UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
		OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		FOR THE TRANSITION PERIOD FROM TO .

(MARK ONE)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE TRANSITION PERIOD FROM ______________________ TO __________________________.

Commission File No. 333-75814-1

Hanover Compression Limited Partnership

(Exact name of registrant as specified in its charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		75-2344249 (I.R.S. Employer Identification No.)
12001 North Houston Rosslyn, Houston, Texas (Address of principal executive offices)		77086 (Zip Code)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		75-2344249 (I.R.S. Employer Identification No.)


12001 North Houston Rosslyn, Houston, Texas (Address of principal executive offices)		77086 (Zip Code)

(281) 447-8787
(Registrant’s telephone number, including area code)

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~~[x]~~ þ No ~~[ ]~~o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ~~[ ]~~ o No ~~[x]~~þ

The registrant meets the conditions set ~~forth~~fourth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. ~~Part~~ Part II, Items 2, 3, 4 and Part I, Item 3, have been omitted in accordance with Instruction (H)(2)(b) and (c), respectively.

TABLE OF CONTENTS

	Page
Part I. Financial Information	3
PART I. FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS	3	3
CONDENSED CONSOLIDATED BALANCE SHEET	3	3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS	4	4
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)	5	5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS	6	6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7	7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19	19
ITEM 4. CONTROLS AND PROCEDURES	34	34
PART II. OTHER INFORMATION	35	34
ITEM 1. LEGAL PROCEEDINGS	35	34
ITEM 5. OTHER INFORMATION	35	35
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K	36
ITEM 6: EXHIBITS		36
SIGNATURES	37	37
EXHIBIT INDEX	38
Certification of CEO pursuant to Section 302
Certification of CFO pursuant to Section 302
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

~~Part~~PART I. ~~Financial~~FINANCIAL ~~Information~~INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANOVER COMPRESSION LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED BALANCE SHEET (in thousands of dollars)

(in thousands of dollars)


	June 30,		December 31,
	2005		2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	31,720	$	38,076
Accounts receivable, net of allowance of $6,865 and $7,573, respectively		212,291		205,644
Inventory, net		202,916		184,798
Costs and estimated earnings in excess of billings on uncompleted contracts		85,829		70,103
Prepaid taxes		2,627		6,988
Current deferred income tax		11,758		13,200
Assets held for sale		4,643		5,169
Other current assets		41,505		30,869


Total current assets		593,289		554,847
Property, plant and equipment, net		1,828,268		1,876,348
Goodwill, net		184,757		183,190
Intangible and other assets		53,867		61,110
Investments in non-consolidated affiliates		86,682		90,326
Assets held for sale		5,714		6,391


Total assets	$	2,752,577	$	2,772,212


LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Short-term debt	$	4,407	$	5,106
Current maturities of long-term debt		1,457		1,430
Accounts payable, trade		61,689		57,402
Accrued liabilities		107,980		115,279
Advance billings		37,837		42,588
Liabilities related to assets held for sale		472		517
Billings on uncompleted contracts in excess of costs and estimated earnings		15,162		20,256


Total current liabilities		229,004		242,578
Long-term debt		623,361		608,613
Due to general partner		761,573		750,217
Other liabilities		36,739		47,232
Deferred income taxes		59,807		66,901


Total liabilities		1,710,484		1,715,541


Commitments and contingencies (Note 7)
Minority interest		17,050		18,778
Partners’ equity:
Partners’ capital		1,010,974		1,020,375
Accumulated other comprehensive income		14,069		17,518



Total partners’ equity		1,025,043		1,037,893


Total liabilities and partners’ equity	$	2,752,577	$	2,772,212

	June 30,		December 31,
	2004		2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	51,874	$	56,619
Accounts receivable, net of allowance of $7,737 and $5,460		222,059		195,183
Inventory, net		189,198		155,297
Costs and estimated earnings in excess of billings on uncompleted contracts		62,996		50,128
Prepaid taxes		4,194		4,677
Current deferred income tax		20,679		26,203
Assets held for sale		13,349		17,344
Other current assets		30,451		36,786
Total current assets		594,800		542,237
Property, plant and equipment, net		1,965,792		2,027,654
Goodwill, net		176,798		176,629
Intangible and other assets		59,772		64,258
Investments in non-consolidated affiliates		87,365		88,718
Assets held for sale, non-current		11,070		13,981
Total assets	$	2,895,597	$	2,913,477
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Short-term debt	$	24,499	$	32,519
Current maturities of long-term debt		1,002		3,511
Accounts payable, trade		66,237		53,354
Accrued liabilities		109,463		119,877
Advance billings		22,492		34,380
Liabilities held for sale		451		1,128
Billings on uncompleted contracts in excess of costs and estimated earnings		26,173		8,427
Total current liabilities		250,317		253,196
Long-term debt		707,761		939,292
Due to general partner		739,453		529,251
Other liabilities		60,602		39,031
Deferred income taxes		65,418		63,185
Total liabilities		1,823,551		1,823,955
Commitments and contingencies (Note 9)
Minority interest		22,228		28,628
Partners’ equity:
Partners’ capital		1,038,741		1,051,667
Accumulated other comprehensive income		11,077		9,227
Total partners’ equity		1,049,818		1,060,894
Total liabilities and partners’ equity	$	2,895,597	$	2,913,477

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

~~The accompanying notes are~~3 ~~an integral part of these condensed consolidated financial statements.~~

3 Table of Contents

~~Table~~HANOVER ofCOMPRESSION ~~Contents~~LIMITED PARTNERSHIP

~~HANOVER~~CONDENSED ~~COMPRESSION~~CONSOLIDATED ~~LIMITED~~STATEMENT ~~PARTNERSHIP~~OF OPERATIONS (in thousands of dollars) (unaudited)

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Revenues and other income:
U.S. rentals	$	87,691		$	83,680		$	174,845		$	170,272
International rentals		55,521			54,599			109,436			106,099
Parts, service and used equipment		50,531			41,414			83,968			85,796
Compressor and accessory fabrication		41,092			44,159			73,616			72,309
Production and processing equipment fabrication		104,297			63,017			193,868			116,446
Equity in income of non-consolidated affiliates		5,158			5,088			9,732			9,771
Other		502			919			963			2,014


		344,792			292,876			646,428			562,707


Expenses:
U.S. rentals		32,984			34,950			67,060			70,489
International rentals		17,144			13,967			34,646			28,740
Parts, service and used equipment		36,215			31,364			61,275			64,333
Compressor and accessory fabrication		36,587			40,454			66,204			66,367
Production and processing equipment fabrication		92,429			53,887			171,554			101,583
Selling, general and administrative		43,909			41,882			86,067			82,256
Foreign currency translation		4,955			(96	)		5,226			(1,169	)
Other		274			387			393			347
Depreciation and amortization		45,236			43,113			90,456			84,910
Interest expense		30,788			31,727			62,855			63,056


		340,521			291,635			645,736			560,912


Income from continuing operations before income taxes		4,271			1,241			692			1,795
Provision for income taxes		8,087			6,160			3,904			13,698


Loss from continuing operations		(3,816	)		(4,919	)		(3,212	)		(11,903	)
Income (loss) from discontinued operations, net of tax		(221	)		481			(492	)		1,664
Income (loss) from sales or write—downs of discontinued operations, net of tax		(247	)		372			(204	)		372


Net loss	$	(4,284	)	$	(4,066	)	$	(3,908	)	$	(9,867	)

~~(in~~The ~~thousands~~accompanying notes are an integral part of ~~dollars)~~these condensed consolidated financial statements. ~~(unaudited)~~

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues and other income:
Domestic rentals	$	83,680		$	80,256		$	170,272		$	158,905
International rentals		58,359			51,014			113,928			102,454
Parts, service and used equipment		41,913			34,976			86,520			72,746
Compressor and accessory fabrication		44,159			36,420			72,309			57,800
Production and processing equipment fabrication		63,017			65,810			116,446			145,950
Equity in income of non-consolidated affiliates		4,907			6,412			9,759			9,292
Other		646			1,476			1,738			2,904
		296,681			276,364			570,972			550,051
Expenses:
Domestic rentals		34,950			31,006			70,489			62,210
International rentals		15,196			14,905			32,322			29,925
Parts, service and used equipment		31,748			26,011			64,978			50,474
Compressor and accessory fabrication		40,454			32,965			66,370			51,603
Production and processing equipment fabrication		53,887			60,145			101,583			129,707
Selling, general and administrative		41,683			40,222			81,556			79,494
Foreign currency translation		627			(573	)		(875	)		(200	)
Other		387			(862	)		347			505
Depreciation and amortization		44,227			35,876			86,978			70,221
Leasing expense		—			20,804			—			43,139
Interest expense		31,727			8,339			63,056			16,638
		294,886			268,838			566,804			533,716
Income from continuing operations before income taxes		1,795			7,526			4,168			16,335
Provision for income taxes		6,203			3,261			14,291			7,681
Income (loss) from continuing operations		(4,408	)		4,265			(10,123	)		8,654
Income (loss) from discontinued operations, net of tax		(30	)		(58	)		(116	)		417
Income (loss) from sales or write-downs of discontinued operations, net of tax		372			(208	)		372			(1,652	)
Net income (loss)	$	(4,066	)	$	3,999		$	(9,867	)	$	7,419

TheTable accompanying notes are an integral part of these condensed consolidated financial statements. Contents

4HANOVER COMPRESSION LIMITED PARTNERSHIP

~~Table~~CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (in thousands of ~~Contents~~dollars) (unaudited)

HANOVER COMPRESSION LIMITED PARTNERSHIP


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net loss	$	(4,284	)	$	(4,066	)	$	(3,908	)	$	(9,867	)
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		—			4,700			608			5,748

Foreign currency translation adjustment		(1,095	)		(2,991	)		(4,057	)		(3,898	)


Comprehensive loss	$	(5,379	)	$	(2,357	)	$	(7,357	)	$	(8,017	)

~~CONDENSED~~The ~~CONSOLIDATED~~accompanying ~~STATEMENT~~notes OFare ~~COMPREHENSIVE~~an ~~INCOME~~integral ~~(LOSS)~~part of these condensed consolidated financial statements.

~~(in thousands of dollars)~~5 ~~(unaudited)~~

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004			2003		2004			2003
Net income (loss)	$	(4,066	)	$	3,999	$	(9,867	)	$	7,419
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		4,700			262		5,748			688
Foreign currency translation adjustment		(2,991	)		9,277		(3,898	)		12,587
Comprehensive income (loss)	$	(2,357	)	$	13,538	$	(8,017	)	$	20,694

~~The~~HANOVER ~~accompanying~~COMPRESSION ~~notes~~LIMITED ~~are an integral part of these condensed consolidated financial statements.~~PARTNERSHIP

5CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands of dollars) (unaudited)


	Six Months Ended
	June 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(3,908	)	$	(9,867	)
Adjustments:
Depreciation and amortization		90,456			84,910
(Gain) loss from discontinued operations, net of tax		696			(2,036	)
Bad debt expense		1,000			918
(Gain) loss on sale of property, plant and equipment		(1,499	)		756
Equity in income of non-consolidated affiliates, net of dividends received		3,851			(2,545	)
(Gain) loss on derivative instruments		416			(259	)
Gain on sale of non-consolidated affiliates		—			(300	)
Restricted stock compensation expense		2,223			765
Pay-in-kind interest on long-term notes payable		11,356			10,203
Deferred income taxes		(3,472	)		7,562
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(13,235	)		(24,522	)
Inventory		(18,576	)		(30,188	)
Costs and estimated earnings versus billings on uncompleted contracts		(26,882	)		4,204
Accounts payable and other liabilities		(1,610	)		5,888
Advance billings		(3,992	)		(2,444	)
Prepaid, effects of exchange rate on accounts denominated in foreign currencies and other		(114	)		10,778


Net cash provided by continuing operations		36,710			53,823
Net cash provided by (used in) discontinued operations		(239	)		4,298

Net cash provided by operating activities		36,471			58,121


Cash flows from investing activities:
Capital expenditures		(54,104	)		(36,911	)
Proceeds from sale of property, plant and equipment		8,973			7,247
Proceeds from sale of non-consolidated affiliates		—			4,663
Cash used for business acquisitions		(3,426	)		—
Cash used to acquire investments in and advances to non-consolidated affiliates		(500	)		(250	)

Net cash used in continuing operations		(49,057	)		(25,251	)
Net cash provided by discontinued operations		50			6,177


Net cash used in investing activities		(49,007	)		(19,074	)


Cash flows from financing activities:
Borrowings on revolving credit facilities		102,500			18,000
Repayments on revolving credit facilities		(32,500	)		(45,000	)
Payments for debt issue costs		—			(193	)
Partners’ distribution, net		(4,471	)		(2,792	)
Net repayments of other debt		(808	)		(7,559	)
Issuance of senior notes, net		—			194,242
Payments of 2000A equipment lease obligations		—			(200,000	)
Payments of 2000B equipment lease obligations		(57,589	)		—

Net cash provided by (used in) continuing operations		7,132			(43,302	)
Net cash used in discontinued operations		—			—


Net cash provided by (used in) financing activities		7,132			(43,302	)


Effect of exchange rate changes on cash and equivalents		(952	)		(490	)

Net decrease in cash and cash equivalents		(6,356	)		(4,745	)
Cash and cash equivalents at beginning of period		38,076			56,619


Cash and cash equivalents at end of period	$	31,720		$	51,874

~~HANOVER~~The ~~COMPRESSION~~accompanying ~~LIMITED~~notes ~~PARTNERSHIP~~are an integral part of these condensed consolidated financial statements.

~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS~~6

(inTable thousands of dollars) (unaudited) Contents

	Six Months Ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	(9,867	)	$	7,419
Adjustments:
Depreciation and amortization		86,978			70,221
(Income) loss from discontinued operations, net of tax		(256	)		1,235
Bad debt expense		918			2,030
(Gain) loss on sale of property, plant and equipment		745			(819	)
Equity in income of non-consolidated affiliates, net of dividends received		(2,533	)		(9,189	)
Gain on derivative instruments		(259	)		(4,139	)
Provision for inventory impairment and reserves		1,527			2,091
Gain on sale of non-consolidated affiliates		(300	)		—
Restricted stock compensation expense		765			339
Pay-in-kind interest on long-term notes payable		10,203			10,751
Deferred income taxes		7,563			3,018
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(24,999	)		(10,755	)
Inventory		(31,708	)		3,305
Costs and estimated earnings versus billings on uncompleted contracts		4,204			8,827
Accounts payable and accrued liabilities		5,492			(32,023	)
Advance billings		(1,467	)		(5,369	)
Prepaid and other		10,864			10,083
Net cash provided by continuing operations		57,870			57,025
Net cash provided by discontinued operations		251			1,882
Net cash provided by operating activities		58,121			58,907
Cash flows from investing activities:
Capital expenditures		(37,064	)		(76,830	)
Payments for deferred lease transaction costs		—			(1,303	)
Proceeds from sale of property, plant and equipment		7,911			8,916
Proceeds from sale of non-consolidated affiliates		4,663			—
Cash used to acquire investments in and advances to non-consolidated affiliates		(250	)		—
Net cash used in continuing operations		(24,740	)		(69,217	)
Net cash provided by discontinued operations		5,666			4,834
Net cash used in investing activities		(19,074	)		(64,383	)
Cash flows from financing activities:
Borrowings on revolving credit facility		18,000			55,000
Repayments on revolving credit facility		(45,000	)		(49,500	)
Payments for debt issue costs		(193	)		(823	)
Net borrowings (repayments) of other debt		(7,559	)		6,932
Borrowings from general partner, due 2014		194,242			—
Payments of 2000 equipment lease obligations		(200,000	)		—
Partners’ distribution, net		(2,792	)		(10,240	)
Net cash provided by (used in) continuing operations		(43,302	)		1,369
Net cash used in discontinued operations		—			(762	)
Net cash provided by (used in) financing activities		(43,302	)		607
Effect of exchange rate changes on cash and equivalents		(490	)		612
Net decrease in cash and cash equivalents		(4,745	)		(4,257	)
Cash and cash equivalents at beginning of period		56,619			19,011
Cash and cash equivalents at end of period	$	51,874		$	14,754

HANOVER COMPRESSION LIMITED PARTNERSHIP

~~The~~NOTES ~~accompanying~~TO ~~notes~~CONDENSED ~~are~~CONSOLIDATED anFINANCIAL ~~integral part of these condensed consolidated financial statements.~~STATEMENTS

61. BASIS OF PRESENTATION

~~Table~~The accompanying unaudited condensed consolidated financial statements of ~~Contents~~Hanover Compression Limited Partnership (“HCLP”, “we”, “us”, “our” or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. It is the opinion of our management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position, results of operations, and cash flows of HCLP for the periods indicated. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. These interim results are not necessarily indicative of results for a full year.

~~HANOVER~~Stock ~~COMPRESSION~~Options ~~LIMITED~~and ~~PARTNERSHIP~~Stock-Based Compensation

~~NOTES~~We TOare ~~CONDENSED~~an ~~CONSOLIDATED~~indirect ~~FINANCIAL~~wholly-owned ~~STATEMENTS~~subsidiary of Hanover Compressor Company (“Hanover”). Certain of our employees participate in stock incentive plans that provide for the granting of options to purchase shares of Hanover common stock and grants of Hanover restricted common stock. In accordance with Statement of Financial Standards No. 123, “Accounting for Stock-Based Compensation”, HCLP measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees”. Except for shares that vest based on performance, we recognize compensation expense equal to the fair value of the restricted stock at the date of grant over the vesting period related to these grants. For restricted shares that vest based on performance, we will record an estimate of the compensation expense to be expensed over three years related to these restricted shares. The compensation expense that will be recognized in our statement of operations will be adjusted for changes in our estimate of the number of restricted shares that will vest as well as changes in Hanover’s stock price. The following pro forma net income (loss) data illustrates the effect on net income (loss) if the fair value method had been applied to all outstanding and unvested stock options in each period (in thousands).

1. BASIS OF PRESENTATION


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net loss as reported	$	(4,284	)	$	(4,066	)	$	(3,908	)	$	(9,867	)
Add back: Restricted stock grant expense		1,168			374			2,223			765
Deduct: Stock-based employee compensation expense determined under the fair value method		(1,853	)		(714	)		(3,549	)		(1,692	)


Pro forma net loss	$	(4,969	)	$	(4,406	)	$	(5,234	)	$	(10,794	)

~~The accompanying unaudited condensed consolidated financial statements of~~Reclassifications Hanover Compression Limited Partnership (“HCLP”, “we”, “us”, “our” or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. HCLP is a Delaware limited partnership and an indirect wholly owned subsidiary of Hanover Compressor Company (“Hanover”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America are not required in these interim financial statements and have been condensed or omitted. It is the opinion of our management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position, results of operations, and cash flows of HCLP for the periods indicated. The financial statement information included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. These interim results are not necessarily indicative of results for a full year.

~~Stock-Based~~Certain ~~Compensation~~amounts in the prior period’s financial statements have been reclassified to conform to the 2005 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

~~Certain of our employees participate in stock option plans that provide for the granting of options to purchase shares of Hanover common stock~~2. ~~In accordance~~INVENTORY with Statement of Financial Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”), HCLP measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The following pro forma net income (loss) data illustrates the effect on net income (loss) if the fair value method had been applied to all outstanding and unvested stock options in each period (in thousands).

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net income (loss) as reported	$	(4,066	)	$	3,999		$	(9,867	)	$	7,419
Add back: Restricted stock grant expense, net of tax		374			110			765			220
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax		(714	)		(533	)		(1,692	)		(1,041	)
Pro forma net income (loss)	$	(4,406	)	$	3,576		$	(10,794	)	$	6,598

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

As of June 30, 2004, 446,000 shares of Hanover’s restricted stock were outstanding under our incentive compensation plans. We will recognize compensation expense equal to the fair value of the restricted stock at the date of grant over the vesting period related to these grants. During the three months ended June 30, 2004 and 2003, we recognized $0.4 million and $0.2 million, respectively, in compensation expense related to these grants and during the six months ended June 30, 2004 and 2003, we recognized $0.8 million and $0.3 million, respectively, in compensation expense related to these grants. (See Note 14.)


	June 30,		December 31,
	2005		2004
Parts and supplies	$	132,222	$	135,751
Work in progress		59,162		42,708
Finished goods		11,532		6,339


	$	202,916	$	184,798

~~Reclassifications~~As of June 30, 2005 and December 31, 2004, we had inventory reserves of approximately $12.1 million and $11.7 million, respectively.

~~Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2004 financial statement classification~~3. ~~These reclassifications had no impact on our consolidated results of operations~~PROPERTY, ~~cash~~ ~~flows~~PLANT orAND ~~partners' equity.~~EQUIPMENT

8Property, plant and equipment consisted of the following (in thousands):


	June 30,			December 31,
	2005			2004
Compression equipment, facilities and other rental assets	$	2,392,061		$	2,360,799
Land and buildings		85,235			89,573
Transportation and shop equipment		77,098			78,577
Other		52,570			51,054

		2,606,964			2,580,003

Accumulated depreciation		(778,696	)		(703,655	)


	$	1,828,268		$	1,876,348

2.As ~~INVENTORIES~~of June 30, 2005, the compression assets owned by 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 $513.5 million, including improvements made to these assets after the sale leaseback transactions.

~~Inventory,~~4. ~~net of reserves, consisted of the following amounts (in thousands):~~DEBT

	June 30,		December 31,
	2004		2003
Parts and supplies	$	140,944	$	114,063
Work in progress		37,864		29,412
Finished goods		10,390		11,822
	$	189,198	$	155,297

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

As of June 30, 2004 and December 31, 2003 we had inventory reserves of approximately $13.5 million and $12.7 million, respectively.


	June 30,		December 31,
	2005		2004
Belleli—factored receivables	$	1,158	$	1,011
Belleli—revolving credit facility		3,249		4,095


Short-term debt	$	4,407	$	5,106

Belleli’s factoring arrangements are typically short term in nature and bore interest at a weighted average rate of 3.0% ~~PROPERTY~~and 4.0% at June 30, ~~PLANT~~2005 ~~AND~~and ~~EQUIPMENT~~December 31, 2004, respectively. Belleli’s revolving credit

~~Property, plant and equipment consisted of the following (in thousands):~~8

	June 30,			December 31,
	2004			2003
Compression equipment, facilities and other rental assets	$	2,411,408		$	2,407,873
Land and buildings		82,435			80,142
Transportation and shop equipment		74,100			77,912
Other		49,699			41,741
		2,617,642			2,607,668
Accumulated depreciation		(651,850	)		(580,014	)
	$	1,965,792		$	2,027,654

facilities bore interest at a weighted average rate of 3.5% and 4.0% ~~INVESTMENTS~~at June 30, IN2005 ~~NON-CONSOLIDATED~~and ~~AFFILIATES~~December 31, 2004, respectively. These revolving credit facilities are callable during 2005.

~~During~~Long-term ~~the~~debt ~~second~~consisted ~~quarter~~ of ~~2004,~~the wefollowing ~~increased our ownership~~ (in ~~CrystaTech,~~thousands): ~~Inc., a process technology company, to 47.24% for approximately $0.3 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 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 other revenue.


	June 30,			December 31,
	2005			2004
Bank credit facility due December 2006	$	77,000		$	7,000
2000B equipment lease notes, interest at 5.2%, due October 2005		—			55,861
2001A equipment lease notes, interest at 8.5%, due September 2008		300,000			300,000
2001B equipment lease notes, interest at 8.8%, due September 2011		250,000			250,000
Fair value adjustment — fixed to floating interest rate swaps		(4,667	)		(5,996	)
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		2,485			3,178

		624,818			610,043

Less-current maturities		(1,457	)		(1,430	)


Long-term debt	$	623,361		$	608,613

5.During ~~DEBT~~February 2005, we repaid our 2000B compressor equipment lease obligations using borrowings from our bank credit facility.

~~Short-term~~As ~~debt~~of ~~consisted~~June 30, 2005, we had $77.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under that facility bore interest at a weighted average rate of ~~the~~6.0% ~~following~~and 5.2% at June 30, 2005 and December 31, 2004, respectively. Our bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $350 million credit limit, plus, in addition to certain other indebtedness, an additional (a) $40 million in ~~thousands~~unsecured indebtedness, (b): $50 million of nonrecourse indebtedness of unqualified subsidiaries and (c) $25 million of secured purchase money indebtedness. As of June 30, 2005, we had $77.0 million of borrowings and $104.5 million of outstanding letters of credit under our bank credit facility, resulting in $168.5 million of additional capacity under such bank credit facility at June 30, 2005.

	June 30,		December 31,
	2004		2003
Belleli-factored receivables	$	18,247	$	13,261
Belleli-revolving credit facility		6,252		16,141
Other, interest at 5.0%		—		3,117
Short-term debt	$	24,499	$	32,519

As of June 30, 2005, HCLP and Hanover were in compliance with all material 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 facility or a default under the indentures and agreements relating to certain of our other debt obligations would in some situations trigger cross-default provisions under our bank credit facility 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. Additionally, our bank credit facility requires that the minimum tangible net worth of HCLP not be less than $702 million. This may limit distributions by HCLP to Hanover in future periods.

~~Belleli’s~~In ~~factoring~~addition ~~arrangements~~to ~~are~~purchase ~~typically~~money ~~short~~and ~~term~~similar inobligations, ~~nature~~the indentures and ~~bore~~the agreements related to ~~interest~~our atcompression aequipment ~~weighted~~lease ~~average~~obligations ~~rate~~for ofour 42001A and 2001B sale leaseback transactions, Hanover’s 8.3625% Senior Notes due 2010 and ~~4.0~~Hanover’s 9% atSenior ~~June~~Notes due 2014 permit us to incur indebtedness up to the $350 30million credit limit under our bank credit facility, ~~2004~~plus ~~and~~(1) an ~~December~~additional $75 ~~31,~~million ~~2003~~in unsecured indebtedness and (2) any additional indebtedness so long as, after ~~respectively.~~incurring ~~Belleli~~such indebtedness, Hanover’s ~~revolving~~ratio ~~credit~~of ~~facilities~~the ~~bore~~sum of consolidated net income before interest atexpense, 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 Hanover’s “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a ~~weighted~~consequence of incurring such additional indebtedness and the application of the proceeds thereon. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, Hanover’s 8.625% Senior Notes due 2010 and Hanover’s 9% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to

~~average~~our ~~rate~~compression ofequipment ~~4.9%~~operating ~~and 3~~leases.2% atAs of June 30, ~~2004~~2005, ~~and~~Hanover’s ~~December 31,~~coverage ~~2003~~ratio was less than 2.25 to 1.0, and therefore as of such date we ~~respectively.~~could ~~These~~not ~~revolving~~incur ~~credit~~indebtedness ~~facilities~~other ~~are~~than ~~all~~under ~~short-term~~our bank credit facility and ~~expire at~~up ~~different~~to ~~times~~an additional $59.9 million in ~~2004~~unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness.

~~Long-term~~5. ~~debt~~DUE ~~consisted~~TO ofGENERAL ~~the following (in thousands):~~PARTNER

	June 30,			December 31,
	2004			2003
Bank credit facility, interest at 4.2%, due December 2006	$	—		$	27,000
2000A equipment lease notes		—			193,600
2000B equipment lease notes, interest at 4.2% and 4.1%, respectively, due October 2005		167,411			167,411
2001A equipment lease notes, interest at 8.5%, due September 2008		300,000			300,000
2001B equipment lease notes, interest at 8.8%, due September 2011		250,000			250,000
Real estate mortgage, collateralized by certain land and buildings, payable through September 2004		—			2,917
Fair value adjustment — fixed to floating interest rate swaps		(11,888	)		—
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		3,240			1,875
		708,763			942,803
Less-current maturities		(1,002	)		(3,511	)
Long-term debt	$	707,761		$	939,292

We have entered into four promissory notes in favor of our general partner. Under these notes, we promised to pay to the order of our general partner: (a) such amounts as are equal to the amounts which are due by Hanover to the holders of Hanover’s $200 million 8.625% Senior Notes due 2010 (the “8.625% Senior Notes”) and all costs incurred by Hanover in connection with the issuance of the 8.625% Senior Notes or any amendment or modification thereof, (b) such amounts as are equal to the amounts which are due by Hanover, excluding the conversion features, to the holders of Hanover’s $143.8 million 4.75% Convertible Senior Notes due 2014 (the “4.75% Convertible Notes”) and all costs incurred by Hanover in connection with the issuance of the 4.75% Convertible Notes or any amendment or modification thereof, (c) such amounts as are equal to the amounts which are due by Hanover to the holders of Hanover’s $200 million 9.0% Senior Notes due 2014 (the “9.0% Senior Notes”) and all costs incurred by Hanover in connection with the issuance of the 9.0% Senior Notes or any amendment or modification thereof, and (d) such amounts as are equal to the amounts which are due by Hanover to the holders of Hanover’s $262.6 million aggregate principal amount at maturity Zero Coupon Subordinated Notes due 2007. The notes described in (a) and (b) above are dated December 15, 2003, the note described in (c) above is dated June 1, 2004 and the note described in (d) above is dated August 31, 2001. Such amounts are due by HCLP to its general partner at the same time or times as such amounts must be paid by Hanover. Our general partner has also entered into four promissory notes in favor of Hanover with the same general terms as the obligations which we have to our general partner under the notes described in (a), (b), (c) and (d) above.

~~Maturities~~Obligations ofto ~~long-term~~our ~~debt~~general ~~(excluding~~partner ~~interest~~that tohave bethe ~~accrued~~same ~~thereon)~~general atterms ~~June~~as the Hanover notes payable ~~30,~~consisted ~~2004~~of ~~are~~the following (in thousands):

	June 30,		December 31,
	2004
	2005		2004
2004	$	431
4.75% senior notes due 2014	$	143,750	$	143,750
2005		168,594
8.625% senior notes due 2010		200,000		200,000
2006		1,002
9.0% senior notes due 2014		200,000		200,000
2007		402
11% zero coupon subordinated notes due March 2007		217,823		206,467
2008		300,045
	$	761,573	$	750,217
Thereafter		238,289
	$	708,763

In June 2004, Hanover issued $200.0 million aggregate principal amount of 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 were loaned to HCLP and together with our available cash were used to repay the outstanding indebtedness and minority interest obligations of $193.6 ~~million and $6~~.~~4 million,~~ ~~respectively,~~ACCOUNTING ~~under~~FOR ~~our 2000A equipment lease that~~DERIVATIVES ~~was to expire in March 2005. (See Note 6.)~~

We ~~expect~~use ~~that~~derivative ~~our~~financial ~~bank credit~~instruments ~~facility~~to ~~and~~minimize ~~cash~~the ~~flow~~risks ~~from~~and/or ~~operations~~costs ~~will~~associated ~~provide us~~with ~~adequate~~financial ~~capital~~and ~~resources~~global tooperating ~~fund~~activities ~~our~~by ~~estimated~~managing ~~level~~our ofexposure ~~capital~~to ~~expenditures for~~interest ~~the~~rate ~~short~~fluctuations ~~term.~~on a Asportion of ~~June 30,~~our ~~2004,~~debt weand ~~had~~leasing noobligations. ~~outstanding~~Our ~~borrowings~~primary ~~and approximately~~objective ~~$94.1~~is ~~million~~to inreduce ~~letters~~our overall cost of ~~credit~~borrowing ~~outstanding~~by ~~under~~managing ~~our~~the ~~bank credit~~fixed ~~facility.~~and ~~Our~~floating ~~bank~~interest ~~credit~~rate ~~facility~~mix ~~permits~~of usour todebt ~~incur~~portfolio. ~~indebtedness,~~We do not ~~subject~~use toderivative ~~covenant~~financial ~~limitations,~~instruments upfor totrading aor ~~$350 million~~other ~~credit~~speculative ~~limit,~~purposes. ~~plus,~~The ~~in addition~~cash toflow ~~certain~~from hedges ~~other~~is ~~indebtedness,~~classified anin ~~additional~~our ~~(a)~~consolidated ~~$40 million~~statements ~~in unsecured~~of ~~indebtedness,~~cash ~~(b)~~flows ~~$50 million~~under ofthe ~~nonrecourse~~same ~~indebtedness~~category ofas the ~~unqualified~~cash ~~subsidiaries~~flows ~~and~~from ~~(c)~~the ~~$25 million~~underlying ofassets, ~~secured~~liabilities ~~purchase~~or ~~money indebtedness~~anticipated transactions.

AsFor ofderivative ~~June 30,~~instruments ~~2004,~~designated weas ~~were~~fair invalue ~~compliance~~hedges, ~~with~~the ~~all~~gain ~~material~~or ~~covenants~~loss ~~and other~~is ~~requirements~~recognized ~~set~~in earnings ~~forth~~ in ~~our~~the ~~bank~~period ~~credit~~of ~~facility,~~change ~~the~~together ~~indentures~~with ~~and agreements~~the ~~related~~gain toor ~~our~~loss ~~compression~~on ~~equipment~~the ~~lease~~hedged ~~obligations~~item ~~and~~attributable ~~the~~to ~~indentures~~the ~~and~~risk ~~agreements~~being ~~relating~~hedged. toFor ~~our~~derivative ~~other~~instruments ~~long-term~~designated ~~debt.~~as Acash ~~default~~flow ~~under~~hedges, the effective ~~our~~portion ~~bank~~of ~~credit~~the ~~facility~~derivative gain or ~~these~~loss ~~agreements~~is ~~would~~included ~~trigger~~in ~~cross-default provisions~~other ~~under~~comprehensive ~~the~~income, ~~agreements~~but ~~relating~~not toreflected in ~~certain~~our consolidated statement of ~~our~~operations ~~other~~until ~~debt obligations~~the corresponding hedged transaction is settled. The ~~Such~~ineffective ~~defaults~~portion ~~would~~is ~~have~~reported ain earnings immediately.

~~material~~In ~~adverse~~March 2004, ~~effect~~we onentered ~~our~~into ~~liquidity~~two interest rate swaps, ~~financial~~which ~~position~~we ~~and~~designated ~~operations.~~as fair value hedges, ~~Giving~~to ~~effect~~hedge the risk of changes in fair value of our note to our ~~$94~~general partner that has the same general terms as Hanover’s 8.~~1 million~~625% Senior Notes due 2010 resulting from changes in ~~outstanding~~interest ~~letters~~rates. These ofinterest ~~credit~~rate swaps, under which we receive fixed payments and make floating payments, result in the ~~liquidity~~conversion ~~available~~of ~~under~~the hedged obligation into floating rate debt. The following table summarizes, ~~our~~by ~~bank~~individual ~~credit~~hedge ~~facility~~instrument, these interest rate swaps as of June 30, ~~2004~~2005 ~~was~~(dollars ~~approximately $256 million.~~in thousands):

In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, Hanover’s 8.625% Senior Notes due 2010 and its 9% Senior Notes due 2014 permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long as, after incurring such indebtedness, Hanover’s 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 Hanover’s “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 thereon. The indentures and agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, Hanover’s 8.625% Senior Notes due 2010 and its 9% 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 June 30, 2004, Hanover’s coverage ratio was less than 2.25 to 1.0, and therefore as of such date we could not incur indebtedness other than under our bank credit facility and up to an additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness.


							Fair Value of
		Fixed Rate to be			Notional		Swap at
Floating Rate to be Paid	Maturity Date	Received			Amount		June 30, 2005
Six Month LIBOR +4.72%	December 15, 2010		8.625	%	$	100,000	$	(2,435	)
Six Month LIBOR +4.64%	December 15, 2010		8.625	%	$	100,000	$	(2,232	)

As of June 30, 2005, a total of approximately $0.6 million in accrued liabilities, $4.1 million ~~DUE~~in long-term TOliabilities ~~GENERAL~~and ~~PARTNER~~a $4.7 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 June 30, 2005, we estimated that the effective rate for the six-month period ending in December 2005 would be approximately 8.8%.

WeDuring ~~have entered into four promissory notes in favor of our general partner. Under these notes~~2001, we ~~promised~~entered tointo ~~pay~~interest torate ~~the~~swaps ~~order of our general partner; (a) such amounts as are equal~~ to ~~the~~convert ~~amounts~~variable ~~which~~lease ~~are~~payments ~~due~~under ~~by Hanover to the~~certain ~~holders~~lease ofarrangements Hanover’s $200 million 8.625% Senior Notes due 2010 (the “8.625% Senior Notes”) and all costs incurred by Hanover in connection with the issuance of the 8.625% Senior Notes or any amendment or modification thereof, (b) such amounts as are equal to ~~the~~fixed ~~amounts~~payments which are due by Hanover, excluding the conversion features, to the holders of Hanover’s $143.8 million 4.75% Convertible Senior Notes due 2014 (the “4.75% Convertible Notes”) and all costs incurred by Hanover in connection with the issuance of the 4.75% Convertible Notes or any amendment or modification thereof, (c) such amounts as ~~are~~follows ~~equal to the amounts which are due by Hanover to the holders of Hanover’s $200 million 9.0% Senior Notes due 2014~~ (~~the~~dollars ~~“9.0% Senior Notes”) and all costs incurred by Hanover~~ in ~~connection with the issuance of the 9.0% Senior Notes or any amendment or modification thereof, and (d~~thousands) ~~such amounts as~~: are equal to the amounts which are due by Hanover to the holders of Hanover’s $262.6 million aggregate principal amount at maturity Zero Coupon Subordinated Notes due 2007. The notes described in (a) and (b) above are dated December 15, 2003, the note described in (c) above is dated June 1, 2004 and the note described in (d) above is dated August 31, 2001. Such amounts are due by HCLP to its general partner at the same time or times as such amounts must be paid by Hanover. Our general partner has also entered into four promissory notes in favor of Hanover with the same general terms as the obligations which we have to our general partner under the notes described in (a), (b), (c) and (d) above.

Obligations to our general partner that have the same general terms as the Hanover notes payable consisted of the following (in thousands):


							Fair Value of
		Fixed Rate to be			Notional		Swap at
Lease	Maturity Date	Paid			Amount		June 30, 2005
March 2000	March 11, 2005		5.2550	%	$	100,000	$	—
August 2000	March 11, 2005		5.2725	%	$	100,000	$	—

	June 30,		December 31,
	2004		2003
4.75% senior notes due 2014	$	143,750	$	143,750
8.625% senior notes due 2010		200,000		200,000
9.0% senior notes due 2014		200,000		—
11% zero coupon subordinated notes due March 2007		195,703		185,501
	$	739,453	$	529,251

These 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 six months ended June 30, 2005, we recorded a reduction to other comprehensive income of approximately $0.6 million compared to an increase to other comprehensive income of approximately $6.3 million during the six months ended June 30, 2004, related to these two swaps.

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 that matured 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 the mark-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 the mark-to-market adjustment were recognized as interest expense in the statement of operations. During the six months ended June 30, 2005, $1.5 million was recorded in interest expense.

~~Table~~The counterparties to our interest rate swap agreements are major international financial institutions. We monitor the credit quality of ~~Contents~~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.

7. ~~ACCRUED~~COMMITMENTS ~~LIABILITIES~~AND CONTINGENCIES

~~Accrued~~HCLP ~~liabilities~~has ~~consisted~~issued of the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

	June 30,		December 31,
	2004		2003
Accrued salaries, bonuses and other employee benefits	$	28,042	$	30,179
Accrued income and other taxes		18,689		15,948
Current portion of hedge instruments		7,601		11,703
Accrued interest		18,323		19,565
Accrued interest - due to general partner		5,918		1,003
Accrued other		30,890		41,479
	$	109,463	$	119,877

8.Table ACCOUNTINGof FOR DERIVATIVES Contents

We use derivative financial instruments to minimize the risks and/or costs associated with financial and global operating 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.


			Maximum Potential
			Undiscounted
			Payments as of
	Term		June 30, 2005
Performance guarantees through letters of credit		2005—2006		89,225
Standby letters of credit		2005—2006		17,958
Commercial letters of credit		2005		1,899
Bid bonds and performance bonds		2005—2011		104,242


			$	213,324

~~For~~We ~~derivative~~have ~~instruments~~issued ~~designated~~guarantees asto ~~fair~~third ~~value~~parties ~~hedges,~~to ~~the~~ensure ~~gain~~performance orof ~~loss~~our isobligations, some of ~~recognized~~which inmay ~~earnings~~be infulfilled ~~the~~by ~~period~~third ofparties. ~~change~~In ~~together~~addition, ~~with~~in ~~the~~December 2003 ~~gain~~and orJune 2004, ~~loss~~Hanover onissued ~~the~~$200.0 million ~~hedged~~aggregate ~~item~~principal ~~attributable~~amount toof ~~the~~its ~~risk being hedged~~8.625% ~~For~~Senior ~~derivative instruments~~Notes ~~designated~~due as2010 ~~cash~~and ~~flow~~issued $200.0 million ~~hedges,~~aggregate ~~the~~principal ~~effective~~amount ~~portion~~ of ~~the derivative~~its ~~gain~~9.0% orSenior ~~loss~~Notes isdue ~~included~~2014, ~~in other comprehensive income~~respectively, ~~but~~which ~~not~~we ~~reflected~~fully inand ~~our~~unconditionally ~~consolidated~~guaranteed ~~statement~~on ofa ~~operations~~senior ~~until~~subordinated ~~the corresponding hedged transaction is settled~~basis. ~~The ineffective portion is reported in earnings~~ ~~immediately.~~

InHanover ~~March 2004,~~has weguaranteed ~~entered into~~the ~~two~~amount ~~interest~~included ~~rate~~below, ~~swaps~~which tois ~~hedge~~a ~~the~~percentage ~~risk~~ of ~~changes~~ inthe ~~fair~~total ~~value~~debt of ~~our~~this non-consolidated ~~note~~affiliate equal to our ~~general~~ownership ~~partner~~percentage ~~that~~in ~~has~~such ~~the same general terms as Hanover’s 8~~affiliate.~~625%~~ ~~Senior~~If ~~Notes~~these ~~due 2010 resulting from~~guarantees ~~changes~~by inHanover ~~interest~~are ~~rates.~~ever ~~These interest rate swaps~~called, ~~under which~~ we ~~receive fixed~~may ~~payments~~have ~~and~~to ~~make~~advance ~~floating~~funds ~~payments,~~to ~~result~~Hanover into ~~the~~cover ~~conversion~~its ~~of the hedged~~ obligation ~~into floating rate debt. The following table summarizes, by~~under ~~individual hedge instrument,~~ these ~~interest rate swaps as of June 30, 2004:~~guarantees.

						Fair Value of
				Maximum
			Fixed Rate to be			Swap at
				Potential
Floating Rate to be Paid	Maturity Date		Received	Notional Amount		June 30, 2004
				Undiscounted
Six Month LIBOR +4.72% Six Month LIBOR +4.64%	December 15, 2010 December 15, 2010		8.625% 8.625%	$100,000,000 $100,000,000		$(6,525) $(5,363)
				Payments as of
	Term			June 30, 2005
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium		2005		$	10,364
El Furrial		2013			34,022

As part of ~~June 30~~the Production Operators Corporation (“POC”) acquisition purchase price, ~~2004~~Hanover may be required to make, and we may have to fund, a ~~total~~contingent ofpayment ~~approximately~~to ~~$1.4 million~~Schlumberger inbased ~~other~~on ~~current~~the ~~assets,~~realization ~~$13.3 million~~of incertain ~~long-term~~tax ~~liabilities~~benefits by Hanover and aits ~~$11~~affiliates through 2016.~~9 million~~ ~~reduction~~To ofdate Hanover and ~~long-term~~its ~~debt~~affiliates ~~was~~have ~~recorded~~not ~~with~~realized ~~respect~~any toof ~~the~~such ~~fair~~tax ~~value~~benefits ~~adjustment~~or ~~related~~ made any payments to ~~these~~Schlumberger ~~two~~in connection ~~swaps~~with them.

12We 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 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.

~~Table~~We are involved in a project to build and operate barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway (“Cawthorne Channel Project”) as part of the ~~Contents~~performance of a contract between an affiliate of The Royal/Dutch Shell Group (“Shell”) and Global Gas and Refining Limited (“Global”), a Nigerian company. We have substantially completed the building of the required barge-mounted facilities. Under the terms of a series of contracts between Global and us, Shell, and several other counterparties, respectively, Global is responsible for the development of the overall project. In light of the political 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 will be able to comply with its obligations under these contracts.

~~During~~This ~~2001,~~project weand ~~entered~~our ~~into~~other ~~three~~projects ~~interest~~in ~~rate~~Nigeria ~~swaps~~are subject to ~~convert~~numerous ~~variable~~risks and uncertainties ~~lease~~associated ~~payments~~with ~~under~~operating ~~certain~~in ~~lease~~Nigeria. ~~arrangements~~Such torisks ~~fixed~~include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, 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, as ~~follows:~~well as other risks normally associated with a major construction project, could materially delay the anticipated commencement of operations of the Cawthorne Channel Project or adversely impact any of our operations in Nigeria. Any such delays could affect the timing and decrease the amount of

							Fair Value of
							Swap at
Lease	Maturity Date	Fixed Rate to be Paid			Notional Amount		June 30, 2004
March 2000	March 11, 2005		5.2550	%	$	100,000,000	$	(2,242	)
August 2000	March 11, 2005		5.2725	%	$	100,000,000	$	(2,264	)
October 2000	October 26, 2005		5.3975	%	$	100,000,000	$	(3,701	)

TheseTable three swaps, which we have designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values have been recognized in other comprehensive income. During the six months ended June 30, 2004 and 2003, we recorded approximately $6.3 million and $1.1 million, respectively, related to these three swaps ($6.3 million and $0.7 million net of tax) in other comprehensive income. As of June 30, 2004, a total of approximately $7.6 million was recorded in current liabilities and approximately $0.6 million in long-term liabilities with respect to the fair value adjustment related to these three swaps. Contents

Onrevenue ~~June 1, 2004,~~ we ~~repaid~~may ~~the outstanding indebtedness and minority interest~~realize ~~obligations~~from ofour ~~$193.6 million~~investments ~~and~~in $6Nigeria.~~4 million,~~ ~~respectively,~~If ~~under~~Shell ~~our~~were ~~2000A equipment~~to ~~lease.~~terminate Asits acontract ~~result,~~with ~~the~~Global ~~two~~for ~~interest~~any reason, ~~rate~~or ~~swaps~~if ~~maturing~~we onwere ~~March 11,~~to ~~2005,~~terminate ~~each~~our ~~having~~involvement ain ~~notional~~the ~~amount of $100 million~~project, ~~associated~~we ~~with~~would ~~the 2000A~~be ~~equipment~~required ~~lease~~to nofind ~~longer~~an alternative ~~meet~~use ~~specific~~for ~~hedge~~the ~~criteria~~barge ~~and~~facility ~~the~~which ~~unrealized gain~~could ~~related~~result toin ~~the~~a ~~mark~~write-~~to-market~~down ~~adjustment~~of ~~prior~~our toinvestment. At June 130, ~~2004~~2005, we had an investment of approximately $567.3 2 million ~~will~~in beprojects ~~amortized~~in ~~into~~Nigeria, ~~interest~~a substantial ~~expense~~majority ~~over~~of ~~the~~which ~~remaining~~related ~~life~~to of the ~~swap~~ Cawthorne Channel Project. InWe ~~addition,~~currently ~~beginning~~anticipate making ~~June~~an approximately $2.5 1,million ~~2004,~~additional ~~changes~~investment in the ~~mark-to-market adjustment~~Cawthorne ~~were~~Channel ~~recognized~~Project asduring 2005. ~~interest~~In ~~expense~~addition, inwe ~~the~~have ~~statement~~approximately ~~of operations~~$4. ~~The~~2 million ~~change~~associated inwith ~~the~~advances ~~mark-~~to~~-market~~, ~~adjustment~~and ~~for June 2004 was~~our ainvestment ~~$0.8 million~~in, ~~gain~~Global.

~~Prior~~We tohave ~~2001,~~significant weoperations ~~entered~~that ~~into~~expose ~~two~~us ~~interest~~to ~~rate~~currency ~~swaps~~risk ~~with~~in ~~notional~~Argentina ~~amounts~~and ofVenezuela. As a ~~$75 million~~result, ~~and~~adverse ~~$125 million~~political conditions and ~~strike~~fluctuations ~~rates~~in ofcurrency ~~5.51%~~exchange ~~and~~rates ~~5.56%,~~could ~~respectively.~~materially ~~The~~and ~~difference~~adversely ~~paid~~affect orour ~~received~~business. onTo ~~the~~mitigate ~~swap~~that ~~transactions~~risk, ~~was~~the ~~recorded~~majority asof anour existing contracts ~~accrued~~provide ~~liability~~that ~~and~~we ~~recognized~~receive payment in, ~~leasing~~or ~~expense~~based inon, ~~all~~U.S. ~~periods~~dollars ~~before~~rather ~~July~~than Argentine pesos and 1,Venezuelan ~~2003~~bolivars, ~~and~~thus inreducing ~~interest~~our ~~expense~~exposure ~~until~~to ~~expiration~~fluctuations in ~~July 2003~~their value. ~~Because~~In February 2003, ~~management~~the ~~decided~~Venezuelan ~~not~~government tofixed ~~designate~~ the ~~interest~~exchange rate ~~swaps~~to ~~as hedges~~1,600 ~~we recognized~~bolivars ~~unrealized~~for ~~gains~~each ofU.S. ~~approximately $4~~dollar.1 In February ~~million~~2004 ~~related~~and toMarch 2005, the ~~change in~~Venezuelan government devalued the ~~fair~~currency ~~value~~to of1,920 ~~these~~bolivars ~~interest~~and 2,148 ~~rate~~bolivars, ~~swaps~~respectively, infor ~~lease~~each ~~expense~~U.S. indollar. The impact of the devaluation on our results ~~statement~~will depend upon the amount of ~~operations~~our ~~during~~assets ~~the~~(primarily ~~six~~working ~~months~~capital ~~ended~~and ~~June 30,~~deferred ~~2003~~taxes) exposed to currency fluctuation in Venezuela in future periods.

~~The~~For ~~counterparties~~the tosix ~~our~~months ~~interest~~ended ~~rate~~June 30, ~~swap~~2005, ~~agreements~~our ~~are~~Argentine ~~major~~operations ~~international~~represented approximately 5% of ~~financial~~our ~~institutions.~~revenue Weand ~~monitor~~8% of our gross profit. For the ~~credit~~six ~~quality~~months ofended ~~these~~June 30, ~~financial~~2005, our Venezuelan ~~institutions~~operations represented approximately 10% of our revenue and do17% ~~not~~of ~~expect~~our ~~non-performance~~gross byprofit. ~~any~~At ~~counterparty~~June 30, ~~although~~ ~~such~~2005, ~~non-performance~~we ~~could~~had ~~have~~approximately a$14.3 million ~~material~~and ~~adverse~~$22.5 million ~~effect~~in onaccounts usreceivable related to our Argentine and Venezuelan operations.

9The economic situation in Argentina and Venezuela is subject to change. ~~COMMITMENTS~~To ~~AND~~the ~~CONTINGENCIES~~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.

WeSeveral ~~have~~compressor ~~issued~~rental projects with a customer in Latin America are scheduled to terminate in accordance with the ~~following~~terms ~~guarantees~~of ~~that~~our lease agreements at various times during the remainder of 2005. These projects represent in the aggregate approximately $2.8 million per month in revenues. We are in ~~not~~the ~~recorded~~process of negotiating extensions of these lease agreements with this customer. While we hope to renew these contracts on ~~our~~favorable terms, we can provide no assurance that these contracts ~~accompanying~~will ~~balance~~be ~~sheet:~~renewed on terms that are as favorable to us as the existing lease agreements or at all. If the contracts were not renewed, we would be required to find alternative uses for these assets.

			Maximum Potential
			Undiscounted
			Payments as of
	Term		June 30, 2004
Performance guarantees through letters of credit		2004-2007	$	86,224
Standby letters of credit		2004		26,127
Bid bonds and performance bonds		2004-2007		80,705
			$	193,056

In the ordinary course of business we are involved in various other 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.

138. RELATED—PARTY TRANSACTIONS

~~Table~~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”. Pursuant to Amendment No. 2, entities affiliated with Schlumberger recently agreed to eliminate Schlumberger’s right to designate a Director to serve on Hanover’s Board of ~~Contents~~Directors in order for Schlumberger to position itself to have maximum flexibility in terms of its ownership of its shares of Hanover’s common stock. Entities affiliated with Schlumberger have in the past, and may in the future, sell shares of Hanover’s common stock from time to time pursuant to Rule 144 under the Securities Act of 1933.

WeTed ~~have~~Collins, ~~issued~~Jr., ~~guarantees~~one toof ~~third~~Hanover’s ~~parties~~Directors, ~~to ensure~~owns ~~performance~~100% of ~~our~~Azalea ~~obligations~~Partners, ~~some~~which ofowns ~~which~~approximately ~~may~~14% beof ~~fulfilled~~Energy byTransfer ~~third~~Group, ~~parties~~LLC (“ETG”). InDuring ~~addition,~~the insix ~~December 2003~~months ~~and~~ended June ~~2004~~30, ~~Hanover~~2005 and ~~issued~~2004 ~~$200.0 million aggregate~~and ~~principal~~during ~~amount~~the oftwelve ~~its~~months ~~8.625%~~ended ~~Senior~~December 31, ~~Notes~~2004, ~~due~~we ~~2010~~recorded ~~and~~sales ~~issued~~of approximately $~~200~~6.0 million, ~~aggregate~~$4.9 million ~~principal~~and ~~amount~~$7.7 million, ofrespectively, ~~its~~related ~~9.0%~~to ~~Senior~~equipment ~~Notes~~leases ~~due~~and ~~2014,~~sales to ~~respectively~~ETG, ~~which~~including weits ~~fully~~indirectly ~~and~~wholly ~~unconditionally~~owned ~~guaranteed~~subsidiary onEnergy aTransfer ~~senior subordinated~~Technologies, ~~basis~~LP. In addition, HCLP and ETG are co-

~~As part of the Production Operators Corporation~~13 (“POC”) acquisition purchase price, Hanover may be required to make, and we may have to fund, a contingent payment to Schlumberger based on the realization of certain tax benefits by Hanover and its affiliates through 2016. To date we have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

HanoverTable has guaranteed the amount included below, which is a percentage of the total debt of this non-consolidated affiliate equal to our ownership percentage in such affiliate. If these guarantees by Hanover are ever called, we may have to advance funds to Hanover to cover its obligation under these guarantees. Contents

			Maximum Potential
			Undiscounted
			Payments as of
	Term		June 30, 2004
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium (1)		2005	$	12,801
El Furrial (1)		2013		38,024

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. HCLP is the designated manager of the facility. As manager, HCLP received revenues related to the facility and distributed to ETG its net share of the operating cash flow of $0.3 million during the six months ended June 30, 2005 and 2004.

~~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~~9. ~~The~~RECENT ~~terms~~ACCOUNTING ~~of the settlement became final in March 2004 and~~PRONOUNCEMENTS provided for 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, and (c) issue a contingent note with a principal amount of $6.7 million. During the six months ended June 30, 2004 and 2003, Hanover recorded $0.1 million and $43.8 million expense, respectively, for the cost of the litigation settlement. For further details regarding the securities settlement, see Hanover’s Form 10-Q for the three months ended March 31, 2004.

OnIn ~~April~~May 212003, ~~2004,~~the ~~Hanover~~Financial ~~issued~~Accounting ~~the~~Standards ~~$6.7 million~~Board ~~contingent~~(“FASB”) ~~note~~issued ~~related~~Statement toof ~~the~~Financial ~~securities~~Accounting ~~settlement.~~Standards ~~The~~(“SFAS”) ~~note is payable~~No. 150, ~~together~~“Accounting ~~with~~for ~~accrued~~Certain ~~interest,~~Financial onInstruments with ~~March 31,~~Characteristics ~~2007~~of ~~but~~both ~~will~~Liabilities beand ~~extinguished~~Equity” (~~with~~“SFAS ~~no money owing under it~~150”). ifSFAS ~~Hanover’s common~~150 ~~stock~~changes ~~trades at or above~~ the ~~average~~accounting ~~price of $12.25 per share~~ for 15 ~~consecutive~~certain ~~trading~~financial ~~days~~instruments atthat, ~~any~~under ~~time~~previous ~~between March 31~~guidance, ~~2004~~issuers ~~and~~could ~~March 31,~~account ~~2007. Hanover~~for ~~recorded~~as ~~the $3~~equity.~~6 million~~ SFAS ~~fair~~150 ~~value~~requires ofthat ~~the~~those ~~contingent~~instruments ~~note~~be ~~issued~~classified ~~based~~as ~~on the~~liabilities ~~present~~in ~~value~~statements of ~~the~~financial position. ~~future~~SFAS ~~cash~~150 ~~flows~~is ~~discounted~~effective atfor ~~borrowing~~financial ~~rates currently~~instruments ~~available~~entered tointo ~~Hanover~~or ~~for~~modified ~~debt~~after ~~with~~May 31, 2003, ~~similar terms~~ and ~~maturities and~~otherwise ~~discounted~~is effective for ~~the~~interim ~~value~~periods ofbeginning ~~the~~after ~~extinguishment~~June 15, ~~feature that is considered an embedded derivative~~2004. ~~Using~~On aNovember 7, ~~market-borrowing~~2003 ~~rate of 9.3%,~~ the ~~principal~~FASB ~~value~~issued ~~and~~Staff ~~the~~Position ~~stipulated~~150-3 ~~interest rate~~that ~~required~~delayed by the ~~note~~effective ofdate 5%for ~~per~~certain ~~annum,~~types ~~a discount~~ of ~~$0.8 million was~~ ~~computed~~financial ~~on the note to be issued~~instruments. ~~The~~We ~~discount~~do ~~will~~not bebelieve ~~amortized to interest expense over~~ the ~~term~~adoption of the ~~note.~~guidance Incurrently ~~March 2004,~~provided ~~Hanover~~in ~~recorded~~SFAS 150 anwill ~~asset~~have ~~for~~a ~~the value~~material ofeffect ~~the~~on ~~embedded~~our ~~derivative,~~consolidated asresults ~~required~~of byoperations ~~SFAS~~or ~~133~~cash flow. ~~Hanover~~However, ~~estimated the~~we ~~value~~may ofbe ~~the~~required ~~derivative~~to ~~and~~classify ~~reduced~~as ~~the~~debt ~~amount~~approximately it$17.1 million ~~included~~in ~~for~~sale ~~the~~leaseback ~~estimate~~obligations ofthat, ~~the~~as ~~value~~ of ~~the~~June 30, ~~note~~2005, bywere ~~approximately~~reported ~~$2.2 million~~as at“Minority ~~each~~interest” ofon ~~June 30,~~our ~~2004 and~~consolidated ~~$2.3 million~~balance atsheet pursuant ~~December 31,~~to ~~2003~~FIN 46.

~~Upon~~These ~~the~~minority ~~occurrence~~interest ofobligations arepresent ~~change~~the ofequity ~~control~~ of ~~Hanover, if~~ the ~~change~~entities ofthat ~~control~~lease compression orequipment ~~shareholder~~to ~~approval~~us. ofIn accordance with the ~~change~~provisions of ~~control~~our ~~occurs~~compression ~~before~~equipment ~~February 9~~lease obligations, ~~2005,~~the ~~which~~equity iscertificate ~~twelve~~holders ~~months~~are ~~after~~entitled ~~the~~to ~~entry~~quarterly ofor ~~the~~semi-annual ~~final~~yield ~~court~~payments ~~approval~~on of the ~~securities~~aggregate ~~related~~outstanding ~~settlement~~equity ~~that~~certificates. ~~became~~As ~~final~~of ~~in March~~June ~~2004~~30, ~~Hanover~~2005, ~~may~~the ~~be obligated~~yield torates ~~contribute~~on anthe ~~additional~~outstanding equity ~~$3 million~~certificates toranged ~~the~~from ~~securities~~11.1% ~~settlement fund~~to 11.5%. ~~Although~~Equity ~~not~~certificate holders may receive a ~~party~~return toof capital payment upon termination of the ~~settlement,~~lease ~~HCLP~~or ~~may~~our ~~need~~purchase toof ~~fund~~the leased compression equipment ~~Hanover’s~~after ~~expenses~~full ~~and~~payment ~~any~~of ~~future~~all ~~settlement~~debt ~~costs,~~obligations ~~including~~of the ~~contingent~~ ~~note~~entities ~~and~~that ~~any~~lease ~~payments~~compression ~~upon~~equipment ~~the~~to ~~occurrence~~us. At ofJune 30, a2005, ~~change~~the incarrying ~~control~~ value of ~~Hanover,~~the ~~through~~minority aninterest ~~advance~~obligations orapproximated ~~distribution~~the tofair market ~~Hanover.~~value ~~Prior~~of toassets ~~March~~that ~~31,~~would ~~2003,~~be ~~HCLP had~~required ~~expensed~~to ~~approximately~~be ~~$9.7~~transferred ~~million~~to ofredeem ~~legal~~the ~~related~~minority ~~costs~~interest obligations.

OnIn ~~June~~November 252004, ~~1999, we notified~~ the ~~Air~~FASB ~~Quality~~issued ~~Bureau~~SFAS ~~of the Environmental Protection Division~~No. 151, ~~New~~“Inventory ~~Mexico~~Costs ~~Environmental~~— ~~Department~~an ~~(the~~Amendment ~~“Division”),~~ of ~~potential~~ ~~violations~~ARB ~~of State regulatory and permitting requirements~~No. ~~The potential violations included failure to conduct required performance tests~~ 43, ~~failure~~Chapter 4” to(“SFAS ~~file~~151”). ~~required~~This ~~notices~~standard ~~and~~provides ~~failure~~clarification tothat ~~pay~~abnormal ~~annual~~amounts ~~filing~~of ~~fees for~~idle ~~compressor~~facility ~~units~~expense, ~~located~~freight, onhandling ~~sites~~costs, ~~for more than one year. We promptly paid the required fees~~ and ~~filed~~spoilage ~~the~~should ~~required~~be ~~notices,~~recognized ~~correcting~~as ~~the potential~~current-period ~~violations~~charges. ~~On June 12~~Additionally, ~~2001,~~this ~~after~~standard ~~the~~requires ~~potential~~that ~~violations~~allocation ~~had been corrected, the Director~~ of ~~the~~fixed ~~Division~~production ~~issued~~overhead ~~a compliance order~~ to ~~us in connection with~~ the ~~potential violations. The compliance order assessed a civil~~ ~~penalty~~costs of ~~$15,000~~conversion ~~per~~be ~~day~~based ~~per~~on ~~alleged~~the ~~regulatory~~normal ~~violation~~capacity ~~and~~of ~~permit; no total penalty amount was proposed in~~ the ~~compliance~~production ~~order~~facilities. OnThe ~~October 3,~~provisions ~~2003,~~of ~~the~~this ~~Division~~standard ~~notified~~are useffective ~~that~~for ~~the~~inventory ~~total~~costs ~~proposed~~incurred ~~penalty~~during ~~would~~fiscal beyears ~~$759,072. However,~~beginning ~~since~~after ~~the alleged violations had been self-disclosed, the amount was~~June ~~reduced to $189~~15,~~768~~ 2005. We ~~subsequently~~do ~~responded~~not toexpect the ~~penalty~~adoption ~~assessment, challenging the basis~~ of the ~~Division’s~~new ~~penalty~~standard ~~calculation. As a result of our challenge, the Division agreed~~ to ahave ~~Stipulated Motion for Time to File Answer and further agreed to meet with us and negotiate~~ a ~~final~~material ~~settlement.~~effect Onon ~~April~~our 8,consolidated ~~2004,~~results ~~we met with Division officials in Santa Fe and agreed to a final settlement~~ of ~~all alleged violations. In June 2004~~operations, wecash ~~paid~~flows aor ~~penalty~~financial ~~of $105,464 in final resolution of this matter~~position.

OnIn ~~June~~December ~~30,~~ 2004, the ~~Texas~~FASB ~~Commission~~issued onSFAS ~~Environmental~~No. 123 ~~Quality~~ (~~TCEQ~~Revised 2004) ~~informed~~, “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the ~~Company~~accounting ~~that~~for itshare-based ~~was~~payment ~~pursuing~~transactions in which an enterprise ~~enforcement~~receives ~~action~~employee ~~against HCLP~~services in exchange for ~~alleged~~(a) equity ~~violations~~instruments of the ~~Texas~~enterprise ~~Health~~or (b) liabilities ~~and~~that ~~Safety~~are ~~Code~~based ~~and~~on the fair value of the enterprise’s equity instruments or that may ~~Commission~~be ~~Rules~~settled atby the ~~Redwood~~issuance ~~Hanover~~of ~~Gateway~~such ~~Plant~~equity ~~(RHG~~instruments. ~~Plant~~SFAS 123(R) ineliminates ~~Madison~~the ability to ~~County,~~account ~~Texas.~~for ~~The~~share-based ~~alleged~~compensation ~~violations~~transactions ~~include~~using ~~failure~~the tointrinsic ~~comply~~value ~~with~~method ~~certain~~under Accounting ~~permit~~Principles ~~limitations~~Board ~~relating~~(APB) Opinion toNo. 25, ~~sulfur~~Accounting ~~emissions~~for ~~during~~Stock ~~certain~~Issued ~~periods~~to inEmployees, ~~2003~~ and ~~2004~~generally would ~~and~~require ~~failure~~instead tothat ~~provide~~such ~~certain~~transactions ~~required~~be ~~notifications~~accounted infor ~~connection therewith.~~using ~~TCEQ~~a ~~has~~fair-value-based ~~proposed~~method. aSFAS 123(R) ~~settlement~~is effective as of ~~$149~~the first interim or annual reporting period that begins after June 15,~~625~~ 2005. inHowever, ~~respect~~on ofApril 14, 2005, the ~~alleged violations~~Securities inand Exchange Commission announced that the effective ~~form~~date of aSFAS ~~proposed~~123(R) ~~Agreed~~will ~~Order~~be ~~dated~~changed to the first annual reporting period that begins after June 2915, ~~2004~~2005. The adoption of SFAS 123(R) is ~~HCLP~~not ~~has~~expected ~~requested~~to have a ~~meeting~~significant ~~with~~effect ~~the~~on ~~TCEQ~~our tofinancial ~~discuss~~position ~~the~~or ~~allegations~~cash ~~and~~flows, tobut will impact ~~challenge~~our ~~certain~~results ~~assumptions~~of ~~made~~operations. byAn illustration of the ~~TCEQ.~~impact Aon ~~date~~our ~~for~~net ~~the~~income ~~meeting~~and earnings per share is presented in the “Stock Options and Stock-Based Compensation” section of Note 1 assuming we had ~~pending~~applied ~~further~~the ~~communication~~fair ~~with~~value ~~TCEQ~~recognition provisions of SFAS 123(R) using the Black-Scholes methodology.

In December 2004, the ~~ordinary~~FASB ~~course~~issued Statement of ~~business~~Financial weAccounting ~~are~~Standards ~~involved~~No. 153, in“Exchange ~~various~~of Nonmonetary ~~other~~Assets, ~~pending~~an ~~or threatened~~amendment ~~legal~~of ~~actions,~~APB ~~including~~Opinion ~~environmental~~No. 29” ~~matters~~(“SFAS 153”). ~~While~~SFAS ~~management~~153 is ~~unable~~ tobased ~~predict~~on the principle ~~ultimate~~that ~~outcome~~exchange of ~~these~~nonmonetary ~~actions,~~assets itshould ~~believes~~be ~~that~~measured ~~any~~based on the fair market value of ~~ultimate~~the ~~liability~~assets ~~arising~~exchanged. ~~from~~SFAS ~~these~~153 ~~actions~~eliminates ~~will~~the ~~not~~exception ~~have~~of anonmonetary ~~material~~exchanges ~~adverse~~of similar ~~effect~~productive onassets ~~our~~and ~~consolidated~~replaces ~~financial~~it ~~position,~~with ~~results~~a general exception for exchanges of ~~operations~~nonmonetary orassets ~~cash~~that ~~flows.~~do not have

Wecommercial ~~are~~substance. ~~involved~~SFAS in153 ais ~~project~~effective tofor ~~build~~nonmonetary ~~and~~asset ~~operate~~exchanges ~~barge-mounted gas compression and gas processing facilities to be stationed~~ in ~~a Nigerian coastal waterway as~~fiscal ~~part~~periods ofbeginning ~~the~~after ~~performance of a contract between an affiliate of The Royal/ Dutch Shell Group (“Shell”) and Global Energy and Refining Ltd. (“Global”)~~June 15, ~~a Nigerian company~~2005. We ~~have~~are ~~completed~~currently ~~the~~evaluating ~~building of~~ the ~~required~~provisions ~~barge-mounted facilities. Under the terms~~ of aSFAS ~~series~~153 ~~of contracts between Global~~ and ~~us,~~ ~~Shell,~~do ~~and~~not ~~several~~believe ~~other counterparties, respectively, Global is responsible for the development of the overall project, which will require significant financing. Global has orally informed us~~ that itour ~~has~~adoption ~~completed a financing transaction, although it is not clear to us whether the funds raised by Global~~ will behave ~~sufficient to perform its obligations under these contracts. In light of the political environment in Nigeria, Global’s lack of~~ a ~~successful~~material ~~track record~~impact with respect to this project and other factors, there is no assurance that Global will be able to comply with its obligations under these contracts. In May 2004, we reached an agreement with Global whereby Global prepaid to us $5.0 million in equipment rental fees that we recorded in other liabilities on our ~~condensed~~ consolidated ~~balance~~results ~~sheet in return for our agreement to waive~~of ~~certain~~operations, ~~defaults~~cash byflows ~~Global~~or ~~with~~financial ~~respect to some of our agreements with them~~position.

IfIn ~~Shell~~March 2005, ~~were~~the toFASB ~~terminate~~issued ~~its~~FASB ~~contract~~Interpretation ~~with~~No. 47, ~~Global~~“Accounting for ~~any~~Conditional ~~reason~~Asset Retirement Obligations” (“FIN 47”). FIN 47 requires uncertainty about the timing or wemethod ~~were~~of settlement of a conditional asset retirement obligation to ~~terminate~~be ~~our~~factored ~~involvement~~into inthe measurement of the liability ~~project,~~when wesufficient ~~would~~information beexists. ~~required~~FIN to47 ~~find~~also clarifies when an ~~alternative~~ ~~use~~entity ~~for~~would ~~the~~have sufficient ~~barge-mounted~~information ~~facility~~to ~~which~~reasonably ~~could~~estimate ~~result~~the infair ~~a write-down~~value of ~~our~~an ~~investment~~asset retirement obligation. AtFIN 47 ~~June 30,~~is ~~2004,~~effective weno ~~had~~later anthan ~~investment~~the end of ~~approximately~~ ~~$30.4 million~~fiscal ~~associated~~years ~~with~~ending ~~the~~after ~~barge-mounted~~December 15, ~~facility~~2005. ~~and~~We are ~~approximately~~currently ~~$4.1 million~~evaluating ~~associated~~the ~~with~~impact ~~advances~~FIN ~~to,~~47 ~~and~~will have on our ~~investment~~consolidated inresults of operations, cash ~~Global~~flows or financial position.

10In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, ~~NEW~~“Accounting Changes ~~ACCOUNTING~~and ~~PRONOUNCEMENTS~~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. We are currently evaluating the provisions of SFAS 154 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

~~In May 2003, the FASB issued SFAS No~~10. ~~150,~~ ~~“Accounting~~REPORTABLE ~~for Certain Financial~~SEGMENTS 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 Position 150-3 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 $22.2 million in sale leaseback obligations that are currently reported as “Minority interest” on our condensed consolidated balance sheet pursuant to FIN 46.

~~These~~We ~~minority~~manage ~~interest~~our ~~obligations~~business ~~represent~~segments primarily based upon the ~~equity~~type of ~~the~~product ~~entities~~or ~~that~~service provided. We ~~lease~~have ~~compression~~five ~~equipment~~principal toindustry ussegments: U.S. InRentals; ~~accordance~~International ~~with~~Rentals; ~~the~~Parts, ~~provisions~~Service ofand ~~our~~Used ~~compression~~Equipment; ~~equipment~~Compressor ~~lease~~and ~~obligations,~~Accessory ~~the~~Fabrication; ~~equity~~and ~~certificate~~Production ~~holders~~and ~~are~~Processing Equipment ~~entitled~~Fabrication. toThe ~~quarterly~~U.S. orand ~~semi-annual~~International ~~yield~~Rentals ~~payments~~segments onprimarily ~~the~~provide ~~aggregate~~natural gas compression ~~outstanding~~and ~~equity~~production ~~certificates.~~and Asprocessing ofequipment ~~June 30,~~rental ~~2004,~~and ~~the~~maintenance ~~yield~~services ~~rates~~to onmeet ~~the~~specific customer ~~outstanding~~requirements ~~equity~~on ~~certificates~~HCLP-owned ~~ranged~~assets. ~~from~~The ~~4.4%~~Parts, toService ~~9.5%.~~and ~~Equity~~Used ~~certificate holders~~Equipment ~~may~~segment ~~receive~~provides a ~~return~~full range of ~~capital~~services ~~payment~~to ~~upon~~support ~~termination~~the surface production needs of ~~the~~customers ~~lease~~from installation and normal ormaintenance ~~our~~and ~~purchase~~services to full operation of ~~the~~a ~~leased~~customer’s ~~compression~~owned assets and surface equipment ~~after~~as well ~~full~~as ~~payment~~sales of ~~all debt~~used ~~obligations~~equipment. ofThe Compressor and Accessory Fabrication segment involves the design, ~~entities~~fabrication ~~that~~and ~~lease~~sale of natural gas compression ~~equipment~~units and accessories to ~~us.~~meet Atunique ~~June 30,~~customer ~~2004,~~specifications. ~~the~~The ~~carrying~~Production ~~value~~and ofProcessing ~~the~~Equipment ~~minority~~Fabrication ~~interest~~segment ~~obligations~~designs, ~~approximated~~fabricates and sells equipment used in the ~~fair~~production ~~market~~and ~~value~~treating of ~~assets~~crude ~~that~~oil ~~would~~and benatural ~~required~~gas ~~to be~~and ~~transferred~~engineering, toprocurement ~~redeem~~and ~~the~~construction ~~minority~~of ~~interest~~heavy ~~obligations~~wall reactors for refineries, desalination plants and tank farms.

11We evaluate the performance of our segments based on segment gross profit. ~~REPORTABLE~~Segment ~~SEGMENTS~~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, interest, foreign currency translation, provision for cost of litigation settlement, goodwill impairment, other expenses and income taxes. Amounts defined as “Other income” include equity in income of non-consolidated affiliates and corporate related items primarily related to cash management activities. Revenues include sales to external customers. Our chief executive officer does not review asset information by segment.

WeThe ~~manage~~following ~~our~~tables ~~business~~present ~~segments~~sales ~~primarily~~and ~~based~~other ~~upon~~financial ~~the~~information ~~type~~by ~~of product or service provided. We have five principal~~ industry ~~segments:~~segment ~~Domestic~~for ~~Rentals;~~the ~~International~~three ~~Rentals;~~months ~~Parts~~ended June 30, ~~Service~~2005 and ~~Used Equipment; Compressor and Accessory Fabrication; and Production and Processing Equipment Fabrication~~2004. ~~The~~ ~~Domestic and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance~~

services to meet specific customer requirements on HCLP-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 unique customer specifications. The Production and Processing Equipment Fabrication Segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas and engineering, procurement and construction of heavy wall reactors for refineries and desalination plants.


	Segments
									Production
					Parts,		Compressor		and
					service		and		processing
	U.S.		International		and used		accessory		equipment		Other
	rentals		rentals		equipment		fabrication		fabrication		income		Total
					(in thousands)
June 30, 2005:
Revenues from external customers	$	87,691	$	55,521	$	50,531	$	41,092	$	104,297	$	5,660	$	344,792
Gross profit		54,707		38,377		14,316		4,505		11,868		5,660		129,433
June 30, 2004:
Revenues from external customers	$	83,680	$	54,599	$	41,414	$	44,159	$	63,017	$	6,007	$	292,876
Gross profit		48,730		40,632		10,050		3,705		9,130		6,007		118,254

WeThe ~~evaluate~~following ~~the~~tables ~~performance~~present ofsales ~~our segments based on segment gross profit. Segment gross profit for each segment includes direct revenues~~ and ~~operating expenses~~other ~~attributable~~financial toinformation ~~that~~by ~~segment.~~industry ~~Costs excluded from~~ segment ~~gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation, provision~~ for ~~cost~~the ofsix ~~litigation~~months ~~settlement,~~ended ~~goodwill impairment~~June 30, ~~other~~2005 ~~expenses~~ and income taxes. Amounts defined as “Other” include equity in income of non-consolidated affiliates, results of other insignificant operations and corporate related items primarily related to cash management activities. Revenues include sales to external customers. Intersegment sales and any resulting profits are eliminated in consolidation. We no longer include intersegment sales when we evaluate the performance of our segments and have adjusted prior periods to conform to the 2004 ~~presentation~~.

The following tables present sales and other financial information by industry segment for the three months ended June 30, 2004 and 2003.


	Segments
									Production
					Parts,		Compressor		and
					service		and		processing
	U.S.		International		and used		accessory		equipment		Other
	rentals		rentals		equipment		fabrication		fabrication		income		Total
June 30, 2005:
Revenues from external customers	$	174,845	$	109,436	$	83,968	$	73,616	$	193,868	$	10,695	$	646,428
Gross profit		107,785		74,790		22,693		7,412		22,314		10,695		245,689
June 30, 2004:
Revenues from external customers	$	170,272	$	106,099	$	85,796	$	72,309	$	116,446	$	11,785	$	562,707
Gross profit		99,783		77,359		21,463		5,942		14,863		11,785		231,195

					Parts, service				Production
	Domestic		International		and used		Compressor		equipment
	rentals		rentals		equipment		fabrication		fabrication		Other		Consolidated
	(in thousands)
June 30, 2004:
Revenues from external customers	$	83,680	$	58,359	$	41,913	$	44,159	$	63,017	$	5,553	$	296,681
Gross profit		48,730		43,163		10,165		3,705		9,130		5,553		120,446
June 30, 2003:
Revenues from external customers	$	80,256	$	51,014	$	34,976	$	36,420	$	65,810	$	7,888	$	276,364
Gross profit		49,250		36,109		8,965		3,455		5,665		7,888		111,332

11. DISCONTINUED OPERATIONS AND OTHER ASSETS HELD FOR SALE

~~The~~During ~~following~~the ~~tables~~fourth ~~present~~quarter ~~sales~~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 ~~other~~certain ~~financial~~used ~~information~~equipment bybusinesses, ~~industry~~which were part of our parts and service business. These ~~segment~~disposals meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the ~~six~~Impairment ~~months~~or ~~ended~~Disposal ~~June 30~~of Long-Lived Assets,” ~~2004~~(“SFAS 144”). SFAS 144 specifically requires that such amounts must represent a component of a business comprised of operations and ~~2003~~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 condensed consolidated statement of operations.

					Parts, service				Production
	Domestic		International		and used		Compressor		equipment
	rentals		rentals		equipment		fabrication		fabrication		Other		Consolidated
	(in thousands)
June 30, 2004:
Revenues from external customers	$	170,272	$	113,928	$	86,520	$	72,309	$	116,446	$	11,497	$	570,972
Gross profit		99,783		81,606		21,542		5,939		14,863		11,497		235,230
June 30, 2003:
Revenues from external customers	$	158,905	$	102,454	$	72,746	$	57,800	$	145,950	$	12,196	$	550,051
Gross profit		96,695		72,529		22,272		6,197		16,243		12,196		226,132

Due to changes in market conditions, the disposal plan for a small piece of our original non-oilfield power generation business has not been completed as of June 30, 2005. We are continuing to actively market these assets and have made valuation adjustments as a result of the change in market conditions. As a result of our consolidation efforts during 2003, we reclassified certain closed facilities to assets held for sale. We have sold certain assets for total sales proceeds of $0.1 million during the six months ended June 30, 2005. The remaining assets are expected to be sold within the next three to six months and the assets and liabilities are reflected as held-for-sale on our condensed consolidated balance sheet.

~~12.~~Summary ~~DISCONTINUED~~of ~~OPERATIONS~~operating ~~AND~~results ~~OTHER~~of ~~ASSETS~~the ~~HELD~~discontinued ~~FOR~~operations ~~SALE~~(in thousands):

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 domestic 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, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“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 condensed consolidated statement of operations. Due to changes in market conditions, the disposal plan was not completed in 2003. We are continuing to actively market these assets and have made valuation adjustments as a result of the change in market conditions. We have sold


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005		2004			2005		2004
Revenues and other:
U.S. rentals	$	67	$	10		$	70	$	15
International rentals		—		3,760			—		7,829
Parts, service and used equipment		—		3,270			—		6,742
Equity in income (loss) of non-consolidated affiliates		—		(181	)		—		(12	)
Other		5		(273	)		5		(279	)


		72		6,586			75		14,295


Expenses:

certain assets related to our used equipment business for total sales proceeds of $5.7 million during the six months ended June 30, 2004 that resulted in a $0.4 million gain. The remaining assets are expected to be sold during the remainder of 2004 and the assets and liabilities are reflected as held-for-sale on our condensed consolidated balance sheet.


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2005			2004		2005			2004
U.S. rentals		219			231		383			391
International rentals		—			1,229		—			3,582
Parts, service and used equipment		—			2,141		—			4,591
Compressor and accessory fabrication		—			—		—			3
Selling, general and administrative		75			490		179			975
Foreign currency translation		—			723		5			294
Depreciation and amortization		—			1,114		—			2,068
Other		(1	)		98		—			134


		293			6,026		567			12,038


Income (loss) from discontinued operations before income taxes		(221	)		560		(492	)		2,257
Provision for income taxes		—			79		—			593


Income (loss) from discontinued operations	$	(221	)	$	481	$	(492	)	$	1,664

~~Summary~~As a result of ~~operating~~our ~~results~~consolidation ofefforts ~~the~~during ~~discontinued~~2003, ~~operations~~we ~~(in~~reclassified ~~thousands):~~certain closed facilities to assets held for sale.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Revenues and other:
Domestic rentals	$	10		$	1,705		$	15		$	3,376
Parts, service and used equipment		2,771			3,658			6,018			7,287
Equity in income of non-consolidated affiliates		—			136			—			550
Other		—			(6	)		(3	)		(93	)
		2,781			5,493			6,030			11,120
Expenses:
Domestic rentals		231			494			391			793
Parts, service and used equipment		1,757			2,255			3,946			4,759
Selling, general and administrative		689			2,271			1,675			3,955
Interest expense		—			296			—			600
Other		134			325			134			371
		2,811			5,641			6,146			10,478
Income (loss) from discontinued operations before income taxes		(30	)		(148	)		(116	)		642
Provision for (benefit from) income taxes		—			(90	)		—			225
Income (loss) from discontinued operations	$	(30	)	$	(58	)	$	(116	)	$	417

Summary balance sheet data for assets held for sale as of June 30, 2005 (in thousands):

As a result of our consolidation efforts during 2003, we reclassified certain closed facilities to assets held for sale.


			Non-
			Oilfield
	Used		Power
	Equipment		Generation		Facilities		Total
Current assets	$	2,455	$	2,188	$	—	$	4,643
Property, plant and equipment		—		766		4,948		5,714

Assets held for sale		2,455		2,954		4,948		10,357
Current liabilities		—		472		—		472

Liabilities held for sale		—		472		—		472

Net assets held for sale	$	2,455	$	2,482	$	4,948	$	9,885

Summary balance sheet data for assets held for sale as of ~~June~~December 3031, 2004 (in thousands):

Non-

Oilfield

Used

Power

Equipment

Generation

Facilities

Total

Current assets

32,~~818~~455

92,~~531~~714

—

135,~~349~~169

Property, plant and equipment

~~160~~—

1,~~145~~077

95,~~765~~314

116,~~070~~391

Assets held for sale

32,~~978~~455

103,~~676~~791

95,~~765~~314

2411,~~419~~560

Current liabilities

—

~~451~~517

—

~~451~~517

Liabilities held for sale

—

~~451~~517

—

~~451~~517

Net assets held for sale

32,~~978~~455

103,~~225~~274

95,~~765~~314

2311,~~968~~043

~~Summary~~12. ~~balance~~INCOME ~~sheet data for assets held for sale as of December 31, 2003 (in~~TAXES ~~thousands):~~

			Non-
			Oilfield
	Used		Power
	Equipment		Generation		Facilities		Total
Current assets	$	6,820	$	10,524	$	—	$	17,344
Property, plant and equipment		924		1,386		11,671		13,981
Assets held for sale		7,744		11,910		11,671		31,325
Current liabilities		—		1,128		—		1,128
Liabilities held for sale		—		1,128		—		1,128
Net assets held for sale	$	7,744	$	10,782	$	11,671	$	30,197

During the three months ended June 30, 2005, we recorded a net tax provision of $8.1 million compared to $6.2 million for the three months ended June 30, 2004. Our effective tax rate for the three months ended June 30, 2005 was 189%, compared to 496% for the three months ended June 30, 2004. During the six months ended June 30, 2005, we recorded a net tax provision of $3.9 million compared to $13.7 million for the six months ended June 30, 2004. Our effective tax rate for the six months ended June 30, 2005 was 564%, compared to 763% for the six months ended June 30, 2004. The change in the effective tax rate was primarily due to the U.S. income tax impact of foreign operations, the relative weight of foreign income to

13U.S. ~~INCOME~~income ~~TAXES~~and the reversal of $3.6 million of tax issue based reserves during the second quarter of 2005. These reserves were reversed because we no longer believe that these tax liabilities will be incurred.

~~During~~Due ~~the~~to ~~first~~our ~~six~~cumulative ~~months of~~U.S. ~~2004~~losses, we ~~recorded~~cannot areach ~~net~~the ~~tax~~conclusion ~~provision~~that ofit ~~$14.3~~is “more likely than not” ~~million~~that ~~compared~~certain toof $7our U.~~7 million~~S. ~~for~~deferred tax assets will be realized in the ~~first~~future. ~~six~~We will be required to ~~months~~record ofadditional ~~2003.~~valuation ~~Our~~allowances ~~effective~~if ~~tax~~our ~~rate~~U.S. ~~for~~deferred ~~the~~tax ~~six~~asset ~~months~~position ~~ended~~is ~~June 30,~~increased ~~2004~~and the ~~was~~“more ~~343%,~~likely ~~compared~~than tonot” ~~47%~~criteria ~~for~~of ~~the~~SFAS ~~six~~109 ~~months~~is ~~ended~~not ~~June 30~~met. In addition, ~~2003.~~we ~~Due~~have torecorded valuation ~~our~~allowances ~~recent~~for ~~domestic~~certain ~~tax~~international ~~losses,~~jurisdictions. If we ~~cannot~~are ~~reach~~required ~~the~~to ~~conclusion~~record ~~that~~additional valuation itallowances ~~is “more~~in ~~likely~~the ~~than~~United ~~not”~~States ~~that~~or ~~certain~~any ofother jurisdictions, our ~~U.S.~~effective ~~deferred~~ tax ~~assets~~rate ~~would be~~will ~~realized~~be inimpacted, perhaps substantially, compared to the ~~near~~statutory ~~future~~rate. ~~Accordingly,~~We ~~our~~believe ~~provision~~that ~~for~~we ~~income~~will ~~taxes for~~likely ~~the~~be ~~six~~required ~~months~~to ~~ended~~record ~~June 30,~~additional ~~2004~~valuation ~~did~~allowances ~~not~~in ~~include~~future aperiods, ~~full~~unless ~~tax~~and ~~benefit~~until ~~for~~we ~~our~~are ~~estimate~~able ofto ~~anticipated~~generate ~~U.S.~~additional ~~losses~~taxable ~~because~~earnings ~~the~~or ~~benefit~~implement isadditional ~~not~~tax ~~anticipated~~planning tostrategies that bewould ~~realized~~minimize inor eliminate the ~~near~~amount ~~future~~of such additional valuation allowance.

~~We reclassified approximately $26~~13.~~2 million~~ toSUBSEQUENT ~~current deferred income taxes that, at December 31, 2003, had~~EVENTS ~~previously been included as part of our net deferred income tax liability. This immaterial reclassification had no impact on our consolidated results of operations, cash flows or partners’ equity.~~

14In July 2005, Hanover’s Board of Directors approved grants of awards under the 2003 Stock Incentive Plan to certain of our employees, including our executive officers, as part of an incentive compensation program. ~~SUBSEQUENT~~The ~~EVENTS~~grants included, in the aggregate, approximately 0.4 million shares of Hanover restricted stock, 0.5 million options to purchase Hanover’s common stock, and cash performance awards with an aggregate target payment of approximately $5.2 million.

InThe ~~July 2004, we granted approximately 1.1 million~~ shares of ~~restricted~~ Hanover ~~common~~ restricted stock ~~under~~and ~~our~~options ~~2003 Stock Incentive Plan~~ to ~~certain employees,~~purchase ~~including~~Hanover’s ~~our~~common ~~executive officers, as part of an incentive compensation plan. Approximately 0.7 million of the shares of restricted~~ stock that were granted will vest over a three-year period at a rate of one-third per year, beginning on the first anniversary of the date of the grant~~, and approximately 0~~.~~4 million~~ ofRecipients ~~the shares~~ of ~~restricted~~performance ~~stock~~awards ~~that were~~are ~~granted~~eligible ~~will vest in July 2007, subject~~ to ~~the~~receive ~~achievement of certain pre-determined~~a ~~performance~~cash ~~based~~payment ~~criteria.~~ranging Infrom ~~the~~0% ~~event~~to of200% ~~a change~~ of ~~control~~target ~~of Hanover,~~at athe ~~portion~~end of ~~these~~three ~~grants~~years ~~are~~from ~~subject~~the tooriginal ~~accelerated~~award ~~vesting.~~grant ~~Because~~date ~~0.4 million~~if ofwe ~~the~~meet ~~restricted~~certain ~~shares~~pre-determined ~~vest~~performance based oncriteria. ~~performance,~~The ~~we will record an estimate of the~~ compensation expense ~~to be expensed~~ ~~over three years~~ related to ~~these~~the ~~restricted~~performance ~~shares.~~awards ~~The compensation expense that~~ will be recognized in our statement of operations and will be be adjusted for changes in our estimate of the ~~number~~percentage of ~~restricted~~target ~~shares~~ that ~~will vest~~is asexpected ~~well~~to asbe ~~changes in our stock price~~achieved.

~~In July 2004, Wilpro Energy Services (PIGAP II) Limited (referred to as “PIGAP~~18 II”) received a notice of default from the Venezuelan state oil company, PDVSA, alleging that PIGAP II is not in compliance under a services agreement as a result of certain operational issues. PIGAP II is a joint venture, currently owned 70% by a subsidiary of The Williams Companies, Inc. (“Williams”) and 30% by HCLP, that operates a natural gas compression facility in Venezuela. PIGAP II has informed us that it does not believe a basis exists for such notice and that it is contesting the giving of this notice. Nonetheless, the giving of this notice of default could be deemed an event of default under PIGAP II’s outstanding project loans totaling approximately $219 million. We understand, however, that the lenders under the PIGAP II project loan agreement have confirmed to PIGAP II that based on the facts they currently know, they have no intention of exercising any rights or remedies under the PIGAP II project loan agreements until the issues raised in the notice and PIGAP II’s response are clarified. In any event, HCLP has not guaranteed and is not otherwise liable for the PIGAP II project loans and an event of default under such project loans does not trigger a default under Hanover and HCLP’s debt obligations. HCLP’s net book investment in PIGAP II at June 30, 2004 was approximately $27.9 million and HCLP’s pretax income with respect to PIGAP II for the six months ended June 30, 2004 was approximately $6.6 million.

18 Table of Contents

~~Table~~ITEM of2. ~~Contents~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~ITEM~~SPECIAL 2.NOTE ~~MANAGEMENT’S~~REGARDING ~~DISCUSSION~~FORWARD—LOOKING ~~AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~STATEMENTS

~~SPECIAL~~Certain ~~NOTE~~matters ~~REGARDING~~discussed ~~FORWARD~~in this Quarterly Report on Form 10-~~LOOKING~~Q ~~STATEMENTS~~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 future 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:

~~Certain~~• ~~matters~~our ~~discussed~~inability into ~~this~~renew ~~Quarterly~~our ~~Report~~short-term onleases ~~Form~~of ~~10-Q~~equipment ~~are “forward-looking~~with ~~statements”~~our ~~intended~~customers so as to ~~qualify~~fully ~~for~~recoup our cost of the ~~safe~~equipment; ~~harbors~~• ~~from liability~~a ~~established~~prolonged bysubstantial ~~the~~reduction ~~Private~~in ~~Securities~~oil ~~Litigation~~and ~~Reform~~natural ~~Act~~gas ofprices, ~~1995 and~~which ~~Section 21E~~could ofcause a decline in the ~~Securities~~demand ~~Exchange~~for ~~Act~~our ofcompression ~~1934,~~and asoil ~~amended.~~and ~~These forward-looking~~natural ~~statements~~gas ~~can~~production ~~generally~~and beprocessing ~~identified~~equipment; as• ~~such~~reduced ~~because~~profit margins or the ~~context~~ loss of market share resulting from competition or the ~~statement~~introduction ~~will~~of ~~include~~competing ~~words~~technologies ~~such~~by asother wecompanies; ~~“believe”,~~• ~~“anticipate”, “expect”,~~changes ~~“estimate”~~in economic or ~~words~~political ofconditions ~~similar~~in ~~import.~~the ~~Similarly,~~countries ~~statements~~in ~~that describe~~which ~~our~~we ~~future~~do ~~plans~~business, ~~objectives~~including orcivil ~~goals~~uprisings, orriots, ~~future~~terrorism, ~~revenues~~the ~~or other~~taking ~~future~~of ~~financial~~property ~~metrics~~without ~~are~~fair ~~also~~compensation ~~forward-looking~~and ~~statements.~~legislative ~~Such forward-looking~~changes; ~~statements~~• ~~are~~changes ~~subject~~in tocurrency ~~certain~~exchange ~~risks~~rates; ~~and~~• ~~uncertainties~~the ~~that could~~inherent ~~cause~~risks associated with our ~~actual~~operations, ~~results~~such toas ~~differ~~equipment ~~materially~~defects, ~~from~~malfunctions ~~those~~and ~~anticipated~~natural ~~as of~~disasters; ~~the~~• ~~date~~our ofinability ~~this~~to ~~report.~~implement ~~These~~certain ~~risks~~business ~~and~~objectives, ~~uncertainties~~such ~~include~~as:

• ~~our~~international ~~inability~~expansion, to• ~~renew~~integrating ~~our~~acquired ~~short-term~~businesses, ~~leases of equipment with our customers so as to fully recoup our cost of the equipment;~~ • agenerating ~~prolonged~~sufficient ~~substantial reduction in oil and natural gas prices~~cash, ~~which could cause a decline in the demand for our compression and oil and natural gas production equipment;~~ • ~~reduced~~accessing ~~profit margins or~~ the ~~loss~~capital ofmarkets, ~~market share resulting from competition or the introduction of competing technologies by other companies;~~ • ~~legislative~~refinancing ~~changes~~existing or ~~changes~~incurring inadditional ~~economic~~indebtedness orto ~~political~~fund ~~conditions~~our ~~in the countries in which we do~~ business;, and • ~~the~~executing ~~inherent risks associated with~~ our ~~operations,~~exit ~~such~~and assale ~~equipment~~strategy ~~defects,~~with ~~malfunctions~~respect ~~and~~to ~~failures~~assets ~~and~~classified ~~natural~~on ~~disasters; •~~ our ~~inability~~balance tosheet ~~implement~~as ~~certain~~held ~~business~~for ~~objectives, such as:~~sale;

• ~~integrating~~risks ~~acquired~~associated ~~businesses,~~with •any ~~implementing~~significant ~~our~~failure ~~new~~or malfunction of our enterprise resource planning ~~systems,~~system; • ~~generating~~governmental ~~sufficient cash~~safety, ~~• accessing the capital markets~~health, •environmental ~~refinancing~~and ~~existing~~other ~~or incurring additional indebtedness to fund our business~~regulations, ~~and~~which •could ~~executing~~require ~~our~~us ~~exit and sale strategy with respect~~ to ~~assets~~make ~~classified~~significant onexpenditures; ~~our balance sheet as discontinued operations~~ and ~~held for sale;~~

• 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.19

OtherTable factors besides those described in this Form 10-Q could also affect our actual results. You should not unduly rely on the forward-looking statements contained in this Form 10-Q, which speak only as of the date of this Form 10-Q. 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 this Form 10-Q or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in our Annual Report on Form 10-K for the year ended December 31, 2003 and the reports we file from time to time with the SEC after the date of this Form 10-Q. All forward-looking statements attributable to HCLP are expressly qualified in their entirety by this cautionary statement. Contents

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

~~Table~~You should not unduly rely on the forward-looking statements, which speak only as of ~~Contents~~the date of this Form 10-Q. Other factors in addition to those described in this Form 10-Q could also affect our actual results. Except as required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. In addition to the risks noted above, you should review the factors and risks we describe in our Annual Report on Form 10-K for the year ended December 31, 2004 and the reports we file from time to time with the SEC after the date of this Form 10-Q. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

GENERAL

Hanover Compression Limited Partnership, a Delaware corporation (“we”, “us”, “our”, “HCLP”, or the “Company”), is a Delaware limited partnership and an indirect wholly -owned subsidiary of Hanover Compressor Company (File No. 1-13071) (“Hanover”). We, together with ~~its~~our subsidiaries, isare a global market leader in the full service natural gas compression business and is also a leading provider of 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~~HCLP was founded as a Delaware corporation in 1990, and ~~has~~reorganized ~~been~~as a Delaware ~~public~~limited ~~company~~partnership ~~since 1997~~in 2000. Our customers include both major and independent oil and gas ~~producers~~ 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, ~~gas measurement~~ and oilfield power generation services, primarily to our ~~domestic~~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 heavy wall reactors for refineries and construction of desalination plants and tank farms, primarily for use in Europe and the Middle East.

OVERVIEW

Our revenue and other income for the ~~three~~second ~~months~~quarter ~~ended~~ 2005 ~~June 30, 2004~~ was $~~296~~344.78 million compared to ~~$276.4 million~~second quarter ~~for~~2004 ~~the~~revenue ~~three~~and ~~months~~other ~~ended~~income ~~June~~of $292.9 ~~30, 2003~~million. Net loss for the ~~three~~second ~~months~~quarter ~~ended~~2005 ~~June 30, 2004~~ was $4.13 million, compared with a net ~~income~~loss of ~~$4.0 million,~~ for the three months ended June 30, 2003. The decrease in our operating results was primarily due to the impact of adoption of FIN 46 and an increase in our provision for income taxes. As a result of the adoption of FIN 46, we recorded approximately $4.21 million in ~~additional depreciation expense associated with~~ the ~~compression~~second ~~equipment operating leases that were consolidated into our financials in the third~~ quarter ~~of 2003. Our provision for income taxes for the three months ended June 30,~~ 2004 ~~did not include a full tax benefit for our estimate of anticipated U~~.~~S. losses. This expense~~ ~~is discussed in greater detail under “Income Taxes” below.~~

Our revenue and other income for the six months ended June 30, ~~2004~~2005 was $~~571~~646.0 4 million compared to revenue and other income of $~~550~~562.17 million for the six months ended June 30, ~~2003~~2004. Net loss for the six months ended June 30, ~~2004~~2005 was $93.9 million, compared with a net ~~income~~ loss of $79.49 million, for the six months ended June 30, 2003. The decrease in our net income was primarily the result of a $8.5 million increase in additional depreciation related to the adoption of FIN 46 and an increase in our provision for income tax. Our provision for income taxes for the six months ended June 30, 2004 ~~did not include a full tax benefit for our estimate of anticipated U~~.S. ~~losses. This expense is discussed in greater detail under “Income Taxes” below.~~

~~During~~Total ~~the~~compression ~~six~~horsepower ~~months~~at ~~ended~~ June 30, ~~2004,~~2005 wewas ~~realized continued improvement in our domestic rental fleet utilization, which increased from~~ approximately ~~76% at December 31~~3, ~~2003 to 79% at June 30~~304, ~~2004. During the six months ended June 30~~000, ~~2004,~~consisting ~~we also achieved an improvement in backlog in both the compression and production and processing fabrication lines~~ of ~~our business. Our parts,~~ ~~service~~approximately ~~and used equipment business segment benefited from strong international service and installation revenue and gross profit during the six months ended June 30~~2, ~~2004~~512,000 ~~but~~horsepower ~~the base parts and service revenue was lower than anticipated. We believe this lower revenue is due to continued delays~~ in ~~maintenance by our customers because of~~ the ~~current~~United ~~strong~~States ~~gas~~and ~~price~~approximately ~~environment~~792,000 ~~particularly in North~~horsepower ~~America~~internationally.

~~Total~~At ~~compression horsepower at~~ June 30, ~~2004 was approximately 3~~2005,~~481,000, consisting~~ ofour ~~approximately~~total ~~2,568,000~~third-party ~~horsepower~~fabrication inbacklog ~~the~~was ~~United~~approximately ~~States and~~$260.4 million ~~approximately~~compared ~~913,000~~to ~~horsepower~~approximately ~~internationally~~$290.9 million ~~Our~~at ~~total~~December 31, ~~compression horsepower~~2004 ~~utilization~~and ~~rate~~$265.7 million at June 30, 2004. The compressor and accessory fabrication backlog was approximately ~~83%~~$67.5 million at June 30, 2005, compared to ~~utilization~~ of approximately ~~81%~~$56.7 million at December 31, ~~2003~~2004 and ~~approximately~~$53.9 million ~~79%~~ at June 30, ~~2003~~2004. The ~~Domestic~~backlog for production and ~~international~~processing ~~utilization~~equipment fabrication was approximately $192.9 million at June 30, 2005, compared to approximately $234.2 million at December 31, 2004 ~~was~~and $211.8 million at June 30, 2004. ~~approximately~~

20Industry Conditions

~~Table~~The ofNorth ~~Contents~~American rig count increased by 14% to 1,648 at June 30, 2005 from 1,441 at June 30, 2004, and the twelve-month rolling average North American rig count increased by 10% to 1,650 at June 30,

~~79% and 96%, respectively, compared to approximately 76% and 94%, respectively,~~20 ~~at December 31, 2003, and approximately 73% and 94%, respectively, at June 30, 2003.~~

AtTable June 30,of 2004, our total third-party fabrication backlog, excluding Belleli, was approximately $104 million compared to approximately $46 million at December 31, 2003 and $84 million at June 30, 2003. Backlog for Belleli at June 30, 2004 was approximately $162 million, compared to approximately $107 million at December 31, 2003 and $77 million at June 30, 2003. The compressor and accessory fabrication backlog was approximately $54 million at June 30, 2004, compared to approximately $28 million at December 31, 2003 and $37 million at June 30, 2003. The backlog for production and processing equipment fabrication, excluding Belleli, was approximately $50 million at June 30, 2004, compared to approximately $18 million at December 31, 2003 and $47 million at June 30, 2003. Contents

~~Industry~~2005 ~~Conditions~~from 1,500 at June 30, 2004. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $6.47 per MMBtu at June 30, 2005 from $5.31 per MMBtu at June 30, 2004. Despite the increase in natural gas prices and the recent 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 by our customers, which we believe is primarily the result of (i) the lack of a significant increase in U.S. natural gas production levels, (ii) the lack of immediate availability of compression equipment in the configuration currently in demand by our customers and (iii) increases in purchases of compression equipment by oil and gas companies that have available capital. However, improved market conditions have led to improved pricing in the U.S. market.

The North American rig count increased by 5% to 1,441 at June 30, 2004 from 1,375 at June 30, 2003, and the twelve-month rolling average North American rig count increased by 23% to 1,500 at June 30, 2004 from 1,215 at June 30, 2003. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $5.31 per Mcf at June 30, 2004 from $4.79 per Mcf at June 30, 2003. During 2003, we did not experience any significant growth in domestic rentals or purchases of equipment and services by our customers, which we believe is primarily the result of the lack of a significant increase in U.S. ~~natural~~Tax ~~gas production levels. However, with~~Position ~~several non-operational issues behind us, we are focused on improving our sales success ratio on new bid opportunities and continue to anticipate some revenue growth in 2004.~~

~~Facility~~Due ~~Consolidation~~to our cumulative U.S. losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 is not met. In addition, we have recorded 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. We believe that we will likely be required to record additional valuation allowances in future periods, unless and until we are able to generate additional taxable earnings or implement additional tax planning strategies that would minimize or eliminate the amount of such additional valuation allowance.

WeRESULTS ~~had~~OF ~~previously announced our plan to reduce our U.S. headcount by~~OPERATIONS approximately 500 employees worldwide and to close four fabrication facilities. During the year ended December 31, 2002, we accrued approximately $2.7 million in employee separation costs related to the reduction in workforce. During the year ended December 31, 2003, we paid approximately $2.0 million in employee separation costs, implemented further cost saving initiatives and closed two facilities in addition to the four fabrication facilities we closed pursuant to our original reduction plan. During the first six months of 2004, we paid an additional $0.7 million in employee separation costs related to the completion of these activities. From December 31, 2002 to June 30, 2004, our U.S. workforce has decreased by approximately 700 employees.

~~U.S.~~THREE ~~Tax~~MONTHS ~~Position~~ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004

AsSummary ~~a result~~ of ~~recent~~Business ~~operating~~Segment ~~losses, we were in a net deferred tax asset~~Results position (for U.S. income tax purposes) for the first time in 2004. Due to our recent domestic tax losses, we could not reach the conclusion that it was “more likely than not” that certain of our U.S. deferred tax assets would be realized in the near future. We will be required to record additional valuation allowances if our domestic deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 continues to not be met. If we are required to record additional valuation allowances, our effective tax rate will be above the statutory rate. Our preliminary analysis leads us to believe that we will likely be required to record a valuation allowance in 2004, and we may be required to record additional valuation allowances in future periods.

21U.S. Rentals (in thousands)


	Three months ended
	June 30,						Increase
	2005			2004			(Decrease)
Revenue	$	87,691		$	83,680			5	%
Operating expense		32,984			34,950			(6	)%


Gross profit	$	54,707		$	48,730			12	%
Gross margin		62	%		58	%		4	%

~~RESULTS~~U.S. OFrental ~~OPERATIONS~~revenue increased during the three months ended June 30, 2005, compared to the three months ended June 30, 2004, due primarily to improvement in market conditions that has led to an improvement in pricing. Gross profit and gross margin for the three months ended June 30, 2005 increased compared to the three months ended June 30, 2004, primarily due to improved pricing and our efforts to reduce maintenance and repair expense.

~~THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003~~21

SummaryTable of Business Segment Results Contents

~~Domestic~~International Rentals (in thousands)

	Three months ended
	June 30,						Increase
	2004			2003			(Decrease)
	2005			2004			(Decrease)
Revenue	$	8355,~~680~~521		$	8054,~~256~~599			42	%
Operating expense		3417,~~950~~144			3113,~~006~~967			1323	%
Gross profit	$	4838,~~730~~377		$	4940,~~250~~632			(16	)%
Gross margin		5869	%		6174	%		(35	)%

~~Domestic~~During ~~rental revenue increased during~~ the three months ended June 30, ~~2004~~2005, international rental revenue increased, compared to the three months ended June 30, ~~2003~~2004, ~~due~~ primarily due to ~~improved utilization~~increased activity in ~~our~~Mexico ~~compression~~and ~~rental fleet~~Nigeria. Gross Weprofit ~~believe~~and ~~that~~gross ~~our~~margin ~~utilization increased~~decreased primarily due to an(a) additional ~~improvement~~costs incurred in ~~market~~the second ~~conditions~~quarter ~~and~~of ~~our~~2005 ~~focus~~related onto ~~putting idle~~the ~~units~~start-up ~~into service. Utilization~~ of ~~our~~projects ~~domestic~~in ~~compression~~Nigeria ~~rental~~(b) lower ~~fleet~~operating costs ~~increased~~during tothe ~~approximately~~three ~~79%~~months atended June 30, 2004 ~~from~~due ~~approximately~~to ~~73%~~the attiming ~~June 30,~~of ~~2003.~~planned ~~Our~~repair ~~utilization~~and ~~increased~~maintenance activities ~~due~~that towere ascheduled 3%to increase in ~~contracted units,~~ the ~~retirement~~second half of ~~units~~2004 ~~to be sold or scrapped~~ and (c) the ~~deployment~~receipt of ~~units into~~ ~~international~~approximately ~~operations~~$0.9 million ~~Gross~~in ~~margin~~additional ~~for~~contractual ~~the~~inflation ~~three~~adjustments ~~months~~in ~~ended~~Venezuela ~~June~~and approximately $1.1 ~~30,~~million ~~2004 decreased~~in ~~slightly,~~negotiated ~~compared~~start toup payments received in Brazil during the ~~three~~second quarter ~~months~~of ~~ended~~2004 ~~June 30,~~associated ~~2003,~~with ~~due~~a ~~to increased~~compression ~~maintenance~~rental ~~and~~project ~~repair~~that ~~expense~~was ~~and~~scheduled ~~increased~~to start up ~~costs~~in the ~~associated~~first ~~with~~quarter ~~bringing~~of ~~idle~~2004 ~~compression~~but ~~units~~was ~~online~~delayed by the customer.

~~International~~Parts, ~~Rentals~~Service and Used Equipment (in thousands)

	Three months ended
	June 30,						Increase
	2004			2003			(Decrease)
	2005			2004			(Decrease)
Revenue	$	5850,~~359~~531		$	5141,~~014~~414			1422	%
Operating expense		1536,~~196~~215			1431,~~905~~364			215	%
Gross profit	$	4314,~~163~~316		$	3610,~~109~~050			2042	%
Gross margin		7428	%		7124	%		34	%

~~During~~Parts, ~~the~~service ~~three~~and ~~months~~used ~~ended~~equipment ~~June 30~~revenue, ~~2004~~gross ~~international~~profit ~~rental revenue~~ and gross ~~profit~~margin ~~increased~~for the three months ended June 30, ~~compared~~2005 towere higher than the three months ended June 30, ~~2003,~~ 2004 primarily due to ~~increased~~higher ~~compression~~parts and service revenues in the U.S. and ~~processing~~an ~~plant~~increase in used rental ~~activity~~equipment inand installation sales. ~~Argentina~~Parts, ~~Brazil~~service and ~~Mexico.~~used ~~Gross~~equipment ~~margin~~revenue ~~for~~includes ~~the~~two ~~three~~business ~~months~~components: ~~ended June~~(1) ~~30,~~parts and service ~~2004~~and ~~increased~~(2) used ~~when~~rental ~~compared~~equipment toand installation sales. For the three months ended June 30, ~~2003~~2005, ~~primarily~~ ~~due~~parts toand ~~(a)~~service ~~lower~~revenue ~~repair~~was ~~and~~$38.6 million ~~maintenance~~with ~~expense~~a ~~that~~gross ismargin ~~expected~~of to27%, ~~increase~~compared into $35.4 million and 28%, respectively, for the ~~second~~three ~~half~~months ofended June 30, 2004. Used rental equipment and installation ~~(b)~~sales revenue for the ~~receipt~~three ofmonths ~~approximately~~ended June 30, 2005 was $011.9 million ~~in additional~~with ~~contractual~~a ~~inflation~~gross margin ~~adjustments~~of in32%, ~~Venezuela~~compared ~~and approximately~~to $16.10 million ~~in negotiated~~with ~~start~~a up2% ~~payments~~gross ~~received~~margin infor ~~Brazil~~the ~~associated~~three ~~with~~months aended ~~compression~~June 30, ~~rental~~2004. ~~project~~Our ~~that~~used ~~was~~rental ~~scheduled~~equipment toand ~~start~~installation upsales inrevenue ~~the~~and ~~first~~gross ~~quarter~~margins ofvary ~~2004 but~~significantly ~~was~~from ~~delayed~~period byto ~~the~~period ~~customer.~~and ~~The~~are ~~inflation~~dependent ~~and~~on ~~negotiated~~the ~~start~~exercise upof ~~payment increased~~purchase ~~our~~options ~~international~~on rental ~~gross~~equipment ~~margin~~ by customers 1%and ~~during~~installation sales associated with the ~~three~~start-up ~~months ended~~of ~~June 30,~~new ~~2004~~projects by customers.

~~Parts, Service and Used Equipment~~22 ~~(in thousands)~~

	Three months ended
	June 30,						Increase
	2004			2003			(Decrease)
Revenue	$	41,913		$	34,976			20	%
Operating expense		31,748			26,011			22	%
Gross profit	$	10,165		$	8,965			13	%
Gross margin		24	%		26	%		(2	)%

22Compression and Accessory Fabrication (in thousands)


	Three months ended
	June 30,						Increase
	2005			2004			(Decrease)
Revenue	$	41,092		$	44,159			(7	)%
Operating expense		36,587			40,454			(10	)%


Gross profit	$	4,505		$	3,705			22	%
Gross margin		11	%		8	%		3	%

~~Parts,~~For ~~service and used equipment revenue and gross profit for~~ the three months ended June 30, ~~2004 was higher than the three months ended June 30~~2005, ~~2003~~compression ~~due primarily to increased international service~~ and ~~installation~~accessory ~~sales~~fabrication ~~which~~revenue ~~were~~decreased ~~partly~~due ~~offset~~to bydecreased arevenues ~~decrease~~ in ~~revenue from~~ our ~~domestic~~high-spec ~~parts~~compression ~~and service~~ business. ~~We believe our North American customers have delayed maintenance~~ in ~~order~~ ~~to keep their equipment on-line for longer periods due to~~ the ~~increase~~second ~~in price~~quarter of ~~natural gas~~2005. Gross ~~margin~~profit ~~for~~and ~~the~~gross ~~three~~margin ~~months~~increased ~~ended~~primarily ~~June 30,~~due ~~2004 was~~to ~~lower~~improved ~~than~~pricing ~~the~~and ~~results~~our ~~for~~focus ~~the three months ended June 30, 2003 primarily~~on ~~due~~improving tooperational ~~the~~efficiencies ~~higher~~in ~~margin~~our onfabrication abusiness ~~used~~in ~~equipment~~2005. ~~sales~~Strong competition in the ~~second~~ second quarter of ~~2003. For the three months ended June 30,~~ 2004, ~~parts~~led ~~and~~to ~~service~~lower ~~revenue~~margins ~~was~~on ~~$35~~orders received.~~4 million with~~ aAs ~~gross margin~~ of ~~28%, compared to $30.8 million and 27%, respectively, for the three months ended~~ June 30, ~~2003.~~2005, ~~Used~~we ~~rental equipment and~~had ~~installation~~compression ~~sales~~fabrication ~~revenue~~backlog inof ~~the three months ended June 30, 2004 was~~ $667.5 million ~~with a gross margin of 4%,~~ compared to $453.29 million ~~with~~at ~~a 19% gross margin for the three months ended~~ June 30, ~~2003~~2004. ~~Our used rental equipment and~~ installation sales and gross margins vary significantly from period to period and are dependent on the exercise of purchase options on rental equipment by customers and the start-up of new projects by customers.

~~Compression~~Production and ~~Accessory~~Processing Equipment Fabrication (in thousands)

	Three months ended
	June 30,						Increase
	2004			2003			(Decrease)
	2005			2004			(Decrease)
Revenue	$	44104,~~159~~297		$	3663,~~420~~017			2166	%
Operating expense		4092,~~454~~429			3253,~~965~~887			2372	%
Gross profit	$	311,~~705~~868		$	39,~~455~~130			730	%
Gross margin		811	%		914	%		(13	)%

~~For~~Production and processing equipment fabrication revenue for the three months ended June 30, ~~2004,~~2005 was ~~compression~~greater ~~fabrication~~than ~~revenue~~for ~~and gross~~the ~~profit~~three ~~increased~~months ended June 30, 2004, primarily due to our increased focus on both fabrication ~~that~~sales and our sales success ratio on new bid opportunities as well as an improvement in market conditions which led to ~~increased~~improved ~~sales~~pricing. ~~Gross~~Production ~~margin~~and ~~declined~~processing equipment fabrication gross margin during the ~~three~~second ~~months~~quarter ~~ended~~2005 was positively impacted by approximately ~~June~~$1.7 ~~30,~~million ~~2004,~~due ~~compared~~primarily to ~~three~~the ~~months~~strengthening ~~ended~~of ~~June 30,~~the ~~2003~~U.S. Dollar, ~~due~~relative to the Euro. Gross margin decreased primarily due to ~~continued~~ ~~strong~~the ~~competition~~increase ~~for~~in ~~new~~revenues ~~orders~~by ~~that~~our ~~negatively~~fabrication ~~impacted~~operations ~~sales~~in Italy ~~prices~~and Dubai, which typically have lower margins. As of June 30, 2005, we had a production and processing ~~the~~equipment ~~resulting~~fabrication ~~gross~~backlog ~~margin~~of $192.9 million compared to $211.8 million at June 30, 2004.

~~Production and Processing Equipment Fabrication~~Expenses ~~(in thousands)~~

	Three months ended
	June 30,						Increase
	2004			2003			(Decrease)
Revenue	$	63,017		$	65,810			(4	)%
Operating expense		53,887			60,145			(10	)%
Gross profit	$	9,130		$	5,665			61	%
Gross margin		14	%		9	%		5	%

Selling, general, and administrative expense (“SG&A”) for the three months ended June 30, 2005 was $43.9 million, compared to $41.9 million during the three months ended June 30, 2004. The increase was primarily due to an increase in compensation costs. As a percentage of revenue, SG&A for the three months ended June 30, 2005 was 13%, compared to 14% for the three months ended June 30, 2004. As a percentage of sales, SG&A expense decreased due to our efforts to manage SG&A costs and drive an increased level of business with existing infrastructure.

~~Production~~Depreciation and ~~processing~~amortization ~~equipment~~expense ~~fabrication revenue~~ for the three months ended June 30, ~~2004~~2005 ~~was~~increased ~~slightly~~to ~~lower~~$45.2 million, ~~than~~compared to $43.1 million for the three months ended June 30, ~~2003,~~ ~~primarily due to a decrease in orders from our customers in the second half of 2003~~2004. WeDepreciation ~~believe our consolidation efforts, management changes~~ and ~~non-operational~~amortization ~~issues~~increased ~~impacted~~during ~~our~~the ~~sales~~three ~~efforts.~~months ~~However~~ended June 30, we2005 ~~are~~as ~~focusing~~compared ~~on improving~~to ~~our~~the ~~sales~~three ~~success ratio on new bid opportunities that has resulted in~~months ~~the~~ended ~~recent~~June 30, ~~improvement~~2004 inprimarily ~~our~~due ~~backlog.~~to ~~Gross~~net ~~profit~~additions ~~and~~to ~~gross~~property, ~~margin~~plant ~~for production~~ and ~~processing~~ equipment ~~fabrication~~placed ~~for~~in service ~~the~~since ~~three months ended~~ June 30, 2004 ~~increased~~, ~~compared~~principally ~~to the second quarter 2003, due primarily to improvements~~ in ~~Belleli’s~~rental ~~operating~~fleet ~~performance~~operations.

~~Other~~The ~~Income~~decrease in our interest expense was primarily due to a decrease in the average debt balance, partially offset by an increase in the overall effective interest rate on outstanding debt to 8.7% from 8.4% during the three months ended June 30, 2005 and 2004, respectively.

~~Equity~~Foreign incurrency ~~income~~translation offor ~~non-consolidated affiliates decreased by $1.5 million to $4.9 million during~~ the three months ended June 30, ~~2004,~~2005 ~~from~~was a loss of $65.40 million, ~~during~~compared ~~the~~to ~~three~~a ~~months~~gain ~~ended~~of ~~June~~$0.1 ~~30,~~million ~~2003.~~for ~~This decrease is primarily due to a decrease in results from our equity interest in PIGAP II, which experienced an increase in interest expense during~~ the three months ended June 30, 2004. ~~compared~~For to the three months ~~ended~~ ended June 30, ~~2003~~2005, asforeign acurrency ~~result~~translation ofincluded ~~the completion~~$5.4 million ofin ~~PIGAP~~translation ~~II’s~~losses related ~~project~~to ~~financing~~the ~~in October 2003.~~re-measurement

~~Expenses~~of our international subsidiaries’ dollar denominated inter-company debt primarily for our subsidiary in Italy.

~~Selling,~~The ~~general,~~following ~~and~~table ~~administrative~~summarizes ~~expense (“SG&A”) for~~ the ~~three~~exchange ~~months ended~~gains ~~June 30,~~and ~~2004~~losses ~~was~~we ~~$41.7 million,~~recorded ~~compared~~for toassets ~~$40.2 million~~exposed ~~during the~~to ~~three~~currency ~~months~~translation ~~ended June 30, 2003. As a percentage of revenue, SG&A~~ (in ~~the~~thousands): ~~second quarter 2004 was 14%, compared to 15% for the same period a year earlier.~~

Depreciation and amortization expense for the three months ended June 30, 2004 increased to $44.2 million, compared to $35.9 million for the same period a year ago. Second quarter 2004 depreciation and amortization expense increased primarily due to (a) additional depreciation expense of approximately $4.2 million associated with the compression equipment operating leases that were consolidated into our financial statements in the third quarter 2003, (b) increased depreciation expense due to additions to the rental fleet, including maintenance capital, placed in service during the first six months of 2004 and during 2003, and (c) approximately $1.0 million in additional amortization expense to write-off deferred financing costs associated with the June 2004 refinancing of our 2000A compression equipment lease obligations.


	Three Months Ended
	June 30,
	2005			2004
Canada	$	422		$	179
Argentina		78			(227	)
Venezuela		140			477
Italy		(5,698	)		51
All other countries		103			(384	)


Exchange gain (loss)	$	(4,955	)	$	96

~~Beginning~~We inhad ~~July 2003,~~intercompany ~~payments~~advances ~~accrued~~outstanding ~~under~~to our ~~sale~~subsidiary ~~leaseback~~in ~~transactions~~Italy of approximately $91.9 ~~were~~million ~~included~~and in$14.7 million ~~interest~~at ~~expense~~June 30, as2005 aand ~~result~~June 30, of2004, ~~consolidating~~respectively. onThese ~~our~~advances ~~balance~~are ~~sheet~~denominated ~~the~~in ~~entities~~U.S. ~~that~~dollars. ~~lease~~The ~~compression~~impact ~~equipment~~of tothe ~~us.~~remeasurement Asof athese ~~result,~~advances ~~during~~on our statement of ~~the~~operations ~~three~~will ~~months~~depend ~~ended~~on ~~June 30,~~the ~~2004~~outstanding asbalance ~~compared~~in tofuture ~~the~~periods. ~~three~~A ~~months~~10% ~~ended~~increase ~~June~~or decrease in ~~30,~~the ~~2003,~~Euro ~~our~~would ~~interest~~result ~~expense~~in ~~increased~~a ~~$23.4 million~~foreign tocurrency ~~$31.7 million~~translation ~~and~~gain ~~our leasing~~or ~~expense~~loss ~~decreased~~of approximately $~~20.~~8.4 million ~~to $0~~.

~~Foreign~~Income ~~currency translation for the three months ended June 30, 2004 was a~~Taxes loss of $0.6 million, compared to a gain of $0.6 million for the three months ended June 30, 2003. The foreign currency translation loss was primarily due to foreign currency loss in our Canadian operations. The following table summarizes the exchange gains and losses we recorded for assets exposed to currency translation (in thousands):

	Three Months Ended
	June 30,
	2004			2003
Canada	$	(544	)	$	38
Argentina		(227	)		770
Venezuela		477			130
All other countries		(333	)		(365	)
Exchange gain (loss)	$	(627	)	$	573

During the three months ended June 30, 2005, we recorded a net tax provision of $8.1 million compared to $6.2 million for the three months ended June 30, 2004. Our effective tax rate for the three months ended June 30, 2005 was 189%, compared to 496% for the three months ended June 30, 2004. The change in the effective tax rate was primarily due to the U.S. income tax impact of foreign operations, the relative weight of foreign income to U.S. income and the reversal of $3.6 million of tax issue based reserves during the second quarter of 2005. These reserves were reversed because we no longer believe that these tax liabilities will be incurred.

~~Income~~Due ~~Taxes~~to our cumulative U.S. losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 is not met. In addition, we have recorded 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. We believe that we will likely be required to record additional valuation allowances in future periods, unless and until we are able to generate additional taxable earnings or implement additional tax planning strategies that would minimize or eliminate the amount of such additional valuation allowance.

~~During~~Discontinued ~~the three months ended June 30, 2004,~~Operations we recorded a net tax provision of $6.2 million compared to a provision for taxes of $3.3 million for the three months ended June 30, 2003. Our effective tax rate for the three months ended June 30, 2004 was 346%, compared to 43% for the three months ended June 30, 2003. The increase in effective rate was primarily due to the impact of valuation allowances provided in the U.S. and the weight of foreign income to U.S. income (loss). Due to our recent domestic tax losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the near future. Accordingly, our provision for income taxes for the three months ended June 30, 2004 did not include a full tax benefit for our estimate of anticipated U.S. losses because the benefit is not anticipated to be realized in the near future.

24During the fourth quarter 2002, we reviewed our business lines and Hanover’s Board of Directors approved management’s recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. Income (loss) from discontinued operations decreased $1.4 million to a net loss of $0.5 million during the three months ended June 30, 2005, from income of $0.9 million during the three months ended June 30, 2004. The decrease in income (loss) from discontinued operations was primarily due to the sale of our Canadian rental fleet in the fourth quarter of 2004.

~~Table of Contents~~24

SIXTable MONTHSof ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Contents

~~Summary~~SIX ofMONTHS ~~Business~~ENDED ~~Segment~~JUNE ~~Results~~30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004

~~Domestic~~Summary ~~Rentals (in~~of ~~thousands)~~Business Segment Results

	Six months ended
	June 30,						Increase
	2004			2003			(Decrease)
Revenue	$	170,272		$	158,905			7	%
Operating expense		70,489			62,210			13	%
Gross profit	$	99,783		$	96,695			3	%
Gross margin		59	%		61	%		(2	)%

U.S. Rentals
(in thousands)

Domestic rental revenue and gross profit increased during the six months ended June 30, 2004, compared to the six months ended June 30, 2003, due primarily to improved utilization in our compression rental fleet. We believe that our utilization increased due to an improvement in market conditions and our focus on putting idle units into service. Utilization of our domestic compression rental fleet increased to approximately 79% at June 30, 2004 from approximately 73% at June 30, 2003. Our utilization increased due to a 3% increase in contracted units, the retirement of units to be sold or scrapped and the deployment of units into international operations. Gross margin for the six months ended June 30, 2004 decreased slightly, compared to the six months ended June 30, 2003, due to increased maintenance and repair expense and increased start up costs associated with bringing idle compression units online.


	Six months ended
	June 30,						Increase
	2005			2004			(Decrease)
Revenue	$	174,845		$	170,272			3	%
Operating expense		67,060			70,489			(5	)%

Gross profit	$	107,785		$	99,783			8	%
Gross margin		62	%		59	%		3	%

~~International~~U.S. ~~Rentals~~rental revenue increased during the six months ended June 30, 2005, compared to the six months (ended June 30, 2004, due primarily to improvement in ~~thousands)~~market conditions that has led to an improvement in pricing. Gross profit and gross margin for the six months ended June 30, 2005 increased compared to the six months ended June 30, 2004, primarily due to improved pricing and our efforts to reduce maintenance and repair expense.

	Six months ended
	June 30,						Increase
	2004			2003			(Decrease)
Revenue	$	113,928		$	102,454			11	%
Operating expense		32,322			29,925			8	%
Gross profit	$	81,606		$	72,529			13	%
Gross margin		72	%		71	%		1	%

International Rentals
(in thousands)

During the six months ended June 30, 2004 international rental revenue and gross profit increased, compared to the six months ended June 30, 2003, primarily due to increased compression and processing plant rental activity in Argentina, Brazil and Mexico. Gross margin for the six months ended June 30, 2004 increased when compared to the six months ended June 30, 2003, primarily due to lower repair and maintenance expense that is expected to increase in the second half of 2004.


	Six months ended
	June 30,						Increase
	2005			2004			(Decrease)
Revenue	$	109,436		$	106,099			3	%
Operating expense		34,646			28,740			21	%


Gross profit	$	74,790		$	77,359			(3	)%
Gross margin		68	%		73	%		(5	)%

~~Parts~~During the six months ended June 30, ~~Service~~2005, international rental revenue increased, compared to the six months ended June 30, 2004, primarily due to increased activity in Nigeria and ~~Used~~Brazil. ~~Equipment~~Gross margin decreased primarily due to (a) additional costs incurred in ~~thousands~~the first six months of 2005 related to the start-up of projects in Nigeria and (b) lower operating costs during the first six months of 2004 due to the timing of planned repair and maintenance activities that were scheduled to increase in the second half of 2004.

	Six months ended
	June 30,						Increase
	2004			2003			(Decrease)
Revenue	$	86,520		$	72,746			19	%
Operating expense		64,978			50,474			29	%
Gross profit	$	21,542		$	22,272			(3	)%
Gross margin		25	%		31	%		(6	)%

Parts,Table service and used equipment revenue for the six months ended June 30, 2004 was higher than the six months ended June 30, 2003 due primarily to increased international installation sales which were partly offset by a decrease in revenue from our domestic parts and service business. We believe our North American customers have delayed maintenance in order to keep their equipment on-line for longer periods due to the increase in the price of natural gas. Gross profit and gross margin for the six months ended June 30, 2004 were lower than the results for the six months ended June 30, 2003 Contents

25Parts, Service and Used Equipment (in thousands)


	Six months ended
	June 30,
							Increase
	2005			2004			(Decrease)
Revenue	$	83,968		$	85,796			(2	)%
Operating expense		61,275			64,333			(5	)%


Gross profit	$	22,693		$	21,463			6	%
Gross margin		27	%		25	%		2	%

Parts, service and used equipment revenue for the six months ended June 30, 2005 were lower than the six months ended June 30, 2004 primarily due to ~~slower~~lower ~~activity~~used inequipment and installation sales that were partially offset by increased parts and service inrevenue. ~~North~~Gross ~~America~~margin ~~and~~percentage afor the ~~high~~six ~~margin~~months ended June 30, 2005 increased due to improved margins on aused rental equipment and installation sales. Parts, service and used equipment ~~sale~~revenue inincludes ~~the~~two ~~first~~business ~~six~~components: ~~months~~(1) parts ofand ~~2003~~service and (2) used rental equipment and installation sales. For the six months ended June 30, ~~2004~~2005, parts and service revenue was $6069.68 million with a gross margin of 27%, compared to $60.6 million and 2927%, respectively, for the six months ended June 30, ~~2003~~2004. Used rental equipment and installation sales revenue infor the six months ended June 30, ~~2004~~2005 was $2514.92 million with a ~~gross~~ gross margin of 2128%, compared to $1225.2 million with a 3822% gross margin for the six months ended June 30, ~~2003~~2004. Our used rental equipment and installation sales revenue and gross margins vary significantly from period to period and are dependent on the exercise of purchase options on rental equipment by customers and installation sales associated with the start-up of new projects by customers.

Compression and Accessory Fabrication (in thousands)

	Six months ended
	June 30,						~~Increase~~
	2004			2003			(Decrease)
							Increase
Revenue	$	72,309		$	57,800			25	%
	2005			2004			(Decrease)
Operating expense		66,370			51,603			29	%
Revenue	$	73,616		$	72,309			2	%
Gross profit	$	5,939		$	6,197			(4	)%
Operating expense		66,204			66,367			0	%
Gross margin		8	%		11	%		(3	)%
Gross profit	$	7,412		$	5,942			25	%
Gross margin		10	%		8	%		2	%

For the six months ended June 30, ~~2004~~2005, compression and accessory fabrication revenue, gross profit and gross margin increased primarily due to ~~our~~ increased ~~focus~~sales onactivity ~~fabrication~~and ~~that~~improved ~~led~~market toconditions ~~increased sales. Gross profit~~ and ~~gross~~our ~~margin~~focus ~~declined~~on inimproving ~~the~~operational ~~six~~efficiencies. ~~months~~As ~~ended~~ of June 30, ~~2004~~2005, ~~compared~~we tohad ~~the~~compression fabrication ~~six~~backlog ~~months~~of ~~ended June~~$67.5 ~~30,~~million ~~2003,~~compared ~~due primarily~~ to ~~continued~~ ~~strong~~$53.9 million ~~competition~~at ~~for new orders~~June 30, ~~which negatively impacted sales prices and the resulting gross margin~~2004.

Production and Processing Equipment Fabrication (in thousands)

	Six months ended
	June 30,						~~Increase~~
	2004			2003			(Decrease)
							Increase
Revenue	$	116,446		$	145,950			(20	)%
	2005			2004			(Decrease)
Operating expense		101,583			129,707			(22	)%
Revenue	$	193,868		$	116,446			66	%
Gross profit	$	14,863		$	16,243			(8	)%
Operating expense		171,554			101,583			69	%
Gross margin		13	%		11	%		2	%
Gross profit	$	22,314		$	14,863			50	%
Gross margin		12	%		13	%		(1	)%

Production and processing equipment fabrication revenue ~~and gross profit~~ for the six months ended June 30, ~~2004~~2005 was greater ~~lower~~ than for the six months ended June 30, ~~2003~~2004, primarily due to ~~a decrease in orders received from~~ our ~~customers~~increased infocus ~~the second half of 2003. We believe our consolidation efforts, management changes and non-operational issues impacted our sales efforts. However, we are focusing~~ on ~~improving our sales success ratio on new bid opportunities which has resulted in the recent improvement in our backlog. Gross margin for production and processing equipment~~ fabrication ~~for the six months~~ ~~ended June 30, 2004 increased, compared to the six months ended June 30, 2003, due primarily to the improvement in Belleli’s operating performance.~~

~~Expenses~~26

SG&ATable for the six months ended June 30, 2004 was $81.6 million, compared to $79.5 million in the six months ended June 30, 2003. As a percentage of revenue, SG&A for the six months ended June 30, 2004 and 2003 was 14%. During the first six months of 2004, we incurred approximately $1.5 million of additional selling, general and administrative costs related to our efforts in connection with the implementation of Section 404 of the Sarbanes-Oxley Act. We expect to incur approximately $2.5 million to $4.5 million of additional costs in the second half of 2004 in connection with these efforts. Contents

26sales and an improvement in market conditions. We have focused on improving our sales success ratio on new bid opportunities, which has resulted in the 2005 improvement in our revenue. Production and processing equipment fabrication gross margin during the six months ended June 30, 2005 was positively impacted by approximately $2.3 million due primarily to the strengthening of the U.S. Dollar, relative to the Euro. As of June 30, 2005, we had a production and processing equipment fabrication backlog of $192.9 million compared to $211.8 million at June 30, 2004.

~~Table of Contents~~Expenses

~~Depreciation~~SG&A ~~and amortization expense~~ for the six months ended June 30, ~~2004 increased~~2005 towas $8786.01 million, compared to $7082.23 million ~~for~~in the ~~same period a year ago. Depreciation and amortization expense for the~~ six months ended June 30, 2004 ~~increased~~. The increase was primarily due to ~~(a)~~an ~~additional~~increase ~~depreciation~~in ~~expense~~compensation ~~of approximately $8~~costs.~~5 million~~ ~~associated with the compression equipment operating leases that~~As ~~were~~a ~~consolidated~~percentage ~~into~~of ~~our financial statements in the third quarter 2003~~revenue, ~~(b)~~SG&A ~~increased~~for ~~depreciation expense due to additions to~~ the ~~rental fleet, including maintenance capital, placed in service during the~~ six months ended June 30, ~~2004~~2005 and ~~during~~2004 ~~2003~~was 13% and ~~(c)~~15%, respectively. ~~approximately~~As ~~$1.0 million~~a inpercentage ~~additional amortization~~of sales, SG&A expense todecreased ~~write-off~~due ~~deferred~~to ~~financing~~our ~~costs~~efforts ~~associated~~to ~~with~~manage ~~the~~SG&A ~~June 2004~~costs ~~refinancing~~and ofdrive ~~our~~an ~~2000A~~increased ~~compression~~level ~~equipment~~of ~~lease~~business ~~obligations~~with existing infrastructure.

~~Beginning~~Depreciation inand ~~July 2003,~~amortization ~~payments~~expense ~~accrued~~for ~~under~~the ~~our~~six ~~sale~~months ~~leaseback~~ended ~~transactions are~~June 30, ~~included~~2005 inincreased ~~interest~~to ~~expense~~$90.5 million, ascompared ato ~~result~~$84.9 million offor ~~consolidating on our balance sheet~~ the ~~entities~~six ~~that~~months ~~lease~~ended ~~compression~~June 30, ~~equipment to us~~2004. AsDepreciation aand amortization ~~result,~~increased during the six months ended June 30, ~~2004~~2005 as compared to the six months ended June 30, ~~2003,~~ ~~our~~2004 ~~interest~~primarily ~~expense~~due ~~increased~~to ~~$46.4 million~~net additions to ~~$63.1 million~~property, plant and ~~our leasing~~equipment ~~expense~~placed ~~decreased~~in service ~~$43.1~~since June ~~million~~30, to2004, $0principally in rental fleet operations.

~~Foreign~~The ~~currency~~decrease ~~translation~~in ~~for~~our ~~the~~interest ~~six~~expense ~~months ended June 30, 2004~~ was aprimarily ~~gain of~~due ~~$0.9 million, compared~~ to a ~~gain~~decrease ofin ~~$0.2 million for~~ the ~~six~~average ~~months~~debt ~~ended June 30~~balance, partially ~~2003.~~offset ~~The~~by ~~foreign~~an ~~currency~~increase ~~translation~~in ~~gain~~the ~~was~~overall ~~primarily~~effective ~~due~~interest torate ~~the devaluation~~on ofoutstanding ~~the~~debt ~~Venezuelan~~to ~~bolivar~~9.0% from ~~The~~8.3% ~~following~~during ~~table~~the ~~summarizes~~six ~~the exchange~~months ~~gains~~ended ~~(losses)~~June we30, ~~recorded~~2005 ~~for~~and ~~assets~~2004, ~~exposed to currency translation~~respectively. ~~(in thousands):~~

	Six Months Ended
	June 30,
	2004			2003
Canada	$	(61	)	$	129
Argentina		(448	)		2,084
Venezuela		1,433			(1,396	)
All other countries		(49	)		(617	)
Exchange gain	$	875		$	200

Foreign currency translation for the six months ended June 30, 2005 was a loss of $5.2 million, compared to a gain of $1.2 million for the six months ended June 30, 2004. For the six months ended June 30, 2005, foreign currency translation included $8.9 million in translation losses related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt, primarily for our subsidiary in Italy.

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

During the six months ended June 30, 2004, we recorded a net tax provision of $14.3 million compared to a provision for taxes of $7.7 million for the six months ended June 30, 2003. Our effective tax rate for the six months ended June 30, 2004 was 343%, compared to 47% for the six months ended June 30, 2003. The increase in effective rate was primarily due to the impact of valuation allowances provided in the U.S. and the weight of foreign income to U.S. income (loss). Due to our recent domestic tax losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets would be realized in the near future. Accordingly, our provision for income taxes for the six months ended June 30, 2004 did not include a full tax benefit for our estimate of anticipated U.S. losses because the benefit is not anticipated to be realized during 2004.


	Six Months Ended
	June 30,
	2005			2004
Canada	$	195		$	233
Argentina		474			(448	)
Venezuela		3,149			1,433
Italy		(8,892	)		92
All other countries		(152	)		(141	)


Exchange gain/(loss)	$	(5,226	)	$	1,169

27We had intercompany advances outstanding to our subsidiary in Italy of approximately $91.9 million and $14.7 million at June 30, 2005 and June 30, 2004, respectively. These advances are denominated in U.S. dollars. The impact of the remeasurement of these advances on our statement of operations will depend on the outstanding balance in future periods. A 10% increase or decrease in the Euro would result in a foreign currency translation gain or loss of approximately $8.4 million.

~~Table~~Income ~~of Contents~~Taxes

~~LIQUIDITY~~During ~~AND~~the ~~CAPITAL~~six ~~RESOURCES~~months ended June 30, 2005, we recorded a net tax provision of $3.9 million compared to $13.7 million for the six months ended June 30, 2004. Our effective tax rate for the six months ended June 30, 2005 was 564%, compared to 763% for the six months ended June 30, 2004. The change in the effective tax rate was primarily due to the U.S. income tax impact of foreign operations, the relative weight of foreign income to U.S. income and the reversal of $3.6 million of tax issue based reserves during the

~~Our unrestricted cash balance amounted to $51.9 million at June 30, 2004~~27 compared to $56.6 million at December 31, 2003. Working capital increased to $344.5 million at June 30, 2004 from $289.0 million at December 31, 2003. The increase in working capital was primarily the result of an increase in accounts receivable and inventory.

OurTable cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the table below (dollars in thousands): Contents

	Six Months Ended
	June 30,
	2004			2003
Net cash provided by (used in) continuing operations:
Operating activities	$	57,871		$	57,025
Investing activities		(24,740	)		(69,217	)
Financing activities		(43,303	)		1,369
Effect of exchange rate changes on cash and cash equivalents		(490	)		612
Net cash provided by discontinued operations		5,917			5,954
Net change in cash and cash equivalents	$	(4,745	)	$	(4,257	)

second quarter of 2005. These reserves were reversed because we no longer believe that these tax liabilities will be incurred.

~~The~~Due ~~decrease~~to inour ~~cash~~cumulative ~~used~~U.S. inlosses, ~~investing~~we ~~activities~~cannot ~~during~~reach the ~~six~~conclusion ~~months~~that ~~ended~~it is “more likely than not” ~~June 30,~~that ~~2004~~certain asof ~~compared~~our U.S. deferred tax assets will be realized in the future. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more ~~six~~likely ~~months~~than ~~ended~~not” ~~June 30~~criteria of SFAS 109 is not met. In addition, ~~2003~~we ~~was~~have ~~primarily~~recorded valuation ~~attributable~~allowances for certain international jurisdictions. If we are required to arecord ~~decrease~~additional valuation allowances in ~~capital~~the ~~expenditures~~United ~~and~~States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially, compared to the $4statutory rate.~~7 million~~ We believe that we will likely be required to record additional valuation allowances in future periods, unless and until we are ~~proceeds~~able ~~received~~to ~~from~~generate ~~the~~additional ~~sale~~taxable ofearnings ~~our~~or ~~interest~~implement inadditional ~~Hanover~~tax ~~Measurement~~planning ~~Services~~strategies that ~~Company,~~would LPminimize or eliminate the amount of such additional valuation allowance.

~~The~~Discontinued ~~increase in cash used in financing activities was primarily due to the~~Operations ~~net repayments of approximately $27.0 million on our bank credit facility.~~

WeDuring ~~may~~the ~~carry~~fourth ~~out~~quarter ~~new~~2002, ~~customer~~we ~~projects~~reviewed ~~through~~our ~~rental~~business ~~fleet~~lines ~~additions~~ and ~~other related~~Hanover’s ~~capital~~Board ~~expenditures.~~of WeDirectors approved ~~generally~~management’s ~~invest~~recommendation ~~funds necessary~~ to ~~make~~exit ~~these rental~~and ~~fleet~~sell ~~additions when~~ our ~~idle~~non-oilfield ~~equipment~~power ~~cannot~~generation ~~economically~~and ~~fulfill a~~certain ~~project’s~~used ~~requirements and the new~~ equipment ~~expenditure~~business ~~is matched with long-term contracts whose expected economic terms exceed our return on capital targets~~lines. ~~During~~Income ~~2004,~~(loss) from wediscontinued ~~plan~~operations todecreased ~~spend approximately~~ $~~100~~2.7 million to ~~$150~~ ~~million on capital expenditures, including (~~a~~) rental~~ ~~equipment~~net ~~fleet~~loss ~~additions and~~of ~~(b) approximately~~ $500.7 million toduring ~~$60 million~~the onsix ~~equipment~~months ~~maintenance capital.~~ended ~~Since capital expenditures are largely discretionary~~June 30, ~~we believe we would be able to significantly reduce them~~2005, ~~in a reasonably short time frame, if expected cash flows~~ from ~~operations~~income ~~were~~of ~~not realized~~$2. ~~Historically, we have~~0 million ~~funded~~during ~~our~~the ~~capital~~six ~~requirements~~months ~~with~~ended ~~a combination of internally generated cash flow~~June 30, ~~borrowings~~2004. ~~under~~The adecrease ~~bank~~in ~~credit~~income ~~facility,~~(loss) from ~~sale leaseback transactions,~~discontinued ~~raising~~operations ~~additional~~was ~~equity~~primarily ~~and~~due ~~issuing long-term debt. Subsequent~~ to ~~December 31, 2003, there have been no significant changes to our obligations to make future payments under existing contracts except for~~ the ~~repayment~~sale of ~~the borrowings under~~ our ~~bank~~Canadian ~~credit~~rental ~~facility~~fleet ~~and~~in ~~Hanover’s~~the ~~issuance~~fourth ofquarter ~~$200 million~~of ~~Senior Notes and loan to HCLP in June~~ 2004 ~~as discussed below~~.

AsLIQUIDITY ~~part~~AND ofCAPITAL ~~our business, we are a party to various financial guarantees,~~RESOURCES 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. The possibility of our having to honor these commitments 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 one to be established.

Our ~~bank~~unrestricted ~~credit~~cash ~~facility~~balance ~~provides~~was ~~for a~~ $~~350~~31.7 million ~~revolving credit facility in which advances bear interest~~ at ~~(a)~~June ~~the greater of the administrative agent’s prime rate~~30, ~~the~~2005 ~~federal~~compared ~~funds~~to ~~effective~~$38.1 million ~~rate~~at December 31, or2004. ~~the~~Working ~~base~~capital CDincreased ~~rate,~~to ~~or (b)~~$364.3 amillion ~~eurodollar~~at ~~rate~~June 30, ~~plus,~~2005 infrom ~~each case, a specified margin~~$312. ~~A commitment fee~~3 million ~~equal~~at toDecember 31, 02004.~~625%~~ ~~times~~The ~~the~~increase ~~average~~in ~~daily~~working ~~amount~~capital ofwas ~~the~~primarily ~~available~~attributable ~~commitment under the bank credit facility is payable quarterly~~ to ~~the~~an ~~lenders participating~~increase in ~~the bank credit~~ ~~facility.~~inventory ~~Our~~and ~~bank~~costs ~~credit~~and ~~facility~~estimated ~~contains~~earnings ~~certain~~in ~~financial~~excess ~~covenants~~of ~~and limitations~~billings on, ~~among~~uncompleted ~~other~~contracts ~~things,~~and ~~indebtedness,~~a decrease ~~liens,~~in ~~leases~~accrued ~~and sales of assets~~liabilities.

28Our cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the table below (dollars in thousands):


	Six Months Ended
	June 30,
	2005			2004
Net cash provided by (used in) continuing operations:
Operating activities	$	36,710		$	53,823
Investing activities		(49,057	)		(25,251	)
Financing activities		7,132			(43,302	)
Effect of exchange rate changes on cash and cash equivalents		(952	)		(490	)
Net cash provided by (used in) discontinued operations		(189	)		10,475


Net change in cash and cash equivalents	$	(6,356	)	$	(4,745	)

AsThe ofdecrease ~~June 30, 2004, we were~~ in ~~compliance~~cash ~~with~~provided ~~all~~by ~~material~~operating ~~covenants~~activities ~~and other~~for ~~requirements~~the ~~set~~six ~~forth~~months inended ~~our bank credit facility~~June 30, ~~the indentures and~~2005 ~~agreements~~as ~~related~~compared to ~~our compression equipment lease obligations and~~ the ~~indentures~~ ~~and~~six ~~agreements~~months ~~relating~~ended to our other long-term debt. A default under our bank credit facility or these agreements would trigger cross-default provisions under the agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidityJune 30, ~~financial position and operations. While there is no assurance, we believe based on our current projections for~~ 2004 ~~that~~was weprimarily ~~will~~due ~~be in~~to ~~compliance~~an ~~with~~increase ~~the financial covenants~~ in ~~our~~costs ~~bank credit facility~~ and ~~the~~ ~~agreements~~estimated ~~related~~earnings toversus ~~our~~billings ~~compression~~on ~~equipment~~uncompleted ~~lease obligations~~projects.

WeThe ~~expect~~increase ~~that~~in ~~our bank credit facility and~~ cash ~~flow~~used ~~from~~in ~~operations~~investing ~~will provide~~activities usduring ~~adequate~~the ~~capital~~six ~~resources~~months toended ~~fund~~June 30, ~~our~~2005 ~~estimated level of capital~~as ~~expenditures~~compared ~~for~~to the ~~short~~six ~~term.~~months Asended of June 30, 2004, wewas ~~had~~primarily noattributable ~~outstanding borrowings~~to ~~and~~an ~~approximately~~increase ~~$94.1 million~~ in ~~letters~~capital expenditures ofduring ~~credit~~the ~~outstanding under~~first ~~our~~six ~~bank~~months ~~credit~~of ~~facility~~2005. ~~Our~~In ~~bank credit facility permits us to incur indebtedness, subject to covenant limitations described above, up to a $350 million credit limit, plus, in~~ addition ~~to certain other indebtedness~~, ~~an additional~~during ~~(a)~~the ~~$40 million~~first inquarter ~~unsecured indebtedness, (b) $50 million~~ of ~~non-recourse~~ ~~indebtedness of unqualified subsidiaries~~2004, ~~and (c) $25 million of~~we ~~secured~~received ~~purchase money indebtedness. Giving effect to our~~ $944.17 million in ~~outstanding~~proceeds ~~letters~~from ~~of credit,~~ the ~~liquidity available~~sale ~~under~~of our ~~bank~~interest ~~credit~~in ~~facility~~Hanover asMeasurement ~~of June 30~~Services Company, ~~2004 was approximately $256 million~~LP.

In June 2003, Hanover and HCLP filed a shelf registration statement with the SEC pursuant to which we may from time to time publicly offer equity, debt or other securities in an aggregate amount not to exceed $700 million. The ~~SEC~~increase ~~subsequently declared the shelf registration statement effective on November 19, 2003, and~~ in ~~December 2003~~cash ~~Hanover~~provided ~~issued~~by ~~approximately~~financing ~~$344 million in~~activities ~~securities~~was ~~under~~primarily ~~the shelf registration statement. In June 2004, Hanover issued an additional $200 million aggregate principal amount of 9.0% Senior Notes~~ due ~~2014,~~to ~~which~~net ~~are fully~~borrowings ~~and unconditionally guaranteed~~ on ~~a senior subordinated basis~~our byrevolving ~~HCLP.~~credit ~~The~~facility ~~net~~partially ~~proceeds~~offset ~~from~~by ~~this~~payments ~~offering~~on ~~were loaned to HCLP and together with our available cash were used to repay~~ the ~~outstanding~~2000B ~~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~~obligation. ~~Subject to market conditions, the shelf~~ ~~registration statement will be available to offer one or more series of additional equity, debt or other securities.~~

~~In addition to purchase money and similar obligations, the indentures and the~~28 agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, Hanover’s 8.625% Senior Notes due 2010 and its 9% Senior Notes due 2014 permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (a) an additional $75 million in unsecured indebtedness and (b) any additional indebtedness so long as, after incurring such indebtedness, Hanover’s 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 Hanover’s “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 thereon. The indentures and agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, Hanover’s 8.625% Senior Notes due 2010 and its 9% 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 June 30, 2004, Hanover’s coverage ratio was less than 2.25 to 1.0, and therefore as of such date we could not incur indebtedness other than under our bank credit facility and up to an additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness.

29 Table of Contents

~~Table~~The decrease in cash provided by discontinued operations was principally related to the sale of ~~Contents~~our Canadian rental fleet which was discontinued and sold in November 2004.

AsWe ofmay ~~June 30,~~carry ~~2004,~~out new customer projects through rental fleet additions and other related capital ~~Hanover’s~~expenditures. ~~credit~~We ~~ratings~~generally asinvest ~~assigned~~funds bynecessary ~~Moody~~to make these rental fleet additions when our idle equipment cannot economically fulfill a project’s ~~Investors~~requirements and the new equipment ~~Service,~~expenditure ~~Inc~~is matched with long-term contracts whose expected economic terms exceed our return on capital targets. We currently plan to spend approximately $125 million to $150 million on net capital expenditures during 2005, including (~~“Moody’s”~~1) rental equipment fleet additions and ~~Standard~~(2) approximately &$40 million ~~Poor’s~~to ~~Ratings~~$50 million ~~Services~~on ~~(“Standard~~equipment &maintenance capital. During February 2005, we ~~Poor’s”)~~repaid ~~were:~~our 2000B compressor equipment lease obligations using borrowings from our bank credit facility. Subsequent to December 31, 2004, there have been no other significant changes to our obligations to make future payments under existing contracts.

			Standard
	Moody's		& Poor's
Outlook	Stable		Negative
Senior implied rating		B1	BB-
Bank credit facility due December 2006	Ba3			—
4.75% convertible senior notes due 2008		B3		—
4.75% convertible senior notes due 2014		B3		B
8.625% senior notes due 2010		B3		B
9.0% senior notes due 2014		B3		B
2001A equipment lease notes, interest at 8.5%, due September 2008		B2		—
2001B equipment lease notes, interest at 8.8%, due September 2011		B2		—
Zero coupon subordinated notes, interest at 11%, due March 31, 2007	Caa1			B-
7.25% convertible subordinated notes due 2029*	Caa1			—
Senior secured		—		B+
Senior unsecured		—		B

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.

*As ~~Rating~~part isof onour ~~the~~business, ~~Mandatorily~~we ~~Redeemable~~are ~~Convertible~~a ~~Preferred~~party ~~Securities~~to ~~that~~various ~~were~~financial ~~issued~~guarantees, byperformance ~~Hanover~~guarantees ~~Compressor~~and other ~~Capital~~contractual ~~Trust~~commitments to extend guarantees of credit and other assistance to various subsidiaries, ~~our~~investees ~~wholly~~and ~~owned~~other ~~subsidiary~~third parties. ~~See~~To ~~discussion~~varying ofdegrees, ~~the~~these ~~impact~~guarantees involve elements of ~~FIN~~performance 46and incredit ~~“Management’s~~risk, ~~Discussion~~which ~~and~~are ~~Analysis~~not included on our consolidated balance sheet. The possibility of ~~Financial~~our ~~Condition~~having ~~and~~to ~~Results~~honor our contingencies is largely dependent upon future operations of ~~Operations~~various —subsidiaries, ~~New~~investees ~~Accounting~~and ~~Pronouncements”~~other ~~under~~third ~~Item~~parties, 7or the occurrence of ~~Hanover’s~~certain future ~~annual~~events. ~~report~~We onwould ~~Form~~record ~~10-K~~a reserve for ~~the~~these ~~year~~guarantees ~~ended~~if ~~December~~events ~~31,~~occurred ~~2003~~that required that one be established.

~~Hanover~~Our ~~and~~bank ~~HCLP~~credit dofacility ~~not~~provides ~~have~~for ~~any~~a ~~credit~~$350 million ~~rating~~revolving ~~downgrade~~credit ~~provisions~~facility in ~~debt~~which ~~agreements or~~advances ~~the~~bear ~~agreements~~interest ~~related~~at to(a) the ~~compression~~greater ~~equipment~~of ~~lease~~the ~~obligations~~administrative ~~that would~~agent’s ~~accelerate~~prime ~~their maturity dates. However~~rate, athe ~~downgrade~~federal ~~in Hanover’s credit~~funds ~~rating~~effective ~~could~~rate, ~~materially~~or ~~and~~the ~~adversely~~base ~~affect~~CD ~~Hanover and HCLP’s ability to renew existing~~rate, or ~~obtain~~ ~~access~~(b) a toeurodollar ~~new~~rate, ~~credit~~plus, ~~facilities~~ in ~~the~~each ~~future~~case, ~~and~~a ~~could increase the~~specified ~~cost~~margin ~~of such facilities~~(6.0% ~~Should~~weighted ~~this~~average ~~occur,~~interest werate ~~might~~at ~~seek~~June 30, ~~alternative sources of funding~~2005). InA ~~addition,~~commitment ~~our~~fee ~~significant~~equal ~~leverage~~to ~~puts us at greater risk of~~0.625% ~~default~~times ~~under~~the ~~one~~average ordaily ~~more~~amount of ~~our~~the ~~existing~~available ~~debt~~commitment ~~agreements~~under ifthe webank ~~experience~~credit anfacility is ~~adverse~~payable ~~change~~quarterly to ~~our~~the ~~financial~~lenders ~~condition~~participating orin ~~results~~the ofbank ~~operations~~credit facility. Our ~~ability~~bank credit tofacility ~~reduce~~contains ~~our~~certain ~~leverage~~financial ~~depends~~covenants ~~upon market~~ and ~~economic~~limitations ~~conditions~~on, asamong ~~well~~other asthings, indebtedness, ~~our~~liens, ~~ability~~leases toand ~~execute liquidity-enhancing transactions such as~~ sales of ~~non-core~~ assets ~~or our equity securities~~.

WeAs ~~use~~of ~~derivative~~June 30, ~~financial~~2005, ~~instruments~~HCLP toand ~~minimize~~Hanover were in compliance with all material covenants and other requirements set forth in our bank credit facility, the ~~risks~~indentures and~~/or~~ ~~costs~~agreements related to our ~~associated~~compression ~~with~~equipment ~~financial~~lease obligations and ~~global~~indentures ~~operating~~and ~~activities~~agreements byrelating ~~managing~~to our other ~~exposure~~long-term todebt. ~~interest~~While ~~rate~~there ~~fluctuation~~is no assurance, we believe based on our current projections for 2005 that HCLP and Hanover will be in compliance with the financial covenants in these agreements. A default under our bank credit facility or a ~~portion~~default under certain of ~~our~~the ~~debt~~various indentures and ~~leasing~~agreements of our debt obligations. ~~Our~~would ~~primary~~trigger ~~objective~~in issome tosituations ~~reduce~~cross-default ~~our~~provisions ~~overall~~under ~~cost~~our ofbank ~~borrowing~~credit byfacilities ~~managing~~or the ~~fixed~~indentures and ~~floating~~agreements ~~interest~~relating ~~rate~~to ~~mix~~certain of our debt ~~portfolio~~obligations. WeSuch dodefaults ~~not~~would ~~use~~have ~~derivative~~a ~~financial~~material ~~instruments~~adverse ~~for~~effect ~~trading~~on orour ~~other~~liquidity, ~~speculative~~financial ~~purposes~~position and operations. ~~The~~Additionally, ~~cash~~our ~~flow~~bank ~~from~~credit ~~hedges~~facility isrequires ~~classified~~that inthe ~~our~~minimum ~~consolidated~~tangible ~~statements~~net worth of ~~cash~~HCLP ~~flows~~not ~~under~~be ~~the~~less ~~same~~than ~~category~~$702 million. asThis ~~the~~may ~~cash~~limit ~~flows~~distributions ~~from~~by ~~the underlying~~HCLP ~~assets,~~to ~~liabilities~~Hanover orin future ~~anticipated transactions~~periods.

~~For~~We ~~derivative~~expect ~~instruments~~that ~~designated~~our asbank ~~fair~~credit ~~value~~facility ~~hedges,~~and ~~the~~cash ~~gain~~flow orfrom ~~loss~~operations iswill provide us adequate ~~recognized~~capital inresources ~~earnings~~to infund ~~the~~our ~~period~~estimated level of ~~change~~capital ~~together~~expenditures ~~with~~for the ~~gain~~short orterm. ~~loss~~Our bank oncredit ~~the~~facility ~~hedged~~permits ~~item~~us ~~attributable~~to incur indebtedness, subject to ~~the~~covenant ~~risk~~limitations, ~~being~~up ~~hedged.~~to ~~For~~a ~~derivative~~$350 ~~instruments~~million ~~designated~~credit aslimit ~~cash~~(with ~~flow~~letters ~~hedges~~of credit treated as indebtedness), ~~the~~plus, ~~effective~~in ~~portion~~addition ofto ~~the~~certain ~~derivative~~other ~~gain~~indebtedness, oran ~~loss~~additional is(1) ~~included~~$40 million in ~~other~~unsecured ~~comprehensive~~indebtedness, ~~income~~(2) $50 million of nonrecourse indebtedness of unqualified subsidiaries, ~~but~~and ~~not~~(3) $25 million of secured purchase money ~~reflected~~indebtedness. inAs ~~our~~of ~~consolidated~~June 30, ~~statement~~2005, we had $77.0 million of ~~operations~~borrowings ~~until~~and ~~the~~$104.5 million ~~corresponding~~of ~~hedged~~outstanding ~~transaction~~letters isof ~~settled.~~credit ~~The~~under ~~ineffective~~our ~~portion~~bank iscredit ~~reported~~facility, resulting in ~~earnings~~$168.5 million of ~~immediately~~additional capacity under such bank credit facility at June 30, 2005.

In ~~March 2004,~~addition weto ~~entered~~purchase ~~into~~money ~~two~~and ~~interest~~similar ~~rate~~obligations, ~~swaps~~the toindentures ~~hedge~~and the ~~risk~~agreements ofrelated to ~~changes~~our incompression ~~fair~~equipment ~~value~~lease ofobligations ~~our~~for ~~note to~~ our ~~general~~2001A ~~partner~~and ~~that~~2001B ~~has~~sale ~~the~~leaseback ~~same general terms as~~transactions, Hanover’s 8.625% Senior Notes due 2010 ~~resulting~~and ~~from changes~~Hanover’s ~~in interest rates~~9.0% ~~These~~Senior ~~interest~~Notes ~~rate~~due ~~swaps,~~2014 ~~under~~permit ~~which~~us weto ~~receive~~incur ~~fixed~~indebtedness ~~payments~~up ~~and~~to ~~make~~the ~~floating~~$350 million ~~payments,~~credit ~~result~~limit inunder ~~the~~our ~~conversion~~bank ofcredit ~~the~~facility, plus (1) an ~~hedged~~additional ~~obligation~~$75 million ~~into~~in ~~floating~~unsecured ~~rate~~indebtedness ~~debt.~~and ~~The~~(2) any ~~following~~additional ~~table~~indebtedness ~~summarizes,~~so bylong as, ~~individual~~after ~~hedge~~incurring ~~instrument~~such indebtedness, ~~these~~Hanover’s ~~interest~~ratio ~~rate~~of ~~swaps~~the assum of ~~June 30~~consolidated net income before interest expense, ~~2004:~~income taxes, depreciation

3029

				Fair Value of
		Fixed Rate to be		Swap at
Floating Rate to be Paid	Maturity Date	Received	Notional Amount	June 30, 2004
Six Month LIBOR +4.72% Six Month LIBOR +4.64%	December 15, 2010 December 15, 2010	8.625% 8.625%	$100,000,000 $100,000,000	$(6,525) $(5,363)

expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements), or Hanover’s “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 thereon. The indentures and agreements related to our 2001A and 2001B compression equipment lease obligations, Hanover’s 8.625% Senior Notes due 2010 and Hanover’s 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 June 30, 2005, Hanover’s coverage ratio was less than 2.25 to 1.0, and therefore as of such date we could not incur indebtedness other than under our bank credit facility and up to an additional $59.9 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing indebtedness.

As of June 30, ~~2004~~2005, aHanover’s ~~total~~credit ofratings ~~approximately~~as ~~$1.4 million~~assigned inby ~~other~~Moody’s ~~current assets~~Investors Service, ~~$13~~Inc.~~3 million~~ (“Moody’s”) ~~in long term liabilities~~ and aStandard ~~$11.9 million~~& ~~reduction~~Poor’s ~~of long-term~~Ratings ~~debt~~Services ~~was~~(“Standard ~~recorded~~& ~~with~~Poor’s”) ~~respect to the fair value adjustment related~~were: ~~to these two swaps.~~

During 2001, we entered into three interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows:


			Standard
	Moody's		& Poor's
Outlook	Stable		Stable
Senior implied rating		B1		BB-
Liquidity rating	SGL-3			—
Bank credit facility due December 2006	Ba3			—
2001A equipment lease notes, interest at 8.5%, due September 2008		B2		B+
2001B equipment lease notes, interest at 8.8%, due September 2011		B2		B+
4.75% convertible senior notes due 2008		B3		B
4.75% convertible senior notes due 2014		B3		B
8.625% senior notes due 2010		B3		B
9.0% senior notes due 2014		B3		B
Zero coupon subordinated notes, interest at 11%, due March 31, 2007	Caa1			B-
7.25% convertible subordinated notes due 2029*	Caa1			B-

							Fair Value of
							Swap at
Lease	Maturity Date	Fixed Rate to be Paid			Notional Amount		June 30, 2004
March 2000	March 11, 2005		5.2550	%	$	100,000,000	$	(2,242	)
August 2000	March 11, 2005		5.2725	%	$	100,000,000	$	(2,264	)
October 2000	October 26, 2005		5.3975	%	$	100,000,000	$	(3,701	)


*		Rating is on the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover Compressor Capital Trust, a trust sponsored by Hanover.

~~These~~Neither ~~three~~Hanover ~~swaps,~~nor ~~which~~HCLP we have ~~designated~~any ascredit ~~cash~~rating ~~flow~~downgrade ~~hedging~~provisions ~~instruments, meet~~in their debt agreements or the ~~specific~~agreements ~~hedge~~related ~~criteria,~~to ~~and~~their ~~any~~compression ~~changes~~equipment inlease ~~their~~obligations ~~fair~~that ~~values~~would ~~have~~accelerate ~~been~~their ~~recognized~~maturity dates. However, a downgrade in ~~other~~Hanover’s ~~comprehensive~~credit ~~income.~~rating ~~During~~could ~~the~~materially ~~six~~and ~~months~~adversely ~~ended~~affect Hanover ~~June 30~~and HCLP’s ability to renew existing, or obtain access to new, credit facilities in the ~~2004~~future and ~~2003,~~could weincrease ~~recorded~~the ~~income~~cost of ~~approximately~~such $6facilities.~~3 million~~ ~~and~~Should ~~$1.1 million,~~this ~~respectively~~occur, ~~related~~we tomight ~~these~~seek ~~three~~alternative sources ~~swaps~~of ~~($6~~funding.~~3 million~~ ~~and~~In ~~$0.7 million~~addition, ~~respectively,~~our ~~net~~significant ofleverage ~~tax)~~puts inus ~~other~~at ~~comprehensive~~greater ~~income.~~risk Asof default under one or more of ~~June 30,~~our ~~2004,~~existing adebt ~~total~~agreements if we experience an adverse change to our financial ofcondition ~~approximately~~or $7results of operations.~~6 million~~ ~~was~~Our ~~recorded~~ability into ~~current~~reduce ~~liabilities~~our leverage depends upon market and ~~approximately~~economic ~~$0.6 million~~conditions, inas ~~long-term~~well ~~liabilities~~as ~~with~~our ~~respect~~ability to ~~the~~execute ~~fair~~liquidity-enhancing transactions such as ~~value~~sales ~~adjustment~~of ~~related~~non-core toassets ~~these~~or ~~three~~our ~~swaps~~equity securities.

OnDerivative ~~June 1,~~Financial ~~2004,~~Instruments. weWe ~~repaid~~use ~~the~~derivative ~~outstanding~~financial ~~indebtedness~~instruments ~~and~~to ~~minority~~minimize ~~interest obligations~~the ~~of $193.6 million~~ risks and/or ~~$6.4 million,~~costs ~~respectively,~~associated ~~under~~with ~~our~~financial ~~2000A equipment~~and ~~lease.~~global Asoperating aactivities ~~result,~~by ~~the~~managing ~~two~~our exposure to interest rate ~~swaps~~fluctuations ~~maturing~~ on ~~March 11,~~a ~~2005,~~portion ~~each~~of ~~having~~our adebt ~~notional~~and ~~amount~~leasing ofobligations. ~~$100 million,~~Our ~~associated~~primary ~~with the~~objective ~~2000A~~is ~~equipment~~to ~~lease~~reduce noour ~~longer~~overall ~~meet~~cost ~~specific~~of ~~hedge~~borrowing ~~criteria~~by ~~and~~managing the ~~unrealized gains~~fixed ofand ~~$5.3 million~~floating ~~related~~interest torate ~~the~~mix ~~mark-to-market~~of our ~~adjustment~~debt ~~prior~~portfolio. toWe ~~June 1,~~do ~~2004~~not ~~will~~use bederivative ~~amortized~~financial ~~into~~instruments ~~interest~~for ~~expense~~trading ~~over~~or ~~the~~other ~~remaining life of the~~speculative ~~swap~~purposes. InThe ~~addition,~~cash ~~beginning~~flow ~~June 1,~~from ~~2004,~~hedges ~~changes~~is classified in ~~the~~our ~~mark-to-market~~consolidated statements of cash flows ~~adjustment~~under ~~will~~the besame ~~recognized~~category as ~~interest~~the ~~expense~~cash inflows from the ~~statement~~underlying ofassets, liabilities or anticipated ~~operations~~transactions.

~~Prior~~For toderivative ~~2001,~~instruments wedesignated ~~entered~~as ~~into~~fair ~~two~~value ~~interest~~hedges, ~~rate~~the ~~swaps~~gain ~~with~~or ~~notional~~loss ~~amounts~~is ofrecognized in ~~$75 million~~earnings ~~and~~in ~~$125 million~~the ~~and~~period ~~strike rates~~ of ~~5.51%~~change ~~and~~together ~~5.56%,~~with ~~respectively. The~~the ~~difference~~gain ~~paid~~ or ~~received~~loss on the ~~swap~~hedged ~~transactions~~item ~~was~~attributable ~~recorded as an~~to ~~accrued~~the ~~liability~~risk ~~and~~being ~~recognized in leasing expense in all periods before July 1, 2003, and in interest expense until their expiration in July 2003~~hedged. ~~Because~~For ~~management~~derivative ~~decided~~instruments ~~not~~designated ~~to designate~~as ~~the~~cash ~~interest~~flow ~~rate swaps as~~ hedges, ~~we recognized unrealized gains of approximately $4.1 million related to~~ the ~~change in the fair value of these~~effective ~~interest~~portion ~~rate swaps in lease expense in our statement~~ of ~~operations during~~ the ~~six~~ ~~months~~derivative ~~ended~~gain ~~June 30,~~or ~~2003.~~loss is

~~The counterparties to the interest rate swap agreements are major international~~30 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.

WeTable 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 the value of these currencies relative to the U.S. dollar. In February 2003, the Venezuelan government fixed the exchange rate to 1,600 bolivars for each U.S. dollar. In February 2004, the government devalued the currency by approximately 17%. The impact of any further devaluation on our results will depend upon the amount of our net assets or liabilities exposed to currency fluctuation in Venezuela in future periods. Contents

~~For~~included ~~the~~in ~~six~~other ~~months~~comprehensive ~~ended June 30~~income, ~~2004,~~but ~~our~~not ~~Argentine operations represented~~reflected ~~approximately~~in ~~6% of~~ our ~~revenue~~consolidated ~~and~~statement 9% of ~~our~~operations ~~gross~~until ~~profit. For~~ the ~~six~~corresponding ~~months ended~~hedged ~~June 30,~~transaction ~~2004,~~is ~~our Venezuelan operations represented approximately 12% of~~settled. ~~our~~The ~~revenue~~ineffective ~~and~~portion ~~21%~~is ofreported ~~our gross profit. At June 30, 2004, we had approximately $16.1 million and $26.0 million~~ in ~~accounts~~earnings ~~receivable related to our Argentine and Venezuelan operations, respectively~~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 note to our general partner that has the same general terms as Hanover’s 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 ~~the~~individual ~~exchange~~hedge ~~gains~~instrument, ~~(losses) we~~these ~~recorded~~interest ~~for assets~~rate ~~exposed~~swaps toas ~~currency~~of ~~translation~~June 30, 2005 (indollars in thousands):


							Fair Value of
		Fixed Rate to be					Swap at
Floating Rate to be Paid	Maturity Date	Received			Notional Amount		June 30, 2005
Six Month LIBOR +4.72%	December 15, 2010		8.625	%	$	100,000	$	(2,435	)
Six Month LIBOR +4.64%	December 15, 2010		8.625	%	$	100,000	$	(2,232	)

~~Table~~As of ~~Contents~~June 30, 2005, a total of approximately $0.6 million in accrued liabilities, $4.1 million in long-term liabilities and a $4.7 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, which is determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of June 30, 2005, we estimated that the effective rate for the six-month period ending in December 2005 would be approximately 8.8%.

	Six Months Ended
	June 30,
	2004			2003
Canada	$	(61	)	$	129
Argentina		(448	)		2,084
Venezuela		1,433			(1,396	)
All other countries		(49	)		(617	)
Exchange gain	$	875		$	200

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):

In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production dropped substantially. In addition, exchange controls have been put in place that put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, exchange controls remain in place, or economic and political conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption of our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the six months ended June 30, 2003, we recognized approximately $2.3 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues. In addition, in August 2004 a recall referendum is expected to be held to call for early presidential elections. Depending on the results of the referendum, our results of operations in Venezuela could be further materially and adversely affected.


							Fair Value of
							Swap at
Lease	Maturity Date	Fixed Rate to be Paid			Notional Amount		June 30, 2005
March 2000	March 11, 2005		5.2550	%	$	100,000	$	—
August 2000	March 11, 2005		5.2725	%	$	100,000	$	—

~~The~~These ~~economic~~swaps, ~~situation~~which inwe ~~Argentina~~designated ~~and~~as ~~Venezuela~~cash isflow ~~subject~~hedging toinstruments, ~~change.~~met To the specific hedge criteria ~~extent~~and ~~that~~any ~~the~~changes ~~situation~~in ~~deteriorates,~~their ~~exchange~~fair ~~controls~~values ~~continue~~were recognized in ~~place~~other ~~and the~~comprehensive ~~value~~income. ofDuring the ~~peso~~six months ~~and~~ended ~~bolivar~~June 30, ~~against~~2005, ~~the~~we ~~dollar~~recorded isa ~~reduced~~reduction ~~further,~~to ~~our results~~other comprehensive income of ~~operations~~approximately $0.6 million incompared ~~Argentina~~to ~~and~~an ~~Venezuela~~increase ~~could~~to beother ~~materially~~comprehensive ~~and~~income of approximately $6.3 million ~~adversely~~during ~~affected~~the ~~which~~six ~~could~~months ~~result~~ended inJune 30, ~~reductions~~2004, inrelated ~~our~~to ~~net~~these ~~income~~two swaps.

WeOn ~~are~~June 1, ~~involved~~2004, inwe arepaid ~~project~~the tooutstanding ~~build~~indebtedness and ~~operate~~minority ~~barge-mounted~~interest ~~gas~~obligations ~~compression and gas processing facilities to be stationed in a Nigerian coastal waterway as part~~ of ~~the performance of a contract between an affiliate of The Royal/ Dutch~~$193.6 ~~Shell~~million ~~Group (“Shell”)~~ and ~~Global Energy and Refining Ltd~~$6.4 million, ~~(“Global”)~~respectively, ~~a Nigerian~~under ~~company.~~our We2000A ~~have~~equipment ~~completed~~lease. ~~the~~As ~~building~~a ofresult, the ~~required barge-mounted~~two ~~facilities.~~interest ~~Under~~rate ~~the~~swaps ~~terms~~that ofmatured aon ~~series of contracts between Global and us~~March 11, ~~Shell,~~ ~~and several other counterparties~~2005, ~~respectively,~~each ~~Global~~having isa ~~responsible for~~notional ~~the~~amount ~~development~~ of ~~the overall project~~$100 million, associated ~~which~~with ~~will~~the ~~require~~2000A ~~significant financing.~~equipment ~~Global~~lease ~~has~~no ~~orally~~longer ~~informed~~met usspecific ~~that~~hedge itcriteria ~~has~~and ~~completed~~the ~~a financing~~unrealized ~~transaction,~~loss ~~although~~related ~~it is not clear~~ to ~~us whether~~ the ~~funds~~mark-to-market ~~raised~~adjustment byprior ~~Global will be sufficient~~ to ~~perform~~June 1, ~~its~~2004 ~~obligations~~of ~~under these contracts~~$5.3 million Inwas ~~light~~amortized ofinto ~~the~~interest ~~political~~expense ~~environment~~over inthe ~~Nigeria,~~remaining ~~Global’s~~life ~~lack~~ of athe ~~successful~~swap. ~~track record~~In ~~with~~addition, ~~respect~~beginning ~~to this project and other factors~~June 1, ~~there is no assurance~~2004, ~~that~~changes ~~Global~~in ~~will~~the ~~be able~~ mark-to-market ~~comply~~adjustment ~~with~~were ~~its~~recognized ~~obligations~~as ~~under~~interest ~~these~~expense ~~contracts. In~~in ~~May 2004,~~the westatement ~~reached~~of operations. anDuring ~~agreement~~the ~~with~~six ~~Global~~months ~~whereby~~ended ~~Global~~June 30, ~~prepaid~~2005, ~~to us~~ $51.05 million inwas ~~equipment rental fees, that we~~ recorded in ~~other liabilities on~~interest ~~our condensed consolidated balance sheet, in return for our agreement to waive certain defaults by Global with respect to some of our agreements with them~~expense.

IfThe ~~Shell~~counterparties ~~were~~ to ~~terminate~~our ~~its~~interest ~~contract~~rate ~~with~~swap ~~Global~~agreements ~~for~~are ~~any~~major ~~reason~~international ~~or we were~~financial toinstitutions. ~~terminate~~We ~~our~~monitor ~~involvement in~~ the ~~project,~~credit wequality ~~would~~of bethese ~~required~~financial toinstitutions ~~find~~and ~~an alternative~~do ~~use~~not ~~for the barge-mounted facility which could result in a~~expect ~~write~~non-~~down~~performance ofby ~~our~~any ~~investment. At June 30~~counterparty, ~~2004,~~although wesuch ~~had~~financial aninstitutions’ ~~investment of approximately $30.4 million associated with the barge~~non-~~mounted~~performance, ~~facility~~if ~~and~~it ~~approximately~~occurred, ~~$4.1 million~~could ~~associated~~have ~~with~~a ~~advances~~material ~~to,~~adverse ~~and~~effect ~~our~~on ~~investment in, Global~~us.

~~NEW~~International ~~ACCOUNTING~~Operations. ~~PRONOUNCEMENTS~~We have significant operations that expose us to currency risk in Argentina and Venezuela. As a result, adverse political conditions and fluctuations in currency exchange rates could materially and adversely affect our business. 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 2003, the Venezuelan government fixed the exchange rate to 1,600 bolivars for each U.S. dollar. 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

~~In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial~~31 ~~Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under~~

32 Table of Contents

~~Table~~amount of ~~Contents~~our assets (primarily working capital and deferred taxes) exposed to currency fluctuation in Venezuela in future periods.

~~previous~~For ~~guidance,~~the ~~issuers~~six ~~could~~months ~~account~~ended ~~for~~June 30, as2005, ~~equity.~~our ~~SFAS~~Argentine ~~150~~operations ~~requires~~represented ~~that those~~approximately ~~instruments~~5% ~~be classified as liabilities in statements~~ of ~~financial~~ ~~position.~~our ~~SFAS~~revenue ~~150~~and is8% ~~effective~~of ~~for~~our ~~financial~~gross ~~instruments~~profit. ~~entered~~For ~~into~~the ~~or modified~~six ~~after~~months ~~May 31,~~ended ~~2003, and otherwise is effective for interim periods beginning after~~ June 1530, ~~2004. On November 7~~2005, ~~2003~~our ~~the FASB issued Staff~~Venezuelan ~~Position~~operations ~~150-3~~represented ~~that~~approximately ~~delayed~~10% ~~the effective date for certain types~~ of ~~financial instruments.~~our Werevenue doand ~~not~~17% ~~believe the adoption~~ of ~~the guidance currently provided in SFAS 150 will have a material effect on~~ our ~~consolidated~~gross ~~results of operations or cash flow~~profit. ~~However~~At June 30, 2005, we ~~may~~had beapproximately ~~required~~$14.3 million toand ~~classify as debt approximately~~ $22.25 million in ~~sale~~accounts ~~leaseback~~receivable ~~obligations~~related ~~that~~to ~~are currently reported as “Minority interest” on~~ our ~~condensed consolidated balance sheet~~ ~~pursuant~~Argentine toand ~~FIN~~Venezuelan 46operations.

~~These~~The ~~minority~~economic ~~interest~~situation ~~obligations~~in ~~represent~~Argentina ~~the~~and ~~equity~~Venezuela ofis ~~the~~subject ~~entities that lease compression equipment~~ to uschange. InTo ~~accordance with~~ the ~~provisions~~extent ofthat ~~our~~the ~~compression~~situation ~~equipment lease obligations~~deteriorates, ~~the~~exchange ~~equity~~controls ~~certificate~~continue ~~holders~~in ~~are entitled~~place toand ~~quarterly or semi-annual yield payments on~~ the ~~aggregate outstanding~~value ~~equity certificates. As~~ of ~~June 30, 2004,~~ the ~~yield~~peso ~~rates~~and onbolivar against the ~~outstanding~~ ~~equity~~dollar ~~certificates~~is ~~ranged~~reduced ~~from~~further, ~~4.4% to 9.5%. Equity certificate holders may receive a return of capital payment upon termination of the lease or~~ our ~~purchase~~results of ~~the~~operations ~~leased~~in ~~compression~~Argentina ~~equipment~~and ~~after~~Venezuela ~~full payment of all~~could ~~debt~~be ~~obligations~~materially ofand ~~the~~adversely ~~entities that lease compression equipment to us. At June 30~~affected, ~~2004,~~which ~~the~~could ~~carrying~~result ~~value~~in ofreductions ~~the~~in ~~minority~~our ~~interest~~net ~~obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations~~income.

33Foreign currency translation for the six months ended June 30, 2005 was a loss of $5.2 million, compared to a gain of $1.2 million for the six months ended June 30, 2004. For the six months ended June 30, 2005, foreign currency translation included $8.9 million in translation losses related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt, primarily for our subsidiary in Italy.

~~Table~~The offollowing ~~Contents~~table summarizes the exchange gains (losses) we recorded for assets exposed to currency translation (in thousands):

ITEM 4. CONTROLS AND PROCEDURES


	Six Months Ended
	June 30,
	2005			2004
Canada	$	195		$	233
Argentina		474			(448	)
Venezuela		3,149			1,433
Italy		(8,892	)		92
All other countries		(152	)		(141	)


Exchange gain/(loss)	$	(5,226	)	$	1,169

~~(a)~~We ~~Evaluation~~had ofintercompany ~~Disclosure~~advances ~~Controls~~outstanding ~~and~~to ~~Procedures.~~ our ~~HCLP’s~~subsidiary ~~principal executive~~in ~~officer~~Italy ~~and~~of ~~principal~~approximately ~~financial officer evaluated the effectiveness~~$91.9 ofmillion ~~our disclosure controls~~ and ~~procedures~~$14.7 million ~~(as~~at ~~defined in Rule~~June ~~13a-15(e)~~30, of2005 ~~the~~and ~~Securities Exchange Act of 1934) as of~~ June 30, 2004, respectively. ~~Based~~These onadvances ~~the~~are ~~evaluation,~~denominated ~~our~~in ~~principal~~U.S. dollars. ~~executive~~The ~~officer~~impact ~~and~~of ~~principal~~the ~~financial~~remeasurement ~~officer believe~~of ~~that~~these ~~our~~advances ~~disclosure~~on ~~controls~~our ~~and~~statement ~~procedures~~of ~~were~~operations ~~effective~~will depend toon ~~ensure that~~the ~~material~~outstanding ~~information~~balance ~~was~~in ~~accumulated~~future ~~and~~periods. ~~communicated~~A to10% ~~our~~increase ~~management, including~~or ~~our~~decrease ~~principal~~in ~~executive~~the ~~officer~~Euro ~~and~~would result ~~principal~~in ~~financial~~a ~~officer,~~foreign ~~as appropriate~~currency totranslation ~~allow~~gain ~~timely~~or ~~decisions~~loss ~~regarding~~of ~~required~~approximately ~~disclosure~~$8.4 million.

~~(b)~~We ~~Changes~~are involved in ~~Internal~~a ~~Controls.~~project ~~Under~~to ~~the~~build ~~direction of our President~~ and ~~Chief~~ ~~Executive~~operate ~~Officer~~barge-mounted ~~and~~gas ~~Senior~~compression ~~Vice President~~ and ~~Chief~~gas ~~Financial Officer,~~processing wefacilities ~~continued~~to ~~the~~be ~~process~~stationed ofin ~~reviewing~~a ~~our~~Nigerian ~~internal~~coastal ~~controls~~waterway ~~and~~(“Cawthorne ~~procedures~~Channel ~~for financial~~Project”) ~~reporting~~as ~~and~~part ~~have changed or are in~~ of the ~~process~~performance of ~~changing~~a ~~some~~contract ~~of those~~between ~~controls~~an ~~and~~affiliate ~~procedures,~~of ~~including~~The ~~changes~~Royal/Dutch ~~relating~~Shell ~~to:~~Group ~~information systems~~ (~~including~~“Shell”) ~~controls over access to the systems~~ and ~~segregation of~~ ~~duties);~~Global ~~human~~Gas ~~resources; internal audit; tax accounting; planning~~ and ~~analysis;~~ ~~reconciliation~~Refining ofLimited ~~accounts; approval of expenditures; preparation~~(“Global”), ~~approval~~ ~~and~~a ~~closing~~Nigerian ofcompany. ~~significant~~We ~~agreements~~have ~~and~~substantially ~~transactions;~~completed ~~review and~~the ~~quantification~~building of ~~compressor~~the ~~substitutions~~required ~~under~~barge-mounted ~~compression~~facilities. ~~equipment~~Under ~~lease agreements;~~the ~~integration~~terms of ~~acquired~~a ~~businesses~~series ~~and~~of ~~assets~~contracts ~~(including~~between ~~integration~~Global ofand ~~certain~~us, ~~financial~~Shell, and ~~accounting~~several ~~systems~~other ~~related~~counterparties, ~~thereto); standardization~~respectively, ofGlobal ~~internal~~is ~~controls~~responsible ~~and~~for ~~policies across~~ the ~~organization; and~~ ~~the~~ development, ~~implementation and enhancements~~ of ~~corporate~~the ~~governance policies~~overall ~~and procedures and performance management systems~~project. AsIn ~~part~~light of ~~our review~~the ofpolitical ~~our~~environment ~~internal~~in ~~controls and procedures for financial reporting~~Nigeria, ~~we have~~Global’s ~~made~~capitalization ~~personnel~~level, ~~changes~~inexperience ~~and~~with ~~hired~~projects ~~additional~~of ~~qualified~~a ~~staff~~similar innature ~~the legal, accounting/finance~~ and ~~human~~lack ~~resource~~of ~~areas~~a ~~and~~successful ~~are utilizing third parties to~~track ~~assist~~record with ~~some~~respect ofto ~~our~~this ~~integration~~project and ~~internal~~other ~~audit~~factors, ~~functions.~~there ~~This review~~ is ~~ongoing,~~no ~~and~~assurance ~~the~~that ~~review~~Global towill ~~date constitutes the evaluation required by Rule~~be ~~13a-15(d)~~able ofto ~~the~~comply ~~Securities~~with ~~Exchange~~its ~~Act~~obligations ofunder ~~1934~~these contracts.

34This 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, 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, as well as other risks normally associated with a major construction project, could materially delay the anticipated commencement of operations of the Cawthorne Channel Project or adversely impact any of our operations in Nigeria. Any such delays could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. If Shell were to terminate its contract with Global for any reason, or if we were to terminate our involvement in the project, we would be required to find an

~~Table of Contents~~32

PARTTable II.of OTHER INFORMATION Contents

~~ITEM~~alternative 1use for the barge facility which could result in a write-down of our investment. ~~LEGAL~~At June 30, ~~PROCEEDINGS~~2005, we had an investment of approximately $67.2 million in projects in Nigeria, a substantial majority of which related to the Cawthorne Channel Project. We currently anticipate making an approximately $2.5 million additional investment in the Cawthorne Channel Project during 2005. In addition, we have approximately $4.2 million associated with advances to, and our investment in, Global.

OnSeveral ~~June 25,~~compressor ~~1999,~~rental weprojects ~~notified~~with ~~the~~a ~~Air~~customer ~~Quality~~in ~~Bureau~~Latin ofAmerica ~~the~~are ~~Environmental Protection~~scheduled ~~Division,~~to ~~New~~terminate ~~Mexico~~in accordance ~~Environmental~~with ~~Department (~~the ~~“Division”),~~terms of ~~potential~~ ~~violations~~our oflease ~~State~~agreements ~~regulatory~~at ~~and~~various ~~permitting~~times ~~requirements.~~during ~~The potential~~the ~~violations~~remainder ~~included~~of ~~failure to conduct required performance tests, failure to file required notices and failure to pay annual filing fees for compressor units located on sites for more than one year~~2005. ~~We promptly paid the~~ ~~required~~These ~~fees~~projects ~~and~~represent ~~filed~~in the ~~required~~aggregate ~~notices,~~approximately ~~correcting the potential violations~~$2. ~~On June~~8 ~~12,~~million ~~2001,~~per ~~after~~month ~~the~~in ~~potential~~revenues. ~~violations~~We ~~had been~~are ~~corrected,~~in the ~~Director~~process of ~~the~~negotiating ~~Division~~extensions ~~issued~~of athese ~~compliance~~lease ~~order~~agreements ~~to us in connection~~ with ~~the~~this ~~potential violations~~customer. ~~The~~While ~~compliance order assessed a civil~~we ~~penalty~~hope ofto ~~$15,000~~renew ~~per~~these ~~day~~contracts ~~per~~on ~~alleged~~favorable ~~regulatory~~terms, ~~violation~~we ~~and~~can ~~permit;~~provide no ~~total~~ ~~penalty~~assurance ~~amount~~that ~~was~~these ~~proposed in the compliance order. On October 3, 2003,~~contracts ~~the~~will ~~Division notified us that the total proposed penalty would~~ be ~~$759,072. However,~~renewed ~~since~~on ~~the~~terms ~~alleged~~that ~~violations~~are ~~had~~as ~~been~~favorable ~~self-disclosed, the amount was reduced~~ to ~~$189,768.~~us Weas ~~subsequently responded to~~ the ~~penalty~~existing ~~assessment, challenging~~lease ~~the~~agreements ~~basis~~or ofat ~~the Division’s penalty calculation~~all. ~~As a result of our~~If ~~challenge,~~ the ~~Division~~contracts ~~agreed~~were tonot ~~a Stipulated Motion for Time to File Answer and further agreed to meet with us and negotiate a final settlement. On April 8~~renewed, ~~2004,~~ we ~~met~~would ~~with~~be ~~Division~~required ~~officials in Santa Fe and agreed~~ to afind ~~final settlement~~alternative ofuses ~~all~~for ~~alleged~~these ~~violations~~assets. ~~In June 2004, we paid a penalty of~~ ~~$105,464 in final resolution of this matter.~~

OnRECENT ~~June 30,~~ACCOUNTING ~~2004, the Texas Commission on Environmental Quality (TCEQ) informed~~PRONOUNCEMENTS the Company that it was pursuing an enforcement action against HCLP for alleged violations of the Texas Health and Safety Code and Commission Rules at the Redwood Hanover Gateway Plant (RHG Plant) in Madison County, Texas. The alleged violations include failure to comply with certain permit limitations relating to sulfur emissions during certain periods in 2003 and 2004 and failure to provide certain required notifications in connection therewith. TCEQ has proposed a settlement of $149,625 in respect of the alleged violations in the form of a proposed Agreed Order dated June 29, 2004. The Company has requested a meeting with the TCEQ to discuss the allegations and to challenge certain assumptions made by the TCEQ. A date for the meeting is pending further communication with TCEQ.

In May 2003, the ~~ordinary~~Financial ~~course~~Accounting Standards Board (“FASB”) issued Statement of ~~business~~Financial Accounting weStandards ~~are~~(“SFAS”) ~~involved~~No. 150, in“Accounting ~~various~~for ~~other~~Certain ~~pending~~Financial orInstruments with ~~threatened~~Characteristics ~~legal~~of ~~actions~~both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, ~~including~~under ~~environmental~~previous ~~matters~~guidance, issuers could account for as equity. SFAS ~~While~~150 ~~management~~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, ~~unable~~2003, toand ~~predict~~otherwise ~~the~~is ~~ultimate~~effective ~~outcome~~for ofinterim ~~these~~periods ~~actions~~beginning after June 15, it2004. ~~believes~~On November 7, 2003 the FASB issued Staff Position 150-3 that ~~any ultimate~~delayed ~~liability~~the ~~arising~~effective ~~from~~date ~~these~~for ~~actions~~certain ~~will~~types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material ~~adverse~~ effect on our consolidated ~~financial position,~~ results of operations or cash flow. However, we ~~flows~~may be required to classify as debt approximately $17.1 million in sale leaseback obligations that, as of June 30, 2005, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

~~ITEM~~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 June 30, 2005, the yield rates on the outstanding equity certificates ranged from 11.1% to 11.5%. ~~OTHER~~Equity ~~INFORMATION~~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 June 30, 2005, 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.

~~None~~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 overhead 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. We do not expect the adoption of the new standard to have a material effect on our consolidated results of operations, cash flows or financial position.

35In 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) will be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS123(R) is not

~~Table of Contents~~33

ITEMTable 6:of EXHIBITS AND REPORTS ON FORM 8-K Contents

(expected to have a~~) Exhibits~~ significant effect on our financial position or cash flows, but will impact our results of operations. An illustration of the impact on our net income and earnings per share is presented in the “Stock Options and Stock-Based Compensation” section of Note 1 assuming we had applied the fair value recognition provisions of SFAS 123(R) using the Black-Scholes methodology.

	4.1		Senior Indenture, dated as of December 15, 2003, between Hanover Compressor Company and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on December 15, 2003).
	4.2		Third Supplemental Indenture to Senior Indenture, 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 on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004).
	4.3		Form of Global Note representing $200,000,000 aggregate principal amount of 9% Senior Notes due 2014 (included in Exhibit 4.2 as Exhibit A thereto).
	10.1		Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to Hanover’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the SEC on August 9, 2004.
	31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
	31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
	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 (2)
	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 (2)

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. We are currently evaluating the provisions of SFAS 153 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (1“FIN 47”). FIN 47 requires uncertainty about the timing or method of settlement of a conditional asset retirement obligation to be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December ~~Filed~~15, ~~herewith~~2005. We are currently evaluating the impact FIN 47 will have 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” (2“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 ~~Furnished~~15, ~~herewith~~2005. We are currently evaluating the provisions of SFAS 154 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

~~(b) Reports~~ITEM ~~submitted~~4. onCONTROLS ~~Form~~AND ~~8-K:~~PROCEDURES

~~None.~~Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

36Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of June 30, 2005. Based on the evaluation, our principal executive officer and principal financial officer believe that our disclosure controls and procedures were effective to ensure that material information was accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to assure that the information has been properly recorded, processed, summarized and reported and to allow timely decisions regarding disclosure.

~~Table~~Changes ofin ~~Contents~~Internal Control over Financial Reporting

~~SIGNATURES~~There was no change in our internal control over financial reporting during our second quarter of fiscal 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~Pursuant~~PART toII. ~~the~~OTHER ~~requirements of the Securities Exchange Act of 1934, the~~INFORMATION ~~registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

~~HANOVER~~ITEM ~~COMPRESSION~~1. ~~LIMITED~~LEGAL PROCEEDINGS ~~PARTNERSHIP~~

~~Date:~~In ~~August~~the ~~12,~~ordinary ~~2004~~course ~~By:~~of ~~/s/~~business ~~CHAD~~we C.are ~~DEATON~~involved ~~Chad~~in Cvarious pending or threatened legal actions, including environmental matters. ~~Deaton~~While ~~President~~management ~~and~~is ~~Chief~~unable ~~Executive~~to ~~Officer~~predict ~~Date:~~the ~~August~~ultimate 12outcome of these actions, ~~2004~~it ~~By:~~believes ~~/s/~~that ~~JOHN~~any E.ultimate ~~JACKSON~~liability ~~John~~arising E.from ~~Jackson~~these ~~Senior~~actions ~~Vice~~will ~~President~~not ~~and~~have ~~Chief~~a material ~~Financial~~adverse ~~Officer~~effect on our consolidated financial position, results of operations or cash flows.

3734

~~EXHIBIT~~ITEM ~~INDEX~~5. OTHER INFORMATION

4.1		Senior Indenture, dated as of December 15, 2003, between Hanover Compressor Company and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on December 15, 2003).
4.2		Third Supplemental Indenture to Senior Indenture, 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 on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004).
4.3		Form of Global Note representing $200,000,000 aggregate principal amount of 9% Senior Notes due 2014 (included in Exhibit 4.2 as Exhibit A thereto).
10.1		Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to Hanover’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the SEC on August 9, 2004.
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
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 (2)
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 (2)

During the quarter ended June 30, 2005, the Management Development and Compensation Committee of Hanover’s Board of Directors completed a review of all of the existing change of control agreements and arrangements with our executive officers. As a result of such review, Hanover’s Compensation Committee approved new arrangements relating to severance payments that would be payable if an executive is terminated within 12 months after a qualifying change of control of Hanover.

	(1)		Filed herewith.
	(2)		Furnished herewith.

Pursuant to the Compensation Committee’s review and approval, on July 29, 2005, Hanover entered into new Change of Control agreements (“COC Agreements”) with Messrs. Lee E. Beckelman, Brian A. Matusek, Gary M. Wilson, Steven W. Muck, Norman A. Mckay, Peter G. Schreck, and Stephen P. York and Ms. Anita H. Colglazier and Ms. Hilary S. Ware. These COC Agreements provide severance to the executive in the event he or she is terminated without cause within 12 months after a change of control occurs, or if during that period, such executive terminates his or her employment for good reason. In such event, each of Messrs. Beckelman, Matusek, Wilson, Muck, and Mckay would be entitled to a severance payment equal to two times the sum of his annual base salary and target bonus and Messrs. Schreck and York and Ms. Ware and Ms. Colglazier would be entitled to a severance payment equal to one and one half times the sum of his or her annual base salary and target bonus. In addition, the COC Agreements provide that Hanover pay the executive his or her pro-rated target bonus for the current year and reimburse the executive for health insurance premiums for a period of up to eighteen months. If the executive is terminated for cause, or such executive terminates his or her employment without good reason, Hanover is not obligated to make any severance payments to such executive. The information in this Item should be read along with the form of the Change of Control Agreement for the executives named above which is incorporated by reference to Exhibit 10.2 to Hanover’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005. Reference is made to such Exhibit 10.2 for the definition of certain terms used in this paragraph. All prior agreements with such executive officers relating to change of control or severance have been terminated.

38On July 29, 2005, Hanover also entered into a Change of Control and Severance Agreement with Hanover’s President and Chief Executive Officer, Mr. John E. Jackson. Mr. Jackson’s agreement provides that if his employment is terminated without cause within 12 months after a change of control occurs, or if during that period, Mr. Jackson terminates his employment for good reason, Mr. Jackson would be entitled to a severance payment equal to three times the sum of his annual base salary and target bonus. If Hanover terminates Mr. Jackson without cause at any time other than the 12 months following a change of control, Mr. Jackson would be entitled to a severance payment equal to his annual base salary and target bonus. In either of these circumstances, the agreement provides that Hanover pay Mr. Jackson’s pro-rated target bonus for the current year and reimburse Mr. Jackson for health insurance premiums for a period of up to eighteen months. If Mr. Jackson is terminated for cause, or Mr. Jackson terminates his employment without good reason, Hanover is not obligated to make any severance payments to Mr. Jackson. The information in this item should be read along with Mr. Jackson’s Change of Control and Severance Agreement which is incorporated by reference to Exhibit 10.1 to Hanover’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005. Reference is made to such Exhibit 10.1 for the definition of certain terms used in this paragraph. All prior agreements with Mr. Jackson relating to change of control or severance have been terminated.

In addition to the benefits payable under the foregoing described agreements, in the event of a change of control of Hanover, Hanover would accelerate the vesting of all long-term incentives under the terms of the respective plans.

ITEM 6: EXHIBITS

(a)

Exhibits

	10.1		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 Hanover Compressor Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005).

	10.2		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 and Ms. Hilary S. Ware (incorporated by reference to Exhibit 10.2 to Hanover Compressor Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005).

	10.3		Letter to Brian Matusek regarding employment terms (incorporated by reference to Exhibit 10.1 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on April 18, 2005).

	10.4		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 Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

	10.5		First Amendment to the Hanover Compressor Company 1998 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

	10.6		First Amendment to the Hanover Compressor Company 1999 Stock Option Plan (incorporated by reference to Exhibit 10.3 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

	10.7		First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

	10.8		First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

	31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

	31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

	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 (2)

	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 (2)


(1)		Filed herewith.

(2)		Furnished herewith.

SIGNATURES

Pursuant to the requirements 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 COMPRESSION LIMITED PARTNERSHIP

Date:		August 9, 2005

By:		/s/ JOHN E. JACKSON


		John E. Jackson
		President and Chief Executive Officer

Date:		August 9, 2005

By:		/s/ LEE E. BECKELMAN


		Lee E. Beckelman
		Vice President and Chief Financial Officer

EXHIBIT INDEX

10.1		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 Hanover Compressor Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005).

10.2		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 and Ms. Hilary S. Ware (incorporated by reference to Exhibit 10.2 to Hanover Compressor Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, as filed with the SEC on August 3, 2005).

10.3		Letter to Brian Matusek regarding employment terms (incorporated by reference to Exhibit 10.1 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on April 18, 2005).

10.4		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 Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

10.5		First Amendment to the Hanover Compressor Company 1998 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

10.6		First Amendment to the Hanover Compressor Company 1999 Stock Option Plan (incorporated by reference to Exhibit 10.3 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

10.7		First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

10.8		First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005).

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

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 (2)

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 (2)


(1)		Filed herewith.

(2)		Furnished herewith.

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