UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(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~~QUARTERLY PERIOD ~~FROM~~ENDED ~~______________________~~SEPTEMBER TO30, ~~__________________________.~~2006

~~Commission~~o ~~File~~TRANSITION ~~No. 333-75814-1~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

Commission File No. 1-31934

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.)


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)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or ~~(as~~a ~~defined~~non-accelerated infiler. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes~~(Check ~~o No þ~~one):

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

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

As of the filing date, no common equity securities of Hanover Compression Limited Partnership (the “Registrant”) were held by non-affiliates of the Registrant. The Registrant is owned 99% by Hanover HL, LLC (“Hanover HL”), as limited partner, and 1% by Hanover Compression General Holdings, LLC (“Hanover General”), as general partner. Hanover HL is an indirect wholly-owned subsidiary of Hanover Compressor Company (File No. 1-13071). Hanover General is a direct wholly-owned subsidiary of Hanover Compressor Company.

The registrant meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. 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
ITEM 1. FINANCIAL STATEMENTS		3
Item 1. Financial Statements		3
CONDENSED CONSOLIDATED BALANCE SHEET		3
Condensed Consolidated Balance Sheets		3
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS		4
Condensed Consolidated Statements of Operations		4
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)		5
Condensed Consolidated Statements of Comprehensive Income (Loss)		5
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS		6
Condensed Consolidated Statements of Cash Flows		6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		7
Notes to Condensed Consolidated Financial Statements		8
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
ITEM 4. CONTROLS AND PROCEDURES		34
Item 4. Controls and Procedures		36
PART II. OTHER INFORMATION		3436
ITEM 1. LEGAL PROCEEDINGS		34
Item 1. Legal Proceedings		36
ITEM 5. OTHER INFORMATION		35
Item 1A. Risk Factors		36
ITEM 6: EXHIBITS		36
Item 6: Exhibits		37
SIGNATURES		3738
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 I. FINANCIAL INFORMATION

~~ITEM~~ Item 1. ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements

HANOVER COMPRESSION LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS (in thousands of dollars)

	June 30,		December 31,
	September 30,		December 31,
	2005		2004
	2006		2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3155,~~720~~111	$	3848,~~076~~233
Accounts receivable, net of allowance of $6,865 and $7,573, respectively		212,291		205,644
Accounts receivable, net of allowance of $5,223 and $4,751, respectively		298,535		243,672
Inventory, net		~~202~~317,~~916~~652		~~184~~251,~~798~~069
Costs and estimated earnings in excess of billings on uncompleted contracts		8579,~~829~~968		7099,~~103~~166
Prepaid taxes		210,~~627~~028		68,~~988~~194
Current deferred income tax		11,758		13,200
Current deferred income taxes		21,786		15,097
Assets held for sale		42,~~643~~020		52,~~169~~020
Other current assets		41,505		30,869
Prepaid expenses		51,768		20,002
Total current assets		593,289		554,847
Other current assets		24,893		25,576
Property, plant and equipment, net		1,828,268		1,876,348
Total current assets		861,761		713,029
Goodwill, net		184,757		183,190
Property, plant and equipment, net		1,843,996		1,823,100
Intangible and other assets		53,867		61,110
Goodwill, net		181,098		184,364
Investments in non-consolidated affiliates		86,682		90,326
Intangible and other assets		49,884		55,130
Assets held for sale		5,714		6,391
Investments in non-consolidated affiliates		91,850		90,741
Total assets	$	23,~~752~~028,~~577~~589	$	2,~~772~~866,~~212~~364
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Short-term debt	$	411,~~407~~157	$	54,~~106~~080
Current maturities of long-term debt		~~1,457~~641		1,~~430~~309
Accounts payable, trade		61110,~~689~~939		5792,~~402~~980
Accrued liabilities		~~107~~143,~~980~~598		~~115~~125,~~279~~884
Advance billings		37145,~~837~~715		4289,~~588~~513
Liabilities related to assets held for sale		472		517
Liabilities held for sale		878		878
Billings on uncompleted contracts in excess of costs and estimated earnings		1583,~~162~~271		2035,~~256~~126
Total current liabilities		~~229~~496,~~004~~199		~~242~~349,~~578~~770
Long-term debt		~~623~~452,~~361~~222		~~608~~431,~~613~~442
Due to general partner		~~761~~684,~~573~~620		~~750~~763,~~217~~867
Other liabilities		3644,~~739~~631		4738,~~232~~976
Deferred income taxes		5993,~~807~~414		6681,~~901~~358
Total liabilities		1,~~710~~771,~~484~~086		1,~~715~~665,~~541~~413
Commitments and contingencies (Note 7)
Commitments and contingencies (Note 9)
Minority interest		1711,~~050~~991		1811,~~778~~873
Partners’ equity:
Partners’ capital		1,~~010~~232,~~974~~441		1,~~020~~173,~~375~~864
Accumulated other comprehensive income		1413,~~069~~071		1715,~~518~~214
Total partners’ equity		1,~~025~~245,~~043~~512		1,~~037~~189,~~893~~078
Total liabilities and partners’ equity	$	23,~~752~~028,~~577~~589	$	2,~~772~~866,~~212~~364

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

HANOVER COMPRESSION LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF OPERATIONS (in thousands of dollars) (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	2006			2005			2006			2005
Revenues and other income:
U.S. rentals	$	8798,~~691~~030		$	8387,~~680~~703		$	~~174~~282,~~845~~746		$	~~170~~262,~~272~~548
International rentals		5563,~~521~~792			5458,~~599~~208			~~109~~193,~~436~~818			~~106~~167,~~099~~644
Parts, service and used equipment		5047,~~531~~951			4174,~~414~~027			83152,~~968~~959			85157,~~796~~995
Compressor and accessory fabrication		4190,~~092~~141			4451,~~159~~798			73214,~~616~~960			72125,~~309~~414
Production and processing equipment fabrication		~~104~~115,~~297~~890			6390,~~017~~312			~~193~~298,~~868~~162			~~116~~284,~~446~~180
Equity in income of non-consolidated affiliates		56,~~158~~313			56,~~088~~027			917,~~732~~391			915,~~771~~759
Other		502			919			963			2,014
Gain on sale of business and other income		1,677			1,781			42,246			2,744
		344,792			292,876			646,428			562,707
		423,794			369,856			1,202,282			1,016,284
Expenses:
U.S. rentals		3239,~~984~~557			3435,~~950~~503			67114,~~060~~377			70102,~~489~~563
International rentals		1725,~~144~~528			1319,~~967~~284			3470,~~646~~551			2853,~~740~~930
Parts, service and used equipment		3637,~~215~~894			3155,~~364~~865			61124,~~275~~017			64117,~~333~~140
Compressor and accessory fabrication		3674,~~587~~371			4044,~~454~~418			66179,~~204~~546			66110,~~367~~622
Production and processing equipment fabrication		9297,~~429~~675			5383,~~887~~146			~~171~~255,~~554~~841			~~101~~254,~~583~~700
Selling, general and administrative		4350,~~909~~913			4145,~~882~~442			86148,~~067~~751			82131,~~256~~509
Foreign currency translation		~~4,955~~905			~~(96~~1,083	)		5(2,~~226~~828	)		(16,~~169~~309	)
Other		~~274~~—			~~387~~133			~~393~~1,204			~~347~~526
Depreciation and amortization		45,236			43,113			90,456			84,910
Debt extinguishment costs		—			7,318			5,902			7,318
Interest expense		30,788			31,727			62,855			63,056
Depreciation and amortization		45,074			47,302			129,653			137,758
		340,521			291,635			645,736			560,912
Interest expense		24,929			30,739			78,109			93,594
Income from continuing operations before income taxes		4,271			1,241			692			1,795
		396,846			370,233			1,105,123			1,015,969
Provision for income taxes		8,087			6,160			3,904			13,698
Income (loss) from continuing operations before income taxes and minority interest		26,948			(377	)		97,159			315
Loss from continuing operations		(3,816	)		(4,919	)		(3,212	)		(11,903	)
Provision for (benefit from) income taxes		6,079			(3,345	)		24,864			559
Income (loss) from discontinued operations, net of tax		(221	)		481			(492	)		1,664
Income (loss) from continuing operations before minority interest		20,869			2,968			72,295			(244	)
Income (loss) from sales or write—downs of discontinued operations, net of tax		(247	)		372			(204	)		372
Minority interest, net of taxes		93			—			—			—
Net loss	$	(4,284	)	$	(4,066	)	$	(3,908	)	$	(9,867	)
Income (loss) from continuing operations		20,962			2,968			72,295			(244	)
Income (loss) from discontinued operations, net of tax		570			(214	)		368			(706	)
Gain (loss) from sales of discontinued operations, net of tax		—			48			63			(156	)
Income (loss) before cumulative effect of accounting changes		21,532			2,802			72,726			(1,106	)
Cumulative effect of accounting changes, net of tax		—			—			370			—
Net income (loss)	$	21,532		$	2,802		$	73,096		$	(1,106	)

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

HANOVER COMPRESSION LIMITED PARTNERSHIP

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

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
	2005			2004			2005			2004
	2006			2005			2006			2005
Net loss	$	(4,284	)	$	(4,066	)	$	(3,908	)	$	(9,867	)
Net income (loss)	$	21,532		$	2,802		$	73,096		$	(1,106	)
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		—			~~4,700~~—			~~608~~—			~~5,748~~609
Foreign currency translation adjustment		(1,~~095~~793	)		(21,~~991~~900	)		(42,~~057~~143	)		(32,~~898~~157	)
Comprehensive loss	$	(5,379	)	$	(2,357	)	$	(7,357	)	$	(8,017	)
Comprehensive income (loss)	$	23,325		$	4,702		$	70,953		$	(2,654	)

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

HANOVER COMPRESSION LIMITED PARTNERSHIP

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

	Six Months Ended
	Nine Months Ended
	June 30,
	September 30,
	2005			2004
	2006			2005
Cash flows from operating activities:
Net loss	$	(3,908	)	$	(9,867	)
Net income (loss)	$	73,096		$	(1,106	)
Adjustments:
Depreciation and amortization		90129,~~456~~653			84137,~~910~~758
(Gain) loss from discontinued operations, net of tax		696			(2,036	)
(Income) loss related to discontinued operations, net of tax		(431	)		862
Bad debt expense		1,000			918
Cumulative effect of accounting changes, net of tax		(370	)		—
(Gain) loss on sale of property, plant and equipment		(1,499	)		756
Bad debt expense		3,169			1,568
Equity in income of non-consolidated affiliates, net of dividends received		3,851			(2,545	)
Gain on sale of property, plant and equipment		(11,282	)		(9,736	)
(Gain) loss on derivative instruments		416			(259	)
Equity in income of non-consolidated affiliates, net of dividends received		(1,125	)		2,924
Gain on sale of non-consolidated affiliates		—			(300	)
Loss on derivative instruments		—			416
Restricted stock compensation expense		2,223			765
(Gain) loss on remeasurement of intercompany balances		(1,858	)		10,968
Pay-in-kind interest on long-term notes payable		11,356			10,203
Net realized gain on trading securities		(2,208	)		—
Deferred income taxes		(3,472	)		7,562
Zero coupon subordinated notes accreted interest paid by refinancing		(86,084	)		—
Gain on sale of business		(28,476	)		(188	)
Stock compensation expense		6,543			4,059
Pay-in-kind interest on zero coupon subordinated notes		6,282			17,185
Sales of trading securities, net		2,208			—
Deferred income taxes		5,145			(8,614	)
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(1350,~~235~~189	)		(2443,~~522~~835	)
Inventory		(1869,~~576~~325	)		(3035,~~188~~956	)
Costs and estimated earnings versus billings on uncompleted contracts		~~(26~~69,~~882~~820	)		4(41,~~204~~694	)
Accounts payable and other liabilities		(1,610	)		5,888
Prepaid and other current assets		(38,526	)		(5,942	)
Advance billings		(3,992	)		(2,444	)
Accounts payable and other liabilities		30,756			21,151
Prepaid, effects of exchange rate on accounts denominated in foreign currencies and other		(114	)		10,778
Advance billings		56,091			27,508
Net cash provided by continuing operations		36,710			53,823
Other		(5,020	)		2,055
Net cash provided by (used in) discontinued operations		(239	)		4,298
Net cash provided by continuing operations		87,869			79,383
Net cash provided by operating activities		36,471			58,121
Net cash provided by (used in) discontinued operations		431			(376	)
Net cash provided by operating activities		88,300			79,007
Cash flows from investing activities:
Capital expenditures		(54173,~~104~~172	)		(36103,~~911~~155	)
Proceeds from sale of property, plant and equipment		823,~~973~~473			738,~~247~~028
Proceeds from sale of non-consolidated affiliates		—			4,663
Proceeds from sale of business		52,125			2,500
Cash used for business acquisitions		~~(3,426~~—	)		—(3,426	)
Cash used to acquire investments in and advances to non-consolidated affiliates		~~(500~~—	)		(~~250~~500	)
Net cash used in continuing operations		(4997,~~057~~574	)		(2566,~~251~~553	)
Net cash provided by discontinued operations		50—			~~6,177~~220
Net cash used in investing activities		(4997,~~007~~574	)		(1966,~~074~~333	)
Cash flows from financing activities:
Borrowings on revolving credit facilities		~~102~~161,500			18120,000
Repayments on revolving credit facilities		(32140,500	)		(4579,000	)
Payments for debt issue costs		—			(193	)
Borrowings from general partner, senior notes due 2013		150,000			—
Partners’ distribution, net		(4,471	)		(2,792	)
Payments for debt issue costs		(3,832	)		—
Net repayments of other debt		(808	)		(7,559	)
Partners’ contribution (distribution), net		(9,214	)		170,112
Issuance of senior notes, net		—			194,242
Proceeds (repayments) of other debt, net		5,994			(1,421	)
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

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


	Nine Months Ended
	September 30,
	2006			2005
Stock-based compensation excess tax benefit		1,213			—
Repayment to general partner, zero coupon subordinated notes principal		(150,000	)		—
Payments of 2000B equipment lease obligations		—			(57,589	)
Payments of 2001A equipment lease obligations		—			(172,177	)

Net cash provided by (used in) continuing operations		15,161			(20,075	)
Net cash used in discontinued operations		—			—

Net cash provided by (used in) financing activities		15,161			(20,075	)


Effect of exchange rate changes on cash and equivalents		991			(835	)

Net increase (decrease) in cash and cash equivalents		6,878			(8,236	)
Cash and cash equivalents at beginning of period		48,233			38,076

Cash and cash equivalents at end of period	$	55,111		$	29,840

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

HANOVER COMPRESSION LIMITED PARTNERSHIP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of 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~~2005. These interim results are not necessarily indicative of results for a full year.

Stock Options and Stock-Based Compensation

We are an indirect wholly-owned 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).

	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	)

Reclassifications

7Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2006 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

~~Table~~2. ofSTOCK ~~Contents~~OPTIONS AND STOCK-BASED COMPENSATION

~~Certain~~We ~~amounts~~are inan ~~the~~indirect ~~prior~~wholly-owned ~~period’s~~subsidiary ~~financial~~of ~~statements~~Hanover ~~have~~Compressor ~~been~~Company ~~reclassified~~(“Hanover”). toCertain ~~conform~~of our toemployees ~~the 2005~~participate ~~financial~~in ~~statement~~stock ~~classification.~~incentive ~~These~~plans ~~reclassifications~~that ~~have~~provide nofor ~~impact~~the ongranting ~~our~~of ~~consolidated~~options to ~~results~~purchase shares of ~~operations,~~Hanover ~~cash~~common ~~flows~~stock orand ~~financial~~grants ~~position~~of Hanover restricted common stock.

2In December 2004, the FASB issued SFAS No. 123 ~~INVENTORY~~(Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and generally requires instead that such transactions be accounted for using a fair value based method. SFAS 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. We adopted the provisions of SFAS 123(R) on January 1, 2006.

~~Inventory~~Prior to January 1, ~~net~~2006, we measured compensation expense for Hanover’s stock-based employee compensation plans using the intrinsic value method, which follows the recognition and measurement principles of ~~reserves~~APB No. 25, ~~consisted~~as permitted by FASB Statement of ~~the~~Financial ~~following~~Accounting ~~amounts~~Standards No. 123, “Accounting for Stock-Based Compensation” (in“SFAS ~~thousands~~No. 123”):.

	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

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under that transition method, compensation cost recognized during the nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value, and (b) compensation cost for any share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. In accordance with the modified prospective transition method, results for prior periods have not been restated. For the nine months ended September 30, 2006 and 2005, stock-based compensation expense of $6.5 million and $4.1 million, respectively, was recognized and included in the accompanying unaudited Condensed Consolidated Statements of Operations. The total income tax benefit recorded in parnters’ equity for share-based compensation arrangements was $1.7 million and zero for the nine-month periods ended September 30, 2006 and 2005, respectively.

AsOn ~~of June~~January 301, ~~2005 and December 31~~2006, ~~2004,~~ we ~~had~~recorded ~~inventory~~the ~~reserves~~cumulative effect of ~~approximately~~the ~~$12.1~~change in accounting related to our ~~million~~adoption ~~and~~of SFAS 123(R) of $110.74 million, ~~respectively~~(net of tax of $0) which relates to the requirement to estimate forfeitures on restricted stock awards.

3. PROPERTY, PLANT AND EQUIPMENT

Property, 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

As 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.

4. DEBT

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

	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% and 4.0% at June 30, 2005 and December 31, 2004, respectively. Belleli’s revolving credit

~~facilities~~Prior ~~bore~~to ~~interest~~the atadoption aof ~~weighted~~SFAS ~~average~~123(R), ~~rate~~we ofrecorded ~~3.5%~~an entry to other assets and 4contributed capital within partners’ equity when Hanover’s restricted stock was granted to HCLP employees.0% atDue to the ~~June 30,~~adoption ~~2005~~of ~~and~~SFAS ~~December~~123(R) on January 311, ~~2004~~2006, ~~respectively.~~we ~~These~~reclassified ~~revolving~~$13.2 million ~~credit~~from ~~facilities~~partners’ ~~are~~equity ~~callable~~and ~~during~~other ~~2005~~assets related to unearned compensation.

~~Long-term~~Prior ~~debt~~to ~~consisted~~the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the ~~following~~exercise of Hanover’s stock options as operating cash flows in our Consolidated Statements of Cash Flows. SFAS 123(R) requires the cash flows from the tax benefits of tax deductions in ~~thousands~~excess of the compensation cost recognized for those options (excess tax benefits): to be classified as financing cash flows. There were $1.2 million excess tax benefits classified as a financing cash inflow in the accompanying Consolidated Statement of Cash Flows for the nine months ended September 30, 2006 that would have been classified as an operating cash inflow prior to our adoption of SFAS 123(R).

	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

As of January 1, 2006, we adopted SFAS 123(R) thereby eliminating pro forma disclosure for periods following such adoption. For purposes of this pro forma disclosure, the value of options is estimated using a Black-Scholes option valuation model and amortized to expense over the options’ vesting periods. Had we used the fair value based accounting method for stock-based compensation expense described by SFAS 123(R) for the three months and nine months ended September 30, 2005, our net income (loss) for the three months and nine months ended September 30, 2005 would have been as set forth in the table below (in thousands).

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


	Three Months			Nine Months
	Ended			Ended
	September 30, 2005			September 30, 2005
Net income (loss), before stock-based compensation for employees	$	2,802		$	(1,106	)
Add back: Stock-based compensation expense for employees previously determined under intrinsic value method, net of tax effect		1,836			4,059
Deduct: Stock-based employee compensation expense for employees determined under the fair value method, net of tax		(2,297	)		(5,846	)

Net income (loss), after effect of stock-based compensation for employees	$	2,341		$	(2,893	)

AsIncentive ~~of June 30, 2005, we had $77.0 million in outstanding borrowings under our bank credit facility.~~Plans Outstanding amounts under that facility bore interest at a weighted average rate of 6.0% 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 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.

AsHanover ofhas ~~June 30,~~employee ~~2005,~~stock ~~HCLP~~incentive ~~and~~plans ~~Hanover~~that ~~were~~provide infor ~~compliance~~the ~~with~~granting ~~all~~of ~~material~~restricted ~~covenants~~stock and ~~other requirements set~~ ~~forth~~options into ~~our~~purchase ~~bank~~common ~~credit~~shares ~~facility, the indentures and agreements related~~ to ~~our~~HCLP ~~compression equipment~~employees. ~~lease~~During ~~obligations and~~ the ~~indentures~~second ~~and~~quarter ~~agreements~~of ~~relating~~2006, ~~to our other long-term debt.~~Hanover’s Astockholders ~~default~~approved ~~under~~the ~~our~~Hanover ~~bank~~Compressor ~~credit~~Company ~~facility~~2006 orStock aIncentive ~~default~~Plan ~~under~~ (the ~~indentures~~“Plan”). ~~and agreements relating~~Upon toadoption ~~certain~~ of ~~our~~the ~~other~~new ~~debt~~Plan, ~~obligations~~Hanover’s ~~would~~Board inof ~~some~~Directors ~~situations~~determined ~~trigger~~to ~~cross-default~~terminate ~~provisions under our bank credit facility or~~ the ~~indentures~~authority ~~and agreements relating~~ to ~~certain of our other~~ ~~debt~~make ~~obligations.~~future ~~Such~~grants ~~defaults~~under ~~would~~all ~~have~~previously aexisting ~~material~~equity ~~adverse~~compensation ~~effect~~plans. onAt ~~our liquidity~~September 30, ~~financial~~2006, ~~position~~approximately ~~and operations~~4.9 million ~~Additionally,~~shares ~~our~~were ~~bank~~available ~~credit~~for ~~facility~~grant ~~requires~~in ~~that~~future ~~the~~periods ~~minimum~~under ~~tangible~~Hanover’s Plan. ~~net~~The ~~worth~~stock ofincentive ~~HCLP~~plans ~~not~~provide befor ~~less~~various ~~than~~long-term ~~$702 million.~~incentive ~~This~~awards, ~~may~~which ~~limit~~include ~~distributions~~stock options, byperformance ~~HCLP~~shares toand ~~Hanover~~restricted ~~in future~~stock ~~periods~~awards.

In ~~addition to purchase money and similar obligations~~July 2006, ~~the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions,~~ Hanover’s ~~8.625%~~Board ~~Senior~~of ~~Notes~~Directors ~~due~~approved ~~2010~~grants ~~and~~of ~~Hanover’s~~awards 9%under ~~Senior~~the ~~Notes~~2006 ~~due~~Long-term Incentive ~~2014~~Awards ~~permit~~Program us to ~~incur indebtedness~~certain upHCLP toemployees, ~~the~~including ~~$350 million credit limit under~~ our ~~bank~~executive ~~credit facility~~officers, ~~plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long~~ as~~, after~~ ~~incurring~~part ~~such indebtedness, Hanover’s ratio~~ of ~~the sum of consolidated net income before~~an ~~interest~~incentive ~~expense,~~compensation ~~income~~program. ~~taxes,~~The ~~depreciation~~grants ~~expense~~included, ~~amortization~~in ofthe ~~intangibles~~aggregate, ~~certain~~approximately ~~other~~0.5 million ~~non-cash~~shares ~~charges~~of ~~and~~Hanover ~~rental~~restricted ~~expense~~stock toor ~~total~~stock-settled ~~fixed~~restricted ~~charges~~stock ~~(all~~units, as0.3 million ~~defined~~shares ~~and adjusted by the~~(at ~~agreements~~target) ~~governing~~of ~~such~~performance ~~obligations),~~vested or Hanover~~’s “coverage~~ ~~ratio,”~~restricted isstock ~~greater~~or ~~than~~stock-settled ~~2.25~~restricted tostock ~~1.0~~units, and cash noawards ~~default~~that orvest ~~event~~over ~~of default has occurred or would occur as~~ a ~~consequence~~period of ~~incurring~~three ~~such~~years ~~additional indebtedness and the application~~ of ~~the proceeds~~approximately ~~thereon~~$1.3 million. ~~The~~A ~~indentures~~description ~~and agreements for our 2001A and 2001B compression equipment lease~~of ~~obligations,~~long-term ~~Hanover’s~~stock-based ~~8.625%~~incentive ~~Senior~~awards ~~Notes due 2010~~ and ~~Hanover’s~~related 9%activity ~~Senior~~within ~~Notes~~each ~~due~~is ~~2014~~provided ~~define~~below. ~~indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to~~

Stock Options

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

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

~~our~~Upon ~~compression~~the ~~equipment~~adoption ~~operating leases. As~~ of ~~June 30,~~SFAS ~~2005~~123(R), ~~Hanover’s~~unvested ~~coverage~~options ~~ratio~~granted ~~was~~prior ~~less than 2.25~~ to ~~1.0,~~the ~~and~~date ~~therefore as~~ of ~~such~~adoption ~~date~~are webeing ~~could~~amortized ~~not~~to ~~incur~~expense ~~indebtedness~~ratably ~~other~~over ~~than~~the ~~under~~remaining ~~our~~vesting ~~bank~~period. ~~credit~~For ~~facility~~options ~~and~~granted upafter tothe ~~an additional~~date ~~$59.9 million~~of inadoption, ~~unsecured~~the ~~indebtedness~~fair ~~and~~value ~~certain~~will ~~other~~be ~~permitted~~amortized ~~indebtedness,~~to ~~including~~expense ~~certain refinancing~~ratably ofover ~~indebtedness~~the vesting period.

5.The ~~DUE~~following TOis ~~GENERAL~~a ~~PARTNER~~summary of Hanover’s stock option activity for the nine months ended September 30, 2006 (in thousands, except per share data and years):

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.


						Weighted
						Average
				Weighted		Remaining
				Average Exercise		Contractual		Aggregate
	Shares			Price per Share		Life (in years)		Intrinsic Value
Outstanding at December 31, 2005		3,021		$	11.77
Granted		—		$	—
Exercised		(442	)	$	10.46
Forfeited		(112	)	$	12.24

Outstanding at September 30, 2006		2,467		$	11.97		4.8	$	15,652

Exercisable at September 30, 2006		2,019		$	12.05		4.1	$	12,690

~~Obligations~~The tofollowing ~~our~~table ~~general~~summarizes ~~partner~~significant ~~that~~ranges ~~have~~of ~~the~~Hanover’s ~~same~~stock ~~general~~options ~~terms~~outstanding ~~as the Hanover notes payable~~and ~~consisted~~exercisable as of ~~the~~September 30, ~~following~~2006 (in thousands, except per share data and years):

	June 30,		December 31,
	Options Outstanding						Options Exercisable
	2005		2004
			Weighted
4.75% senior notes due 2014	$	143,750	$	143,750
			Average		Weighted				Weighted
8.625% senior notes due 2010		200,000		200,000
			Remaining		Average				Average
9.0% senior notes due 2014		200,000		200,000
			Contractual		Exercise				Exercise
11% zero coupon subordinated notes due March 2007		217,823		206,467
Range of exercise prices	Shares		Life (in years)		Price		Shares		Price
	$	761,573	$	750,217
$7.51–10.00		901		2.2	$	9.76		854	$	9.75
$10.01–12.50		941		7.1	$	11.76		547	$	11.74
$12.51–15.00		496		5.2	$	14.44		489	$	14.46
$15.01–17.50		75		5.5	$	17.25		75	$	17.25
$17.51–20.00		21		5.4	$	18.95		21	$	18.95
$22.51–25.00		33		4.8	$	25.00		33	$	25.00
		2,467						2,019

6.A ~~ACCOUNTING~~summary ~~FOR~~of ~~DERIVATIVES~~the status of Hanover’s unvested stock options granted to HCLP employees as of September 30, 2006 and changes during the nine months ended September 30, 2006 is presented below (shares in thousands):

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.


				Weighted-Average
				Grant Date
	Shares			Fair Value
Unvested stock options:
Unvested at December 31, 2005		914		$	5.31
Granted		—		$	—
Vested		(402	)	$	5.58
Forfeited		(64	)	$	5.24

Unvested at September 30, 2006		448		$	5.03

~~For~~As ~~derivative~~of ~~instruments~~September 30, ~~designated as fair value hedges~~2006, ~~the~~there ~~gain~~was orapproximately ~~loss~~$1.8 million isof ~~recognized~~unrecognized incompensation cost ~~earnings~~related into ~~the~~unvested ~~period~~options. ofSuch ~~change~~cost ~~together~~is ~~with~~expected ~~the~~to ~~gain~~be orrecognized ~~loss~~over ona ~~the~~weighted-average ~~hedged item attributable to~~period ~~the~~of ~~risk being hedged~~1.4 years. ~~For~~Total ~~derivative~~compensation ~~instruments~~expense ~~designated~~for asstock ~~cash~~options ~~flow~~was ~~hedges,~~$0.4 million ~~the~~and ~~effective~~$1.4 million, ~~portion~~respectively, offor the ~~derivative~~three ~~gain~~and ornine ~~loss~~month isperiods ~~included~~ended ~~in other comprehensive income~~September 30, ~~but~~2006. ~~not~~The ~~reflected~~total intrinsic invalue ~~our consolidated statement~~ of ~~operations~~options ~~until~~exercised during the ~~corresponding~~three ~~hedged~~and ~~transaction~~nine ismonth ~~settled. The~~periods ~~ineffective~~ended ~~portion~~September 30, is2006 ~~reported~~was $0.4 million inand ~~earnings~~$3.3 million, ~~immediately~~respectively.

Restricted Stock Awards

For grants of restricted stock and stock-settled restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of the restricted stock at the date of grant. The weighted-average fair value of Hanover restricted stock awards granted to HCLP employees during the three and nine month periods ended September 30, 2006 was $16.32. The weighted-average fair value

~~In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk~~ of ~~changes~~Hanover inrestricted ~~fair~~stock ~~value~~awards ofgranted ~~our note~~ to ~~our~~HCLP ~~general~~employees ~~partner~~during ~~that has~~ the ~~same general~~three ~~terms~~and asnine ~~Hanover’s 8.625% Senior Notes due 2010 resulting from changes in interest rates.~~month ~~These~~periods ~~interest~~ended ~~rate swaps~~September 30, ~~under~~2005 ~~which~~was we$11.98 ~~receive fixed payments~~ and ~~make floating payments~~$11.96, ~~result in the conversion of the hedged obligation into floating rate debt~~respectively. ~~The following table summarizes,~~ ~~by individual hedge instrument, these interest rate swaps as of June 30, 2005 (dollars in thousands):~~

							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	)

For restricted stock and stock-settled restricted stock units that vest based on performance, we record an estimate of the compensation expense to be expensed over the vesting period related to these grants. The compensation expense recognized in our statements of operations is adjusted for changes in our estimate of the number of performance stock that will vest. After the adoption of SFAS 123(R), performance stock awards are expensed based on the original grant date value of the awards. During the three and nine months ended September 30, 2006, 0.3 million shares (at target) of Hanover performance stock awards were granted to HCLP employees. Based on the Company’s performance, the ultimate amount of shares that will vest can range from 0% to 200% of target. No performance stock awards were granted during the nine months ended September 30, 2005.

AsA ofsummary ~~June 30, 2005, a total~~ of ~~approximately~~the ~~$0.6 million~~status ~~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~~Hanover’s ~~value~~unvested ~~adjustment~~restricted ~~related~~stock toawards ~~these~~(including ~~two swaps. We estimate the effective floating rate, that~~performance isstock) ~~determined~~granted ~~in arrears pursuant~~ to ~~the~~HCLP ~~terms~~employees as of ~~the swap~~September 30, to2006 beand ~~paid~~changes atduring the ~~time~~nine ofmonths ~~settlement.~~ended ~~As of June~~September 30, ~~2005,~~2006 weare ~~estimated~~presented ~~that~~below ~~the~~(shares ~~effective rate for the six-month period ending~~ in ~~December 2005~~ ~~would be approximately 8.8%.~~thousands):

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):


				Weighted-
				Average
				Grant Date
	Shares			Fair Value
Unvested restricted stock awards:
Unvested at December 31, 2005		1,280		$	11.80
Granted		764		$	16.32
Vested		(355	)	$	11.97
Forfeited		(119	)	$	11.73
Change in expected vesting of performance awards		48		$	11.39

Unvested at September 30, 2006		1,618		$	13.89

							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	$	—

As of September 30, 2006, there was approximately $16.9 million of total unrecognized compensation cost related to unvested restricted stock awards (including performance shares). Such cost is expected to be recognized over a weighted-average period of 2.0 years. Total compensation expense for restricted stock awards was $2.0 million and $1.8 million for the three months ended September 30, 2006 and 2005, respectively. Total compensation expense for restricted stock awards was $5.1 million and $4.1 million for the nine months ended September 30, 2006 and 2005, respectively. The total fair value of restricted stock awards vested in the three and nine month periods ended September 30, 2006 was $3.7 million and $4.3 million, respectively.

~~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~~3. ~~During the six~~INVENTORY 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~~Inventory, ~~2004,~~net ~~we repaid the outstanding indebtedness and minority interest obligations~~ of ~~$193.6 million and $6.4 million~~reserves, ~~respectively,~~consisted ~~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~~following ~~equipment~~amounts 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~~thousands): ~~operations. During the six months ended June 30, 2005, $1.5 million was recorded in interest expense.~~

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


	September 30,		December 31,
	2006		2005
Parts and supplies	$	138,162	$	135,310
Work in progress		168,902		105,405
Finished goods		10,588		10,354

	$	317,652	$	251,069

7As of September 30, 2006 and December 31, 2005, we had inventory reserves of approximately $11.7 million ~~COMMITMENTS~~and ~~AND~~$11.8 million, ~~CONTINGENCIES~~respectively.

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

			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

4. PROPERTY, PLANT AND EQUIPMENT

~~We have issued guarantees to third parties to ensure performance of our obligations~~Property, ~~some~~plant ~~of which may be fulfilled by third parties. In addition, in December 2003~~ and ~~June 2004,~~equipment ~~Hanover issued~~consisted ~~$200.0 million aggregate principal amount~~ of ~~its~~the ~~8.625%~~following ~~Senior~~(in ~~Notes due 2010 and issued~~thousands): ~~$200.0 million aggregate principal amount of its 9.0% Senior Notes due 2014, respectively, which we fully and unconditionally guaranteed on a senior subordinated basis.~~

Hanover 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.


	September 30,			December 31,
	2006			2005
Compression equipment, facilities and other rental assets	$	2,539,882		$	2,441,119
Land and buildings		97,987			87,604
Transportation and shop equipment		84,361			77,507
Other		56,644			53,824

		2,778,874			2,660,054
Accumulated depreciation		(934,878	)		(836,954	)

	$	1,843,996		$	1,823,100

			Maximum
			Potential
			Undiscounted
			Payments as of
	Term		June 30, 2005
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium		2005	$	10,364
El Furrial		2013		34,022

As of September 30, 2006, 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 $342.3 million, including improvements made to these assets after the sale leaseback transactions.

As part of the Production Operators Corporation (“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 20165. ToINVESTMENTS ~~date~~IN ~~Hanover~~NON-CONSOLIDATED ~~and~~AFFILIATES ~~its affiliates have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.~~

WeInvestments in affiliates that are ~~substantially~~not ~~self-insured~~controlled ~~for~~by ~~worker’s~~HCLP ~~compensation,~~but ~~employer’s~~where ~~liability,~~we ~~auto~~have ~~liability, general~~the ~~liability,~~ability ~~property~~to ~~damage/loss,~~exercise significant ~~and~~influence ~~employee~~over ~~group~~the ~~health~~operations ~~claims~~are inaccounted ~~view~~for ofusing the ~~relatively~~equity method. Our share of ~~high~~net ~~per-incident~~income ~~deductibles~~or welosses ~~absorb~~of ~~under~~these ~~our~~affiliates ~~insurance~~is ~~arrangements~~reflected ~~for~~in ~~these~~the ~~risks.~~Consolidated ~~Losses~~Statements upof Operations toas ~~deductible~~“Equity ~~amounts~~in ~~are~~income ~~estimated~~of ~~and~~non-consolidated ~~accrued~~affiliates”. ~~based~~Our ~~upon~~primary ~~known~~equity ~~facts~~method investments are comprised of entities that own, ~~historical~~operate, ~~trends~~service and ~~industry~~ ~~averages~~maintain compression and other related facilities.

WeOur ~~are~~ownership ~~involved~~interest ~~in a project to build~~ and ~~operate~~location ~~barge-mounted gas compression and gas processing facilities to be stationed in a Nigerian coastal waterway (“Cawthorne Channel Project”) as part~~ of ~~the~~ ~~performance~~each ofequity amethod ~~contract~~investee ~~between~~at ~~an affiliate of The Royal/Dutch Shell Group (“Shell”) and Global Gas and Refining Limited (“Global”)~~September 30, a2006 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~~as ~~development of the overall~~follows: 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.


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

Summarized combined earnings information for these entities consisted of the following amounts (on a 100% basis, in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Revenues	$	51,692	$	51,894	$	151,441	$	148,198
Operating income		25,991		27,369		74,700		74,914
Net income		16,053		13,783		37,200		40,925

6. DEBT

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


	September 30,			December 31,
	2006			2005
Bank credit facility due November 2010	$	69,000		$	48,000
2001A equipment lease notes, interest at 8.5%, due September 2008		133,000			133,000
2001B equipment lease notes, interest at 8.75%, due September 2011		250,000			250,000
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		863			1,751

		452,863			432,751
Less-current maturities		(641	)		(1,309	)

Long-term debt	$	452,222		$	431,442

As of September 30, 2006, we had $69.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facility bore interest at a weighted average rate of 7.1% and 6.1% at September 30, 2006 and December 31, 2005,

~~revenue~~respectively. weAs ~~may~~of ~~realize~~September ~~from~~30, ~~our~~2006, ~~investments~~we inalso ~~Nigeria.~~had Ifapproximately ~~Shell~~$164.9 million ~~were~~in toletters ~~terminate~~of ~~its~~credit ~~contract~~outstanding ~~with~~under ~~Global~~our ~~for any~~bank ~~reason,~~credit orfacility. ifOur webank ~~were~~credit tofacility ~~terminate~~permits ~~our~~us ~~involvement~~to inincur ~~the project~~indebtedness, wesubject ~~would be required~~ to ~~find an~~covenant ~~alternative~~limitations, ~~use~~up ~~for~~to ~~the~~a ~~barge~~$450 million ~~facility~~credit limit, ~~which~~plus, ~~could result~~ in aaddition ~~write-down~~to ofcertain ~~our~~other ~~investment. At June 30~~indebtedness, ~~2005, we had~~ an ~~investment~~additional of(a) ~~approximately~~ $~~67.2~~50 million in ~~projects in Nigeria~~unsecured indebtedness, ~~a substantial~~(b) ~~majority~~$100 million of ~~which~~indebtedness ~~related~~of tointernational ~~the~~subsidiaries ~~Cawthorne~~and ~~Channel~~(c) ~~Project. We currently anticipate making an approximately~~ $~~2.5~~35 million ~~additional~~of secured ~~investment~~purchase inmoney ~~the Cawthorne Channel Project during 2005~~indebtedness. InAdditional ~~addition,~~borrowings weof ~~have~~up ~~approximately~~to $4216.21 million ~~associated~~were ~~with~~available under ~~advances~~that ~~to,~~facility ~~and~~as ~~our investment~~of inSeptember 30, ~~Global~~2006.

WeAs ~~have~~of ~~significant~~September 30, ~~operations~~2006, ~~that~~HCLP ~~expose~~and usHanover towere ~~currency risk~~ in ~~Argentina~~compliance ~~and~~with ~~Venezuela.~~all Ascovenants ~~a result, adverse political conditions~~ and ~~fluctuations in currency exchange rates could materially~~other ~~and~~requirements ~~adversely~~set ~~affect~~forth in our ~~business.~~bank Tocredit ~~mitigate that risk~~facility, the ~~majority~~indentures ofand ~~our~~agreements ~~existing~~related ~~contracts~~to our ~~provide~~compression ~~that~~equipment welease ~~receive~~obligations ~~payment~~and ~~in,~~the orindentures ~~based on, U.S. dollars rather than Argentine pesos~~ and ~~Venezuelan~~ ~~bolivars,~~agreements ~~thus~~relating ~~reducing~~to our ~~exposure~~other long-term ~~to fluctuations in their value~~debt. InA ~~February 2003, the~~default ~~Venezuelan~~under ~~government~~our ~~fixed~~bank ~~the~~credit ~~exchange~~facility ~~rate~~or toa ~~1,600~~default ~~bolivars~~under ~~for~~certain ~~each~~of ~~U.S.~~the ~~dollar. In~~various ~~February 2004~~indentures and ~~March 2005,~~agreements ~~the~~would ~~Venezuelan~~in ~~government~~some ~~devalued~~situations ~~the~~trigger ~~currency~~cross-default toprovisions ~~1,920~~under ~~bolivars~~our ~~and~~bank ~~2,148~~credit ~~bolivars,~~facility ~~respectively,~~or ~~for each U.S. dollar. The impact of~~ the ~~devaluation~~indentures onand ~~our~~agreements ~~results will~~relating ~~depend~~to ~~upon~~certain ~~the amount~~ of our ~~assets~~other ~~(primarily~~debt ~~working~~obligations. Such ~~capital~~defaults ~~and~~would ~~deferred~~have ~~taxes)~~a ~~exposed~~material ~~to currency~~adverse ~~fluctuation~~effect inon ~~Venezuela~~our inliquidity, ~~future~~financial ~~periods~~position and operations.

~~For~~While all of the ~~six~~agreements ~~months~~related ~~ended~~to ~~June 30,~~our ~~2005~~long-term debt do not contain the same financial covenants, ~~our~~the ~~Argentine~~indentures ~~operations~~and ~~represented~~the ~~approximately~~agreements 5%related ofto our compression equipment lease obligations for our ~~revenue~~2001A and 2001B sale leaseback transactions, Hanover’s 8.625% ofSenior ~~our~~Notes ~~gross~~due ~~profit~~2010, Hanover’s 7.5% ~~For~~Senior ~~the~~Notes ~~six~~due ~~months~~2013 ~~ended~~and ~~June~~Hanover’s 9.0% Senior Notes due 2014 permit us at a minimum, (1) 30to incur indebtedness, ~~2005~~at any time, of up to $400 million under our ~~Venezuelan~~bank credit ~~operations~~facility, ~~represented~~plus ~~approximately~~an ~~10%~~additional $75 million in unsecured indebtedness, (2) to incur 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 thereof and (3) to incur certain purchase money and similar obligations. The indentures and agreements for our ~~revenue~~2001A and 172001B compression equipment lease obligations, Hanover’s 8.625% Senior Notes due 2010, Hanover’s 7.5% Senior Notes due 2013 and Hanover’s 9.0% Senior Notes due 2014 define indebtedness to include the present value of our ~~gross~~rental ~~profit~~obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. AtAs ~~June~~of September 30, ~~2005~~ 2006, weHanover’s ~~had~~coverage ~~approximately~~ratio ~~$14~~exceeded 2.~~3 million~~25 to 1.0, and therefore as of such date it would allow us to incur a limited amount of indebtedness in addition to our bank credit facility and the additional $~~22.5~~75 million in ~~accounts~~unsecured ~~receivable~~indebtedness ~~related~~and tocertain ~~our~~other permitted indebtedness, ~~Argentine~~including ~~and~~certain ~~Venezuelan~~refinancing ~~operations~~of indebtedness allowed by such bank credit facility.

~~The economic situation in Argentina and Venezuela is subject to change~~7. ToDUE ~~the~~TO ~~extent~~GENERAL ~~that the~~PARTNER 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.

~~Several~~We ~~compressor~~have ~~rental~~entered ~~projects~~into ~~with~~four apromissory ~~customer~~notes in ~~Latin~~favor ~~America~~of ~~are~~our ~~scheduled~~general topartner. ~~terminate~~Under inthese notes, we ~~accordance~~promised ~~with~~to pay to the ~~terms~~order of our ~~lease~~general ~~agreements~~partner: at(a) such ~~various~~amounts ~~times~~as ~~during~~are equal to the ~~remainder~~amounts which are due by Hanover to the holders of ~~2005~~Hanover’s $200 million 8.625% Senior Notes due 2010 (the ~~These~~“8.625% ~~projects~~Senior ~~represent~~Notes”) and all costs incurred by Hanover in connection with the ~~aggregate~~issuance ~~approximately~~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 $2143.8 million ~~per~~4.75% ~~month~~Convertible inSenior ~~revenues~~Notes due 2014 (the “4.75% WeConvertible ~~are~~Notes”) and all costs incurred by Hanover in connection with the ~~process~~issuance of ~~negotiating~~the ~~extensions~~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 ~~these~~Hanover’s ~~lease~~$200 million ~~agreements~~9.0% Senior Notes due 2014 (the “9.0% Senior Notes”) and all costs incurred by Hanover in connection with ~~this~~the ~~customer~~issuance of the 9.0% ~~While~~Senior weNotes ~~hope~~or any amendment or modification thereof, and (d) such amounts as are equal to ~~renew~~the ~~these~~amounts ~~contracts~~which are ondue ~~favorable~~by ~~terms~~Hanover to the holders of Hanover’s $150 million 7.5% Senior Notes due 2013 (the “7.5% Senior Notes”) and all costs incurred by Hanover in connection with the issuance of the 7.5% Senior Notes or any amendment or modification thereof. The notes described in (a) and (b) above are dated December 15, we2003, ~~can~~the ~~provide~~note nodescribed ~~assurance~~in ~~that~~(c) above ~~these~~is ~~contracts~~dated June 1, 2004 and the note described in ~~will~~(d) above beis ~~renewed~~dated onMarch 31, ~~terms~~2006. ~~that~~Such amounts are asdue ~~favorable~~from HCLP to usits asgeneral ~~the~~partner ~~existing~~at ~~lease~~the ~~agreements~~same time or attimes ~~all~~as such amounts must be paid by Hanover. IfOur general partner has also entered into four promissory notes in favor of Hanover with the ~~contracts~~same ~~were~~general ~~not~~terms ~~renewed,~~as the obligations which we have ~~would~~to beour ~~required~~general partner under the notes described in (a), (b), (c) and (d) above. The promissory note to ~~find~~our ~~alternative~~general ~~uses~~partner ~~for~~that ~~these~~has ~~assets~~the same general terms as Hanover’s 11% Zero Coupon Subordinated Notes was redeemed in March 2006 in connection with the repayment of the 11% Zero Coupon Subordinated Notes by Hanover in March 2006.

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.

8. RELATED—PARTY TRANSACTIONS

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 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.

Ted Collins, Jr., one of Hanover’s Directors, owns 100% of Azalea Partners, which owns approximately 14% of Energy Transfer Group, LLC (“ETG”). During the six months ended June 30, 2005 and 2004 and during the twelve months ended December 31, 2004, we recorded sales of approximately $6.0 million, $4.9 million and $7.7 million, respectively, related to equipment leases and sales to ETG, including its indirectly wholly owned subsidiary Energy Transfer Technologies, LP. In addition, HCLP and ETG are co-

~~owners~~Obligations ofto aour ~~power~~general ~~generation~~partner ~~facility~~that inhave ~~Venezuela. Under~~ the ~~agreement~~ ofsame ~~co-ownership,~~general ~~each~~terms ~~party is responsible for its obligations~~ as ~~a co-owner. HCLP is~~ the ~~designated~~ ~~manager~~Hanover ofnotes ~~the facility. As manager, HCLP received revenues related to the facility and~~payable ~~distributed~~consisted ~~to ETG its net share~~ of the ~~operating~~following ~~cash~~(in ~~flow of $0.3 million during the six months~~thousands): ~~ended June 30, 2005 and 2004.~~

9. RECENT ACCOUNTING PRONOUNCEMENTS


	September 30,			December 31,
	2006			2005
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			200,000
11% zero coupon subordinated notes due March 2007		—			229,803
7.5% senior notes due 2013		150,000			—
Fair value adjustment — fixed to floating interest rate swaps		(9,130	)		(9,686	)

	$	684,620		$	763,867

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7~~, 2003 the FASB issued Staff Position 150-3 that delayed the effective date for certain types of financial instruments~~.5% WeSenior doNotes ~~not~~due ~~believe the adoption of the guidance currently provided in SFAS~~2013 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 $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.

~~These~~In ~~minority~~March 2006, ~~interest~~Hanover ~~obligations~~completed ~~represent~~a ~~the~~public ~~equity~~offering of ~~the~~$150 million ~~entities~~aggregate ~~that~~principal ~~lease~~amount ~~compression~~of ~~equipment~~7.5% toSenior ~~us.~~Notes Indue ~~accordance~~2013. ~~with~~Hanover used the ~~provisions~~net ofproceeds ~~our~~from ~~compression~~the ~~equipment~~offering ~~lease~~of ~~obligations~~$146.6 million, ~~the~~together ~~equity~~with ~~certificate~~borrowings ~~holders~~under ~~are~~our ~~entitled~~bank credit facility, to ~~quarterly~~redeem ortheir ~~semi-annual~~11% ~~yield~~Zero ~~payments~~Coupon Subordinated onNotes due March 31, 2007. In connection with the redemption, we expensed $5.9 million ~~aggregate~~related ~~outstanding~~to ~~equity~~the ~~certificates~~call premium. AsHanover ofpaid ~~June~~approximately $242 ~~30,~~million ~~2005~~to redeem their 11% Zero Coupon Subordinated Notes, including the ~~yield~~call ~~rates~~premium. onThe ~~the~~offering ~~outstanding equity~~and ~~certificates~~sale ~~ranged~~of ~~from~~the 117.15% Senior Notes were made pursuant to ~~11.5%.~~an ~~Equity~~automatic ~~certificate~~shelf ~~holders~~registration ~~may~~statement ~~receive~~on aForm ~~return~~S-3 offiled with the ~~capital~~Securities ~~payment~~and ~~upon~~Exchange ~~termination~~Commission. ofHanover ~~the~~may ~~lease~~redeem orup ~~our~~to ~~purchase~~35% of the ~~leased~~7.5% ~~compression~~Senior ~~equipment after~~Notes ~~full~~using ~~payment~~the proceeds of ~~all~~certain ~~debt~~equity ~~obligations~~offerings completed before April 15, 2009 at a redemption price of 107.5% of the ~~entities~~principal ~~that~~amount, ~~lease~~plus ~~compression~~accrued ~~equipment~~and unpaid interest to usthe redemption date. At ~~June 30~~In addition, ~~2005,~~Hanover ~~the~~may ~~carrying~~redeem ~~value~~some or all of the ~~minority~~7.5% ~~interest~~Senior ~~obligations~~Notes ~~approximated~~at ~~the~~any ~~fair~~time on or after April 15, ~~market~~2010 ~~value~~at ofcertain ~~assets~~redemption ~~that~~prices ~~would~~together bewith ~~required~~accrued tointerest, beif ~~transferred~~any, to ~~redeem~~ the ~~minority~~date ~~interest~~of ~~obligations~~redemption.

InThe ~~November 2004,~~7.5% ~~the~~Senior ~~FASB~~Notes ~~issued~~are ~~SFAS~~general ~~No. 151,~~unsecured ~~“Inventory~~senior ~~Costs~~obligations —of anHanover ~~Amendment~~and rank equally in right of ~~ARB~~payment Nowith all of Hanover’s other senior debt. ~~43, Chapter 4”~~ ~~(“SFAS~~The ~~151”)~~7.5% ~~This~~Senior ~~standard~~Notes ~~provides~~are ~~clarification~~effectively subordinated ~~that~~to ~~abnormal~~all ~~amounts~~existing and future liabilities of ~~idle~~Hanover’s subsidiaries that do not guarantee ~~facility~~the ~~expense,~~7.5% ~~freight,~~Senior ~~handling~~Notes. ~~costs,~~The ~~and~~7.5% ~~spoilage~~Senior ~~should~~Notes beare ~~recognized~~guaranteed ason ~~current-period~~a senior subordinated basis by us. ~~charges~~The 7.5% ~~Additionally,~~Senior ~~this~~Notes ~~standard~~rank ~~requires~~equally ~~that~~in ~~allocation~~right of ~~fixed~~payment ~~production~~with ~~overhead~~Hanover’s to8.625% ~~the costs~~Senior ofNotes ~~conversion~~and Hanover’s be9.0% ~~based~~Senior onNotes and the ~~normal~~guarantee ~~capacity~~ of the ~~production facilities~~7.5% ~~The~~Senior ~~provisions~~Notes ~~of this~~by ~~standard~~us ~~are~~ranks ~~effective~~equally ~~for~~in ~~inventory~~right of ~~costs~~payment ~~incurred~~with ~~during~~the ~~fiscal~~guarantee ~~years~~of ~~beginning~~Hanover’s ~~after~~8.625% ~~June 15,~~Senior ~~2005~~Notes and Hanover’s 9.0% WeSenior doNotes ~~not~~by us. ~~expect~~The ~~the~~indenture ~~adoption~~under ofwhich the ~~new~~7.5% ~~standard~~Senior toNotes ~~have~~were aissued ~~material~~contains ~~effect~~various ~~on our~~financial ~~consolidated~~covenants ~~results~~which oflimit, ~~operations~~among other things, ~~cash~~Hanover ~~flows~~and HCLP’s ability to incur additional indebtedness or ~~financial~~sell ~~position~~assets.

~~In December 2004, the FASB issued SFAS No~~8. ~~123~~ ~~(Revised~~ACCOUNTING ~~2004),~~FOR ~~“Share-Based Payment” (“SFAS~~DERIVATIVES 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 SFAS 123(R) is not expected to have a 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.

InWe ~~December 2004,~~use ~~the~~derivative ~~FASB~~financial ~~issued~~instruments ~~Statement~~to ofminimize ~~Financial~~the ~~Accounting~~risks ~~Standards~~and/or ~~No. 153,~~costs ~~“Exchange~~associated ofwith ~~Nonmonetary~~financial ~~Assets,~~activities anby ~~amendment~~managing ofour ~~APB~~exposure ~~Opinion~~to ~~No. 29”~~interest ~~(“SFAS~~rate ~~153”)~~fluctuations on a portion of our debt and leasing obligations. ~~SFAS~~Our ~~153~~primary objective is ~~based~~to onreduce ~~the principle~~our ~~that~~overall ~~exchange~~cost of ~~nonmonetary~~borrowing ~~assets~~by managing ~~should~~the befixed ~~measured~~and ~~based~~floating oninterest ~~the~~rate ~~fair~~mix ~~market~~of ~~value~~our ofdebt portfolio. We do not use derivative ~~the~~financial ~~assets~~instruments ~~exchanged.~~for ~~SFAS~~trading ~~153~~or ~~eliminates~~other ~~the~~speculative ~~exception~~purposes. ofCash ~~nonmonetary~~flow ~~exchanges~~from ofhedges ~~similar~~are ~~productive~~classified ~~assets~~in ~~and~~our ~~replaces~~consolidated itstatements ~~with~~of acash ~~general~~flows ~~exception~~under ~~for~~the ~~exchanges~~same ofcategory ~~nonmonetary~~as ~~assets~~the ~~that~~cash flows dofrom ~~not~~the ~~have~~underlying assets, liabilities or anticipated transactions.

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. For derivative instruments designated as fair value hedges, the gain or loss is recognized in earnings in the period of change together with the gain or loss on the hedged item attributable to the risk being hedged. The following table summarizes, by individual hedge instrument, these interest rate swaps as of September 30, 2006 (dollars in thousands):


							Fair Value of
		Fixed Rate to be			Notional		Swap at
Floating Rate to be Paid	Maturity Date	Received			Amount		September 30, 2006
Six Month LIBOR +4.72%	December 15, 2010		8.625	%	$	100,000	$	(4,687	)
Six Month LIBOR +4.64%	December 15, 2010		8.625	%	$	100,000	$	(4,443	)

~~commercial~~As ~~substance.~~of ~~SFAS~~September 30, ~~153~~2006, isa ~~effective~~total ~~for~~of ~~nonmonetary~~approximately ~~asset~~$1.6 million ~~exchanges~~ in ~~fiscal~~accrued liabilities, $7.5 ~~periods~~million ~~beginning~~in ~~after~~long-term ~~June 15,~~liabilities ~~2005~~and a $9.1 million Wereduction ~~are~~of ~~currently~~debt ~~evaluating~~due to our general partner was recorded with respect to the ~~provisions~~fair ofvalue ~~SFAS~~adjustment ~~153~~related ~~and~~to these two swaps. doWe ~~not~~estimate ~~believe~~the ~~that~~effective ~~our~~floating ~~adoption~~rate, ~~will~~which ~~have~~is adetermined ~~material~~in ~~impact~~arrears onpursuant ~~our~~to ~~consolidated~~the ~~results~~terms of ~~operations~~the swap, ~~cash~~to ~~flows~~be orpaid ~~financial~~at ~~position~~the time of settlement. As of September 30, 2006, we estimated that the effective rate for the six-month period ending in December 2006 would be approximately 9.9%.

InThe ~~March 2005,~~counterparties ~~the~~to ~~FASB~~our ~~issued~~interest ~~FASB~~rate ~~Interpretation~~swap ~~No. 47,~~agreements ~~“Accounting~~are ~~for~~major ~~Conditional~~international ~~Asset~~financial ~~Retirement Obligations” (“FIN 47”)~~institutions. ~~FIN~~We 47monitor ~~requires uncertainty about~~ the ~~timing~~credit orquality ~~method~~ of ~~settlement~~ ofthese afinancial ~~conditional~~institutions ~~asset~~and ~~retirement~~do ~~obligation~~not ~~to be factored into the measurement of the~~expect ~~liability~~non-performance ~~when~~by ~~sufficient~~any ~~information~~counterparty, ~~exists.~~although ~~FIN~~such 47financial ~~also~~institutions’ ~~clarifies~~non-performance, ~~when~~if ~~an entity would have~~it ~~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 15~~occurred, ~~2005.~~could Wehave ~~are currently~~a ~~evaluating~~material ~~the~~adverse ~~impact~~effect ~~FIN 47 will have~~ on ~~our consolidated results of operations, cash flows or financial position~~us.

~~In May 2005, the FASB issued Statement of Financial Accounting Standards No~~9. ~~154,~~ ~~“Accounting Changes~~COMMITMENTS ~~and~~AND ~~Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS~~CONTINGENCIES 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.

~~10.~~HCLP ~~REPORTABLE~~has ~~SEGMENTS~~issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

We manage our business segments primarily based upon the type of product or service provided. We have five principal industry segments: U.S. Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; and Production and Processing Equipment Fabrication. The U.S. and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on 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, desalination plants and tank farms.


			Maximum Potential
			Undiscounted
			Payments as of
	Term		September 30, 2006
Performance guarantees through letters of credit		2006-2010	$	155,490
Standby letters of credit		2006-2007		13,739
Commercial letters of credit		2006-2007		15,833
Bid bonds and performance bonds		2006-2011		125,564

			$	310,626

We ~~evaluate~~have ~~the~~issued ~~performance~~guarantees ofto ~~our~~third ~~segments~~parties ~~based~~to onensure ~~segment~~performance ~~gross~~of ~~profit.~~our ~~Segment~~obligations, ~~gross~~some ~~profit~~of ~~for~~which ~~each~~may ~~segment~~be ~~includes~~fulfilled ~~direct~~by ~~revenues~~third ~~and operating expenses~~parties. ~~Costs~~In ~~excluded from segment gross profit include selling~~addition, ~~general~~in ~~and administrative~~December 2003, ~~depreciation~~June 2004 and ~~amortization~~March 2006, ~~interest,~~Hanover ~~foreign~~issued ~~currency~~$200.0 million ~~translation,~~aggregate ~~provision~~principal ~~for~~amount ~~cost~~ of ~~litigation~~its ~~settlement,~~8.625% ~~goodwill~~Senior ~~impairment~~Notes, ~~other~~ ~~expenses~~issued ~~and income taxes~~$200.0 million aggregate ~~Amounts~~principal ~~defined~~amount ~~as “Other income” include equity in income~~ of ~~non-consolidated~~ ~~affiliates~~its ~~and~~9.0% ~~corporate~~Senior ~~related~~Notes, ~~items~~issued ~~primarily~~$150.0 million ~~related~~aggregate toprincipal amount ~~cash~~of ~~management activities~~its 7.5% ~~Revenues~~Senior ~~include~~Notes, ~~sales~~respectively, towhich ~~external~~we ~~customers.~~fully ~~Our~~and ~~chief~~unconditionally ~~executive~~guaranteed ~~officer~~on ~~does not~~a ~~review~~senior ~~asset~~subordinated ~~information by segment~~basis.

~~The~~Hanover ~~following~~has ~~tables~~guaranteed ~~present~~the ~~sales~~amount ~~and~~included ~~other~~below, ~~financial~~which ~~information~~is bya ~~industry~~percentage ~~segment~~of ~~for~~ the total debt of this ~~three~~non-consolidated ~~months~~affiliate ~~ended~~equal ~~June 30~~to our ownership percentage in such affiliate. If these guarantees by Hanover are ever called, ~~2005~~we ~~and~~may ~~2004~~have to advance funds to Hanover to cover its obligation under these guarantees (dollars in thousands).


			Maximum Potential
			Undiscounted
			Payments as of
	Term		September 30, 2006
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium		2009	$	4,999
El Furrial		2013		29,019

			$	34,018

As part of the Production Operators Corporations (“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 Hanover and its affiliates have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

We are substantially self-insured for worker’s compensation, employer’s liability, auto liability, general liability, property damage/loss, and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses are estimated and accrued based upon known facts, historical trends and industry averages.

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

	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

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

~~The~~In ~~following~~early ~~tables~~June ~~present~~and ~~sales~~again ~~and~~in ~~other~~October 2006, ~~financial~~the ~~information~~area byexperienced ~~industry~~unrest ~~segment~~and ~~for~~violence ~~the~~and ~~six~~gas delivery ~~months~~from ~~ended~~Shell to the Project was stopped in June ~~30,~~2006. ~~2005~~The Project did not receive any gas from Shell during the third quarter and ~~2004~~Shell has not completed repairs on its gathering system. As a result, the Cawthorne Channel Project has not operated since early June 2006.

	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

During the three and nine month periods ended September 30, 2006, we recognized $0 million and $7.3 million, respectively, of revenues related to the Cawthorne Channel Project and we have received approximately $2.6 million in payments during 2006. Even though we believe we are entitled to rents from Global, irrespective of whether Shell has declared Force Majeure, and have invoiced Global for rents, collectibility is not reasonably assured due to uncertainty regarding when the Project’s operations will restart and Global’s dependence on gas production by the Cawthorne Channel Project to pay its rents to us. Therefore, we did not recognize any revenue related to the Cawthorne Channel Project in the third quarter of 2006. Once the Cawthorne Channel Project goes back on-line, we will determine how much revenue to recognize for the period it is on-line. Based on current long-term expectations of future run-time, we believe we will recover all of our receivables and our full investment in the Cawthorne Channel Project over the term of the contract.

11This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. ~~DISCONTINUED~~Such ~~OPERATIONS~~risks ~~AND~~include, ~~OTHER~~among ~~ASSETS~~other ~~HELD~~things, ~~FOR~~political, ~~SALE~~social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks including risks arising from the recent increase in violence and local unrest, could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. If Shell does not provide gas to the project or if Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment and receivables related to this project. At September 30, 2006, we had net assets of approximately $75.3 million related to projects in Nigeria, a majority of which is related to our investment and accounts receivable for the Cawthorne Channel Project.

~~During~~Additionally, ~~the~~due ~~fourth~~to ~~quarter~~the ofenvironment ~~2002~~in Nigeria, ~~Hanover~~Global’s ~~Board~~capitalization oflevel, ~~Directors~~inexperience ~~approved management’s plan to~~with ~~dispose of our non-oilfield power generation~~ projects, ~~which were part~~ of ~~our~~a ~~U.S.~~similar ~~rental~~nature ~~business,~~ and ~~certain~~lack ~~used equipment businesses, which were part~~ of ~~our~~a ~~parts~~successful ~~and~~track ~~service~~record ~~business.~~with ~~These disposals~~respect ~~meet~~to ~~the~~this ~~criteria~~project ~~established for recognition as discontinued operations under SFAS 144,~~and ~~“Accounting~~other ~~for the Impairment or Disposal of Long-Lived Assets~~factors,” ~~(“SFAS~~there ~~144”).~~is ~~SFAS~~no ~~144 specifically~~assurance ~~requires~~ that ~~such~~Global ~~amounts must represent a component of a business comprised of operations and cash flows that~~ can besatisfy ~~clearly~~its ~~distinguished,~~obligations ~~operationally~~under ~~and~~its ~~for financial~~various ~~reporting purposes~~contracts, ~~from~~including ~~the~~its ~~rest~~contract ofwith ~~the entity~~Hanover. ~~These businesses are reflected as discontinued~~ ~~operations in our condensed consolidated statement of operations.~~

~~Due~~In ~~to changes in market conditions,~~ the ~~disposal~~ordinary ~~plan~~course ~~for a small piece~~ of ~~our original non-oilfield power generation~~ business ~~has~~we ~~not been completed as of June 30, 2005. We~~ are ~~continuing~~ toinvolved ~~actively~~in ~~market~~various ~~these~~other ~~assets~~pending ~~and~~or ~~have~~threatened ~~made valuation adjustments as a result of the~~legal ~~change~~actions, inincluding ~~market~~environmental ~~conditions~~matters. AsWhile amanagement ~~result~~is ofunable ~~our consolidation efforts during 2003, we reclassified certain closed facilities~~ to ~~assets~~predict ~~held~~the ~~for sale. We have sold certain assets for total sales~~ultimate ~~proceeds~~outcome of ~~$0.1 million~~these ~~during~~actions, ~~the~~it ~~six~~believes ~~months~~that ~~ended~~any ~~June 30,~~ultimate ~~2005.~~liability ~~The~~arising ~~remaining~~from ~~assets~~these ~~are~~actions will ~~expected~~not tohave bea ~~sold~~material ~~within~~adverse ~~the~~effect ~~next~~on ~~three~~our toconsolidated ~~six~~financial ~~months~~position, ~~and~~results ~~the~~of ~~assets~~operations ~~and liabilities are~~or ~~reflected~~cash ~~as held-for-sale on our condensed consolidated balance sheet~~flows.

~~Summary~~10. RELATED—PARTY ~~of operating results of the discontinued operations (in thousands):~~TRANSACTIONS

	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:

Ted Collins, Jr., one of Hanover’s Directors, owns 100% of Azalea Partners, which owns approximately 15% of Energy Transfer Group, LLC (“ETG”). In the first quarter of 2006, we entered into an agreement to be ETG’s exclusive manufacturer of Dual Drive compressors and to provide marketing services for ETG. During the nine months ended September 30, 2006 and 2005, we recorded revenue of approximately $34.8 million and $14.5 million, respectively, related to sales to ETG. As of September 30, 2006 and December 31, 2005, we had receivable balances due from ETG of $7.3 million and $1.1 million, respectively. In addition, HCLP and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership, each party is responsible for its obligations as a co-owner. In addition, 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 $0.5 million for both of the nine month periods ended September 30, 2006 and 2005.

	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

11. RECENT ACCOUNTING PRONOUNCEMENTS

AsIn aMay 2003, ~~result~~the Financial Accounting Standards Board (“FASB”) issued Statement of ~~our~~Financial Accounting ~~consolidation~~Standards ~~efforts~~(“SFAS”) ~~during~~No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, weand ~~reclassified~~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 ~~closed~~types of ~~facilities~~financial instruments. The adoption of the guidance currently provided in SFAS 150 did not have a material effect on our consolidated results of operations or cash flow. However, upon further guidance from the FASB, we may be required to ~~assets~~classify ~~held~~as ~~for~~debt approximately $12.0 million in sale leaseback obligations that, as of September 30, 2006, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

~~Summary~~These ~~balance~~minority ~~sheet~~interest ~~data~~obligations ~~for~~represent ~~assets~~the ~~held~~equity ~~for~~of ~~sale~~the asentities that lease compression equipment to us. In accordance with the provisions of ~~June~~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 September 30, ~~2005~~2006, ~~(in~~the ~~thousands):~~yield rates on the outstanding equity certificates ranged from 13.3% to 13.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At September 30, 2006, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

			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

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

~~Summary~~In ~~balance~~December 2004, ~~sheet~~the ~~data~~FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for ~~assets~~share-based ~~held~~payment transactions in which an enterprise receives employee services in exchange for ~~sale~~(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 requires instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) is effective as of ~~December~~the first interim or annual reporting period that begins after June 3115, 2005. ~~2004~~However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(inR) ~~thousands~~would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R): did not have a material impact on our financial position or cash flows, but impacted our results of operations. See Note 2 for a discussion of the impact of the adoption of SFAS 123(R).

			Non-
			Oilfield
	Used		Power
	Equipment		Generation		Facilities		Total
Current assets	$	2,455	$	2,714	$	—	$	5,169
Property, plant and equipment		—		1,077		5,314		6,391
Assets held for sale		2,455		3,791		5,314		11,560
Current liabilities		—		517		—		517
Liabilities held for sale		—		517		—		517
Net assets held for sale	$	2,455	$	3,274	$	5,314	$	11,043

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

12In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, ~~INCOME~~“Accounting Changes ~~TAXES~~and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to newly adopted accounting principles, unless impracticable. Corrections of errors will continue to be reported under SFAS 154 by restating prior periods as of the beginning of the first period presented. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on our consolidated results of operations, cash flows or financial position.

~~During~~In ~~the three months ended June~~February 302006, ~~2005,~~the weFASB ~~recorded~~issued aStatement ~~net tax provision~~ of ~~$8.1 million compared~~Financial toAccounting ~~$6.2 million~~Standards ~~for the three months ended June 30, 2004~~No. ~~Our effective tax rate for the three months ended June~~ 30155, ~~2005 was 189%, compared to 496%~~ “Accounting for ~~the~~Certain ~~three~~Hybrid ~~months~~Instruments ~~ended~~— ~~June 30, 2004.~~an ~~During~~amendment ~~the six months ended June 30, 2005, we recorded a net tax provision~~ of ~~$3.9 million compared~~FASB toStatements ~~$13~~No.7 ~~million~~133 ~~for~~and ~~the~~140” ~~six~~(“SFAS ~~months ended June 30, 2004~~155”). ~~Our effective tax rate for the~~ ~~six~~SFAS ~~months~~155 ~~ended June~~(a) ~~30,~~permits ~~2005~~fair ~~was~~value ~~564%, compared to 763% for the six months ended June 30, 2004.~~remeasurement ~~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.~~for ~~income~~any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the ~~reversal~~requirements of $3FASB No.6 ~~million~~133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of ~~tax~~credit ~~issue~~risk ~~based~~in ~~reserves~~the ~~during~~form of subordination are not embedded derivatives, and (e) amends SFAS No. 140 to eliminate the ~~second~~prohibition ~~quarter~~on ofa ~~2005~~qualifying special-purpose entity from holding a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument. ~~These~~SFAS ~~reserves~~155 ~~were~~is ~~reversed~~effective ~~because~~for all financial weinstruments noacquired ~~longer~~or ~~believe~~issued after the beginning of an entity’s first fiscal year that ~~these~~begins after ~~tax~~September 15, ~~liabilities~~2006. We are currently evaluating the provisions of SFAS 155 and do not believe that our adoption will behave ~~incurred~~a material impact on our consolidated results of operations, cash flows or financial position.

~~Due~~In ~~to our cumulative U.S. losses~~June 2006, ~~we cannot reach~~ the ~~conclusion~~FASB ~~that~~issued itFASB isInterpretation No. 48, “~~more~~Accounting ~~likely~~for ~~than~~Uncertainty ~~not”~~in Income ~~that~~Taxes” ~~certain~~(“FIN ~~of our U~~48”).S. ~~deferred~~This ~~tax~~interpretation ~~assets~~is ~~will~~effective befor ~~realized~~fiscal inyears ~~the~~beginning ~~future.~~after ~~We will be required to~~December 15, ~~record~~2006. ~~additional~~This ~~valuation~~interpretation ~~allowances~~clarifies ifthe ~~our~~accounting ~~U.S.~~for ~~deferred~~uncertainty ~~tax~~in ~~asset~~income ~~position~~taxes isrecognized ~~increased~~in ~~and the~~a ~~“more~~company’s ~~likely~~financial ~~than~~statements ~~not”~~in ~~criteria~~accordance ofwith ~~SFAS~~FASB ~~109~~Statement ~~is not met~~No. ~~In addition~~ 109, weAccounting ~~have~~for ~~recorded valuation~~Income ~~allowances~~Taxes. ~~for~~This ~~certain~~interpretation ~~international~~prescribes ~~jurisdictions.~~a Ifrecognition wethreshold ~~are~~and ~~required~~measurement toattribute ~~record~~for ~~additional~~the ~~valuation~~financial ~~allowances~~statement inrecognition ~~the~~and ~~United~~measurement ~~States~~of ora ~~any~~tax ~~other~~position ~~jurisdictions,~~taken ~~our~~or ~~effective~~expected ~~tax~~to ~~rate will~~ be ~~impacted,~~taken ~~perhaps~~in a ~~substantially,~~tax ~~compared~~return. toThe ~~the~~interpretation ~~statutory~~also ~~rate.~~provides Weguidance ~~believe~~on ~~that~~derecognition, weclassification, ~~will likely~~interest beand ~~required~~penalties, toaccounting ~~record additional valuation allowances~~ in ~~future~~interim periods, ~~unless~~disclosure, and ~~until~~transition. weWe are ~~able~~ ~~to generate additional taxable earnings or implement additional tax planning strategies that~~currently ~~would~~evaluating ~~minimize or eliminate~~ the ~~amount~~provisions of ~~such~~FIN ~~additional valuation allowance~~48.

13In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, ~~SUBSEQUENT~~“Fair ~~EVENTS~~Value Measurements” (“SFAS 157”). SFAS 157 provides a single definition of fair value, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the provisions of SFAS 157.

In 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 program12. ~~The~~REPORTABLE ~~grants included, in the aggregate, approximately 0.4 million shares of~~SEGMENTS ~~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.~~

~~The~~We ~~shares~~manage our business segments primarily based upon the type of ~~Hanover~~product ~~restricted~~or ~~stock~~service provided. We have six principal industry segments: U.S. Rentals; International Rentals; Parts, Service and ~~options~~Used Equipment; toCompressor ~~purchase~~and ~~Hanover’s~~Accessory ~~common~~Fabrication; ~~stock~~Production ~~that~~and ~~were~~Processing — Belleli; and ~~granted~~Production ~~will~~and ~~vest~~Processing ~~over~~— aSurface ~~three-year~~Equipment ~~period~~Fabrication. atThe aU.S. ~~rate~~and ofInternational ~~one-third~~Rentals segments ~~per~~primarily ~~year,~~provide ~~beginning~~natural ongas ~~the~~compression ~~first~~and production and processing equipment rental ~~anniversary~~and ofmaintenance ~~the~~services ~~date~~to ofmeet ~~the~~specific ~~grant~~customer requirements on HCLP-owned assets. ~~Recipients~~The ofParts, Service ~~performance~~and ~~awards~~Used ~~are~~Equipment ~~eligible~~segment provides a full range of services to ~~receive~~support athe surface ~~cash~~production ~~payment~~needs ~~ranging~~of customers from 0%installation and normal maintenance and services to ~~200%~~full operation of ~~target~~a atcustomer’s ~~the~~owned ~~end~~assets and surface equipment as well as sales of ~~three~~used ~~years~~equipment. The ~~from~~Compressor and Accessory Fabrication segment involves the ~~original~~design, ~~award~~fabrication and sale of ~~grant~~natural ~~date~~gas ifcompression weunits and accessories to meet ~~certain~~unique ~~pre-determined~~customer ~~performance~~specifications. ~~based~~The Production ~~criteria~~and Processing — Surface Equipment Fabrication segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas. The ~~compensation~~Production ~~expense~~and Processing — Belleli segment provides engineering, procurement and construction services primarily related to the ~~performance~~manufacturing ~~awards~~of ~~will~~heavy bewall ~~recognized~~reactors infor ~~our~~refineries ~~statement~~and construction of desalinization ~~operations~~plants and ~~will~~tank befarms. During 2005, we determined that the Production and Processing ~~adjusted~~— ~~for~~Belleli ~~changes~~segment inshould become a separate reportable segment from our ~~estimate~~Production ofand ~~the~~Processing ~~percentage~~— Surface ofEquipment ~~target~~Fabrication ~~that~~reportable issegment ~~expected~~due to bediffering ~~achieved~~long term economic characteristics. We have adjusted prior periods to conform to the current presentation.

We evaluate the performance of our segments based on segment gross profit. Segment gross profit for each segment includes direct revenues and operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, 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, gain on sales of a business and corporate related items primarily related to cash management activities. Revenues include sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments. Our chief executive officer does not review asset information by segment.

~~ITEM~~The 2.following ~~MANAGEMENT’S~~tables ~~DISCUSSION~~present ~~AND~~sales ~~ANALYSIS~~and OFother ~~FINANCIAL~~financial ~~CONDITION~~information ~~AND~~by ~~RESULTS~~industry OFsegment ~~OPERATIONS~~for the three months ended September 30, 2006 and 2005.

SPECIAL NOTE REGARDING FORWARD—LOOKING STATEMENTS


									Production and						Total
					Parts,		Compressor		Processing						revenues
					service and		and		Surface						and
	U.S.		International		used		accessory		equipment				Other		other
	rentals		rentals		equipment		fabrication		fabrication		Belleli		income		income
							(in thousands)
September 30, 2006:
Revenue from external customers	$	98,030	$	63,792	$	47,951	$	90,141	$	50,776	$	65,114	$	7,990	$	423,794
Gross profit		58,473		38,264		10,057		15,770		10,471		7,744		7,990		148,769
September 30, 2005:
Revenue from external customers	$	87,703	$	58,208	$	74,027	$	51,798	$	43,421	$	46,891	$	7,808	$	369,856
Gross profit		52,200		38,924		18,162		7,380		4,000		3,166		7,808		131,640

~~Certain~~The ~~matters~~following ~~discussed~~tables inpresent ~~this~~sales ~~Quarterly~~and ~~Report~~other onfinancial ~~Form~~information ~~10-Q~~by ~~are~~industry ~~“forward-looking~~segment ~~statements” intended to qualify~~ for the ~~safe harbors from liability established by the Private Securities~~nine ~~Litigation~~months ~~Reform~~ended ~~Act of 1995 and Section~~September ~~21E of the Securities Exchange Act of 1934~~30, as2006 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~~2005. ~~These~~ ~~risks and uncertainties include:~~

• our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment; • a prolonged substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our compression and oil and natural gas production and processing equipment; • reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies; • changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, the taking of property without fair compensation and legislative changes; • changes in currency exchange rates; • the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters; • our inability to implement certain business objectives, such as:


									Production and						Total
					Parts,		Compressor		Processing						revenues
					service and		and		Surface						and
	U.S.		International		used		accessory		equipment				Other		other
	rentals		rentals		equipment		fabrication		fabrication		Belleli		income		income
							(in thousands)
September 30, 2006:
Revenue from external customers	$	282,746	$	193,818	$	152,959	$	214,960	$	133,992	$	164,170	$	59,637	$	1,202,282
Gross profit		168,369		123,267		28,942		35,414		24,888		17,433		59,637		457,950
September 30, 2005:
Revenue from external customers	$	262,548	$	167,644	$	157,995	$	125,414	$	145,051	$	139,129	$	18,503	$	1,016,284
Gross profit		159,985		113,714		40,855		14,792		18,778		10,702		18,503		377,329

•13. ~~international~~ASSETS ~~expansion,~~HELD •FOR ~~integrating~~SALE ~~acquired~~AND businesses, • generating sufficient cash, • accessing the capital markets, • refinancing existing or incurring additional indebtedness to fund our business, and • executing our exit and sale strategy with respect to assets classified on our balance sheet as held for sale;DISPOSITIONS

•In ~~risks~~February 2006, ~~associated~~we ~~with~~sold ~~any~~our ~~significant~~U.S. ~~failure~~amine ortreating ~~malfunction~~rental ofassets ~~our~~to ~~enterprise~~Crosstex ~~resource~~Energy ~~planning~~Services ~~system;~~L.P. (“Crosstex”) •for ~~governmental~~approximately ~~safety,~~$51.5 million ~~health,~~and ~~environmental~~recorded a pre-tax gain of $28.4 million that is included in gain on sale of business and other ~~regulations~~income in the attached condensed consolidated statement of operations. Our U.S. amine treating rental assets had revenues of approximately $7.6 million in 2005. Because we leased back from Crosstex one of the facilities sold in this transaction, ~~which~~approximately ~~could~~$3.3 million ~~require~~of usadditional togain ~~make~~was ~~significant~~deferred ~~expenditures;~~into ~~and~~future periods. We also entered into a three-year strategic alliance with Crosstex. The disposal of these assets did not meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”).

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

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

Due to changes in market conditions, we have made valuation adjustments and the disposal plan for a small piece of our original non-oilfield power generation business was not completed as of September 30, 2006. We are continuing to actively market this asset. The remaining asset is expected to be sold within the next three to six months and the asset and liabilities are reflected as held-for-sale on our condensed consolidated balance sheet.

•Summary ~~our~~of ~~inability~~operating toresults ~~comply~~of ~~with covenants in our debt agreements and~~ the ~~decreased~~discontinued ~~financial~~operations ~~flexibility~~(in ~~associated with our substantial debt.~~thousands):

You should not unduly rely on the forward-looking statements, which speak only as of 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.


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006		2005
Revenues and other:
U.S. rentals	$	—	$	250		$	15	$	320
Other		776		74			776		79

		776		324			791		399

Expenses:
U.S. rentals		48		274			182		657
Selling, general and administrative		1		101			84		280
Foreign currency translation		—		—			—		5
Interest expense		—		163			—		163

		49		538			266		1,105

Income (loss) from discontinued operations before income taxes		727		(214	)		525		(706	)
Provision for income taxes		157		—			157		—

Income (loss) from discontinued operations	$	570	$	(214	)	$	368	$	(706	)

Summary balance sheet data for assets held for sale (in thousands):


	September 30,			December 31,
	2006			2005
Current asset	$	2,020		$	2,020
Current liabilities		(878	)		(878	)

Net assets held for sale	$	1,142		$	1,142

14. INCOME TAXES

During the three months ended September 30, 2006, we recorded a net tax provision of $6.1 million compared to a net tax benefit of $3.3 million for the three months ended September 30, 2005. Our effective tax rate for the three months ended September 30, 2006 was 23%, compared to 887% for the three months ended September 30, 2005. During the nine months ended September 30, 2006, we recorded a net tax provision of $24.9 million compared to $0.6 million for the nine months ended September 30, 2005. Our effective tax rate for the nine months ended September 30, 2006 was 26%, compared to 177% for the nine months ended September 30, 2005. The change in the effective tax rates was primarily due to our current U.S. tax position and the change in the weight of our U.S. income (loss), including the gain on the sale of our U.S. amine treating business that was recorded in the first quarter of 2006, compared to total income (loss) and the impact of change in loss jurisdictions. During the nine months ended September 30, 2006, we recorded pre-tax income in the U.S. and therefore were able to realize the benefit from net operating loss carryforwards and capital loss carryforwards that previously we had provided a valuation allowance against. Our tax provision for the nine months ended September 30, 2006 includes approximately $3.0 million in deferred tax expense related to the enactment of the Texas Margins tax described below. Our provision for the three and nine months ended September 30, 2005 was impacted by a $3.1 million valuation allowance against U.K. deferred tax assets for which we could not come to the conclusion that realization is more likely than not.

On May 18, 2006, the Governor of Texas signed into law House Bill 3 (“HB-3”) which modifies the existing Texas franchise tax law. The modified franchise tax will be computed by subtracting either costs of goods sold or compensation expense, as defined in HB-3, from gross revenue to arrive at a gross margin. The resulting gross margin will be taxed at a one percent tax rate. HB-3 has also expanded the definition of tax paying entities to include limited partnerships and thereby now subjecting us to a new state tax expense. HB-3 becomes effective for activities occurring on or after January 1, 2007. We believe that this tax should still be accounted for as an income tax, following the provisions of SFAS 109, because it has the characteristics of an income tax. Accordingly, a deferred tax liability of $3.0 million was established for future liabilities under this new tax in the nine months ended September 30, 2006.

Due to our cumulative U.S. tax losses, we can not 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. In addition, we have recorded valuation allowances for certain international jurisdictions. If we are required to record and/or release additional valuation allowances in the United States or any other jurisdiction, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (“IRC”) , the annual utilization of our net operating loss carryforward may be limited if there is a 50 percentage point change in ownership of Hanover within a three-year period by certain stockholders owning 5% or more of Hanover’s stock. We do not believe that a 50 percentage point change in ownership has occurred during the three year period ended September 30, 2006. It is possible that subsequent transactions involving Hanover’s capital stock could result in such a limitation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

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

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

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

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

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

	•		changes in currency exchange rates;

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

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

	•		international expansion, including our ability to timely and cost-effectively execute projects in new international operating environments,

	•		integrating acquired businesses,

	•		generating sufficient cash,

	•		accessing the capital markets, and

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

	•		risks associated with any significant failure or malfunction of our enterprise resource planning system;

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

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

Other factors in addition to those described in this Form 10-Q could also affect our actual results. You should carefully consider the risks and uncertainties described above and those described in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Form 10-Q. 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. You should, however, review the factors and risks we describe in our Annual Report on Form 10-K for the year ended December 31, 2005 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 our subsidiaries, are a global market leader in the full service natural gas compression business and isare also a leading provider of service, fabrication and equipment for oil and natural gas production, processing and transportation applications. We sell and rent this equipment and provide complete operation and maintenance services, including run-time guarantees, for both customer-owned equipment and our fleet of rental equipment. HCLP was founded as a Delaware corporation in 1990, and reorganized as a Delaware limited partnership in 2000. Our customers include both major and independent oil and gas producers and distributors as well as national oil and gas companies in the countries in which we operate. Our maintenance business, together with our parts and service business, provides solutions to customers that own their own compression and surface production and processing equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment and provide gas processing and treating, and oilfield power generation services, primarily to our U.S. and international customers as a complement to our compression services. In addition, through our subsidiary, Belleli Energy S.r.l. (“Belleli”), we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of ~~desalination~~desalinization plants and tank farms, primarily ~~for~~ for use in Europe and the Middle East.

OVERVIEW

Our revenue and other income for the ~~second~~third quarter ~~2005~~2006 was $~~344~~423.8 million compared to ~~second~~third quarter ~~2004~~2005 revenue and other income of $~~292~~369.9 million. Net ~~loss~~income for the ~~second~~third quarter ~~2005~~2006 was $421.35 million compared ~~with~~to a net ~~loss~~income of $42.18 million in the ~~second~~third quarter ~~2004~~2005. Our revenue and net income increased due to improved market conditions and our focus on improving sales and margins.

Our revenue and other income for the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 was $~~646~~1,202.43 million compared to revenue and other income of $~~562~~1,016.73 million for the ~~six~~nine months ended ~~June~~September 30, ~~2004~~ 2005. Net ~~loss~~income for the ~~six~~ nine months ended ~~June~~September 30, ~~2005~~2006 was $373.91 million compared with a net loss of $91.91 million for the nine months ended September 30, 2005. Our revenue and net income ~~six~~increased due to improved market conditions and our focus on improving sales and margins. In addition, results for the nine months ended ~~June~~September 30, ~~2004~~2006 benefited from a pre-tax gain of $28.4 million on the sale of our U.S. amine treating business in the first quarter of 2006 and an $8.0 million pre-tax gain on the sale of our fabrication facilities in Canada during the second quarter of 2006. Results for the nine months ended September 30, 2006 were also impacted by debt extinguishment costs of $5.9 million related to the call premium when Hanover repaid thier 11% Zero Coupon Subordinated Notes due March 31, 2007 in the first quarter of 2006.

Total compression horsepower at ~~June~~September 30, ~~2005~~2006 was approximately 3,~~304~~337,000, consisting of approximately 2,~~512~~444,000 horsepower in the United States and approximately ~~792~~893,000 horsepower internationally.

At ~~June~~September 30, ~~2005~~2006, our total third-party fabrication backlog was approximately $~~260~~688.48 million compared to approximately $~~290~~373.91 million at December 31, ~~2004~~2005 and $~~265~~394.78 million at ~~June~~September 30, ~~2004.~~ ~~The~~2005. Our compressor and accessory fabrication backlog was approximately $67192.54 million at ~~June~~ September 30, ~~2005~~2006, compared to approximately $5685.74 million at December 31, ~~2004~~2005 and $5395.96 million at ~~June~~September 30, ~~2004~~2005. ~~The~~ Our backlog for production and processing equipment fabrication was approximately $~~192~~496.94 million at ~~June~~September 30, ~~2005~~2006, compared to approximately $~~234~~287.27 million at December 31, ~~2004~~2005 and $~~211~~299.82 million at ~~June~~September 30, ~~2004~~2005.

Industry Conditions

The North American rig count increased by 1412% to 12,~~648~~185 at ~~June~~September 30, ~~2005~~2006 from 1,~~441~~949 at ~~June~~ September 30, ~~2004~~ 2005, and the twelve-month rolling average North American rig count increased by 1020% to 2,090 at September 30, 2006 from 1,~~650~~743 at September 30, 2005. In addition, the twelve-month ~~June~~rolling average U.S. wellhead natural gas price increased to $7.45 per Mcf at September 30, 2006 from $6.44 per Mcf at September 30, 2005. 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 significant growth in U.S. rentals of equipment, which we believe is primarily the result of (i) the lack of immediate availability of compression equipment in the configuration currently in demand by our customers, and (ii) an increase in the purchase of compression equipment by oil and gas companies that have available capital. However, improved market conditions have led to improved pricing and demand for compression equipment in the U.S. market. In response, we have converted one of our facilities to refurbish approximately 200,000 horsepower of idle U.S. compression assets so we can deploy these units in both our U.S. and international rental businesses. To date,

2023

~~2005 from 1,500 at June 30, 2004. In addition,~~ the ~~twelve-month~~compression ~~rolling~~units ~~average New York Mercantile Exchange wellhead natural gas price increased to $6.47 per MMBtu at June 30, 2005~~ from ~~$5.31~~ ~~per~~the ~~MMBtu~~first atphase ~~June 30,~~of ~~2004.~~this ~~Despite~~project ~~the~~have ~~increase~~primarily inbeen ~~natural~~deployed ~~gas prices and the recent~~on ~~increase~~international inprojects; ~~the rig count~~but, ~~U.S.~~we ~~natural~~expect ~~gas~~that ~~production~~this ~~levels have not significantly changed. Recently~~program, wealong ~~have~~with ~~not~~the ~~experienced~~addition ~~any significant growth in U.S. rentals~~ of ~~equipment~~new ~~by our~~rental ~~customers~~units, ~~which~~will weincrease ~~believe~~our isavailable ~~primarily the result of (i) the lack of a significant increase in~~ U.S. ~~natural~~horsepower ~~gas~~over ~~production levels, (ii)~~ the ~~lack~~next oftwelve 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 capitalmonths. ~~However,~~ ~~improved market conditions have led to improved pricing in the U.S. market.~~

U.S. Tax Position

Due to our cumulative U.S. tax losses, we ~~cannot~~can not 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. WeDuring ~~will~~the benine months ~~required~~ended ~~to record~~September 30, ~~additional~~2006, ~~valuation~~we ~~allowances~~recorded ifpre-tax ~~our~~income in the U.S. ~~deferred~~and ~~tax~~therefore ~~asset~~were ~~position~~able isto realize ~~increased and~~ the ~~“more~~ ~~likely~~benefit ~~than~~from ~~not”~~net ~~criteria~~operating ofloss ~~SFAS~~carryforwards ~~109~~and iscapital ~~not~~loss ~~met.~~carryforwards Inthat previously ~~addition,~~ we ~~have~~had ~~recorded~~provided a valuation ~~allowances~~ ~~for~~allowance ~~certain international jurisdictions~~against. If we are required to record ~~additional~~and/or release additional valuation allowances in the United States or any other ~~jurisdictions~~jurisdiction, 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.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~2005~~2006 COMPARED TO THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~2004~~2005

Summary of Business ~~Segment~~Line Results

U.S. Rentals
(in thousands)

	Three months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	8798,~~691~~030		$	8387,~~680~~703			512	%
Operating expense		3239,~~984~~557			3435,~~950~~503			(611	)%
Gross profit	$	5458,~~707~~473		$	4852,~~730~~200			12	%
Gross margin		6260	%		5860	%		40	%

U.S. rental revenue and gross profit increased during the three months ended ~~June~~September 30, ~~2005~~2006, compared to the three months ended ~~June~~September 30, ~~2004~~2005, due primarily to an improvement in market conditions that has led to an improvement in pricing. ~~Gross~~and ~~profit~~an ~~and~~increase ~~gross~~in contracted horsepower. Gross margin for the three months ended ~~June~~September 30, ~~2005 increased~~2006 ~~compared~~benefited tofrom ~~the~~price ~~three~~increases, ~~months~~but ~~ended~~was offset ~~June 30,~~by ~~2004,~~higher ~~primarily~~repair ~~due~~and tomaintenance ~~improved~~expenses ~~pricing~~ and the impact of recording increased incentive ~~our~~compensation ~~efforts~~expenses toof ~~reduce~~approximately ~~maintenance~~$1.1 million, ~~and~~including ~~repair~~the ~~expense~~impact of the adoption of SFAS 123(R).

International Rentals
(in thousands)

	Three months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	5563,~~521~~792		$	5458,~~599~~208			210	%
Operating expense		1725,~~144~~528			1319,~~967~~284			2332	%
Gross profit	$	38,~~377~~264		$	4038,~~632~~924			(62	)%
Gross margin		6960	%		7467	%		(57	)%

During the three months ended ~~June~~September 30, ~~2005~~2006, international rental revenue increased, compared to to the three months ended ~~June~~September 30, ~~2004~~2005, primarily due to increased rental activity in Venezuela, Mexico, Argentina and ~~Nigeria~~Brazil. Gross profit and gross margin decreased primarily due to higher ~~(a) additional~~repair ~~costs~~and ~~incurred~~maintenance costs in ~~the~~Venezuela, Argentina and Mexico and increased costs in ~~second~~Nigeria. ~~quarter~~Additionally, ofwe ~~2005~~were ~~related~~not able to ~~the~~recognize ~~start-up~~approximately $5.4 million of revenues related to projects in Nigeria (b)of which $4.2 ~~lower~~million ~~operating~~related ~~costs during~~to the ~~three~~Cawthorne ~~months~~Channel ~~ended~~Project) that ~~June 30,~~were ~~2004~~off-line due to the ~~timing~~unrest ofin ~~planned~~that ~~repair~~area and ~~maintenance activities~~the ~~that~~resulting ~~were~~uncertainty ~~scheduled~~related to ~~increase~~the collection inof the ~~second~~associated ~~half~~receivables ofduring ~~2004 and (c)~~ the ~~receipt~~third quarter of ~~approximately~~ $02006.~~9 million~~ inAlthough ~~additional~~we ~~contractual~~were ~~inflation adjustments in Venezuela and~~not ~~approximately~~able ~~$1.1 million~~to inrecognize ~~negotiated~~these ~~start~~revenues, upwe ~~payments~~have ~~received~~recognized ~~in Brazil during~~ the ~~second quarter~~expenses ofincurred ~~2004~~ associated with athese projects ~~compression rental project that was scheduled to start up~~ in ~~the first~~Nigeria. ~~quarter~~This ofimpacted ~~2004~~gross ~~but~~margins ~~was delayed~~ by ~~the~~approximately ~~customer~~3%.

~~Parts, Service and Used Equipment~~24 ~~(in thousands)~~

	Three months ended
	June 30,						Increase
	2005			2004			(Decrease)
Revenue	$	50,531		$	41,414			22	%
Operating expense		36,215			31,364			15	%
Gross profit	$	14,316		$	10,050			42	%
Gross margin		28	%		24	%		4	%

Parts, service and used equipment revenue, gross profit and gross margin for the three months ended June 30, 2005 were higher than the three months ended June 30, 2004 primarily due to higher parts and service revenues in the U.S. and an increase in used rental equipment and installation sales. Parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. For the three months ended June 30, 2005, parts and service revenue was $38.6 million with a gross margin of 27%, compared to $35.4 million and 28%, respectively, for the three months ended June 30, 2004. Used rental equipment and installation sales revenue for the three months ended June 30, 2005 was $11.9 million with a gross margin of 32%, compared to $6.0 million with a 2% gross margin for the three months ended June 30, 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~~Parts, Service and ~~Accessory~~Used ~~Fabrication~~Equipment (in thousands)

	Three months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	4147,~~092~~951		$	4474,~~159~~027			(735	)%
Operating expense		3637,~~587~~894			4055,~~454~~865			(1032	)%
Gross profit	$	410,~~505~~057		$	318,~~705~~162			22(45	)%
Gross margin		1121	%		825	%		3(4	)%

~~For~~Parts, service and used equipment revenue for the three months ended ~~June~~September 30, ~~2005,~~2006 ~~compression~~were ~~and~~lower than ~~accessory~~the ~~fabrication~~three ~~revenue~~months ~~decreased~~ ended September 30, 2005 primarily due to ~~decreased~~a ~~revenues~~decrease in ~~our~~used ~~high-spec~~rental ~~compression~~equipment sales. ~~business~~Gross inprofit and gross margin for the ~~second~~three ~~quarter~~months ofended ~~2005.~~September 30, 2006 were lower than ~~Gross~~the ~~profit~~three ~~and~~months ~~gross~~ended ~~margin~~September 30, ~~increased~~2005 primarily due to ~~improved~~reduced ~~pricing~~margins ~~and~~on ~~our~~used ~~focus~~rental onequipment ~~improving~~sales ~~operational~~and ~~efficiencies~~installation insales. ~~our~~Parts, ~~fabrication~~service and used equipment revenue includes two business components: in(1) parts ~~2005.~~and ~~Strong~~service ~~competition~~and in(2) used rental equipment and installation sales. For the ~~second~~three ~~quarter~~months ofended ~~2004~~September 30, ~~led~~2006, toparts ~~lower~~and ~~margins~~service onrevenue ~~orders~~was ~~received~~$43.7 million Aswith a gross margin of ~~June~~24%, compared to $40.7 30million and 25%, ~~2005~~respectively, wefor ~~had~~the three months ended ~~compression~~September 30, ~~fabrication~~2005. ~~backlog~~Used ofrental equipment and installation sales revenue for the three months ended September 30, 2006 was $674.52 million with a gross margin of (6)%, compared to $5333.93 million atwith ~~June~~a 24% gross margin for the three months ended September 30, ~~2004~~2005. 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.

Compressor and Accessory Fabrication
(in thousands)


	Three months ended
	September 30,						Increase
	2006			2005			(Decrease)
Revenue	$	90,141		$	51,798			74	%
Operating expense		74,371			44,418			67	%

Gross profit	$	15,770		$	7,380			114	%
Gross margin		17	%		14	%		3	%

For the three months ended September 30, 2006, compressor and accessory fabrication revenue, gross profit and gross margin increased, compared to the three months ended September 30, 2005, primarily due to improved market conditions that led to higher sales levels and improved pricing. As of September 30, 2006, we had compressor fabrication backlog of $192.4 million compared to $95.6 million at September 30, 2005.

Production and Processing Equipment Fabrication
(in thousands)

	Three months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	~~104~~115,~~297~~890		$	6390,~~017~~312			6628	%
Operating expense		9297,~~429~~675			5383,~~887~~146			7217	%
Gross profit	$	1118,~~868~~215		$	97,~~130~~166			30154	%
Gross margin		1116	%		148	%		(38	)%

Production and processing equipment fabrication revenue, gross profit and gross margin for the three months ended ~~June~~September 30, ~~2005 was~~2006 ~~greater~~were higher than for the three months ended ~~June~~September 30, ~~2004~~ 2005, primarily due to ~~our increased focus on both fabrication sales and our sales success ratio on new bid opportunities as well as~~ an improvement in market conditions ~~which~~that led to ~~improved~~an ~~pricing.~~increase ~~Production~~in ~~and processing equipment~~awarded ~~fabrication~~sales, ~~gross~~improved ~~margin~~pricing ~~during~~and ~~the~~an ~~second~~improvement ~~quarter~~in ~~2005~~operating ~~was positively impacted by approximately $1~~efficiencies.~~7 million~~ ~~due~~Margins ~~primarily~~for to the ~~strengthening~~three ofmonths ended ~~the U.S. Dollar~~September 30, ~~relative~~2005 towere ~~the~~also ~~Euro.~~impacted ~~Gross margin decreased primarily due to the increase in revenues~~ by ~~our~~poor ~~fabrication~~performance ~~operations~~on ina ~~Italy and~~number ~~Dubai,~~of ~~which typically have lower margins~~jobs. As of ~~June~~ September 30, ~~2005~~2006, we had a production and processing equipment fabrication backlog of $~~192~~496.9 4 million compared to $~~211~~299.82 million at ~~June~~September 30, 2005, including Belleli’s backlog of $454.0 ~~2004~~million and $203.1 million at September 30, 2006 and 2005, respectively.

~~Expenses~~25

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.

Depreciation and amortization expense for the three months ended June 30, 2005 increased to $45.2 million, compared to $43.1 million for the three months ended June 30, 2004. Depreciation and amortization increased during the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 primarily due to net additions to property, plant and equipment placed in service since June 30, 2004, principally in rental fleet operations.

The 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.

Foreign currency translation for the three months ended June 30, 2005 was a loss of $5.0 million, compared to a gain of $0.1 million for the three months ended June 30, 2004. For the three months ended June 30, 2005, foreign currency translation included $5.4 million in translation losses related to the re-measurement

ofBelleli’s ~~our~~revenue ~~international~~and ~~subsidiaries~~gross profit increased during the three months ended September 30, 2006 compared to the same period in 2005 due to improved market conditions. During the three months ended September 30, 2006, Belleli’s ~~dollar~~revenue ~~denominated~~increased ~~inter-company~~$18.2 million to $65.1 million and Belleli’s ~~debt~~gross ~~primarily~~profit ~~for~~increased ~~our~~$4.6 million ~~subsidiary~~to $7.7 million compared to the same period in ~~Italy~~2005.

Expenses

Selling, general, and administrative expense (“SG&A”) for the three months ended September 30, 2006 was $50.9 million, compared to $45.4 million during the three months ended September 30, 2005. The increase in SG&A expense is primarily due to increased incentive compensation expenses, including the impact of our adoption of SFAS 123(R), and other costs associated with the increase in business activity. As a percentage of revenues and other income, SG&A for both the three months ended September 30, 2006 and September 30, 2005 was 12%.

Depreciation and amortization expense for the three months ended September 30, 2006 decreased to $45.1 million, compared to $47.3 million for the three months ended September 30, 2005. Depreciation and amortization decreased during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005 primarily due to reduced amortization of deferred financing costs. Depreciation and amortization expense for the three months ended September 30, 2005 included a write-off of $2.5 million of unamortized debt issuance costs related to the partial redemption and repayment of our 2001A compression equipment lease obligations.

The decrease in our interest expense was primarily due to debt repayments since September 30, 2005 including the redemption of our promissory note to our general partner that had the same general terms as Hanover’s 11% Zero Coupon Subordinated Notes due 2013. Hanover redeemed its 11% Zero Coupon Subordinated Notes in March 2006 using proceeds from its public offering of $150 million 7.5% Senior Notes due 2013 and borrowings under the bank credit facility.

Foreign currency translation for the three months ended September 30, 2006 and 2005 was a loss of $0.9 million and $1.1 million, respectively. For the three months ended September 30, 2006, foreign currency translation included a $0.3 million gain related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt. For the three months ended September 30, 2005, foreign currency translation included a $2.1 million loss related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt, primarily for our subsidiary in Canada.

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

	Three Months Ended
	June 30,
	September 30,
	2005			2004
	2006			2005
Canada	$	~~422~~(61	)	$	~~179~~(1,447	)
Argentina		78(73	)		(~~227~~112	)
Venezuela		~~140~~6			~~477~~304
Italy		(~~5,698~~637	)		51(273	)
All other countries		~~103~~(140	)		~~(384~~445	)
Exchange gain (loss)	$	(~~4,955~~905	)	$	96(1,083	)

We 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~~foreign ~~remeasurement~~exchange ~~of these advances~~ on our ~~statement~~statements of operations will depend on the ~~outstanding~~amount ~~balance~~of inour ~~future periods. A 10% increase or decrease in~~net ~~the~~asset ~~Euro~~and ~~would~~liability ~~result~~positions inexposed ato ~~foreign~~ currency ~~translation~~fluctuations ~~gain~~in orfuture ~~loss of approximately $8~~periods.~~4 million.~~

Income Taxes

During the three months ended ~~June~~September 30, ~~2005~~2006, we recorded a net tax provision of $86.1 million compared to a net tax benefit of $63.23 million for the three months ended ~~June~~September 30, ~~2004~~2005. Our effective tax rate for the three months ended ~~June~~September 30, ~~2005~~2006 was ~~189~~23%, compared to ~~496~~887% for the three months ended ~~June~~September 30, ~~2004~~ 2005. The change in the effective tax rate was primarily due to our ~~the~~current U.S. ~~income~~ tax ~~impact~~position ~~of foreign~~and ~~operations,~~ the ~~relative~~change in the weight of ~~foreign~~our U.S. income to(loss), including the gain on the sale of our U.S. amine treating business that was recorded in the first quarter of 2006, compared to total income (loss) and the ~~reversal~~impact of $3change in loss jurisdictions.6 During the ~~million~~three ofmonths ended September 30, 2006, we recorded pre-tax ~~issue~~income ~~based~~in ~~reserves~~the ~~during~~U.S. and therefore were able to realize the ~~second~~benefit ~~quarter~~from ofnet operating loss carryforwards and capital loss carryforwards that previously we had provided a valuation allowance against. Our provision for the three months ended September 30, 2005 was impacted by a $3.1 million ~~These~~valuation ~~reserves~~allowance ~~were~~against ~~reversed~~U.K. deferred ~~because~~tax assets for which we nocould ~~longer~~not ~~believe~~come to the conclusion that ~~these~~realization ~~tax~~is ~~liabilities~~more ~~will~~likely bethan ~~incurred~~not.

~~Due to our cumulative U.S. losses, we cannot reach the conclusion that it is “more likely than not”~~26 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.

Discontinued Operations

During 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.

~~SIX~~Due ~~MONTHS~~to ~~ENDED~~our ~~JUNE~~cumulative 30U.S. tax losses, ~~2005~~we ~~COMPARED~~can TOnot ~~SIX~~reach ~~MONTHS~~the ~~ENDED~~conclusion ~~JUNE~~that 30it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future. In addition, ~~2004~~we have recorded valuation allowances for certain international jurisdictions. If we are required to record and/or release additional valuation allowances in the United States or any other jurisdiction, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate.

~~Summary~~NINE ofMONTHS ~~Business~~ENDED ~~Segment~~SEPTEMBER ~~Results~~30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

Summary of Business Line Results

U.S. Rentals
(in thousands)

	Six months ended
	Nine months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	~~174~~282,~~845~~746		$	~~170~~262,~~272~~548			38	%
Operating expense		67114,~~060~~377			70102,~~489~~563			(512	)%
Gross profit	$	~~107~~168,~~785~~369		$	99159,~~783~~985			85	%
Gross margin		6260	%		5961	%		3(1	)%

U.S. rental revenue and gross profit increased during the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006, compared to the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005, due primarily to an improvement in market conditions that has led to an improvement in pricing. ~~Gross~~and ~~profit~~an ~~and~~increase ~~gross~~in contracted horsepower. Gross margin for the ~~six~~nine months ended ~~June~~September 30, ~~2005 increased~~2006 decreased compared to the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005, primarily due to ~~improved~~$3.0 million ~~pricing~~of ~~and~~higher expenses related to our ~~efforts~~ program to ~~reduce~~refurbish ~~maintenance~~approximately 200,000 horsepower of idle U.S. compression equipment and ~~repair~~the ~~expense~~impact of recording increased incentive compensation expenses of approximately $2.8 million, including the impact of the adoption of SFAS 123(R), partially offset by price increases.

International Rentals
(in thousands)

	Six months ended
	Nine months ended
	June 30,						Increase
	September 30,						Increase
	2005			2004			(Decrease)
	2006			2005			(Decrease)
Revenue	$	~~109~~193,~~436~~818		$	~~106~~167,~~099~~644			316	%
Operating expense		3470,~~646~~551			2853,~~740~~930			2131	%
Gross profit	$	74123,~~790~~267		$	77113,~~359~~714			(38	)%
Gross margin		6864	%		7368	%		(54	)%

During the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006, international rental revenue and gross profit increased, compared to the ~~six~~ nine months ended ~~June~~September 30, ~~2004~~2005, primarily due to increased rental activity in ~~Nigeria~~Venezuela, Mexico and ~~Brazil~~Nigeria. Gross margin decreased primarily due to ~~(a) additional~~increased labor costs ~~incurred~~in Argentina and reduced margins in ~~the~~Brazil ~~first~~and ~~six~~Mexico. ~~months~~Additionally, we did not recognize approximately $6.3 million of ~~2005~~revenues related to projects in Nigeria (of which $5.1 million related to the ~~start~~Cawthorne Channel Project) that were off-upline ofdue ~~projects~~to the unrest in ~~Nigeria~~that area and ~~(b) lower~~the resulting ~~operating~~uncertainty ~~costs~~related ~~during~~to the ~~first~~collection ~~six~~of the associated receivables during the nine months ofended ~~2004~~September 30, ~~due~~2006. Although we were not able to ~~the~~recognize ~~timing~~these ofrevenues, ~~planned~~we ~~repair~~have recognized ~~and~~the ~~maintenance~~expenses ~~activities~~incurred ~~that~~associated ~~were~~with ~~scheduled to~~these ~~increase~~projects in ~~the~~Nigeria. ~~second~~This ~~half~~impacted ofgross margins ~~2004~~by approximately 1%.

2527

Parts, Service and Used Equipment
(in thousands)

	Six months ended
	Nine months ended
	June 30,
	September 30,						Increase
							Increase
	2006			2005			(Decrease)
	2005			2004			(Decrease)
Revenue	$	152,959		$	157,995			(3	)%
Revenue	$	83,968		$	85,796			(2	)%
Operating expense		124,017			117,140			6	%
Operating expense		61,275			64,333			(5	)%
Gross profit	$	28,942		$	40,855			(29	)%
Gross profit	$	22,693		$	21,463			6	%
Gross margin		19	%		26	%		(7	)%
Gross margin		27	%		25	%		2	%

Parts, service and used equipment revenue for the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 were lower ~~than~~ than the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005 primarily due to ~~lower~~a ~~used~~decrease ~~equipment~~in ~~and~~used ~~installation~~rental ~~sales~~equipment ~~that were partially offset by increased parts and service revenue~~sales. Gross margin ~~percentage~~ for the ~~six~~ nine months ended ~~June~~September 30, ~~2005~~2006 ~~increased~~decreased due to ~~improved~~lower margins on used ~~rental~~ equipment sales and installation sales. Parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. For the ~~six~~nine months ended ~~June~~ September 30, ~~2005~~2006, parts and service revenue was $69128.86 million with a gross margin of 2723%, compared to $60110.65 million and 2726%, respectively, for the ~~six~~nine months ended ~~June~~ September 30, ~~2004~~2005. Used rental equipment and installation sales revenue for the ~~six~~nine months ended ~~June~~ September 30, ~~2005~~2006 was $1424.24 million with a gross margin of 28(4)%, compared to $2547.25 million with a 22 25% gross margin for the ~~six~~nine months ended ~~June~~ September 30, ~~2004~~2005. Used rental equipment and installation gross margin was negatively impacted by approximately $3.0 million of cost overruns on installation jobs in the first quarter of 2006. 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~~Compressor and Accessory Fabrication (in thousands)

	Six months ended
	Nine months ended
	June 30,
	September 30,						Increase
							Increase
	2006			2005			(Decrease)
	2005			2004			(Decrease)
Revenue	$	214,960		$	125,414			71	%
Revenue	$	73,616		$	72,309			2	%
Operating expense		179,546			110,622			62	%
Operating expense		66,204			66,367			0	%
Gross profit	$	35,414		$	14,792			139	%
Gross profit	$	7,412		$	5,942			25	%
Gross margin		16	%		12	%		4	%
Gross margin		10	%		8	%		2	%

For the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006, ~~compression~~compressor and accessory fabrication revenue, gross ~~profit~~ profit and gross margin increased primarily due to ~~increased sales activity and~~ improved market conditions ~~and~~ ~~our~~that ~~focus~~led onto ~~improving~~higher sales ~~operational~~levels ~~efficiencies~~and better pricing. As of ~~June~~September 30, ~~2005~~2006, we had ~~compression~~ compressor fabrication backlog of $67192.54 million compared to $5395.96 million at ~~June~~September 30, ~~2004~~2005.

Production and Processing Equipment Fabrication
(in thousands)

	Six months ended
	Nine months ended
	June 30,
	September 30,						Increase
							Increase
	2006			2005			(Decrease)
	2005			2004			(Decrease)
Revenue	$	298,162		$	284,180			5	%
Revenue	$	193,868		$	116,446			66	%
Operating expense		255,841			254,700			0	%
Operating expense		171,554			101,583			69	%
Gross profit	$	42,321		$	29,480			44	%
Gross profit	$	22,314		$	14,863			50	%
Gross margin		14	%		10	%		4	%
Gross margin		12	%		13	%		(1	)%

Production and processing equipment fabrication revenue for the ~~six~~nine months ended ~~June~~September 30, 2006 ~~2005~~ was ~~greater~~ higher than for the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005, primarily due to ~~our~~an ~~increased~~improvement in ~~focus~~market conditions that led to an increase in awarded sales, improved pricing and an improvement in operating efficiencies. Gross margins improved due to improved market conditions and poor performance on a few jobs in the first nine months of 2005. As of September 30, 2006, we had a production and processing equipment fabrication backlog of $496.4 million compared to $299.2 million at September 30, 2005, including Belleli’s backlog of $454.0 million and $203.1 million at September 30, 2006 and 2005, respectively.

26Belleli’s revenue and gross profit increased during the nine months ended September 30, 2006 compared to the same period in 2005 due to improved market conditions. During the nine months ended September 30, 2006, Belleli’s revenue increased $25.0 million to $164.2 million and Belleli’s gross profit increased $6.7 million to $17.4 million compared to the same period in 2005.

~~sales~~Gain ~~and an improvement in market conditions. We have focused~~ on ~~improving~~sale 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.~~business ~~Dollar, relative to the Euro. As of June 30, 2005, we had a production~~ and ~~processing equipment~~other ~~fabrication backlog of $192.9 million compared to $211.8 million at June 30, 2004.~~income

Gain on sale of business and other income for the nine months ended September 30, 2006 increased to $42.2 million, compared to $2.7 million for the nine months ended September 30, 2005. The increase was primarily due to a pre-tax gain of $28.4 million on the sale of our U.S. amine treating business in the first quarter of 2006 and an $8.0 million pre-tax gain on the sale of assets used in our fabrication facility in Canada during the second quarter of 2006.

Expenses

SG&A for the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 was $86148.18 million, compared to $82131.35 million for in the ~~six~~ nine months ended ~~June~~September 30, ~~2004~~2005. The increase ~~was~~in SG&A expense is primarily due to increased ~~an increase in~~ compensation ~~costs.~~expenses, ~~As a~~including ~~percentage~~the impact of ~~revenue,~~our ~~SG&A~~adoption ~~for~~of ~~the~~SFAS ~~six~~123(R), ~~months~~and ~~ended~~other costs ~~June 30,~~associated ~~2005~~with ~~and~~the ~~2004~~increase ~~was~~in ~~13%~~business ~~and 15%, respectively~~activity. As a percentage of ~~sales~~revenues and other income, SG&A ~~expense~~for ~~decreased~~the ~~due~~nine tomonths ~~our~~ended ~~efforts~~September 30, to2006 ~~manage SG&A costs~~ and ~~drive~~September 30, an2005 ~~increased~~was ~~level~~12% ofand ~~business with existing infrastructure~~13%, respectively.

Depreciation and amortization expense for the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 ~~increased~~decreased to $90129.5 7 million, compared to $84137.98 million for the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005. Depreciation and amortization ~~increased~~decreased during the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 as compared to the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005 primarily due to ~~net~~reduced ~~additions~~amortization toof ~~property,~~deferred financing ~~plant~~costs and ~~equipment~~reduced ~~placed~~amortization inrelated to installation costs that were fully amortized. ~~service~~Depreciation ~~since~~and ~~June~~amortization expense for the nine months ended September 30, ~~2004,~~2005 ~~principally~~included ina write-off ~~rental~~of ~~fleet~~$2.5 million ~~operations~~of unamortized debt issuance costs related to the partial redemption and repayment of our 2001A compression equipment lease obligations.

~~The~~Other ~~decrease~~expense infor ~~our~~the ~~interest~~nine ~~expense~~months ~~was~~ended ~~primarily~~September 30, ~~due~~2006 increased to a$1.2 million, ~~decrease~~compared into $0.5 million for the ~~average~~nine ~~debt~~months ~~balance~~ended September 30, ~~partially~~ ~~offset~~2005. byWe anrecorded ~~increase~~a in$1.2 million ~~the~~charge ~~overall~~to other ~~effective~~expense ~~interest~~in ~~rate~~the onsecond ~~outstanding~~quarter ~~debt~~of 2006 related to ~~9.0% from~~the ~~8.3%~~write-down ~~during~~of ~~the~~a ~~six~~pre-acquisition receivable ~~months~~for ~~ended~~Belleli ~~June 30,~~to ~~2005~~our ~~and~~estimated ~~2004,~~net ~~respectively~~realizable value.

~~Foreign~~The ~~currency~~decrease ~~translation~~in ~~for~~our ~~the~~interest ~~six~~expense ~~months~~was ~~ended~~primarily ~~June~~due to debt repayments since September 30, 2005 and ~~was~~the aredemption ~~loss~~in March 2006 of ~~$5.2 million, compared~~our promissory note to aour ~~gain~~general ofpartner ~~$1.2 million~~that ~~for~~had the ~~six~~same general ~~months~~terms ~~ended~~as ~~June 30,~~Hanover’s ~~2004.~~11% ~~For~~Zero ~~the~~Coupon ~~six~~Subordinated ~~months~~Notes ~~ended June 30,~~due ~~2005,~~2013. ~~foreign~~Hanover ~~currency~~redeemed ~~translation~~its ~~included~~11% Zero ~~$8.9 million~~Coupon Subordinated Notes in ~~translation~~March 2006 ~~losses~~using ~~related~~proceeds ~~to the~~from ~~re-measurement~~its public offering of ~~our~~$150 million ~~international~~7.5% ~~subsidiaries’~~Senior ~~dollar~~Notes ~~denominated~~due ~~inter-company~~2013 ~~debt, primarily~~and ~~for~~borrowings ~~our~~under ~~subsidiary~~the inbank ~~Italy~~credit facility.

Foreign currency translation for the nine months ended September 30, 2006 was a gain of $2.8 million, compared to a loss of $6.3 million for the nine months ended September 30, 2005. The increase in foreign exchange gain is primarily due to the strengthening of the Euro against the U.S. Dollar for the nine months ended September 30, 2006 as compared to the strengthening of the U.S. Dollar against the Euro for the nine months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, foreign currency translation included a $1.9 million gain and an $11.0 million loss, respectively, related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt, primarily for our subsidiary in Italy. During the nine months ended September 30, 2005, we recorded the impact of the change in the fixed exchange rate made by the Venezuelan government.

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

	Six Months Ended
	Nine Months Ended
	June 30,
	September 30,
	2005			2004
	2006			2005
Canada	$	~~195~~(1,078	)	$	~~233~~(1,252	)
Argentina		~~474~~(1,020	)		~~(448~~362	)
Venezuela		~~3,149~~581			13,~~433~~453
Italy		(83,~~892~~617	)		92(9,165	)
All other countries		~~(152~~728	)		~~(141~~293	)
Exchange gain/(loss)	$	(52,~~226~~828	)	$	1(6,~~169~~309	)

~~Income Taxes~~29

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 U.S. income and the reversal of $3.6 million of tax issue based reserves during the

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

~~Due~~During tothe ~~our~~nine ~~cumulative~~months Uended September 30, 2006, we recorded a net tax provision of $24.S9 million compared to $0.6 million ~~losses~~for the nine months ended September 30, we2005. ~~cannot~~Our ~~reach~~effective tax rate for the ~~conclusion~~nine ~~that~~months itended isSeptember 30, ~~“more~~2006 ~~likely~~was ~~than~~26%, ~~not”~~compared to 177% for the nine months ended ~~that~~September 30, ~~certain~~2005. ofThe change in the effective tax rate was primarily due to our current U.S. ~~deferred~~ tax position ~~assets~~and ~~will~~the bechange ~~realized~~ in the ~~future.~~weight Weof ~~will~~our beU.S. ~~required~~income ~~to record~~(loss), ~~additional~~including ~~valuation~~the ~~allowances~~gain ifon the sale of our U.S. ~~deferred~~amine ~~tax~~treating ~~asset~~business ~~position~~that iswas ~~increased~~recorded ~~and~~in the ~~“more~~ ~~likely~~first ~~than~~quarter ~~not”~~of ~~criteria~~2006, ofcompared ~~SFAS~~to ~~109~~total income is(loss) and ~~not~~the ~~met~~impact of change in loss jurisdictions. InDuring ~~addition~~the nine months ended September 30, 2006, we ~~have~~ recorded ~~valuation allowances~~pre-tax ~~for~~income ~~certain~~in ~~international~~the ~~jurisdictions~~U.S. Ifand wetherefore ~~are~~were ~~required~~able to ~~record~~realize ~~additional~~the ~~valuation~~benefit ~~allowances~~from innet ~~the~~operating ~~United~~loss ~~States~~carryforwards orand ~~any~~capital ~~other~~loss ~~jurisdictions,~~carryforwards ~~our~~that ~~effective~~previously ~~tax~~we ~~rate will~~had beprovided ~~impacted,~~a ~~perhaps~~valuation ~~substantially,~~allowance ~~compared~~against. toOur tax provision for the ~~statutory~~nine ~~rate~~months ended September 30, 2006 includes approximately $3.0 million Wein ~~believe~~deferred ~~that~~tax weexpense ~~will~~related ~~likely~~to the enactment of the beTexas ~~required~~Margins totax. ~~record~~Our ~~additional~~provision ~~valuation~~for ~~allowances~~the innine ~~future~~months ~~periods~~ended September 30, ~~unless~~2005 ~~and~~was ~~until~~impacted weby ~~are~~a ~~able~~$3.1 million tovaluation ~~generate~~allowance ~~additional~~against ~~taxable~~U.K. ~~earnings~~deferred ortax ~~implement~~assets ~~additional~~for ~~tax~~which ~~planning~~we ~~strategies~~could ~~that would~~not ~~minimize~~come orto the ~~eliminate~~conclusion ~~the~~that ~~amount~~realization ofis ~~such~~more ~~additional~~likely ~~valuation~~than ~~allowance~~not.

~~Discontinued~~Due ~~Operations~~to our cumulative U.S. tax losses, we can not 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. In addition, we have recorded valuation allowances for certain international jurisdictions. If we are required to record and/or release additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate.

~~During~~Cumulative ~~the~~Effect ~~fourth quarter 2002, we reviewed our business lines and Hanover’s Board~~ of ~~Directors approved~~Accounting management’s recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. Income (loss) from discontinued operations decreased $2.7 million to a net loss of $0.7 million during the six months ended June 30Change, ~~2005,~~Net ~~from income~~ of ~~$2.0 million~~Tax ~~during the six 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.~~

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

LIQUIDITY AND CAPITAL RESOURCES

Our unrestricted cash balance was $3155.71 million at ~~June~~September 30, ~~2005~~2006 compared to $3848.12 million at December 31, ~~2004~~2005. Working capital increased to $~~364~~365.36 million at ~~June~~September 30, ~~2005~~2006 from $~~312~~363.3 ~~million~~ million at December 31, ~~2004~~2005. The increase in working capital was primarily attributable to an increase in ~~inventory~~ ~~and~~accounts ~~costs~~receivable and ~~estimated~~inventory, ~~earnings~~substantially offset by an increase in ~~excess~~advance billings ofand billings on uncompleted contracts ~~and~~in ~~a decrease~~excess inof ~~accrued~~costs ~~liabilities~~and estimated earnings.

Our 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
	Nine Months Ended
	June 30,
	September 30,
	2005			2004
	2006			2005
Net cash provided by (used in) continuing operations:
Operating activities	$	3687,~~710~~869		$	5379,~~823~~383
Investing activities		(4997,~~057~~574	)		(2566,~~251~~553	)
Financing activities		715,~~132~~161			(4320,~~302~~075	)
Effect of exchange rate changes on cash and cash equivalents		~~(952~~991	)		(~~490~~835	)
Net cash provided by (used in) discontinued operations		~~(189~~431	)		~~10,475~~(156	)
Net change in cash and cash equivalents	$	(6,~~356~~878	)	$	(48,~~745~~236	)

The ~~decrease~~increase in cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, ~~2005~~2006 as compared to the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005 was primarily due to ancash generated from improved operating performance. The increase inwas ~~costs~~substantially ~~and~~offset by the payment of $86.1 ~~estimated~~million ~~earnings~~of ~~versus~~accreted ~~billings~~interest from August 31, 2001 to March 31, 2006 on ~~uncompleted~~our ~~projects~~note to our general partner that had the same general terms as Hanover’s 11% Zero Coupon Subordinated Notes, which Hanover redeemed in the second quarter of 2006. The accreted interest was previously included in the outstanding balance of our note to our general partner that had the same general terms as Hanover’s 11% Zero Coupon Subordinated Notes.

The increase in cash used in investing activities during the ~~six~~nine months ended ~~June~~September 30, ~~2005 as~~2006 as compared to the ~~six~~nine months ended ~~June~~September 30, ~~2004~~2005 was primarily attributable to ana $70.0 million increase in net capital expenditures during the ~~first~~nine ~~six~~ months ofended ~~2005~~September 30, 2006. InThe increase ~~addition,~~in ~~during~~cash ~~the~~used ~~first~~in ~~quarter~~investing ofactivities ~~2004,~~was ~~we received~~partially ~~$4.7 million~~offset inby proceeds received from the sales ~~sale~~ of our ~~interest~~amine treating business in ~~Hanover~~the ~~Measurement~~first ~~Services~~quarter of 2006 and our Canadian fabrication ~~Company,~~assets LPin the second quarter of 2006.

~~The increase in cash provided by financing activities was primarily due to net borrowings on our~~30 ~~revolving credit facility partially offset by payments on the 2000B equipment lease obligation.~~

The ~~decrease~~increase in cash provided by ~~discontinued~~financing ~~operations~~activities was ~~principally~~primarily ~~related~~due to the ~~sale~~use of our bank ~~Canadian~~credit ~~rental~~facility ~~fleet~~for ~~which~~a ~~was~~portion ~~discontinued~~of ~~and~~the ~~sold~~redemption inof ~~November 2004~~our note to our general partner that had the same general terms as Hanover’s 11% Zero Coupon Subordinated Notes, including the payment of accreted interest.

We may carry out new customer projects through rental fleet additions and other related capital expenditures. We generally invest funds necessary to make these rental fleet additions when our idle equipment cannot economically fulfill a project’s requirements and the new equipment expenditure is matched with long-term contracts whose expected economic terms exceed our return on capital targets. We currently plan to spend approximately $~~125~~225 million to $~~150~~250 million on net capital expenditures during ~~2005,~~2006 including (1) rental equipment fleet additions and (2) approximately $4065 million to $5075 million on equipment maintenance capital. ~~During~~Projected ~~February 2005, we~~maintenance ~~repaid~~capital for 2006 includes the cost of our ~~2000B~~program ~~compressor~~to ~~equipment~~refurbish ~~lease~~approximately ~~obligations~~200,000 ~~using~~horsepower ~~borrowings~~of idle ~~from~~U.S. compression equipment. In addition, our ~~bank~~purchase ~~credit~~order commitments as of September 30, ~~facility~~2006 are approximately $337 million. ~~Subsequent~~Other than the increase in purchase commitments and the refinancing completed in March 2006 which is discussed below, subsequent to December 31, ~~2004~~2005, there have been no other significant changes to our obligations to make future payments under existing contracts.

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~~capital ~~equity~~contributions and advances from Hanover and issuing long-term debt.

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

~~Our~~In ~~bank~~March 2006, ~~credit~~Hanover ~~facility~~completed ~~provides~~a ~~for~~public aoffering of $~~350~~150 million ~~revolving~~aggregate ~~credit~~principal ~~facility~~amount inof 7.5% Senior Notes due 2013, which ~~advances bear~~we ~~interest~~have atguaranteed (on a~~) the~~ ~~greater~~senior ofsubordinated basis. Hanover used the ~~administrative~~net ~~agent’s~~proceeds ~~prime~~from ~~rate~~the offering of $146.6 million, ~~the~~together ~~federal~~with ~~funds~~borrowings under our bank ~~effective~~credit ~~rate~~facility, orto ~~the~~redeem ~~base~~Hanover’s CD11% ~~rate,~~Zero orCoupon ~~(b) a~~Subordinated ~~eurodollar~~Notes ~~rate,~~due ~~plus~~March 31, in2007. ~~each~~In connection ~~case~~with the redemption, awe ~~specified margin~~expensed (6$5.0%9 million ~~weighted~~related ~~average~~to ~~interest~~the ~~rate~~call atpremium. ~~June~~Hanover paid approximately $242 30million to redeem its 11% Zero Coupon Subordinated Notes, ~~2005)~~including the call premium. AThe ~~commitment~~offering ~~fee~~and ~~equal~~sale toof 0the 7.~~625~~5% Senior Notes were made pursuant to an automatic shelf ~~times~~registration statement on Form S-3 filed with the ~~average~~Securities ~~daily~~and ~~amount~~Exchange Commission. Hanover may redeem up to 35% of the ~~available~~7.5% ~~commitment~~Senior ~~under~~Notes using the ~~bank~~proceeds ~~credit~~of ~~facility~~certain isequity offerings completed ~~payable~~before ~~quarterly~~April 15, to2009 ~~the~~at ~~lenders~~a ~~participating~~redemption inprice of 107.5% of the ~~bank~~principal ~~credit~~amount, ~~facility~~plus accrued and unpaid interest to the redemption date. ~~Our~~In ~~bank~~addition, ~~credit facility~~Hanover ~~contains~~may ~~certain~~redeem ~~financial~~some ~~covenants~~or ~~and~~all ~~limitations~~of the 7.5% Senior Notes at any time on, ~~among~~or ~~other~~after ~~things~~April 15, ~~indebtedness,~~2010 at certain redemption prices together with ~~liens~~accrued interest, ~~leases~~if ~~and~~any, ~~sales~~to the date of ~~assets~~redemption.

AsOur ofbank ~~June 30,~~credit ~~2005,~~facility ~~HCLP~~provides ~~and~~for ~~Hanover~~a ~~were~~$450 million inrevolving ~~compliance~~credit ~~with~~in ~~all~~which ~~material covenants and other~~U.S. ~~requirements~~dollar-denominated ~~set~~advances ~~forth~~bear ininterest at our ~~bank credit facility~~option, at (a) the ~~indentures~~greater ~~and~~of ~~agreements~~the ~~related~~Administrative Agent’s toprime ~~our compression~~rate ~~equipment~~or ~~lease~~the ~~obligations~~federal ~~and~~funds ~~indentures~~effective ~~and~~rate ~~agreements~~plus ~~relating~~0.50% to(“ABR”), ~~our~~or ~~other~~(b) the Eurodollar ~~long-term~~rate ~~debt.~~(“LIBOR”), ~~While~~in ~~there~~each iscase noplus ~~assurance,~~an weapplicable ~~believe~~margin ~~based~~ranging onfrom ~~our~~0.375% ~~current~~to ~~projections~~1.5%, ~~for~~with ~~2005~~respect to ~~that~~ABR ~~HCLP~~loans, and ~~Hanover~~1.375% ~~will~~to be2.5%, ~~in compliance~~ with ~~the~~respect ~~financial~~to ~~covenants~~LIBOR loans, in ~~these~~each ~~agreements.~~case Adepending ~~default~~on ~~under our~~Hanover’s ~~bank~~consolidated ~~credit~~leverage ~~facility~~ratio. orEuro-denominated aadvances ~~default~~bear ~~under~~interest ~~certain~~at of the ~~various~~Eurocurrency ~~indentures~~rate, ~~and agreements of our~~plus ~~debt~~an ~~obligations~~applicable ~~would~~margin ~~trigger~~ranging infrom ~~some~~1.375% ~~situations~~to ~~cross-default~~2.5%, ~~provisions~~depending ~~under~~on ~~our~~Hanover’s ~~bank~~consolidated ~~credit~~leverage ~~facilities~~ratio. orA ~~the~~commitment ~~indentures~~fee ~~and~~ranging ~~agreements~~from ~~relating~~0.375% to ~~certain~~0.5%, ofdepending ~~our~~on ~~debt~~Hanover’s ~~obligations.~~consolidated ~~Such~~leverage ~~defaults~~ratio, ~~would~~times ~~have~~the aaverage ~~material~~daily ~~adverse~~amount ~~effect~~of onthe ~~our~~available ~~liquidity,~~commitment ~~financial position~~under ~~and~~the ~~operations. Additionally, our~~ bank credit facility ~~requires that the minimum tangible~~is ~~net~~payable ~~worth~~quarterly ofto ~~HCLP~~the ~~not~~lenders beparticipating ~~less~~in ~~than~~the ~~$702 million.~~bank ~~This~~credit ~~may limit distributions by HCLP to Hanover in future periods~~facility.

WeAs ~~expect~~of ~~that~~September 30, ~~our~~2006, ~~bank~~HCLP ~~credit facility~~ and ~~cash~~Hanover ~~flow~~were ~~from~~in ~~operations~~compliance ~~will~~with ~~provide~~all uscovenants ~~adequate~~and other ~~capital~~requirements ~~resources~~set toforth ~~fund~~in our ~~estimated~~bank ~~level~~credit offacility, ~~capital~~the ~~expenditures~~indentures ~~for~~and ~~the~~agreements ~~short~~related ~~term.~~to ~~Our bank~~our ~~credit~~compression ~~facility~~equipment ~~permits~~lease usobligations toand ~~incur~~the ~~indebtedness,~~indentures ~~subject~~and toagreements ~~covenant~~relating ~~limitations, up~~ to aour ~~$350~~other ~~million~~long-term ~~credit~~debt. ~~limit~~While ~~(with~~there ~~letters~~is ofno ~~credit~~assurance, ~~treated~~we asbelieve ~~indebtedness),~~based ~~plus,~~on inour ~~addition~~current toprojections ~~certain~~for 2006 ~~other~~that ~~indebtedness,~~HCLP anand ~~additional~~Hanover ~~(1)~~will ~~$40 million~~be in ~~unsecured~~compliance ~~indebtedness,~~with ~~(2)~~the ~~$50 million~~financial ~~of nonrecourse~~covenants ~~indebtedness~~in ofthese ~~unqualified~~agreements. ~~subsidiaries,~~A default ~~and~~under ~~(3)~~our ~~$25 million~~bank ofcredit ~~secured~~facility ~~purchase~~or ~~money indebtedness.~~a Asdefault ofunder ~~June 30,~~certain ~~2005,~~of wethe ~~had~~various ~~$77.0 million~~indentures ofand agreements ~~borrowings~~would ~~and~~in ~~$104.5 million~~some ~~of outstanding~~situations ~~letters~~trigger ofcross-default ~~credit~~provisions under our bank credit facility, or ~~resulting~~the inindentures ~~$168.5 million~~and agreements relating to certain of our other debt obligations. Such defaults ~~additional~~would ~~capacity~~have ~~under~~a ~~such~~material ~~bank~~adverse ~~credit~~effect ~~facility~~on atour ~~June 30~~liquidity, ~~2005~~financial position and operations.

InAs ~~addition~~of toSeptember 30, ~~purchase money and similar obligations~~2006, ~~the~~we ~~indentures~~had ~~and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, Hanover’s 8~~$69.~~625%~~0 million ~~Senior~~of ~~Notes~~outstanding ~~due~~borrowings ~~2010~~ and ~~Hanover’s 9~~$164.0%9 million ~~Senior Notes due 2014 permit us to incur~~of ~~indebtedness~~outstanding upletters toof ~~the $350 million~~ credit ~~limit~~ under our bank credit facility, ~~plus~~resulting (in $216.1) anmillion of additional ~~$75 million~~capacity inunder ~~unsecured~~such ~~indebtedness~~bank ~~and~~credit ~~(2) any~~facility ~~additional~~at ~~indebtedness~~September 30, so2006. ~~long~~We ~~as, after~~expect ~~incurring~~that ~~such~~our ~~indebtedness,~~bank credit ~~Hanover’s~~facility ~~ratio~~and ofcash ~~the~~flow ~~sum~~from ofoperations ~~consolidated~~will ~~net~~provide ~~income~~us ~~before interest~~adequate ~~expense,~~capital ~~income~~resources ~~taxes,~~to ~~depreciation~~fund our estimated

2931

~~expense,~~level ~~amortization~~ of ~~intangibles,~~capital ~~certain~~expenditures ~~other non-cash~~for ~~charges~~the ~~and~~short ~~rental~~term. ~~expense~~Our tobank ~~total~~credit ~~fixed~~facility ~~charges~~permits ~~(all~~us asto ~~defined and adjusted by the~~incur ~~agreements)~~indebtedness, orsubject ~~Hanover’s~~to ~~“coverage~~covenant ~~ratio~~limitations,” isup ~~greater than 2.25~~ to ~~1.0 and no default or event of default has occurred or would occur as~~ a ~~consequence~~$450 million ofcredit ~~incurring~~limit, ~~such~~plus, ~~additional~~in ~~indebtedness and~~addition ~~the application of the proceeds thereon. The indentures and agreements related~~ to ~~our~~certain ~~2001A~~other ~~and 2001B compression equipment lease obligations~~indebtedness, ~~Hanover’s~~an ~~8.625%~~additional ~~Senior~~(a) ~~Notes~~$50 million ~~due~~in ~~2010~~unsecured ~~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,~~(b) ~~Hanover’s coverage ratio was less than 2.25 to~~$100 ~~1.0,~~million ~~and therefore as~~ of ~~such date we could not incur~~ indebtedness ~~other~~of ~~than~~international ~~under~~subsidiaries ~~our bank credit facility~~ and up(c) ~~to an additional~~ $~~59.9~~35 million inof ~~unsecured~~secured ~~indebtedness~~purchase ~~and certain other~~money ~~permitted~~ indebtedness~~, including certain refinancing indebtedness~~.

AsWhile all of ~~June 30~~the agreements related to our long-term debt do not contain the same financial covenants, ~~2005~~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, Hanover’s 7.5% Senior Notes due 2013 and Hanover’s 9.0% Senior Notes due 2014 permit us at a minimum, (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility, ~~ratings~~plus an additional $75 million in unsecured indebtedness, (2) to incur additional indebtedness so long as, ~~assigned~~after byincurring ~~Moody~~such indebtedness, Hanover’s ~~Investors~~ratio ~~Service~~of the sum of consolidated net income before interest expense, ~~Inc.~~income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (~~“Moody~~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 thereof and (3) to incur certain purchase money and ~~Standard~~similar &obligations. ~~Poor~~The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, Hanover’s ~~Ratings~~8.625% ~~Services~~Senior ~~(“Standard~~Notes &due 2010, ~~Poor~~Hanover’s”) ~~were:~~7.5% Senior Notes due 2013 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 September 30, 2006, Hanover’s coverage ratio exceeded 2.25 to 1.0, and therefore as of such date it would allow us to incur a limited amount of indebtedness in addition to our bank credit facility and the additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing of indebtedness allowed by such bank credit facility.

			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-

In September 2006, Moody’s Investors Service, Inc. (“Moody’s”) announced the implementation of its new Probability-of-Default (PD) and Loss-Given-Default (LGD) rating methodologies for the U.S. and Canadian oilfield service and refining and marketing sectors. As of September 30, 2006, Hanover’s credit ratings as assigned by Moody’s and Standard & Poor’s Ratings Services (“Standard & Poor’s”) were:


			Standard
	Moody’s		& Poor’s
Outlook		Positive		Stable
Senior implied rating		B1		BB-
Liquidity rating		SGL-3		—
2001A equipment lease notes, interest at 8.5%, due September 2008		Ba3, LGD 3		B+
2001B equipment lease notes, interest at 8.75%, due September 2011		Ba3, LGD 3		B+
4.75% convertible senior notes due 2008		B3, LGD 5		B
4.75% convertible senior notes due 2014		B3, LGD 5		B
8.625% senior notes due 2010		B2, LGD 4		B
9.0% senior notes due 2014		B2, LGD 4		B
7.5% senior notes due 2013		B2, LGD 4		B
7.25% convertible subordinated notes due 2029*		B3, LGD 6		B-


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

Neither Hanover nor HCLP have any credit rating downgrade provisions in their ~~debt~~respective debt agreements or the agreements related to their compression equipment lease obligations that would accelerate their maturity dates. However, a downgrade in Hanover’s credit rating could materially and adversely affect Hanover’s and HCLP’s ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. Should this occur, we might seek alternative sources of funding. In addition, our significant leverage puts us at greater risk of default under one or more of our existing debt agreements if we experience an adverse change to our financial condition or results of operations. Our ability to reduce our leverage depends upon market and economic conditions, as well as our ability to execute liquidity-enhancing transactions such as sales of non-core assets or ~~our~~Hanover equity securities.

~~Derivative Financial Instruments. We use derivative financial instruments to minimize the risks~~32 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.

For derivative instruments designated as fair value hedges, the gain or loss is recognized in earnings in the period of change together with the gain or loss on the hedged item attributable to the risk being hedged. For derivative instruments designated as cash flow hedges, the effective portion of the derivative gain or loss is

~~included~~Derivative inFinancial ~~other~~Instruments. ~~comprehensive~~We ~~income,~~use ~~but~~derivative ~~not~~financial ~~reflected~~instruments to minimize the risks inand/or costs associated with financial activities by managing our ~~consolidated~~exposure ~~statement~~to interest rate fluctuations on a portion of ~~operations~~our ~~until~~debt ~~the~~and ~~corresponding~~leasing ~~hedged~~obligations. ~~transaction~~Our primary objective is ~~settled~~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 ~~ineffective~~cash ~~portion~~flow from hedges is ~~reported~~classified in ~~earnings~~our ~~immediately~~consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

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~~For derivative instruments designated as fair value hedges, the gain or loss is recognized in earnings in the period of change together with the gain or loss on the hedged item attributable to the risk being hedged. The following table summarizes, by individual hedge instrument, these interest rate swaps as of ~~June~~ September 30, ~~2005~~2006 (dollars in thousands):

							Fair Value of
		Fixed Rate to be					Swap at
Floating Rate to be Paid	Maturity Date	Received			Notional Amount		~~June~~September 30, ~~2005~~2006
Six Month LIBOR +4.72%	December 15, 2010		8.625	%	$	100,000	$	(24,~~435~~687	)
Six Month LIBOR +4.64%	December 15, 2010		8.625	%	$	100,000	$	(24,~~232~~443	)

As of ~~June~~September 30, ~~2005~~2006, a total of approximately $01.6 million in accrued liabilities, $47.1 5 million in long-term liabilities and a $49.71 million reduction of ~~long-term~~ debt due to our general partner 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~~September 30, ~~2005~~2006, we estimated that the effective rate for the six-month period ending in December ~~2005~~2006 would be approximately 89.89%.

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

							Fair Value of
							Swap at
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	$	—

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.

International Operations. 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

31In 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 amount of our assets (primarily working capital) exposed to currency fluctuation in Venezuela in future periods.

For the nine months ended September 30, 2006, our Argentine operations represented approximately 4% of our revenue and 6% of our gross profit. For the nine months ended September 30, 2006, our Venezuelan operations represented approximately 9% of our revenue and 15% of our gross profit. At September 30, 2006, we had approximately $14.2 million and $23.4 million in accounts receivable related to our Argentine and Venezuelan operations, respectively.

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

Foreign currency translation for the nine month ended September 30, 2006 was a gain of $2.8 million, compared to a loss of $6.3 million for the nine months ended September 30, 2005. The increase in foreign exchange gain is primarily due to strengthening of the Euro against the U.S. Dollar for the nine months ended September 30, 2006 as compared to the strengthening of the U.S. Dollar against the Euro for the nine months ended September 30, 2005. During the nine months ended September 30, 2005, we recorded the impact of the change in the fixed exchange rate made by the Venezuelan government.

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

For the six months ended June 30, 2005, our Argentine operations represented approximately 5% of our revenue and 8% of our gross profit. For the six months ended June 30, 2005, our Venezuelan operations represented approximately 10% of our revenue and 17% of our gross profit. At June 30, 2005, we had approximately $14.3 million and $22.5 million in accounts receivable related to our Argentine and Venezuelan operations.

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

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.

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

	Six Months Ended
	Nine Months Ended
	June 30,
	September 30,
	2005			2004
	2006			2005
Canada	$	~~195~~(1,078	)	$	~~233~~(1,252	)
Argentina		~~474~~(1,020	)		~~(448~~362	)
Venezuela		~~3,149~~581			13,~~433~~453
Italy		(83,~~892~~617	)		92(9,165	)
All other countries		~~(152~~728	)		~~(141~~293	)
Exchange gain/(loss)	$	(52,~~226~~828	)	$	1(6,~~169~~309	)

We 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~~foreign ~~remeasurement~~exchange ~~of these advances~~ on our ~~statement~~statements of operations will depend on the ~~outstanding~~amount ~~balance~~of inour ~~future~~net asset ~~periods.~~and Aliability ~~10%~~positions ~~increase~~exposed orto ~~decrease~~currency influctuations ~~the Euro would result~~ in afuture ~~foreign currency translation gain or loss of approximately $8~~periods.~~4 million.~~

We are involved in a project tocalled ~~build~~the ~~and~~Cawthorne ~~operate~~Channel ~~barge-mounted~~Project ~~gas~~in ~~compression~~Nigeria, ~~and~~a ~~gas~~project ~~processing~~in which ~~facilities~~Global toGas beand ~~stationed~~Refining inLtd., a Nigerian ~~coastal~~entity ~~waterway~~ (“~~Cawthorne Channel Project~~Global”) ashas ~~part~~contracted ~~of the~~with ~~performance of a contract between~~ an affiliate of The Royal/Dutch ~~Shell~~ Group (“Shell”) to process gas from some of Shell’s Nigerian oil and gas fields. ~~Global~~Pursuant ~~Gas~~to ~~and~~a ~~Refining~~contract ~~Limited~~between (“Hanover and Global”), we rent and operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian ~~company~~coastal waterway. We ~~have substantially~~ completed ~~the~~ the building of the required barge-mounted facilities. ~~Under~~and ~~the~~our ~~terms~~portion of athe ~~series~~project ofwas ~~contracts between~~declared ~~Global~~commercial ~~and~~by ~~us,~~Global ~~Shell,~~in ~~and~~November 2005. ~~several~~The ~~other~~contract ~~counterparties,~~runs ~~respectively,~~for ~~Global~~a isten-year ~~responsible~~period ~~for~~which ~~the development~~commenced of when the ~~overall~~ project. Inwas ~~light~~declared ofcommercial, ~~the~~subject ~~political~~to ~~environment~~a inpurchase ~~Nigeria~~option, by Global’s, that is exercisable ~~capitalization~~for ~~level,~~the ~~inexperience~~remainder ~~with~~of ~~projects~~the term of athe ~~similar~~contract. ~~nature~~Under ~~and~~the ~~lack~~terms of a ~~successful~~series ~~track record~~of ~~with~~contracts ~~respect~~between Global toand ~~this~~Hanover, ~~project~~Shell, and several other ~~factors~~counterparties, ~~there~~respectively, ~~is no assurance that~~ Global ~~will~~is beprimarily ~~able~~responsible tofor ~~comply~~the ~~with~~overall ~~its obligations under these contracts~~project.

~~This~~In ~~project~~the ~~and~~first ~~our~~nine ~~other~~months ~~projects~~of in2006, ~~Nigeria~~violence ~~are subject to numerous risks~~ and ~~uncertainties associated~~local ~~with~~unrest ~~operating~~significantly increased in Nigeria. ~~Such~~As a ~~risks~~result ~~include,~~of ~~among~~these ~~other things~~events, ~~political,~~Global ~~social~~declared ~~and economic~~Force ~~instability,~~Majeure ~~civil~~with ~~uprisings,~~respect ~~riots,~~to ~~terrorism,~~ the ~~taking~~Cawthorne ~~of property without fair~~Channel ~~compensation~~Project. ~~and~~Global’s ~~governmental~~ actions ~~that~~followed ~~may~~a ~~restrict~~declaration ~~payments or the movement~~ of ~~funds~~Force orMajeure ~~result in~~by ~~the~~Shell ~~deprivation~~under ofits contract ~~rights. Any of these risks, as well as other risks normally associated~~ with ~~a major construction project, could materially delay the anticipated commencement~~ ofGlobal. ~~operations~~We ofhave ~~the~~notified ~~Cawthorne~~Global ~~Channel~~that ~~Project~~we ordispute ~~adversely~~their ~~impact~~declaration ~~any~~ of ~~our~~Force ~~operations~~Majeure inand ~~Nigeria.~~that ~~Any~~we ~~such~~believed ~~delays~~local ~~could~~conditions ~~affect~~did ~~the~~not ~~timing~~relieve ~~and~~Global’s ~~decrease~~obligations ~~the~~to ~~amount~~make ofmonthly ~~revenue we may realize~~rental ~~from~~payments ~~our~~or ~~investments~~monthly inoperations ~~Nigeria.~~and Ifmaintenance ~~Shell~~fee ~~were~~payments to ~~terminate~~us ~~its~~under our contract with Global ~~for any~~. ~~reason,~~The orCawthorne ifChannel weProject ~~were~~was tobrought ~~terminate~~back ~~our~~on-line ~~involvement~~ in ~~the~~April 2006 ~~project,~~and weoperated ~~would~~through ~~be required to find an~~early June 2006.

32In early June and again in October 2006, the area experienced unrest and violence and gas delivery from Shell to the Project was stopped in June 2006. The Project did not receive any gas from Shell during the third quarter and Shell has not completed repairs on its gathering system. As a result, the Cawthorne Channel Project has not operated since early June 2006.

This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks including risks arising from the recent increase in violence and local unrest, could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. If Shell does not provide gas to the project or if Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the Cawthorne Channel Project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment and receivables related to this project. At September 30, 2006, we had net assets of approximately $75.3 million related to projects in Nigeria, a majority of which is related to our investment and accounts receivable for the Cawthorne Channel Project.

~~alternative~~Additionally, ~~use~~due ~~for~~to the ~~barge~~environment ~~facility which could result~~ in aNigeria, ~~write-down~~Global’s ofcapitalization ~~our~~level, ~~investment.~~inexperience Atwith ~~June 30,~~projects ~~2005, we had an investment~~ of ~~approximately~~a ~~$67.2 million~~similar innature ~~projects~~and inlack ~~Nigeria,~~of a ~~substantial~~ ~~majority~~successful oftrack ~~which~~record ~~related~~with respect to ~~the~~this ~~Cawthorne~~project ~~Channel~~and other ~~Project.~~factors, Wethere ~~currently~~is ~~anticipate making~~no anassurance ~~approximately~~that ~~$2.5 million~~Global ~~additional~~can ~~investment~~satisfy inits ~~the~~obligations ~~Cawthorne~~under ~~Channel~~its ~~Project during~~various ~~2005. In addition~~contracts, weincluding ~~have~~its ~~approximately~~contract ~~$4.2 million associated~~ with ~~advances to, and our investment in, Global~~Hanover.

~~Several~~NEW ~~compressor~~ACCOUNTING ~~rental projects with a customer in Latin America are scheduled to terminate in~~PRONOUNCEMENTS accordance with the terms of 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 the process of negotiating extensions of these lease agreements with this customer. While we hope to renew these contracts on favorable terms, we can provide no assurance that these contracts will be 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.

~~RECENT~~In ~~ACCOUNTING~~May 2003, ~~PRONOUNCEMENTS~~the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position 150-3 that delayed the effective date for certain types of financial instruments. The adoption of the guidance currently provided in SFAS 150 did not have a material effect on our consolidated results of operations or cash flow. However, upon further guidance from the FASB, we may be required to classify as debt approximately $12.0 million in sale leaseback obligations that, as of September 30, 2006, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

InThese ~~May 2003,~~minority ~~the~~interest ~~Financial~~obligations ~~Accounting~~represent ~~Standards~~the ~~Board~~equity ~~(“FASB”) issued Statement~~ of ~~Financial Accounting~~the ~~Standards~~entities ~~(“SFAS”)~~that ~~No. 150,~~lease ~~“Accounting for Certain Financial Instruments with~~compression ~~Characteristics~~equipment ofto ~~both Liabilities and Equity” (“SFAS 150”)~~us. ~~SFAS~~In ~~150~~accordance ~~changes~~with the ~~accounting~~provisions ~~for certain~~of ~~financial~~our ~~instruments~~compression ~~that,~~equipment ~~under~~lease ~~previous guidance~~obligations, the ~~issuers could account for as~~ equity~~. SFAS~~ ~~150~~certificate ~~requires~~holders ~~that~~are ~~those~~entitled ~~instruments~~to bequarterly ~~classified~~or assemi-annual ~~liabilities~~yield inpayments ~~statements~~on ~~of financial~~the ~~position.~~aggregate ~~SFAS~~outstanding ~~150~~equity iscertificates. ~~effective~~As ~~for~~of ~~financial instruments entered into or modified after May~~September 3130, ~~2003~~ 2006, ~~and~~the ~~otherwise~~yield isrates ~~effective~~on ~~for~~the outstanding ~~interim~~equity ~~periods~~certificates ~~beginning~~ranged ~~after~~from ~~June 15, 2004~~13.3% Onto ~~November~~ 13.7~~, 2003~~%. ~~the~~Equity ~~FASB~~certificate ~~issued~~holders ~~Staff~~may ~~Position~~receive a ~~150-3~~return ~~that~~of ~~delayed~~capital ~~the~~payment ~~effective~~upon ~~date~~termination ~~for certain types~~ of ~~financial~~ ~~instruments.~~the Welease door ~~not~~our ~~believe~~purchase ~~the adoption~~ of the ~~guidance~~leased ~~currently provided in SFAS~~compression ~~150~~equipment ~~will~~after ~~have~~full apayment ~~material~~of ~~effect~~all ondebt ~~our~~obligations ~~consolidated results~~ of ~~operations~~the orentities ~~cash~~that ~~flow.~~lease ~~However, we~~compression ~~may~~equipment beto ~~required~~us. toAt ~~classify~~September 30, as2006, ~~debt~~the ~~approximately~~carrying ~~$17.1 million~~value inof ~~sale~~the ~~leaseback~~minority ~~obligations~~interest ~~that,~~obligations asapproximated ofthe ~~June 30,~~fair ~~2005,~~market ~~were~~value ~~reported~~of asassets ~~“Minority~~that ~~interest”~~would onbe ~~our~~required ~~consolidated~~to ~~balance~~be ~~sheet pursuant~~transferred to ~~FIN~~redeem 46the minority interest obligations.

~~These~~In ~~minority~~November 2004, ~~interest obligations represent~~ the ~~equity~~FASB ofissued ~~the~~SFAS ~~entities that lease compression equipment to us~~No. 151, In“Inventory ~~accordance~~Costs ~~with~~— ~~the~~an ~~provisions~~Amendment of ~~our~~ARB ~~compression equipment lease obligations~~No. 43, ~~the~~Chapter 4” ~~equity~~(“SFAS ~~certificate~~151”). ~~holders~~This ~~are~~standard ~~entitled~~provides toclarification ~~quarterly~~that orabnormal ~~semi-annual~~amounts ~~yield~~of ~~payments on the~~idle ~~aggregate~~facility ~~outstanding~~expense, ~~equity~~freight, ~~certificates.~~handling ~~As of June 30~~costs, ~~2005,~~and ~~the~~spoilage ~~yield~~should ~~rates~~be onrecognized ~~the~~as ~~outstanding~~current-period ~~equity~~charges. ~~certificates~~Additionally, ~~ranged~~this ~~from~~standard ~~11.1%~~requires tothat ~~11.5%.~~allocation ~~Equity~~of ~~certificate~~fixed ~~holders~~production ~~may~~overheads ~~receive~~to athe costs ~~return~~ of ~~capital~~ ~~payment~~conversion ~~upon~~be ~~termination~~based ofon the ~~lease~~normal orcapacity ~~our purchase~~ of the ~~leased~~production ~~compression~~facilities. ~~equipment after~~The ~~full~~provisions ~~payment~~ of this ~~all~~standard ~~debt~~are ~~obligations~~effective offor ~~the~~inventory ~~entities that~~costs ~~lease~~incurred ~~compression~~during ~~equipment~~fiscal toyears ~~us.~~beginning Atafter June 30 15, 2005,. ~~the~~The ~~carrying~~adoption ~~value~~ of ~~the~~SFAS ~~minority interest~~151 ~~obligations~~did ~~approximated~~not ~~the~~have ~~fair~~a ~~market~~material ~~value~~effect ofon ~~assets~~our ~~that~~consolidated ~~would~~results ~~be required to be~~of ~~transferred~~operations, tocash ~~redeem~~flows ~~the~~or ~~minority~~financial ~~interest obligations~~position.

In ~~November~~December 2004, the FASB issued SFAS No. ~~151~~123 (Revised 2004), “~~Inventory~~Share-Based ~~Costs — an Amendment of ARB No. 43, Chapter 4~~Payment” (“SFAS ~~151~~ 123(R)”). This standard ~~provides~~addresses ~~clarification~~the ~~that~~accounting ~~abnormal~~for ~~amounts~~share-based ofpayment ~~idle~~transactions in which an ~~facility~~enterprise ~~expense,~~receives ~~freight,~~employee ~~handling~~services ~~costs,~~in ~~and~~exchange ~~spoilage~~for ~~should~~(a) equity beinstruments ~~recognized~~of asthe ~~current-period~~enterprise or ~~charges.~~(b) liabilities ~~Additionally,~~that ~~this~~are ~~standard~~based ~~requires~~on ~~that~~the ~~allocation~~fair value of ~~fixed~~the ~~production~~enterprise’s ~~overhead~~equity toinstruments ~~the~~or that may ~~costs~~be settled by the issuance of ~~conversion~~such beequity ~~based~~instruments. onSFAS 123(R) eliminates the ~~normal~~ability ~~capacity~~to account offor share-based compensation transactions using the ~~production~~intrinsic ~~facilities~~value method under Accounting Principles Board (APB) Opinion No. 25, ~~The~~Accounting ~~provisions~~for ofStock Issued to Employees, and generally ~~this~~requires ~~standard~~instead ~~are~~that ~~effective~~such transactions be accounted for ~~inventory~~using ~~costs~~a ~~incurred~~fair-value-based ~~during~~method. ~~fiscal~~SFAS 123(R) ~~years~~is ~~beginning~~effective as of the first interim or annual reporting period that begins after June 15, 2005. WeHowever, doon ~~not~~April 14, ~~expect~~2005, the ~~adoption~~Securities ofand Exchange Commission announced that the effective ~~new~~date ~~standard~~of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R) did not have a material ~~effect~~impact on our financial ~~consolidated~~position or cash flows, but impacted our results of operations,. ~~cash~~See ~~flows~~Note or2 ~~financial~~for ~~position~~a discussion of the impact of the adoption of SFAS 123(R).

In December 2004, the FASB issued ~~SFAS~~Statement of Financial Accounting Standards No. ~~123~~153, ~~(Revised~~“Exchange ~~2004)~~of Nonmonetary Assets, ~~“Share-Based~~an ~~Payment~~amendment of APB Opinion No. 29” (“SFAS ~~123(R)~~ 153”). ~~This~~SFAS ~~standard~~153 ~~addresses~~is ~~the accounting for share-~~based ~~payment~~on ~~transactions in which an~~the ~~enterprise~~principle ~~receives~~that ~~employee services in~~ exchange ~~for (a) equity instruments~~ of ~~the~~nonmonetary ~~enterprise~~assets ~~or (b) liabilities~~should ~~that~~be ~~are~~measured based on the fair market value of ~~the enterprise’s equity instruments or that may~~ ~~be settled by~~ the ~~issuance~~assets ~~of such equity instruments~~exchanged. SFAS ~~123(R)~~153 eliminates the ~~ability~~exception ~~to account~~of ~~for~~nonmonetary ~~share-based~~exchanges ~~compensation~~of ~~transactions~~similar productive ~~using~~assets ~~the~~and ~~intrinsic~~replaces ~~value~~it ~~method~~with ~~under~~a ~~Accounting Principles~~general ~~Board~~exception ~~(APB) Opinion No. 25, Accounting~~ for ~~Stock~~exchanges ~~Issued~~of tononmonetary ~~Employees,~~assets ~~and generally~~that ~~would~~do ~~require~~not ~~instead~~have ~~that~~commercial ~~such transactions be accounted for using a fair-value-based method~~substance. SFAS ~~123(R)~~ 153 is effective asfor ofnonmonetary ~~the~~asset ~~first~~exchanges ~~interim~~in orfiscal periods ~~annual~~beginning ~~reporting period that begins~~ after June 15, 2005. ~~However,~~The onadoption ~~April 14, 2005, the Securities and Exchange Commission announced that the effective date~~ of SFAS ~~123(R)~~153 ~~will~~did benot ~~changed~~have toa ~~the~~material ~~first~~impact ~~annual~~on our ~~reporting~~consolidated ~~period~~results ~~that~~of ~~begins after June 15~~operations, ~~2005.~~cash ~~The~~flows ~~adoption~~or offinancial ~~SFAS123(R) is not~~position.

33In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application for reporting a change in accounting principle in the absence of explicit transition requirements specific to newly adopted accounting principles, unless impracticable. Corrections of errors will continue to be reported under SFAS 154 by restating prior periods as of the beginning of the first period presented. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years

~~expected~~beginning toafter ~~have a significant effect on our financial position or cash flows~~December 15, ~~but will impact our results of operations~~2005. AnThe ~~illustration~~adoption of ~~the~~ ~~impact~~SFAS on154 ~~our~~did ~~net~~not ~~income~~have ~~and~~a ~~earnings~~material ~~per~~impact ~~share~~on ~~is presented in the “Stock Options and~~our ~~Stock-Based~~consolidated ~~Compensation”~~results ~~section~~ of ~~Note~~operations, 1cash ~~assuming~~flows weor ~~had~~financial ~~applied the fair value recognition provisions of SFAS 123(R) using the Black-Scholes methodology~~position.

In ~~December~~February ~~2004~~2006, the FASB issued Statement of Financial Accounting Standards No. ~~153~~155, “~~Exchange of~~Accounting ~~Nonmonetary~~for ~~Assets,~~Certain Hybrid Instruments — an amendment of ~~APB~~FASB ~~Opinion~~Statements No. 29133 and 140” (“SFAS ~~153~~155”). SFAS ~~153~~155 is(a) permits ~~based~~fair onvalue ~~the~~remeasurement for any hybrid financial instrument that contains an ~~principle~~embedded derivative that ~~exchange~~otherwise ofwould ~~nonmonetary~~require ~~assets~~bifurcation, ~~should~~(b) clarifies bewhich ~~measured~~interest-only strips ~~based~~and onprincipal-only ~~the~~strips ~~fair~~are ~~market~~not ~~value~~subject to the requirements of FASB No. 133, (c) ~~the~~establishes a requirement to evaluate interests in securitized financial assets ~~exchanged.~~to ~~SFAS~~identify interests ~~153~~that ~~eliminates~~are ~~the~~freestanding ~~exception~~derivatives ofor ~~nonmonetary~~that ~~exchanges~~are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of ~~similar~~credit risk in ~~productive~~the ~~assets~~form of subordination are not embedded derivatives, and ~~replaces~~(e) amends itSFAS ~~with~~No. 140 to eliminate the prohibition on a ~~general~~qualifying ~~exception~~special-purpose ~~for~~entity ~~exchanges~~from ofholding ~~nonmonetary~~a ~~assets~~derivative instrument that dopertains ~~not~~to ~~have~~a ~~commercial~~beneficial ~~substance~~interest other than another derivative financial instrument. SFAS ~~153~~155 is effective for ~~nonmonetary~~all ~~asset~~financial ~~exchanges~~instruments inacquired ~~fiscal periods~~or issued after the beginning of an entity’s first fiscal year that begins after ~~June~~September 15, ~~2005~~2006. We are currently evaluating the provisions of SFAS ~~153~~155 and do not believe that our adoption will have a material impact on our consolidated results of operations, cash flows or financial position.

In ~~March~~June ~~2005~~2006, the FASB issued FASB Interpretation No. 4748, “Accounting for ~~Conditional~~Uncertainty ~~Asset Retirement~~in ~~Obligations~~Income Taxes” (“FIN 4748”). ~~FIN~~This 47interpretation ~~requires~~is ~~uncertainty~~effective ~~about~~for ~~the~~fiscal ~~timing~~years orbeginning ~~method~~after ofDecember 15, ~~settlement~~2006. ofThis ainterpretation ~~conditional~~clarifies ~~asset~~the ~~retirement~~accounting ~~obligation~~for touncertainty bein ~~factored~~income ~~into~~taxes ~~the~~recognized ~~measurement~~in ~~of the~~a ~~liability~~company’s ~~when~~financial ~~sufficient~~statements ~~information~~in ~~exists~~accordance with FASB Statement No. 109, ~~FIN~~Accounting 47for ~~also~~Income Taxes. ~~clarifies~~This ~~when~~interpretation anprescribes ~~entity~~a ~~would~~recognition ~~have sufficient~~threshold ~~information~~and tomeasurement ~~reasonably~~attribute ~~estimate~~for the financial ~~fair~~statement ~~value~~recognition and measurement of ana ~~asset~~tax ~~retirement~~position ~~obligation.~~taken ~~FIN 47~~or isexpected ~~effective~~to nobe ~~later~~taken ~~than~~in a ~~the~~tax ~~end~~return. ofThe ~~fiscal~~interpretation ~~years~~also ~~ending~~provides ~~after~~guidance ~~December 15~~on derecognition, ~~2005.~~classification, ~~We are~~interest ~~currently~~and ~~evaluating~~penalties, ~~the~~accounting ~~impact~~in ~~FIN~~interim 47periods, ~~will~~disclosure, ~~have~~and ontransition. ~~our~~We ~~consolidated~~are ~~results~~currently evaluating ofthe ~~operations,~~provisions ~~cash flows~~of orFIN ~~financial position~~48.

In ~~May~~September ~~2005~~2006, the FASB issued Statement of Financial Accounting Standards No. ~~154~~157, “~~Accounting Changes~~Fair ~~and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3~~Value Measurements” (“SFAS ~~154~~ 157”). SFAS ~~154~~157 ~~requires~~provides ~~retrospective application for reporting~~ a ~~change~~single indefinition ~~accounting principle in the absence~~ of ~~explicit~~fair ~~transition~~value, ~~requirements~~establishes ~~specific to newly adopted accounting principles,~~a ~~unless~~framework ~~impracticable.~~for ~~Corrections~~measuring offair ~~errors~~value ~~will~~and ~~continue~~requires toadditional bedisclosures ~~reported~~about ~~under~~the ~~SFAS~~use ~~154 by restating prior periods as~~ of ~~the~~fair ~~beginning~~value to ofmeasure ~~the~~assets ~~first~~and ~~period presented~~liabilities. SFAS ~~154~~157 is effective for ~~accounting~~financial ~~changes~~statements ~~and~~issued ~~corrections~~for ~~of errors made in~~ fiscal years beginning after ~~December~~November 15, ~~2005.~~ We2007, ~~are~~and ~~currently~~interim ~~evaluating~~periods ~~the~~within ~~provisions~~those offiscal ~~SFAS~~years. ~~154~~We ~~and do not believe that our adoption~~are ~~will~~currently ~~have~~evaluating athe ~~material~~provisions ~~impact on our consolidated results~~ of ~~operations,~~SFAS ~~cash flows or financial position~~157.

~~ITEM~~ Item 4. ~~CONTROLS~~Controls ~~AND~~and ~~PROCEDURES~~Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of ~~June~~September 30, ~~2005~~2006. Based on the evaluation, our principal executive officer and ~~principal~~ principal financial officer ~~believe~~have concluded 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 disclosureeffective.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our ~~second~~third quarter of fiscal ~~2005~~2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

~~ITEM~~ Item 1. ~~LEGAL~~Legal ~~PROCEEDINGS~~Proceedings

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

34Item 1A. Risk Factors

There have been no material changes in our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

~~ITEM~~Item 6: ~~5. OTHER INFORMATION~~Exhibits

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.

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.

On 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	~~10.1~~	2006 Long Term Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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	~~10.2~~	Form of Award Notice Time Vested Restricted Stock (incorporated by reference to Exhibit 10.2 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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	~~10.3~~	Form of Award Notice Time Vested Restricted Stock Units (stock settled) (incorporated by reference to Exhibit 10.3 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	~~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	~~10.4~~	Form of Award Notice Performance Vested Restricted Stock (incorporated by reference to Exhibit 10.4 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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	~~10.5~~	Form of Award Notice Performance Vested Restricted Stock Units (stock settled) (incorporated by reference to Exhibit 10.5 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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	~~10.6~~	Form of Award Notice Cash Incentive Plan (incorporated by reference to Exhibit 10.6 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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	~~10.7~~	Schedule of Compensation for Non-Employee Directors (incorporated by reference to Exhibit 10.8 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 27, 2006)	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*
	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 *
	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**
	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**
	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.


*		Filed herewith.

**		Furnished herewith.

3637

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

HANOVER COMPRESSION LIMITED PARTNERSHIP

37Date: November 9, 2006



By:	/s/ JOHN E. JACKSON
	John E. Jackson
	President and Chief Executive Officer

Date: November 9, 2006



By:	/s/ LEE E. BECKELMAN
	Lee E. Beckelman
	Senior Vice President and Chief Financial Officer

EXHIBIT INDEX

10.1		~~Change~~2006 ofLong ~~Control~~Term ~~and~~Cash ~~Severance~~Incentive ~~Agreement~~Plan ~~dated July 29, 2005 between John E. Jackson and the Company~~ (incorporated by reference to Exhibit 10.1 to Hanover Compressor Company’s ~~Quarterly~~Current Report on Form 108-QK ~~for the quarter ended June 30, 2005, as~~ filed with the SEC on ~~August~~July 327, ~~2005~~2006).
10.2		Form of ~~Change~~Award ofNotice ~~Control~~Time ~~Agreement~~Vested ~~dated~~Restricted ~~July~~Stock 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~~Current Report on Form 108-QK ~~for the quarter ended June 30, 2005, as~~ filed with the SEC on ~~August~~July 327, ~~2005~~2006).
10.3		~~Letter~~Form toof ~~Brian~~Award ~~Matusek~~Notice ~~regarding~~Time ~~employment~~Vested ~~terms~~Restricted Stock Units (stock settled) (incorporated by reference to Exhibit 10.13 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on ~~April~~July 1827, ~~2005~~2006).
10.4		~~Amendment~~Form ~~No. 2 dated as~~ of ~~July~~Award 8,Notice ~~2005,~~Performance toVested ~~Purchase~~Restricted ~~Agreement~~Stock 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 10.14 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 1327, ~~2005~~2006).
10.5		~~First~~Form ~~Amendment~~of toAward ~~the~~Notice ~~Hanover~~Performance ~~Compressor~~Vested ~~Company~~Restricted ~~1998~~ Stock ~~Option~~Units ~~Plan~~(stock settled) (incorporated by reference to Exhibit 10.25 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 1327, ~~2005~~2006).
10.6		~~First~~Form ~~Amendment~~of toAward ~~the~~Notice ~~Hanover~~Cash ~~Compressor~~Incentive ~~Company 1999 Stock Option~~ Plan (incorporated by reference to Exhibit 10.36 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 1327, ~~2005~~2006).
10.7		~~First~~Schedule ~~Amendment~~of toCompensation ~~the~~for ~~Hanover~~Non-Employee ~~Compressor~~Directors ~~Company 2001 Equity Incentive Plan~~ (incorporated by reference to Exhibit 10.48 to Hanover Compressor Company’s Current Report on Form 8-K filed with the SEC on July 1327, ~~2005~~2006).
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*
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*
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**
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**
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.


*		Filed herewith.

**		Furnished herewith.

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