typically involves the separation of oil and gas and the removal of contaminants. The end result is “pipeline,” or “sales” quality oil and gas. Further processing or refining is almost always required before oil or gas is

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suitable for use as fuel or feedstock for petrochemical production. Production processing normally takes place in the “upstream” market, while refining and petrochemical processing is referred to as the “downstream” market.

Wellhead or upstream production and processing equipment includes a wide and diverse range of products. We sell “standard” production and processing equipment primarily into U.S. markets, which is used for processing wellhead production from onshore or shallow-water offshore platform production. In addition, we sell custom-engineered,built-to-specification production and processing equipment, which typically consists of much larger equipment packages than standard equipment, and is generally used in much larger scale production operations. These large projects tend to be in remote areas, such as deepwater offshore sites and in developing countries with limited oil and gas industry infrastructure.

The standard production and processing equipment market tends to be somewhat commoditized, with sales following general industry trends. Equipment can be built for inventory based on historical product mix and predicted industry activity. The custom equipment market is driven by global economic and political trends, and the type of equipment that is purchased can vary significantly. Technology, engineering capabilities, project management and quality control standards are the key drivers in the custom equipment market.

In addition, through our ownership of Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms, primarily for use in Europe and the Middle East.

Market Conditions

We believe that the most fundamental force driving the demand for gas compression and production and processing equipment is the growing global consumption of natural gas and its byproducts. As more gas is consumed, the demand for compression and production and processing equipment increases. In addition, we expect the demand for natural gas and natural gas byproducts to continue to increase and result in additional demand for compression and production and processing equipment and related services.

Although natural gas has historically been a more significant source of energy in the United States than in the rest of the world, we believe that aggregate international natural gas consumption has grown recently. Despite this growth in energy demand, most international energy markets have historically lacked the infrastructure necessary to either transport natural gas to local markets or consume it locally so natural gas historically has been flared at the wellhead. Given recent environmental legislation prohibiting such flaring and the construction of numerous natural gas-fueled power plants built to meet international energy demand, we believe that international compression markets are experiencing growth.

We believe that natural gas is considered to be one of the “fuels of the future” because it provides the best mix of environmental soundness, economy and availability of any energy source. Rising worldwide energy demand, environmental considerations, the further development of the natural gas pipeline infrastructure and the increasing use of natural gas as a fuel source in oilfield power generation are the principal reasons for this growth.

While gas compression and production and processing equipment typically must be engineered to high specifications to meet demanding and unique customer specifications, the fundamental technology of such equipment has been stable and has not been subject to significant technological change.

Business Segments

Our revenues and income are derived from six business segments:

•  U.S. rentals.  Our U.S. rental segment primarily provides natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets located within the United States.

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•  International rentals.  Our international rentals segment provides substantially the same services as our U.S. rental segment except it services locations outside the United States.

•  Compressor and accessory fabrication.  Our compressor and accessory fabrication segment involves the design, fabrication and sale of natural gas compression units and accessories to meet standard or unique customer specifications.

•  Production and processing fabrication — surface equipment.  Our production and processing fabrication — surface equipment segment designs, fabricates and sells equipment used in the production, treating and processing of crude oil and natural gas.

•  Production and processing fabrication — Belleli.  Our production and processing fabrication — Belleli segment provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms.

•  Parts, service and used equipment.  Our parts, service and used equipment segment provides a full range of services to support the surface production and processing needs of customers, from installation and normal maintenance services to full operation of a customer’s owned assets as well as sales of used equipment.

The U.S. and international compression rentals segments have operations primarily in the United States and Latin America. For financial data relating to our business segments and financial data relating to the amount or percentage of revenue contributed by any class of similar products or services which accounted for 10% or more of consolidated revenue in any of the last three fiscal years, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of thisForm 10-K and Note 22 to the Notes to Consolidated Financial Statements in Item 15 of thisForm 10-K.

Compression Rentals, Maintenance Services and Compressor and Accessory Fabrication

We provide our customers with a full range of compressor and associated equipment sales, rental, maintenance and contract compression services. As of December 31, 2006, our compressor fleet consisted of 6,399 units, ranging from 8 to 4,735 horsepower per unit. The size, type and geographic diversity of this rental fleet generally enable us to provide our customers with a range of compression units that can serve a wide variety of applications and to select the correct equipment for the job, rather than trying to “fit” the job to our fleet of equipment.

We base our gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the length of the contract, market conditions and the inclusion of any other desired services, such as installation, transportation and the degree of daily operation. In 2004 we began to selectively introduce price increases for our U.S. compression rental business that, along with an improvement in total contracted units, resulted in a 9% increase in revenue from our U.S. rental business in the year ended December 31, 2006 as compared to the year ended December 31, 2005. Substantially all of our units are operated pursuant to “contract compression” or “rental with full maintenance” agreements under which we perform all maintenance and repairs on such units while under contract. In the U.S. onshore market, compression rental fleet units are generally leased under contract with minimum terms of six months to two years, which convert tomonth-to-month at the end of the stipulated minimum period. Historically, the majority of our customers have extended the length of their contracts, on amonth-to-month basis, beyond the initial term. Typically, our compression rental units used in offshore and international applications carry substantially longer lease terms than those for onshore U.S. applications.

We believe an essential element of our success is our ability to provide compression services to customers with contractually committed compressor run-times of between 95% and 98%. We are able to offer this level of commitment due largely to our preventive maintenance program and extensive field service network that permits us to promptly address maintenance requirements. Our team of experienced maintenance personnel performs our rental compression maintenance services both at our facilities and in the field. Such maintenance facilities are generally situated in close proximity to actual rental fleet deployment to permit superior service response times.

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Our rental fleet units are serviced at manufacturers’ recommended maintenance intervals, modified as required by the particular characteristics of each job and the actual operating experience of each compressor unit. Prior to the conclusion of any rental job, our field management evaluates the condition of the equipment and, where practical, corrects any problems before the equipment is shipped out from the job site. Although natural gas compressors generally do not suffer significant technological obsolescence, they do require routine maintenance and periodic refurbishing to prolong their useful life. Routine maintenance includes alignment, compression checks and other parametric checks that indicate a change in the condition of the equipment. In addition, oil and wear-particle analysis is performed on our units on an ongoing scheduled basis and prior to their redeployment at specific compression rental jobs. Overhauls are done on a condition-based interval instead of a time-based schedule. In our experience, these rigorous procedures maximize component life and unit availability and minimize avoidable downtime. Typically, we overhaul each rental compressor unit for general refurbishment every 36 to 48 months and anticipate performing a comprehensive overhaul of each rental compressor unit every 60 to 72 months.

Our field service mechanics provide all operating and maintenance services for our compression units leased on a contract compression or full maintenance basis and are on-call 24 hours a day. Those field personnel receive regular mechanical and safety training both from our staff and our vendors. Each of our field mechanics is responsible for specific compressor unit installations and has at his or her disposal a dedicated local parts inventory. Additionally, each field mechanic operates from a fully equipped service vehicle. Each mechanic’s field service vehicle is equipped with a radio or cellular telephone, which allows that individual to be our primary contact with the customer’s field operations staff and to be contacted at either his or her residence or mobile phone 24 hours a day. Accordingly, our field service mechanics are given the responsibility to promptly respond to customer service needs as they arise based on the mechanic’s trained judgment and field expertise.

We believe the foundation for our successful field operations effort is the experience and responsiveness of our compressor rental field service and shop staff of compressor mechanics. Our field service mechanics are coordinated and supported by regional operations managers who have supervisory responsibility for specific geographic areas.

Our compressor and accessory fabrication operations design, engineer and assemble compression units and accessories for sale to third parties as well as for placement in our compressor rental fleet. As of December 31, 2006, we had a compressor and accessory fabrication backlog for sale to third parties of $325.1 million compared to $85.4 million at December 31, 2005. At December 31, 2006, approximately $10.1 million of future revenue related to our compressor and accessory fabrication backlog was expected to be recognized after December 31, 2007. In general, units to be sold to third parties are assembled according to each customer’s specifications and sold on a turnkey basis. We acquire major components for these compressor units from third-party suppliers.

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Compressor Rental Fleet

The size and horsepower of our compressor rental fleet owned or operated under lease on December 31, 2006 is summarized in the following table.

	Number		Aggregate		% of
Range of Horsepower Per Unit	of Units		Horsepower		Horsepower
			(In thousands)
Up to 100		1,743		119,965		4	%
101-200		1,357		207,906		6	%
201-500		1,114		362,460		11	%
501-800		555		353,459		11	%
801-1,100		486		487,193		14	%
1,101-1,500		885		1,213,085		36	%
1,501-2,500		183		334,297		10	%
2,501-4,735		76		260,052		8	%
Total		6,399		3,338,417		100	%

Production and Processing Equipment Fabrication and Rental

We design, engineer, fabricate, sell and rent a broad range of oil and gas production and processing equipment designed to heat, separate and dehydrate crude oil and natural gas. Our product line includes line heaters, oil and gas separators, dewpoint plants, cryogenic plants, glycol dehydration units and skid-mounted production packages designed for both onshore and offshore production facilities. Through our subsidiary, Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms, primarily for use in Europe and the Middle East. In addition, we purchase and recondition used production and processing equipment that is then either sold or rented and generally maintain standard product inventories to meet most customers’ rapid response requirements and minimize customer downtime. As of December 31, 2006, we had a production and processing equipment fabrication backlog of $482.5 million compared to $287.7 million at December 31, 2005. Typically, we expect our production and processing equipment backlog to be produced within a three to thirty-six month period. At December 31, 2006, approximately $125.7 million of future revenue related to our production and processing equipment backlog was expected to be recognized after December 31, 2007.

Parts, Service and Used Equipment

We often provide contract operations and related services for customers that prefer to own their production, gas treating and oilfield power generation or compression equipment. We believe that we are particularly well qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression rental, production processing equipment and oilfield power generation equipment and facilities. As customers look to us to provide an ever-widening array of outsourced services, we will continue to build our core business with emerging business opportunities, such as turnkey operations and maintenance services, installation services and oilfield-related power generation sales and services. In addition, we purchase and recondition used gas compression units, oilfield power generation and treating facilities and production and processing equipment that is then sold or rented to customers. We maintain parts inventories for our own use and to meet our customers’ needs. As of December 31, 2006, we had approximately $135.6 million in parts and supplies inventories.

Sources and Availability of Raw Materials

Our fabrication operations consist of fabricating compressor and production and processing equipment from components and subassemblies, most of which we acquire from a wide range of vendors. These components represent a significant portion of the cost of our compressor and production and processing

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equipment products. In addition, we fabricate critical process equipment for refinery and petrochemical facilities, tank farms and other vessels used in production, processing and treating of crude oil and natural gas. Steel is a commodity which can have wide price fluctuations and represents a significant portion of the raw materials for these products. Increases in raw material costs cannot always be offset by increases in our products’ sales prices. While many of our materials and components are available from multiple suppliers at competitive prices, some of the components used in our products are obtained from a limited group of suppliers. Due to the recent increased demand for compression equipment, however, we have experienced longer lead times for components from our suppliers and have increased the amount of our purchases made in anticipation of future orders.

Market and Customers

Our global customer base consists primarily of U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines. Additionally, we have negotiated strategic alliances or preferred vendor relationships with key customers pursuant to which we receive preferential consideration in customer compressor and oil and gas production and processing equipment procurement decisions in exchange for providing enhanced product availability, product support, automated procurement practices and limited pricing concessions. No individual customer accounted for more than 10% of our consolidated revenues during 2006, 2005 or 2004.

Our rental and sales activities are conducted throughout the continental United States, internationally and in offshore operations. International locations include Argentina, Italy, United Arab Emirates (“UAE”), Libya, Equatorial Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Egypt, Mexico, Peru, Pakistan, Oman, Indonesia, Algeria, Nigeria, Tunisia, Saudi Arabia, United Kingdom, China and Russia. We have fabrication facilities in the United States, Italy, UAE and the United Kingdom. In addition, we have representative offices in the Netherlands, Switzerland and the Cayman Islands. As of December 31, 2006, equipment representing approximately 27% of our aggregate compressor rental fleet horsepower was being used in international applications.

Sales and Marketing

Our salespeople pursue the market for our products in their respective territories. Each salesperson is assigned a customer list on the basis of the experience and personal relationships of the salesperson and the individual service requirements of the customer. This customer and relationship-focused strategy is communicated through frequent direct contact, technical presentations, print literature, print advertising and direct mail. Our advertising and promotion strategy is a concentrated approach, tailoring specific messages into a very focused presentation methodology. Additionally, our salespeople coordinate with each other to effectively pursue customers who operate in multiple regions. The salespeople maintain contact with our operations personnel in order to promptly respond to and satisfy customer needs. Our sales efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

Upon receipt of a request for proposal or bid by a customer, we analyze the application and prepare a quotation, including selection of the equipment, pricing and delivery date. The quotation is then delivered to the customer and, if we are selected as the vendor, final terms are agreed upon and a contract or purchase order is executed. Our engineering and operations personnel also often provide assistance on complex applications, field operations issues or equipment modifications.

Competition

We are a major provider of rental natural gas compression equipment and services in the United States. However, the natural gas compression services and fabrication business is highly competitive. Overall, we experience considerable competition from companies who may be able to more quickly adapt to changes

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within our industry and changes in economic conditions as a whole, more readily take advantage of available opportunities and adopt more aggressive pricing policies.

Because our rental business is capital intensive, our ability to take advantage of growth opportunities is limited by our ability to raise capital. To the extent that any of our competitors have a lower cost of capital or have greater access to capital than we do, they may be able to compete more effectively, which may allow them to more readily take advantage of available opportunities.

Compressor industry participants can achieve operational efficiencies through increased size and horsepower density. As the number and density of rental units increases in a rental fleet, the number of support personnel required usually does not increase proportionately.

One of the significant cost items in the compressor rental business is the amount of inventory required to service rental units. Each rental company must maintain a minimum amount of inventory to remain competitive. As the size of the rental fleet increases, the required amount of inventory does not increase in the same proportion, thus providing economic efficiencies. Additionally, the larger rental fleet companies can generate cost savings through improved purchasing power and vendor support.

We believe that we compete effectively on the basis of price, customer service, and flexibility in meeting customer needs and quality and reliability of our compressors and related services. We face vigorous competition in both compression rental and compressor fabrication, with some firms competing in both segments. In our production and processing equipment business, we have different competitors in the standard and custom engineered equipment markets. Competitors in the standard equipment market include several large companies and a large number of small, regional fabricators. Competition in the standard equipment market is generally based upon price and availability. Our competition in the custom engineered market usually consists of larger companies that have the ability to provide integrated projects and product support after the sale. Increasingly, the ability to fabricate these large custom-engineered systems near to the point of end-use is a major competitive advantage.

International Operations

We operate in many geographic markets outside the United States. At December 31, 2006, of the approximately 891,000 horsepower of compression we had deployed internationally, approximately 93% was located in Latin America (primarily in Venezuela, Argentina, Mexico and Brazil). Changes in local economic or political conditions, particularly in Venezuela, Argentina and other parts of Latin America and Nigeria, could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Additional risks inherent in our international business activities include the following:

•  difficulties in managing international operations;

•  unexpected changes in regulatory requirements;

•  tariffs and other trade barriers which may restrict our ability to enter into new markets;

•  governmental actions that result in the deprivation of contract rights, including possible law changes;

•  changes in political and economic conditions in the countries in which we operate, including civil uprisings, riots, kidnappings and terrorist acts, particularly with respect to our operations in Nigeria;

•  potentially adverse tax consequences;

•  restrictions on repatriation of earnings or expropriation of property without fair compensation;

•  difficulties in establishing new international offices and risks inherent in establishing new relationships in foreign countries;

•  the burden of complying with the various laws and regulations in the countries in which we operate; and

•  fluctuations in currency exchange rates and the value of the U.S. dollar, particularly with respect to our operations in Argentina, Venezuela and Europe.

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In addition, our future plans involve expanding our business in international markets where we currently do not conduct business. The risks inherent in establishing new business ventures, especially in international markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We have significant operations that expose us to currency risk in Argentina and Venezuela. To mitigate that risk in these countries, the majority of our existing contracts provide that we receive payment in, or based on, U.S. dollars rather than Argentine pesos and Venezuelan bolivars, thus reducing our exposure to fluctuations in the value of these currencies relative to the U.S. dollar.

For financial data relating to our geographic concentrations, see Note 22 to the Notes to Consolidated Financial Statements included in Item 15 of thisForm 10-K.

Cawthorne Channel Project

We are involved in a project called the Cawthorne Channel Project in Nigeria, a project in which Global Gas and Refining Ltd., a Nigerian entity (“Global”) has contracted with an affiliate of Royal Dutch Shell plc (“Shell”) to process gas from some of Shell’s Nigerian oil and gas fields. Pursuant to a contract between us and Global, we rent and operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian coastal waterway. We completed the building of the required barge-mounted facilities and our portion of the project was declared commercial by Global in November 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option, by Global, that is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between Global and Hanover, Shell, and several other counterparties, respectively, Global is primarily responsible for the overall project.

During 2006, violence and local unrest significantly increased in Nigeria. As a result of these events, Global declared Force Majeure with respect to the Cawthorne Channel Project in February of 2006. Global’s actions followed a declaration of Force Majeure by Shell under its contract with Global. We notified Global that pursuant to the contract we disputed their declaration of Force Majeure and that we believe local conditions did not relieve Global’s obligations to make monthly rental payments or monthly operations and maintenance fee payments to us under our contract with Global. The Cawthorne Channel Project was brought back on-line in April 2006 and operated through early June 2006.

In early June and periodically throughout the remainder of 2006, the area experienced unrest and violence and gas delivery from Shell to the Cawthorne Channel Project was stopped in June 2006. The Cawthorne Channel Project did not receive any gas from Shell during the last six months of 2006 and Shell has not completed repairs on its gathering system. As a result, the Cawthorne Channel Project has not operated since early June 2006.

During the year ended December 31, 2006, we recognized $7.4 million of revenues related to the Cawthorne Channel Project and we have received approximately $2.6 million in payments during 2006. An additional $1.3 million was collected in January 2007. Even though we believe we are entitled to rents from Global, irrespective of whether Shell has declared Force Majeure, and have accordingly invoiced Global for rents, collectibility is not reasonably assured due to uncertainty regarding when the Cawthorne Channel Project’s operations will restart and Global’s dependence on gas production by the Cawthorne Channel Project to pay its rents to us. Therefore, we billed but did not recognize revenue in the amount of $8.4 million related to the Cawthorne Channel Project during the last six months of 2006. Once the Cawthorne Channel Project goes back on-line, we will determine whether or not and how much revenue to recognize for the period it is on-line. Based on current long-term expectations of future run-time, we believe we will recover all of our receivables and our full investment in the Cawthorne Channel Project over the term of the contract.

However, if Shell does not provide gas to the project or if Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we would be required to find an alternative use for the barge facility which could potentially result in an impairment and

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write-down of our investment and receivables related to this project and could have a material impact on our consolidated financial position or results of operation. Additionally, due to the environment in Nigeria, Global’s capitalization level, inexperience with projects of a similar nature and lack of a successful track record with respect to this project and other factors, there is no assurance that Global can satisfy its obligations under its various contracts, including its contract with us.

This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks, including risks arising from the recent increase in violence and local unrest, could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. At December 31, 2006, we had net assets of approximately $72 million related to projects in Nigeria, a majority of which is related to our capital investment and advances/accounts receivable for the Cawthorne Channel Project.

Government Regulation

We are subject to various federal, state, local and international laws and regulations relating to occupational health and safety and the environment including regulations and permitting for air emissions, wastewater and storm water discharges and waste handling and disposal activities. From time to time as part of the regular overall evaluation of our operations, including newly acquired operations, we apply for or amend facility permits with respect to storm water or wastewater discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to new or revised permitting conditions that may be onerous or costly to comply with. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks, or pipelines and other regulated units, all of which may impose additional regulatory compliance and permitting obligations. Failure to comply with these occupational health and safety and environmental laws and regulations or associated permits may result in the assessment of administrative, civil, and criminal penalties, the imposition of investigatory and remedial obligations, and the issuance of injunctions as to future compliance. Moreover, as with any owner or operator of real property, we are subject toclean-up costs and liability for regulated substances or any other toxic or hazardous wastes that may exist on or have been released from any of our properties.

In connection with our due diligence investigation of potential new properties for acquisition, we typically perform an evaluation to identify potentially significant environmental issues and take measures to have such issues addressed by the seller or ourselves, as appropriate under the circumstances. We cannot be certain, however, that all such possible environmental issues will be identified and fully addressed prior to our acquisition of new properties, nor can we control another entity’s willingness or ability, solvent or insolvent, to fund the remediation of their contamination of our existing properties or properties where we operate when such liability is established. Moreover, the production of atmospheric emissions of regulated substances, and the handling of petroleum products and other regulated substances is a normal part of our operations and we have experienced occasional minor spills, incidental leakages and emission rates in excess of permit limits in connection with our operations. As part of the regular overall evaluation of our operations, including newly acquired facilities, we assess the compliance and permitting status of these operations and facilities with applicable environmental laws and regulations and seek to address identified issues in accordance with applicable law.

The Comprehensive Environmental Response, Compensation and Liability Act, also known as “CERCLA” or the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the facility or disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA and similar state laws, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural

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resources and for the costs of certain health studies. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment.

The Resource Conservation and Recovery Act (“RCRA”) and regulations promulgated by it govern the generation, storage, transfer and disposal of hazardous wastes. We must comply with RCRA regulations for any of our operations that involve the generation, management or disposal of hazardous wastes (such as painting activities or the use of solvents) in quantities regulated under RCRA. In addition, to the extent we operate underground tanks on behalf of specific customers; such operations may be regulated under RCRA.

We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our operations for a number of years. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such materials have been taken for disposal by companiessub-contracted to us. In addition, many of these properties have been previously owned or operated by third parties whose treatment and disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under our control. These properties and the materials released or disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, we could be required to remove or remediate historical property contamination, or to perform certain operations to prevent future contamination. At one of our owned sites, we are currently working with the prior owner who has undertaken the full legal obligations to monitorand/orclean-up contamination at such site that occurred prior to our acquisition of this site. We are not currently under any order requiring that we undertake or pay for anyclean-up activities. However, we cannot provide any assurance that we will not receive any such order in the future.

The Federal Water Pollution Control Act of 1972, also known as the “Clean Water Act,” and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the Environmental Protection Agency or the state. The Environmental Protection Agency also has adopted regulations requiring covered industrial operators to obtain permits for storm water discharges. Costs may be associated with the treatment of wastewater or developing and implementing storm water pollution prevention plans.

The Clean Air Act restricts the emission of air pollutants from many sources, including compressors and operational support facilities. New facilities may be required to obtain permits before work can begin, and existing facilities may be required to incur capital costs in order to remain in compliance with newly enacted legislation as it emerges. In addition, certain states have or are considering, and the federal government has passed, more stringent air emission controls on off-road engines.

We believe that we are currently in substantial compliance with environmental laws and regulations and other known regulatory requirements. It is possible that stricter environmental laws and regulations may be imposed in the future, such as more stringent air emission requirements or proposals to make currently non-hazardous wastes subject to more stringent and costly handling, disposal andclean-up requirements. While we may be able to pass on the additional costs of complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. Accordingly, new laws or regulations or amendments to existing laws or regulations might require us to undertake significant capital expenditures and otherwise have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Our operations outside the United States are potentially subject to similar international governmental controls and restrictions pertaining to the environment and other regulated activities in the countries in which we operate. We believe our operations are in substantial compliance with existing international governmental controls and restrictions and that compliance with these international controls and restrictions has not had a material adverse effect on our operations. We cannot provide any assurance, however, that we will not incur significant costs to comply with these international controls and restrictions in the future.

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Executive Officers of the Registrant

The following sets forth, as of February 20, 2007, the name, age and prior business experience of each of our executive officers:

Name	Age		Position
John E. Jackson		48	President and Chief Executive Officer; Director
Lee E. Beckelman		41	Senior Vice President and Chief Financial Officer
Brian A. Matusek		47	Senior Vice President — Western Hemisphere
Norman A. Mckay		47	Senior Vice President — Eastern Hemisphere
Gary M. Wilson		50	Senior Vice President, General Counsel and Secretary
Anita H. Colglazier		51	Vice President — Controller
Peter G. Schreck		42	Vice President — Treasurer
Stephen P. York		50	Vice President — Investor Relations and Technology
Steven W. Muck		54	Vice President — Global Human Resources and Health, Safety and Environment

The following sets forth certain information regarding executive officers of the Company:

John E. Jacksonwas elected President and Chief Executive Officer in October 2004 and as a director in July 2004. Mr. Jackson joined Hanover in January 2002 as Senior Vice President and Chief Financial Officer. Prior to joining Hanover, Mr. Jackson served as Vice President and Chief Financial Officer of Duke Energy Field Services, a joint venture of Duke Energy and ConocoPhillips and one of the nation’s largest producers and marketers of natural gas liquids. Mr. Jackson joined Duke Energy Field Services as Vice President and Controller in April 1999 and was named Chief Financial Officer in February 2001. Prior to joining Duke Energy Field Services, Mr. Jackson served in a variety of treasury, controller and accounting positions at Union Pacific Resources between June 1981 and April 1999.

Lee E. Beckelmanwas appointed Senior Vice President and Chief Financial Officer in July 2006, after having served as Vice President and Chief Financial Officer since January 2005. Mr. Beckelman joined Hanover in December 2002 as Vice President of Investor Relations and Corporate Development. Prior to joining Hanover, Mr. Beckelman was Vice President of J.P. Morgan Securities Inc. (previously Chase Securities Inc.) where he was responsible for the marketing and structuring of syndicated loans, primarily for companies in the energy industry. Prior to joining J.P. Morgan Securities Inc. in July 1995, Mr. Beckelman also worked in energy project finance and development for Bechtel Enterprises and Transworld Oil USA and began his career in 1988 with Texas Commerce Bank.

Brian A. Matusekwas appointed Senior Vice President — Western Hemisphere in July 2006, having served as Senior Vice President, U.S. and Global Services since May 2005. Mr. Matusek joined Hanover in August 2003 and had previously served as Vice President of Marketing, Product Development & Domestic Sales and Vice President of Marketing and Strategic Development. Prior to joining Hanover, Mr. Matusek served in various senior managerial roles with Schlumberger from 1998 through 2003, including leadership roles in Schlumberger’s compression systems and artificial lift product lines. Before joining Schlumberger as part of its purchase of Camco International, Inc., Mr. Matusek served as Vice President — International Business of Camco. Prior to Camco’s 1997 purchase of Production Operators, Inc. (POI), Mr. Matusek was employed by POI for over 16 years in various management positions, including Vice President — International Operations.

Norman A. “Norrie” Mckaywas appointed Senior Vice President — Eastern Hemisphere in July 2006, having served as Vice President Eastern Hemisphere since May 2005. From 1981 to May 2005, Mr. Mckay served in a variety of engineering and management positions of increasing responsibility with Schlumberger Ltd. and its affiliates. During his career, Mr. Mckay has been based in Houston as well as a number of international locations, including Bolivia, Italy, Libya, France, Mexico, Venezuela, United Kingdom and Dubai.

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Immediately prior to joining Hanover, Mr. Mckay held the position of Global Account Director of Schlumberger Oilfield Services, based in Milan, Italy.

Gary M. Wilsonwas appointed Senior Vice President, General Counsel and Secretary in May 2004. Since 1985, Mr. Wilson served with Schlumberger Ltd. in various positions of increasing responsibility, including Deputy General Counsel of Schlumberger Oilfield Services. Mr. Wilson acted as General Counsel of WesternGeco, a joint venture between Schlumberger and Baker Hughes Inc., a position he held since 2000. During his career, Mr. Wilson has been based in Houston as well as a number of international locations, including Abu Dhabi, Dubai, Jakarta, London, Paris and Singapore.

Anita H. Colglazierwas appointed Vice President — Controller in March 2005. Ms. Colglazier joined Hanover in 2002 and served as Director, Financial Reporting and Policy until her appointment as Controller. Prior to joining Hanover, Ms. Colglazier held various management and accounting positions during her 18 years with Union Pacific Resources Company (“UPRC”), including Assistant Controller. Anadarko Petroleum acquired UPRC in July 2000. After the acquisition through her departure in 2002, Ms. Colglazier worked as an accounting manager supporting the transition and integration of UPRC into Anadarko. Prior to joining UPRC, Ms. Colglazier was an auditor with Deloitte, Haskins & Sells.

Peter G. Schreckhas served as Vice President — Treasurer since September 2000. Mr. Schreck was previously employed in various financial positions by Union Pacific Corporation and its affiliated subsidiaries from 1988 through August 2000. Immediately prior to joining Hanover, Mr. Schreck held the position of Treasurer and Director of Financial Services for Union Pacific Resources Company.

Stephen P. Yorkwas appointed Vice President — Investor Relations and Technology in March 2005. Mr. York joined Hanover in April 2002 and served as Vice President — Controller until his current appointment. Prior to joining Hanover, Mr. York served as Director, Payroll Production of Exult, Inc., in Charlotte, NC. From 1981 to 2000, Mr. York held various management positions of increasing responsibility with Bank of America Corporation, including Vice President — Audit Director and Senior Vice President — Personnel Operations, Controller/Mortgage Accounting, and Corporate Accounts Payable/Fixed Assets.

Steven W. Muckwas appointed Vice President — Global Human Resources and Health, Safety and Environment in July 2006, having served as Vice President — Latin America since May 2005. Mr. Muck joined Hanover in 2000 as Vice President — International Operations. From 1997 to 2000, Mr. Muck served as Vice President of Worldwide Operations of Dresser-Rand Compressor Services. In addition, Mr. Muck held positions in sales, marketing and operations with Dresser-Rand and its predecessor, Ingersoll Rand, from 1975 to 1997.

Employees

As of December 31, 2006, we had approximately 8,300 employees, approximately 600 of whom are represented by a labor union. Additionally, we had approximately 500 contract personnel. We believe that our relations with our employees and contract personnel are satisfactory.

Electronic Information

We maintain a website which can be found athttp://www.hanover-co.com. We make our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K, and the amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available on our website as soon as reasonably practicable after we electronically file such material with, or furnish to, the Securities and Exchange Commission. Also, such information is readily available at the website of the Securities and Exchange Commission, which can be found athttp://www.sec.gov.

A paper copy of any of the above-described filings, including the exhibits to thisForm 10-K, is also available free of charge from the Company upon request by contacting Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086, Attention: Corporate Secretary(281) 405-5175. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E.,

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Washington, D.C. 20549. You can obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information on the operation of the public reference facilities. Our SEC filings are also available at the offices of the New York Stock Exchange, Inc., 11 Wall Street, New York, New York 10005.

Hanover has adopted “P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct” (“Code of Ethics”) that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics is posted on the Company’s website athttp://www.hanover-co.com. Any changes to,and/or waivers granted, with respect to our Code of Ethics relating to our principal executive officer, principal financial officer, principal accounting officer, and other executive officers and directors of Hanover that we are required to disclose pursuant to applicable rules and regulations of the Securities and Exchange Commission will be posted on our website. Upon request the Company will provide a copy of our Code of Ethics without charge. Such request can be made in writing to the Corporate Secretary at Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086.

Item 1A.   Risk Factors

We have a substantial amount of debt, including our compression equipment lease obligations, that could limit our ability to fund future growth and operations and increase our exposure during adverse economic conditions.

At December 31, 2006, we had approximately $1,381.9 million of debt, including approximately $20.0 million in borrowings and excluding outstanding letters of credit of approximately $207.3 million under our bank credit facility. Additional borrowings of up to $222.7 million were available under that facility as of December 31, 2006.

Our substantial debt could have important consequences. For example, these commitments could:

•  make it more difficult for us to satisfy our contractual obligations;

•  increase our vulnerability to general adverse economic and industry conditions;

•  limit our ability to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

•  increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are at, and a portion of our compression equipment leasing expense is based upon, variable interest rates;

•  limit our flexibility in planning for, or reacting to, changes in our business and our industry;

•  place us at a disadvantage compared to our competitors that have less debt or fewer operating lease commitments; and

•  limit our ability to borrow additional funds.

We will need to generate a significant amount of cash to service our debt, to fund working capital and to pay our debts as they come due.

Our ability to make scheduled payments on our compression equipment lease obligations and our other debt, or to refinance our debt and other obligations, will depend on our ability to generate cash in the future. Our ability to generate cash in the future is subject to, among other factors, our operational performance, as well as general economic, financial, competitive, legislative and regulatory conditions. For the year ended December 31, 2006, we incurred interest expense of $118.0 million related to our debt, including our compression equipment lease obligations.

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Our ability to refinance our debt and other financial obligations at a reasonable cost will be affected by the factors discussed herein and by the general market at the time we refinance. The factors discussed herein could adversely affect our ability to refinance this debt and other financial obligations at a reasonable cost.

Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our bank credit facility in an amount sufficient to enable us to pay our debt, compression equipment lease obligations, operating lease commitments and other financial obligations, or to fund our other liquidity needs. We cannot be sure that we will be able to refinance any of our debt or our other financial obligations on commercially reasonable terms or at all. Our inability to refinance our debt or our other financial obligations on commercially reasonable terms could materially adversely affect our business.

The documents governing our outstanding debt, including our compression equipment lease obligations, contain financial and other restrictive covenants. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us.

Our bank credit facility and other debt obligations, including the indentures related to our notes and the agreements related to our compression equipment lease obligations, contain, among other things, covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities. These covenants include provisions that, among other things, restrict our ability to:

•  incur additional debt or issue guarantees;

•  create liens on our assets;

•  engage in mergers, consolidations and dispositions of assets;

•  enter into additional operating leases;

•  pay dividends on or redeem capital stock;

•  enter into derivative transactions;

•  make certain investments or restricted payments;

•  make investments, loans or advancements to certain of our subsidiaries;

•  prepay or modify our debt facilities;

•  enter into transactions with affiliates; or

•  enter into sale leaseback transactions.

In addition, under our bank credit facility we have granted the lenders a security interest in our inventory, equipment and certain of our other property and the property of our U.S. subsidiaries and pledged 66% of the equity interest in certain of our international subsidiaries.

Our bank credit facility also prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock.

Our bank credit facility and other financial obligations and the agreements related to our compression equipment lease obligations require us to maintain financial ratios and tests, which may require that we take action to reduce our debt or act in a manner contrary to our business objectives. Adverse conditions in the oil and gas business or in the United States or global economy or other events related to our business may affect our ability to meet those financial ratios and tests. A breach of any of these covenants or failure to maintain such financial ratios would result in an event of default under our bank credit facility, the agreements related to our compression equipment lease obligations and the agreements relating to our other financial obligations. A material adverse change in our business may also limit our ability to effect borrowings under our bank credit facility. If such an event of default occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable.

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We have significant leverage relative to our total capitalization, which could result in a downgrade in our credit rating or other adverse consequences if we do not reduce our leverage.

As of February 20, 2007, our credit ratings as assigned by Moody’s and Standard & Poor’s were:

			Standard
	Moody’s		& Poor’s
Outlook		Positive		Positive
Senior implied rating		B1		BB−
Liquidity Rating		SGL-3		—
2001A equipment lease notes, interest at 8.5%, due September 2008		Ba3, LGD 3		B+
2001B equipment lease notes, interest at 8.8%, due September 2011		Ba3, LGD 3		B+
4.75% convertible senior notes due 2008		B3, LGD 5		B
4.75% convertible senior notes due 2014		B3, LGD 5		B
8.625% senior notes due 2010		B2, LGD 4		B
9.0% senior notes due 2014		B2, LGD 4		B
7.5% senior notes due 2013		B2, LGD 4		B
7.25% convertible junior subordinated notes due 2029*		B3, LGD 6		B−

* Rating is on the TIDES Preferred Securities issued by Hanover Compressor Capital Trust, a trust that we sponsored.

We do not have any credit rating downgrade provisions in our debt agreements or the agreements related to our compression equipment lease obligations that would accelerate their maturity dates. However, a downgrade in our credit rating could materially and adversely affect our ability to renew existing, or obtain access to new credit facilities in the future and could increase the cost of such facilities. In addition, our significant leverage puts us at greater risk of default under one or more of our existing debt agreements if we experience an adverse change to our financial condition or results of operations. Our ability to reduce our leverage depends upon market and economic conditions, as well as our ability to execute liquidity-enhancing transactions such as sales of non-core assets or our equity securities.

Our ability to substitute compression equipment under our compression equipment leases is limited and there are risks associated with reaching that limit prior to the expiration of the lease term.

As of December 31, 2006, we were the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting in is equal to or greater than the value of the equipment that is being substituted out. We generally substitute equipment when one of our lease customers exercises a contractual right or otherwise desires to buy the leased equipment or when fleet equipment owned by the special purpose entities becomes obsolete or is selected by us for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to, among other restrictions, a percentage of the termination value under each lease. The termination value is equal to (1) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (2) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity or to the holders of the notes issued by the special purpose entity or their agents. In the following table, termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by our compression equipment operating leases. The aggregate amount of replacement equipment substituted (in dollars and percentage of termination value), the termination value

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and the substitution percentage limitation relating to each of our compression equipment operating leases as of December 31, 2006 are as follows:

								Substitution
								Limitation as
	Value of		Percentage of					Percentage of
	Substituted		Termination			Termination		Termination			Lease Termination
Lease	Equipment		Value(1)			Value(1)		Value			Date
	(Dollars in millions)
2001A compression equipment lease	$	20.2		14.7	%	$	137.1		25	%		September 2008
2001B compression equipment lease		54.0		21.0	%		257.7		25	%		September 2011
Total	$	74.2				$	394.8

(1) Termination value assumes all accrued rents paid before termination.

In the event we reach the substitution limitation prior to a lease termination date, we will not be able to effect any additional substitutions with respect to such lease. This inability to substitute could have a material adverse effect on our business, consolidated financial position, results of operations and cash flows.

A prolonged, substantial reduction in oil or gas prices, or prolonged instability in U.S. or global energy markets, could adversely affect our business.

Our operations depend upon the levels of activity in the global energy market, including natural gas development, production, processing and transportation. Oil and gas prices and the level of drilling and exploration activity can be volatile. For example, oil and gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil and gas prices or significant instability in energy markets. As a result, the demand for our gas compression and oil and gas production and processing equipment would be adversely affected. Any future significant, prolonged decline in oil and gas prices could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Erosion of the financial condition of our customers can also adversely affect our business. During times when the oil or natural gas market weakens, the likelihood of the erosion of the financial condition of these customers increases. If and to the extent the financial condition of our customers declines, our customers could seek to preserve capital by canceling or delaying scheduled maintenance of their existing gas compression and oil and gas production and processing equipment or determining not to purchase new gas compression and oil and gas production and processing equipment. In addition, upon the financial failure of a customer, we could experience a loss associated with the unsecured portion of any of our outstanding accounts receivable.

There are many risks associated with conducting operations in international markets.

We operate in many geographic markets outside the United States. Changes in local economic or political conditions, particularly in Latin America and Nigeria, could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Additional risks inherent in our international business activities include the following:

•  difficulties in managing international operations, including our ability to timely and cost effectively execute projects;

•  unexpected changes in regulatory requirements;

•  tariffs and other trade barriers that may restrict our ability to enter into new markets;

•  governmental actions that result in the deprivation of contract rights;

•  changes in political and economic conditions in the countries in which we operate, including civil uprisings, riots, kidnappings and terrorist acts, particularly with respect to our operations in Nigeria;

•  potentially adverse tax consequences;

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•  restrictions on repatriation of earnings or expropriation of property without fair compensation;

•  difficulties in establishing new international offices and risks inherent in establishing new relationships in foreign countries; and

•  the burden of complying with the various laws and regulations in the countries in which we operate.

Our future plans involve expanding our business in international markets where we currently do not conduct business. The risks inherent in establishing new business ventures, especially in international markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Local unrest and violence in Nigeria has adversely affected our financial results and could result in possible impairment and write-downs of our assets in Nigeria if the political situation in Nigeria does not improve.

Our projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks, including risks arising from the increase in violence and local unrest in Nigeria over the past year, have and could further adversely impact our operations in Nigeria and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria.

For example, we are involved in a project called the Cawthorne Channel Project in Nigeria in which we rent and operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian coastal waterway. Because of unrest and violence in the region, gas flow to the project was stopped in June 2006. As a result, we did not recognize revenue on the Cawthorne Channel Project for the last six months of 2006, and we may not be able to recognize revenue from this project in the near future. If the violence and local unrest in Nigeria continues or worsens, we may experience further decreases in revenue from our projects in Nigeria.

At December 31, 2006, we had net assets of approximately $72 million related to projects in Nigeria, a majority of which is related to our capital investment and advances/accounts receivable for the Cawthorne Channel Project. If we are unable to operate our assets under our current projects, we may be required to find alternative uses for those assets, which could potentially result in an impairment and write-down of our investment in those assets in Nigeria and could materially impact our consolidated financial position or results of operation.

Further changes to the laws and regulations of Venezuela could adversely impact our results of operations and require us to write-down our investments in Venezuela.

Recently, laws and regulations in Venezuela have been subject to frequent and significant changes. These changes have included currency controls, restrictions on repatriation of capital, expropriation and nationalization of certain firms and industries and changes to the tax laws. We derived approximately 8% of our 2006 revenues and other income from our operations and interests in joint ventures located in Venezuela. If the government of Venezuela institutes further changes to the laws and regulations of Venezuela, those changes could increase the expenses incurred by our Venezuelan operations, resulting in a reduction in our net income or a write-down of our investments in Venezuela. At December 31, 2006, we had net assets in Venezuela, including investments in non-consolidated affiliates, of approximately $267 million.

Fluctuations in currency exchange rates in international jurisdictions could adversely affect our business.

We have not hedged exchange rate exposures, which exposes us to risk of exchange rate losses. We have significant operations that expose us to currency risk in Italy, Argentina and Venezuela. The impact of foreign currency exchange on our statements of operations will depend on the amount of our net assets and liability positions exposed to currency fluctuations in future periods.

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In February 2004 and March 2005, the Venezuelan government devalued the currency to 1,920 bolivars and 2,148 bolivars, respectively, for each U.S. dollar. The impact of any further devaluation on our results will depend upon the amount of our assets (primarily working capital and deferred taxes) exposed to currency fluctuation in Venezuela in future periods.

The economic situation in Argentina and Venezuela is subject to change. To the extent that the situation deteriorates, exchange controls continue in place and the value of the peso and bolivar against the dollar is reduced further, our results of operations in Argentina and Venezuela could be materially and adversely affected, which could result in reductions in our net income.

Our proposed merger with Universal is subject to the receipt of consents and approvals from various government entities that may impose conditions on, jeopardize or delay completion of the mergers or reduce the anticipated benefits of the merger.

In February 2007, we announced that we had entered into an agreement to merge with Universal. Completion of the merger is conditioned upon, among other events, the expiration or termination of the applicable waiting period under theHart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, and the expiration or termination of any mandatory waiting period under applicablenon-U.S. antitrust laws, where the failure to observe that waiting period would be reasonably likely to have a material adverse effect on the combined company after the merger.

It is possible that the required consents, orders, approvals and clearances will not be obtained. Moreover, if they are obtained, they may impose conditions on, or require divestitures relating to operations or assets of, Hanover or Universal. The merger agreement requires Hanover and Universal to satisfy any conditions or divestiture requirements imposed upon them unless the conditions or divestitures would be reasonably likely to have a material adverse effect on the combined company after the merger. A substantial delay in obtaining any required approvals or the imposition of any unfavorable conditions or divestitures in connection with the receipt of any required approvals may jeopardize or delay completion of the merger or reduce the anticipated benefits of the merger.

While the merger is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business.

Uncertainty about the effect of the merger on employees, customers and suppliers may have an adverse effect on us and, consequently, on the combined company. Although we intend to take steps to reduce any adverse effects, these uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers, suppliers and others who deal with us to seek to change existing business relationships with us. Employee retention may be particularly challenging during the pendency of the merger because employees may experience uncertainty about their future roles with the combined company. If, despite our retention efforts, employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the combined company’s business could be seriously harmed. In addition, the merger agreement restricts us, without Universal’s consent and subject to certain exceptions, from making certain acquisitions and taking other specified actions until the merger occurs or the merger agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business that may arise prior to completion of the merger or termination of the merger agreement.

Failure to complete the merger could negatively impact our stock price and our future business and financial results because of, among other things, the disruption that would occur as a result of uncertainties relating to a failure to complete the merger.

Although Hanover and Universal have agreed to use their reasonable best efforts to obtain stockholder approval of the merger, the stockholders of both Hanover and Universal may not approve

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the merger. In addition, Hanover and Universal may not receive the required consents, orders, approvals and clearances to complete the merger or satisfy the other conditions to the completion of the merger. If the merger is not completed for any reason, we could be subject to several risks, including the following:

•  being required to pay Universal a termination fee of up to $70 million in certain circumstances, as described further in the next risk factor; and

•  having had the focus of our management directed toward the merger and integration planning instead of on our core business and other opportunities that could have been beneficial to us.

In addition, we would not realize any of the expected benefits of having completed the merger. We have incurred and will continue to incur substantial financial advisory, legal and other expenses associated with the merger even if it does not close.

If the merger is not completed, the price of our common stock may decline to the extent that the current market price of that stock reflects a market assumption that the merger will be completed and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the merger was not consummated due to an adverse change in our business. In addition, our business may be harmed, and the price of our common stock may decline as a result, to the extent that customers, suppliers and others believe that we cannot compete in the marketplace as effectively without the merger or otherwise remain uncertain about our future prospects in the absence of the merger. Similarly, current and prospective employees may experience uncertainty about the future of our company if the merger is not completed, and the loss of those employees could adversely affect us. If the merger is not completed, we may not be able to attract and retain key management, marketing and technical personnel due to uncertainty about the future of our company, which could harm our businesses and results. The realization of any of these risks may materially adversely affect our business, financial results, financial condition and stock price.

The merger agreement limits our ability to pursue an alternative acquisition proposal and may require us to pay a termination fee of up to $70 million if we do.

The merger agreement prohibits the parties from soliciting, initiating or encouraging alternative merger or acquisition proposals with any third party. The merger agreement also provides for the payment by Hanover or Universal of a termination fee of up to $70 million if the merger agreement is terminated in certain circumstances in connection with a competing acquisition proposal or the withdrawal by the board of directors of one of the companies of its recommendation that the stockholders of that company vote for the merger.

These provisions limit our ability to pursue offers from third parties that could result in greater value to our stockholders. The obligation to make the termination fee payment also may discourage a third party from pursuing an alternative acquisition proposal.

Many of our compressor leases with customers have short initial terms, and we cannot be sure that the leases for these rental compressors will be renewed after the end of the initial lease term.

The length of our compressor leases with customers varies based on operating conditions and customer needs. In most cases, under currently prevailing lease rates, the initial lease terms are not long enough to enable us to fully recoup the average cost of acquiring or fabricating the equipment. We cannot be sure that a substantial number of our lessees will continue to renew their leases or that we will be able to re-lease the equipment to new customers or that any renewals or re-leases will be at comparable lease rates. The inability to renew or re-lease a substantial portion of our compressor rental fleet would have a material adverse effect upon our business, consolidated financial condition, results of operations and cash flows.

We operate in a highly competitive industry.

We experience competition from companies that may be able to adapt more quickly to technological changes within our industry and throughout the economy as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies. We also may not be able to take advantage of certain opportunities or make certain investments because of our significant leverage and the

24

restrictive covenants in our bank credit facility, the agreements related to our compression equipment lease obligations and our other obligations. In times of weak market conditions, we may experience reduced profit margins from increased pricing pressure. We may not be able to continue to compete successfully in times of weak market conditions or against such competition. If we cannot compete successfully, we may lose market share and our business, consolidated financial condition, results of operations and cash flows could be materially adversely affected.

Natural gas operations entail inherent risks that may result in substantial liability to us.

Natural gas operations entail inherent risks, including equipment defects, malfunctions and failures and natural disasters, which could result in uncontrollable flows of gas or well fluids, fires and explosions. These risks may expose us, as an equipment operator or fabricator, to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. Our business, consolidated financial condition, results of operations and cash flows could be materially adversely affected if we incur substantial liability and the damages are not covered by insurance or are in excess of policy limits.

Our ability to manage our business effectively will be weakened if we are unable to attract and retain qualified personnel.

We believe that our success depends on our ability to attract and retain qualified employees. There is significant demand in our industry for experienced qualified employees. If we fail to retain our skilled personnel and to recruit other skilled personnel, we could be unable to compete effectively. Our ability to retain personnel may also be impacted by the proposed merger with Universal.

Our business is subject to a variety of governmental regulations.

We are subject to a variety of federal, state, local and international laws and regulations relating to the environment, health and safety, export controls, currency exchange, labor and employment and taxation. These laws and regulations are complex, change frequently and have tended to become more stringent over time. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions as to future compliance. From time to time as part of the regular overall evaluation of our operations, including newly acquired operations, we may be subject to compliance audits by regulatory authorities in the various countries in which we operate.

We may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to new or revised permitting conditions that may be onerous or costly to comply with. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks or pipelines and other regulated units, all of which may impose additional compliance and permitting obligations.

As one of the largest natural gas compression companies in the United States, we conduct operations at numerous facilities in a wide variety of locations across the country. Our operations at many of these facilities require federal, state or local environmental permits or other authorizations. Additionally, natural gas compressors at many of our customer facilities require individual air permits or general authorizations to operate under various air regulatory programs established by rule or regulation. These permits and authorizations frequently contain numerous compliance requirements, including monitoring and reporting obligations and operational restrictions, such as emission limits. Generally, our customers are contractually responsible for any permits on their facilities, however, given the large number of facilities in which we operate, and the numerous environmental permits and other authorizations applicable to our operations, we occasionally identify or are notified of technical violations of certain requirements existing in various permits and other authorizations, and it is likely that similar technical violations will occur in the future. Occasionally, we have been assessed penalties for our non-compliance, and we could be subject to such penalties in the future. While such penalties generally do not have a material financial impact on our business or operations, it is possible

25

future violations could result in substantial penalties. In addition, future events, such as compliance with more stringent laws, regulations or permit conditions, a major expansion of our operations into more heavily regulated activities, more vigorous enforcement policies by regulatory agencies, or stricter or different interpretations of existing laws and regulations could require us to make material expenditures.

Our stock price may experience volatility.

Our stock price, like that of other companies, can be volatile. Some of the factors that could affect our stock price are quarterly increases or decreases in revenue or earnings, changes in revenue or earnings estimates by the investment community, and speculation in the press or investment community about our financial condition or results of operations and our proposed merger with Universal. General market conditions and U.S. or international economic factors unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results.

We are dependent on particular suppliers and are vulnerable to product shortages and price increases.

Some of the components used in our products are obtained from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases, inferior component quality and a potential inability to obtain an adequate supply of required components in a timely manner. The partial or complete loss of certain of these sources could have a negative impact on our results of operations and could damage our customer relationships. Further, a significant increase in the price of one or more of these components could have a negative impact on our results of operations.

Item 1B.   Unresolved Staff Comments

None.

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Item 2.   Properties

The following table describes the material facilities owned or leased by Hanover and our subsidiaries as of December 31, 2006:

			Square
Location	Status		Feet		Uses
Broken Arrow, Oklahoma		Owned		141,549		Compressor and accessory fabrication
Houston, Texas		Owned		307,944		Compressor and accessory fabrication; corporate office
Houston, Texas		Leased		67,937		Office
Anaco, Venezuela		Leased		129,000		Compressor rental and service
Barquisimeto, Venezuela		Owned		12,917		Compressor rental and service
Casacara Station, Colombia		Owned		14,000		Compressor rental and service
Casper, Wyoming		Owned		28,390		Compressor rental and service
Comodoro Rivadavia, Argentina		Owned		26,000		Compressor rental and service
Davis, Oklahoma		Owned		393,870		Compressor rental and service
El Tigre, Venezuela		Leased		18,299		Compressor rental and service
Farmington, New Mexico		Owned		20,361		Compressor rental and service
Farmington, New Mexico		Leased		18,691		Compressor rental and service
Gillette, Wyoming		Leased		10,200		Compressor rental and service
Kilgore, Texas		Owned		33,039		Compressor rental and service
Maturin, Venezuela		Owned		14,747		Compressor rental and service
Midland, Texas		Owned		53,300		Compressor rental and service
Neuquen, Argentina		Owned		30,000		Compressor rental and service
Oklahoma City, Oklahoma		Leased		37,485		Compressor rental and service
Pampa, Texas		Leased		24,000		Compressor rental and service
Pocola, Oklahoma		Owned		18,705		Compressor rental and service
Santa Cruz, Bolivia		Leased		21,119		Compressor rental and service
Victoria, Texas		Owned		59,852		Compressor rental and service
Walsall, UK — Westgate		Owned		44,700		Compressor rental and service
Yukon, Oklahoma		Owned		22,453		Compressor rental and service
Bridgeport, Texas		Leased		13,500		Parts, service and used equipment
Broken Arrow, Oklahoma		Leased		19,000		Parts, service and used equipment
Houston, Texas		Leased		28,750		Parts, service and used equipment
Port Harcourt, Nigeria		Leased		32,808		Parts, service and used equipment
Broussard, Louisiana		Owned		74,402		Production and processing equipment fabrication
Columbus, Texas		Owned		219,552		Production and processing equipment fabrication
Corpus Christi, Texas		Owned		11,000		Production and processing equipment fabrication
Jebel Ali Free Zone, UAE		Owned		113,211		Production and processing equipment fabrication
Hamriyah Free Zone, UAE		Owned		140,946		Production and processing equipment fabrication
Mantova, Italy		Owned		654,397		Production and processing equipment fabrication
Tulsa, Oklahoma		Owned		40,100		Production and processing equipment fabrication
Victoria, Texas		Owned		50,506		Production and processing equipment fabrication

Our executive offices are located at 12001 North Houston Rosslyn, Houston, Texas 77086 and our telephone number is(281) 447-8787.

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Item 3.   Legal Proceedings

In the ordinary course of business we are involved in various pending or threatened legal actions, including environmental matters. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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

No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2006.

PART II

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange under the symbol “HC.” As of February 20, 2007, 104,597,156 shares of our common stock were issued and held by 5,480 holders of record. Our transfer agent is the American Stock Transfer and Trust Company and is located at 59 Maiden Lane, Plaza Level, New York, NY 10038. On February 20, 2007, the last reported sales price of our common stock on the New York Stock Exchange was $22.13. The following table presents, for the periods indicated, the range of high and low quarterly sales prices of our common stock, as reported on the New York Stock Exchange.

	Price
	High		Low
Year ended December 31, 2005
First Quarter	$	14.87	$	11.35
Second Quarter	$	12.32	$	10.13
Third Quarter	$	15.68	$	11.45
Fourth Quarter	$	14.80	$	12.47
Year ended December 31, 2006
First Quarter	$	18.81	$	14.20
Second Quarter	$	21.10	$	15.57
Third Quarter	$	19.75	$	16.07
Fourth Quarter	$	20.64	$	17.04

We have not paid any cash dividends on our common stock since our formation and do not anticipate paying such dividends in the foreseeable future. The Board of Directors anticipates that all cash flow generated from operations in the foreseeable future will be retained and used to pay down debt or develop and expand our business. Any future determinations to pay cash dividends on our common stock will be at the discretion of the Board of Directors and will be dependent upon our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by the Board of Directors. Our bank credit facility, with JPMorgan Chase Bank, N.A. as agent, prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock.

The certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this 2006 Annual Report on Form 10-K. We have also filed with the New York Stock Exchange the annual written affirmation certifying that we are not aware of any violations by Hanover of the NYSE Corporate Governance Listing Standards.

See Item 12 of thisForm 10-K for disclosures regarding securities authorized for issuance under equity compensation plans.

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Item 6.   Selected Financial Data

In the table below we have presented certain selected financial data for Hanover for each of the five years in the period ended December 31, 2006. The historical consolidated financial data has been derived from Hanover’s audited consolidated financial statements. The following information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of thisForm 10-K and the Consolidated Financial Statements in Item 15 of thisForm 10-K.

	Years Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Income Statement Data:
Revenues and other income:
U.S. rentals	$	384,292		$	351,128		$	341,570		$	324,186		$	328,600
International rentals		263,228			232,587			214,598			191,301			175,337
Parts, service and used equipment		224,810			225,636			180,321			164,935			223,685
Compressor and accessory fabrication		303,205			179,954			158,629			106,896			114,009
Production and processing equipment fabrication		429,697			360,267			270,284			260,660			149,656
Equity in income of non-consolidated affiliates		19,430			21,466			19,780			23,014			18,554
Gain on sale of business and other income(1)		46,001			4,551			3,413			4,088			3,600
Total revenues and other income(2)		1,670,663			1,375,589			1,188,595			1,075,080			1,013,441
Expenses:
U.S. rentals		152,605			139,465			144,580			127,425			122,172
International rentals		96,631			76,512			63,953			61,875			52,996
Parts, service and used equipment		183,965			169,168			135,929			123,255			179,843
Compressor and accessory fabrication		249,910			156,414			144,832			96,922			99,446
Production and processing equipment fabrication		366,590			325,924			242,251			234,203			127,442
Selling, general and administrative		204,247			182,198			173,066			159,870			150,863
Depreciation and amortization(4)(5)		181,416			182,681			175,308			169,164			148,141
Interest expense(5)(7)		118,006			136,927			146,978			89,175			43,352
Foreign currency translation		(4,317	)		7,890			(5,222	)		2,548			16,727
Securities related litigation settlement(3)		—			—			(4,163	)		42,991			—
Other		1,204			526			407			2,906			27,607
Debt extinguishment costs(4)		5,902			7,318			—			—			—
Goodwill impairment		—			—			—			35,466			52,103
Leasing expense(5)		—			—			—			43,139			90,074
		1,556,159			1,385,023			1,217,919			1,188,939			1,110,766
Income (loss) from continuing operations before income taxes		114,504			(9,434	)		(29,324	)		(113,859	)		(97,325	)
Provision for (benefit from) income taxes(6)		28,782			27,714			24,767			3,629			(17,114	)
Income (loss) from continuing operations		85,722			(37,148	)		(54,091	)		(117,488	)		(80,211	)
Income (loss) from discontinued operations, net of tax(2)		431			(869	)		10,085			(3,861	)		(35,857	)
Cumulative effect of accounting change, net of tax(5)		370			—			—			(86,910	)		—
Net income (loss)	$	86,523		$	(38,017	)	$	(44,006	)	$	(208,259	)	$	(116,068	)
Basic earnings (loss) per common share from continuing operations	$	0.85		$	(0.41	)	$	(0.64	)	$	(1.45	)	$	(1.01	)
Diluted earnings (loss) per common share from continuing operations	$	0.80		$	(0.41	)	$	(0.64	)	$	(1.45	)	$	(1.01	)
Weighted average common and common equivalent shares:
Basic		101,178			91,556			84,792			81,123			79,500
Diluted		112,035			91,556			84,792			81,123			79,500

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	Years Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Cash flows provided by (used in):
Operating activities	$	209,089		$	122,487		$	131,837		$	164,735		$	195,717
Investing activities		(168,168	)		(104,027	)		11,129			(43,470	)		(193,703	)
Financing activities		(18,134	)		(6,890	)		(162,350	)		(84,457	)		(4,232	)
Balance Sheet Data (end of period):
Working capital	$	326,565		$	351,694		$	301,893		$	279,050		$	218,398
Net property, plant and equipment(5)		1,863,452			1,823,100			1,876,348			2,027,654			1,167,675
Total assets(5)		3,070,889			2,862,996			2,771,229			2,942,274			2,176,983
Debt and convertible preferred securities(5)(7)		1,369,931			1,478,948			1,643,616			1,782,823			641,194
Common stockholders’ equity(7)		1,014,282			909,782			760,055			753,488			927,626

(1)	In February 2006, we sold our U.S. amine treating rental assets to Crosstex Energy Services L.P. (“Crosstex”) for approximately $51.5 million which resulted in a $28.4 million pre-tax gain reported in gain on sale of business and other income. In addition, in May 2006 we sold the assets used in our fabrication facility in Canada, which was part of our Production and processing fabrication- surface equipment segment, as part of management’s plan to improve overall operating efficiency in this line of business. The sale resulted in an $8.0 million pre-tax gain reported in gain on sale of business and other income. The disposal of these assets did not meet the criteria established for recognition as discontinued operations. For a description of discontinued operations, see Note 3 in Notes to the Consolidated Financial Statements in Item 15 of this Form10-K.
(2)	We have grown as a result of internal growth and acquisitions. In August 2003, we exercised our option to acquire the remaining 49% interest in Belleli in order to gain complete control of Belleli. In the fourth quarter of 2002, we decided to discontinue certain businesses. In November 2004, we sold the compression rental assets of our Canadian subsidiary for approximately $56.9 million. Additionally, in December 2004 we sold our ownership interest in Collicutt Energy Services Ltd. (“CES”) for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interest of CES. These businesses are reflected as discontinued operations in our consolidated statements of operations.
(3)	In May 2003, Hanover reached an agreement that was subject to court approval, to settle securities class actions, ERISA class actions and the shareholder derivative actions. The terms of the settlement became final in March 2004 and required Hanover to: (a) make a cash payment of approximately $30 million to the securities settlement fund (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (b) issue 2.5 million shares of Hanover common stock to the securities settlement fund, and (c) issue a contingent note with a principal amount of $6.7 million to the securities settlement fund.
	In April 2004, we issued the $6.7 million contingent note related to the securities settlement. The note was payable, together with accrued interest, on March 31, 2007 but was extinguished (with no money paid under it) under the terms of the note since our common stock traded above the average price of $12.25 per share for 15 consecutive trading days during the third quarter of 2004. As a result of the cancellation of the note in the third quarter of 2004, we reversed the note and the embedded derivative, which resulted in a $4.0 million reduction to the cost of the securities-related litigation.
(4)	In March 2006, we completed a public offering of $150 million aggregate principal amount of 7.5% Senior Notes due 2013. We used the net proceeds from the offering of $146.6 million, together with borrowings under our bank credit facility, to redeem our 11% Zero Coupon Subordinated Notes due March 31, 2007. In connection with the redemption, we expensed $5.9 million related to the call premium.
	During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations. In connection with the redemption and repayment, we expensed $7.3 million related to the call premium and $2.5 million through depreciation and amortization expense related to unamortized debt issuance costs.

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(5)	In accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” as revised in December 2003 (“FIN 46”), for periods ending after June 30, 2003, we have included in our consolidated financial statements the special purpose entities that lease compression equipment to us. As a result, on July 1, 2003, we added approximately $897 million of compression equipment assets, net of accumulated depreciation, and approximately $1,139.6 million of our compression equipment lease obligations (including approximately $1,105.0 million in debt) to our balance sheet. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Leasing Transactions and Accounting Change for FIN 46” in Item 7 of this Form10-K.
(6)	During 2006, we recorded pre-tax income in the U.S. and therefore were able to realize the benefit from net operating loss carryforwards and capital loss carryforwards that previously we had provided a valuation allowance against. In addition, during the fourth quarter of 2006, we recorded a benefit for the reversal of $10.2 million of the valuation allowance on our net deferred tax assets in the U.S., which is recorded as a reduction to our provision for income taxes. This reversal is the result of our conclusion in the fourth quarter of 2006 that it is more likely than not that we will realize the benefit from the associated net deferred tax assets. As a result, our 2006 tax provision benefited from approximately $36.2 million in valuation allowances that were reversed.
(7)	On August 15, 2005, we completed a public offering of 13,154,385 shares of common stock under our shelf registration that resulted in approximately $179.1 million of net proceeds for Hanover. The net proceeds from this offering were used to redeem $167.0 million in indebtedness and repay $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations during September 2005.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the results of operations and financial condition of Hanover Compressor Company should be read in conjunction with the Consolidated Financial Statements and related Notes thereto in Item 15 of thisForm 10-K.

Overview

We are a global market leader in the full service natural gas compression business and are also a leading provider of service, fabrication and equipment for oil and natural gas production processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Hanover was founded as a Delaware corporation in 1990, and has been a public company since 1997. Our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, and oilfield power generation services, primarily to our U.S. and international customers as a complement to our compression services. In addition, through our subsidiary, Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms, primarily for use in Europe and the Middle East.

Competitive Strengths

We believe we have the following key competitive strengths:

•  Total solutions provider:  We believe that we are the only company in our industry that offers both outsourced rental of, as well as the sale of, compression and oil and gas production and processing equipment and related services. Our services include complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment,

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as well as engineering and product design, fabrication, installation, customer service and after-market support. Our global customer base consists of U.S. and international companies engaged in all aspects of the oil and gas industry, including large integrated oil and gas companies, national oil and gas companies, independent producers and natural gas processors, gatherers and pipelines. By offering a broad range of services that complement our historic strengths, we believe that we can provide comprehensive integrated global solutions to meet our customers’ oil and gas production and processing equipment and compression needs. We believe the breadth and quality of our services and rental fleet, the depth of our customer relationships and our presence in many major gas-producing regions place us in a position to capture additional outsourced business on a global basis.

•  Leading position in high horsepower compression:  High horsepower compression, composed of units with greater than 500 horsepower, is the largest portion of our rental fleet, based on horsepower. We believe we are a leading provider of these units, which are typically installed on larger wells, gathering systems and processing and treating facilities. The scale and more attractive unit economics of these facilities generally insulate them from declining commodity prices. As a result, compressors in this segment tend to realize higher utilization rates.

•  Provider of superior customer service:  To facilitate our total solutions approach, we have adopted a geographical business unit concept and utilize a decentralized management and operating structure to provide superior customer service in a relationship-driven, service-intensive industry. We believe that our regionally-based network, local presence, experience and in-depth knowledge of customers’ operating needs and growth plans enable us to effectively meet their evolving demands on a more timely basis. Our salespeople pursue the rental and sales market for our products and services in their respective territories. Our efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

•  International experience:  We believe we are a leader in natural gas compression as well as service and fabrication of equipment for oil and gas processing and transportation services in Latin America, with an expanding presence in West Africa, the Middle and Far East and Russia. As of December 31, 2006, we had approximately 891,000 horsepower of compression deployed internationally, of which approximately 93% was located in Latin America (primarily in Venezuela, Argentina, Mexico and Brazil). We opened offices in Oman and Egypt during 2006 and Pakistan during 2005. During 2004, we opened offices in Nigeria, the Middle and Far East and Russia. We believe our experience in managing our international operations and our efforts to develop and expand our international sales force have created a global platform from which we can continue to grow in international markets.

Business Strategy

We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies:

•  Focus on core operations.  We have built our leading market position through our strengths in compression rentals, compressor fabrication, production and processing equipment rental and fabrication and parts and service. We are focusing our efforts on these businesses and on streamlining operations in our core markets. We believe this focused approach will enable us to enhance our growth prospects and returns. In addition, we are actively pursuing improvements in our U.S. fleet utilization by prudently employing additional units, moving idle U.S. units into service in international markets and retiring less profitable units in order to improve our utilization and enhance the returns for our business. We have also converted one of our facilities to refurbish approximately 200,000 horsepower of idle U.S. compression assets so we can deploy these units in both our U.S. and international rental businesses.

•  Expand international presence.  International markets continue to represent the greatest growth opportunity for our business. We believe that these markets are underserved in the area of the products and services we offer. In addition, we typically see higher returns in international markets relative to the

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United States. We intend to allocate additional resources toward international markets, to open offices abroad, where appropriate, and to move idle U.S. units into service in international markets.

•  Continuing development of product lines.  We intend to continue to develop and deliver products and services beyond the rental and sale of compression equipment, including productionand/or processing equipment, engineering, installation, and operating services. As we move forward, we are seeing new opportunities driven more by our ability to deliver a total solution rather than just a single product. A total solution will typically incorporate multiple Hanover product offerings. We believe that this will enable us to capitalize on and expand our existing client relationships and enhance our revenue and returns from each individual project.

•  Focus on process improvement.  We plan to focus on process improvements by consistently reviewing and rationalizing our existing business lines. We have developed a more disciplined and systematic approach to evaluating return on capital, exercising cost controls and operating and managing our business. Through our Service Excellence Program, we will continue to take the best practices from across our organization and formalize these practices into common company-wide standards that we expect will bring improved operating and financial performance. In addition, we intend to take advantage of our enterprise resource planning system platform to help us better evaluate our markets and business opportunities, operate and maintain our assets and make more informed and timely decisions.

•  Disciplined use of capital.  We intend to continue to focus on our capital discipline, as we believe it will better position us for growth and enhanced returns. During 2005, we used proceeds from our equity offering to decrease our outstanding debt and compression equipment lease obligations by approximately $170 million. During 2004, we used cash flows from operations and asset sales to reduce our outstanding debt and compression equipment lease obligations by approximately $149 million. As a result, we surpassed our objective to reduce our debt and compression equipment lease obligations by $180 million from 2004 through 2007.

Market Conditions

Our operations depend upon the levels of activity in natural gas development, production, processing and transportation. Such activity levels typically decline when there is a significant reduction in oil and gas prices or significant instability in energy markets. In recent years, oil and gas prices have been extremely volatile. Our revenues increased during 2004, 2005 and 2006, which we believe resulted from an improvement in market conditions.

The North American rig count increased by 6% to 2,174 at December 31, 2006 from 2,045 at December 31, 2005, and the twelve-month rolling average North American rig count increased by 15% to 2,118 at December 31, 2006 from 1,838 at December 31, 2005. The twelve-month rolling average New York Mercantile Exchange wellhead natural gas price decreased to $6.42 per Mcf at December 31, 2006 from $7.51 per Mcf at December 31, 2005. Despite the increase in the rig count, U.S. natural gas production levels have not significantly changed. Recently, we have not experienced any significant growth in U.S. rentals of equipment, which we believe is primarily the result of (1) the lack of immediate availability of compression equipment in the configuration currently in demand by our customers and (2) increases in purchases of compression equipment by oil and gas companies that have available capital. However, improved market conditions have led to improved pricing and demand for sales of equipment in the U.S. market.

Summary of Results

Net income (losses).  We recorded consolidated net income of $86.5 million for the year ended December 31, 2006, as compared to consolidated net losses of $38.0 million and $44.0 million for the years ended December 31, 2005 and 2004, respectively. Our results for the year ended 2006 was affected by benefits that may not necessarily be indicative of our core operations or our future prospects and impact comparability between years. These special items are discussed in “— Year Ended December 31, 2006 Compared to Year Ended December 31, 2005” below. Our results for the years ended 2005 and 2004 were affected by a number

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of charges that impact comparability between years. These special items are discussed in “— Year Ended December 31, 2005 Compared to Year Ended December 31, 2004” below.

Results by Product Line.  The following table summarizes revenues, expenses and gross profit margin percentages for each of our product lines (dollars in thousands):

	Years Ended December 31,
	2006			2005			2004
Revenues and other income:
U.S. rentals	$	384,292		$	351,128		$	341,570
International rentals		263,228			232,587			214,598
Parts, service and used equipment		224,810			225,636			180,321
Compressor and accessory fabrication		303,205			179,954			158,629
Production and processing equipment fabrication		429,697			360,267			270,284
Equity in income of non-consolidated affiliates		19,430			21,466			19,780
Gain on sale of business and other income		46,001			4,551			3,413
	$	1,670,663		$	1,375,589		$	1,188,595
Expenses:
U.S. rentals	$	152,605		$	139,465		$	144,580
International rentals		96,631			76,512			63,953
Parts, service and used equipment		183,965			169,168			135,929
Compressor and accessory fabrication		249,910			156,414			144,832
Production and processing equipment fabrication		366,590			325,924			242,251
	$	1,049,701		$	867,483		$	731,545
Gross profit margin:
U.S. rentals		60	%		60	%		58	%
International rentals		63	%		67	%		70	%
Parts, service and used equipment		18	%		25	%		25	%
Compressor and accessory fabrication		18	%		13	%		9	%
Production and processing equipment fabrication		15	%		10	%		10	%

Critical Accounting Estimates

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and accounting policies, including those related to bad debts, inventories, fixed assets, investments, intangible assets, income taxes, revenue recognition and contingencies and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances. The results of this process form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and liquidity.

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Allowances and Reserves

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review the adequacy of our allowance for doubtful accounts monthly. Balances aged greater than 90 days are reviewed individually for collectibility. In addition, all other balances are reviewed based on significance and customer payment histories. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During 2006, 2005 and 2004, we recorded bad debt expense of approximately $2.5 million, $2.0 million, and $2.7 million, respectively.

We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those expected by management, additional inventory write-downs may be required. During 2006, 2005 and 2004, we wrote-down inventory of approximately $2.3 million, $0.1 million, and $1.1 million, respectively.

Long-Lived Assets and Investments

We review for the impairment of long-lived assets, including property, plant and equipment and assets held for sale whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as compared to its estimated fair value and is charged to the period in which the impairment occurred. The determination of what constitutes an indication of possible impairment, the estimation of future cash flows and the determination of estimated fair value are all significant judgments. There were no significant impairments in 2006, 2005 or 2004.

In addition, we perform an annual goodwill impairment test, pursuant to the requirements of SFAS 142, in the fourth quarter of each year or whenever events indicate impairment may have occurred, to determine if the estimated recoverable value of the reporting unit exceeds the net carrying value of the reporting unit, including the applicable goodwill. We determine the fair value of our reporting units using a combination of the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast, the weighted average cost of capital and a market multiple on the reporting units’ earnings before interest, tax, depreciation and amortization. Changes in forecasts could affect the estimated fair value of our reporting units and result in a goodwill impairment charge in a future period. There were no impairments in 2006, 2005 or 2004 related to our annual goodwill impairment test.

We hold investments in companies having operations in areas that relate to our business. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Tax Assets

As of December 31, 2006, we reported a net deferred tax liability of $54.5 million, which included gross deferred tax assets of $301.7 million, net of a valuation allowance of $47.0 million and gross deferred tax liabilities of $356.1 million. Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions and future financial conditions.

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Additionally, we must consider any prudent and feasible tax planning strategies that might minimize the amount of tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets. We must also consider if we have the ability to implement these strategies should the forecasted conditions actually occur. The principal tax planning strategy available to us relates to the permanent reinvestment of the earnings of international subsidiaries. Assumptions related to the permanent reinvestment of the earnings of international subsidiaries are reconsidered periodically to give effect to changes in our businesses and in our tax profile.

��

Due to our income from the results of U.S. operations in 2006 and our expectations for income in 2007 and future years and in consideration of the timing of the reversal of deductions taken for tax in advance of book (“temporary differences”), during the fourth quarter of 2006, we reached the conclusion that it is more likely than not that our net deferred tax assets in the U.S. would be realized. Previously, because of cumulative tax losses in the U.S., we were not able to reach the “more likely than not” criteria of SFAS 109 and had recorded a valuation allowance on our net U.S. deferred tax assets. We have recorded valuation allowances for certain deferred tax assets that are not likely to be realized. If we are required to record and/or release additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate.

Revenue Recognition — Percentage of Completion Accounting

We recognize revenue and profit for our fabrication operations as work progresses on long-term, fixed-price contracts using thepercentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We follow this method because reasonably dependable estimates of the revenue and costs applicable to various stages of a contract can be made and because the fabrication projects usually last several months. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. The average duration of these projects is three to thirty-six months. Due to the long-term nature of some of our jobs, developing the estimates of cost often requires significant judgment.

We estimatepercentage-of-completion for compressor and accessory fabrication on a direct labor hour to total labor hour basis. This calculation requires management to estimate the number of total labor hours required for each project and to estimate the profit expected on the project. Production and processing equipment fabricationpercentage-of-completion is estimated using the direct labor hour and cost to total cost basis. The cost to total cost basis requires us to estimate the amount of total costs (labor and materials) required to complete each project. Since we have many fabrication projects in process at any given time, we do not believe that materially different results would be achieved if different estimates, assumptions, or conditions were used for any single project.

Factors that must be considered in estimating the work to be completed and ultimate profit include labor productivity and availability, the nature and complexity of work to be performed, the impact of change orders, availability of raw materials and the impact of delayed performance. If the aggregate combined cost estimates for all of our fabrication businesses had been higher or lower by 1% in 2006, our results of operations before tax would have been decreased or increased by approximately $6.2 million. As of December 31, 2006, we had recognized approximately $85.9 million in estimated earnings on uncompleted contracts.

Contingencies and Litigation

We are substantially self-insured for worker’s compensation, employer’s liability, property, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We review these estimates quarterly and believe such accruals to be adequate. However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual

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experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that the experience becomes known. As of December 31, 2006 and 2005, we had recorded approximately $4.5 million and $4.2 million, respectively, in claim reserves.

In the ordinary course of business, we are involved in various pending or threatened legal actions. While we are unable to predict the ultimate outcome of these actions, SFAS 5, “Accounting for Contingencies” requires management to make judgments about future events that are inherently uncertain. We are required to record (and have recorded) a loss during any period in which we believe, based on our experience, a contingency is probable of resulting in a financial loss to us. In making its determinations of likely outcomes of pending or threatened legal matters, management considers the evaluation of counsel knowledgeable about each matter.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Summary

Our revenue and other income for the year ended December 31, 2006 was $1,670.7 million compared to revenue and other income of $1,375.6 million for the year ended December 31, 2005. Net income for the year ended December 31, 2006 was $86.5 million compared with a net loss of $38.0 million for the year ended December 31, 2005. Our revenue and net income increased due to improved market conditions and our focus on improving sales and margins. In addition, results for the year ended December 31, 2006 benefited from a pre-tax gain of $28.4 million on the sale of our U.S. amine treating business, an $8.0 million pre-tax gain on the sale of our fabrication facilities in Canada, and a benefit from the utilization of $36.2 million of net operating and capital losses that previously had valuation allowance (including the reversal of $10.2 million of the valuation allowance on our net deferred tax assets in the U.S.) Results for the year ended December 31, 2006 were also impacted by debt extinguishment costs of $5.9 million related to the call premium to repay our 11% Zero Coupon Subordinated Notes due March 31, 2007. Net loss in 2005 included $7.3 million in debt extinguishment costs and $2.5 million related to write-off of deferred financing costs in Depreciation and amortization.

Summary of Business Line Results

U.S. Rentals

	Years Ended December 31,						Increase
	2006			2005			(Decrease)
	(In thousands)
Revenue	$	384,292		$	351,128			9	%
Operating expense		152,605			139,465			9	%
Gross profit	$	231,687		$	211,663			9	%
Gross margin		60	%		60	%		—

U.S. rental revenue increased during the year ended December 31, 2006, compared to the year ended December 31, 2005, due primarily to improvement in market conditions that has led to an improvement in pricing and an increase in contracted horsepower of approximately 3%. Gross margin for the year ended December 31, 2006 benefited from price increases, but was offset by $2.1 million of incremental expenses related to our program to refurbish approximately 200,000 horsepower of idle U.S. compression equipment and the impact of recording increased incentive compensation expenses of approximately $4.3 million, including the impact of the adoption of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”).

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International Rentals

	Years Ended December 31,						Increase
	2006			2005			(Decrease)
	(In thousands)
Revenue	$	263,228		$	232,587			13	%
Operating expense		96,631			76,512			26	%
Gross profit	$	166,597		$	156,075			7	%
Gross margin		63	%		67	%		(4	)%

During the year ended December 31, 2006, international rental revenue and gross profit increased, compared to the year ended December 31, 2005, primarily due to increased rental activity in Venezuela, Mexico, Brazil and Argentina. Gross margin decreased primarily due to increased labor costs in Argentina of approximately $2.2 million and higher repair and maintenance costs in Venezuela, Brazil and Mexico. Additionally, approximately $9.3 million of billings related to the Cawthorne Channel Project in 2006 were not recognized due to the local unrest and uncertainty about when the project’s operations will go back on-line (see further discussion in Note 19 of the Notes to the Consolidated Financial Statements included in Item 15 of this Form 10-K).

Parts, Service and Used Equipment

	Years Ended December 31,						Increase
	2006			2005			(Decrease)
	(In thousands)
Revenue	$	224,810		$	225,636			—
Operating expense		183,965			169,168			9	%
Gross profit	$	40,845		$	56,468			(28	)%
Gross margin		18	%		25	%		(7	)%

Our parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. Parts, service and used equipment revenue for the year ended December 31, 2006 were slightly lower than the year ended December 31, 2005 primarily due to a decrease in used rental equipment sales, partially offset by an increase in base parts and service revenue. For the year ended December 31, 2006, parts and service revenue was $179.0 million with a gross margin of 24%, compared to $152.4 million and 26%, respectively, for the year ended December 31, 2005. Used rental equipment and installation sales revenue for the year ended December 31, 2006 was $45.8 million with a gross margin of (4)%, compared to $73.2 million with a 22% gross margin for the year ended December 31, 2005. Gross margin for the year ended December 31, 2006 decreased due to lower margins on base parts and service sales in the U.S. and cost overruns on installation jobs in 2006. Used rental equipment and installation gross margin was negatively impacted by approximately $6.0 million of cost overruns on installation jobs in 2006. In 2005, used rental equipment revenue included a $20.3 million sale of a gas plant in Madisonville, Texas at a margin of 25%. Our used rental equipment and installation sales revenue and gross margins vary significantly from period to period and are dependent on the sale of used rental equipment, the exercise of purchase options on rental equipment by customers and installation sales associated with thestart-up of new projects by customers.

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Compression and Accessory Fabrication

	Years Ended December 31,						Increase
	2006			2005			(Decrease)
	(In thousands)
Revenue	$	303,205		$	179,954			68	%
Operating Expense		249,910			156,414			60	%
Gross Profit	$	53,295		$	23,540			126	%
Gross Margin		18	%		13	%		5	%

For the year ended December 31, 2006, compression and accessory fabrication revenue, gross profit and gross margin increased primarily due to improved market conditions that led to higher sales levels, better pricing and an improvement in operating efficiencies. As of December 31, 2006, we had compression and accessory fabrication backlog of approximately $325.1 million compared to $85.4 million at December 31, 2005.

Production and Processing Equipment Fabrication

	Years Ended December 31,						Increase
	2006			2005			(Decrease)
	(In thousands)
Revenue	$	429,697		$	360,267			19	%
Operating expense		366,590			325,924			12	%
Gross profit	$	63,107		$	34,343			84	%
Gross margin		15	%		10	%		5	%

Production and processing equipment fabrication revenue for the year ended December 31, 2006 was greater than for the year ended December 31, 2005, primarily due to an improvement in market conditions that led to an increase in awarded sales, improved pricing and an improvement in operating efficiencies. Gross margins improved due to improved market conditions and poor performance on a few jobs during 2005. As of December 31, 2006, we had a production and processing equipment fabrication backlog of $482.5 million compared to $287.7 million at December 31, 2005, including Belleli’s backlog of $414.0 million and $237.0 million at December 31, 2006 and 2005, respectively.

Belleli’s revenue and gross profit increased for the year ended December 31, 2006 compared to 2005 due to improved market conditions. During the year ended December 31, 2006, Belleli’s revenue increased $76.2 million to $254.9 million and gross profit increased $17.1 million to $27.9 million compared to the year ended December 31, 2005.

Equity in Income of Non-Consolidated Affiliates

Equity in income of non-consolidated affiliates decreased by $2.1 million to $19.4 million during the year ended December 31, 2006, from $21.5 million during the year ended December 31, 2005. This decrease is primarily due to reduced operating results for the Simco joint venture caused by increased operating costs in 2006.

Gain on sale of business and other income

Gain on sale of business and other income for the year ended December 31, 2006 increased to $46.0 million, compared to $4.6 million for the year ended December 31, 2005. The increase was primarily due to a pre-tax gain of $28.4 million on the sale of our U.S. amine treating business in the first quarter of 2006 and an $8.0 million pre-tax gain on the sale of assets used in our fabrication facility in Canada during the second quarter of 2006.

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Expenses

Selling, general and administrative expense (“SG&A”) in 2006 was $204.2 million compared to $182.2 million in 2005. The increase in SG&A expense for the year was due primarily to higher compensation expenses of approximately $16.1 million, including the impact of our adoption of SFAS 123(R) and other costs associated with the increase in business activity. SG&A expenses as a percentage of revenues and other income for the year ended December 31, 2006 decreased to 12% from 13% in the prior year. As a percentage of revenues and other income, SG&A expense decreased due to our efforts to manage SG&A costs while achieving an increased level of business.

Depreciation and amortization expense for 2006 was $181.4 million, compared to $182.7 million in 2005. Depreciation for the year ended December 31, 2005 included a write-off of $2.5 million of unamortized debt issuance costs related to the partial redemption and repayment of our 2001A compression equipment lease obligations.

Interest expense for the year ended December 31, 2006 decreased $18.9 million to $118.0 million, from the same period in the prior year. The decrease in interest expense was primarily due to a decrease in outstanding debt that was primarily due to our August 2005 public offering of 13.2 million shares of common stock that resulted in approximately $179.1 million of net proceeds that were used to redeem $167.0 million in indebtedness and repay $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations during September 2005. In addition, our overall effective interest rate on outstanding debt decreased to 8.2% from 8.6% during the year ended December 31, 2006 and 2005, respectively. This decrease in the effective interest rate was primarily due to the March 2006 redemption of our 11% Zero Coupon Subordinated Notes using proceeds from our public offering of $150 million 7.5% Senior Notes due 2013 and borrowings under our bank credit facility.

Foreign currency translation for the year ended December 31, 2006 was a gain of $4.3 million, compared to a loss of $7.9 million for the year ended December 31, 2005. The increase in foreign exchange gain is primarily due to the strengthening of the Euro against the U.S. Dollar for the year ended December 31, 2006 as compared to the strengthening of the U.S. Dollar against the Euro for the year ended December 31, 2005. The impact of foreign currency exchange on our statements of operations will depend on the amount of our net assets and liability positions exposed to currency fluctuations in future periods.

The following table summarizes the exchange gains and losses we recorded for assets exposed to currency translation (in thousands):

	Year Ended
	December 31,
	2006			2005
Italy	$	5,102		$	(10,388	)
Argentina		(1,050	)		388
Venezuela		587			3,501
Canada		(1,074	)		(1,705	)
All other countries		752			314
Exchange gain (loss)	$	4,317		$	(7,890	)

Other expense for the year ended December 31, 2006 increased to $1.2 million, compared to $0.5 million for the year ended December 31, 2005. We recorded a $1.2 million charge to other expense in the second quarter of 2006 related to the write-down of a pre-acquisition receivable for Belleli to our estimated net realizable value.

Debt extinguishment costs for the year ended December 31, 2006 were $5.9 million as a result of the call premium paid in connection with the redemption of our 11% Zero Coupon Subordinated Notes due March 31, 2007. Debt extinguishment costs for the year ended December 31, 2005 were $7.3 million as a result of the call premium paid in connection with the partial redemption and repayment of the 2001A compression equipment lease obligations in September 2005.

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Income Taxes

The provision for income taxes increased $1.1 million, to $28.8 million for the year ended December 31, 2006 from $27.7 million for the year ended December 31, 2005. Our effective income tax rates during the year ended December 31, 2006 and December 31, 2005 were 25.1% and (293.8%), respectively. The change in the effective tax rate was primarily due to the following factors: (1) the reversal of $36.2 million of valuation allowance during 2006, primarily due to the usage of net operating loss and capital loss carryforwards in the U.S. that previously had a valuation allowance, (2) the impact of change in loss jurisdictions and (3) the inclusion in the year ended December 31, 2005 of the reversal of $4.3 million of tax issues based reserves related to resolved Canadian, Nigeria and Venezuela tax liabilities. The reserves were released during 2005 because we no longer believe that it is probable that these liabilities will be incurred or the statute of limitations has expired. Our tax provision for 2006 includes approximately $3.0 million in deferred tax expense related to the enactment of the Texas Margin tax.

Due to our income from the results of U.S. operations in 2006 and our expectations for income in 2007 and future years and in consideration of the timing of the reversal of deductions taken for tax in advance of book (“temporary differences”), during the fourth quarter of 2006, we reached the conclusion that it is more likely than not that our net deferred tax assets in the U.S. would be realized and reversed a $10.2 million valuation allowance that had been recorded in prior years. Previously, because of cumulative tax losses in the U.S., we were not able to reach the “more likely than not” criteria of SFAS 109 and had recorded a valuation allowance on our net U.S. deferred tax assets. We have recorded valuation allowances for certain deferred tax assets that are not likely to be realized. If we are required to record and/or release additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate.

Cumulative Effect of Accounting Changes, Net of Tax

On January 1, 2006, we recorded the cumulative effect of a change in accounting related to our adoption of SFAS 123(R) of $0.4 million which relates to the requirement to estimate forfeitures on restricted stock awards.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Summary

For the year ended December 31, 2005, revenue increased to $1,375.6 million over 2004 revenue of $1,188.6 million primarily due to improved market conditions. Net loss for the year ended December 31, 2005 was $38.0 million, compared with a net loss of $44.0 million in 2004. Net loss in 2005 included $7.3 million in debt extinguishment costs and $2.5 million related to write-off of deferred financing costs in Depreciation and amortization.

Summary of Business Line Results

U.S. Rentals

	Years Ended December 31,						Increase
	2005			2004			(Decrease)
	(In thousands)
Revenue	$	351,128		$	341,570			3	%
Operating expense		139,465			144,580			(4	)%
Gross profit	$	211,663		$	196,990			7	%
Gross margin		60	%		58	%		2	%

U.S. rental revenue increased during the year ended December 31, 2005, compared to the year ended December 31, 2004, due primarily to improvement in market conditions that has led to an improvement in pricing. Gross profit and gross margin for the year ended December 31, 2005 increased compared to the year

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ended December 31, 2004, primarily due to improved pricing in 2005 and our efforts to reduce fleet maintenance and repair expenses. During the second half of 2005, we converted one of our facilities to repair and overhaul approximately 200,000 horsepower of idle compression equipment over the next two years. We incurred repair expenses in connection with this program that decreased our gross margin by approximately 1% for the year ended December 31, 2005.

International Rentals

	Years Ended December 31,						Increase
	2005			2004			(Decrease)
	(In thousands)
Revenue	$	232,587		$	214,598			8	%
Operating expense		76,512			63,953			20	%
Gross profit	$	156,075		$	150,645			4	%
Gross margin		67	%		70	%		(3	)%

During the year ended December 31, 2005, international rental revenue and gross profit increased, compared to the year ended December 31, 2004, due primarily to new rental projects that came on-line in 2005. Gross margin was negatively impacted by approximately 1% due to lower margin projects in Nigeria and by approximately 2% due to an increase in maintenance and repair costs in Argentina. Our Argentine operations have experienced an increase in labor costs due to pressures from unions for increased compensation for workers.

Parts, Service and Used Equipment

	Years Ended December 31,						Increase
	2005			2004			(Decrease)
	(In thousands)
Revenue	$	225,636		$	180,321			25	%
Operating expense		169,168			135,929			24	%
Gross profit	$	56,468		$	44,392			27	%
Gross margin		25	%		25	%		—

Our parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. Parts, service and used equipment revenue for the year ended December 31, 2005 were higher than the year ended December 31, 2004 primarily due to improved business conditions and an increase in used rental equipment and installation sales. For the year ended December 31, 2005, parts and service revenue was $152.4 million with a gross margin of 26%, compared to $139.2 million and 24%, respectively, for the year ended December 31, 2004. Used rental equipment and installation sales revenue for the year ended December 31, 2005 was $73.2 million with a gross margin of 22%, compared to $41.1 million with a 27% gross margin for the year ended December 31, 2004. In 2005, we sold used rental equipment related to a gas plant in Madisonville, Texas for $20.3 million and a margin of 25%. Our used rental equipment and installation sales revenue and gross margins vary significantly from period to period and are dependent on the sale of used rental equipment, the exercise of purchase options on rental equipment by customers and installation sales associated with thestart-up of new projects by customers.

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Compression and Accessory Fabrication

	Years Ended December 31,						Increase
	2005			2004			(Decrease)
	(In thousands)
Revenue	$	179,954		$	158,629			13	%
Operating Expense		156,414			144,832			8	%
Gross Profit	$	23,540		$	13,797			71	%
Gross Margin		13	%		9	%		4	%

For the year ended December 31, 2005, compression and accessory fabrication revenue increased as a result of strong market conditions. Gross profit and gross margin increased primarily due to improved market conditions that led to improved pricing and due to our focus on improving operational efficiencies. As of December 31, 2005, we had compression and accessory fabrication backlog of approximately $85.4 million compared to $56.7 million at December 31, 2004.

Production and Processing Equipment Fabrication

	Years Ended December 31,						Increase
	2005			2004			(Decrease)
	(In thousands)
Revenue	$	360,267		$	270,284			33	%
Operating expense		325,924			242,251			35	%
Gross profit	$	34,343		$	28,033			23	%
Gross margin		10	%		10	%		—

Production and processing equipment fabrication revenue for the year ended December 31, 2005 was greater than for the year ended December 31, 2004, primarily due to our increased focus on fabrication sales and an improvement in market conditions. Production and processing equipment fabrication gross margin during the year ended December 31, 2005 was positively impacted by approximately $3.7 million, or 1%, due to the strengthening of the U.S. Dollar relative to the Euro. Margins were negatively impacted by approximately $4 million in cost overruns and late delivery penalties on a number of international jobs in the year ended December 31, 2005. As of December 31, 2005, we had a production and processing equipment fabrication backlog of $287.7 million compared to $234.2 million at December 31, 2004, including Belleli’s backlog of $237.0 million and $150.0 million at December 31, 2005 and 2004, respectively.

Equity in Income of Non-Consolidated Affiliates

Equity in income of non-consolidated affiliates increased by $1.7 million to $21.5 million during the year ended December 31, 2005, from $19.8 million during the year ended December 31, 2004. This increase is primarily due to improved operating results for the El Furrial and PIGAP II joint ventures.

Expenses

SG&A as a percentage of revenue for the year ended December 31, 2005 decreased to 13% from 15% in the prior year. As a percentage of revenue, SG&A expense decreased due to our efforts to manage SG&A costs while achieving an increased level of business. SG&A expense in 2005 was $182.2 million compared to $173.1 million in 2004. The increase in SG&A expense for the year was due primarily to higher compensation expenses, partially offset by reduced auditing and consulting expense relating to Sarbanes-Oxley.

Depreciation and amortization expense for 2005 was $182.7 million, compared to $175.3 million in 2004. The increase in depreciation and amortization was primarily due to net additions to property, plant and equipment placed in service during the year and approximately $2.5 million in additional amortization expense related to unamortized debt issuance costs from our partial redemption of the 2001A compression equipment lease obligations in September 2005. Depreciation and amortization expense for the year ended December 31,

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2004 included $1.7 million in amortization to write-off deferred financing costs associated with the June 2004 refinancing of our 2000A compression equipment obligations and early payoff of a portion of our 2000B compression equipment lease obligations. There were no significant asset impairments in 2005 or 2004.

Interest expense for the year ended December 31, 2005 decreased $10.1 million to $136.9 million, from the same period in the prior year. The decrease in interest expense was primarily due to a decrease in our average debt balance, partially offset by an increase in the overall effective interest rate on outstanding debt to 8.6% from 8.4% during the year ended December 31, 2005 and 2004, respectively.

Foreign currency translation for the year ended December 31, 2005 was a loss of $7.9 million, compared to a gain of $5.2 million for the year ended December 31, 2004. For the year ended December 31, 2005, foreign currency translation included $12.2 million in translation losses related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt. For the year ended December 31, 2004, foreign currency translation included $5.5 million in translation gains related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt.

The following table summarizes the exchange gains and losses we recorded for assets exposed to currency translation (in thousands):

	Year Ended
	December 31,
	2005			2004
Italy	$	(10,388	)	$	4,170
Argentina		388			(624	)
Venezuela		3,501			1,165
Canada		(1,705	)		105
All other countries		314			406
Exchange gain (loss)	$	(7,890	)	$	5,222

At December 31, 2005 we had intercompany advances outstanding to our subsidiary in Italy of approximately $68.7 million which were denominated in U.S. dollars. The impact of the remeasurement of these advances on our statement of operations by our subsidiary will depend on the outstanding balance in future periods. The remeasurement of these advances in 2005 resulted in a translation loss of approximately $10.3 million compared to a $3.7 million gain for 2004.

In May 2003, Hanover reached an agreement to settle the securities class actions, ERISA class actions and the shareholder derivative actions previously filed against it. The terms of the settlement became final in March 2004 and provided for Hanover to: (1) make a cash payment of approximately $30 million to the securities settlement fund (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (2) issue 2.5 million shares of Hanover common stock, and (3) issue a contingent note with a principal amount of $6.7 million.

In April 2004, we issued the $6.7 million contingent note related to the securities settlement. The note was payable, together with accrued interest, on March 31, 2007 but was extinguished (with no money paid under it) under the terms of the note since our common stock traded above the average price of $12.25 per share for 15 consecutive trading days during the third quarter of 2004. As a result of the cancellation of the note in the third quarter of 2004, we reversed the note and the embedded derivative, which resulted in a $4.0 million reduction to the cost of the securities-related litigation.

Debt extinguishment costs for the year ended December 31, 2005 were $7.3 million as a result of the call premium paid in connection with the partial redemption and repayment of the 2001A compression equipment lease obligations in September 2005.

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Income Taxes

The provision for income taxes increased $2.9 million, to $27.7 million for the year ended December 31, 2005 from $24.8 million for the year ended December 31, 2004. The average effective income tax rates during the year ended December 31, 2005 and December 31, 2004 were (293.8%) and (84.5%), respectively. The change in rate was primarily due to the following factors: (1) decrease in book loss before tax during the year ended December 31, 2005, (2) release of $4.3 million of tax issues based reserves related to resolved Canadian, Nigerian, and Venezuelan tax liabilities during the year ended December 31, 2005, and (3) the relative weight of international income to U.S. income. The reserve was reversed because we no longer believe that these tax liabilities will be incurred.

As a result of continued operating losses, we were in a net deferred tax asset position (for U.S. income tax purposes). Due to our cumulative U.S. tax losses, we could not reach the conclusion at December 31, 2005 that it was “more likely than not” that certain of our U.S. deferred tax assets would be realized in the future and we recorded a valuation allowance on our net U.S. deferred tax asset position. In addition, we have provided valuation allowances for certain international jurisdictions. If we are required to record additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially compared to the statutory rate.

Discontinued Operations

Income from discontinued operations decreased $7.1 million, to a net loss of $0.8 million during the year ended December 31, 2005, from income of $6.3 million during the year ended December 31, 2004. The decrease in income from discontinued operations was due to the dispositions that occurred in 2004.

During the fourth quarter of 2004, we sold the compression rental assets of our Canadian subsidiary, Hanover Canada Corporation, to Universal Compression Canada, a subsidiary of Universal Compression Holdings, Inc., for approximately $56.9 million. Additionally, in December 2004 we sold our ownership interest in CES for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interests of CES. During 2004, we recorded a $2.1 million gain (net of tax) related to the sale of Hanover Canada Corporation and CES.

During the fourth quarter of 2004, we sold an asset held for sale related to our discontinued power generation business for approximately $7.5 million and realized a gain of approximately $0.7 million. This asset was sold to a subsidiary of The Wood Group. The Wood Group owns 49.5% of the Simco/ Harwat Consortium, a joint venture gas compression project in Venezuela in which we hold a 35.5% ownership interest.

Leasing Transactions and Accounting Change for FIN 46

As of December 2006, we are the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (1) enabled us to affordably extend the duration of our financing arrangements and (2) reduced our cost of capital.

In August 2001 and in connection with the acquisition of Production Operators Corporation (“POC”), we completed two sale leaseback transactions involving certain compression equipment. Under one sale leaseback transaction, we received $309.3 million in proceeds from the sale of certain compression equipment. Under the second sale leaseback transaction, we received $257.8 million in proceeds from the sale of additional compression equipment. Under the first transaction, the equipment was sold and leased back by us for a seven-year period and will continue to be deployed by us in the normal course of our business. The agreement originally called for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $0.2 million. Due to the partial redemption in September 2005, as discussed below, semi-annual rental payments are now approximately $5.7 million in addition to quarterly rental payments of

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approximately $0.1 million. Under the second transaction, the equipment was sold and leased back by us for a ten-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $0.2 million. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. We incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. During February 2005, we repaid our 2000B compression equipment lease obligations using borrowings from our bank credit facility.

As of December 31, 2006, the remaining compression assets owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $340.2 million, including improvements made to these assets after the sale leaseback transactions.

The following table summarizes, as of December 31, 2006, the residual value guarantee, lease termination date and minority interest obligations for our equipment leases (in thousands):

	Residual				Minority
	Value		Lease		Interest
Lease	Guarantee		Termination Date		Obligation
2001A compression equipment lease	$	102,853		September 2008	$	4,123
2001B compression equipment lease		175,000		September 2011		7,750
	$	277,853			$	11,873

The agreements in connection with the compression equipment lease obligations contain certain financial covenants and limitations which restrict us with respect to, among other things, indebtedness, liens, leases and sale of assets. We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting in is equal to or greater than the value of the equipment that is being substituted out. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to under each lease.

The minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2006, the yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2006, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

Liquidity and Capital Resources

Our unrestricted cash balance amounted to $73.3 million at December 31, 2006 compared to $48.2 million at December 31, 2005. Working capital decreased to $326.6 million at December 31, 2006 from $351.7 million at December 31, 2005. The decrease in working capital was primarily the result of an increase in advanced billings and billings on uncompleted contracts in excess of costs and estimated earnings, partially offset by an increase in accounts receivable and inventory, which resulted from an improvement in market conditions that has led to increased activity.

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Our cash flow from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flow, are summarized in the table below (dollars in thousands):

For the Year Ended December 31:	2006			2005
Net cash provided by (used in) continuing operations:
Operating activities	$	209,535		$	122,870
Investing activities		(168,168	)		(105,247	)
Financing activities		(18,134	)		(6,890	)
Effect of exchange rate changes on cash and cash equivalents		2,266			(1,413	)
Discontinued operations		(446	)		837
Net change in cash and cash equivalents	$	25,053		$	10,157

The increase in cash provided by operating activities for the year ended December 31, 2006 as compared to the year ended December 31, 2005 was primarily due to cash generated from improved operating performance. The increase was partially offset by the payment of $86.1 million of accreted interest from August 31, 2001 to March 31, 2006 on our 11% Zero Coupon Subordinated Notes, which were redeemed in the second quarter of 2006. The accreted interest was previously included in the outstanding balance of our 11% Zero Coupon Subordinated Notes.

The increase in cash used in investing activities during the year ended December 31, 2006 as compared to the year ended December 31, 2005 was primarily attributable to increased net capital expenditures for the year ended December 31, 2006. The increase in cash used in investing activities was partially offset by proceeds received from the sales of our amine treating business in the first quarter of 2006 and our Canadian fabrication assets in the second quarter of 2006.

The increase in cash used in financing activities during the year ended December 31, 2006 as compared to the year ended December 31, 2005 was primarily due to the use of cash flow from operations to pay down our bank credit facility.

We may carry out new customer projects through rental fleet additions and other related capital expenditures. We generally invest funds necessary to make these rental fleet additions when our idle equipment cannot economically fulfill a project’s requirements and the new equipment expenditure is matched with long-term contracts whose expected economic terms exceed our return on capital targets. We currently plan to spend approximately $325 million to $375 million on net capital expenditures during 2007 including (1) rental equipment fleet additions and (2) approximately $70 million to $80 million on equipment maintenance capital. Projected maintenance capital for 2007 includes the cost of our program to refurbish a minimum of 200,000 horsepower of idle U.S. compression equipment.

We have not paid any cash dividends on our common stock since our formation and do not anticipate paying such dividends in the foreseeable future. The Board of Directors anticipates that all cash flow generated from operations in the foreseeable future will be retained and used to pay down debt or develop and expand our business. Any future determinations to pay cash dividends on our common stock will be at the discretion of the Board of Directors and will be dependent upon our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by the Board of Directors. Our bank credit facility, with JPMorgan Chase Bank, N.A. as agent, prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock.

Historically, we have funded our capital requirements with a combination of internally generated cash flow, borrowings under a bank credit facility, sale leaseback transactions, raising additional equity and issuing long-term debt.

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The following summarizes our cash contractual obligations at December 31, 2006 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

Cash Contractual Obligations:	Total		2007		2008-2009		2010-2011		Thereafter
	(In thousands)
Long term Debt(1)
4.75% convertible senior notes due 2008	$	192,000	$	—	$	192,000	$	—	$	—
4.75% convertible senior notes due 2014		143,750		—		—		—		143,750
7.25% convertible junior subordinated notes due 2029(2)		84,803		18,803		—		—		66,000
8.625% senior notes due 2010		200,000		—		—		200,000		—
7.5% senior notes due 2013		150,000		—		—		—		150,000
9.0% senior notes due 2014		200,000		—		—		—		200,000
Bank credit facility due 2010		20,000		—		—		20,000		—
Other long-term debt		677		455		94		112		16
2001A equipment lease notes, due 2008		133,000		—		133,000		—		—
2001B equipment lease notes, due 2011		250,000		—		—		250,000		—
Total long-term debt		1,374,230		19,258		325,094		470,112		559,766
Interest on long-term debt(3)		594,016		108,246		184,391		142,538		158,841
Minority interest obligations(1)(4)		11,873		—		4,123		7,750		—
Purchase commitments		385,274		384,103		1,171		—		—
Facilities and other equipment operating leases		6,370		3,463		2,420		487		—
Total contractual cash obligations	$	2,371,763	$	515,070	$	517,199	$	620,887	$	718,607

(1)	For more information on our long-term debt and minority interest obligations, see Notes 11 and 12 to the Notes to Consolidated Financial Statements in Item 15 of thisForm 10-K.
(2)	In December 2006, we announced an irrevocable call for redemption in the first quarter of 2007 of a portion of our 7.25% Convertible Junior Subordinated Notes. These notes are owned by Hanover Compressor Capital Trust which issued a call to redeem its TIDES Preferred Securities and its TIDES Common Securities.
(3)	Interest amounts calculated using interest rates in effect as of December 31, 2006, including the effect of interest rate swaps.
(4)	Represents third party equity interest of lease equipment trusts that was required to be consolidated into our financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Leasing Transactions and Accounting Change for FIN 46” in Item 7 of thisForm 10-K.

As part of our business, we are a party to various financial guarantees, performance guarantees and other contractual commitments to extend guarantees of credit and other assistance to various subsidiaries, investees and other third parties. To varying degrees, these guarantees involve elements of performance and credit risk, which are not included on our consolidated balance sheet or reflected in the table above. The possibility of our having to honor our contingencies is largely dependent upon future operations of various subsidiaries, investees and other third parties, or the occurrence of certain future events. We would record a reserve for these guarantees if events occurred that required that one be established. See Note 19 to the Notes to Consolidated Financial Statements in Item 15 of thisForm 10-K.

Debt Refinancing/Repayment.  In June 2003, we filed a shelf registration statement with the SEC pursuant to which we registered delayed public offerings of equity, debt or other securities in an aggregate amount not to exceed $700 million. The SEC declared the shelf registration statement effective on November 19, 2003.

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In December 2003, we issued under our shelf registration statement $200.0 million aggregate principal amount of our 8.625% Senior Notes due 2010, which are fully and unconditionally guaranteed on a senior subordinated basis by HCLP. The proceeds from this offering were used to repay the outstanding indebtedness and minority interest obligations of $194.0 million and $6.0 million, respectively, under our 1999A equipment lease that was to expire in June 2004.

Also in December 2003, we issued under our shelf registration statement $143.8 million aggregate principal amount of our 4.75% Convertible Senior Notes due 2014. We may redeem these convertible notes beginning in 2011 under certain circumstances. The convertible notes are convertible into shares of our common stock at an initial conversion rate of 66.6667 shares of our common stock per $1,000 principal amount of the convertible notes (subject to adjustment in certain events) at any time prior to the stated maturity of the convertible notes or the redemption or repurchase of the convertible notes by us. The proceeds from this offering were used to repay a portion of the outstanding indebtedness under our bank credit facility.

In June 2004, we issued under our shelf registration statement $200.0 million aggregate principal amount of our 9.0% Senior Notes due 2014, which are fully and unconditionally guaranteed on a senior subordinated basis by HCLP. The net proceeds from this offering and available cash were used to repay the outstanding indebtedness and minority interest obligations of $193.6 million and $6.4 million, respectively, under our 2000A equipment lease that was to expire in March 2005.

On August 15, 2005, we completed a public offering of 13,154,385 shares of common stock under our shelf registration that resulted in approximately $179.1 million of net proceeds for Hanover. The net proceeds from this offering were used to redeem $167.0 million in indebtedness and repay $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations during September 2005.

In connection with the redemption and repayment of a portion of our 2001A compression equipment lease obligations, we expensed $7.3 million related to the call premium and $2.5 million related to unamortized debt issuance costs. The $7.3 million of costs related to the call premium have been classified as debt extinguishment costs and the $2.5 million related to unamortized debt issuance costs have been classified as depreciation and amortization expense on the accompanying Consolidated Statements of Operations. During February 2005, we repaid our 2000B compression equipment lease obligations using borrowings from our bank credit facility.

In March 2006, we completed a public offering of $150 million aggregate principal amount of 7.5% Senior Notes due 2013. We used the net proceeds from the offering of $146.6 million, together with borrowings under our bank credit facility, to redeem our 11% Zero Coupon Subordinated Notes due March 31, 2007. In connection with the redemption, we expensed $5.9 million related to the call premium. We paid approximately $242 million to redeem our 11% Zero Coupon Subordinated Notes, including the call premium. The offering and sale of the 7.5% Senior Notes due 2013 were made pursuant to an automatic shelf registration statement onForm S-3 filed with the Securities and Exchange Commission. We may redeem up to 35% of the 7.5% Senior Notes due 2013 using the proceeds of certain equity offerings completed before April 15, 2009 at a redemption price of 107.5% of the principal amount, plus accrued and unpaid interest to the redemption date. In addition, we may redeem some or all of the 7.5% Senior Notes due 2013 at any time on or after April 15, 2010 at certain redemption prices together with accrued interest, if any, to the date of redemption.

In December 2006 and February 2007, we announced irrevocable calls for redemption in the first quarter of 2007 of a portion of our 7.25% Convertible Junior Subordinated Notes due 2029 (“Jr. TIDES Notes”). All of the Jr. TIDES Notes are owned by Hanover Compressor Capital Trust, a Delaware business trust (the “Trust”) and the Trust is required to use the proceeds to redeem its 7.25% Convertible Preferred Securities (“TIDES Preferred Securities”) and its 7.25% Convertible Common Securities (“TIDES Common Securities”). Hanover owns all of the TIDES Common Securities. Of the $49 million of TIDES Preferred Securities called in the aggregate, $1.4 million was converted in December 2006 into 0.1 million shares of our common stock and the remainder has been or will be converted or redeemed in the first quarter of 2007.

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Bank Credit Facility.  In November 2005, we entered into a $450 million bank credit facility having a maturity date of November 21, 2010. Our prior $350 million bank credit facility that was scheduled to mature in December 2006 was terminated upon closing of the new facility. The new facility also provides for an incremental term loan facility of up to $300 million. The incremental term loan was not syndicated with the credit facility. The new agreement prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock. Borrowings under the new facility are secured by substantially all of our unencumbered personal property and real property assets. In addition, all of the capital stock of U.S. subsidiaries and 66% of the capital stock of the first tier international subsidiaries has been pledged to secure the obligations under the new credit facility. Up to $75 million of the credit facility can be borrowed in loans denominated in Euros. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets.

Our bank credit facility provides for a $450 million revolving credit in which U.S. dollar-denominated advances bear interest at our option, at (1) the greater of the Administrative Agent’s prime rate or the federal funds effective rate plus an applicable margin (“ABR”), or (2) the eurodollar rate (“LIBOR”), in each case plus an applicable margin ranging from 0.375% to 1.5%, with respect to ABR loans, and 1.375% to 2.5%, with respect to LIBOR loans, in each case depending on our consolidated leverage ratio. Euro-denominated advances bear interest at the eurocurrency rate, plus an applicable margin ranging from 1.375% to 2.5%, depending on our consolidated leverage ratio. A commitment fee ranging from 0.375% to 0.5%, depending on our consolidated leverage ratio, times the average daily amount of the available commitment under the bank credit facility is payable quarterly to the lenders participating in the bank credit facility.

As of December 31, 2006, we were in compliance with all covenants and other requirements set forth in our bank credit facility, the indentures and agreements related to our compression equipment lease obligations and the indentures and agreements relating to our other long-term debt. While there is no assurance, we believe based on our current projections for 2007 that we will be in compliance with the financial covenants in these agreements. A default under our bank credit facility or a default under certain of the various indentures and agreements would in some situations trigger cross-default provisions under our bank credit facilities or the indentures and agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

We expect that our bank credit facility and cash flow from operations will provide us adequate capital resources to fund our estimated level of capital expenditures for 2007. As of December 31, 2006, we had $20.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facilities bore interest at a weighted average rate of 6.9% and 6.1% at December 31, 2006 and 2005, respectively. As of December 31, 2006, we also had approximately $207.3 million in letters of credit outstanding under our new bank credit facility. Our new bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $450 million credit limit, plus, in addition to certain other indebtedness, an additional (1) $50 million in unsecured indebtedness, (2) $100 million of indebtedness of international subsidiaries and (3) $35 million of secured purchase money indebtedness. Additional borrowings of up to $222.7 million were available under that facility as of December 31, 2006.

While all of the agreements related to our long-term debt do not contain the same financial covenants, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 permit us at a minimum, (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility (which is $50 million less than the full capacity under that facility), plus an additional $75 million in unsecured indebtedness, (2) to incur additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements governing such obligations), or our “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereof and (3) to

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incur certain purchase money and similar obligations. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of December 31, 2006, Hanover’s coverage ratio exceeded 2.25 to 1.0, and therefore as of such date it would allow us to incur a certain amount of additional indebtedness in addition to our bank credit facility and the additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness allowed by such bank credit facility.

Credit Ratings.  As of February 20, 2007, our credit ratings as assigned by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“Standard & Poor’s”) were:

		Standard &
	Moody’s	Poor’s
Outlook	Positive	Positive
Senior implied rating	B1	BB−
Liquidity Rating	SGL-3	—
2001A equipment lease notes, interest at 8.5%, due September 2008	Ba3, LGD 3	B+
2001B equipment lease notes, interest at 8.8%, due September 2011	Ba3, LGD 3	B+
4.75% convertible senior notes due 2008	B3, LGD 5	B
4.75% convertible senior notes due 2014	B3, LGD 5	B
8.625% senior notes due 2010	B2, LGD 4	B
9.0% senior notes due 2014	B2, LGD 4	B
7.5% senior notes due 2013	B2, LGD 4	B
7.25% convertible junior subordinated notes due 2029*	B3, LGD 6	B−

* Rating is on the TIDES Preferred Securities issued by Hanover Compressor Capital Trust, a trust that we sponsored.

We do not have any credit rating downgrade provisions in our debt agreements or the agreements related to our compression equipment lease obligations that would accelerate their maturity dates. However, a downgrade in our credit rating could materially and adversely affect our ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. Should this occur, we might seek alternative sources of funding. In addition, our significant leverage puts us at greater risk of default under one or more of our existing debt agreements if we experience an adverse change to our financial condition or results of operations. Our ability to reduce our leverage depends upon market and economic conditions, as well as our ability to execute liquidity-enhancing transactions such as sales of non-core assets or our equity securities.

Derivative Financial Instruments.  We use derivative financial instruments from time to time to minimize the risksand/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt and leasing obligations. Our primary objective is to reduce our overall cost of borrowing by managing the fixed and floating interest rate mix of our debt portfolio. We do not use derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

For derivative instruments designated as fair value hedges, the gain or loss is recognized in earnings in the period of change together with the gain or loss on the hedged item attributable to the risk being hedged. For derivative instruments designated as cash flow hedges, the effective portion of the derivative gain or loss is included in other comprehensive income, but not reflected in our consolidated statement of operations until the corresponding hedged transaction is settled. The ineffective portion is reported in earnings immediately.

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In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk of changes in fair value of our 8.625% Senior Notes due 2010 resulting from changes in interest rates. These interest rate swaps, under which we receive fixed payments and make floating payments, result in the conversion of the hedged obligation into floating rate debt. The following table summarizes, by individual hedge instrument, these interest rate swaps as of December 31, 2006 (dollars in thousands):

							Fair Value of
		Fixed Rate					Swap at
		to be			Notional		December 31,
Floating Rate to be Paid	Maturity Date	Received			Amount		2006
Six Month LIBOR + 4.72%	December 15, 2010		8.625	%	$	100,000	$	(4,495	)
Six Month LIBOR + 4.64%	December 15, 2010		8.625	%	$	100,000	$	(4,237	)

As of December 31, 2006, a total of approximately $2.3 million in accrued liabilities, $6.4 million in long-term liabilities and an $8.7 million reduction of long-term debt was recorded with respect to the fair value adjustment related to these two swaps. We estimate the effective floating rate, that is determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of December 31, 2006 we estimated that the effective rate for the six-month period ending in June 2007 would be approximately 9.8%.

The counterparties to our interest rate swap agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such financial institutions’ non-performance, if it occurred, could have a material adverse effect on us.

Off-Balance Sheet Arrangements

We have agreed to guarantee obligations of indebtedness of the Simco/Harwat Consortium and of El Furrial, each of which are joint ventures that we acquired interests in pursuant to our acquisition of POC. Each of these joint ventures is a non-consolidated affiliate of Hanover and our guarantee obligations are not recorded on our accompanying balance sheet. Our guarantee obligation is a percentage of the total debt of the non-consolidated affiliate equal to our ownership percentage in such affiliate. We have issued the following guarantees of the indebtedness of our non-consolidated affiliates (in thousands):

			Maximum Potential
			Undiscounted
			Payments as of
			December 31,
	Term		2006
Simco/Harwat Consortium		2009	$	3,728
El Furrial		2013	$	28,015

Our obligation to perform under the guarantees arises only in the event that our non-consolidated affiliate defaults under the agreements governing the indebtedness. We currently have no reason to believe that either of these non-consolidated affiliates will default on their indebtedness. For more information on these off-balance sheet arrangements, see Note 8 to the Notes to Consolidated Financial Statements in Item 15 of thisForm 10-K.

New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position150-3 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash

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flow. However, we may be required to classify as debt approximately $12.0 million in sale leaseback obligations that, as of December 31, 2006, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2006, the yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2006, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). This standard provides clarification that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges. Additionally, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees,and generally would require instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R) did not have a significant effect on our financial position or cash flows, but did impact our results of operations. See Note 16 for a discussion of the impact of the adoption of SFAS 123(R).

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on our consolidated results of operations, cash flows or financial position.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to newly adopted accounting principles, unless impracticable. Corrections of errors will continue to be reported under SFAS 154 by restating prior periods as of the beginning of the first period presented. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on our consolidated results of operations, cash flows or financial position.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”).

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SFAS 155 (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We are currently evaluating the provisions of SFAS 155 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation is effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Differences between the amounts recognized in balance sheet prior to adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings (accumulated deficit). We are currently evaluating the provisions of FIN 48 and currently believe the adoption will result in a reduction to stockholders’ equity of an amount between $1.5 million and $6.0 million.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate and foreign currency risk. Hanover and its subsidiaries periodically enter into interest rate swaps to manage our exposure to fluctuations in interest rates. At December 31, 2006, the fair market value of our interest rate swaps, excluding the portion attributable to and included in accrued interest, was a net liability of approximately $8.7 million, of which $2.3 million was recorded in accrued liabilities and $6.4 million in other long-term liabilities.

At December 31, 2006 we were a party to two interest rate swaps to convert fixed rate debt to floating rate debt as follows (dollars in thousands):

								Fair Value of
			Fixed Rate					Swap at
			to be			Notional		December 31,
Floating Rate to be Paid	Maturity Date		Received			Amount		2006
Six Month LIBOR + 4.72%		December 15, 2010		8.625	%	$	100,000	$	(4,495	)
Six Month LIBOR + 4.64%		December 15, 2010		8.625	%	$	100,000	$	(4,237	)

At December 31, 2006, due to these two swaps, we were exposed to variable interest rates, which fluctuate with market interest rates, on $200.0 million in notional debt. Assuming a hypothetical 10% increase in the variable rates from those in effect at December 31, 2006, the increase in our annual interest expense with respect to such swaps would be approximately $2.0 million.

At December 31, 2006, we were exposed to variable rental rates, which fluctuate with market interest rate, on a portion of the equipment leases we entered into in 2001. Assuming a hypothetical 10% increase in the variable rates from those in effect at year end, the increase in annual interest expense on the equipment lease notes would be approximately $0.2 million.

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We are also exposed to interest rate risk on borrowings under our floating rate bank credit facility. At December 31, 2006, $20.0 million was outstanding bearing interest at a weighted average effective rate of 6.9% per annum. Assuming a hypothetical 10% increase in the weighted average interest rate from those in effect at December 31, 2006, the increase in annual interest expense for advances under this facility would be approximately $0.1 million.

We have significant operations that expose us to currency risk in Argentina and Venezuela. To mitigate that risk, the majority of our existing contracts provide that we receive payment in, or based on, U.S. dollars rather than Argentine pesos and Venezuelan bolivars, thus reducing our exposure to fluctuations in their value.

In February 2004 and March 2005, the Venezuelan government devalued the currency to 1,920 bolivars and 2,148 bolivars, respectively, for each U.S. dollar. The impact of the devaluation on our results will depend upon the amount of our assets (primarily working capital and deferred taxes) exposed to currency fluctuation in Venezuela in future periods.

For the year ended December 31, 2006, our Argentine operations represented approximately 5% of our revenues and other income and 7% of our gross profit. For the year ended December 31, 2006, our Venezuelan operations represented approximately 8% of our revenues and other income and 12% of our gross profit. At December 31, 2006, we had approximately $18.1 million and $20.2 million in accounts receivable related to our Argentine and Venezuelan operations.

Recently, laws and regulations in Venezuela have been subject to frequent and significant changes. These changes have included currency controls, restrictions on repatriation of capital, expropriation and nationalization of certain firms and industries and changes to the tax laws. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. If exchange controls remain in place, or economic and political conditions in Venezuela deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income.

The economic situation in Argentina and Venezuela is subject to change. To the extent that the situation deteriorates, exchange controls continue in place and the value of the peso and bolivar against the dollar is reduced further, our results of operations in Argentina and Venezuela could be materially and adversely affected which could result in reductions in our net income.

The following table summarizes the exchange gains and losses we recorded for assets exposed to currency translation (in thousands):

	Year Ended
	December 31,
	2006			2005
Italy	$	5,102		$	(10,388	)
Argentina		(1,050	)		388
Venezuela		587			3,501
Canada		(1,074	)		(1,705	)
All other countries		752			314
Exchange gain (loss)	$	4,317		$	(7,890	)

The impact of foreign exchange on our statement of operations will depend on the amount of our net asset and liability positions exposed to currency fluctuations in future periods.

Item 8.   Financial Statements and Supplementary Data

The financial statements and supplementary information specified by this Item are presented following Item 15 of this report.

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Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A   Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934) as of December 31, 2006. Based on the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2006.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on the results of our evaluation under the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.   Other Information

On February 22, 2007, upon the Board of Director’s approval of the Company’s 2006 Financial Statements, the final amount of the cash bonuses payable to our executive officers for services performed during the year ended December 31, 2006 became effective. The following table sets forth the amount of the cash bonus to be paid to our highest paid executive officers. We expect the bonus payment to be made on or about March 9, 2007. The compensation reflected in the table below does not reflect all compensation and other perquisites paid to these executive officers during the year ended December 31, 2006. Such information

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will be included under the caption “Information Regarding Executive Compensation” in the definitive proxy statement for our 2007 Meeting of Stockholders.

			2006 Bonus
			Approved
			For Payment
Name	Position		in 2007
John E. Jackson		President and Chief Executive Officer; Director	$	800,000
Lee E. Beckelman		Senior Vice President and Chief Financial Officer	$	200,000
Brian A. Matusek		Senior Vice President — Western Hemisphere	$	215,000
Norman A. Mckay		Senior Vice President — Eastern Hemisphere	$	215,000
Steven W. Muck		Vice President — Global Human Resources & HSE	$	170,000
Gary M. Wilson		Senior Vice President, General Counsel and Secretary	$	215,000

PART III

Item 10.   Directors, Executive Officers and Corporate Governance

The information included or to be included in the Company’s definitive proxy statement for its 2007 Meeting of Stockholders under the captions “Nominees for Election as Directors,” “Director Qualifications and Nominations,” “Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference herein. Please see Item 1 of thisForm 10-K for identification of our executive officers and the information set forth below relating to our Board of Directors.

Hanover has adopted “P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct” (“Code of Ethics”) that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics is posted on the Company’s website athttp://www.hanover-co.com. Any changes to,and/or waivers granted, with respect to our Code of Ethics relating to our principal executive officer, principal financial officer, principal accounting officer, and other executive officers and directors of Hanover that we are required to disclose pursuant to applicable rules and regulations of the Securities and Exchange Commission, will be posted on our website. Upon request the Company will provide a copy of our Code of Ethics without charge. Such request can be made in writing to the Corporate Secretary at Hanover Compressor Company, 12001 North Houston Rosslyn, Houston, Texas 77086.

Information concerning the name, age, and background of the nominees for election to the Board of Directors is set forth below.

I. Jon Brumley,68, has served as a director of the Company since February 2002. Mr. Brumley is Chairman and director of Encore Acquisition Company, an independent energy company located in Fort Worth, Texas. Prior to founding Encore Acquisition Company in 1998, Mr. Brumley served as Chairman and Chief Executive Officer of MESA, Inc., which merged with Parker & Parsley in 1997 to become Pioneer Natural Resources Company. Mr. Brumley has spent over thirty years in the oil and gas industry, including having previously served as Chairman of XTO Energy Inc. (formerly Cross Timbers Oil Company) and President and Chief Executive Officer of Southland Royalty Company.

Ted Collins, Jr.,68, has served as a director of the Company since April 1992. Mr. Collins has been a private investor, primarily energy related, since June 2000. From January 1988 to July 2000, he was President of Collins & Ware, Inc., an independent oil and gas company. From July 1982 through December 1987, Mr. Collins served as President of Enron Oil & Gas Co. Mr. Collins also serves on the Board of Directors of Encore Acquisition Company and Energy Transfer Partners, LLC.

Margaret K. Dorman,43, has served as a director of the Company since February 2004. Ms. Dorman is Senior Vice President, Chief Financial Officer and Treasurer of Smith International, Inc., a position she has held since 1999. Ms. Dorman joined Smith International, Inc. in 1995 as the Director of Financial Planning and Reporting and, in 1998, was named Vice President, Controller and Assistant Treasurer.

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Robert R. Furgason,71, has served as a director of the Company since May 1995. In January 2005, Dr. Furgason assumed the role of Executive Director of the Harte Research Institute for Gulf of Mexico Studies at Texas A&M University — Corpus Christi after having served as the President of Texas A&M University — Corpus Christi since 1990. He was Vice Chancellor of Academic Affairs and Professor of Chemical Engineering at the University of Nebraska from 1984 to 1990 and previously held a series of faculty and administrative positions at various universities and has held positions with B.F. Goodrich Chemical Co., Escuela Politecnica Nacional Universidad, Quito, Ecuador, Martin-Marietta (Lockhead-Martin) and Phillips Petroleum. Dr. Furgason is the former President of the Accreditation Board for Engineering and Technology Board of Directors, serves on a number of other accreditation, policy and civic boards, and is a trustee of the Driscoll Hospital Foundation.

Victor E. Grijalva,68, has served as a director of the Company since February 2002 and served as Chairman of the Board from 2002 to May 2006. From August 2 to August 19, 2002, Mr. Grijalva also served as interim President and Chief Executive Officer of the Company. Mr. Grijalva began his career with Schlumberger in 1964 as a senior development engineer and, after a number of overseas assignments, served as President of Wireline and Testing in North America and Executive Vice President of Oilfield Services Worldwide before being appointed Vice Chairman of Schlumberger in 1998. Mr. Grijalva retired from Schlumberger on December 31, 2001. Mr. Grijalva is also a director of Transocean, Inc. and Dynegy, Inc.

Gordon T. Hall,47, has served as a director of the Company since March 2002 and Chairman of the Board since May 19, 2006. Prior to his election as a director, Mr. Hall was a Managing Director at Credit Suisse First Boston. While at Credit Suisse First Boston, Mr. Hall served as Senior Oil Field Services Analyst and Co-Head of the Global Energy Group. Mr. Hall joined the First Boston Corporation in 1987 as a technology analyst. Prior to joining First Boston Corporation, Mr. Hall was an engineer with Raytheon Corporation. Mr. Hall is also a director of Hydril Company, is a member of the Advisory Board for Legacy Partners Group LLC, and serves as a director of a privately held company and several non-profit organizations.

John E. Jackson,48, has been a director since July 2004 and has served as President and Chief Executive Officer of the Company since October 2004. Mr. Jackson joined the Company in January 2002 as Senior Vice President and Chief Financial Officer. Previously, Mr. Jackson was Vice President and Chief Financial Officer of Duke Energy Field Services, a joint venture of Duke Energy and ConocoPhillips and one of the nation’s largest producers and marketers of natural gas liquids. Mr. Jackson joined Duke Energy Field Services as Vice President and Controller in April 1999 and was named Chief Financial Officer in February 2001. Prior to joining Duke Energy Field Services, Mr. Jackson served in a variety of treasury, controller and accounting positions at Union Pacific Resources between June 1981 and April 1999.

Peter H. Kamin,45, was elected a director of the Company effective January 1, 2007. Mr. Kamin is aco-founder and Managing Partner of ValueAct Capital, an investment partnership that was formed in 2000. Prior to founding ValueAct Capital, Mr. Kamin founded and managed for eight years Peak Investment L.P. Before founding Peak Investment, Mr. Kamin was a partner with Morningside, N.A., Ltd., a private equity concern, and began his investment career in 1984 at Fidelity Management and Research. Mr. Kamin is also a director of Seitel Inc. and Sirva, Inc.

William C. Pate,43, was elected a director of the Company effective January 1, 2007. Mr. Pate is Chief Investment Officer and a Managing Director of Equity Group Investments, L.L.C., or EGI, a private investment firm, and serves as a member of the board of directors of certain private affiliates of EGI. Prior to joining EGI in 1994, Mr. Pate was an associate with The Blackstone Group and served in the mergers and acquisitions group of Credit Suisse First Boston. Mr. Pate also serves as a director of Adams Respiratory Therapeutics, Inc. and Covanta Holding Corporation.

Stephen M. Pazuk,63, has served as a director of the Company since February 2004. Mr. Pazuk is the Chief Financial Officer and Treasurer of Drive Thru Technology, a position he has held since 2000. He has also been involved in venture capital investments and real estate development in Boston, Massachusetts, and Fresno and Clovis, California, since his retirement as Senior Vice President, Treasurer and Partner of Wellington Management Company, LLP in June 2000. Mr. Pazuk started his career with Wellington in 1968

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and held various positions during his tenure, including Treasurer of Wellington Trust Company NA and President of Wellington Sales Company. He worked as a senior tax professional with Price Waterhouse & Co. from 1965 to 1968. Mr. Pazuk currently serves on the board of several privately-held companies.

L. Ali Sheikh,58, has served as a director of the Company since March 2006. Mr. Sheikh is President, Chief Operating Officer, and co-founder of SND Energy Company, Inc. (since 1989) and SND Energy Acquisition, L.P. (since 1996) and also serves as director and limited partner, respectively. In addition, Mr. Sheikh has served since 2000 as President, Chief Operating Officer, co-founder and member of Topcat Oilfield Services, LLC and Topcat Wells Services, LLC. Mr. Sheikh began his career as a geologist and from 1991 to 1993, was Vice President and Manager of Golden Spike Indonesia, a subsidiary of Union Pacific Resources, and from 1979 to 1989, was a Vice President of Sun Exploration and Production Company, managing various aspects of operations in the Far East, Africa, and South America.

Item 11.   Executive Compensation

The information included or to be included under the captions “Information Regarding Executive Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Company’s definitive proxy statement for its 2007 Meeting of Stockholders is incorporated by reference herein.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information included or to be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive proxy statement for its 2007 Meeting of Stockholders is incorporated by reference herein.

EQUITY COMPENSATION PLAN INFORMATION

The equity compensation plans and agreements discussed in this section are referred to collectively as the “Equity Compensation Plans.” The table below provides information as of December 31, 2006 with respect to shares of our common stock that may be issued under the following Equity Compensation Plans of the Company: 1997 Stock Option Plan, the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, the 1999 Stock Option Plan, the 2001 Equity Incentive Plan, the 2003 Stock Incentive Plan and the 2006 Stock Incentive Plan. The Compensation Committee has authority to make future grants only under the 2006 Stock Incentive Plan.

			Weighted-		Number of securities
			average exercise		remaining available for
	Number of securities to be		price of		future issuance under
	issued upon exercise of		outstanding		equity compensation plans
	outstanding options,		options, warrants		(excluding securities
	warrants and rights		and rights		reflected in column (a))
Plan Category	(a)		(b)		(c)
Equity compensation plans approved by security holders(1)(2)		1,964,368	$	11.93		4,952,224
Equity compensation plans not approved by Stockholders(3)		396,288	$	12.41		—
Total		2,360,656	$	12.01		4,952,224

(1) Composed of the 1997 Stock Option Plan, the 2001 Equity Incentive Plan, the 2003 Stock Incentive Plan and the 2006 Stock Incentive Plan. In addition to the outstanding options, as of December 31, 2006, there were 1,899,024 shares of unvested restricted stockand/or stock settled restricted stock units outstanding (including performance shares at maximum potential payout) which were granted under the 2003 and 2006 Stock Incentive Plans.

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(2)

Under the terms of the 2006 Stock Incentive Plan, in addition to incentive and non-qualified options, Hanover may grant restricted stock, restricted stock units, stock appreciation rights and performance-based awards. The following Equity Compensation Plans, although terminated as to future grants, provided for the following awards in addition to options: the 1997 Stock Option Plan (restricted stock); the 2001 Equity Incentive Plan (restricted stock, although no more than 1.0 million of the 1.5 million shares authorized under such plan could be issued pursuant to restricted stock awards); and the 2003 Stock Incentive Plan (restricted stock and performance awards).

(3)

Composed of the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan and the 1999 Stock Option Plan.

At December 31, 2005, we had 1,167,715 of securities remaining available for future issuance under equity compensation plans.

The Equity Compensation Plans that the company did not request to be approved by stockholders are described below. The 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, and the 1999 Stock Option Plan have the following material features: (1) awards under such Equity Compensation Plans are limited to stock options and may be made, depending on the terms of each Equity Compensation Plan, to our officers, directors, employees, advisors and consultants; (2) unless otherwise set forth in any applicable stock option agreement and depending on the terms of each Equity Compensation Plan, the stock options vest over a period of up to five years; (3) the term of the stock options granted under the Equity Compensation Plans may not exceed 10 years; and (4) no additional grants may be made under these Equity Compensation Plans.

Additional information as of December 31, 2006, regarding the Equity Compensation Plans that the company did not request to be approved by stockholders is provided in the following table.

					Number of Shares
					Reserved for
	Original		Shares Previously		Issuance		Weighted-		Shares
	Number of		Issued Pursuant to		Upon the Exercise of		Average		Available
	Shares		Stock Option		Outstanding Stock		Exercise		for Future
Plan or Agreement Name	Issuable(#)		Exercises(#)		Options(#)		Price($)		Grants(#)
1998 Stock Option Plan		520,000		98,048		167,476	$	13.47		*
December 9, 1998 Stock Option Plan		700,000		469,664		138,534	$	9.75		*
1999 Stock Option Plan		600,000		50,428		90,278	$	14.50		*

* The Board of Directors terminated authority to make future grants under these plans on May 15, 2003.

Item 13.   Certain Relationships and Related Transactions and Director Independence

The information included or to be included under the captions “Certain Relationships and Related Transactions” and “Director Independence” in the Company’s definitive proxy statement for its 2007 Meeting of Stockholders is incorporated by reference herein.

Item 14.   Principal Accounting Fees and Services

The information included or to be included under the caption “Principal Accounting Fees and Services” in the Company’s definitive proxy statement for its 2007 Meeting of Stockholders is incorporated by reference herein.

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PART IV

Item 15.   Exhibits, Financial Statement Schedules

(a) Documents filed as a part of this report.

1. Financial Statements.  The following financial statements are filed as a part of this report.

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Comprehensive Income (Loss)	F-5
Consolidated Statements of Cash Flows	F-6
Consolidated Statements of Common Stockholders’ Equity	F-8
Notes to Consolidated Financial Statements	F-9
Selected Quarterly Unaudited Financial Data	F-55

2. Financial Statement Schedule

Schedule II — Valuation and Qualifying Accounts S-1

All other schedules have been omitted because they are not required under the relevant instructions.

3. Exhibits

Exhibit
Number			Description
	2	.1	Agreement and Plan of Merger, dated February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc., and Ulysses Sub, Inc. incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2007.
	3	.1	Certificate of Incorporation of the Hanover Compressor Holding Co., incorporated by reference to Exhibit 3.1 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.2	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.3	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Company, dated July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.4	Amended and Restated Bylaws of the Company, dated March 10, 2004, incorporated by reference to Exhibit 3.4 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.1	Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (FileNo. 333-24953) onForm S-1, as amended.
	4	.2	Form of Hanover Compressor Capital Trust 71/4% Convertible Preferred Securities, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	4	.3	Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15, 1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 filed with the SEC on February 14, 2000.
	4	.4	Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029, incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	4	.5	Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of March 15, 2001, between the Company and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.

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Exhibit
Number			Description
	4	.6	Form of 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 4.8 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.7	Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the 2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	4	.8	Form of 8.50% Senior Secured Notes due 2008, incorporated by reference to Exhibit 4.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.9	Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the 2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	4	.10	Form of 8.75% Senior Secured Notes due 2011, incorporated by reference to Exhibit 4.12 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.11	Senior Indenture, dated as of December 15, 2003, among the Company, Subsidiary Guarantors named therein and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement onForm 8-A, as filed with the SEC on December 15, 2003.
	4	.12	First Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 8.625% Senior Notes due 2010, dated as of December 15, 2003, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement onForm 8-A, as filed with the SEC on December 15, 2003.
	4	.13	Form of 8.625% Senior Notes due 2010, incorporated by reference to Exhibit 4.17 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.14	Second Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 4.75% Convertible Senior Notes due 2014, dated as of December 15, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.4 to the Company’s Current Report onForm 8-K, as filed with the SEC on December 16, 2003.
	4	.15	Form of 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.19 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.16	Third Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 9.0% Senior Notes due 2014, dated as of June 1, 2004, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership onForm 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.17	Form of 9% Senior Notes due 2014, incorporated by reference to Exhibit 4.3 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership onForm 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.18	Fourth Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 71/2 % Senior Notes due 2013, dated as of March 31, 2006, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on March 31, 2006.
	4	.19	Form of Note for the 71/2 % Senior Notes due 2013, incorporated by reference to Exhibit 4.2 to the Company’s Current Report onForm 8-K, as filed with the SEC on March 31, 2006.
	10	.1	Stipulation and Agreement of Settlement, dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003.
	10	.2	PIGAP Settlement Agreement, dated as of May 14, 2003, by and among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.

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Exhibit
Number			Description
	10	.3	Credit Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership, The Royal Bank of Scotland plc as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent, and the several lenders parties thereto, incorporated by reference to Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.
	10	.4	Guarantee and Collateral Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership and certain of their subsidiaries in favor of JPMorgan Chase Bank, N.A. as Collateral Agent, incorporated by reference to Exhibit 10.4 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.
	10	.5	First Amendment and Consent, dated as of June 27, 2006 with respect to the Hanover Compressor Company and Hanover Compression Limited Partnership Credit Agreement dated November 21, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
	10	.6	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the “2001A Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.7	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.8	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.66 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.9	Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.67 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.10	Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.11	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the “2001B Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.12	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.13	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.72 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.14	Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.73 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.15	Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.16	Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees, incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 filed with the SEC on February 14, 2000.

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Exhibit
Number			Description
	10	.17	Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	10	.18	Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	10	.19	Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001.
	10	.20	Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.1 to the Company’s Current Report onForm 8-K filed with the SEC on February 6, 2003.
	10	.21	Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.3 to the Company’s Current Report onForm 8-K filed with the SEC on September 14, 2001.
	10	.22	Amendment No. 2, dated as of July 8, 2005 to Purchase Agreement by and among the Company, Hanover Compression Limited Partnership and Schlumberger Technology Corporation, for itself and as successor in interest to Camco International Inc., Schlumberger Surenco S.A. and Schlumberger Oilfield Holdings Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.
	10	.23	Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement (FileNo. 333-24953) onForm S-1, as amended.††
	10	.24	Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 1998.††
	10	.25	First Amendment to the Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.26	Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to Exhibit 10.33 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1998.††
	10	.27	Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (FileNo. 333-32092) onForm S-8 filed with the SEC on March 10, 2000.††
	10	.28	First Amendment to the Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 10.3 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.29	Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (FileNo. 333-73904) onForm S-8 filed with the SEC on November 21, 2001.††
	10	.30	First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.31	Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 15, 2003.††

64

Exhibit
Number			Description
	10	.32	First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.33	Hanover Compressor Company 2006 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on March 24, 2006.††
	10	.34	First Amendment to be effective February 3, 2007 to the Hanover Compressor Company 2006 Stock Incentive Plan incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on February 5, 2007. ††
	10	.35	Hanover Compressor Company 2006 Long-Term Cash Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006. ††
	10	.36	Employment Letter with Peter Schreck, dated August 22, 2000, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003.††
	10	.37	Employment Letter with Stephen York, dated March 6, 2002, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003.††
	10	.38	Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004.††
	10	.39	Gary M. Wilson letter dated July 29, 2005 relating to employment benefits. †† *
	10	.40	Gary M. Wilson letter dated October 10, 2006 relating to employment benefits. †† *
	10	.41	Employment Letter with John E. Jackson dated October 5, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on October 6, 2004.††
	10	.42	Change of Control and Severance Agreement dated July 29, 2005 between John E. Jackson and the Company, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2005.††
	10	.43	Employment Letter with Lee E. Beckelman dated January 31, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on February 1, 2005.††
	10	.44	Employment Letter with Anita H. Colglazier dated April 4, 2002 with explanatory note, incorporated by reference to Exhibit 10.61 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004. ††
	10	.45	Letter to Brian Matusek regarding employment terms, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on April 18, 2005. ††
	10	.46	Employment Letter with Norrie Mckay effective as of May 16, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2005.††
	10	.47	Form of Change of Control Agreement dated July 29, 2005 between the Company and each of Messrs. Lee E. Beckelman, Brian A. Matusek, Gary M. Wilson, Steven W. Muck, Norman A. Mckay, Stephen P. York and Peter G. Schreck and Ms. Anita H. Colglazier, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q For the quarter ended June 30, 2005.††
	12	.1	Computation of ratio of earnings to fixed charges.*
	14	.1	P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct (the “Code of Ethics”), incorporated by reference to Exhibit 14.1 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	14	.2	Amendment to the Code of Ethics, incorporated by reference to Exhibit 14.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on January 20, 2005.
	21	.1	List of Subsidiaries.*
	23	.1	Consent of PricewaterhouseCoopers LLP.*
	31	.1	Certification of the Chief Executive Officer pursuant toRule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	31	.2	Certification of the Chief Financial Officer pursuant toRule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

65

Exhibit
Number			Description
	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*	Filed herewith
††	Management contract or compensatory plan or arrangement

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HANOVER COMPRESSOR COMPANY

By:  /s/  JOHN E. JACKSON

John E. Jackson

President and Chief Executive Officer

Date: February 28, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/  JOHN E. JACKSON John E. Jackson	President, Chief Executive Officer and Director (Principal Executive Officer)	February 28, 2007
/s/  LEE E. BECKELMAN Lee E. Beckelman	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	February 28, 2007
/s/  ANITA H. COLGLAZIER Anita H. Colglazier	Vice President and Controller (Principal Accounting Officer)	February 28, 2007
/s/  I. JON BRUMLEY I. Jon Brumley	Director	February 28, 2007
/s/  TED COLLINS, JR. Ted Collins, Jr.	Director	February 28, 2007
/s/  MARGARET K. DORMAN Margaret K. Dorman	Director	February 28, 2007
/s/  ROBERT R. FURGASON Robert R. Furgason	Director	February 28, 2007
/s/  VICTOR E. GRIJALVA Victor E. Grijalva	Director	February 28, 2007
/s/  GORDON T. HALL Gordon T. Hall	Director	February 28, 2007
/s/  PETER H. KAMIN Peter H. Kamin	Director	February 28, 2007
/s/  WILLIAM C. PATE William C. Pate	Director	February 28, 2007
/s/  STEPHEN M. PAZUK Stephen M. Pazuk	Director	February 28, 2007
/s/  L. ALI SHEIKH L. Ali Sheikh	Director	February 28, 2007

67

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Hanover Compressor Company:

We have completed integrated audits of Hanover Compressor Company and its subsidiaries’ (the “Company”) consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Hanover Compressor Company and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 16 to the financial statements, the Company changed its method of accounting for share-based payments in 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over

F-1

financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Houston, Texas

February 14, 2007

F-2

HANOVER COMPRESSOR COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005
	(In thousands, except par value and share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	73,286		$	48,233
Accounts receivable, net of allowance of $4,938 and $4,751		283,073			243,672
Inventory, net		308,093			251,069
Costs and estimated earnings in excess of billings on uncompleted contracts		109,732			99,166
Current deferred income taxes		20,129			13,842
Other current assets		86,350			48,403
Total current assets		880,663			704,385
Property, plant and equipment, net		1,863,452			1,823,100
Goodwill, net		181,098			184,364
Intangible and other assets		55,702			60,406
Investments in non-consolidated affiliates		89,974			90,741
Total assets	$	3,070,889		$	2,862,996
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	4,433		$	4,080
Current maturities of long-term debt		455			1,309
Accounts payable, trade		136,908			92,980
Accrued liabilities		147,320			129,683
Advance billings		170,859			89,513
Billings on uncompleted contracts in excess of costs and estimated earnings		94,123			35,126
Total current liabilities		554,098			352,691
Long-term debt		1,365,043			1,473,559
Other liabilities		48,953			38,976
Deferred income taxes		76,522			76,115
Total liabilities		2,044,616			1,941,341
Commitments and contingencies (Note 19)
Minority interest		11,991			11,873
Common stockholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 103,825,732 and 102,392,918 shares issued, respectively		104			102
Additional paid-in capital		1,104,730			1,097,766
Deferred employee compensation — restricted stock grants		—			(13,249	)
Accumulated other comprehensive income		12,983			15,214
Accumulated deficit		(99,565	)		(186,088	)
Treasury stock — 449,763 and 366,091 common shares, at cost, respectively		(3,970	)		(3,963	)
Total common stockholders’ equity		1,014,282			909,782
Total liabilities and common stockholders’ equity	$	3,070,889		$	2,862,996

The accompanying notes are an integral part of these financial statements.

F-3

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2006			2005			2004
	(In thousands, except per share amounts)
Revenues and other income:
U.S. rentals	$	384,292		$	351,128		$	341,570
International rentals		263,228			232,587			214,598
Parts, service and used equipment		224,810			225,636			180,321
Compressor and accessory fabrication		303,205			179,954			158,629
Production and processing equipment fabrication		429,697			360,267			270,284
Equity in income of non-consolidated affiliates		19,430			21,466			19,780
Gain on sale of business and other income		46,001			4,551			3,413
		1,670,663			1,375,589			1,188,595
Expenses:
U.S. rentals		152,605			139,465			144,580
International rentals		96,631			76,512			63,953
Parts, service and used equipment		183,965			169,168			135,929
Compressor and accessory fabrication		249,910			156,414			144,832
Production and processing equipment fabrication		366,590			325,924			242,251
Selling, general and administrative		204,247			182,198			173,066
Depreciation and amortization		181,416			182,681			175,308
Interest expense		118,006			136,927			146,978
Foreign currency translation		(4,317	)		7,890			(5,222	)
Securities related litigation settlement		—			—			(4,163	)
Other		1,204			526			407
Debt extinguishment costs		5,902			7,318			—
		1,556,159			1,385,023			1,217,919
Income (loss) from continuing operations before income taxes		114,504			(9,434	)		(29,324	)
Provision for income taxes		28,782			27,714			24,767
Income (loss) from continuing operations		85,722			(37,148	)		(54,091	)
Income (loss) from discontinued operations, net of tax		368			(756	)		6,314
Gain (loss) from sales of discontinued operations, net of tax		63			(113	)		3,771
Income (loss) before cumulative effect of accounting changes		86,153			(38,017	)		(44,006	)
Cumulative effect of accounting changes, net of tax		370			—			—
Net income (loss)	$	86,523		$	(38,017	)	$	(44,006	)
Basic income (loss) per common share:
Income (loss) from continuing operations	$	0.85		$	(0.41	)	$	(0.64	)
Income (loss) from discontinued operations, net of tax		0.01			(0.01	)		0.12
Cumulative effect of accounting changes, net of tax		—			—			—
Net income (loss)	$	0.86		$	(0.42	)	$	(0.52	)
Diluted income (loss) per common share:
Income (loss) from continuing operations	$	0.80		$	(0.41	)	$	(0.64	)
Income (loss) from discontinued operations, net of tax		0.01			(0.01	)		0.12
Cumulative effect of accounting changes, net of tax		—			—			—
Net income (loss)	$	0.81		$	(0.42	)	$	(0.52	)
Weighted average common and equivalent shares outstanding:
Basic		101,178			91,556			84,792
Diluted		112,035			91,556			84,792

The accompanying notes are an integral part of these financial statements.

F-4

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Net income (loss)	$	86,523		$	(38,017	)	$	(44,006	)
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		—			608			8,638
Foreign currency translation adjustment		(2,231	)		(2,912	)		(347	)
Comprehensive income (loss)	$	84,292		$	(40,321	)	$	(35,715	)

The accompanying notes are an integral part of these financial statements.

F-5

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	86,523		$	(38,017	)	$	(44,006	)
Adjustments:
Depreciation and amortization		181,416			182,681			175,308
(Income) loss from discontinued operations, net of tax		(431	)		869			(10,085	)
Cumulative effect of accounting changes, net of tax		(370	)		—			—
Bad debt expense		2,465			1,955			2,658
Gain on sale of property, plant and equipment		(11,798	)		(13,183	)		(6,076	)
Equity in income of non-consolidated affiliates, net of dividends received		(1,831	)		(2,783	)		(10,112	)
Loss on derivative instruments		—			416			1,886
(Gain) loss on remeasurement of intercompany balances		(2,061	)		12,155			(5,456	)
Securities related litigation settlement, in excess of cash paid		—			—			(6,326	)
Net realized gain on trading securities		(4,873	)		—			—
Zero coupon subordinated notes accreted interest paid by refinancing		(86,084	)		—			—
Gain on sale of non-consolidated affiliates		—			—			(300	)
Gain on sale of business		(28,476	)		(367	)		—
Stock compensation expense		9,773			5,676			2,599
Pay-in-kind interest on zero coupon subordinated notes		6,282			23,336			20,966
Sales of trading securities		23,344			—			—
Purchases of trading securities		(18,471	)		—			—
Deferred income taxes		140			19,304			11,627
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(31,539	)		(45,061	)		(4,021	)
Inventory		(59,944	)		(73,936	)		(21,966	)
Costs and estimated earnings versus billings on uncompleted contracts		51,298			(21,117	)		(5,733	)
Prepaid and other current assets		(35,058	)		(15,840	)		(561	)
Accounts payable and other liabilities		51,268			41,037			(3,806	)
Advance billings		81,885			47,549			16,130
Other		(3,923	)		(1,804	)		10,996
Net cash provided by continuing operations		209,535			122,870			123,722
Net cash provided by (used in) discontinued operations		(446	)		(383	)		8,115
Net cash provided by operating activities		209,089			122,487			131,837
Cash flows from investing activities:
Capital expenditures		(246,583	)		(155,146	)		(90,496	)
Proceeds from sale of property, plant and equipment		26,290			51,101			24,265
Proceeds from the sale of business		52,125			2,724			—
Proceeds from sale of non-consolidated affiliates		—			—			4,663
Cash used for business acquisitions, net		—			(3,426	)		—
Cash used to acquire investments in and advances to non-consolidated affiliates		—			(500	)		(250	)
Net cash used in continuing operations		(168,168	)		(105,247	)		(61,818	)
Net cash provided by discontinued operations		—			1,220			72,947
Net cash provided by (used in) investing activities		(168,168	)		(104,027	)		11,129
Cash flows from financing activities:
Borrowings on revolving credit facilities		196,500			152,000			52,200
Repayments on revolving credit facilities		(224,500	)		(111,000	)		(72,200	)
Proceeds from issuance of senior notes		150,000			—			—
Payments for debt issue costs		(3,832	)		(2,592	)		(253	)
Proceeds from warrant conversions and stock options exercised		5,675			4,990			9,549
Issuance of senior notes, net		—			—			194,125
Proceeds from equity offering, net of issuance costs		—			179,100			—
Repayment of zero coupon subordinated notes principal		(150,000	)		—			—
Stock-based compensation excess tax benefit		1,516			—			—

The accompanying notes are an integral part of these financial statements.

F-6

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

	Years Ended December 31,
	2006			2005			2004
	(In thousands)
Payments of 2000A compression equipment lease obligations		—			—			(200,000	)
Payments of 2000B compression equipment lease obligations		—			(57,589	)		(115,000	)
Payments of 2001A compression equipment lease obligations		—			(172,177	)		—
Borrowings of other debt		7,673			2,180			—
Repayments of other debt		(1,166	)		(1,802	)		(30,771	)
Net cash used in continuing operations		(18,134	)		(6,890	)		(162,350	)
Net cash used in discontinued operations		—			—			—
Net cash used in financing activities		(18,134	)		(6,890	)		(162,350	)
Effect of exchange rate changes on cash and equivalents		2,266			(1,413	)		841
Net increase (decrease) in cash and cash equivalents		25,053			10,157			(18,543	)
Cash and cash equivalents at beginning of year		48,233			38,076			56,619
Cash and cash equivalents at end of year	$	73,286		$	48,233		$	38,076
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized amounts	$	196,745		$	118,787		$	125,047
Income taxes paid, net	$	20,722		$	18,471		$	15,830
Supplemental disclosure of non-cash transactions:
Assets sold in exchange for note receivable		—		$	1,600		$	1,314
Conversion of deferred stock option liability	$	35		$	282		$	334
Conversion of debt to common stock	$	1,447			—			—
Common stock issued for securities settlement		—			—		$	29,800
Acquisitions of businesses:
Property, plant and equipment acquired		—		$	359			—
Other assets acquired, net of cash acquired		—		$	286			—
Goodwill		—		$	2,781			—

The accompanying notes are an integral part of these financial statements.

F-7

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

								Accumulated									Deferred			Retained
					Additional			Other									Compensation-			Earnings/
	Common Stock				Paid-in			Comprehensive			Treasury Stock						Restricted			(Accumulated
	Shares		Amount		Capital			Income (loss)			Shares			Amount			Stock Grants			Deficit)
	(In thousands, except share data)
Balance at December 31, 2003		82,649,629	$	83	$	856,020		$	9,227			(252,815	)	$	(2,325	)	$	(5,452	)	$	(104,065	)
Exercise of stock options		1,140,073		1		9,882			—			—			—			—			—
Cumulative translation adjustment		—		—		—			(347	)		—			—			—			—
Change in fair value of derivative financial instrument, net of tax		—		—		—			8,638			—			—			—			—
Issuance of restricted stock grants, net of forfeitures, net of amortization expense		1,364,268		1		17,308			—			(408,995	)		(4,982	)		(9,728	)		—
Issuance of common stock for shareholder litigation		2,500,000		3		29,797			—			—			—			—			—
Net loss		—		—		—			—			—			—			—			(44,006	)
Balance at December 31, 2004		87,653,970	$	88	$	913,007		$	17,518			(661,810	)	$	(7,307	)	$	(15,180	)	$	(148,071	)
Exercise of stock options		1,564,363		1		5,271			—			—			—			—			—
Cumulative translation adjustment		—		—		—			(2,912	)		—			—			—			—
Change in fair value of derivative financial instrument, net of tax		—		—		—			608			—			—			—			—
Issuance of restricted stock grants, net of forfeitures, net of amortization expense		20,200		—		401			—			295,719			3,344			1,931			—
Equity offering, net of issuance costs		13,154,385		13		179,087			—			—			—			—
Net loss		—		—		—			—			—			—			—			(38,017	)
Balance at December 31, 2005		102,392,918	$	102	$	1,097,766		$	15,214			(366,091	)	$	(3,963	)	$	(13,249	)	$	(186,088	)
Exercise of stock options		538,775		1		5,709			—			—			—			—			—
Stock options expense		—		—		1,734			—			—			—			—			—
Cumulative translation adjustment		—		—		—			(2,231	)		—			—			—			—
Issuance of restricted stock grants, net of forfeitures and cancellations		813,072		1		8,046			—			(83,672	)		(7	)		—			—
Convertible debentures converted to common stock		80,967		—		1,447			—			—			—			—			—
Cumulative effect of in accounting change related to FASB 123(R) adoption		—		—		(370	)		—			—			—			—			—
Income tax benefit from stock compensation expense		—		—		3,647			—			—			—			—			—
Reversal of deferred compensation due to adoption of FASB 123(R)		—		—		(13,249	)		—			—			—			13,249			—
Net income		—		—		—			—			—			—			—			86,523
Balance at December 31, 2006		103,825,732	$	104	$	1,104,730		$	12,983			(449,763	)	$	(3,970	)	$	—		$	(99,565	)

The accompanying notes are an integral part of these financial statements.

F-8

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006, 2005 and 2004

1.   The Company, Business and Significant Accounting Policies

Hanover Compressor Company, together with its subsidiaries (“we”, “us”, “our”, “Hanover”, or “the Company”), is a global market leader in the full service natural gas compression business and is also a leading provider of service, fabrication and equipment for oil and natural gas production, processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. Hanover was founded as a Delaware corporation in 1990, and has been a public company since 1997. Our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, and oilfield power generation services, primarily to our U.S. and international customers as a complement to our compression services. In addition, through our subsidiary, Belleli Energy S.r.l. (“Belleli”), we provide engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms, primarily for use in Europe and the Middle East.

Substantially all of our assets and operations are owned or conducted by our wholly-owned subsidiary, Hanover Compression Limited Partnership (“HCLP”).

Principles of Consolidation

The accompanying consolidated financial statements include Hanover and its wholly-owned and majority owned subsidiaries and certain variable interest entities, for which we are the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated entities in which we own more than a 20% interest and do not have a controlling interest are accounted for using the equity method.

Use of Estimates in the Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates and assumptions used are reasonable.

Our operations are influenced by many factors, including the global economy, international laws and currency exchange rates. Contractions in the more significant economies of the world could have a substantial negative impact on the rate of our growth and profitability. Acts of war or terrorism could influence these areas of risk and our operations. Doing business in international locations subjects us to various risks and considerations including, but not limited to, economic and political conditions in the United States and abroad, currency exchange rates, tax laws and other laws and trade restrictions.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

F-9

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

Revenue from equipment rentals is recorded when earned over the period of rental and maintenance contracts which generally range from one month to five years. Parts, service and used equipment revenue is recorded as products are delivered and title is transferred or services are performed for the customer.

Compressor, production and processing equipment fabrication revenue are recognized using thepercentage-of-completion method. We estimatepercentage-of-completion for compressor and accessory fabrication and production equipment fabrication on a direct labor hour to total labor hour basis. Processing equipment fabricationpercentage-of-completion is estimated using the direct labor hour to total labor hour and the cost to total cost basis. The average duration of these projects is typically between three and thirty-six months.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, advances to non-consolidated affiliates and notes receivable. We believe that the credit risk in temporary cash investments that we have with financial institutions is minimal. Trade accounts and notes receivable are due from companies of varying size engaged principally in oil and gas activities throughout the world. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of products and the services we provide them and the terms of our rental contracts. Trade accounts receivable is recorded net of estimated doubtful accounts of approximately $4.9 million and $4.8 million at December 31, 2006 and 2005, respectively.

The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review the adequacy of our allowance for doubtful accounts monthly. Balances aged greater than 90 days are reviewed individually for collectibility. In addition, all other balances are reviewed based on significance and customer payment histories. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During the years ended December 31, 2006, 2005, and 2004, our bad debt expense was $2.5 million, $2.0 million and $2.7 million, respectively.

Inventory

Inventory consists of parts used for fabrication or maintenance of natural gas compression equipment and facilities, processing and production equipment, and also includes compression units and production equipment that are held for sale. Inventory is stated at the lower of cost or market using the average-cost method.

Trading Securities

Beginning in 2006, we purchased short-term debt securities denominated in U.S. dollars and exchanged them for short-term debt securities denominated in local currency in Latin America to achieve more favorable exchange rates. These debt securities are classified as trading securities because we hold them for a short period of time and have frequent buying and selling. Our net gain in 2006 from sales of trading securities was $4.9 million. No trading securities were held as of December 31, 2006.

F-10

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives as follows:

Compression equipment, facilities and other rental assets	4 to 30 years
Buildings	20 to 35 years
Transportation, shop equipment and other	3 to 12 years

Major improvements that extend the useful life of an asset are capitalized. Repairs and maintenance are expensed as incurred. When rental equipment is sold, retired or otherwise disposed of, the cost, net of accumulated depreciation, is recorded in parts, service and used equipment expenses. Sales proceeds are recorded in parts, service and used equipment revenues. Interest is capitalized in connection with equipment and facilities meeting specific thresholds that are constructed for Hanover’s use in our rental operations until such equipment is complete. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.

Computer software

Certain costs related to the development or purchase of internal-use software are capitalized and amortized over the estimated useful life of the software which ranges from three to five years. Costs related to the preliminary project stage, data conversion and the post-implementation/operation stage of an internal-use computer software development project are expensed as incurred.

Long-Lived Assets, other than Intangibles

We review for the impairment of long-lived assets, including property, plant and equipment, and assets held for sale whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The impairment loss recognized represents the excess of the assets carrying value as compared to its estimated fair value.

We hold investments in companies having operations or technology in areas that relate to our business. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary.

Goodwill and Other Intangibles

Goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred pursuant to Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Identifiable intangibles are amortized over the assets’ estimated useful lives.

Advance Billings

Advance billings are primarily comprised of billings related to jobs where revenue is recognized on thepercentage-of-completion method that have not begun and advance billings on installation and other service jobs.

Income Taxes

We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments that would change the tax law or rates. A valuation allowance is recognized

F-11

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized.

Foreign Currency Translation

The financial statements of subsidiaries outside the U.S., except those for which we have determined that the U.S. dollar is the functional currency, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at average monthly rates of exchange. The resulting gains and losses from the translation of accounts are included in accumulated other comprehensive income. For subsidiaries for which we have determined that the U.S. dollar is the functional currency, financial statements are measured using U.S. dollar functional currency and translation gains and losses are included in net income (loss).

Earnings Per Common Share

Basic income (loss) per common share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding for the period. Diluted income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, convertible senior notes and convertible subordinated notes, unless their effect would be anti-dilutive.

The table below indicates the potential shares of common stock that were included in computing the dilutive potential shares of common stock used in diluted income (loss) per common share (in thousands):

	Years Ended December 31,
	2006		2005		2004
Weighted average common shares outstanding — used in basic income (loss) per common share		101,178		91,556		84,792
Net dilutive potential common stock issuable:
On exercise of options and vesting of restricted stock		1,274		**		**
On exercise of warrants		—		**		**
On conversion of convertible junior subordinated notes due 2029		**		**		**
On conversion of convertible senior notes due 2008		**		**		**
On conversion of convertible senior notes due 2014		9,583		**		**
Weighted average common shares and dilutive potential common shares — used in dilutive income (loss) per common share		112,035		91,556		84,792

** Excluded from diluted income (loss) per common share as the effect would have been anti-dilutive.

Net income for the diluted earnings per share calculation for the year ended December 31, 2006 is adjusted to add back interest expense and amortization of financing costs, net of tax, relating to the Company’s convertible senior notes due 2014 totaling $4.7 million.

F-12

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below indicates the potential shares of common stock issuable that were excluded from net dilutive potential shares of common stock issuable as their effect would have been anti-dilutive (in thousands):

	Years Ended December 31,
	2006		2005		2004
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock		—		2,378		2,512
On exercise of options-exercise price greater than average market value at end of period		52		935		995
On exercise of warrants		—		2		4
On conversion of convertible junior subordinated notes due 2029		4,825		4,825		4,825
On conversion of convertible senior notes due 2008		4,370		4,370		4,370
On conversion of convertible senior notes due 2014		—		9,583		9,583
		9,247		22,093		22,289

Stock Options and Stock-Based Compensation

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and generally requires instead that such transactions be accounted for using a fair value based method.

Prior to January 1, 2006, we measured compensation expense for our stock-based employee compensation plans using the intrinsic value method, which follows the recognition and measurement principles of APB No. 25, as permitted by FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized for the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value, and (b) compensation cost for any share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. In accordance with the modified prospective transition method, results for prior periods have not been restated. For the years ended December 31, 2006, 2005 and 2004, stock-based compensation expense of $9.8 million, $5.7 million and $2.6 million, respectively, was recognized and included in the accompanying Consolidated Statements of Operations. For the year ended December 31, 2006, we recognized an income tax benefit that was recorded as an addition to additional paid in capital in our consolidated balance sheet of $3.6 million for share-based compensation arrangements. There was no income tax benefit recognized for share-based compensation arrangements for the years ended December 31, 2005 and 2004.

On January 1, 2006, we recorded the cumulative effect of a change in accounting related to our adoption of SFAS 123(R) of $0.4 million (net of tax of $0) which relates to the requirement to estimate forfeitures on restricted stock awards.

Prior to the adoption of SFAS 123(R), we recorded deferred compensation in equity when restricted stock was granted. Due to the adoption of SFAS 123(R) on January 1, 2006, we reclassified $13.2 million from deferred compensation to additionalpaid-in-capital.

F-13

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in our Consolidated Statements of Cash Flows. SFAS 123(R) requires the cash flows from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. There were $1.5 million of excess tax benefits classified as a financing cash inflow in the accompanying Consolidated Statement of Cash Flows for the year ended December 31, 2006 that would have been classified as an operating cash inflow prior to our adoption of SFAS 123(R).

Our adoption of SFAS 123(R) on January 1, 2006 eliminated the pro forma requirements disclosure for periods following our adoption. For purposes of this pro forma disclosure, the value of options is estimated using a Black-Scholes option valuation model and amortized to expense over the options’ vesting periods. Had we used the fair value based accounting method for stock-based compensation expense described by SFAS 123(R) for the years ended December 31, 2005 and 2004, our diluted net loss per common and equivalent share for the years ended December 31, 2005 and 2004 would have been as set forth in the table below ($ in thousands, except per share data).

	Years Ended December 31,
	2005			2004
Net loss, before stock-based compensation for employees	$	(38,017	)	$	(44,006	)
Add back: Stock-based compensation expense for employees previously determined under intrinsic value method, net of tax effect		5,676			2,599
Deduct: Stock-based employee compensation expense for employees determined under the fair value method, net of tax		(8,098	)		(4,817	)
Net loss, after effect of stock-based compensation for employees	$	(40,439	)	$	(46,224	)
Net loss per share:
Basic, as reported for prior periods	$	(0.42	)	$	(0.52	)
Basic after effect of stock-based compensation for employees	$	(0.44	)	$	(0.55	)
Diluted as reported for prior periods	$	(0.42	)	$	(0.52	)
Diluted after effect of stock-based compensation for employees	$	(0.44	)	$	(0.55	)

Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income (loss) for the Company has historically consisted of foreign currency translation adjustments and changes in the fair value of derivative financial instruments, net of tax. Our accumulated other comprehensive income (loss) as of December 31, 2006 and 2005 is solely comprised of foreign currency translation adjustments.

Financial Instruments

Our financial instruments include cash, receivables, payables, and debt. Except for debt as described in Note 11, the estimated fair value of such financial instruments at December 31, 2006 and 2005 approximate their carrying value as reflected in our consolidated balance sheet. The fair value of our debt has been estimated based on year-end quoted market prices.

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by SFAS 137, SFAS 138, and SFAS 149, requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the

F-14

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

We utilize derivative financial instruments from time to time to minimize the risksand/or costs associated with financial and global operating activities by managing our exposure to interest rate fluctuation on a portion of our leasing obligations. We do not utilize derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in the Consolidated Statements of Cash Flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2006 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

2.   Business Acquisitions

Acquisitions were accounted for under the purchase method of accounting. Results of operations of companies acquired are included from the date of acquisition. We allocate the cost of the acquired business to the assets acquired and the liabilities assumed based upon fair value estimates thereof. These estimates are revised during the allocation period as necessary when information regarding contingencies becomes available to redefine and requantify assets acquired and liabilities assumed. The allocation period varies for each acquisition but does not exceed one year. To the extent contingencies are resolved or settled during the allocation period, such items are included in the revised purchase price allocation. After the allocation period, the effect of changes in such contingencies is included in results of operations in the periods the adjustments are determined. Material changes in preliminary allocations are not anticipated by management.

Year Ended December 31, 2005

In April 2005, we acquired certain assets of Part Technical Services, S.A. (“PTS”) for approximately $3.4 million. PTS is located in Mexico and provides operations and maintenance services to customers with natural gas compression equipment.

3.   Dispositions

In February 2006, we sold our U.S. amine treating rental assets to Crosstex Energy Services L.P. (“Crosstex”) for approximately $51.5 million and recorded a pre-tax gain of $28.4 million that is included in gain on sale of business and other income in our consolidated statement of operations. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Our U.S. amine treating rental assets had revenues of approximately $7.6 million in 2005. Because Hanover leased back from Crosstex one of the facilities sold in this transaction, approximately $3.3 million of additional gain was deferred into future periods. We also entered into a three-year strategic alliance with Crosstex.

During the first quarter of 2006, Hanover’s Board of Directors approved management’s plan to dispose of the assets used in our fabrication facility in Canada, which was part of our Production and Processing Fabrication-Surface Equipment segment. These assets were sold in May 2006 as part of management’s plan to improve overall operating efficiency in this line of business. The Canadian assets were sold for approximately $10.1 million and we recorded a pre-tax gain of approximately $8.0 million as a result of the transaction in gain on sale of business and other income in our consolidated statement of operations. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144.

F-15

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the fourth quarter of 2002, Hanover’s Board of Directors approved management’s plan to dispose of our non-oilfield power generation projects, which were part of our U.S. rental business, and certain used equipment businesses, which were part of our parts and service business. These disposals meet the criteria established for recognition as discontinued operations under SFAS 144. SFAS 144 specifically requires that such amounts must represent a component of a business comprised of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. These businesses are reflected as discontinued operations in our consolidated statement of operations.

In November 2004, we sold the compression rental assets of our Canadian subsidiary, Hanover Canada Corporation, to Universal Compression Canada, a subsidiary of Universal Compression Holdings, Inc., for approximately $56.9 million. Additionally, in December 2004 we sold our ownership interest in Collicutt Energy Services Ltd. (“CES”) for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interest of CES. The sale of our Canadian compression rental fleet and our interest in CES resulted in a $2.1 million gain, net of tax. These businesses are reflected as discontinued operations in our consolidated statements of operations.

In the year ended December 31, 2005, we sold certain assets related to our discontinued operations for total sales proceeds of $1.2 million that resulted in $0.1 million in income. During October 2004, we sold an asset held for sale related to our discontinued power generation business for approximately $7.5 million and realized a gain of approximately $0.7 million. This asset was sold to a subsidiary of The Wood Group. The Wood Group owns 49.5% of the Simco/Harwat Consortium, a joint venture gas compression project in Venezuela in which we hold a 35.5% ownership interest.

In the year ended December 31, 2005, we sold certain other assets held for sale, including a fabrication facility that was closed as part of the consolidation of our fabrication operations in 2003. We received proceeds of $6.5 million from these sales that resulted in a $0.2 million loss and is reflected in gain on sale of business and other income.

4.   Inventory

Inventory, net of reserves, consisted of the following amounts (in thousands):

	December 31,
	2006		2005
Parts and supplies	$	135,632	$	135,310
Work in progress		162,096		105,405
Finished goods		10,365		10,354
	$	308,093	$	251,069

During the years ended December 31, 2006, 2005 and 2004 we recorded approximately $2.3 million, $0.1 million and $1.1 million, respectively, in inventory write-downs and reserves for inventory which was either obsolete, excess or carried at a price above market value. As of December 31, 2006 and 2005, we had inventory reserves of $11.9 million and $11.8 million, respectively.

F-16

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.   Compressor and Production and Processing Equipment Fabrication Contracts

Costs, estimated earnings and billings on uncompleted contracts consisted of the following (in thousands):

	December 31,
	2006			2005
Costs incurred on uncompleted contracts	$	558,607		$	372,675
Estimated earnings		85,938			42,976
		644,545			415,651
Less — billings to date		(628,936	)		(351,611	)
	$	15,609		$	64,040

Presented in the accompanying financial statements as follows (in thousands):

	December 31,
	2006			2005
Costs and estimated earnings in excess of billings on uncompleted contracts	$	109,732		$	99,166
Billings on uncompleted contracts in excess of costs and estimated earnings		(94,123	)		(35,126	)
	$	15,609		$	64,040

6.   Property, plant and equipment

Property, plant and equipment consisted of the following (in thousands):

	December 31,
	2006			2005
Compression equipment, facilities and other rental assets	$	2,587,377		$	2,441,119
Land and buildings		107,444			87,604
Transportation and shop equipment		89,673			77,507
Other		58,788			53,824
		2,843,282			2,660,054
Accumulated depreciation		(979,830	)		(836,954	)
	$	1,863,452		$	1,823,100

Depreciation expense was $175.1 million, $171.5 million and $162.0 million in 2006, 2005 and 2004, respectively. Assets under construction of $109.8 million and $88.5 million are included in compression equipment, facilities and other rental assets at December 31, 2006, and 2005, respectively. We capitalized $1.8 million, $0.4 million and $0.3 million of interest related to construction in process during 2006, 2005, and 2004, respectively.

During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. During February 2005, we repaid our 2000B compression equipment lease obligations using borrowings from our bank credit facility. During 2004, we used cash flow from operations and proceeds from asset sales to exercise our purchase option and reduce our outstanding debt and minority interest obligations by $115.0 million under our 2000B compression equipment operating leases. In June 2004 and December 2003, we exercised our purchase options under the 2000A and 1999 compression equipment operating leases (See Note 11). As of December 31, 2006, the remaining compression assets owned by the entities that lease equipment to us but, pursuant to our adoption of FIN 46 are included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $340.2 million, including improvements made to these assets after the sale leaseback transactions.

F-17

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.   Intangible and Other Assets

Intangible and other assets consisted of the following (in thousands):

	December 31,
	2006		2005
Deferred debt issuance and leasing transactions costs	$	26,553	$	28,331
Notes and other receivables		9,714		13,284
Intangibles		5,524		4,682
Deferred taxes		7,085		7,999
Other		6,826		6,110
	$	55,702	$	60,406

Notes receivable result primarily from customers for sales of equipment or advances to other parties in the ordinary course of business.

Intangible assets and debt issuance transactions costs consisted of the following:

	As of December 31, 2006					As of December 31, 2005
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
	(In thousands)
Deferred debt issuance transaction costs	$	58,037	$	(31,484	)	$	54,205	$	(25,874	)
Marketing related (3-20 yr life)		2,256		(524	)		2,063		(324	)
Customer related (20 yr life)		3,022		(621	)		2,724		(423	)
Technology based (5 yr life)		1,259		(497	)		868		(355	)
Contract based (17 yr life)		1,326		(697	)		650		(521	)
	$	65,900	$	(33,823	)	$	60,510	$	(27,497	)

Amortization of intangible and deferred debt issuance transaction costs totaled $6.3 million, $11.2 million and $13.3 million in 2006, 2005 and 2004, respectively. Estimated future intangible amortization expense is (in thousands):

2007	$	6,799
2008		5,547
2009		4,642
2010		4,266
2011		2,505
Thereafter		8,318
	$	32,077

8.   Investments in Non-Consolidated Affiliates

Investments in affiliates that are not controlled by Hanover but where we have the ability to exercise significant influence over the operations are accounted for using the equity method. Our share of net income or losses of these affiliates is reflected in the Consolidated Statements of Operations as Equity in income of non-consolidated affiliates. Our primary equity method investments are comprised of entities that own, operate, service and maintain compression and other related facilities. Our equity method investments totaled approximately $90.0 million and $90.7 million at December 31, 2006 and 2005, respectively.

F-18

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our ownership interest and location of each equity method investee at December 31, 2006 is as follows:

	Ownership
	Interest			Location		Type of Business
PIGAP II		30.0	%		Venezuela	Gas Compression Plant
El Furrial		33.3	%		Venezuela	Gas Compression Plant
Simco/Harwat Consortium		35.5	%		Venezuela	Water Injection Plant

Summarized balance sheet information for investees accounted for by the equity method follows (on a 100% basis, in thousands):

	December 31,
	2006		2005
Current assets	$	135,845	$	137,936
Non-current assets		463,661		495,071
Current liabilities, excluding debt		77,618		37,403
Debt payable		256,648		301,384
Other non-current liabilities		59,515		51,752
Owners’ equity		205,725		242,468

Summarized earnings information for these entities for the years ended December 31, 2006, 2005 and 2004 follows (on a 100% basis, in thousands):

	Years Ended December 31,
	2006		2005		2004
Revenues	$	199,029	$	198,906	$	191,804
Operating income		86,421		100,441		93,871
Net income		20,003		54,473		45,275

PIGAP II, El Furrial and Simco/Harwat Consortium were acquired in connection with the Production Operators Corporation (“POC”) acquisition completed in August 2001. During 2006, 2005 and 2004, we received approximately $17.6 million, $18.7 million and $9.8 million in dividends from these joint ventures. At December 31, 2006, 2005 and 2004 we had cumulatively recognized approximately $32.9 million, $31.0 million and $28.0 million, respectively, of earnings in excess of distributions from these joint ventures.

Due to the significance of PIGAP II and El Furrial to our results of operations for the year ended December 31, 2005, their financial statements for the year ended December 31, 2006 are required byRule 3-09 ofRegulation S-X and will be filed as an amendment to thisForm 10-K by June 29, 2007.

In connection with our investment in El Furrial and Simco/Harwat Consortium, we guaranteed our portion of the debt in the joint venture related to these projects. At December 31, 2006 and 2005 we have guaranteed approximately $31.7 million and $39.5 million, respectively, of the debt which is on the books of these joint ventures. These amounts are not recorded on Hanover’s books.

In December 2004, we sold our ownership interest in CES for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interest of CES. In the normal course of business, we previously engaged in purchase and sale transactions with Collicutt Energy Services Ltd. During the year ended December 31, 2004, we had sales to this related party of $0.0 million and purchases of $6.1 million.

On March 5, 2004, we sold our 50.384% limited partnership interest and 0.001% general partnership interest in Hanover Measurement Services Company, L.P. to EMS Pipeline Services, L.L.C. for $4.9 million, of which $0.2 million was put in escrow subject to the outcome of post closing working capital adjustments

F-19

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and other matters that have resulted in the $0.2 million being returned to the purchaser. We had no obligation to the purchaser with respect to any post-closing adjustment in excess of the escrowed amount. We accounted for our interest in Hanover Measurement under the equity method. As a result of the sale, we recorded a $0.3 million gain that is included in gain on sale of business and other income.

9.   Goodwill

Goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred pursuant to the provisions of SFAS 142. The provisions of SFAS 142 require us to identify our reporting units and perform an annual impairment assessment of the goodwill attributable to each reporting unit. We allocate goodwill to our reporting units based on the business acquisition from which it resulted. We perform our annual impairment assessment in the fourth quarter of the year and determine the fair value of reporting units using a combination of the expected present value of future cash flows and a market approach.

There were no impairments in 2006, 2005 or 2004 related to our annual impairment test.

The table below presents the change in the net carrying amount of goodwill for the years ended December 31, 2006 and 2005 (in thousands):

						Purchase
						Adjustment
	December 31,		Acquisitions/			and Other		December 31,
	2005		Dispositions(1)			Adjustments		2006
U.S. rentals	$	100,209	$	(3,138	)	$	—	$	97,071
International rentals		37,654		—			—		37,654
Parts, service and used equipment		32,110		(128	)		—		31,982
Compressor and accessory fabrication		14,391		—			—		14,391
Total	$	184,364	$	(3,266	)	$		$	181,098

						Purchase
						Adjustment
	December 31,		Acquisitions/			and Other			December 31,
	2004		Dispositions(2)			Adjustments(3)			2005
U.S. rentals	$	100,456	$	—		$	(247	)	$	100,209
International rentals		35,085		2,781			(212	)		37,654
Parts, service and used equipment		33,076		(562	)		(404	)		32,110
Compressor and accessory fabrication		14,573		—			(182	)		14,391
Total	$	183,190	$	2,219		$	(1,045	)	$	184,364

(1)	Reductions to goodwill for the sale of a pipeline business in Argentina and our U.S. amine rental treating assets in 2006.
(2)	Additions to goodwill for our international rentals segment in 2005 relates to our acquisition of PTS.
(3)	Relates primarily to purchase price adjustments for taxes related to acquisitions.

F-20

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10.   Accrued Liabilities

Accrued liabilities are comprised of the following (in thousands):

	December 31,
	2006		2005
Accrued salaries, bonuses and other employee benefits	$	51,299	$	36,823
Accrued income and other taxes		36,188		26,868
Current portion of interest rate swaps		2,276		1,849
Accrued interest		22,744		19,838
Accrued other		34,813		44,305
	$	147,320	$	129,683

11.   Long-term Debt

Long-term debt consisted of the following (in thousands):

	December 31,
	2006			2005
Bank credit facility due November 2010	$	20,000		$	48,000
4.75% convertible senior notes due 2008*		192,000			192,000
4.75% convertible senior notes due 2014*		143,750			143,750
8.625% senior notes due 2010**		200,000			200,000
7.5% senior notes due 2013**		150,000			—
9.0% senior notes due 2014**		200,000			200,000
2001A compression equipment lease notes, interest at 8.5%, due September 2008		133,000			133,000
2001B compression equipment lease notes, interest at 8.75%, due September 2011		250,000			250,000
Zero coupon subordinated notes, interest at 11%*		—			229,803
7.25% convertible junior subordinated notes due 2029*		84,803			86,250
Fair value adjustment — fixed to floating interest rate swaps		(8,732	)		(9,686	)
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		677			1,751
		1,365,498			1,474,868
Less — current maturities		(455	)		(1,309	)
Long-term debt	$	1,365,043		$	1,473,559

*	Securities issued by Hanover (parent company)
**	Securities issued by Hanover (parent company) and guaranteed by HCLP.

F-21

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Maturities of long-term debt (excluding interest to be accrued thereon) at December 31, 2006 are (in thousands):

	December 31,
	2006
2007	$	455
2008		325,045
2009		49
2010		211,322
2011		250,058
Thereafter		578,569
	$	1,365,498

Bank Credit Facility

In November 2005, we entered into a $450 million bank credit facility having a maturity date of November 21, 2010. Our prior $350 million bank credit facility that was scheduled to mature in December 2006 was terminated upon closing of the new facility. The new facility also provides for an incremental term loan facility of up to $300 million. The incremental term loan was not syndicated with the credit facility. The new agreement prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock. Borrowings under the new facility are secured by substantially all of our unencumbered personal property and real property assets. In addition, all of the capital stock of U.S. subsidiaries and 66% of the capital stock of the first tier international subsidiaries has been pledged to secure the obligations under the new credit facility. Up to $75 million of the credit facility can be borrowed in loans denominated in euros. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets.

Our bank credit facility provides for a $450 million revolving credit in which U.S. dollar-denominated advances bear interest at our option, at (1) the greater of the Administrative Agent’s prime rate or the federal funds effective rate plus an applicable margin (“ABR”), or (2) the eurodollar rate (“LIBOR”), in each case plus an applicable margin ranging from 0.375% to 1.5%, with respect to ABR loans, and 1.375% to 2.5%, with respect to LIBOR loans, in each case depending on our consolidated leverage ratio. Euro-denominated advances bear interest at the eurocurrency rate, plus an applicable margin ranging from 1.375% to 2.5%, depending on our consolidated leverage ratio. A commitment fee ranging from 0.375% to 0.5%, depending on our consolidated leverage ratio, times the average daily amount of the available commitment under the bank credit facility is payable quarterly to the lenders participating in the bank credit facility.

As of December 31, 2006, we had $20.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facilities bore interest at a weighted average rate of 6.9% and 6.1% at December 31, 2006 and 2005, respectively. As of December 31, 2006, we also had approximately $207.3 million in letters of credit outstanding under our new bank credit facility. Our new bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $450 million credit limit, plus, in addition to certain other indebtedness, an additional (1) $50 million in unsecured indebtedness, (2) $100 million of indebtedness of international subsidiaries and (3) $35 million of secured purchase money indebtedness. Additional borrowings of up to $222.7 million were available under that facility as of December 31, 2006.

As of December 31, 2006, we were in compliance with all covenants and other requirements set forth in our bank credit facility, the indentures and agreements related to our compression equipment lease obligations and the indentures and agreements relating to our other long-term debt. A default under our bank credit

F-22

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

facility or a default under certain of the various indentures and agreements would in some situations trigger cross-default provisions under our bank credit facilities or the indentures and agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

While all of the agreements related to our long-term debt do not contain the same financial covenants, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 permit us at a minimum, (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility (which is $50 million less than the full capacity under that facility), plus an additional $75 million in unsecured indebtedness, (2) to incur additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements governing such obligations), or our “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereof and (3) to incur certain purchase money and similar obligations. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, our 8.625% Senior Notes due 2010, our 7.5% Senior Notes due 2013 and our 9.0% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of December 31, 2006, Hanover’s coverage ratio exceeded 2.25 to 1.0, and therefore as of such date it would allow us to incur a certain amount of additional indebtedness in addition to our bank credit facility and the additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness allowed by such bank credit facility.

7.5% Senior Notes due 2013

In March 2006, we completed a public offering of $150 million aggregate principal amount of 7.5% Senior Notes due 2013 (the “2013 Senior Notes”). We used the net proceeds from the offering of $146.6 million, together with borrowings under our bank credit facility, to redeem our 11% Zero Coupon Subordinated Notes due March 31, 2007. The offering and sale of the 2013 Senior Notes were made pursuant to an automatic shelf registration statement onForm S-3 filed with the Securities and Exchange Commission. We may redeem up to 35% of the 2013 Senior Notes using the proceeds of certain equity offerings completed before April 15, 2009 at a redemption price of 107.5% of the principal amount, plus accrued and unpaid interest to the redemption date. In addition, we may redeem some or all of the 2013 Senior Notes at any time on or after April 15, 2010 at certain redemption prices together with accrued interest, if any, to the date of redemption.

The 7.5% Senior Notes due 2013 are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 7.5% Senior Notes due 2013 are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the 7.5% Senior Notes due 2013. The 7.5% Senior Notes due 2013 are guaranteed on a senior subordinated basis by HCLP. The 7.5% Senior Notes due 2013 rank equally in right of payment with our 8.625% Senior Notes due 2010 and 9.0% Senior Notes due 2014 and the guarantee of the 7.5% Senior Notes due 2013 by HCLP ranks equally in right of payment with the guarantee of the 8.625% Senior Notes due 2010 and 9.0% Senior Notes due 2014 by HCLP. The indenture under which the 7.5% Senior Notes due 2013 were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets. The fair value of the 7.5% Senior Notes due 2013 is approximately $151.1 million at December 31, 2006.

F-23

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.0% Senior Notes due 2014

In June 2004, we issued $200 million aggregate principal amount of 9.0% Senior Notes due June 1, 2014 (the “2014 Senior Notes”). The net proceeds from this offering and available cash were used to repay the outstanding indebtedness and minority interest obligations of $193.6 million and $6.4 million, respectively, under our 2000A compression equipment lease that was to expire in March 2005. We may redeem up to 35% of the 2014 Senior Notes using the proceeds of certain equity offerings completed before June 1, 2007 at a redemption price of 109% of the principal amount, plus accrued and unpaid interest to the redemption date. In addition, we may redeem some or all of the 2014 Senior Notes at any time on or after June 1, 2009 at certain redemption prices together with accrued interest, if any, to the date of redemption.

The 2014 Senior Notes are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 2014 Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the senior notes. The 2014 Senior Notes are guaranteed on a senior subordinated basis by HCLP. The 2014 Senior Notes rank equally in right of payment with the 2013 Senior Notes and the 2010 Senior Notes and the guarantee of the 2014 Senior Notes by HCLP ranks equally in right of payment with the guarantee of the 2013 Senior Notes and the 2010 Senior Notes by HCLP. The indenture under which the 2014 Senior Notes were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets. The fair value of the 2014 Senior Notes is approximately $215.3 million at December 31, 2006.

8.625% Senior Notes due 2010

In December 2003, we issued $200 million aggregate principal amount of 8.625% Senior Notes due December 15, 2010 (the “2010 Senior Notes”). The net proceeds from this offering and available cash were used to repay the outstanding indebtedness and minority interest obligations of $194.0 million and $6.0 million, respectively, under our 1999A compression equipment lease that was to expire in June 2004. We had the right to redeem up to 35% of the 2010 Senior Notes using the proceeds of certain equity offerings completed before December 15, 2006 at a redemption price of 108.625% of the principal amount, plus accrued and unpaid interest to the redemption date. In addition, we may redeem some or all of the 2010 Senior Notes at any time on or after December 15, 2007 at certain redemption prices together with accrued interest, if any, to the date of redemption.

The 2010 Senior Notes are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 2010 Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the 2010 Senior Notes. The 2010 Senior Notes are guaranteed on a senior subordinated basis by HCLP. The 2010 Senior Notes rank equally in right of payment with the 2013 Senior Notes and the 2014 Senior Notes, and the guarantee of the 2010 Senior Notes by HCLP ranks equally in right of payment with the guarantee of the 2013 Senior Notes and the 2014 Senior Notes by HCLP. The indenture under which the 2010 Senior Notes were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets. The fair value of the 2010 Senior Notes is approximately $209.0 million at December 31, 2006.

4.75% Convertible Senior Notes due 2014

In December 2003 we issued $143.75 million aggregate principal amount of 4.75% Convertible Senior Notes due January 15, 2014. The convertible senior notes are convertible by holders into shares of our common stock at an initial conversion rate of 66.6667 shares of common stock per $1,000 principal amount of convertible senior notes (subject to adjustment for anti-dilution in certain events), which is equal to an initial conversion price of $15.00 per share, at any time prior to their stated maturity or redemption or repurchase by us.

F-24

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At any time on or after January 15, 2011 but prior to January 15, 2013, we may redeem some or all of the convertible senior notes at a redemption price equal to 100% of the principal amount of the convertible senior notes plus accrued and unpaid interest, if any, if the price of our common stock exceeds 135% of the conversion price of the convertible senior notes then in effect for 20 trading days out of a period of 30 consecutive trading days. At any time on or after January 15, 2013, we may redeem some or all of the convertible senior notes at a redemption price equal to 100% of the principal amount of the convertible senior notes plus accrued and unpaid interest, if any. Holders have the right to require us to repurchase the convertible senior notes upon a specified change in control, at a repurchase price equal to 100% of the principal amount of the convertible senior notes plus accrued and unpaid interest, if any.

The convertible senior notes are our general unsecured obligations and rank equally in right of payment with all of our other senior debt, although they are not guaranteed by HCLP. The convertible senior notes are effectively subordinated to all existing and future liabilities of our subsidiaries. The fair value of the 2014 convertible senior notes is approximately $206.9 million at December 31, 2006.

4.75% Convertible Senior Notes due 2008

In March 2001, we issued $192 million aggregate principal amount of 4.75% Convertible Senior Notes due March 15, 2008. The convertible senior notes are convertible at the option of the holder into shares of our common stock at a conversion rate of 22.7596 shares of common stock per $1,000 principal amount of convertible senior notes, which is equivalent to a conversion price of approximately $43.94 per share. The conversion rate is subject to anti-dilution adjustment in certain events.

We have the right at any time to redeem some or all of the convertible senior notes. If we experience a specified change in control, a holder of the convertible senior notes may require us to repurchase, with cash or common stock, some or all of the convertible senior notes at a price equal to 100% of the principal amount plus accrued and unpaid interest to the repurchase date.

The convertible senior notes are our general unsecured obligations and rank equally in right of payment with all of our other senior debt, although they are not guaranteed by HCLP. The convertible senior notes are effectively subordinated to all existing and future liabilities of our subsidiaries. The fair value of the 2008 convertible senior notes is approximately $186.2 million at December 31, 2006.

Zero Coupon Subordinated Notes due March 31, 2007

On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We had previously given notice of our intent to exercise the PIGAP put in January 2003. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from Hanover in August 2001 as part of the purchase price for the acquisition of POC’s natural gas compression business, ownership interest in certain joint venture projects in Latin America, and related assets. As a result, we retained our interest in PIGAP. As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. We restructured the $150 million subordinated note as our Zero Coupon Subordinated Notes due March 31, 2007, which notes were issued to Schlumberger in such transaction and were sold by Schlumberger in a registered public offering in December 2003. Original issue discount accreted under the zero coupon notes at a rate of 11.0% per annum for their remaining life, up to a total principal amount of approximately $263 million payable at maturity.

In March 2006, we redeemed the zero coupon notes using proceeds from our 7.5% senior notes due 2013 and borrowings under our bank credit facility. In connection with the redemption, we expensed $5.9 million related to the call premium. We paid approximately $242 million to redeem our 11% Zero Coupon Subordinated Notes, including the call premium.

F-25

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.25% Convertible Junior Subordinated Notes due 2029

In December 1999, we issued $86.3 million of unsecured 7.25% Convertible Preferred Securities (“TIDES Preferred Securities”) through our subsidiary, Hanover Compressor Capital Trust (the “Trust”), a Delaware business trust. Under a guarantee agreement, we guaranteed on a subordinated basis any payments required to be made by Hanover Compressor Capital Trust to the extent the Trust does not have funds available to make the payments.

The TIDES Preferred Securities are convertible at the option of the holder into 2.7972 shares of our common stock, subject to adjustment for anti-dilution in certain events, have a liquidation amount of $50 per security and mature in 2029, but we may redeem them, in whole or in part, at any time. We are required to pay annual cash distributions at the rate of 7.25%, payable quarterly in arrears. However, such payments may be deferred for up to 20 consecutive quarters subject to certain restrictions. We recorded approximately $6.3 million in interest expense, during 2006, 2005 and 2004, for distributions related to convertible preferred securities. During any periods in which payments are deferred, in general, we cannot pay any dividend or distribution on our capital stock or redeem, purchase, acquire or make any liquidation on any of our capital stock. The fair value of the TIDES Preferred Securities is approximately $95.8 million at December 31, 2006.

In December 2006 and February 2007, we announced irrevocable calls for redemption in the first quarter of 2007 of a portion of our 7.25% Convertible Junior Subordinated Notes due 2029 (“Jr. TIDES Notes”). All of the Jr. TIDES Notes are owned by the Trust. The Trust is required to use these proceeds to redeem a portion of its TIDES Preferred Securities and its 7.25% Convertible Common Securities (“TIDES Common Securities”). Hanover owns all of the TIDES Common Securities. Of the $49 million of TIDES Preferred Securities called in the aggregate, $1.4 million was converted in December 2006 into 0.1 million shares of our common stock and the remainder has been or will be converted or redeemed in the first quarter of 2007.

Prior to December 31, 2003, the TIDES Preferred Securities were reported on our balance sheet as “Mandatorily Redeemable Convertible Preferred Securities”. Because we only have a limited ability to make decisions about its activities and we are not the primary beneficiary of Hanover Compressor Capital Trust, Hanover Compressor Capital Trust is a variable interest entity (“VIE”) under FIN 46. As such, the TIDES Preferred Securities issued by Hanover Compressor Capital Trust are no longer reported on our balance sheet. Instead, we now report our Jr. TIDES Notes payable to Hanover Compressor Capital Trust as a debt. These intercompany notes had previously been eliminated in our consolidated financial statements.

2001 Sale Leaseback Transactions

In August 2001 and in connection with the POC acquisition, HCLP completed two sale leaseback transactions with two separate trusts involving certain compression equipment. Under the first transaction, HCLP received proceeds of $309.3 million from Hanover Equipment Trust 2001A (the “Trust 2001A”) from the sale of compression equipment. Simultaneously, the Trust 2001A issued notes in the principal amount of $300 million. The notes are secured by an assignment of the lease and a security interest in the equipment. The agreements under which the notes were issued contain various financial covenants which require, among other things, that we meet our specified quarterly financial ratios and restricts, among other things, our ability to incur additional indebtedness or sell assets. The notes, which bear interest at 8.5% paid semiannually, mature on September 1, 2008. The fair value of the Trust 2001A debt obligations currently outstanding is approximately $134.3 million at December 31, 2006.

Under the second sale leaseback transaction, HCLP received additional proceeds of $257.8 million from Hanover Equipment Trust 2001B (the “Trust 2001B”) from the sale of compression equipment. Simultaneously, the Trust 2001B issued notes in the principal amount of $250 million. The notes are secured by an assignment of the lease and a security interest in the equipment. The notes, which bear interest at 8.75% paid

F-26

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

semiannually, mature on September 1, 2011. The fair value of the Trust 2001B debt obligations is approximately $260.0 million at December 31, 2006.

The Trust 2001A and Trust 2001B compression equipment leases and the related guarantees are HCLP’s senior subordinated obligations, and those obligations rank junior in right of payment to all of HCLP’s senior debt. The lease obligations rank equally in right of payment with the guarantee by HCLP of our 2010 Senior Notes, our 2013 Senior Notes and our 2014 Senior Notes. Certain of the lease obligations will be guaranteed by Hanover only upon the occurrence of certain events of default, and, if it comes into effect, this conditional guarantee will also be made on a senior subordinated basis. The remaining lease obligations under the Trust 2001A and Trust 2001B compression equipment leases are fully and unconditionally guaranteed by Hanover on a senior subordinated basis.

As of December 31, 2006, HCLP had residual value guarantees in the amount of approximately $277.9 million under the agreements associated with our two sale leaseback transactions that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of HCLP’s purchase options.

We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting is equal to or greater than the value of the equipment that is being substituted. We generally substitute equipment when one of our lease customers exercises a contractual right or otherwise desires to buy the leased equipment or when fleet equipment owned by the special purpose entities becomes obsolete or is selected by us for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to, among other restrictions, a percentage of the termination value under each lease. The termination value is equal to (1) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (2) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity or to the holders of the notes issued by the special purpose entity or their agents. In the following table, termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by our compression equipment operating leases. The aggregate amount of replacement equipment substituted (in dollars and percentage of termination value), the termination value and the substitution percentage limitation relating to each of our compression equipment operating leases as of December 31, 2006 are as follows:

								Substitution
								Limitation as
	Value of		Percentage of					Percentage of
	Substituted		Termination			Termination		Termination			Lease
Lease	Equipment		Value(1)			Value(1)		Value			Termination Date
	(Dollars in millions)
2001A compression equipment lease	$	20.2		14.7	%	$	137.1		25	%		September 2008
2001B compression equipment lease		54.0		21.0	%		257.7		25	%		September 2011
Total	$	74.2				$	394.8

(1) Termination value assumes all accrued rents paid before termination.

During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. In connection with the redemption and repayment, we

F-27

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expensed $7.3 million related to the call premium and $2.5 million related to unamortized debt issuance costs. The $7.3 million of costs related to the call premium have been classified as debt extinguishment costs and the $2.5 million related to unamortized debt issuance costs have been classified as depreciation and amortization expense on the accompanying Consolidated Statements of Operations.

During 2004, we paid off $115.0 million in indebtedness and minority interest obligations under our 2000B equipment lease notes. During February 2005, we repaid our 2000B compressor equipment lease obligations using our bank credit facility and therefore classified our 2000B equipment lease notes as long-term debt.

12.   Leasing Transactions and Accounting Change for FIN 46

As of December 31, 2006, we are the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (1) enabled us to affordably extend the duration of our financing arrangements and (2) reduced our cost of capital.

In August 2001 and in connection with the acquisition of POC, we completed two sale leaseback transactions involving certain compression equipment. Under one sale leaseback transaction, we received $309.3 million in proceeds from the sale of certain compression equipment. Under the second sale leaseback transaction, we received $257.8 million in proceeds from the sale of additional compression equipment. Under the first transaction, the equipment was sold and leased back by us for a seven-year period and will continue to be deployed by us in the normal course of our business. The agreement originally called for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $0.2 million. Due to the partial redemption in September 2005, as discussed below, semi-annual rental payments are now approximately $5.7 million in addition to quarterly rental payments of approximately $0.1 million. Under the second transaction, the equipment was sold and leased back by us for a ten-year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $0.2 million. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. We incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. During February 2005, we repaid our 2000B compression equipment lease obligations using borrowings from our bank credit facility.

During 2004, we used cash flow from operations and proceeds from asset sales to exercise our purchase option and reduce our outstanding debt and minority interest obligations by $115.0 million under our 2000B compression equipment operating leases. In June 2004, we exercised our purchase options under the 2000A compression equipment operating leases. As of December 31, 2006, the remaining compression assets owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $340.2 million, including improvements made to these assets after the sale leaseback transactions.

F-28

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes as of December 31, 2006 the residual value guarantee, lease termination date and minority interest obligations for equipment leases (in thousands):

	Residual				Minority
	Value		Lease		Interest
Lease	Guarantee		Termination Date		Obligation
August 2001	$	102,853		September 2008	$	4,123
August 2001		175,000		September 2011		7,750
	$	277,853			$	11,873

The lease facilities contain certain financial covenants and limitations which restrict us with respect to, among other things, indebtedness, liens, leases and sale of assets. We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting in is equal to or greater than the value of the equipment that is being substituted out. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to under each lease.

The minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2006, the yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2006, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

13.   Income Taxes

The components of income (loss) from continuing operations before income taxes were as follows (in thousands):

	Years Ended December 31,
	2006		2005			2004
U.S.	$	60,230	$	(33,146	)	$	(69,475	)
International		54,274		23,712			40,151
	$	114,504	$	(9,434	)	$	(29,324	)

F-29

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The provision for (benefit from) income taxes from continuing operations consisted of the following (in thousands):

	Years Ended December 31,
	2006			2005		2004
Current tax provision (benefit):
Federal	$	468		$	—	$	168
State		1			8		(27	)
International		26,657			8,402		12,999
Total current		27,126			8,410		13,140
Deferred tax provision (benefit):
Federal		(9,135	)		273		(4,380	)
State		(1,158	)		1,477		1,959
International		11,949			17,554		14,048
Total deferred		1,656			19,304		11,627
Total provision for income taxes	$	28,782		$	27,714	$	24,767

The provision for income taxes for 2006, 2005 and 2004 resulted in effective tax rates on continuing operations of 25.1%, (293.8)%, and (84.5)%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows (in thousands):

	Years Ended December 31,
	2006			2005			2004
Federal income tax at statutory rate	$	40,076		$	(3,302	)	$	(10,263	)
State income taxes, net of federal benefit		(752	)		965			1,256
International effective rate/ U.S. rate differential (including international valuation allowances)		10,643			12,819			8,195
Resolution of certain tax positions		10			(4,254	)		(2,783	)
U.S. impact of international operations, net of federal benefit		13,480			13,201			14,877
U.S. valuation allowances		(36,217	)		7,596			10,880
Other, net		1,542			689			2,605
	$	28,782		$	27,714		$	24,767

F-30

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred tax assets (liabilities) are comprised of the following (in thousands):

	December 31,
	2006			2005
Deferred tax assets:
Net operating losses carryforward	$	303,243		$	322,906
Inventory		5,105			5,983
Alternative minimum tax credit carryforward		5,834			5,345
Accrued liabilities		8,597			5,253
Intangibles		4,140			7,727
Capital loss carryforward		3,126			11,611
Other		18,605			19,885
Gross deferred tax assets		348,650			378,710
Valuation allowance		(46,996	)		(75,420	)
		301,654			303,290
Deferred tax liabilities:
Property, plant and equipment		(351,769	)		(355,111	)
Other		(4,338	)		(4,901	)
Gross deferred tax liabilities		(356,107	)		(360,012	)
	$	(54,453	)	$	(56,722	)

Presented in the accompanying financial statements as follows (in thousands):

	Year Ended
	December 31,
	2006			2005
Current deferred income tax assets	$	20,129		$	13,842
Intangibles and other asset		7,085			7,999
Accrued liabilities		(5,145	)		(2,448	)
Deferred income tax liabilities		(76,522	)		(76,115	)
Net deferred tax liabilities	$	(54,453	)	$	(56,722	)

We had a U.S. net operating loss carryforward at December 31, 2006 of approximately $776.2 million which is subject to expiration from 2020 through 2025. At December 2006, we had a capital loss carryforward of approximately $8.9 million that will expire in future years through 2010. In addition we had an alternative minimum tax credit carryforward of approximately $5.8 million that does not expire. At December 31, 2006, we had approximately $90.2 million of net operating loss carryforwards in certain international jurisdictions, of which approximately $16.5 million have no expiration date, $47.3 million are subject to expiration from 2007 to 2011; and the remainder expires in future years through 2016.

The valuation allowance decreased by $28.4 million primarily due to a $36.2 million reduction due to the utilization of U.S. net operating and capital losses that previously had valuation allowances. This reduction was partially offset by valuation allowances primarily recorded against our net operating loss carryforwards in certain international jurisdictions. Due to our income from the results of U.S. operations in 2006 and our current expectations for income in 2007 and future years and in consideration of the timing of the reversal of deductions taken for tax in advance of book (“temporary differences”), during the fourth quarter of 2006 we reached the conclusion that it is more likely than not that our net deferred tax assets in the U.S. would be

F-31

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

realized and reversed a $10.2 million valuation allowance that had been recorded in prior years. Previously, because of cumulative tax losses in the U.S., we were not able to reach the “more likely than not” criteria of SFAS 109 and had recorded a valuation allowance on our net U.S. deferred tax assets.

The remaining valuation allowance is to provide for $14.1 million in tax assets in the U.S. and $32.9 million in tax assets in international locations that are not likely to be realized. Upon the utilization of 2004 and 2005 net operating loss carryforwards in the U.S., approximately $6.3 million tax effect will be recorded to equity primarily related to stock options and restricted stock.

Realization of deferred tax assets associated with net operating loss carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to their expiration. Management believes it is more likely than not that the remaining deferred tax asset, not subject to valuation allowance, will be realized through future taxable income on reversal of temporary differences.

We plan to reinvest the undistributed earnings of our international subsidiaries of approximately $268 million. Accordingly, U.S. deferred taxes have not been provided on these earnings. Calculating the tax effect of distributing these amounts is not practicable at this time.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”), the annual utilization of our net operating loss carryforward may be limited if there is a 50 percentage point change in ownership of Hanover within a three-year period by certain stockholders owning 5% or more of our stock. We do not believe that a 50 percentage point change in ownership has occurred during the three year period ended December 31, 2006. It is possible that subsequent transactions involving our capital stock could result in such a limitation.

14.   Accounting for Derivatives

We use derivative financial instruments from time to time to minimize the risksand/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt and leasing obligations. Our primary objective is to reduce our overall cost of borrowing by managing the fixed and floating interest rate mix of our debt portfolio. We do not use derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

For derivative instruments designated as fair value hedges, the gain or loss is recognized in earnings in the period of change together with the gain or loss on the hedged item attributable to the risk being hedged. For derivative instruments designated as cash flow hedges, the effective portion of the derivative gain or loss is included in other comprehensive income, but not reflected in our consolidated statements of operations until the corresponding hedged transaction is settled. The ineffective portion is reported in earnings immediately.

In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk of changes in fair value of our 8.625% Senior Notes due 2010 resulting from changes in interest rates. These interest rate swaps, under which we receive fixed payments and make floating payments, result in the conversion of the hedged obligation into floating rate debt. The following table summarizes, by individual hedge instrument, these interest rate swaps as of December 31, 2006 (dollars in thousands):

								Fair Value of
			Fixed Rate					Swap at
			to be			Notional		December 31,
Floating Rate to be Paid	Maturity Date		Received			Amount		2006
Six Month LIBOR +4.72%		December 15, 2010		8.625	%	$	100,000	$	(4,495	)
Six Month LIBOR +4.64%		December 15, 2010		8.625	%	$	100,000	$	(4,237	)

F-32

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of December 31, 2006, a total of approximately $2.3 million in accrued liabilities, $6.4 million in long-term liabilities and an $8.7 million reduction of long-term debt was recorded with respect to the fair value adjustment related to these two swaps. We estimate the effective floating rate, that is determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of December 31, 2006 we estimated that the effective rate for the six-month period ending in June 2007 would be approximately 9.8%.

During 2001, we entered into interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows (dollars in thousands):

								Fair Value of
								Swap at
			Fixed Rate			Notional		December 31,
Lease	Maturity Date		to be Paid			Amount		2006
March 2000		March 11, 2005		5.2550	%	$	100,000	$	—
August 2000		March 11, 2005		5.2725	%	$	100,000	$	—

These two swaps, which we designated as cash flow hedging instruments, met the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income. During the years ended December 31, 2006, 2005 and 2004, we recorded other comprehensive income of approximately $0.0 million, $0.6 million and $9.2 million, respectively, related to these swaps ($0.0 million, $0.6 million and $9.2 million, respectively, net of tax).

On June 1, 2004, we repaid the outstanding indebtedness and minority interest obligations of $193.6 million and $6.4 million, respectively, under our 2000A equipment lease. As a result, the two interest rate swaps maturing on March 11, 2005, each having a notional amount of $100 million, associated with the 2000A equipment lease no longer met specific hedge criteria and the unrealized loss related to themark-to-market adjustment prior to June 1, 2004 of $5.3 million was amortized into interest expense over the remaining life of the swap. In addition, beginning June 1, 2004, changes in themark-to-market adjustment were recognized as interest expense in the statement of operations. During the year ended December 31, 2005 we recorded approximately $1.5 million in interest expense related to themark-to-market adjustment of these swaps.

During 2004, we repaid approximately $115.0 million of debt and minority interest obligations related to our October 2000 compressor equipment lease. Because we are no longer able to forecast the remaining variable payments under this lease, the interest rate swap could no longer be designated as a hedge. Because of these factors, in the fourth quarter 2004 we reclassed the $2.8 million fair value that had been recorded in other comprehensive income into interest expense. During December 2004, we terminated this interest rate swap and made a payment of approximately $2.6 million to the counterparty.

During 2003, we entered into forward exchange contracts with a notional value of $10.0 million to mitigate the risk of changes in exchange rates between the Euro and the U.S. dollar. These contracts matured during 2004.

The counterparties to our interest rate swap agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us.

15.   Common Stockholders’ Equity

On August 15, 2005, the Company completed a public offering of 13,154,385 shares of common stock that resulted in approximately $179.1 million of net proceeds for Hanover. Of the 13,154,385 shares of common stock sold by Hanover, 1,715,789 shares of common stock were sold pursuant to the underwriters’ over-allotment option.

F-33

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other

In March 2004, we issued and delivered to the escrow agent for the settlement fund 2.5 million shares of Hanover common stock, as required by the settlement. The settlement fund shares were distributed in August 2005.

As of December 31, 2004, warrants to purchase approximately 4,000 shares of common stock at $.005 per share were outstanding. Warrants were exercised for approximately 2,100 shares in 2005 and the remaining warrants to purchase shares expired in August 2005.

16.   Stock Options and Stock-Based Compensation

Incentive Plans

Hanover has employee stock incentive plans that provide for the granting of restricted stock and options to purchase common shares. During the second quarter of 2006, stockholders approved the Hanover Compressor Company 2006 Stock Incentive Plan (the “Plan”). Upon adoption of the new Plan, our Board of Directors determined to terminate the authority to make future grants under all previously existing equity compensation plans. At December 31, 2006, approximately 4.9 million shares were available for grant in future periods under the Plan. The stock incentive plans provide for various long-term incentive awards, which include stock options, performance shares and restricted stock awards.

In July 2006, the Board of Directors approved grants of awards under the 2006 Long-term Incentive Awards Program to certain employees, including our executive officers, as part of an incentive compensation program. The grants included, in the aggregate, approximately 0.5 million shares of restricted stock or stock-settled restricted stock units, 0.3 million shares (at target) of performance vested restricted stock or stock-settled restricted stock units, and cash awards that vest over a period of three years of approximately $1.3 million. A description of long-term stock-based incentive awards and related activity within each is provided below.

Stock Options

Prior to the adoption of SFAS 123(R), and in accordance with APB No. 25, no stock-based compensation cost was reflected in net income for grants of stock options to employees because we granted stock options with an exercise price equal to the fair market value of the stock on the date of grant. Options granted typically vest over a three to four year period and are exercisable over a ten-year period. For footnote disclosures under SFAS No. 123, the fair value of each option award was estimated on the date of grant using a Black-Scholes option valuation model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards.

No stock options have been granted after January 1, 2006 following the adoption of SFAS 123(R). For future stock option grants, we currently plan to use the Black-Scholes valuation model to calculate the fair value of each stock option award and we will follow the provisions of SFAS 123(R). The Company will use historical data and other pertinent information to estimate the expected volatility for the term of new options and the outstanding period of the option. The risk free interest rate will be based on the U.S. Treasury yield curve in effect at the time of grant.

Upon the adoption of SFAS 123(R), unvested options granted prior to the date of adoption are being amortized to expense ratably over the remaining vesting period. For options granted after the date of adoption, the fair value will be amortized to expense ratably over the vesting period.

F-34

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of stock option activity for the years ended December 31, 2006, 2005 and 2004 (in thousands, except per share data and years):

						Weighted
						Average
				Weighted		Remaining
				Average Exercise		Contractual		Aggregate
	Shares			Price per Share		Life (in Years)		Intrinsic Value
Outstanding at December 31, 2003		5,932		$	9.07
Granted(1)		77		$	11.47
Exercised		(1,140	)	$	8.38
Forfeited		(625	)	$	13.19
Outstanding at December 31, 2004		4,244		$	8.67
Granted(1)		478		$	11.98
Exercised		(1,562	)	$	3.19
Forfeited		(139	)	$	14.44
Outstanding at December 31, 2005		3,021		$	11.77
Granted		—		$	—
Exercised		(539	)	$	10.53
Forfeited		(121	)	$	12.39
Outstanding at December 31, 2006		2,361		$	12.01		4.7	$	16,442
Exercisable at December 31, 2006		1,971		$	12.05		4.0	$	13,687

(1) Option price equal to fair market value on date of grant.

The following table summarizes significant ranges of stock options outstanding and exercisable as of December 31, 2006 (in thousands, except per share data and years):

	Options Outstanding
			Weighted				Options Exercisable
			Average		Weighted				Weighted
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range of Exercise Prices	Shares		Life (in Years)		Price		Shares		Price
$7.51-10.00		842		2.0	$	9.76		840	$	9.76
$10.01-12.50		901		6.9		11.74		519		11.69
$12.51-15.00		491		5.0		14.44		485		14.46
$15.01-17.50		75		5.2		17.25		75		17.25
$17.51-20.00		21		5.1		18.95		21		18.95
$25.00		31		4.8		25.00		31		25.00
		2,361						1,971

The weighted-average fair value of options at date of grant was $5.08, and $5.56 per option during 2005 and 2004, respectively.

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. The fair value

F-35

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:

	2006		2005			2004
Expected life		—		7 years			7.5 years
Interest rate		—		4.0	%		4.2	%
Volatility		—		32.0	%		38.0	%
Dividend yield		—		0	%		0	%

See Note 1 for stock based compensation pro forma impact on net income for periods before our adoption of SFAS 123(R).

A summary of the status of the Company’s unvested stock options as of December 31, 2006 and changes during the year ended December 31, 2006 is presented below (shares in thousands):

				Weighted-Average
				Grant Date
	Shares			Fair Value
Unvested stock options:
Unvested at December 31, 2005		914		$	5.31
Granted		—		$	—
Vested		(456	)	$	5.47
Forfeited		(68	)	$	5.23
Unvested at December 31, 2006		390		$	5.10

As of December 31, 2006, there was approximately $1.4 million of unrecognized compensation cost related to unvested options. Such cost is expected to be recognized over a weighted-average period of 1.3 years. Total compensation expense for stock options was $1.7 million for the year ended December 31, 2006 and zero for the years ended December 31, 2005 and 2004. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $4.2 million, $13.9 million and $4.0 million, respectively.

Restricted Stock Awards

For grants of restricted stock and stock-settled restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of the restricted stock at the date of grant. The weighted-average fair value of restricted stock awards granted during the years ended December 31, 2006, 2005 and 2004 was $16.31, $11.96 and $11.59, respectively.

For restricted stock and stock-settled restricted stock units that vest based on performance, we record an estimate of the compensation expense to be expensed over the vesting period related to these grants. The compensation expense recognized in our statements of operations is adjusted for changes in our estimate of the number of performance stock that will vest. After the adoption of SFAS 123(R), performance stock awards are expensed based on the original grant date value of the awards. During the year ended December 31, 2006, 0.3 million shares (at target) of performance stock awards were granted. Based on the Company’s performance, the ultimate amount of shares that will vest can range from 0% to 200% of target. No performance stock awards were granted during the year ended December 31, 2005.

F-36

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company’s time vested and performance vested restricted stock awards (including stock settled restricted stock units) as of December 31, 2006 and changes during the year ended December 31, 2006 are presented below (shares in thousands):

				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Unvested restricted stock awards:
Unvested at December 31, 2005		1,280		$	11.80
Granted		911		$	16.31
Vested		(383	)	$	12.08
Forfeited		(137	)	$	11.85
Change in expected vesting of performance awards		82		$	11.39
Unvested at December 31, 2006		1,753		$	14.06

As of December 31, 2006, there was approximately $19.5 million of total unrecognized compensation cost related to unvested restricted stock awards (including performance shares). Such cost is expected to be recognized over a weighted-average period of 1.8 years. Total compensation expense for restricted stock awards was $8.1 million $5.7 million and $2.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. The total fair value of restricted stock awards vested in the years ended December 31, 2006, 2005 and 2004 were $4.6 million, $3.7 million and $1.6 million, respectively.

17.   Benefit Plans

Our 401(k) retirement plan provides for optional employee contributions up to the IRS limitation and discretionary employer matching contributions. We recorded matching contributions of $3.4 million, $2.9 million, and $2.7 million during the years ended December 31, 2006, 2005 and 2004, respectively.

18.   Related Party and Certain Other Transactions

Transactions with GKH Entities

Hanover and GKH Investments, L.P. and GKH Private Limited (collectively “GKH”), were parties to a stockholders agreement that provided, among other things, for GKH’s rights of visitation and inspection and our obligation to provide Rule 144A information to prospective transferees of our common stock held by GKH.

On December 3, 2002, GKH, as nominee for GKH Private Limited, and GKH Investments, L.P. made a partial distribution of 10.0 million shares out of a total of 18.3 million shares held by GKH to its limited and general partners. In addition, we received a letter on March 11, 2004 from the administrative trustee of the GKH Liquidating Trust indicating it and one of its affiliates had decided to distribute 5.8 million shares of the remaining 8.3 million shares of Hanover common stock owned by the GKH Liquidating Trust (formerly held by GKH Investments, L.P. and GKH Private Limited, collectively “GKH”) and its affiliate to the relevant beneficiaries. We understand that in April 2004 GKH contributed the remaining 2.5 million shares of our common stock held by GKH to the settlement fund. (See Note 20.)

Transactions with Schlumberger Entities

In August 2001, we purchased POC from Schlumberger Technology Company, Camco International Inc., Schlumberger Surenco, S.A., Schlumberger Oilfield Holdings Limited, Operational Services, Inc.

F-37

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On July 8, 2005, we entered into Amendment No. 2 to the Purchase Agreement dated June 28, 2001 by and among Hanover, HCLP, and Schlumberger Technology Corporation (“STC”), for itself and as successor in interest to Camco International Inc., Schlumberger Surenco S.A. (“Surenco”), and Schlumberger Oilfield Holdings Ltd. (“SOHL”). SOHL, STC and Surenco collectively are referred to as “Schlumberger Companies”. Schlumberger Limited (Schlumberger Limited and the Schlumberger Companies, collectively are referred to as “Schlumberger”) owns, directly or indirectly, all of the equity of the Schlumberger Companies. Pursuant to Amendment No. 2, Schlumberger agreed to eliminate its right to designate a Director to serve on our Board of Directors in order for Schlumberger to position itself to have maximum flexibility in terms of its ownership of its shares of our common stock. Schlumberger previously had the right under the POC purchase agreement, so long as Schlumberger owns at least 5% of the Common Stock and subject to certain restrictions, to nominate one representative to sit on our Board of Directors. Schlumberger currently has no representative who sits on the Company’s board of directors. As of December 31, 2005, Schlumberger sold all of their Hanover common stock and is no longer considered a related party.

Hanover made purchases of equipment and services of approximately $0.5 million from Schlumberger during both the years ended December 31, 2005 and 2004.

In connection with the POC Acquisition, Hanover issued a $150.0 million subordinated acquisition note to Schlumberger, which was scheduled to mature on December 15, 2005. The terms of this note were renegotiated in May, 2003 and subsequently redeemed in March 2006. (See Note 11.)

Other Related Party Transactions

In connection with the restatements announced by Hanover in 2002, certain present and former officers and directors were named as defendants in putative stockholder class actions, stockholder derivative actions and were involved with the investigation that was conducted by the Staff of the SEC. Pursuant to the indemnification provisions of our certificate of incorporation and bylaws, we paid legal fees on behalf of certain employees, officers and directors involved in these proceedings. In connection with these proceedings, we advanced, on behalf of indemnified officers and directors $0.1 million during 2004.

Ted Collins, Jr., a Director of the Company, owns 100% of Azalea Partners, which owns approximately 15% of ETG. In 2006, 2005 and 2004, we recorded sales of approximately $46.9 million, $25.5 million and $7.7 million, respectively, related to equipment leases and sales to ETG. As of December 31, 2006 and 2005, we had receivable balances due from ETG of $4.5 million and $1.1 million, respectively. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow of $0.7 million, $0.5 million, and $0.8 million during 2006, 2005 and 2004, respectively.

Mr. Collins is a passive investor in ETG through his ownership of Azalea Partners; he does not serve as an officer, director, or employee of ETG. While Mr. Collins’ relationship with ETG and the Company does not expressly exclude him from being an independent director under the rules of the New York Stock Exchange and the Securities and Exchange Commission, on July 7, 2005, the Governance Committee of the Board of Directors reevaluated Mr. Collins’ independence in light of recent transactions entered into between the Company and ETG to broadly consider whether such additional transactions might be considered a material relationship between Mr. Collins and the Company. The Governance Committee considered the recent increased commercial activity between the Company and ETG, and the potential impact of these transactions on ETG’s revenue. In reviewing the overall relationship, the Governance Committee determined that Mr. Collins should no longer be classified as an independent director. Mr. Collins was therefore removed from the Governance Committee. Such action was ratified by the Board of Directors on July 8, 2005, and was reported to the New York Stock Exchange as required.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Jon Brumley, a Director of the Company, is the Chairman of the Board of Encore Acquisition Company (“Encore”). During the year ended December 31, 2006, Hanover recorded revenue from sales to Encore of approximately $3.5 million. As of December 31, 2006 we had receivables from Encore of approximately $0.2 million. Hanover recorded no revenue from sales to Encore for the years ended December 31, 2005 and 2004, respectively.

19.   Commitments and Contingencies

Cawthorne Channel Project

We are involved in a project called the Cawthorne Channel Project in Nigeria, a project in which Global Gas and Refining Ltd., a Nigerian entity (“Global”) has contracted with an affiliate of Royal Dutch Shell plc (“Shell”) to process gas from some of Shell’s Nigerian oil and gas fields. Pursuant to a contract between us and Global, we rent and operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian coastal waterway. We completed the building of the required barge-mounted facilities and our portion of the project was declared commercial by Global in November 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option, by Global, that is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between Global and Hanover, Shell, and several other counterparties, respectively, Global is primarily responsible for the overall project.

During 2006, violence and local unrest significantly increased in Nigeria. As a result of these events, Global declared Force Majeure with respect to the Cawthorne Channel Project in February of 2006. Global’s actions followed a declaration of Force Majeure by Shell under its contract with Global. We notified Global that pursuant to the contract we disputed their declaration of Force Majeure and that we believe local conditions did not relieve Global’s obligations to make monthly rental payments or monthly operations and maintenance fee payments to us under our contract with Global. The Cawthorne Channel Project was brought back on-line in April 2006 and operated through early June 2006.

In early June and periodically throughout the remainder of 2006, the area experienced unrest and violence and gas delivery from Shell to the Cawthorne Channel Project was stopped in June 2006. The Cawthorne Channel Project did not receive any gas from Shell during the last six months of 2006 and Shell has not completed repairs on its gathering system. As a result, the Cawthorne Channel Project has not operated since early June 2006.

During the year ended December 31, 2006, we recognized $7.4 million of revenues related to the Cawthorne Channel Project and we have received approximately $2.6 million in payments during 2006. An additional $1.3 million was collected in January 2007. Even though we believe we are entitled to rents from Global, irrespective of whether Shell has declared Force Majeure, and have accordingly invoiced Global for rents, collectibility is not reasonably assured due to uncertainty regarding when the Cawthorne Channel Project’s operations will restart and Global’s dependence on gas production by the Cawthorne Channel Project to pay its rents to us. Therefore, we billed but did not recognize revenue in the amount of $8.4 million related to the Cawthorne Channel Project during the last six months of 2006. Once the Cawthorne Channel Project goes back on-line, we will determine whether or not and how much revenue to recognize for the period it is on-line. Based on current long-term expectations of future run-time, we believe we will recover all of our receivables and our full investment in the Cawthorne Channel Project over the term of the contract.

However, if Shell does not provide gas to the project or if Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we would be required to find an alternative use for the barge facility which could potentially result in an impairment and write-down of our investment and receivables related to this project and could have a material impact on our consolidated financial position or results of operation. Additionally, due to the environment in Nigeria,

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Global’s capitalization level, inexperience with projects of a similar nature and lack of a successful track record with respect to this project and other factors, there is no assurance that Global can satisfy its obligations under its various contracts, including its contract with us.

This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks, including risks arising from the recent increase in violence and local unrest, could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. At December 31, 2006, we had net assets of approximately $72 million related to projects in Nigeria, a majority of which is related to our capital investment and advances/accounts receivable for the Cawthorne Channel Project.

Commitments and Other Contingencies

Rent expense, excluding lease payments for the leasing transactions described in Note 12, for 2006, 2005 and 2004 was approximately $7.7 million, $6.3 million, and $6.9 million, respectively. Commitments for future minimum rental payments with terms in excess of one year at December 31, 2006 are: 2007 — $3.5 million; 2008 — $1.8 million; 2009 — $0.6 million; 2010 — $0.4 million; 2011 — $0.1 million and $0.0 million thereafter.

Hanover has issued the following guarantees which are not recorded on our accompanying balance sheet (in thousands):

			Maximum Potential
			Undiscounted
			Payments as of
			December 31,
	Term		2006
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium(1)		2009	$	3,728
El Furrial(1)		2013		28,015
Other:
Performance guarantees through letters of credit(2)		2007-2010		207,332
Standby letters of credit		2007		13,759
Commercial letters of credit		2007		9,558
Bid bonds and performance bonds(2)		2007-2012		112,369
			$	374,761

(1)	We have guaranteed the amount included above, which is a percentage of the total debt of thisnon-consolidated affiliate equal to our ownership percentage in such affiliate. (See Note 8.)
(2)	We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by third parties.

As part of the POC acquisition purchase price, Hanover may be required to make a contingent payment to Schlumberger based on the realization of certain tax benefits by Hanover through 2016. To date we have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

We are substantially self-insured for worker’s compensation, employer’s liability, auto liability, general liability, property damage/loss, and employee group health claims in view of the relatively high per-incident

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

20.   Securities Class Action Settlement

Hanover and certain of its past and present officers and directors were named as defendants in a consolidated federal court action that included a putative securities class action, arising under the Employee Retirement Income Security Act (“ERISA”) and shareholder derivative actions. The litigation related principally to the matters involved in the transactions underlying the restatements of our financial statements. The plaintiffs alleged, among other things, that we and the other defendants acted unlawfully and fraudulently in connection with those transactions and our original disclosures related to those transactions and thereby violated the antifraud provisions of the federal securities laws and the other defendants’ fiduciary duties to Hanover.

On October 23, 2003, we entered into a Stipulation of Settlement, which settled all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions described above. The terms of the settlement required us to: (1) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (2) issue 2.5 million shares of our common stock, and (3) issue a contingent note with a principal amount of $6.7 million. In April 2004, we issued the $6.7 million contingent note related to the securities settlement. The note was payable, together with accrued interest, on March 31, 2007 but was extinguished (with no money paid under it) during the third quarter of 2004 under the terms of the note since our common stock traded above the average price of $12.25 per share for 15 consecutive trading days. In addition, upon the occurrence of a change of control that involved us, if the change of control or shareholder approval of the change of control occurred before February 9, 2005, which was twelve months after final court approval of the settlement, we would have been obligated to contribute an additional $3 million to the settlement fund. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing shareholders owning more than 1% but less than 10% of our outstanding common stock to participate in the process to appoint two independent directors to our board of directors (pursuant to which on February 4, 2004 we appointed Margaret K. Dorman and Stephen M. Pazuk to our board of directors) and certain enhancements to our code of conduct.

GKH, which, as of December 31, 2003, owned approximately 10% of Hanover’s outstanding common stock and which sold shares in our March 2001 secondary offering of common stock, are parties to the settlement and have agreed to settle claims against them that arise out of that offering as well as other potential securities, ERISA, and derivative claims. The terms of the settlement required GKH to transfer 2.5 million shares of Hanover common stock from their holdings or from other sources to the settlement fund.

On October 24, 2003, the parties moved the United States District Court for the Southern District of Texas for preliminary approval of the proposed settlement and sought permission to provide notice to the potentially affected persons and to set a date for a final hearing to approve the proposed settlement. On December 5, 2003, the court held a hearing and granted the parties’ motion for preliminary approval of the proposed settlement and, among other things, ordered that notice be provided to appropriate persons and set the date for the final hearing. The final hearing was held on February 6, 2004, and no objections to the settlement or requests to be excluded from the terms of the settlement had been received prior to the deadline set by the court.

On February 9, 2004, the United States District Court for the Southern District of Texas entered three Orders and Final Judgments, approving the settlement on the terms agreed upon in the Stipulation of Settlement with respect to all of the claims described above. The court also entered an Order and Final Judgment approving the plans of allocation with respect to each action, as well as an Order and Final Judgment approving the schedule of attorneys’ fees for counsel for the settling plaintiffs. The time in which

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

these Orders and Final Judgments may be appealed expired on March 10, 2004 without any appeal being lodged. The settlement has therefore become final and has been implemented according to its terms. In March 2004, we issued and delivered to the escrow agent for the settlement fund 2.5 million shares of Hanover common stock, as required by the settlement. The settlement fund shares were distributed in August 2005.

21.   New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position150-3 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $12.0 million in sale leaseback obligations that, as of December 31, 2006, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2006, the yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2006, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). This standard provides clarification that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges. Additionally, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees,and generally would require instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R) did not have a significant effect on our financial position or cash flows, but did impact our results of operations. See Note 16 for a discussion of the impact of the adoption of SFAS 123(R).

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on our consolidated results of operations, cash flows or financial position.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to newly adopted accounting principles, unless impracticable. Corrections of errors will continue to be reported under SFAS 154 by restating prior periods as of the beginning of the first period presented. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on our consolidated results of operations, cash flows or financial position.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of FASB No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We are currently evaluating the provisions of SFAS 155 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation is effective for fiscal years beginning after December 15, 2006. This interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Differences between the amounts recognized in balance sheet prior to adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings (accumulated deficit). We are currently evaluating the provisions of FIN 48 and currently believe the adoption will result in a reduction to stockholders’ equity of an amount between $1.5 million and $6.0 million.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

22.   Industry Segments and Geographic Information

We manage our business segments primarily based upon the type of product or service provided. We have six principal industry segments: U.S. Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; Production and Processing Fabrication — Belleli; and Production and Processing Fabrication — Surface Equipment. The U.S. and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets. The Parts, Service and Used Equipment segment provides a full range of services to support the surface production needs of customers from installation and normal maintenance and services to full operation of a customer’s owned assets and surface equipment as well as sales of used equipment. The Compressor and Accessory Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet standard or unique customer specifications. The Production and Processing Fabrication — Surface Equipment segment designs, fabricates and sells equipment used in the production, treating and processing of crude oil and natural gas. Production and Processing Fabrication — Belleli provides engineering, procurement and construction services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities and construction of evaporators and brine heaters for desalination plants and tank farms.

We evaluate the performance of our segments based on segment gross profit. Segment gross profit for each segment includes direct revenues and operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation, provision for cost of litigation settlement, other expenses and income taxes. Revenues include sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments. Our chief executive officer does not review asset information by segment.

No individual customer accounted for more than 10% of our consolidated revenues during any of the periods presented.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables present sales and other financial information by industry segment, a reconciliation of Hanover’s revenues and other income, and geographic data for the years ended December 31, 2006, 2005 and 2004.

							Compressor		Production and
					Parts, Service		and		Processing Fabrication					Reportable
			International		and Used		Accessory		Surface					Segments
	U.S. Rentals		Rentals		Equipment		Fabrication		Equipment			Belleli		Total		Other(1)		Consolidated
	(In thousands of dollars)
2006
Revenues from external customers	$	384,292	$	263,228	$	224,810	$	303,205	$	174,770		$	254,927	$	1,605,232	$	—	$	1,605,232
Gross profit		231,687		166,597		40,845		53,295		35,252	��		27,855		555,531		—		555,531
Total assets		1,358,018		637,723		162,688		134,336		62,772			126,967		2,482,504		588,385		3,070,889
Capital expenditures		138,686		87,641		—		—		247			17,282		243,856		2,727		246,583
2005
Revenues from external customers	$	351,128	$	232,587	$	225,636	$	179,954	$	181,574		$	178,693	$	1,349,572	$	—	$	1,349,572
Gross profit		211,663		156,075		56,468		23,540		23,581			10,762		482,089		—		482,089
Total assets		1,415,879		669,421		63,909		70,170		48,880			105,302		2,373,561		489,435		2,862,996
Capital expenditures		61,370		87,858		—		—		123			4,577		153,928		1,218		155,146
2004
Revenues from external customers	$	341,570	$	214,598	$	180,321	$	158,629	$	132,684		$	137,600	$	1,165,402	$	—	$	1,165,402
Gross profit		196,990		150,645		44,392		13,797		14,588			13,445		433,857		—		433,857
Total assets		1,468,060		616,339		61,078		56,825		45,185			99,964		2,347,451		423,778		2,771,229
Capital expenditures		40,271		36,713		—		—		139			7,768		84,891		5,605		90,496

	Years Ended December 31,
	2006		2005		2004
	(In thousands)
Total revenue for reportable segments.	$	1,605,232	$	1,349,572	$	1,165,402
Gain on sale of business and other income(2)		65,431		26,017		23,193
Total consolidated revenues and other income	$	1,670,663	$	1,375,589	$	1,188,595

Geographic Data

	United States		International(3)		Consolidated
	(In thousands of dollars)
2006
Revenues from external customers	$	888,290	$	716,942	$	1,605,232
Property, plant and equipment, net	$	1,250,656	$	612,796	$	1,863,452
2005
Revenues from external customers	$	713,563	$	636,009	$	1,349,572
Property, plant and equipment, net	$	1,255,935	$	567,165	$	1,823,100
2004
Revenues from external customers	$	618,792	$	546,610	$	1,165,402
Property, plant and equipment, net	$	1,315,610	$	560,738	$	1,876,348

(1)	Includes investments in non-consolidated affiliates and other corporate related items.
(2)	Includes equity in income of non-consolidated affiliates and gain on sale of business and other income.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(3) International operations include approximately $113.2 million, $109.9 million and $121.2 million of revenues and $190.5 million, $192.9 million and $197.6 million of property, plant and equipment, net, for 2006, 2005 and 2004, respectively, related to operations in Venezuela.

23.   Impact of Hurricanes

Hurricanes Katrina and Rita caused operational disruptions, including the shutdown of our Gulf Coast facilities for a few days, that negatively impacted our financial performance in the third quarter of 2005. During the year ended December 31, 2005, we recorded $0.2 million in depreciation expense and $0.6 million of U.S. Rentals repair expense to record the insurance deductibles related to our estimate of the damage done to units impacted by Hurricanes Katrina and Rita.

We have notified our insurance underwriters of our potential losses and have begun filing our claim for damages caused by Hurricanes Katrina and Rita, and we have been working with an adjuster for both hurricanes. We are continuing to evaluate and document the damage caused by these two hurricanes. We have expensed our insurance deductibles and we do not believe the remaining impact from repair or replacement of the affected units will be material to our consolidated results of operations, cash flows or financial position.

24.   Subsequent Events

On February 5, 2007, we entered into an Agreement and Plan Merger (“Merger Agreement”) with Universal Compression Holdings, Inc., a Delaware corporation (“Universal”), Iliad Holdings, Inc., a Delaware corporation (“Iliad”), Hector Sub, Inc., a Delaware corporation (“Hanover Merger Sub”), and Ulysses Sub, Inc., a Delaware corporation (“Universal Merger Sub”). Iliad is a newly formed, wholly owned direct subsidiary of Universal, and Hanover Merger Sub and Universal Merger Sub are direct wholly owned subsidiaries of Iliad.

The Merger Agreement provides that Universal Merger Sub will merge with and into Universal (the “Universal Merger”) and Hanover Merger Sub will merge with and into us (the “Hanover Merger” and, together with the Universal Merger, the “Mergers”). As a result of the Mergers, the holders of Universal common stock will have the right to receive one share of Iliad common stock in exchange for each Universal share, and the holders of our common stock will have the right to receive 0.325 shares of Iliad common stock in exchange for each share of our common stock held by such holder. Universal and Hanover will continue as wholly owned subsidiaries of Iliad.

All outstanding equity awards at the effective time of the Mergers will be assumed by Iliad and converted into awards to receive shares of Iliad common stock. Each outstanding right or option to acquire one share of our common stock outstanding immediately prior to the Hanover Merger will be converted into an option to acquire 0.325 shares of Iliad common stock at an adjusted exercise price. Each outstanding right or option to acquire one share of Universal common stock outstanding immediately prior to the Universal Merger will be converted into an option to acquire one share of Iliad common stock at the same exercise price. Universal’s and our equity incentive plans will be assumed by Iliad.

Consummation of the Mergers is subject to customary conditions, including, among others, (1) approval of the stockholders of each of Hanover and Universal, (2) the receipt of required regulatory approvals, (3) the receipt of consents under the parties’ respective bank credit facilities and the arrangement of financings to provide sufficient funds to repay or repurchase any indebtedness required to be repaid upon consummation of the Mergers and (4) the absence of any material adverse effect with respect to Hanover’s and Universal’s business, as applicable.

The Merger Agreement contains certain termination rights for us and Universal. Upon termination of the Merger Agreement under certain specified circumstances, one party would be required to pay the other party a termination fee of up to $70 million.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with the approval of the Merger Agreement, on February 3, 2007, our Board of Directors approved an amendment to our 2006 Stock Incentive Plan (the “Stock Incentive Plan Amendment”) to allow us to make awards under the 2006 Stock Incentive Plan after the Stock Incentive Plan Amendment that will not automatically accelerate vesting upon the consummation of the Mergers.

In December 2006 and February 2007, we announced irrevocable calls for redemption in the first quarter of 2007 of a portion of our 7.25% Convertible Junior Subordinated Notes due 2029. All of the Jr. TIDES Notes are owned by Hanover Compressor Capital Trust, a Delaware business trust and the Trust is required to use the proceeds to redeem its 7.25% Convertible Preferred Securities and its 7.25% Convertible Common Securities. Hanover owns all of the TIDES Common Securities. Of the $49 million of TIDES Preferred Securities called in the aggregate, $1.4 million was converted in December 2006 into 0.1 million shares of our common stock and the remainder has been or will be converted or redeemed in the first quarter of 2007.

25.   Guarantor Subsidiary

The Company’s obligations under its 8.625% Senior Notes due 2010, 9% Senior Notes due 2014 and 7.5% Senior Notes due 2013 are jointly and severally, fully and unconditionally guaranteed by HCLP. As a result of these guarantee arrangements, the Company is required to present the following condensed consolidating financial information pursuant toRule 3-10 ofRegulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the Company’s share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

F-47

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet

December 31, 2006

			Guarantor		Other
	Parent		Subsidiary		Subsidiaries		Eliminations			Consolidation
	(In thousands)
ASSETS
Total current assets	$	—	$	443,759	$	444,561	$	(7,657	)	$	880,663
Property, plant and equipment, net		—		1,027,123		836,329		—			1,863,452
Investments in non-consolidated affiliates		—		—		89,974		—			89,974
Investments in affiliates		1,227,369		216,536		1,227,369		(2,671,274	)		—
Intercompany receivables		725,804		378,344		698,891		(1,803,039	)		—
Other assets		53,649		220,921		12,038		(49,808	)		236,800
Total Long-term Assets		2,006,822		1,842,924		2,864,601		(4,524,121	)		2,190,226
Total Assets	$	2,006,822	$	2,286,683	$	3,309,162	$	(4,531,778	)	$	3,070,889
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities	$	10,719	$	270,413	$	280,769	$	(7,803	)	$	554,098
Long-term debt		981,821		20,222		383,000		(20,000	)		1,365,043
Intercompany payables		—		666,250		1,116,789		(1,783,039	)		—
Other long-term liabilities		—		102,429		72,708		(49,662	)		125,475
Total liabilities		992,540		1,059,314		1,853,266		(1,860,504	)		2,044,616
Minority interest		—		—		11,991		—			11,991
Stockholders’ equity		1,014,282		1,227,369		1,443,905		(2,671,274	)		1,014,282
Total Liabilities and Stockholders’ Equity	$	2,006,822	$	2,286,683	$	3,309,162	$	(4,531,778	)	$	3,070,889

F-48

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet

December 31, 2005

			Guarantor		Other
	Parent		Subsidiary		Subsidiaries		Eliminations			Consolidation
	(In thousands)
ASSETS
Total current assets	$	—	$	351,617	$	366,843	$	(14,075	)	$	704,385
Property, plant and equipment, net		—		1,011,550		811,550		—			1,823,100
Investments in non-consolidated affiliates		—		—		90,741		—			90,741
Investments in affiliates		1,173,864		277,103		1,173,864		(2,624,831	)		—
Intercompany receivables		832,512		372,603		773,553		(1,978,668	)		—
Other assets		9,264		174,629		64,865		(3,988	)		244,770
Total Long-term Assets		2,015,640		1,835,885		2,914,573		(4,607,487	)		2,158,611
Total Assets	$	2,015,640	$	2,187,502	$	3,281,416	$	(4,621,562	)	$	2,862,996
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities	$	15,741	$	168,882	$	180,888	$	(12,820	)	$	352,691
Long-term debt		1,090,117		48,442		383,000		(48,000	)		1,473,559
Intercompany payables		—		736,745		1,193,923		(1,930,668	)		—
Other long-term liabilities		—		59,569		60,765		(5,243	)		115,091
Total liabilities		1,105,858		1,013,638		1,818,576		(1,996,731	)		1,941,341
Minority interest		—		—		11,873		—			11,873
Stockholders’ equity		909,782		1,173,864		1,450,967		(2,624,831	)		909,782
Total Liabilities and Stockholders’ Equity	$	2,015,640	$	2,187,502	$	3,281,416	$	(4,621,562	)	$	2,862,996

F-49

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations

Year Ended December 31, 2006

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidation
	(In thousands)
Revenues	$	—		$	1,053,020		$	552,212		$	—		$	1,605,232
Equity in income of non-consolidating affiliates		—			—			19,430			—			19,430
Gain on sale of business and other income		—			31,012			14,989			—			46,001
Revenues and other income		—			1,084,032			586,631			—			1,670,663
Costs and expenses		932			889,917			544,515			—			1,435,364
Other (income) expense:
Interest expense, net		75,510			7,290			35,206			—			118,006
Debt extinguishment costs		—			5,902			—			—			5,902
Intercompany charges, net		(59,981	)		109,032			(49,051	)		—			—
Equity in (income) loss of affiliates		(69,426	)		(32,895	)		(69,426	)		171,747			—
Other, net		—			(168	)		(2,945	)		—			(3,113	)
Income (loss) from continuing operations before income taxes		52,965			104,954			128,332			(171,747	)		114,504
Provision for (benefit from) income taxes		(33,558	)		35,745			26,595			—			28,782
Income (loss) from continuing operations		86,523			69,209			101,737			(171,747	)		85,722
Income (loss) from discontinued operations		—			(153	)		584			—			431
Cumulative effect of accounting change		—			370			—			—			370
Net income (loss)	$	86,523		$	69,426		$	102,321		$	(171,747	)	$	86,523

F-50

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Operations

Year Ended December 31, 2005

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidation
	(In thousands)
Revenues	$	—		$	850,299		$	499,273		$	—		$	1,349,572
Equity in income of non-consolidating affiliates		—			—			21,466			—			21,466
Gain on sale of business and other income		—			1,651			2,900			—			4,551
Revenues and other income		—			851,950			523,639			—			1,375,589
Costs and expenses		932			742,805			488,625			—			1,232,362
Other (income) expense:
Interest expense, net		81,689			9,529			45,709			—			136,927
Debt extinguishment costs		—			7,318			—			—			7,318
Intercompany charges, net		(66,156	)		127,182			(61,026	)		—			—
Equity in (income) loss of affiliates		25,005			(18,063	)		25,005			(31,947	)		—
Other, net		—			205			8,211			—			8,416
Income (loss) from continuing operations before income taxes		(41,470	)		(17,026	)		17,115			31,947			(9,434	)
Provision for (benefit from) income taxes		(3,453	)		8,316			22,851			—			27,714
Income (loss) from continuing operations		(38,017	)		(25,342	)		(5,736	)		31,947			(37,148	)
Income (loss) from discontinued operations		—			337			(1,206	)		—			(869	)
Net income (loss)	$	(38,017	)	$	(25,005	)	$	(6,942	)	$	31,947		$	(38,017	)

Condensed Consolidating Statement of Operations
Year Ended December 31, 2004

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidation
	(In thousands)
Revenues	$	—		$	753,038		$	412,364		$	—		$	1,165,402
Equity in income of non-consolidating affiliates		—			(666	)		20,446			—			19,780
Gain on sale of business and other income		—			2,165			1,248			—			3,413
Revenues and other income		—			754,537			434,058			—			1,188,595
Costs and expenses		932			688,535			390,452			—			1,079,919
Other (income) expense:
Interest expense, net		69,168			27,687			50,123			—			146,978
Intercompany charges, net		(53,195	)		102,031			(48,836	)		—			—
Equity in (income) loss of affiliates		35,413			(25,802	)		35,413			(45,024	)		—
Other, net		(4,163	)		(530	)		(4,285	)		—			(8,978	)
Income (loss) from continuing operations before income taxes		(48,155	)		(37,384	)		11,191			45,024			(29,324	)
Provision for (benefit from) income taxes		(4,149	)		(1,486	)		30,402			—			24,767
Income (loss) from continuing operations		(44,006	)		(35,898	)		(19,211	)		45,024			(54,091	)
Income from discontinued operations		—			485			9,600			—			10,085
Net income (loss)	$	(44,006	)	$	(35,413	)	$	(9,611	)	$	45,024		$	(44,006	)

F-51

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2006

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidation
	(In thousands)
Cash flows from operating activities:
Net cash provided by (used in) continuing operations	$	(15,409	)	$	111,632		$	113,312		$	—	$	209,535
Net cash used in discontinued operations		—			(446	)		—			—		(446	)
Net cash provided by (used in) operating activities		(15,409	)		111,186			113,312			—		209,089
Cash flows from investing activities:
Capital expenditures		—			(130,656	)		(115,927	)		—		(246,583	)
Proceeds from sale of property, plant and equipment		—			15,160			11,130			—		26,290
Proceeds from sale of business		—			51,500			625			—		52,125
Net cash used in investing activities		—			(63,996	)		(104,172	)		—		(168,168	)
Cash flows from financing activities:
Borrowings (repayments) on revolving credit facilities, net		—			(28,000	)		—			—		(28,000	)
Proceeds from the issuance of senior notes		150,000			—			—			—		150,000
Payments for debt issue costs		—			(3,832	)		—			—		(3,832	)
Proceeds from warrant conversions and stock options exercised		5,675			—			—			—		5,675
Repayment of zero coupon subordinated notes principal		(150,000	)		—			—			—		(150,000	)
Stock-based compensation excess tax benefit		—			1,516			—			—		1,516
Capital contribution (distribution), net		9,734			(9,734	)		—			—		—
Borrowings (repayments) between subsidiaries, net		—			(11,557	)		11,557			—		—
Borrowings (repayments) on other debt, net		—			7,046			(539	)		—		6,507
Net cash provided by (used in) financing activities		15,409			(44,561	)		11,018			—		(18,134	)
Effect of exchange rate changes on in cash and cash equivalents		—			—			2,266			—		2,266
Net increase in cash and cash equivalents		—			2,629			22,424			—		25,053
Cash and cash equivalents at beginning of year		—			10,724			37,509			—		48,233
Cash and cash equivalents at end of year	$	—		$	13,353		$	59,933		$	—	$	73,286

F-52

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidation
	(In thousands)
Cash flows from operating activities:
Net cash provided by (used in) continuing operations	$	(15,643	)	$	144,908		$	(6,395	)	$	—		$	122,870
Net cash used in discontinued operations		—			(383	)		—			—			(383	)
Net cash provided by (used in) operating activities		(15,643	)		144,525			(6,395	)		—			122,487
Cash flows from investing activities:
Capital expenditures		—			(229,390	)		(97,933	)		172,177			(155,146	)
Proceeds from sale of property, plant and equipment		—			44,070			179,208			(172,177	)		51,101
Proceeds from sale of business		—			2,724			—			—			2,724
Cash used for business acquisitions, net		—			—			(3,426	)		—			(3,426	)
Cash used to acquire investments in and advances to non-consolidated affiliates		—			—			(500	)		—			(500	)
Net cash provided by (used in) continuing operations		—			(182,596	)		77,349			—			(105,247	)
Net cash provided by discontinued operations		—			1,220			—			—			1,220
Net cash provided by (used in) investing activities		—			(181,376	)		77,349			—			(104,027	)
Cash flows from financing activities:
Borrowings (repayments) on revolving credit facilities, net		—			41,000			—			—			41,000
Borrowings (repayments) between subsidiaries, net		—			(163,908	)		163,908			—			—
Payments for debt issue costs		—			(2,592	)		—			—			(2,592	)
Proceeds from warrant conversions and stock options exercised		4,990			—			—			—			4,990
Capital contribution (distribution), net		(168,447	)		168,447			—			—			—
Proceeds from equity offering, net of issuance costs		179,100			—			—			—			179,100
Payments on compression equipment lease obligations		—			—			(229,766	)		—			(229,766	)
Borrowings (repayments) on other debt, net		—			1,404			(1,026	)		—			378
Net cash provided by (used in) financing activities		15,643			44,351			(66,884	)		—			(6,890	)
Effect of exchange rate changes on in cash and cash equivalents		—			—			(1,413	)		—			(1,413	)
Net increase in cash and cash equivalents		—			7,500			2,657			—			10,157
Cash and cash equivalents at beginning of year		—			3,224			34,852			—			38,076
Cash and cash equivalents at end of year	$	—		$	10,724		$	37,509		$	—		$	48,233

F-53

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2004

				Guarantor			Other
	Parent			Subsidiary			Subsidiaries			Eliminations		Consolidation
	(In thousands)
Cash flows from operating activities:
Net cash provided by (used in) continuing operations	$	(18,090	)	$	100,308		$	41,504		$	—	$	123,722
Net cash provided by discontinued operations		—			8,115			—			—		8,115
Net cash provided by (used in) operating activities		(18,090	)		108,423			41,504			—		131,837
Cash flows from investing activities:
Capital expenditures		—			(33,216	)		(57,280	)		—		(90,496	)
Proceeds from sale of property, plant and equipment		—			19,093			5,172			—		24,265
Proceeds from sale of non-consolidated affiliates		—			4,663			—			—		4,663
Cash used to acquire investments in and advances to non-consolidated affiliates		—			(250	)		—			—		(250	)
Net cash used in continuing operations		—			(9,710	)		(52,108	)		—		(61,818	)
Net cash provided by discontinued operations		—			13,314			59,633			—		72,947
Net cash provided by investing activities		—			3,604			7,525			—		11,129
Cash flows from financing activities:
Borrowings (repayments) on revolving credit facilities, net		—			(20,000	)		—			—		(20,000	)
Borrowings (repayments) between subsidiaries, net		—			15,938			(15,938	)		—		—
Payments for debt issue costs		—			(253	)		—			—		(253	)
Proceeds from warrant conversions and stock options exercised		9,549			—			—			—		9,549
Issuance of senior notes, net		194,125			—			—			—		194,125
Capital contribution (distribution), net		(185,584	)		185,584			—			—		—
Payments on compression equipment lease obligations		—			(315,000	)		—			—		(315,000	)
Repayments on other debt		—			(3,358	)		(27,413	)		—		(30,771	)
Net cash provided by (used in) financing activities		18,090			(137,089	)		(43,351	)		—		(162,350	)
Effect of exchange rate changes on in cash and cash equivalents		—			—			841			—		841
Net increase (decrease) in cash and cash equivalents		—			(25,062	)		6,519			—		(18,543	)
Cash and cash equivalents at beginning of year		—			28,286			28,333			—		56,619
Cash and cash equivalents at end of year	$	—		$	3,224		$	34,852		$	—	$	38,076

F-54

HANOVER COMPRESSOR COMPANY

SELECTED QUARTERLY UNAUDITED FINANCIAL DATA

The table below sets forth selected unaudited quarterly financial information for 2006 and 2005:

	1st			2nd			3rd			4th
	Quarter			Quarter			Quarter			Quarter
	(In thousands, except per share amounts)
2006(1):
Revenues from external customers	$	336,730		$	390,111		$	415,804		$	462,587
Gross profit		120,589			136,945			140,779			157,218
Income before cumulative effect of accounting changes		22,049			21,704			12,279			30,121
Net income		22,419			21,704			12,279			30,121
Income per common share and income per common share before cumulative effect of accounting changes:
Basic	$	0.22		$	0.21		$	0.12		$	0.30
Diluted	$	0.22		$	0.21		$	0.12		$	0.28
2005(2):
Revenues from external customers	$	296,601		$	339,132		$	362,048		$	351,791
Gross profit		111,221			123,773			123,832			123,263
Net loss		(12,464	)		(6,416	)		(14,938	)		(4,199	)
Loss per common share:
Basic	$	(0.15	)	$	(0.07	)	$	(0.16	)	$	(0.04	)
Diluted	$	(0.15	)	$	(0.07	)	$	(0.16	)	$	(0.04	)

(1)

In the first quarter of 2006, we recorded a $5.9 million charge for debt extinguishment costs and a $28.4 million pre-tax gain on the sale of our U.S. amine treating business. In the second quarter of 2006, we recorded an $8.0 million pre-tax gain on the sale of our fabrication facilities in Canada. In the fourth quarter of 2006, we recorded a benefit for the reversal of $10.2 million of the valuation allowance on our net deferred tax assets in the U.S.

(2)

During the third quarter of 2005, we recorded a $7.3 million charge for debt extinguishment costs and a $2.5 million write-off of deferred financing costs.

F-55

SCHEDULE II

HANOVER COMPRESSOR COMPANY

VALUATION AND QUALIFYING ACCOUNTS

			Additions
	Balance at		Charged to					Balance at
	Beginning		Costs and					End of
Description	of Period		Expenses		Deductions			Period
	(In thousands)
Allowance for doubtful accounts deducted from accounts receivable in the balance sheet
2006	$	4,751	$	2,465	$	2,278	(1)	$	4,938
2005		7,573		1,955		4,777	(1)		4,751
2004		5,460		2,658		545	(1)		7,573
Allowance for obsolete and slow moving inventory deducted from inventories in the balance sheet
2006	$	11,797	$	2,293	$	2,178	(2)	$	11,912
2005		11,699		148		50	(2)		11,797
2004		12,729		1,062		2,092	(2)		11,699
Allowance for deferred tax assets not expected to be realized
2006	$	75,420	$	13,061	$	41,485	(3)	$	46,996
2005		65,441		13,015		3,036	(3)		75,420
2004		55,015		23,429		13,003	(3)		65,441
Allowance for employee loans
2004	$	6,021	$	—	$	6,021		$	—

(1)	Uncollectible accounts written off, net of recoveries.
(2)	Obsolete inventory written off at cost, net of value received.
(3)	Reflects utilization of tax assets that previously had a valuation allowance.

S-1

EXHIBIT INDEX

Exhibit
Number			Description
	2	.1	Agreement and Plan of Merger, dated February 5, 2007, by and among Hanover Compressor Company, Universal Compression Holdings, Inc., Iliad Holdings, Inc., Hector Sub, Inc., and Ulysses Sub, Inc. incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2007.
	3	.1	Certificate of Incorporation of the Hanover Compressor Holding Co., incorporated by reference to Exhibit 3.1 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.2	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.3	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Company, dated July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company’s Current Report onForm 8-K filed with the SEC on February 5, 2001.
	3	.4	Amended and Restated Bylaws of the Company, dated March 10, 2004, incorporated by reference to Exhibit 3.4 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.1	Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (FileNo. 333-24953) onForm S-1, as amended.
	4	.2	Form of Hanover Compressor Capital Trust 71/4% Convertible Preferred Securities, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	4	.3	Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15, 1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 filed with the SEC on February 14, 2000.
	4	.4	Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029, incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	4	.5	Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of March 15, 2001, between the Company and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.6	Form of 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 4.8 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.7	Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the 2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	4	.8	Form of 8.50% Senior Secured Notes due 2008, incorporated by reference to Exhibit 4.10 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.9	Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the 2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	4	.10	Form of 8.75% Senior Secured Notes due 2011, incorporated by reference to Exhibit 4.12 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.11	Senior Indenture, dated as of December 15, 2003, among the Company, Subsidiary Guarantors named therein and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement onForm 8-A, as filed with the SEC on December 15, 2003.
	4	.12	First Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 8.625% Senior Notes due 2010, dated as of December 15, 2003, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement onForm 8-A, as filed with the SEC on December 15, 2003.

Exhibit
Number			Description
	4	.13	Form of 8.625% Senior Notes due 2010, incorporated by reference to Exhibit 4.17 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.14	Second Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 4.75% Convertible Senior Notes due 2014, dated as of December 15, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.4 to the Company’s Current Report onForm 8-K, as filed with the SEC on December 16, 2003.
	4	.15	Form of 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.19 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	4	.16	Third Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 9.0% Senior Notes due 2014, dated as of June 1, 2004, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership onForm 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.17	Form of 9% Senior Notes due 2014, incorporated by reference to Exhibit 4.3 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership onForm 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.18	Fourth Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 71/2 % Senior Notes due 2013, dated as of March 31, 2006, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on March 31, 2006.
	4	.19	Form of Note for the 71/2 % Senior Notes due 2013, incorporated by reference to Exhibit 4.2 to the Company’s Current Report onForm 8-K, as filed with the SEC on March 31, 2006.
	10	.1	Stipulation and Agreement of Settlement, dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2003.
	10	.2	PIGAP Settlement Agreement, dated as of May 14, 2003, by and among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	10	.3	Credit Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership, The Royal Bank of Scotland plc as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent, and the several lenders parties thereto, incorporated by reference to Exhibit 10.3 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.
	10	.4	Guarantee and Collateral Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership and certain of their subsidiaries in favor of JPMorgan Chase Bank, N.A. as Collateral Agent, incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
	10	.5	First Amendment and Consent, dated as of June 27, 2006 with respect to the Hanover Compressor Company and Hanover Compression Limited Partnership Credit Agreement dated November 21, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2006.
	10	.6	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the “2001A Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.7	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.8	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.66 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.9	Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.67 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.

Exhibit
Number			Description
	10	.10	Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.11	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the “2001B Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.12	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.13	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.72 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.14	Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.73 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.15	Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2001.
	10	.16	Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees, incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 filed with the SEC on February 14, 2000.
	10	.17	Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	10	.18	Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (FileNo. 333-30344) onForm S-3 as filed with the SEC on February 14, 2000.
	10	.19	Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2001.
	10	.20	Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.1 to the Company’s Current Report onForm 8-K filed with the SEC on February 6, 2003.
	10	.21	Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.3 to the Company’s Current Report onForm 8-K filed with the SEC on September 14, 2001.
	10	.22	Amendment No. 2, dated as of July 8, 2005 to Purchase Agreement by and among the Company, Hanover Compression Limited Partnership and Schlumberger Technology Corporation, for itself and as successor in interest to Camco International Inc., Schlumberger Surenco S.A. and Schlumberger Oilfield Holdings Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.
	10	.23	Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement (FileNo. 333-24953) onForm S-1, as amended.††
	10	.24	Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 1998.††

Exhibit
Number			Description
	10	.25	First Amendment to the Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.26	Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to Exhibit 10.33 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1998.††
	10	.27	Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (FileNo. 333-32092) onForm S-8 filed with the SEC on March 10, 2000.††
	10	.28	First Amendment to the Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 10.3 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.29	Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (FileNo. 333-73904) onForm S-8 filed with the SEC on November 21, 2001.††
	10	.30	First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.31	Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 15, 2003.††
	10	.32	First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company’s Current Report onForm 8-K filed with the SEC on July 13, 2005.††
	10	.33	Hanover Compressor Company 2006 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on March 24, 2006.††
	10	.34	First Amendment to be effective February 3, 2007 to the Hanover Compressor Company 2006 Stock Incentive Plan incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on February 5, 2007. ††
	10	.35	Hanover Compressor Company 2006 Long-Term Cash Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006. ††
	10	.36	Employment Letter with Peter Schreck, dated August 22, 2000, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003.††
	10	.37	Employment Letter with Stephen York, dated March 6, 2002, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2003.††
	10	.38	Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2004.††
	10	.39	Gary M. Wilson letter dated July 29, 2005 relating to employment benefits. †† *
	10	.40	Gary M. Wilson letter dated October 10, 2006 relating to employment benefits. †† *
	10	.41	Employment Letter with John E. Jackson dated October 5, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on October 6, 2004.††
	10	.42	Change of Control and Severance Agreement dated July 29, 2005 between John E. Jackson and the Company, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended June 30, 2005.††
	10	.43	Employment Letter with Lee E. Beckelman dated January 31, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on February 1, 2005.††
	10	.44	Employment Letter with Anita H. Colglazier dated April 4, 2002 with explanatory note, incorporated by reference to Exhibit 10.61 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2004.††
	10	.45	Letter to Brian Matusek regarding employment terms, incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the SEC on April 18, 2005. ††
	10	.46	Employment Letter with Norrie Mckay effective as of May 16, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended March 31, 2005.††

Exhibit
Number			Description
	10	.47	Form of Change of Control Agreement dated July 29, 2005 between the Company and each of Messrs. Lee E. Beckelman, Brian A. Matusek, Gary M. Wilson, Steven W. Muck, Norman A. Mckay, Stephen P. York and Peter G. Schreck and Ms. Anita H. Colglazier, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q For the quarter ended June 30, 2005.††
	12	.1	Computation of ratio of earnings to fixed charges.*
	14	.1	P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct (the “Code of Ethics”), incorporated by reference to Exhibit 14.1 to the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.
	14	.2	Amendment to the Code of Ethics, incorporated by reference to Exhibit 14.1 to the Company’s Current Report onForm 8-K, as filed with the SEC on January 20, 2005.
	21	.1	List of Subsidiaries.*
	23	.1	Consent of PricewaterhouseCoopers LLP.*
	31	.1	Certification of the Chief Executive Officer pursuant toRule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	31	.2	Certification of the Chief Financial Officer pursuant toRule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*	Filed herewith
††	Management contract or compensatory plan or arrangement