UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended ~~December~~June 3130, ~~2004~~2005

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

For the transition period from to

Commission File Numbers: 001-15843 ~~333-48279~~

333-48279

UNIVERSAL COMPRESSION HOLDINGS, INC.

UNIVERSAL COMPRESSION, INC.

(Exact name of registrants as specified in their charters)

DELAWARE		13-3989167
TEXAS		74-1282680
(States or Other Jurisdictions of Incorporation of Organization)		(I.R.S. Employer Identification Nos.)
(States or Other Jurisdictions of Incorporation or Organization)		(I.R.S. Employer Identification Nos.)
4444 BRITTMOORE ROAD HOUSTON, TEXAS		77041
(Address of Principal Executive Offices)		(Zip Code)

(713) 335-7000

(Registrants’ telephone number, including area code)

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o (Universal Compression Holdings, Inc.)

Yes o No ý (Universal Compression, Inc.)

UNIVERSAL COMPRESSION, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.

As of ~~February~~July 728, 2005, there were 3132,~~634~~222,~~710~~ 857 shares of Universal Compression Holdings, Inc.’s common stock, $0.01 par value, outstanding and 4,910 shares of Universal Compression, Inc.’s common stock, $10.00 par value, outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

	December 31, 2004			March 31, 2004
	June 30, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	5336,~~958~~499		$	~~121~~38,~~189~~723
Accounts receivable, net of allowance for bad debts of $3,408 and $3,189 as of December 31, 2004 and March 31, 2004, respectively	95,853			79,587
Accounts receivable, net of allowance for bad debts of $3,244 and $2,747 as of June 30, 2005 and March 31, 2005, respectively	107,003			116,270
Current portion of notes receivable	~~171~~121			~~709~~129
Inventories, net of reserve for obsolescence of $12,534 and $12,041 as of December 31, 2004 and March 31, 2004, respectively	85,893			89,968
Inventories, net of reserve for obsolescence of $11,305 and $10,981 as of June 30, 2005 and March 31, 2005, respectively	90,963			95,394
Current deferred tax asset	6,~~701~~138			56,~~819~~138
Other	1112,~~548~~946			13,~~938~~206
Total current assets	~~254~~253,~~124~~670			~~311~~269,~~210~~860
Contract compression equipment	1,461,803			1,344,218
Property, plant and equipment:
Other property	139,884			117,128
Contract compression equipment	1,510,204			1,485,637
Accumulated depreciation and amortization	(279,881		)	(216,569		)
Other property	155,007			141,114
Net property, plant and equipment	1,321,806			1,244,777
Accumulated depreciation and amortization	(325,894		)	(300,968		)
Goodwill	401,144			390,371
Net property, plant and equipment	1,339,317			1,325,783
Notes receivable	1,038			444
Goodwill	401,354			401,278
Other non-current assets	25,072			25,649
Notes receivable	1,088			1,038
Total assets	$	2,003,184		$	1,972,451
Other non-current assets	20,251			24,799
Total assets	$	2,015,680		$	2,022,758
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	4048,~~700~~374		$	4457,~~948~~942
Accrued liabilities	40,~~069~~151			4037,~~765~~862
Unearned revenue	2721,~~023~~654			2532,~~596~~201
Accrued interest	172,~~215~~529			105,~~933~~619
Current portion of long-term debt and capital lease obligations	1025,~~118~~453			1420,~~369~~400
Total current liabilities	~~135~~138,~~125~~161			~~136~~154,~~611~~024
Capital lease obligations	~~388~~305			~~997~~347
Long-term debt	~~836~~823,~~551~~705			~~869~~837,~~076~~349
Non-current deferred tax liability	~~163~~164,~~137~~848			~~149~~158,~~554~~017
Derivative financial instrument used for hedging purposes	6,376			14,423
Derivative financial instruments used for hedging purposes	5,576			6,283
Other liabilities	57,~~273~~059			25,~~555~~066
Total liabilities	1,~~146~~139,~~850~~654			1,~~173~~161,~~216~~086
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock	~~316~~321			~~313~~320
Treasury stock	(11		)	(11		)
Additional paid-in capital	~~740~~753,~~938~~481			~~734~~751,~~124~~898
Deferred compensation	(26,~~286~~939		)	(17,~~256~~438		)
Other comprehensive loss	(22,132		)	(35,344		)
Accumulated other comprehensive loss	(23,981		)	(18,116		)
Retained earnings	~~139~~153,~~509~~155			~~101~~135,~~409~~019
Total stockholders’ equity	~~856~~876,~~334~~026			~~799~~861,~~235~~672
Total liabilities and stockholders’ equity	$	2,~~003~~015,~~184~~680		$	12,~~972~~022,~~451~~758

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003			2004			2003
	2005			2004
Revenue:
Domestic contract compression	$	7579,~~170~~672		$	7170,~~067~~973		$	~~219,321~~		$	~~209,983~~
International contract compression	2730,~~810~~300			2022,~~789~~746			~~73,428~~			~~61,193~~
Fabrication	5055,~~823~~836			4257,~~092~~362			~~165,957~~			~~121,030~~
Aftermarket services	3841,~~873~~876			3633,~~219~~793			~~110,728~~			~~105,872~~
Total revenue	~~192~~207,~~676~~684			~~170~~184,~~167~~874			~~569,434~~			~~498,078~~
Costs and expenses:
Domestic contract compression—direct costs	27,~~071~~776			2526,~~073~~265			~~80,134~~			~~76,662~~
International contract compression—direct costs	67,~~427~~907			4,~~981~~913			~~16,752~~			~~13,991~~
Fabrication—direct costs	4852,~~605~~972			3853,~~480~~336			~~153,713~~			~~111,649~~
Aftermarket services—direct costs	3033,~~917~~047			2926,~~053~~612			~~87,733~~			~~83,082~~
Depreciation and amortization	2325,~~611~~633			2122,~~504~~673			~~69,407~~			~~63,411~~
Selling, general and administrative	1920,~~224~~438			1618,~~101~~215			~~55,684~~			~~49,351~~
Interest expense, net	1612,~~821~~460			1716,~~994~~817			~~49,792~~			~~55,870~~
Debt extinguishment costs	—			—475			~~475~~			~~14,397~~
Gain on termination of interest rate swaps	—			—(3,197		)	~~(3,197~~		)	—
Foreign currency (gain) loss	(238		)	(466		)	286			(631		)
Foreign currency gain	(837		)	(358		)
Other income, net	(589		)	(1,630		)	(228		)	(2,525		)
Other loss, net	352			417
Facility consolidation costs	—			—			—			1,821
Total costs and expenses	179,748			166,168
Total costs and expenses	171,849			151,090			510,551			467,078
Income before income taxes	27,936			18,706
Income before income taxes	20,827			19,077			58,883			31,000
Income tax expense	9,800			6,921
Income tax expense	6,702			7,344			20,783			11,937
Net income	$	18,136		$	11,785
Net income	$	14,125		$	11,733		$	38,100		$	19,063
Weighted average common and common equivalent shares outstanding:
Weighted average common and common equivalent shares outstanding:
Basic	31,800			31,248
Basic	31,406			30,841			31,330			30,800
Diluted	32,563			31,880
Diluted	32,082			31,243			31,998			31,087
Earnings per share—Basic	$	0.57		$	0.38
Earnings per share—Basic	$	0.45		$	0.38		$	1.22		$	0.62
Earnings per share—Diluted	$	0.56		$	0.37
Earnings per share—Diluted	$	0.44		$	0.38		$	1.19		$	0.61

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003
	2005			2004
Cash flows from operating activities:
Net income	$	3818,~~100~~136		$	1911,~~063~~785
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization	6925,~~407~~633			6322,~~411~~673
Non-cash gain from interest rate swap settlement	~~(3,197~~—		)	—(3,197		)
Loss on early extinguishment of debt	~~475~~—			~~14,397~~475
Gain on asset sales	(1,410		)	(1,877		)
Loss on asset sales	457			287
Amortization of debt issuance costs	~~3,240~~573			31,~~215~~038
Amortization of deferred compensation	~~661~~499			~~460~~203
Deferred taxes provision	136,~~333~~152			45,~~796~~142
Increase in receivables	(15,647		)	(24,908		)
(Increase) decrease in receivables	9,267			(13,208		)
Decrease in inventories	7,297			3,467
(Increase) decrease in inventories	4,431			(4,898		)
Increase (decrease) in accounts payables	(4,728		)	8,915
Decrease in accounts payables	(9,568		)	(136		)
Increase in accrued liabilities	2,~~497~~512			82,~~215~~649
Increase in unearned revenue	1,427			31,702
Increase (decrease) in unearned revenue	(10,547		)	1,817
Increase in accrued interest	6,282			8,032
Increase (decrease) in accrued interest	(3,090		)	6,411
Other	(5,514		)	(1,115		)
Decrease in other current assets and liabilities	(1,342		)	(3,921		)
Net cash provided by operating activities	112,223			137,773
Other	1,447			(2,768		)
Net cash provided by operating activities	44,560			24,352
Cash flows from investing activities:
Additions to property, plant and equipment	(~~105~~41,~~382~~886		)	(6820,~~471~~345		)
Proceeds from sale of property, plant and equipment	184,~~067~~400			321,~~335~~910
Cash paid for acquisitions	(59,959		)	(761		)
Cash paid for acquisitions, net of cash acquired	—			(3,099		)
Net cash used in investing activities	(~~147~~37,~~274~~486		)	(3621,~~897~~534		)
Cash flows from financing activities:
Principal repayments of long-term debt	(9910,~~238~~623		)	(~~229~~85,~~750~~000		)
Borrowings under revolving credit facility	67,000			—
Debt extinguishment premium and costs	—			(400		)
Proceeds from issuance of debt	—			175,000
Proceeds from common stock issuance	1,198			1,094
Debt extinguishment premium and costs	(400		)	(12,492		)
Payments on capital lease agreements	(156		)	(1,294		)
Interest rate swap settlement	(3,067		)	—
Net cash used in financing activities	(9,581		)	(85,600		)
Debt issuance costs	—			(4,640		)
Effect of exchange rate changes on cash and cash equivalents	283			(285		)
Proceeds from common stock issuance	3,926			—
Net decrease in cash and cash equivalents	(2,224		)	(83,067		)
Payments on capital lease agreements	(1,294		)	—
Cash and cash equivalents at beginning of period	38,723			121,189
Net cash used in financing activities	(33,073		)	(71,882		)
Cash and cash equivalents at end of period	$	36,499		$	38,122
Effect of exchange rate changes on cash and cash equivalents	893			855
Net increase (decrease) in cash and cash equivalents	(68,124		)	28,994
Cash and cash equivalents at beginning of period	121,189			71,693
Cash and cash equivalents at end of period	$	53,958		$	101,542

See accompanying notes to unaudited consolidated financial statements.

UNIVERSAL COMPRESSION HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~December~~June 3130, ~~2004~~2005

1. Basis of Presentation

These unaudited consolidated financial statements should be read in conjunction with the consolidated ~~financial~~ financial statements presented in the Universal Compression Holdings, Inc. (the “Company”) Annual Report on Form 10-K for the year ended March 31, ~~2004~~2005. That ~~report~~ report contains a more comprehensive summary of the Company’s major accounting policies. In the opinion of management, the accompanying unaudited consolidated financial statements contain all appropriate adjustments, all of which are ~~normally~~ normally recurring adjustments unless otherwise noted, considered necessary to ~~present~~ present fairly the financial position of the Company and its consolidated ~~subsidiaries~~ subsidiaries and the results of operations and cash flows for the respective periods. Operating results for the three-month ~~and~~period ~~nine-month periods~~ ended ~~December~~June 3130, ~~2004~~ ~~are~~2005 are not necessarily indicative of the results that may be expected for the ~~fiscal~~ fiscal year ending March 31, ~~2005~~2006.

Net income (loss) per share, basic and diluted, is calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings ~~per~~Per ~~share~~Share.”

The dilutive effect of stock ~~options~~ options outstanding for the three ~~and nine~~ months ended ~~December~~June 3130, 2005 and 2004 ~~was~~were ~~675~~763,000 shares and ~~668~~632,000 shares, respectively. ~~The~~For ~~dilutive effect of stock options outstanding for~~ the three ~~and nine~~ months ended ~~December~~June 3130, ~~2003,~~2005 ~~was 402,000 shares~~ and ~~278,000 shares, respectively. For the three and nine months ended December 31,~~ 2004, outstanding stock ~~options of 43,000 and 340,000~~ ~~shares, respectively, were excluded from the computation of diluted earnings per share as the~~ options’ ~~exercise prices were greater than the average market price~~ of ~~the common stock for such periods. For the three and nine months ended December 31~~192, ~~2003, outstanding stock options of 860,~~000 and 1574,~~042,~~000 shares, respectively, were excluded from the computation of diluted earnings per share as the options’ exercise prices were greater than the average market price of the common stock for such periods.

Reclassifications

Certain reclassifications have been made to the prior ~~year~~period amounts to conform to the current ~~year~~ period classification.

Stock Options

~~The~~In ~~Company~~electing ~~has elected~~ to follow Accounting Principles Board (“APB”) No. 25, “Accounting ~~for~~ for Stock Issued to Employees,” for expense recognition purposes~~. As a result~~, the Company is obligated to provide the expanded disclosures required under SFAS No. 123, “Accounting for Stock Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123,” for stock-based compensation granted in 1998 and thereafter. In addition, if materially different from reported results, the Company is obligated to disclose pro forma net income and earnings per share had compensation expense relating to the three months ended June 30, 2005 and 2004 grants been measured under the fair value recognition provisions of SFAS No. 123.

No options were granted during the three months ended December 31, 2004 and 2003. The weighted-average fair value at date of grant for options granted during the nine months ended December 31, 2004 was $14.91. The weighted-average fair value at date of grant for options granted during the nine months ended December 31, 2003 was $12.01. Fair values were estimated using the Black-Scholes option valuation model with the following assumptions:

	Three Months Ended December 31,				Nine Months Ended December 31,
	2004		2003		2004		2003
Expected life in years	7		8		7		8
Interest rate	4.11	%	3.10	%	4.11	%	3.10	%
Volatility	41.80	%	50.34	%	41.80	%	50.34	%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%

The ~~following~~ following table summarizes results as if the Company had recorded compensation ~~expense~~ expense under the provisions of SFAS No. 123 for the three months ~~and nine months~~ ended ~~December~~June 3130, ~~2004~~2005 and ~~2003~~2004 (in thousands, except per share amounts):

	Three Months Ended December 31,						Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003			2004		2003
	2005			2004
Net income, as reported	$	1418,~~125~~136		$	11,~~733~~785		$	~~38,100~~	$	~~19,063~~
Additional compensation expense, net of tax	$	583		$	899		$	1,750	$	2,697
Add: Stock-based compensation for restricted stock awards included in reported net income, net of tax	324			128
Pro forma net income	$	13,542		$	10,834		$	36,350	$	16,366
Deduct: Stock-based compensation determined under the fair value method, net of tax	(1,063		)	(729		)
Basic earnings per share:
Pro forma net income	$	17,397		$	11,184
As reported	$	0.45		$	0.38		$	1.22	$	0.62
Basic earnings per share:
Pro forma	$	0.43		$	0.35		$	1.16	$	0.53
As reported	$	0.57		$	0.38
Diluted earnings per share:
Pro forma	$	0.55		$	0.36
As reported	$	0.44		$	0.38		$	1.19	$	0.61
Diluted earnings per share:
Pro forma	$	0.42		$	0.35		$	1.14	$	0.53
As reported	$	0.56		$	0.37
Pro forma	$	0.53		$	0.35

2. Recent Accounting Pronouncements

In ~~December~~November 2004, the Financial Accounting Standards Board (“FASB”) ~~issued~~ issued SFAS No. ~~123R~~151, “~~Share-Based~~Inventory ~~Payment.”~~Costs ~~This~~- ~~statement~~an isamendment ~~a revision~~of toARB 43, Chapter 4.” SFAS No. ~~123,~~151 provides ~~“Accounting~~clarification ~~for~~that ~~Stock-Based~~abnormal ~~Compensation” and~~amounts ~~supercedes~~of ~~APB~~idle ~~Opinion~~facility ~~No. 25~~expense, ~~“Accounting~~freight, handling ~~for~~costs ~~Stock~~and ~~Issued~~wasted ~~to Employees.” This~~material ~~statement~~be ~~requires~~recognized ~~that the~~as ~~compensation~~current ~~cost~~period ~~relating~~charges. toIn addition, ~~share-based~~SFAS No. 151 ~~payment~~requires ~~transactions~~the ~~be recognized~~allocation inof ~~financial~~fixed ~~statements. That~~production ~~cost~~overheads ~~will~~to bethe ~~measured~~costs of conversion be based on the ~~fair~~normal ~~value~~capacity of the ~~equity or liability~~ ~~instruments~~production ~~issued~~facilities. ~~This~~ ~~statement~~SFAS No. 151 ~~will be~~is effective for ~~the~~inventory ~~Company~~costs incurred during fiscal years beginning ~~July~~after 1June 15, 2005. The Company is currently evaluating the impact that SFAS No. ~~123R~~151 will have on its financial statements.

3In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123 and supercedes APB Opinion No. 25. ~~Goodwill~~This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement will be effective for the Company beginning in fiscal year 2007. The Company is currently evaluating the impact that SFAS No. 123R will have on its financial statements.

~~The~~In December 2004, ~~Company’s~~the ~~acquisitions~~FASB ~~were~~issued ~~accounted~~SFAS ~~for~~No. 153, “Exchanges asof ~~purchases~~Nonmonetary ~~and~~Assets ~~accordingly,~~– ~~the~~an ~~results~~amendment of ~~operations~~APB ofOpinion ~~the~~No. 29,” ~~acquired~~to address ~~businesses~~the ~~are~~measurement ~~included~~of inexchanges ~~the~~of ~~accompanying~~nonmonetary ~~financial~~assets. SFAS ~~statements~~No. 153 ~~from~~eliminates the ~~dates~~exception from fair value measurement for nonmonetary exchanges of ~~acquisition.~~similar ~~Goodwill~~productive assets ~~has~~and ~~been~~replaces ~~recognized~~it ~~for~~with ~~the~~a ~~amount~~general ofexception ~~the~~for ~~excess~~exchanges of nonmonetary ~~the~~assets ~~purchase~~that ~~price~~do ~~over~~not ~~the~~have ~~fair~~commercial ~~value~~substance. This ofstatement will be effective for the ~~net~~Company ~~assets~~beginning ~~acquired~~July ~~and~~1, 2005. The Company is ~~accounted~~currently ~~for~~evaluating inthe ~~accordance~~impact ~~with~~that SFAS No. ~~142,~~153 ~~“Goodwill~~will ~~and~~have ~~Other~~on ~~Intangible~~its ~~Assets”~~financial statements.

~~The~~In December 2004, ~~changes~~the inFASB ~~the~~issued ~~carrying~~FASB ~~amount~~Staff ofPosition No. 109-1, “Application ~~goodwill~~of ~~from~~FASB ~~March~~Statement No. 31109, ~~2004~~Accounting tofor ~~December 31~~Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” ~~are~~which asprovides ~~follows~~guidance on the recently enacted American Jobs Creation Act of 2004 (the “Act”). The Act provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides for the treatment of the deduction as a special deduction as described in SFAS ~~thousands):~~No. 109. As such, the deduction will have no effect on existing deferred tax assets and liabilities. Based upon the Company’s analysis of FSP No. 109-1, the Company does not expect to benefit from this special deduction for several more years.

	Domestic Contract Compression		International Contract Compression		Aftermarket Services		Fabrication		Total
Balance as of March 31, 2004	$	261,752	$	52,896	$	46,681	$	29,042	$	390,371
Acquisitions	—		7,550		1,253		—		8,803
Purchase adjustments and other	—		—		486		—		486
Impact of foreign currency translation	—		1,484		—		—		1,484
Balance as of December 31, 2004	$	261,752	$	61,930	$	48,420	$	29,042	$	401,144

In December 2004, the FASB issued FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004,” which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Act on a company’s income tax expense and deferred tax liability. FSP 109-2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet decided on whether, and to what extent, we might elect to repatriate foreign earnings under the provisions in the Act. Any such repatriation under the Act must occur by December 31, 2005. Accordingly, the Company’s consolidated financial statements do not reflect a provision for taxes related to this election.

~~The~~In ~~Company~~March ~~performs~~2005, ~~its~~the ~~annual~~FASB ~~goodwill~~issued ~~impairment~~FASB ~~assessment~~Interpretation inNo. ~~accordance~~47, ~~with~~“Accounting ~~SFAS~~for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. ~~142~~143.” asThis statement clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if the ~~fourth~~liability’s ~~quarter~~fair value can be reasonably estimated. The provisions of FIN 47 are effective January 1, 2006. The Company does not expect the adoption of this Interpretation will have a material effect on its consolidated financial statements.

43. Inventories, Net

Inventories, net consisted of the following (in thousands):

	December 31, 2004			March 31, 2004
	June 30, 2005			March 31, 2005
Raw materials	$	6163,~~524~~900		$	6062,~~064~~599
Work-in-progress	3336,~~200~~324			3740,~~510~~560
Finished goods	32,~~703~~044			43,~~435~~216
Total inventories	98102,~~427~~268			~~102~~106,~~009~~375
Reserve	(1211,~~534~~305		)	(1210,~~041~~981		)
Inventories, net	$	8590,~~893~~963		$	8995,~~968~~394

54. Long-Term Debt ~~(Including Capital Lease Obligations)~~

As of ~~December~~ ~~31,~~June ~~2004~~30, 2005, the Company had approximately $~~847~~848.1 8 million in outstanding ~~debt~~ ~~and~~long-term ~~capital lease~~ debt obligations consisting ~~primarily~~ of $~~522~~399.2 0 million outstanding under the seven-year term ~~senior secured notes operating lease~~ ~~facility, made up of 8 7/8% senior notes due 2008 and a term~~ loan ~~due 2008~~, $~~172~~173.94 million outstanding ~~under~~of ~~the~~ 7 1/4 % senior notes ~~due 2010~~, $~~100~~200.0 million outstanding under the asset-backed securitization lease facility (the “ABS ~~lease facility~~Facility”) , and $5076.04 million outstanding under the revolving credit facility.

InMaturities ~~the first quarter~~ of ~~fiscal 2004, Universal Compression, Inc. (“Universal”), our wholly~~long-~~owned~~term ~~subsidiary,~~debt ~~purchased~~for ~~or redeemed all of~~ the ~~outstanding~~twelve ~~$229.8~~months ~~million~~ended ~~aggregate~~June ~~principal~~30 ~~amount~~ of ~~its 9 7/8% senior discount notes due 2008. Due to~~ the ~~early~~periods ~~extinguishment~~indicated ~~of this~~are ~~debt,~~as ~~the~~follows ~~Company recognized expenses of $14.4 million~~ (in the first quarter of fiscal year 2004 resulting primarily from the redemption and tender premiums of $12.0 million, write-off of unamortized debt issuance costs of $1.9 million and $0.5 million of other costs.thousands):

In April 2004 Universal repurchased $5.0 million of its 8 7/8% senior notes due 2008. In June 2004, the Company paid $80.0 million to reduce the amount outstanding under the ABS lease facility.

2006	$	25,099
2007	25,099
2008	25,099
2009	25,099
2010	274,903
Thereafter	473,505
Total debt	$	848,804

~~Maturities~~5. Accounting offor ~~long-term~~Interest ~~debt~~Rate ~~and capital lease obligations as of December 31, 2004 are as follows (in thousands):~~Swaps

2005	$	10,118
2006	18,690
2007	18,878
2008	541,027
2009	18,563
Thereafter	239,781
Total debt	$	847,057

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133), all derivative instruments must be recognized on the balance sheet at fair value, and changes in such fair values are recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

In June 2004, the Company reduced the notional amount of the interest rate swap agreement that converts variable interest payments under the ABS Facility to fixed interest payments in connection with a debt repayment of $80.0 million. In accordance with SFAS No. 133, the Company recorded a gain of $3.2 million to earnings that had previously been recorded in other comprehensive income as a result of the reduction in the notional amount of such interest rate swap agreement. As of June 30, 2005, the Company had an interest rate swap agreement with a notional amount of $81.8 million related to the $200.0 million outstanding under the ABS Facility. The interest rate swap agreement terminates in February 2013 and has a fixed rate of 5.21%, resulting in a net effective interest rate of 6.48% (5.21% plus the 1.27% margin applicable under the ABS Facility). ~~Accounting~~In ~~for~~accordance ~~Interest~~with SFAS ~~Rate~~No. 133, ~~Swaps~~the Company’s balance sheet at June 30, 2005 includes a $3.8 million noncurrent liability related to the interest rate swap agreement.

In ~~accordance~~ ~~with~~January ~~SFAS No. 133~~2005, the asCompany ~~amended~~entered byinto ~~SFAS~~interest ~~Nos.~~rate ~~137~~swap ~~and~~agreements ~~138~~to convert variable ~~(collectively~~interest ~~referred~~payments related to as$300 ~~SFAS~~million ~~No.~~of ~~133),~~the ~~all~~seven-year ~~derivative~~term ~~instruments~~loan ~~must~~to befixed ~~recognized~~interest onpayments. ~~the~~These ~~balance~~interest ~~sheet~~rate atswap ~~fair~~agreements ~~value,~~terminate in March 2010 and ~~changes~~have a weighted average fixed rate of 4.02%, resulting in ~~such~~a ~~fair~~net ~~values~~effective ~~are~~fixed ~~recognized~~interest inrate ~~earnings~~on ~~unless~~this ~~specific~~$300 ~~hedging~~million ~~criteria~~of ~~are~~debt ~~met~~of 5.77% ~~Changes~~(4.02% in plus the ~~values~~1.75% margin ofapplicable ~~derivatives~~under ~~that~~the ~~meet~~new ~~these~~credit ~~hedging~~facility). In ~~criteria~~accordance ~~will~~with ~~ultimately offset~~SFAS ~~related~~No. 133, ~~earnings~~the ~~effects~~Company’s balance ofsheet ~~the~~at ~~hedged~~June ~~item~~30, ~~pending~~2005 ~~recognition~~includes ina $0.2 million noncurrent ~~earnings~~liability related to these interest rate swap agreements.

InThese ~~June 2004, the Company reduced the notional amount of~~ interest rate ~~swaps~~swap ~~that~~agreements, ~~convert~~which ~~variable interest payments under~~ the ~~ABS~~Company ~~lease~~has ~~facility~~designated toas ~~fixed~~cash ~~interest~~flow ~~payments in connection with a~~hedging ~~debt repayment of $80.0 million. In accordance with SFAS No. 133~~instruments, meet the ~~Company~~specific ~~recorded~~hedge acriteria ~~gain~~and ofany ~~$3.2~~changes ~~million~~in totheir ~~earnings that~~fair ~~had~~values ~~previously~~were ~~been~~recognized ~~recorded~~ in other comprehensive income asor ~~a result of the reduction in the notional amount of such interest rate swaps~~loss. As ofBecause ~~December 31, 2004,~~ the ~~Company had~~terms ~~interest rate swaps with a notional amount~~ of ~~$86.0 million related to~~ the ~~$100.0~~ ~~million~~hedged ~~outstanding~~items ~~under the ABS lease facility. The swaps terminate in February 2013~~ and ~~have a weighted average fixed rate of 5.2%. In accordance with SFAS No. 133,~~ the ~~Company’s~~ ~~balance sheet at December 31, 2004 includes a $4.2 million noncurrent liability related to the~~ interest rate ~~swaps. The~~swap ~~swaps,~~agreements ~~which the Company has designated~~substantially ~~as cash flow hedging instruments~~coincide, ~~meet~~ the ~~specific~~hedges ~~hedge~~are ~~criteria~~expected ~~and~~to ~~any changes~~exactly inoffset ~~their~~changes ~~fair values were recognized~~ in ~~other~~expected ~~comprehensive income or~~cash ~~loss.~~flows ~~Because~~due ~~the~~to ~~terms~~fluctuations ofin the ~~hedged~~variable ~~item~~rate and, therefore, the ~~swaps substantially~~Company ~~coincide,~~currently ~~the~~does ~~hedge~~not isexpect ~~expected~~any toineffectiveness.

~~exactly~~The Company has entered into interest rate swap agreements to hedge $100.0 million of our 7 1/4% senior notes. The interest rate swap agreements are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. The Company’s balance sheet at June 30, 2005 includes a $1.6 million noncurrent liability related to these interest rate swap agreements. The change in the debt’s fair value is also recorded, with the offset being recorded to income. The interest rate swap agreements, which the Company has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in income. For the three months ended June 30, 2005, the change in the debt’s fair value and the change in the swaps’ fair value exactly offset and did not impact net income. Because the terms of the hedged item and the interest rate swap agreements substantially coincide, the hedge is expected ~~cash~~to ~~flows~~exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

In March 2004, the Company entered into interest rate swap agreements to hedge $100.0 million of the Company’s $175.0 million 7 1/4% senior notes due 2010. The swaps are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. The Company’s balance sheet at December 31, 2004 includes a $2.1 million noncurrent liability related to the interest rate swaps. The change in the debt’s fair value is also recorded with the offset being recorded to income. The swaps, which the Company has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in income. For the quarter ended December 31, 2004, the change in the debt’s fair value and the change in the swaps’ fair value exactly offset and did not impact net income. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, the Company currently does not expect any ineffectiveness.

The counterparties to the Company’s interest rate swap agreements are major international financial institutions. The Company monitors the credit quality of these financial institutions and does not expect non-performance by them.

76. Comprehensive Income

Comprehensive income consisted of the following (in thousands):

	Three Months Ended December 31,						Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003			2004		2003
	2005			2004
Net income	$	1418,~~125~~136		$	11,~~733~~785		$	~~38,100~~	$	~~19,063~~
Other comprehensive income:
Other comprehensive income, net of tax:
Interest rate swap gain	472			2,769			3,149		3,112
Interest rate swap agreement gain (loss)	(6,446		)	4,529
Cumulative translation adjustment	~~7,089~~581			1(3,~~589~~695		)	~~10,063~~		~~10,822~~
Comprehensive income	$	2112,~~686~~271		$	1612,~~091~~619		$	~~51,312~~	$	~~32,997~~

For the three ~~and nine~~ months ended ~~December~~June 3130, ~~2004~~2005 the change in cumulative translation adjustment was primarily related to the translation of the balance sheets for the Company’s Brazil and ~~December~~Canada ~~31,~~subsidiaries. ~~2003~~For the three months ended June 30, 2004 the change in cumulative translation adjustment iswas primarily related to the translation of the balance sheets for the Company’s ~~Canadian~~Canada and Argentina subsidiaries.

87. Industry Segments

The Company has four principal business segments: domestic contract compression, international contract compression, fabrication and aftermarket services. The domestic contract compression segment provides natural gas compression ~~services~~ to customers in the United States. The international contract compression segment provides natural gas compression ~~services~~ to international customers, including Canada. The fabrication segment provides services related to the design, engineering and assembly of natural gas ~~and air~~ compressors for sale to third parties ~~and for use~~ in ~~the Company’s~~addition ~~contract~~to ~~compression~~those ~~fleet~~that asthe ~~well~~Company asuses ~~construction~~in ofits ~~installation~~contract ~~projects~~compression fleet. The aftermarket services segment sells parts and components and provides maintenance to customers who own compression equipment and customers who ~~utilize~~use equipment ~~from~~provided ~~the~~by ~~Company’s competitors~~other companies. Revenue ~~Fabrication revenue~~ presented in the table below includes ~~only~~ only sales to third parties.

The Company’s reportable segments are strategic business units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. The Company evaluates the performance of its reportable segments based on segment gross profit. Gross profit is defined as total revenue less direct costs. The ~~Company~~segment gross ~~has~~profit nomeasure ~~material~~used ~~sales~~by ~~between~~management for evaluation purposes excludes ~~segments~~inter-segment transactions and, accordingly, there is no inter-segment revenue to be reported.

The following table presents unaudited revenue and gross profit by business segment for the ~~three-month~~ ~~and~~three ~~the~~months ~~nine-month periods~~ ended ~~December~~June 3130, ~~2004~~2005 and ~~2003~~2004 (in thousands):

Three Months Ended December 31,

Nine Months Ended December 31,

Three Months Ended June 30,

2004

2003

2004

2003

2005

2004

Revenue:

Domestic contract compression

79,672

~~75,170~~

$70,973

~~71,067~~

~~219,321~~

~~209,983~~

International contract compression

2730,~~810~~300

22,746

~~20,789~~

~~73,428~~

~~61,193~~

Fabrication

5055,~~823~~836

57,362

~~42,092~~

~~165,957~~

~~121,030~~

Aftermarket services

3841,~~873~~876

33,793

~~36,219~~

~~110,728~~

~~105,872~~

Total

207,684

~~192,676~~

$184,874

~~170,167~~

~~569,434~~

~~498,078~~

Gross Profit:

Domestic contract compression

51,896

~~48,099~~

$44,708

~~45,994~~

~~139,187~~

~~133,321~~

International contract compression

2122,~~383~~393

17,833

~~15,808~~

~~56,676~~

~~47,202~~

Fabrication

2,~~218~~864

4,026

~~3,612~~

~~12,244~~

~~9,381~~

Aftermarket services

78,~~956~~829

7,181

~~7,166~~

~~22,995~~

~~22,790~~

Total

7985,~~656~~982

$73,748

~~72,580~~

~~231,102~~

~~212,694~~

No one customer accounted for more than 10% of total revenue for any of the periods presented.

The table below presents unaudited revenue and gross profit by geographical location for the three months ended June 30, 2005 and 2004 (in thousands). The basis of attributing revenue and gross profit to specific geographical locations is primarily based upon the geographical location of the sale, service or use of the assets.

	Three Months Ended June 30,
	2005		2004
Revenue:
United States	$	140,522	$	127,091
Canada	19,638		19,057
Latin America	37,701		22,097
Asia Pacific	9,823		16,629
Total	$	207,684	$	184,874
Gross Profit:
United States	$	59,314	$	52,072
Canada	6,643		4,590
Latin America	16,429		14,067
Asia Pacific	3,596		3,019
Total	$	85,982	$	73,748

8. Commitments and Contingencies

In the ordinary course of business, the Company is involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on the Company’s financial position, operating results or cash flows.

In December 1999, Weatherford Global sold the assets and properties of its Gemini compressor business in Corpus Christi, Texas to GE Packaged Power, L.P., (“GEPP”). As part of that sale, Weatherford Global entered into an agreement to purchase from GEPP $38.0 million of compressor components over five years and $3.0 million of parts over three years, and GEPP agreed to provide compressors to Weatherford Global during that time period at negotiated prices. We assumed this obligation in connection with our acquisition of Weatherford Global in February 2001. As of June 30, 2005, approximately $26.7 million of components and approximately $18.2 million of parts have been purchased from GEPP. As a result of GEPP product performance issues, we have been unable to satisfy and have not satisfied in full our purchase commitment in respect of components under this agreement with GEPP. The unsatisfied

~~The~~portion ~~table~~of ~~below~~the ~~presents~~purchase ~~revenue~~commitment is ~~and~~approximately ~~gross~~$11.3 ~~profit by geographic~~million. GEPP ~~location~~could ~~for~~assert ~~the~~its ~~three-month~~right ~~and~~to ~~the~~enforce ~~nine-month~~this ~~periods~~obligation, ~~ended~~but ~~December~~has ~~31,~~not ~~2004~~indicated any ~~and~~intention ~~2003~~to ~~(in~~do ~~thousands). The~~so ~~basis~~at ofthis time. ~~attributing~~However, ~~revenue~~if ~~and~~GEPP ~~gross~~should ~~profit~~seek to ~~specific~~enforce ~~geographic~~this ~~locations~~obligation, ~~is primarily~~we ~~based~~believe ~~upon~~we have ~~the~~valid ~~geographic~~defenses ~~location~~and ofcounter ~~the~~claims ~~sale,~~and ~~service~~would oraggressively ~~where~~defend ~~the~~against ~~assets~~such ~~are~~enforcement ~~utilized~~and pursue such counter claims.

	Three Months Ended December 31,				Nine Months Ended December 31,
	2004		2003		2004		2003
Revenue:
United States	$	126,544	$	121,253	$	392,221	$	361,731
Canada	22,907		25,190		63,886		62,416
Latin America	23,680		16,643		67,393		52,030
Asia Pacific	19,545		7,081		45,934		21,901
Total	$	192,676	$	170,167	$	569,434	$	498,078
Gross Profit:
United States	$	54,326	$	54,540	$	162,010	$	156,791
Canada	5,345		3,576		14,762		11,707
Latin America	15,473		12,138		43,481		36,646
Asia Pacific	4,512		2,326		10,849		7,550
Total	$	79,656	$	72,580	$	231,102	$	212,694

9. Commitments and Contingencies

In the ordinary course of business, the Company is involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows.

In December 1999, Weatherford Global sold the assets and properties of its Gemini compressor business in Corpus Christi, Texas to GE Packaged Power, L.P., or GEPP. As part of that sale, Weatherford Global entered into an agreement to purchase from GEPP $38.0 million of compressor components over five years and $3.0 million of parts over three years, and GEPP agreed to provide compressors to Weatherford Global during that time period at negotiated prices. We assumed this obligation in connection with our acquisition of Weatherford Global in February 2001. As of December 31, 2004, approximately $26.3 million of components and approximately $16.4 million of parts have been purchased from GEPP. As a result of GEPP product performance issues, we have been unable to satisfy and have not satisfied in full our purchase commitment in respect of components under this agreement with GEPP. The unsatisfied portion of the purchase commitment is approximately $11.7 million. GEPP could assert its right to enforce this obligation, but has not indicated any intention to do so at this time. However, if GEPP should seek to enforce this obligation, we believe we have valid defenses and counter claims and would aggressively defend against such enforcement and pursue such counter claims.

The Company has no other commitments or contingent liabilities, which, in the judgment of management, would result in losses that would materially affect the Company’s consolidated financial position, operating results or cash flows.

10. Facility Consolidation Costs

On April 28, 2003, the Company announced the transfer of substantially all of its fabrication activities based in Tulsa, Oklahoma to its existing facility in Houston, Texas. Engineering, production and related support functions were consolidated with Houston-based functions. The Company did not incur additional costs related to this consolidation during the three and nine months ended December 31, 2004 and the Company does not expect to incur additional facility consolidation costs during the two-year period ending September 30, 2005. Total costs related to the facility consolidation were $1.8 million during the nine months ended December 31, 2003 and are shown separately as facility consolidation costs in the consolidated statements of operations. The costs incurred were related to the fabrication segment. See below for further details of the costs incurred (in thousands):

	Nine Months Ended December 31, 2003
Severance and personnel costs	$	1,131
Relocation costs	289
Other costs	401
Total facility consolidation costs	$	1,821

11. Acquisitions

On November 2, 2004, Universal Compression Canada, Limited Partnership, a subsidiary of the Company, purchased the contract compression fleet of Hanover Canada Corporation, a subsidiary of Hanover Compressor Company for $56.9 million, which was funded by $50.0 million in borrowings under our revolving credit facility and $6.9 million in cash. The acquisition resulted in goodwill of $7.6 million. The pro forma effects are not material to the financial statements.

The results of operations of the acquisition are included in the accompanying financial statements from the date of acquisition. The Company is in the process of finalizing the purchase price allocation and expects to finalize the allocation on completion of the valuation.

12. Subsequent Events

In January 2005, the Company closed a $650 million senior secured credit facility with a syndicate of lenders and financial institutions consisting of a $250 million five-year revolving line of credit and a $400 million seven-year bank loan. The Company used approximately $30 million under the new credit facility, together with borrowings under another facility, to repay $82 million of a term loan due 2008. The Company intends to use a significant portion of the new credit facility to redeem the outstanding $440 million of 8 7/8% senior notes due February 2008 and utilize additional capacity for working capital needs and general corporate purposes. In conjunction with the closing of the new credit facility, a notice was sent to the trustee and the holders of the 8 7/8% notes that the notes will be redeemed on February 15, 2005 at a price of 104.438%. As part of this redemption, the Company will record approximately $26 million, on a pretax basis, in debt extinguishment costs, including approximately $20 million in call premium and approximately $6 million in write-off of unamortized debt issuance costs.

In January 2005, the Company entered into interest rate swap agreements to convert variable interest payments related to $300 million of the new $400 million seven-year bank loan to fixed interest payments. These swaps terminate in March 2010 and have a weighted average fixed rate of 4.01%, resulting in a net effective fixed interest rate on this $300 million of debt of 5.76% (4.01% plus the 1.75% margin applicable under the new credit facility). The swaps, which the Company has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values are recognized in other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and therefore, the Company currently does not expect any ineffectiveness. The counterparties to the Company’s interest rate swap agreements are major international financial institutions. The Company continually monitors the credit quality of these financial institutions and does not expect non-performance by them.

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

	December 31, 2004			March 31, 2004
	June 30, 2005			March 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	5336,~~958~~499		$	~~121~~38,~~189~~723
Accounts receivable, net of allowance for bad debts of $3,408 and $3,189 as of December 31, 2004 and March 31, 2004, respectively	95,853			79,587
Accounts receivable, net of allowance for bad debts of $3,244 and $2,747 as of June 30, 2005 and March 31, 2005, respectively	107,003			116,270
Current portion of notes receivable	~~171~~121			~~709~~129
Inventories, net of reserve for obsolescence of $12,534 and $12,041 as of December 31, 2004 and March 31, 2004, respectively	85,893			89,968
Inventories, net of reserve for obsolescence of $11,305 and $10,981 as of June 30, 2005 and March 31, 2005, respectively	90,963			95,394
Current deferred tax asset	6,~~701~~138			56,~~819~~138
Other	1112,~~548~~946			13,~~938~~206
Total current assets	~~254~~253,~~124~~670			~~311~~269,~~210~~860
Contract compression equipment	1,461,803			1,344,218
Property, plant and equipment:
Other property	139,884			117,128
Contract compression equipment	1,510,204			1,485,637
Accumulated depreciation and amortization	(279,881		)	(216,569		)
Other property	155,007			141,114
Net property, plant and equipment	1,321,806			1,244,777
Accumulated depreciation and amortization	(325,894		)	(300,968		)
Goodwill	401,144			390,371
Net property, plant and equipment	1,339,317			1,325,783
Notes receivable	1,038			444
Goodwill	401,354			401,278
Other non-current assets	25,072			25,649
Notes receivable	1,088			1,038
Total assets	$	2,003,184		$	1,972,451
Other non-current assets	20,251			24,799
Total assets	$	2,015,680		$	2,022,758
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable, trade	$	4048,~~700~~374		$	4457,~~948~~942
Accrued liabilities	40,~~069~~151			4037,~~765~~862
Unearned revenue	2721,~~023~~654			2532,~~596~~201
Accrued interest	172,~~215~~529			105,~~933~~619
Current portion of long-term debt and capital lease obligations	1025,~~118~~453			1420,~~369~~400
Total current liabilities	~~135~~138,~~125~~161			~~136~~154,~~611~~024
Capital lease obligations	~~388~~305			~~997~~347
Long-term debt	~~836~~823,~~551~~705			~~869~~837,~~076~~349
Non-current deferred tax liability	~~163~~164,~~137~~848			~~149~~158,~~554~~017
Derivative financial instrument used for hedging purposes	6,376			14,423
Derivative financial instruments used for hedging purposes	5,576			6,283
Other liabilities	57,~~273~~059			25,~~555~~066
Total liabilities	1,~~146~~139,~~850~~654			1,~~173~~161,~~216~~086
Commitments and contingencies (Note 9)
Commitments and contingencies (Note 8)
Stockholder’s equity:
Common stock	49			49
Additional paid-in capital	~~731~~739,~~481~~376			~~725~~737,~~694~~293
Other comprehensive loss	(22,132		)	(35,344		)
Accumulated other comprehensive loss	(23,981		)	(18,116		)
Retained earnings	~~146~~160,~~936~~582			~~108~~142,~~836~~446
Total stockholder’s equity	~~856~~876,~~334~~026			~~799~~861,~~235~~672
Total liabilities and stockholder’s equity	$	2,~~003~~015,~~184~~680		$	12,~~972~~022,~~451~~758

See accompanying notes to unaudited consolidated financial statements.

1211

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003			2004			2003
	2005			2004
Revenue:
Domestic contract compression	$	7579,~~170~~672		$	7170,~~067~~973		$	~~219,321~~		$	~~209,983~~
International contract compression	2730,~~810~~300			2022,~~789~~746			~~73,428~~			~~61,193~~
Fabrication	5055,~~823~~836			4257,~~092~~362			~~165,957~~			~~121,030~~
Aftermarket services	3841,~~873~~876			3633,~~219~~793			~~110,728~~			~~105,872~~
Total revenue	~~192~~207,~~676~~684			~~170~~184,~~167~~874			~~569,434~~			~~498,078~~
Costs and expenses:
Domestic contract compression—direct costs	27,~~071~~776			2526,~~073~~265			~~80,134~~			~~76,662~~
International contract compression—direct costs	67,~~427~~907			4,~~981~~913			~~16,752~~			~~13,991~~
Fabrication—direct costs	4852,~~605~~972			3853,~~480~~336			~~153,713~~			~~111,649~~
Aftermarket services—direct costs	3033,~~917~~047			2926,~~053~~612			~~87,733~~			~~83,082~~
Depreciation and amortization	2325,~~611~~633			2122,~~504~~673			~~69,407~~			~~63,411~~
Selling, general and administrative	1920,~~224~~438			1618,~~101~~215			~~55,684~~			~~49,351~~
Interest expense, net	1612,~~821~~460			1716,~~994~~817			~~49,792~~			~~55,870~~
Debt extinguishment costs	—			—475			~~475~~			~~14,397~~
Gain on termination of interest rate swaps	—			—(3,197		)	~~(3,197~~		)	—
Foreign currency (gain) loss	(238		)	(466		)	286			(631		)
Foreign currency gain	(837		)	(358		)
Other income, net	(589		)	(1,630		)	(228		)	(2,525		)
Other loss, net	352			417
Facility consolidation costs	—			—			—			1,821
Total costs and expenses	179,748			166,168
Total costs and expenses	171,849			151,090			510,551			467,078
Income before income taxes	27,936			18,706
Income before income taxes	20,827			19,077			58,883			31,000
Income tax expense	9,800			6,921
Income tax expense	6,702			7,344			20,783			11,937
Net income	$	18,136		$	11,785
Net income	$	14,125		$	11,733		$	38,100		$	19,063

See accompanying notes to unaudited consolidated financial statements.

1312

UNIVERSAL COMPRESSION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Nine Months Ended December 31,
	Three Months Ended June 30,
	2004			2003
	2005			2004
Cash flows from operating activities:
Net income	$	3818,~~100~~136		$	1911,~~063~~785
Adjustments to reconcile net income to cash provided by operating activities, net of effect of acquisitions:
Depreciation and amortization	6925,~~407~~633			6322,~~411~~673
Non-cash gain from interest rate swap settlement	~~(3,197~~—		)	—(3,197		)
Loss on early extinguishment of debt	~~475~~—			~~14,397~~475
Gain on asset sales	(1,410		)	(1,877		)
Loss on asset sales	457			287
Amortization of debt issuance costs	~~3,240~~573			31,~~215~~038
Deferred taxes provision	13,333			4,796
Amortization of deferred compensation	499			203
Increase in receivables	(15,647		)	(24,908		)
Deferred taxes provision	6,152			5,142
Decrease in inventories	7,297			3,467
(Increase) decrease in receivables	9,267			(13,208		)
Increase (decrease) in accounts payable	(4,728		)	8,915
(Increase) decrease in inventories	4,431			(4,898		)
Increase in accrued liabilities	3,158			8,675
Decrease in accounts payable	(9,568		)	(136		)
Increase in unearned revenue	1,427			31,702
Increase in accrued liabilities	2,512			2,649
Increase in accrued interest	6,282			8,032
Increase (decrease) in unearned revenue	(10,547		)	1,817
Other	(5,514		)	(1,115		)
Increase (decrease) in accrued interest	(3,090		)	6,411
Net cash provided by operating activities	112,223			137,773
Decrease in other current assets and liabilities	(1,342		)	(3,921		)
Other	1,447			(2,768		)
Net cash provided by operating activities	44,560			24,352
Cash flows from investing activities:
Additions to property, plant and equipment	(~~105~~41,~~382~~886		)	(6820,~~471~~345		)
Proceeds from sale of property, plant and equipment	184,~~067~~400			321,~~335~~910
Cash paid for acquisitions	(59,959		)	(761		)
Cash paid for acquisitions, net of cash acquired	—			(3,099		)
Net cash used in investing activities	(~~147~~37,~~274~~486		)	(3621,~~897~~534		)
Cash flows from financing activities:
Principal repayments of long-term debt	(9910,~~238~~623		)	(~~229~~85,~~750~~000		)
Borrowings under revolving credit facility	67,000			—
Debt extinguishment premium and costs	—			(400		)
Proceeds from issuance of debt	—			175,000
Capital contributions from stockholder	1,198			1,094
Debt extinguishment premium and costs	(400		)	(12,492		)
Payments on capital lease agreements	(156		)	(1,294		)
Interest rate swap settlement	(3,067		)	—
Net cash used in financing activities	(9,581		)	(85,600		)
Debt issuance costs	—			(4,640		)
Effect of exchange rate changes on cash and cash equivalents	283			(285		)
Investment in subsidiary by parent	3,926			—
Net decrease in cash and cash equivalents	(2,224		)	(83,067		)
Payments on capital lease agreements	(1,294		)	—
Cash and cash equivalents at beginning of period	38,723			121,189
Net cash used in financing activities	(33,073		)	(71,882		)
Cash and cash equivalents at end of period	$	36,499		$	38,122
Effect of exchange rate changes on cash and cash equivalents	893			855
Net increase (decrease) in cash and cash equivalents	(68,124		)	28,994
Cash and cash equivalents at beginning of period	121,189			71,693
Cash and cash equivalents at end of period	$	53,958		$	101,542

See accompanying notes to unaudited consolidated financial statements.

1413

UNIVERSAL COMPRESSION, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~June 3130, ~~2004~~ 2005

1. Basis of Presentation

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements presented in the Universal Compression, Inc. (“Universal”) Annual Report on Form 10-K for the year ended March 31, ~~2004~~2005. That report contains a more comprehensive summary of Universal’s major accounting policies. In the opinion of management, the accompanying unaudited consolidated financial statements contain all appropriate adjustments, all of which are normally recurring adjustments unless otherwise noted, considered necessary to present fairly the financial position of Universal and its consolidated subsidiaries and the results of operations and cash flows for the respective periods. Operating results for the three-~~month~~months ~~and nine-month periods~~ ended ~~December~~ 31June 30, ~~2004~~2005 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, ~~2005~~2006.

Reclassifications

Certain reclassifications have been made to the prior ~~year~~period amounts to conform to the current ~~year~~ period classification.

2. RecentStock Accounting PronouncementsOptions

In ~~December~~electing ~~2004,~~to ~~the~~follow ~~Financial~~ Accounting ~~Standards~~Principles Board (“~~FASB~~APB”) ~~issued SFAS~~ No. ~~123R~~ 25, “~~Share-Based~~Accounting ~~Payment.~~for Stock Issued to Employees” ~~This~~for ~~statement~~expense recognition purposes, Universal is ~~a revision~~obligated to provide the expanded disclosures required under Statement of Financial Accounting Standards (“SFAS ”) No. 123, “Accounting for Stock- Based Compensation” and ~~supercedes~~SFAS ~~APB Opinion~~ No. 25 148, “Accounting for Stock ~~Issued to~~-Based ~~Employees.” This~~Compensation-Transition ~~statement~~and ~~requires~~Disclosure-an ~~that the~~amendment ~~compensation~~of ~~cost~~SFAS ~~relating~~No. to123” ~~share~~for stock-based ~~payment transactions be~~ ~~recognized~~compensation granted in ~~financial~~1998 ~~statements~~and thereafter. ~~That~~ ~~cost~~In ~~will~~addition, beif ~~measured~~materially ~~based~~different onfrom ~~the~~reported ~~fair~~results, ~~value~~Universal ofis obligated ~~the~~to ~~equity~~disclose orpro ~~liability instruments~~forma ~~issued. This~~net ~~statement~~income ~~will be~~had ~~effective~~compensation ~~for~~expense ~~Universal~~relating ~~beginning~~to the ~~July~~three 1months ended June 30, 2005~~. Universal~~ isand ~~currently~~2004 ~~evaluating~~grants ~~the~~been ~~impact that~~measured ~~SFAS~~under ~~No.~~the fair ~~123R~~value ~~will~~recognition ~~have~~provisions onof ~~its~~SFAS ~~financial statements~~No. 123.

3The following table summarizes results as if Universal had recorded compensation expense under the provisions of SFAS No. ~~Goodwill~~ 123 for the three months ended June 30, 2005 and 2004 (in thousands):

Universal’s acquisitions were accounted for as purchases and accordingly, the results of operations of the acquired businesses are included in the accompanying financial statements from the dates of acquisition. Goodwill has been recognized for the amount of the excess of the purchase price over the fair value of the net assets acquired and is accounted for in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”.

	Three Months Ended June 30,
	2005			2004
Net income, as reported	$	18,136		$	11,785
Add: Stock-based compensation for restricted stock awards included in reported net income, net of tax	324			128
Deduct: Stock-based compensation determined under the fair value method, net of tax	(1,063		)	(729		)
Pro forma net income	$	17,397		$	11,184

~~The~~2. Recent ~~changes~~Accounting ~~in the carrying amount of goodwill from March 31, 2004 to December 31, 2004, are as follows (in thousands):~~Pronouncements

	Domestic Contract Compression		International Contract Compression		Aftermarket Services		Fabrication		Total
Balance as of March 31, 2004	$	261,752	$	52,896	$	46,681	$	29,042	$	390,371
Acquisitions	—		7,550		1,253		—		8,803
Purchase adjustments and other	—		—		486		—		486
Impact of foreign currency translation	—		1,484		—		—		1,484
Balance as of December 31, 2004	$	261,752	$	61,930	$	48,420	$	29,042	$	401,144

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs - an amendment of ARB 43, Chapter 4.” SFAS No. 151 provides clarification that abnormal amounts of idle facility expense, freight, handling costs and wasted material be recognized as current period charges. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Universal is currently evaluating the impact that SFAS No. 151 will have on its financial statements.

~~Universal performs its annual goodwill impairment assessment in accordance with SFAS No. 142 as of the fourth quarter.~~14

15In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123 and supercedes APB Opinion No. 25. This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This statement will be effective for Universal beginning in fiscal year 2007. Universal is currently evaluating the impact that SFAS No. 123R will have on its financial statements.

4In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” to address the measurement of exchanges of nonmonetary assets. ~~Inventories~~SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement will be effective for Universal beginning July 1, 2005. Universal ~~Net~~is currently evaluating the impact that SFAS No. 153 will have on its financial statements.

~~Inventories~~In December 2004, ~~net~~the ~~consisted~~FASB issued FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the ~~following~~Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” which provides guidance on the recently enacted American Jobs Creation Act of 2004 (the “Act”). The Act provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides for the treatment of the deduction as a special deduction as described in SFAS ~~thousands):~~No. 109. As such, the deduction will have no effect on existing deferred tax assets and liabilities. Based upon Universal’s analysis of FSP No. 109-1, Universal does not expect to benefit from this special deduction for several more years.

	December 31, 2004			March 31, 2004
Raw materials	$	61,524		$	60,064
Work-in-progress	33,200			37,510
Finished goods	3,703			4,435
Total inventories	98,427			102,009
Reserve	(12,534		)	(12,041		)
Inventories, net	$	85,893		$	89,968

In December 2004, the FASB issued FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004,” which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Act on a company’s income tax expense and deferred tax liability. FSP 109-2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. Universal has not yet decided on whether, and to what extent, we might elect to repatriate foreign earnings under the provisions in the Act. Any such repatriation under the Act must occur by December 31, 2005. Accordingly, Universal’s consolidated financial statements do not reflect a provision for taxes related to this election.

5In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” This statement clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if the liability’s fair value can be reasonably estimated. The provisions of FIN 47 are effective January 1, 2006. ~~Long-Term~~Universal ~~Debt~~does ~~(Including~~not ~~Capital~~expect ~~Lease~~the adoption of ~~Obligations)~~this Interpretation will have a material effect on its consolidated financial statements.

~~As of December 31, 2004, Universal had approximately $847~~3.~~1 million in outstanding debt and capital lease obligations consisting primarily of $522.2 million outstanding under the seven-year term senior secured notes operating lease facility~~ Inventories, ~~made up of 8~~ 7/8% senior notes due 2008 and term loan due 2008, $172.9 million outstanding of 7 1/4 % senior notes due 2010, $100.0 million outstanding under the asset-backed securitization lease facility (the “ABS lease facility”) and $50.0 million outstanding under the revolving credit facility.Net

~~In the first quarter of fiscal 2004~~Inventories, ~~Universal~~net ~~purchased~~consisted ~~or redeemed all~~ of ~~the~~ ~~outstanding $229.8 million aggregate principal amount of its 9 7/8% senior discount notes due 2008. Due to~~ the ~~early~~ ~~extinguishment~~following ~~of this debt, Universal recognized expenses of $14.4 million~~ (in the first quarter of fiscal year 2004 resulting primarily from the redemption and tender premiums of $12.0 million, write-off of unamortized debt issuance costs of $1.9 million and $0.5 million of other costs.thousands):

In April 2004 Universal repurchased $5.0 million of its 8 7/8% senior notes due 2008. In June 2004, Universal paid $80.0 million to reduce the amount outstanding under the ABS lease facility.

	June 30, 2005			March 31, 2005

Raw materials	$	63,900		$	62,599
Work-in-progress	36,324			40,560
Finished goods	2,044			3,216
Total inventories	102,268			106,375
Reserve	(11,305		)	(10,981		)
Inventories, net	$	90,963		$	95,394

~~Maturities of long-term debt and capital lease obligations as of December 31, 2004 are as follows (in thousands):~~15

2005	$	10,118
2006	18,690
2007	18,878
2008	541,027
2009	18,563
Thereafter	239,781
Total debt	$	847,057

4. Long-Term Debt

6As of June 30, 2005, Universal had approximately $848. ~~Accounting~~8 million ~~for~~in ~~Interest~~outstanding ~~Rate~~long-term ~~Swaps~~debt obligations consisting of $399.0 million outstanding under the seven-year term loan, $173.4 million outstanding of 7 1/4% senior notes, $200.0 million outstanding under the asset-backed securitization lease facility (the “ABS Facility”), and $76.4 million outstanding under the revolving credit facility.

~~In accordance~~Maturities ~~with~~of ~~SFAS~~long-term ~~No. 133,~~debt asfor ~~amended~~the bytwelve ~~SFAS Nos. 137 and 138~~months ~~(collectively~~ended ~~referred~~June to30 asof ~~SFAS No. 133), all derivative instruments must be recognized on~~ the ~~balance~~periods ~~sheet~~indicated ~~at fair value, and changes in such fair values~~ are ~~recognized~~as infollows ~~earnings unless specific hedging criteria are met. Changes~~ (in ~~the~~ ~~values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.~~thousands):

In June 2004, Universal reduced the notional amount of interest rate swaps that convert variable interest payments under the ABS lease facility to fixed interest payments in connection with a debt repayment of $80.0 million. In accordance with SFAS No. 133, Universal recorded a gain of $3.2 million to earnings that had previously been recorded in other comprehensive income as a result of the reduction in the notional amount of such interest rate swaps. As of December 31, 2004, Universal had interest rate swaps with a notional amount of $86.0 million related to the $100.0 million outstanding under the ABS lease facility. The swaps terminate in February 2013 and have a weighted average fixed rate of 5.2%. In accordance with SFAS No. 133, Universal’s balance sheet at December 31, 2004 includes a $4.2 million noncurrent liability related to the interest rate swap. The swaps, which Universal has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness.

2006	$	25,099
2007	25,099
2008	25,099
2009	25,099
2010	274,903
Thereafter	473,505
Total debt	$	848,804

165. Accounting for Interest Rate Swaps

In ~~March~~accordance ~~2004, Universal entered into interest rate swap agreements to~~with ~~hedge~~SFAS ~~$100~~No.0 133 ~~million~~“Accounting offor ~~our~~Derivative ~~$175.0 million 7 1/4% senior notes due 2010. The swaps are used to hedge the change in fair value of the debt~~ and, inHedging ~~effect~~Activities,” ~~convert the fixed interest payment to a~~as ~~variable~~amended ~~interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with~~ (SFAS No. 133 ~~and~~), asall ~~such,~~derivative ~~are~~instruments ~~recorded~~must atbe ~~fair~~recognized ~~value~~ on the balance sheet~~. Universal’s~~ ~~balance sheet~~ at ~~December~~ ~~31, 2004 includes a $2.1 million noncurrent liability related to the interest rate swaps. The change in the debt’s~~ fair value ~~is also recorded with the offset being recorded to income. The swaps~~, ~~which Universal has designated as fair value hedging instruments, meet the specific hedge criteria~~ and ~~any~~ changes in ~~their~~such fair values ~~were~~are recognized in ~~income. For~~earnings unless ~~the~~specific ~~quarter~~hedging ~~ended~~criteria ~~December~~are ~~31,~~met. ~~2004,~~Changes ~~the change~~ in the ~~debt’s~~values ~~fair~~of ~~value~~derivatives that ~~and~~meet ~~the~~these ~~change~~hedging incriteria ~~the~~will ~~swaps’~~ultimately ~~fair value exactly~~ offset ~~and~~ ~~did~~related ~~not impact net income. Because~~earnings ~~the~~effects ~~terms~~ of the hedged item ~~and~~pending ~~the~~recognition ~~swaps substantially coincide, the hedge is expected to exactly offset changes~~ in ~~fair values due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness~~earnings.

~~The~~In ~~counterparties~~June to 2004, Universal’s reduced the notional amount of the interest rate swap ~~agreements~~agreement ~~are~~that ~~major~~converts ~~international~~variable ~~financial~~interest ~~institutions~~payments under the ABS Facility to fixed interest payments in connection with a debt repayment of $80.0 million. In accordance with SFAS No. 133, Universal recorded ~~monitors~~a gain of $3.2 million to earnings that had previously been recorded in other comprehensive income as a result of the ~~credit~~reduction in the notional ~~quality~~amount of ~~these~~such ~~financial~~interest ~~institutions~~rate swap agreement. As of June 30, 2005, Universal had an interest rate swap agreement with a notional amount of $81.8 million related to the $200.0 million outstanding under the ABS Facility. The interest rate swap agreement terminates in February 2013 and ~~does~~has ~~not~~a ~~expect~~fixed ~~non-performance~~rate byof 5.21%, resulting in a net effective ~~them~~interest rate of 6.48% (5.21% plus the 1.27% margin applicable under the ABS Facility). In accordance with SFAS No. 133, Universal’s balance sheet at June 30, 2005 includes a $3.8 million noncurrent liability related to the interest rate swap agreement.

7In January 2005, Universal entered into interest rate swap agreements to convert variable interest payments related to $300 million of the seven-year term loan to fixed interest payments. These interest rate swap agreements terminate in March 2010 and have a weighted average fixed rate of 4.02%, resulting in a net effective fixed interest rate on this $300 million of debt of 5.77% (4.02% plus the 1.75% margin applicable under the new credit facility). ~~Comprehensive~~In ~~Income~~accordance with SFAS No. 133, Universal’s balance sheet at June 30, 2005 includes a $0.2 million noncurrent liability related to these interest rate swap agreements.

~~Comprehensive~~These interest rate swap agreements, which Universal has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income ~~consisted~~or loss. Because the terms of the ~~following~~hedged (items and the interest rate swap agreements substantially coincide, the hedges are expected to exactly offset changes in ~~thousands):~~expected cash flows due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness.

	Three Months Ended December 31,				Nine Months Ended December 31,
	2004		2003		2004		2003
Net income	$	14,125	$	11,733	$	38,100	$	19,063
Other comprehensive income:
Interest rate swap gain	472		2,769		3,149		3,112
Cumulative translation adjustment	7,089		1,589		10,063		10,822
Comprehensive income	$	21,686	$	16,091	$	51,312	$	32,997

Universal has entered into interest rate swap agreements to hedge $100.0 million of our 7 1/4% senior notes. The interest rate swap agreements are used to hedge the change in fair value of the debt and, in effect, convert the fixed interest payment to a variable interest payment based on the six-month LIBOR rate. The swaps are accounted for in accordance with SFAS No. 133 and, as such, are recorded at fair value on the balance sheet. Universal’s balance sheet at June 30, 2005 includes a $1.6 million noncurrent liability related to these interest rate swap agreements. The change in the debt’s fair value is also recorded, with the offset being recorded to income. The interest rate swap agreements, which Universal has designated as fair value hedging instruments, meet the specific hedge criteria and any changes in their fair values were recognized in income. For the three months ended June 30, 2005, the change in the debt’s fair value and the change in the swaps’ fair value exactly offset and did not impact net income. Because the terms of the hedged item and the interest rate swap agreements substantially coincide, the hedge is expected to exactly offset changes in fair values due to fluctuations in the variable rate and, therefore, Universal currently does not expect any ineffectiveness.

~~For~~The ~~the three~~counterparties ~~and~~to ~~nine~~Universal’s ~~months~~interest ~~ended~~rate ~~December~~swap ~~31,~~agreements ~~2004~~are ~~and~~major ~~December~~international ~~31, 2003, the change in~~financial ~~cumulative~~institutions. ~~translation~~Universal ~~adjustment~~monitors isthe ~~primarily~~credit ~~related~~quality toof ~~the~~these ~~translation of~~financial ~~the~~institutions ~~balance~~and ~~sheets~~does ~~for~~not ~~Universal’s~~expect ~~Canadian~~non-performance ~~subsidiaries~~by them.

~~8. Industry Segments~~16

~~Universal has four principal business segments: domestic contract compression, international contract compression, fabrication and aftermarket services~~6. ~~The domestic contract~~Comprehensive compression segment provides natural gas compression services to customers in the United States. The international contract compression segment provides natural gas compression services to international customers. The fabrication segment provides services related to the design, engineering and assembly of natural gas and air compressors for sale to third parties and for use in Universal’s contract compression fleet as well as construction of installation projects. The aftermarket services segment sells parts and components and provides maintenance to customers who own compression equipment and customers who utilize equipment from Universal’s competitors. Fabrication revenue presented in the table below includes only sales to third parties.Income

~~Universal’s reportable~~Comprehensive ~~segments~~income ~~are strategic business units that offer distinct products~~consisted ~~and~~of ~~services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. Universal evaluates~~ the ~~performance~~following of(in its reportable segments based on segment gross profit. Gross profit is defined as total revenue less direct costs. Universal has no material sales between segments and, accordingly, there is no inter-segment revenue to be reported.thousands):

	Three Months Ended June 30,
	2005			2004
Net income	$	18,136		$	11,785
Other comprehensive income, net of tax:
Interest rate swap agreements gain (loss)	(6,446		)	4,529
Cumulative translation adjustment	581			(3,695		)
Comprehensive income	$	12,271		$	12,619

~~The~~For the three ~~following~~months ~~table~~ended ~~presents~~June ~~revenue~~30, ~~and~~2005 ~~gross~~the ~~profit~~change byin ~~business~~cumulative ~~segment~~translation ~~for~~adjustment was primarily related to the translation of the balance sheets for Universal’s ~~three-month~~Brazil and Canada subsidiaries. For the ~~nine-month~~three ~~periods~~months ended ~~December~~June 3130, 2004 ~~and~~the change ~~2003 (~~in cumulative translation adjustment was primarily related to the ~~thousands):~~translation of the balance sheets for Universal’s Canada and Argentina subsidiaries.

	Three Months Ended December 31,				Nine Months Ended December 31,
	2004		2003		2004		2003
Revenue:
Domestic contract compression	$	75,170	$	71,067	$	219,321	$	209,983
International contract compression	27,810		20,789		73,428		61,193
Fabrication	50,823		42,092		165,957		121,030
Aftermarket services	38,873		36,219		110,728		105,872
Total	$	192,676	$	170,167	$	569,434	$	498,078
Gross Profit:
Domestic contract compression	$	48,099	$	45,994	$	139,187	$	133,321
International contract compression	21,383		15,808		56,676		47,202
Fabrication	2,218		3,612		12,244		9,381
Aftermarket services	7,956		7,166		22,995		22,790
Total	$	79,656	$	72,580	$	231,102	$	212,694

7. Industry Segments

NoUniversal ~~one~~has ~~customer~~four principal ~~accounted~~business ~~for~~segments: domestic contract ~~more~~compression, ~~than~~international ~~10%~~contract compression, fabrication and aftermarket services. The domestic contract compression segment provides natural gas compression to customers in the United States. The international contract compression segment provides natural gas compression to international customers, including Canada. The fabrication segment provides services related to the design, engineering and assembly of ~~total~~natural ~~revenue~~gas compressors for ~~any~~sale ofto third parties in addition to those that ~~the~~Universal ~~periods~~uses in its contract compression fleet. The aftermarket services segment sells parts and components and provides maintenance to customers who own compression equipment and customers who use equipment provided by other companies. Revenue presented in the table below includes only sales to third parties.

18Universal’s reportable segments are strategic business units that offer distinct products and services. They are managed separately since each business segment requires different marketing strategies due to customer specifications. Universal evaluates the performance of its reportable segments based on segment gross profit. Gross profit is defined as total revenue less direct costs. The segment gross profit measure used by management for evaluation purposes excludes inter-segment transactions and, accordingly, there is no inter-segment revenue to be reported.

The ~~table~~following ~~below~~ table presents unaudited revenue and gross profit by ~~geographic~~ ~~location~~business segment for the three~~-month~~ months ~~and the nine-month periods~~ ended ~~December~~ 31June 30, ~~2004~~2005 and ~~2003~~2004 (in thousands)~~. The basis of attributing revenue and gross profit to specific geographic locations is primarily based upon the geographic location of the sale, service or where the assets are utilized.~~:

	Three Months Ended December 31,							Nine Months Ended December 31,
	Three Months Ended June 30,
	2004					2003		2004		2003
	2005			2004
Revenue:
United States	$				126,544	$	121,253	$	392,221	$	361,731
Domestic contract compression	$	79,672		$	70,973
Canada	22,907					25,190		63,886		62,416
International contract compression	30,300			22,746
Latin America	23,680					16,643		67,393		52,030
Fabrication	55,836			57,362
Asia Pacific	19,545					7,081		45,934		21,901
Aftermarket services	41,876			33,793
Total	$	207,684		~~192,676~~$	184,874	$	~~170,167~~	$	~~569,434~~	$	~~498,078~~
Gross Margin:
Gross Profit:
United States	$		54,326			$	54,540	$	162,010	$	156,791
Domestic contract compression	$	51,896		$	44,708
Canada	5,345					3,576		14,762		11,707
International contract compression	22,393			17,833
Latin America	15,473					12,138		43,481		36,646
Fabrication	2,864			4,026
Asia Pacific	4,512					2,326		10,849		7,550
Aftermarket services	8,829			7,181
Total	$	7985,~~656~~982		$	73,748	$	~~72,580~~	$	~~231,102~~	$	~~212,694~~

~~9. Commitments~~No ~~and~~one ~~Contingencies~~customer accounted for more than 10% of total revenue for any of the periods presented.

In the ordinary course of business, Universal is involved in various pending or threatened legal actions. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on Universal’s consolidated financial position, operating results or cash flows.17

InThe ~~December 1999,~~table ~~Weatherford~~below ~~Global sold~~presents ~~the~~unaudited ~~assets~~revenue and ~~properties~~gross ofprofit ~~its Gemini compressor business in Corpus~~by ~~Christi,~~geographical ~~Texas~~location tofor GEthe ~~Packaged~~three ~~Power,~~months ~~L.P.,~~ended orJune ~~GEPP. As part of that sale~~30, ~~Weatherford~~ ~~Global~~2005 ~~entered into an agreement to purchase from GEPP $38.0 million of compressor components over five years~~ and ~~$3.0 million of~~2004 ~~parts over three years, and GEPP agreed to provide compressors to Weatherford Global during that time period at negotiated prices. We assumed this obligation~~ (in ~~connection with our acquisition of Weatherford Global in~~ ~~February 2001~~thousands). The Asbasis of ~~December 31, 2004, approximately~~attributing ~~$26.3 million~~revenue ~~of components~~ and ~~approximately~~gross ~~$16.4 million~~profit ~~of parts have been purchased from GEPP. As a result of GEPP product performance issues, we have been unable~~ to ~~satisfy~~specific ~~and~~geographical ~~have~~locations ~~not~~is ~~satisfied~~primarily ~~in full our purchase~~based ~~commitment~~upon inthe ~~respect~~geographical oflocation ~~components under this agreement with GEPP. The unsatisfied portion~~ of the ~~purchase commitment is approximately $11.7 million. GEPP could assert its right to enforce this obligation~~sale, ~~but~~service ~~has~~or ~~not indicated~~use ~~any~~of ~~intention~~the ~~to do so at this time~~assets. ~~However, if GEPP should seek to enforce this obligation, we believe we have valid defenses and counter claims and would aggressively defend against such enforcement and pursue such counter claims.~~

Universal has no other commitments or contingent liabilities, which, in the judgment of management, would result in losses that would materially affect Universal’s consolidated financial position, operating results or cash flows.

	Three Months Ended June 30,
	2005		2004
Revenue:
United States	$	140,522	$	127,091
Canada	19,638		19,057
Latin America	37,701		22,097
Asia Pacific	9,823		16,629
Total	$	207,684	$	184,874
Gross Profit:
United States	$	59,314	$	52,072
Canada	6,643		4,590
Latin America	16,429		14,067
Asia Pacific	3,596		3,019
Total	$	85,982	$	73,748

108. Commitments ~~Facility~~and ~~Consolidation Costs~~Contingencies

OnIn ~~April 28,~~the ~~2003, Universal announced~~ordinary ~~the~~course ~~transfer~~ of ~~substantially all of its fabrication activities based in Tulsa~~business, ~~Oklahoma~~ toUniversal ~~its~~is ~~existing~~involved ~~facility~~ in ~~Houston,~~various ~~Texas. Engineering,~~pending ~~production~~or ~~and related support~~threatened ~~functions~~legal ~~were consolidated with Houston-based functions~~actions. ~~Universal~~ ~~did~~In ~~not incur additional costs related to this consolidation during~~ the ~~three~~opinion ~~and~~of ~~nine months ended December 31~~management, ~~2004 and Universal does not expect to incur additional facility consolidation costs during~~ the ~~two-year~~amount ~~period~~of ~~ending~~ultimate ~~September 30~~liability, ~~2005. Total costs related to the facility~~ ~~consolidation~~if ~~were $1.8 million during the nine months ended December 31~~any, ~~2003 and~~with ~~are~~respect ~~shown~~to ~~separately~~these asactions ~~facility~~will ~~consolidation~~not ~~costs~~have ina ~~the~~material ~~consolidated statements~~adverse ~~of operations. The costs~~effect ~~incurred~~on ~~were~~Universal’s ~~related~~financial toposition, ~~the~~operating ~~fabrication~~results ~~segment. See~~or ~~below~~cash ~~for further details of the costs incurred (in thousands):~~flows.

19In December 1999, Weatherford Global sold the assets and properties of its Gemini compressor business in Corpus Christi, Texas to GE Packaged Power, L.P., (“GEPP”). As part of that sale, Weatherford Global entered into an agreement to purchase from GEPP $38.0 million of compressor components over five years and $3.0 million of parts over three years, and GEPP agreed to provide compressors to Weatherford Global during that time period at negotiated prices. Universal assumed this obligation in connection with our acquisition of Weatherford Global in February 2001. As of June 30, 2005, approximately $26.7 million of components and approximately $18.2 million of parts have been purchased from GEPP. As a result of GEPP product performance issues, we have been unable to satisfy and have not satisfied in full our purchase commitment in respect of components under this agreement with GEPP. The unsatisfied portion of the purchase commitment is approximately $11.3 million. GEPP could assert its right to enforce this obligation, but has not indicated any intention to do so at this time. However, if GEPP should seek to enforce this obligation, we believe we have valid defenses and counter claims and would aggressively defend against such enforcement and pursue such counter claims.

	Nine Months Ended December 31, 2003
Severance and personnel costs	$	1,131
Relocation costs	289
Other costs	401
Total facility consolidation costs	$	1,821

~~11. Acquisitions~~18

On November 2, 2004, Universal Compression Canada, Limited Partnership, a subsidiary of Universal, purchased the contract compression fleet of Hanover Canada Corporation, a subsidiary of Hanover Compressor Company for $56.9 million, which was funded by $50.0 million in borrowings under our revolving credit facility and $6.9 million in cash. The acquisition resulted in goodwill of $7.6 million. The pro forma effects are not material to the financial statements.

The results of operations of the acquisition are included in the accompanying financial statements from the date of acquisition. Universal is in the process of finalizing the purchase price allocation and expects to finalize the allocation on completion of the valuation.

12. Subsequent Events

In January 2005, Universal closed a $650 million senior secured credit facility with a syndicate of lenders and financial institutions consisting of a $250 million five-year revolving line of credit and a $400 million seven-year bank loan. Universal used approximately $30 million under the new credit facility, together with borrowings under another facility, to repay $82 million of a term loan due 2008. Universal intends to use a significant portion of the new credit facility to redeem the outstanding $440 million of 8 7/8% senior notes due February 2008 and utilize additional capacity for working capital needs and general corporate purposes. In conjunction with the closing of the new credit facility, a notice was sent to the trustee and the holders of the 8 7/8% notes that the notes will be redeemed on February 15, 2005 at a price of 104.438%. As part of this redemption, Universal will record approximately $26 million, on a pretax basis, in debt extinguishment costs, including approximately $20 million in call premium and approximately $6 million in write-off of unamortized debt issuance costs.

In January 2005, Universal entered into interest rate swap agreements to convert variable interest payments related to $300 million of the new $400 million seven-year bank loan to fixed interest payments. These swaps terminate in March 2010 and have a weighted average fixed rate of 4.0%, resulting in a net effective fixed interest rate on this $300 million of debt of 5.76% (4.01% plus the 1.75% margin applicable under the new credit facility). The swaps, which Universal has designated as cash flow hedging instruments, meet the specific hedge criteria and any changes in their fair values are recognized in other comprehensive income or loss. Because the terms of the hedged item and the swaps substantially coincide, the hedge is expected to exactly offset changes in expected cash flows due to fluctuations in the variable rate and therefore, the Company currently does not expect any ineffectiveness. The counterparties to Universal’s interest rate swap agreements are major international financial institutions. Universal continually monitors the credit quality of these financial institutions and does not expect non-performance by them.

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

The terms “our,” “Company,” “we” and “us” when used in this report refer to Universal Compression Holdings, Inc. and its subsidiaries, including Universal Compression, Inc. and its subsidiaries, as a combined entity, and its predecessors~~, except where it is made clear that such term means only the parent company~~. The term “Universal” refers to Universal Compression, Inc. ~~and~~ and its subsidiaries, as a combined entity.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, contained in this report are forward-looking statements, including, without limitation, statements regarding future financial position, business strategy, ~~proposed~~ proposed acquisitions, budgets, litigation, projected costs and plans and objectives of management for future operations. You can identify many of these statements by looking for words such as “believes,” “expects,” “will,” “intends,” “projects,” “anticipates,” “estimates,” “continues” or similar words or the ~~negative~~ negative thereof.

Such forward-looking statements in this report include, without limitation:

• our business growth strategy and projected costs;

• our future financial position;

• the sufficiency of available cash flows to fund continuing operations;

• the expected amount of our capital expenditures;

• anticipated cost savings, future revenue, gross profits, EBITDA, as adjusted, and other financial or operational measures related to our business and our primary business segments; and

• the future value of our equipment; and

• plans and objectives of our management for our future operations.

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. ~~The~~These ~~risks~~forward looking statements are also affected by the risk ~~related~~factors toand ~~our~~forward ~~business~~looking statements described in our Annual Report on Form 10-K for the year ended March 31, ~~2004~~2005 ~~under~~and ~~“Risk~~those ~~Factors”~~set ~~and~~forth ~~elsewhere~~from intime ~~this~~to ~~report could~~time ~~cause~~ in our ~~actual~~filings ~~results~~with tothe ~~differ~~Securities ~~from~~and ~~those~~Exchange ~~described~~Commission in(“SEC”), orwhich ~~otherwise~~are ~~projected~~available orthrough ~~implied~~our ~~by,~~website and through the ~~forward-looking~~SEC’s ~~statements~~Electronic Data Gathering and Retrieval System (“EDGAR”) at http://www.sec.gov. Although we believe ~~that~~ that the expectations reflected in these forward-looking statements are based on on reasonable assumptions, no assurance can be given that these expectations ~~will~~ will prove to be correct. Important factors that could cause our actual results to to differ materially from the expectations reflected in these forward-looking statements include, among other things:

• conditions in the oil and gas industry, including a sustained decrease in the level of supply or demand for natural gas and the impact of the price of natural gas;

• ~~competition~~ the ability ~~among~~of ~~the~~our ~~various~~competitors ~~providers~~to ofcapture ~~natural~~market ~~gas~~share ~~compression~~and ~~services~~our ability to retain or increase our market share;

• changes in political or economic conditions in key operating markets, including international markets;

• changes in safety and environmental regulations pertaining to the production and transportation of natural gas;

• ~~acts of~~ introduction ~~war~~of orcompeting ~~terrorism~~technologies orby ~~governmental~~us or ~~military~~by ~~responses~~other ~~thereto~~companies;

• introduction of competing technologies by other companies;

• our ability to retain and grow our customer base;

• our level of indebtedness and ability to fund our business;

• our ability to recoup our investment by re-leasing our compressors after typically short initial lease terms;

• currency exchange rate fluctuations;

• employment workforce factors, including loss of key employees; ~~and~~

• liability claims related to the use of our products and services.;

~~All~~• our ~~forward-looking statements included in~~ability ~~this report are based on information available~~ to usimplement on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and ~~oral~~effect ~~forward-looking~~price ~~statements~~increases ~~attributable~~for ~~to us or persons acting on~~ our ~~behalf~~products ~~are~~and ~~expressly qualified in their entirety by the cautionary statements contained throughout this report.~~services;

21• our ability to manage the rising costs and availability of components and materials from our vendors;

• changes in our strategic direction;

• changes in laws or regulatory conditions in the U.S. and other countries in which we operate;

• our ability to timely, properly and cost-effectively implement our enterprise resource planning (“ERP”) system; and

• our ability to accurately make estimates and assumptions that affect the amounts reported in the financial statements and related disclosures.

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events

or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.

General

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements, and the notes thereto, appearing elsewhere in this report, as well as the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2004~~2005. See “Item 1. Financial Statements –— footnote 1, Basis of Presentation” in this report.

UNIVERSAL COMPRESSION HOLDINGS, INC.

Overview

Generally, our overall business activity and revenue increase as the demand for natural gas compression services increases. In the United States, increases in compression demand are driven by growth in the production of natural gas and by declining reservoir pressure in maturing natural gas producing fields. In international markets, increases in compression demand are driven by similar factors as in the United States, as well as growth in natural gas industry infrastructure, environmental and other governmental initiatives encouraging the production and consumption of natural gas, and growth in the worldwide transportation of natural gas. The demand for compression services is also driven by general increases in the demand for energy fuel stocks, including natural gas, which is generally driven by economic growth. In addition, the outsourcing of compression needs is driven by the expectation of our customers for improved operating efficiency, increased flexibility to replace compressors as field requirements change and reduced capital requirements.General

~~Industry~~We ~~Conditions~~provide a full range of natural gas compression services, including sales, operations, maintenance and fabrication services and products to the natural gas industry, both domestically and internationally. Through our core business, contract compression, and our fleet as of June 30, 2005 of approximately 7,000 compressor units comprising approximately 2.5 million horsepower, we provide natural gas compression to domestic and international customers. Through our equipment fabrication business we design, engineer and assemble natural gas compressors for sale to third parties and for use in our contract compression fleet. Through our aftermarket services business, we sell parts and components and provide maintenance and operations services to customers who own their compression equipment or use equipment provided by other companies. These services and products are essential to the natural gas industry as gas must be compressed to be delivered from the wellhead to end-users and, sometimes in the case of declining reservoir pressure, in order to be produced from the wellhead itself. Our customers consist primarily of domestic and international oil and gas companies, international state-owned oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines.

~~General~~Generally, our ~~industry~~overall ~~conditions~~business ~~improved~~activity and revenue increase as the demand for natural gas increases. In the United States, increases in ~~our~~the ~~third~~demand ~~quarter~~for compression services and products are driven by growth in the production of ~~fiscal~~natural ~~2005~~gas, asby ~~evidenced~~declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased ~~industry~~demand for ~~activity~~compression equipment for growing non-conventional natural gas production, from places such as coal bed methane, tight sands and ~~customer~~shale gas. In international markets, increases in the demand for ~~our~~compression ~~contract~~services ~~compression~~and products are driven by growth in natural ~~services~~gas industry infrastructure, environmental initiatives encouraging the production and consumption of natural gas and the growth in the worldwide transportation and use of natural gas. ~~Demand~~ The ~~remained~~demand ~~strong~~for compression services is also driven by general increases in the demand for energy fuel stocks, including natural gas, which is generally ~~our~~driven ~~fabrication~~by economic growth, and ~~aftermarket~~by ~~services~~increases in the outsourcing of compression needs.

Industry Conditions and Trends

Generally, the worldwide natural gas industry continued to exhibit strength during our first fiscal quarter, as evidenced by continued strong demand for our compression services and products.

Company Performance Trends and Fiscal Year 2006 Outlook

We continue to expect strong demand in the contract compression segment to support an average utilization rate in the low 90% range, as well as a stable price environment. While domestic contract compression gross margin is expected to stay within its historical range, we still expect our international contract compression gross margin to remain in the mid-70% range. Additionally, we continue to selectively add new large-horsepower units to our contract compression fleet to meet customer requirements in both domestic and international markets.

Customer demand is expected to support continued revenue growth in our aftermarket services segment. We expect aftermarket services gross margins to remain within its historical range.

We continue to expect solid customer demand in our fabrication segment, however, segment revenue is likely to be lower and gross margins higher in fiscal year 2006 than in fiscal year 2005 as we continue to implement our process improvements, maintain more rigorous pricing discipline and focus on more standard compression packages. Although this segment experienced $2.8 million in warranty and start-up expenses during this first fiscal quarter related to packages shipped in fiscal year 2005, we believe we have resolved or

appropriately reserved for those issues and do not expect to incur similar costs in the future, primarily as a result of the process improvements and the other changes referred to above.

We are investing in key initiatives to help support the future growth of our company. These initiatives include an increased marketing and business development commitment targeted at aftermarket service and international expansion, and our new company-wide ERP system, which is being implemented during fiscal 2006.

Challenges and Uncertainties

Market conditions in the natural gas industry, competition in the natural gas compression industry and the risks inherent in our on-going international expansion continue to represent key challenges and uncertainties. Additionally, the fiscal year 2006 implementation of our ERP system is anticipated to have a continuing impact on our selling, general and administrative expenses until implementation is completed. Moreover, implementation problems, if encountered, could negatively impact our business by disrupting our operations. Although we currently have no reason to believe that any such significant implementation problems will occur, there are inherent limitations in our ability to predict and plan for these risks and estimate the magnitude of their impact. Consequently, it is possible that the occurrence of a significant implementation problem could be material to our business operations.

Financial Highlights

~~Net~~Some ~~income~~of the more significant financial items for the three months ended ~~December~~June 3130, ~~2004~~2005, ~~was higher by~~as ~~$2.4~~compared ~~million,~~to ~~or 20.4%, than net income for~~ the prior year period~~. Net income for the nine months ended December 31~~, ~~2004~~which ~~was~~are ~~higher~~discussed bybelow ~~$19.0~~in ~~million~~“Financial ~~than net income for the prior year~~Results ~~period. Significant~~of ~~items~~Operations,” ~~for~~were ~~the~~as ~~three- and nine-month periods follow~~follows:

• ~~Higher~~Net ~~Revenue~~Income. ~~Compared to the prior year periods, total~~Net ~~revenue~~income ~~was higher by $22.5 million, or 13.2%,~~ for the three months ended ~~December~~ ~~31,~~June ~~2004~~30, ~~and~~2005 increased by $716.4 million, or 1453.39%~~, for the nine months ended December 31, 2004~~. ~~The increase in revenue for both the three- and the nine-month periods was due to increased activity in all business segments, led by the fabrication and international contract compression segments.~~

• ~~Lower~~Higher ~~Fabrication Gross Margin~~Revenue. ~~Compared~~Total revenue towas ~~the~~higher ~~prior~~by ~~year three-month~~$22.8 ~~period~~million, ~~fabrication~~or ~~gross~~12.3%, ~~margin~~ for the three months ended ~~December~~ 31June 30, ~~2004,~~2005 ~~declined~~due ~~from 8.6%~~ to ~~4.4%. This~~higher ~~reduction~~levels inof ~~gross~~activity ~~margin~~within ~~was~~the ~~primarily~~contract ~~due~~compression ~~to warranty costs~~ and ~~losses~~aftermarket ~~incurred~~services ~~on certain relatively complex projects~~segments.

• Lower Interest Expense. ~~Compared~~ Interest ~~to the prior year periods, interest~~ expense was lower by $14.~~2 million,~~4 ~~or 6.5%, for the three months ended December 31, 2004, and by $6.1~~ million, or 10 25.9%, for the ~~nine~~three months ended ~~December~~June 3130, ~~2004.~~2005 ~~The decreases in interest expense resulted~~ primarily from the ~~Company’s $80.0 million~~refinancing ~~reduction in the amount outstanding under the asset-backed securitization lease facility (the “ABS lease facility”) in June 2004, the lowering~~ of ~~interest rates resulting from entering into interest rate swap agreements in March 2004 to convert fixed interest payments to variable interest payments on~~ $~~100~~400.0 ~~million~~ ~~of our $175.0~~ million of ~~7 1/4% senior notes due 2010 and the refinancing of $175.0 million of~~ long- term debt in ~~May~~February ~~2003, which both reduced the amount of the Company’s long-term debt outstanding and lowered the interest rate on that debt~~2005.

• ~~Gain~~Higher onDepreciation ~~Termination~~and ofAmortization ~~Interest Rate Swaps~~Expense. ~~Included~~Depreciation ~~within~~and ~~net~~amortization ~~income for the~~expense ~~nine~~increased ~~months~~by ~~ended~~$3.0 ~~December 31~~million, ~~2004~~or ~~is a $3~~13.21%, ~~million~~due ~~gain~~primarily to on-going ~~the termination~~capital ofadditions, ~~interest~~consisting ~~rate~~primarily ~~swaps~~of ~~related~~additions to our compression fleet and compressor overhauls, and the ~~repayment~~acquisition of ~~debt~~an additional contract compression fleet in ~~June~~Canada in November 2004.

• ~~Debt~~Lower ~~Extinguishment~~Fabrication ~~and~~Gross ~~Facility Consolidation Costs~~Margin. ~~The prior year~~Fabrication ~~nine-month~~gross ~~period~~margin ~~included~~declined ~~$14~~from 7.40% ~~million~~to of5.1% ~~debt~~primarily ~~extinguishment costs~~ as a result of the ~~Company’s May 2003 refinancing activity and~~ $12.8 million of ~~facility~~ ~~consolidation~~warranty ~~costs~~and ~~related~~start-up toexpenses ~~the~~recorded ~~transfer~~for ofcertain ~~substantially all of~~relatively ~~the~~complex ~~Tulsa,~~packages ~~Oklahoma~~shipped ~~fabrication~~in ~~operations~~fiscal toyear ~~the Houston fabrication facility~~2005.

22• Higher Selling, General and Administrative Expense. Selling, general and administrative expense (“SG&A”) increased by $2.2 million, or 12.2%, due primarily to our on-going investment in our international infrastructure, growing international revenue taxes, which are classified as SG&A, increased marketing and business development activities and costs associated with the implementation of our ERP system. SG&A expenses represented 10% of total revenues for both periods.

Operating Highlights

The higher revenue for the three- and nine-month periods is attributable to increased industry activity and customer demand, which resulted in higher overall utilization of our contract compression fleet and increased sales in the fabrication and aftermarket services businesses. The following table summarizes total ~~available~~ available horsepower, average contracted horsepower, horsepower utilization ~~percentages~~ percentages and fabrication backlog.

	Three Months Ended						~~Nine Months Ended~~
	December 31, 2004		March 31, 2004		December 31, 2003		December 31, 2004		December 31, 2003
	June 30, 2005			March 31, 2005			June 30, 2004
	(Horsepower in thousands)						~~(Horsepower in thousands)~~
Total Available Horsepower (at period end):
Domestic contract compression	1,~~908~~921		~~1,904~~	1,925	~~1,900~~		1,~~908~~899		~~1,900~~
International contract compression	~~518~~566		~~417~~	544	~~401~~		~~518~~424		~~401~~
Total	2,~~426~~487		~~2,321~~	2, 469	~~2,301~~		2,~~426~~323		~~2,301~~
Average Contracted Horsepower:
Domestic contract compression	1,~~696~~740		~~1,630~~	1,717	~~1,661~~		1,~~662~~626		~~1,652~~
International contract compression	~~442~~513		~~372~~	484	~~363~~		~~412~~388		~~356~~
Total	2,~~138~~253		~~2,002~~	2,201	~~2,024~~		2,~~074~~014		~~2,008~~
Horsepower Utilization:
Spot (at period end)	8991.94	%	~~86.1~~%	%90.4	~~87.0~~	%	8987.96	%	~~87.0~~%	%
Average	8990.87	%	~~86.4~~%	%90.0	~~86.9~~	%	8886.47	%	~~85.6~~%	%
	June 30, 2005			March 31, 2005			June 30, 2004
				(In millions)
Fabrication Backlog	$	72.8		$	68.7		$	80.7

	December 31, 2004		December 31, 2004		December 31, 2004
	(In millions)
Fabrication Backlog	$	83.0	$	88.2	$	91.6

Domestic available horsepower remained relatively stable for the quarter ended June 30, 2005 from March 31, 2005. The increase in international horsepower was primarily attributable to horsepower that was added in Latin America.

Domestic average ~~available~~contracted horsepower ~~remained~~increased ~~relatively~~by ~~stable~~1.3% for the ~~three~~quarter ~~months and nine months~~ ended ~~December~~June 3130, ~~2004~~ 2005 compared to ~~the~~March ~~same~~31, ~~prior~~2005. International ~~year~~average ~~periods. The~~contracted ~~increase~~horsepower inincreased ~~international~~by ~~horsepower~~6.0% ~~was~~for the ~~primarily~~quarter ~~attributable~~ended toJune ~~horsepower~~30, ~~that~~2005 ~~was~~compared ~~added~~to inMarch ~~Latin~~31, ~~America~~2005. ~~and~~These ~~the~~increases were ~~Canadian~~primarily ~~acquisition~~attributable into ~~November~~higher ~~2004~~customer demand.

~~Domestic~~Fabrication ~~average~~backlog ~~contracted~~fluctuates ~~horsepower~~period ~~remained~~to ~~relatively~~period ~~stable~~due ~~for~~to, ~~the~~among ~~three~~other ~~months and nine months ended December 31~~things, ~~2004 compared to~~ the ~~same~~timing ~~prior~~of ~~year~~the ~~periods. International~~receipt ~~average contracted~~of ~~horsepower~~orders ~~increased~~placed by ~~21.8%~~customers ~~for~~and the ~~three~~timing ~~months~~of ~~ended~~revenue ~~December 31, 2004 compared to the prior year quarter and by 15~~recognition.7% The ~~for~~backlog ~~the~~of ~~nine~~fabrication ~~months ended~~projects ~~December~~at 31July 28, ~~2004~~2005 ~~compared~~was toapproximately ~~the same prior year period~~$106. ~~These increases~~8 ~~were~~million. A ~~primarily~~majority ~~attributable~~of to the ~~acquisition~~backlog ~~that was made in Canada and~~is ~~higher~~expected ~~customer~~to ~~demand~~be completed within ~~Latin~~a ~~America~~180-day period.

Fabrication backlog fluctuates quarter to quarter due to the timing of receipt of orders placed by customers and the timing of recognition of revenue. The backlog of fabrication projects at February 3, 2005 was approximately $86.1 million. A majority of the backlog is expected to be completed within a 180-day period.22

Recent Acquisition and Refinancing Activity

Recent Acquisition. In November 2004, a wholly-owned subsidiary of the Company purchased the Canadian contract compression fleet of Hanover Compressor Company, for $56.9 million in cash. At the time of the acquisition, the acquired fleet totaled approximately 83,000 horsepower and was expected to generate annual revenue of approximately $15 million. Following the subsequent sale of approximately 7,000 horsepower from the fleet, however, the expected annual revenue is now estimated to be approximately $13.5 million. The acquisition was funded by $50.0 million in borrowings under our revolving credit facility and $6.9 million in cash. We expect this transaction will be accretive to our earnings per share during the first year of operations.

Refinancing Activity. In January 2005, we closed a $650 million senior secured credit facility with a syndicate of lenders and financial institutions consisting of a $250 million five-year revolving line of credit and a $400 million seven-year bank loan. We used approximately $30 million under the new credit facility, together with borrowings under another facility, to repay $82 million of a term loan due 2008. We intend to use a significant portion of the new credit facility to redeem the outstanding $440 million of 8 7/8% senior notes due February 2008 and utilize additional capacity for working capital needs and general corporate purposes. In

conjunction with the closing of the new credit facility, a notice was sent to the trustee and the holders of the 8 7/8% notes that the notes will be redeemed on February 15, 2005 at a price of 104.438%. As part of this redemption, we will record approximately $26 million, on a pretax basis, in debt extinguishment costs, including approximately $20 million in call premium and approximately $6 million in write-off of unamortized debt issuance costs.

In January 2005, the Company also entered into forward interest rate swap agreements to hedge $300 million of debt. The interest rate swap agreements convert variable interest payments related to $300 million of the new $400 million seven-year bank loan to fixed interest payments for a portion of the term of the bank loan.

As a result of the refinancing and the related swap agreements, we expect that the Company’s resulting annual cash interest expense will be reduced by approximately $11 million to $15 million on a pre-tax basis, or $0.22 to $0.30 per diluted share on an after tax basis, depending upon future LIBOR rates and whether the Company enters into further interest rate hedging instruments. The Company also expects that reduced amortization of deferred financing costs will further reduce interest expense by approximately $1.8 million per year on a pretax basis, or $0.03 to $0.04 per diluted share on an after tax basis. In addition, the refinancing has extended our debt maturities, with no significant debt coming due before 2010.

Financial Results of Operations

Three months ended DecemberJune 3130, 20042005 compared to three months ended DecemberJune 3130, 20032004

The following table summarizes the results of operations for each of the Company and Universal:

	Three Months Ended December 31,
	Three Months Ended June 30,
	2004			2003
	2005			2004
	(Dollars in thousands)
Revenue:
Domestic contract compression	$	7579,~~170~~672		$	7170,~~067~~973
% of total revenue	39.0		%	41.8		%
% of revenue	38.3		%	38.4		%
International contract compression	$	2730,~~810~~300		$	2022,~~789~~746
% of total revenue	14.4		%	12.2		%
% of revenue	14.6		%	12.3		%
Fabrication	$	5055,~~823~~836		$	4257,~~092~~362
% of total revenue	26.4		%	24.7		%
% of revenue	26.9		%	31.0		%
Aftermarket services	$	3841,~~873~~876		$	3633,~~219~~793
% of total revenue	20.2		%	21.3		%
% of revenue	20.2		%	18.3		%
Total Revenue.	$	192,676		$	170,167
Total revenue	$	207,684		$	184,874
Gross Profit:
Gross profit:
Domestic contract compression	$	4851,~~099~~896		$	4544,~~994~~708
International contract compression	2122,~~383~~393			1517,~~808~~833
Fabrication	2,~~218~~864			34,~~612~~026
Aftermarket services	78,~~956~~829			7,~~166~~181
Total Gross Profit	$	79,656		$	72,580
Total gross profit	$	85,982		$	73,748
Gross Margin:
Gross margin:
Domestic contract compression	6465.01		%	6463.70		%
International contract compression	7673.9		%	7678.04		%
Fabrication	45.41		%	87.60		%
Aftermarket services	2021.51		%	1921.82		%
Total Gross Margin	41.3		%	42.7		%
Total gross margin	41.4		%	39.9		%
Expenses:
Depreciation and amortization	$	2325,~~611~~633		$	2122,~~504~~673
Selling, general and administrative	1920,~~224~~438			1618,~~101~~215
Interest expense, net	1612,~~821~~460			1716,~~994~~817
Foreign currency gain	(~~238~~837		)	(~~466~~358		)
Other income, net	(589		)	(1,630		)
Other loss, net	352			417
Income tax expense	6,702			7,344
Debt extinguishment costs	—			475
Net income	$	14,125		$	11,733
Gain on termination of interest rate swaps	—			(3,197		)
Income tax expense	9,800			6,921
Net income	$	18,136		$	11,785

Revenue. Domestic contract compression revenue increased due ~~primarily~~ to higher average contract ~~prices~~rates and increased ~~contracted~~ contracted horsepower ~~for~~in the three months ended ~~December~~June 3130, ~~2004~~2005. International contract compression revenue increased primarily as a result of additional revenue from the acquisition of an additional contract compression fleet in Canada, ~~additional revenue from a project in Brazil~~ and additional compression business in Argentina and Mexico, which contributed to increases of $23.6 million, $12.70 million and $1.~~3 million, respectively. Fabrication revenue increased due to increased customer demand in Asia Pacific and increased installation projects in Latin America, resulting in increased revenues of $11.~~0 million ~~and $1.7 million~~, respectively. ~~This increased revenue contribution was partially offset by decreased fabrication revenue in Canada of $4.4 million.~~ Fabrication revenue ~~fluctuates~~remained ~~quarter to quarter due to the timing of~~relatively ~~receipt~~stable offor ~~orders~~both ~~placed by customers and the timing of revenue recognition~~periods. Aftermarket ~~services~~ services revenue was higher due primarily to ~~increases~~increased customer demand within the ~~Latin~~United ~~America~~States ($15.6 2 million), ~~and~~Latin ~~Asia~~America ~~Pacific~~ ($12.0 million) ~~due,~~and inCanada ~~part, to acquisitions made in~~($0.9 ~~those regions~~million).

Gross Profit. The ~~changes to~~increase in gross profit (defined as total ~~revenue~~revenues less direct costs) for the three ~~months~~ months ended ~~December~~June 3130, ~~2004~~2005 compared to the prior year period ~~were~~was primarily attributable to revenue increases discussed above for domestic and international contract compression and aftermarket services. The decreased gross profit experienced in fabrication was primarily due to warranty and start up costs on certain relatively complex projects.

25Gross Margin. The increase in domestic contract compression gross margin is primarily attributable to a price increase initiated during the three months ended June 30, 2005 and reduced repair and maintenance costs. The decrease in international

~~international contract compression, offset by a decline in fabrication primarily due to warranty costs and losses incurred on certain relatively complex projects.~~23

~~Gross Margin.~~ contract ~~The~~compression ~~reduction in fabrication~~ gross margin ~~for the~~is ~~three months ended December 31, 2004 was~~ primarily ~~due~~attributable to ~~warranty~~increased ~~costs~~ repair and maintenance ~~losses~~costs ~~incurred~~in onLatin ~~certain relatively complex projects~~America. AsThe lower afabrication ~~percentage~~gross ofmargin ~~segment~~primarily ~~revenue,~~resulted ~~direct~~from ~~costs~~the above-mentioned ~~for~~increase ~~domestic~~in ~~contract~~warranty ~~compression,~~and ~~international~~start-up ~~contract~~costs. Gross ~~compression~~margin ~~and~~ for aftermarket services remained relatively stable ~~compared to the prior year~~for ~~three-month~~both ~~period~~periods.

Depreciation ~~and~~ and Amortization. The increase in depreciation and amortization expense for the three months ended June ~~December 31~~30, ~~2004~~2005 compared to the prior year period primarily resulted from on-going capital additions, ~~including~~consisting ~~the~~primarily ~~start~~ of ~~operations~~additions to our contract compression fleet and compressor overhauls, and the acquisition of athe ~~project~~contract compression fleet in ~~Brazil~~Canada in November 2004.

Selling, General and Administrative Expenses. The increase in ~~selling,~~SG&A ~~general and administrative~~ expenses for the three months ended ~~December~~June 3130, ~~2004~~2005 relates to the increased expenses ~~resulting~~within ~~from~~the United States of $1.3 million due primarily to increased ~~operating~~marketing ~~activity~~and ~~within~~business ~~Latin~~development ~~America~~activities and ~~Asia~~the on-going ~~Pacific~~implementation of ~~$2.0 million~~an ~~and~~ERP $0system.~~6 million, respectively.~~ ~~Selling,~~SG&A ~~general~~expenses ~~and~~in ~~administrative~~Latin ~~expenses~~America ~~represented~~increased 10$1.0% ofmillion ~~total~~due to our ~~revenue~~on-going ~~for~~investment ~~the~~in ~~three~~our ~~months~~international ~~ended~~infrastructure ~~December~~and ~~31,~~growing international ~~2004~~revenue taxes, ~~compared~~which toare 9classified as SG&A.5 SG&A expenses represented 10% of total revenues for ~~the~~both ~~three months ended December 31, 2003~~periods.

~~Other~~Earnings Before ~~Income~~Interest, Taxes, Depreciation and Amortization, (“EBITDA”), as adjusted. EBITDA, as adjusted, for the three months ~~net~~ended June 30, 2005 was $65.2 million compared to $55.1 million for the prior year period. The ~~decrease~~ increase in EBITDA ~~other~~of ~~income~~18.3% from the prior year period is primarily ~~due~~attributable ~~gains~~to ~~from~~ the revenue ~~sale~~increases ofdiscussed above for domestic ~~contract~~ and international contract compression ~~equipment~~and ~~due~~aftermarket toservices. EBITDA, ~~customers~~as ~~exercising~~adjusted, ~~purchase~~is ~~options~~defined, indiscussed and reconciled to net income ~~the~~on ~~three~~page ~~months~~27 ~~ended~~of ~~December~~this 31report, ~~2003~~within Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~Income Tax~~Interest Expense, Net. ~~Income~~The ~~tax~~decrease ~~expense~~in ~~decreased,~~interest ~~although~~expense ~~income before taxes increased~~ for the three months ended ~~December~~June 3130, ~~2004,~~2005 asis primarily arelated ~~result~~to of the ~~reduction~~Company’s ofdebt ~~our~~refinancing ~~effective tax~~activities. The ~~rate~~lower ~~from~~interest ~~37%~~rates toresulting ~~36%. The~~from ~~reduction~~the inrefinancing ~~the~~of ~~effective~~$400.0 ~~tax~~million ~~rate~~of islong ~~primarily~~term ~~due~~debt toin ~~the~~February ~~increased~~2005 ~~share of~~reduced ~~international~~interest ~~income~~expense asby a$5.2 ~~proportion~~million. This decrease ofwas ~~consolidated~~partially ~~income,~~offset ~~which~~by onan ~~average is~~increase ~~taxed~~in atinterest aexpense ~~lower~~of ~~statutory~~$0.8 million ~~rate~~relating ~~than~~to ~~income~~amounts ~~generated~~outstanding inunder ~~the~~our ~~United~~revolving ~~States~~credit facility.

26Gain on Termination of Interest Rate Swaps. A $3.2 million gain on the termination of interest rate swaps was recognized for the three months ended June 30, 2004. This gain was the result of reducing the notional amount of interest rate swaps by $84.8 million on our ABS Facility in connection with a principal reduction of $80.0 million in June 2004.

~~Nine~~Income Tax Expense. The increase in income tax expense for the three months ended ~~December~~June 3130, ~~2004~~2005 ~~compared~~is primarily related to ~~nine~~the ~~months~~higher ~~ended~~income ~~December~~before 31income taxes, ~~2003~~partially offset by a decrease in the effective tax rate in the current period due to an increasing percentage of earnings from international locations, which is typically taxed at a slightly lower rate.

~~The following table summarizes the results of operations:~~24

	Nine Months Ended December 31,
	2004			2003
	(Dollars in thousands)
Revenue:
Domestic contract compression	$	219,321		$	209,983
% of total revenue	38.5		%	42.1		%
International contract compression	$	73,428		$	61,193
% of total revenue	12.9		%	12.3		%
Fabrication	$	165,957		$	121,030
% of total revenue	29.1		%	24.3		%
Aftermarket services	$	110,728		$	105,872
% of total revenue	19.5		%	21.3		%
Total Revenue	$	569,434		$	498,078
Gross Profit:
Domestic contract compression	$	139,187		$	133,321
International contract compression	56,676			47,202
Fabrication	12,244			9,381
Aftermarket services	22,995			22,790
Total Gross Profit	$	231,102		$	212,694
Gross Margin:
Domestic contract compression	63.5		%	63.5		%
International contract compression	77.2		%	77.1		%
Fabrication	7.4		%	7.8		%
Aftermarket services	20.8		%	21.5		%
Total Gross Margin	40.6		%	42.7		%
Expenses:
Depreciation and amortization	$	69,407		$	63,411
Selling, general and administrative	55,684			49,351
Interest expense, net	49,792			55,870
Foreign currency (gain) loss	286			(631		)
Other income, net	(228		)	(2,525		)
Debt extinguishment costs	475			14,397
Gain on termination of interest rate swaps	(3,197		)	—
Facility consolidation costs	—			1,821
Income tax expense	20,783			11,937
Net income	$	38,100		$	19,063

Liquidity and Capital Resources

~~Revenue. Domestic contract compression revenue~~Our ~~increased~~primary ~~due~~sources ~~primarily~~of tocash ~~higher~~are ~~average~~operating ~~contract~~activities ~~prices~~ and ~~increased contracted~~financing ~~horsepower in the nine months ended December 31, 2004~~activities. ~~International~~Our ~~contract~~primary ~~compression~~uses ~~revenue increased primarily as a result~~ of ~~additional~~cash ~~revenue~~are ~~from a project in Brazil,~~operating ~~additional~~expenditures, ~~compression~~capital ~~business~~expenditures ~~in Argentina~~ and ~~additional~~long-term ~~revenue~~debt ~~from the acquisition of an additional contract compression fleet in Canada which contributed to increases of $3~~repayments.7 The ~~million,~~following ~~$3.6~~table ~~million~~summarizes ~~and~~our ~~$2.6 million,~~sources ~~respectively. Fabrication revenue increased due to increased customer demand in the Asia Pacific, United States~~ and ~~Latin~~uses ~~America regions, which contributed increases~~ of ~~$21.6~~cash ~~million,~~for ~~$20.8 million and $5.0 million, respectively, compared to~~ the ~~nine~~three months ended ~~December~~ 31June 30, ~~2003. This~~2005 ~~increased revenue~~and ~~contribution~~2004, ~~was~~and ~~partially offset by decreased fabrication revenue in~~our ~~Canada~~cash ofand ~~$2.5~~working ~~million. Fabrication revenue~~capital ~~fluctuates~~as ~~quarter to quarter due to the timing~~ of ~~receipt of orders placed by customers and~~ the ~~timing~~end of ~~revenue~~such ~~recognition. Aftermarket~~periods ~~services revenue was higher primarily due to increases within Latin America~~ (~~$2.3 million) and Asia Pacific ($1.7 million) due,~~ in ~~part, to acquisitions made in those regions.~~thousands):

	Three Months Ended June 30,
	2005			2004
Net cash provided by (used in):
Operating activities	$	44,560		$	24,352
Investing activities	$	(37,486	)	$	(21,534	)
Financing activities	$	(9,581	)	$	(85,600	)

	As of June 30,
	2005			2004
Cash	$	36,499		$	38,122
Working capital, net of cash	$	79,010		$	76,226

~~Gross Profit~~Overview. ~~The~~Net ~~changes~~cash toused ~~gross~~in ~~profit~~investing ~~(defined~~and ~~as total~~financing ~~revenue~~activities ~~less~~exceeded ~~direct~~net ~~costs)~~cash provided by operating activities by $2.5 million for the ~~nine~~three months ended ~~December~~June 3130, ~~2004~~2005 ~~compared~~primarily as a result of $41.9 million toof capital expenditures, as discussed below. As a result, the ~~prior~~cash ~~year~~balance ~~period~~of ~~were~~$38.7 ~~primarily~~million ~~attributable~~at March 31, 2005 declined to ~~revenue~~$36.5 ~~increases~~million at June 30, 2005. ~~discussed~~For ~~above~~the ~~for~~three ~~domestic~~months ~~contract~~ended ~~compression~~June 30, ~~international~~2004, ~~contract compression~~net cash used in investing and financing ~~fabrication~~activities exceeded net cash provided by operating activities by $82.8 million.

~~Gross Margin~~Operations. As aNet ~~percentage~~cash ofprovided ~~segment revenue, direct costs~~by ~~for~~operating ~~all~~activities ~~business~~increased ~~segments~~$20.2 million for the ~~nine~~three months ended ~~December~~June 3130, ~~2004 remained~~ ~~relatively~~2005 ~~stable~~compared ~~for~~to the ~~comparable~~prior ~~nine-~~year three month period primarily as a result of increased earnings and changes in working capital.

~~Depreciation~~Capital ~~and~~Expenditures. Capital expenditures for ~~Amortization~~the three months ended June 30, 2005 were $41.9 million consisting of $24.7 ~~The~~million ~~increase~~for infleet ~~depreciation~~additions, ~~and~~$11.1 million ~~amortization~~for ~~expense~~compressor overhauls, $1.4 million for ~~the~~service ~~nine~~trucks ~~months~~and $4.7 million for machinery, equipment, ~~ended~~information ~~December~~technology 31equipment and other items. Based on current market conditions, ~~2004~~we ~~compared~~expect to continue to ~~the~~invest ~~prior~~in ~~year~~fleet ~~primarily~~additions, ~~resulted~~compressor overhauls and maintenance and other capital requirements. We expect net capital expenditures (defined as capital expenditures less proceeds from asset sales) of approximately $125 million to $140 million for the fiscal ~~start~~year ofending ~~operations~~March of31, a2006, ~~project~~including inapproximately ~~Brazil~~$40 ~~and~~million ~~other~~for ~~capital~~compression fleet ~~additions~~maintenance capital.

~~Selling,~~Long-term ~~General~~Debt. ~~and Administrative~~As ~~Expenses. The increase~~of inJune ~~selling~~30, 2005, ~~general~~we ~~and~~had ~~administrative~~approximately ~~expenses~~$848.8 million ~~for~~in ~~the~~outstanding ~~nine~~long-term ~~months~~debt ~~ended~~obligations ~~December~~consisting ~~31,~~of ~~2004~~$399.0 ~~relates~~million tooutstanding under the ~~increased~~seven-year ~~expenses resulting from~~term ~~increased~~loan, ~~operating~~$173.4 ~~activity~~million ~~within~~outstanding ~~Latin~~of ~~America~~7 ~~and~~1/4% ~~Asia~~senior ~~Pacific~~notes, of $3200.7 0 million outstanding ~~and~~under ~~$1.9~~the ~~million,~~ABS ~~respectively. Selling~~Facility, ~~general~~ and ~~administrative~~$76.4 ~~expenses~~million ~~represented~~outstanding ~~10%~~under ~~of total~~the ~~revenues~~revolving ~~for~~credit ~~both periods~~facility.

Debt Extinguishment Costs. Debt extinguishment costs incurred during the nine months ended December 31, 2003 were primarily due to the early extinguishment in May 2003 of Universal’s outstanding $229.8 million 9 7/8% senior discount notes due 2008. The ~~net proceeds from the offering by~~ ~~Universal~~maturities of ~~new~~this 7debt ~~1/4% senior discount notes due 2010 and available funds were used to pay~~ for the ~~extinguishment~~twelve ofmonths ~~the~~ended 9June ~~7/8%~~30 ~~senior discount notes due 2008. As a result~~ of the ~~early~~periods ~~extinguishment~~indicated ofare ~~debt,~~shown abelow ~~charge of $14.4 million was recognized~~ (in ~~the prior~~thousands). ~~year~~We ~~resulting~~expect ~~from~~to ~~the~~pay ~~redemption~~these ~~and~~principal ~~tender~~payments ~~premiums~~through ofcash ~~$12.0~~generated ~~million,~~by ~~write-off~~operations ~~of unamortized debt issuance costs of $1.9 million~~ and ~~$0.5 million of other costs. For the nine months ended December 31, 2004,~~ debt ~~extinguishment~~refinancing ~~costs of $0~~activity.~~5 million resulted from the buyback of $5.0 million of our 8 7/8% senior notes due 2008.~~

Gain on Termination of Interest Rate Swaps. A $3.2 million gain on the termination of interest rate swaps was recognized for the nine months ended December 31, 2004. This gain was the result of reducing the notional amount of interest rate swaps by $84.8 million on our ABS lease facility in connection with a principal reduction of $80.0 million in June 2004.

2006	$	25,099
2007	25,099
2008	25,099
2009	25,099
2010	274,903
Thereafter	473,505
Total debt	$	848,804

Facility Consolidation Costs. Facility consolidation costs incurred during the nine months ended December 31, 2003 were $1.8 million. These costs related to the transfer of the Tulsa, Oklahoma fabrication operations to the Houston fabrication facility and were primarily for severance, personnel costs and relocation costs.25

~~Other Income~~Historically, we have financed capital expenditures with net cash provided by operating and financing activities. ~~The~~Based on current ~~decrease~~market inconditions, ~~other~~we ~~income~~expect isthat ~~primarily~~net ~~due~~cash ~~gains~~provided ~~from~~by operating activities will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through the ~~sale~~2006 offiscal ~~domestic~~year. To the extent that net cash provided by ~~contract~~operating ~~compression~~activities ~~equipment~~is ~~due~~not sufficient to ~~customers~~finance ~~exercising~~our ~~purchase~~operating ~~options in~~expenditures, ~~the~~capital ~~nine~~expenditures ~~months~~and ~~ended~~scheduled ~~December~~interest 31and debt repayments through the 2006 fiscal year, ~~2003~~we may borrow additional funds under our revolving credit facility or we may obtain additional debt or equity financing.

~~Income~~Debt ~~Tax Expense~~Covenants and Availability. ~~The increase~~Covenants in ~~income~~our ~~tax~~credit facilities ~~expense~~require ~~for~~that ~~the~~we ~~nine~~maintain ~~months~~various ~~ended~~financial ~~December~~ratios, 31including a collateral coverage ratio (market value of domestic compression collateral to amount of indebtedness outstanding under our new credit facility) of greater than or equal to 1.25 to 1, ~~2004~~a total leverage ratio (total debt to earnings ~~primarily~~before ~~relates~~interest, taxes, depreciation and amortization expense) of less than or equal to ~~increased~~5 ~~income~~to 1, and an interest coverage ratio (earnings before interest, taxes, asdepreciation ~~compared~~and amortization expense to ~~the~~interest ~~nine~~expense) of greater ~~months~~than ~~ended~~or ~~December~~equal 31to 2.5 to 1. As of June 30, ~~2003~~2005, ~~due~~we toand ~~items~~our ~~mentioned~~subsidiaries ~~above~~were in compliance with all of the financial covenants.

28As of June 30, 2005, due to restrictive covenants and after giving effect to $23.0 million of outstanding letters of credit under our financing documents, we had an aggregate unused credit availability of approximately $121.9 million from our revolving credit facility.

~~Liquidity and Capital Resources~~26

~~Our primary sources of cash are operating activities and financing~~THE ~~activities. Our~~COMPANY’S ~~primary uses of cash are operating expenditures~~DEFINITION, capital expenditures and long-term debt repayments. The following table summarizes our sources and uses of cash for the nine-month periods ended December 31, 2003 and 2004, and our cash and working capital as of the end of such periods:RECONCILIATION

	Nine Months Ended December 31,
	2004			2003
	(In thousands)
Net cash provided by (used in):
Operating activities	$	112,223		$	137,773
Investing activities.	$	(147,274	)	$	(36,897	)
Financing activities	$	(33,073	)	$	(71,882	)

AND USE OF EBITDA, AS ADJUSTED

	As of December 31,
	2004		2003
	(In thousands)
Cash	$	53,958	$	101,542
Working capital, net of cash	$	65,041	$	51,397

EBITDA, as adjusted, is defined as net income plus income taxes, interest expense (including debt extinguishment costs and gain on the termination of interest rate swaps), depreciation and amortization, foreign currency gains or losses, excluding non-recurring items (including facility consolidation costs) and extraordinary gains or losses.

~~Overview. Net cash used in investing and financing~~EBITDA, ~~activities~~as ~~exceeded net cash provided by operating activities by $68.1 million for the nine months ended December 31~~adjusted, ~~2004~~represents ~~primarily as~~ a ~~result~~measure ofupon ~~$60.0 million~~which ~~paid~~management ~~for~~assesses ~~acquisitions, $32.2 million in net debt prepayments during the~~performance ~~period~~ and ~~$105.4 million of capital expenditures~~, as ~~discussed~~such, ~~below. As~~we abelieve ~~result,~~that the ~~cash~~generally ~~balance~~accepted ofaccounting ~~$121.2~~principle (“GAAP”) ~~million~~measure atmost ~~March~~directly ~~31,~~comparable ~~2004 declined~~ to ~~$54.0~~it ~~million~~is atnet ~~December~~income ~~31,~~or ~~2004~~net loss. ~~For~~The following ~~the~~table ~~nine~~reconciles ~~months~~our ~~ended~~EBITDA, ~~December~~as 31adjusted, ~~2003,~~ to net ~~cash~~income ~~provided by operating activities exceeded cash used~~ (in ~~investing and financing activities by $29.0 million.~~thousands):

Operations. Net cash provided by operating activities decreased $25.6 million, or 18.5%, for the nine months ended December 31, 2004 compared to the prior year period primarily as a result of changes in working capital including lower unearned revenue of $30.3 million related to the timing of progress billing activity for the fabrication segment.

	Three Months Ended June 30,
	2005			2004
EBITDA, as adjusted	$	65,192		$	55,116
Depreciation and amortization	(25,633		)	(22,673		)
Interest expense, net	(12,460		)	(16,817		)
Debt extinguishment costs	—			(475		)
Gain on termination of interest rate swaps	—			3,197
Foreign currency gain	837			358
Income tax expense	(9,800		)	(6,921		)
Net income	$	18,136		$	11,785

~~Capital~~Management ~~Expenditures. Capital expenditures~~believes ~~for~~disclosure ~~the~~of ~~nine months ended December 31~~EBITDA, ~~2004~~as ~~were $105.4 million consisting of $61.2 million for fleet additions~~adjusted, ~~$30.0 million~~ ~~for~~a ~~compressor~~non-GAAP ~~overhauls~~measure, ~~$5.9~~provides ~~million for service trucks~~useful ~~and~~information ~~$8.3 million~~to ~~for~~investors ~~machinery~~because, ~~equipment,~~when ~~information~~viewed ~~technology equipment~~with ~~and~~our ~~other~~GAAP ~~items. Based~~results onand ~~current~~accompanying ~~market conditions~~reconciliations, weit ~~expect~~provides toa ~~continue~~more tocomplete ~~invest~~understanding inof ~~fleet additions,~~our ~~compressor~~performance ~~overhauls~~than ~~and~~GAAP ~~maintenance~~results ~~and other capital requirements~~alone. WeManagement ~~expect~~uses ~~capital~~EBITDA, ~~expenditures~~as ~~to be~~adjusted, ~~approximately~~as ~~$145~~a ~~million~~supplemental ~~for~~measure ~~the~~to ~~fiscal~~review ~~year~~current ~~ending~~period ~~March~~operating 31performance, ~~2005~~a comparability measure, ~~including approximately~~a ~~$40~~performance ~~million~~measure for ~~compression~~period ~~fleet~~to ~~maintenance~~period ~~capital~~comparisons and a valuation measure.

~~Long-term~~Use of ~~Debt~~EBITDA, as adjusted, by itself and without consideration of other measures, ~~Capital~~is ~~Lease~~not ~~Obligations.~~an Asadequate measure of ~~December~~the ~~31,~~Company’s ~~2004~~performance because this measure excludes certain material items. Further, wethe measure has a limitation in ~~had~~that ~~approximately~~many ~~$847~~users of financial statements believe that EBITDA is a measure of liquidity or of cash flows.~~1 million~~ We do not use EBITDA, as adjusted, in ~~outstanding~~this way ~~debt~~because it excludes interest and ~~capital~~income ~~lease~~tax payments and changes in working ~~obligations~~capital ~~consisting~~accounts ~~primarily~~and therefore we urge the readers of ~~$522.2 million~~our ~~outstanding~~financial ~~under~~statements to not use the ~~seven-year~~ ~~term~~measure ~~senior~~in ~~secured~~this ~~notes~~way ~~operating~~either. Management ~~lease~~compensates ~~facility~~for these limitations by using EBITDA, ~~made~~as upadjusted, ofas 8a supplemental measure to ~~7/8%~~other ~~senior~~GAAP ~~notes~~results ~~due~~to ~~2008~~provide a more complete understanding of our performance without considering financial and aother ~~term~~items ~~loan~~that ~~due~~have ~~2008,~~less ~~$172~~bearing on operating performance.~~9 million~~ The measure has a limitation, as it does not consider ~~outstanding~~the amount of 7required ~~1/4%~~reinvestment ~~senior~~to ~~notes~~maintain ~~due~~similar ~~2010,~~going ~~$100~~forward results.~~0 million~~ Management ~~outstanding under~~mitigates ~~the~~this ~~ABS~~limitation ~~lease~~by ~~facility~~reviewing and ~~$50.0~~disclosing the ~~million~~Company’s ~~outstanding~~capital ~~under~~and ~~the~~maintenance ~~revolving~~capital expenditures on a regular basis ~~credit~~as ~~facility~~yet another supplemental tool to evaluate the Company.

29EBITDA, as adjusted, is not a measure of financial performance under GAAP and should not be considered an alternative to net income as an indicator of our operating performance or to net cash provided by operating activities as a measure of our liquidity.

~~The~~ITEM ~~maturities of this debt are shown below~~3. We ~~expect~~Quantitative toand ~~pay~~Qualitative ~~these~~Disclosures ~~principal payments~~about ~~through~~Market ~~cash generated by operations and debt refinancing activity.~~Risk

	(In thousands)
2005	$	10,118
2006	18,690
2007	18,878
2008	541,027
2009	18,563
Thereafter	239,781
Total debt	$	847,057

Variable Rate Debt

InWe ~~January~~are ~~2005, the~~exposed ~~Company closed a $650 million senior secured credit facility with a~~to ~~syndicate~~market ofrisk lenders and financial institutions consisting of a $250 million five-year revolving line of credit and a $400 million seven-year bank loan. The Company used approximately $30 million under the new credit facility, together with borrowings under another facility, to repay $82 million of a term loan due ~~2008.~~ ~~Universal intends~~ to ~~use~~variable ainterest ~~significant~~rates ~~portion~~under ofour ~~the~~financing ~~new credit facility to redeem the outstanding $440 million of 8 7/8% senior notes due February 2008~~ and ~~utilize additional capacity for working capital needs and general corporate~~interest ~~purposes.~~rate Inswap ~~conjunction with the closing of the new credit facility, a notice was sent to the trustee and the holders of the 8 7/8% notes that the notes will be redeemed on February 15, 2005 at a price of 104~~arrangements.438%. As part of this redemption, Universal will record approximately $26 million, on a pretax basis, in debt extinguishment costs, including approximately $20 million in call premium and approximately $6 million in write-off of unamortized debt issuance costs.

~~Historically,~~The weinterest ~~have financed capital~~rate ~~expenditures~~under ~~with~~our ~~net~~revolving ~~cash~~credit ~~provided~~facility, bywhich ~~operations~~had ~~and financing activities~~$76. ~~Based~~4 onmillion ~~current~~outstanding ~~market~~as of ~~conditions~~June 30, we2005, ~~expect~~is ~~that~~based ~~net~~upon, ~~cash~~at ~~provided~~our byoption, ~~operating~~either ~~activities~~a ~~will~~base ~~be sufficient~~rate toplus ~~finance~~an applicable ~~our operating expenditures~~margin, ~~capital~~which ~~expenditures~~varies ~~and scheduled~~from ~~interest~~0.25% ~~and~~to ~~debt~~1.25% ~~repayments~~based ~~through~~on ~~the~~our ~~2005 fiscal year excluding~~leverage ~~funds~~ratio, ~~required~~or ~~for~~ the ~~Canada~~one, ~~acquisition. To~~two, ~~the~~three ~~extent~~or ~~that~~six ~~net~~month ~~cash~~LIBOR, ~~provided~~plus byan ~~operating~~applicable ~~activities is not~~margin ~~sufficient~~which tovaries ~~finance~~from ~~our~~1.25% ~~operating~~to ~~expenditures,~~2.25% ~~capital~~based ~~expenditures~~on ~~and scheduled~~our ~~interest~~leverage ~~and~~ratio. At ~~debt~~July ~~repayments~~28, ~~through~~2005, the ~~2005~~applicable ~~fiscal~~rate ~~year,~~was ~~we may~~the ~~borrow~~one ~~additional~~month ~~funds~~LIBOR, ~~under~~which ~~our~~was ~~new~~3.69% ~~revolving~~and ~~line~~the ofapplicable ~~credit~~margin orwas ~~we may obtain additional debt or equity financing~~1.5%.

~~Debt~~At ~~Covenants~~June ~~and~~30, ~~Availability~~2005, $99. ~~Covenants~~0 inmillion ~~our~~of ~~credit~~the ~~facilities~~$399.0 ~~require that~~million weoutstanding ~~maintain~~under ~~various~~the ~~financial~~seven-year ~~ratios,~~term ~~including~~loan remained afloating. The ~~collateral~~remaining ~~coverage~~$300.0 ~~ratio~~million ofoutstanding ~~greater~~under ~~than~~the ~~1.25~~seven-year term loan is subject to 1interest ~~(market~~rate swap ~~value~~agreements, ofwhich ~~compression~~are ~~collateral~~described tobelow in “Interest ~~amount~~Rate ofSwap ~~indebtedness~~Arrangements.” This facility ~~outstanding~~provides, ~~under~~at our ~~new~~option, ~~credit~~for ~~facility),~~interest at a ~~total~~base rate plus an ~~leverage~~applicable ~~ratio~~margin of ~~less~~either ~~than~~0.50% or ~~equal~~0.75% todepending 5on toour 1rating ~~(total~~from ~~debt~~S&P and toMoodys, ~~earnings~~or ~~before interest~~the one, ~~taxes~~two, ~~depreciation~~three ~~and~~or ~~amortization~~six ~~expense)~~month ~~and~~LIBOR, anplus ~~interest coverage~~a ~~ratio~~margin of ~~greater~~either 1.50% ~~than~~or 21.575% todepending 1on ~~(earnings~~the ~~before~~rating ~~interest,~~from ~~taxes, depreciation~~S&P and ~~amortization expense to interest expense)~~Moodys. As ofAt ~~February~~July 728, 2005, wethe ~~and~~applicable ~~our subsidiaries~~rate ~~are~~was inthe ~~compliance~~one ~~with~~month ~~all~~LIBOR, ofwhich was 3.69%, and the applicable ~~financial~~margin ~~covenants~~was 1.75%.

As of February 7, 2005, subject to the above-mentioned covenants and other restrictions, we had unused credit availability under our new credit facility of approximately $146.1 million. Upon the redemption of the 8 7/8% senior notes on February 15, 2005, we expect to have an aggregate unused credit availability of approximately $93.3 million.27

Also at June 30, 2005, $118.2 million of our ABS Facility was subject to a variable interest rate based on the one month LIBOR, which was 3.69% at July 28, 2005, plus 1.27%. The remaining $81.8 million is subject to an interest rate swap agreement, which is described below in “Interest Rate Swap Arrangements.”

~~UNIVERSAL~~In ~~COMPRESSION~~addition, ~~INC~~$100 million of our 7 1/4% senior notes are subject to interest rate swap agreements which convert the fixed rate to a variable rate. The variable rate under these interest rate swap agreements is six month LIBOR, payable in arrears, plus an average applicable margin of 3.21%. At July 28, 2005, the six month LIBOR was 4.17%.

~~Nine~~As ~~months~~of ~~ended~~June ~~December 31~~30, 2005, ~~2004~~approximately $393.6 million of our outstanding indebtedness and ~~compared~~other toobligations ~~nine~~bore ~~months~~interest ~~ended~~at ~~December~~floating ~~31,~~rates ~~2003~~and a 1.0% increase in interest rates would result in an approximate $3.9 million annual increase in our interest expense.

~~The~~Interest ~~following~~Rate ~~table~~Swap ~~summarizes the results of operations:~~Arrangements

	Nine Months Ended December 31,
	2004			2003
	(Dollars in thousands)
Revenue:
Domestic contract compression	$	219,321		$	209,983
% of total revenue	38.5		%	42.1		%
International contract compression	$	73,428		$	61,193
% of total revenue	12.9		%	12.3		%
Fabrication	$	165,957		$	121,030
% of total revenue	29.1		%	24.3		%
Aftermarket services	$	110,728		$	105,872
% of total revenue	19.5		%	21.3		%
Total Revenue	$	569,434		$	498,078
Gross Profit:
Domestic contract compression	$	139,187		$	133,321
International contract compression	56,676			47,202
Fabrication	12,244			9,381
Aftermarket services	22,995			22,790
Total Gross Profit	$	231,102		$	212,694
Gross Margin:
Domestic contract compression.	63.5		%	63.5		%
International contract compression	77.2		%	77.1		%
Fabrication	7.4		%	7.8		%
Aftermarket services	20.8		%	21.5		%
Total Gross Margin	40.6		%	42.7		%
Expenses:
Depreciation and amortization	$	69,407		$	63,411
Selling, general and administrative	55,684			49,351
Interest expense, net	49,792			55,870
Foreign currency (gain) loss	286			(631		)
Other income, net	(228		)	(2,525		)
Debt extinguishment costs	475			14,397
Gain on termination of interest rate swaps	(3,197		)	—
Facility consolidation costs	—			1,821
Income tax expense	20,783			11,937
Net income	$	38,100		$	19,063

We are also a party to interest rate swap agreements which are recorded at fair-market value in our financial statements. A change in the underlying interest rates may also result in a change in their recorded value.

~~Revenue. Domestic~~At ~~contract~~June ~~compression~~30, ~~revenue~~2005, ~~increased due primarily to higher average contract prices and increased contracted horsepower in~~ the ~~nine~~notional ~~months~~amount ~~ended December 31, 2004. International contract compression revenue increased primarily as a result~~ of ~~additional revenue from a project in Brazil, additional compression business in Argentina and additional revenue from~~ the ~~acquisition~~ ofinterest anrate ~~additional~~swap ~~contract~~agreement ~~compression~~related ~~fleet~~to inour ~~Canada which~~ABS ~~contributed~~Facility towas ~~increases of~~ $381.78 million, ~~$3.6 million~~ and ~~$3.5~~the ~~million, respectively. Fabrication~~fair ~~revenue increased~~market ~~due~~value toof ~~increased~~this ~~customer~~interest ~~demand~~rate ~~in the Asia Pacific, United States~~swap ~~and~~agreement ~~Latin~~was ~~America~~a ~~regions,~~liability ~~which contributed increases~~ of ~~$21.6~~approximately ~~million,~~ $203.8 ~~million~~ ~~and $5.0~~ million, ~~respectively,~~which ~~compared~~was torecorded ~~the nine months ended~~as ~~December~~a ~~31,~~noncurrent ~~2003~~liability. ~~This~~ ~~increased revenue~~The ~~contribution~~interest ~~was~~rate ~~partially~~swap ~~offset~~agreement byterminates ~~decreased fabrication revenue~~ in ~~Canada of $2~~February 2013.5 ~~million. Fabrication revenue~~The ~~fluctuates~~fixed ~~quarter~~rate toof ~~quarter~~this ~~due~~swap toagreement ~~the~~is ~~timing~~5.21%, offor ~~receipt of orders~~an ~~placed~~all-in byfixed ~~customers~~rate ~~and the timing~~ of ~~revenue recognition~~6. ~~Aftermarket~~48% ~~services~~on ~~revenue~~this ~~was~~portion ~~higher primarily~~of ~~due~~the toABS ~~increases~~Facility, ~~within~~inclusive ~~Latin~~of the ~~America~~ABS ~~($2.3~~Facility’s ~~million)~~applicable ~~and~~margin ~~Asia~~of ~~Pacific ($~~1.~~7 million) due, in part, to acquisitions made in those regions~~27%.

31At June 30, 2005, the notional amount of the interest rate swap agreements related to the seven-year term loan was $300.0 million. The fair market value of these interest rate swap agreements was a liability of approximately $0.2 million, which was recorded as a noncurrent liability. The interest rate swap agreements terminate in March 2010. The weighted average fixed rate of these interest rate swap agreements is 4.02%, for an all-in weighted average fixed rate of 5.77% on this portion of the term loan, inclusive of the term loan’s applicable margin of 1.75%.

~~Gross~~As ~~Profit. The~~noted ~~changes~~above, the tonotional ~~gross~~amount ~~profit~~of ~~(defined~~the asinterest ~~total revenue~~rate ~~less~~swap ~~direct~~agreements ~~costs)~~related ~~for~~to ~~the~~our ~~nine~~7 ~~months~~1/4% senior ~~ended~~notes ~~December~~was ~~31,~~$100 ~~2004~~million. The ~~compared~~fair tomarket ~~the~~value ~~prior~~of ~~year~~these ~~period~~interest ~~were~~rate ~~primarily~~swap ~~attributable~~agreements toat ~~revenue~~June ~~increases discussed~~30, ~~above~~2005, ~~for~~was ~~domestic~~a liability ~~contract~~of ~~compression,~~approximately ~~international~~$1.6 ~~contract~~million. ~~compression~~These ~~and~~interest ~~fabrication~~rate swap agreements terminate in May 2010.

~~Gross~~Foreign ~~Margin. As~~Currency aExchange ~~percentage of segment revenue, direct costs for all business segments for the nine months ended December 31, 2004 remained relatively stable for the comparable nine-month period.~~Rates

~~Depreciation~~To ~~and~~minimize any ~~Amortization.~~ significant foreign currency credit risk, we generally contractually require ~~The~~that ~~increase~~payment by our customers be made in ~~depreciation~~U.S. ~~and~~dollars. ~~amortization~~If ~~expense~~payment ~~for~~is ~~the~~not ~~nine~~made ~~months~~in ~~ended~~U.S. ~~December 31~~dollars, ~~2004~~we ~~compared~~generally toutilize the ~~prior~~exchange ~~year~~rate ~~primarily~~into ~~resulted from~~U.S. dollars on the ~~start~~payment ofdate ~~operations~~and ofbalance apayments ~~project~~ in ~~Brazil~~local ~~and~~currency ~~other~~against ~~capital additions~~local expenses.

Selling,ITEM General and Administrative Expenses4. The increase inControls selling, general and administrative expenses for the nine months ended December 31, 2004 relates to the increased expenses resulting from increased operating activity within Latin America and Asia Pacific of $3.7 million and $1.9 million, respectively. Selling, general and administrative expenses represented 10% of total revenues for both periods.Procedures

~~Debt Extinguishment Costs. Debt extinguishment costs incurred during the nine months ended December 31, 2003 were primarily due to the early extinguishment in May 2003 of Universal~~Management’s ~~outstanding~~ ~~$229.8~~Evaluation ~~million 9 7/8% senior discount notes due 2008. The net proceeds from the offering by Universal~~ of ~~new~~Disclosure 7Controls ~~1/4% senior discount notes due 2010~~ and available funds were used to pay for the extinguishment of the 9 7/8% senior discount notes due 2008. As a result of the early extinguishment of debt, a charge of $14.4 million was recognized in the prior year resulting from the redemption and tender premiums of $12.0 million, write-off of unamortized debt issuance costs of $1.9 million and $0.5 million of other costs. For the nine months ended December 31, 2004, debt extinguishment costs of $0.5 million resulted from the buyback of $5.0 million of our 8 7/8% senior notes due 2008.Procedures

~~Gain~~As required onby ~~Termination~~Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of ~~Interest~~1934 ~~Rate~~(the ~~Swaps.~~“Exchange AAct”), ~~$3.2~~Company ~~million~~and ~~gain~~Universal onmanagement, including the ~~termination~~Chief ofExecutive ~~interest~~Officer ~~rate~~and ~~swaps~~Chief ~~was~~Financial ~~recognized~~Officer ~~for~~of the ~~nine~~Company ~~months~~and ~~ended~~of ~~December~~Universal, 31evaluated as of the end of the period covered by this report, ~~2004~~the effectiveness of their disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). ~~This~~ Based ~~gain~~on ~~was~~that evaluation, the Chief Executive Officer and Chief ~~result~~Financial Officer of ~~reducing~~ the ~~notional~~Company ~~amount~~and Universal concluded that their disclosure controls and procedures, as of ~~interest~~the ~~rate~~end ~~swaps~~of the period covered by ~~$84.8~~this ~~million~~report, onwere ~~our~~effective ~~ABS lease~~for ~~facility~~the purpose of ensuring that information required to be disclosed by the Company and Universal in ~~connection~~this report is recorded, processed, ~~with~~summarized aand ~~principal~~reported ~~reduction~~within ofthe ~~$80.0~~time ~~million~~periods inspecified ~~June~~by ~~2004~~the rules and forms under the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures.

~~Facility Consolidation~~Changes ~~Costs. Facility consolidation~~in ~~costs~~Internal ~~incurred~~Control ~~during~~over ~~the~~Financial nine months ended December 31, 2003 were $1.8 million. These costs related to the transfer of the Tulsa, Oklahoma fabrication operations to the Houston fabrication facility and were primarily for severance, personnel costs and relocation costs.Reporting

~~Other~~There ~~Income,~~were no ~~net. The decrease~~changes in ~~other~~the ~~income~~Company’s isor ~~primarily~~Universal’s ~~due~~internal ~~gains~~control ~~from~~over ~~the~~financial reporting ~~sale~~during ofthe ~~domestic contract~~last ~~compression~~fiscal ~~equipment~~quarter ~~due~~that tomaterially ~~customers~~affected, ~~exercising~~or ~~purchase~~are reasonably ~~options~~likely ~~in the~~to ~~nine~~materially ~~months~~affect, ~~ended~~their ~~December~~internal ~~31,~~control ~~2003~~over financial reporting.

Income Tax Expense. The increase in income tax expense for the nine months ended December 31, 2004 primarily relates to increased income before taxes as compared to the nine months ended December 31, 2003 due to items mentioned above.28

32PART II. OTHER INFORMATION

ITEM 31. ~~Quantitative~~Legal ~~and Qualitative Disclosures About Market Risk~~Proceedings

~~We are exposed to some market risk due to the floating or variable interest rates under our financing arrangements~~None. Some of the interest and lease payments under our financing arrangements are based on a floating rate plus an applicable margin. The variable interest rate under our revolving credit facility, which had no amounts outstanding as of December 31, 2004, is based upon either a base rate or LIBOR, at our option, and the applicable margin is a variable amount from 1.5% to 2.5% based on a leverage ratio. The variable interest rate under our $82.2 million term loan is based upon the one-month LIBOR rate and the applicable margin is a fixed 3.25%. The one-month LIBOR rate at January 27, 2005 was 2.6%. The variable interest rate applicable to $100 million of our 7 1/4% senior notes due 2010 pursuant to an interest rate swap is based upon the six-month LIBOR rate plus the applicable margin of 3.2%. The six-month LIBOR rate at January 27, 2005 was 2.9%. As of December 31, 2004, approximately $246.1 million of our outstanding indebtedness and other obligations bore interest at floating rates and a 1.0% increase in interest rates would result in an approximate $2.5 million annual increase in our interest expense.

WeITEM ~~hold interest rate swaps related to the ABS operating lease facility~~2. AtUnregistered ~~December~~Sales ~~31, 2004, the fair market value~~ of ~~these~~ ~~interest~~Equity ~~rate~~Securities ~~swaps~~and ~~was~~Use ~~a liability~~ of ~~approximately $4.2 million, which was recorded as a noncurrent liability. The interest rate swaps terminate in February 2013. The weighted average fixed rate of these swaps is 5.2%.~~Proceeds

~~To minimize any significant foreign currency credit risk, we generally contractually require that payment by our customers be made in U~~None.~~S. dollars. If payment is not made in U.S. dollars, we generally utilize the exchange rate into U.S. dollars on the payment date and balance payments in local currency against local expenses.~~

33ITEM 3. Defaults Upon Senior Securities

~~ITEM 4~~None. ~~Controls and Procedures~~

~~As required~~ITEM by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), Company and Universal management, including the Chief Executive Officer and Chief Financial Officer of the Company and of Universal, evaluated as of the end of the period covered by this report, the effectiveness of their disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)4. ~~Based~~ onSubmission ~~that evaluation, the Chief Executive Officer and Chief Financial Officer~~ of ~~the~~Matters ~~Company and Universal concluded that their disclosure controls and procedures, as of the end of the period covered by this report, were effective for the purpose of ensuring that information required~~ to bea ~~disclosed by~~Vote ~~the Company and Universal in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms~~ of ~~the Exchange~~Security Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As required by Exchange Act Rule 13a-15(d) and Rule 15d-15(d), management, including the Chief Executive Officer and Chief Financial Officer of the Company and of Universal, also evaluated whether any change in their internal control over financial reporting that occurred during the quarter covered by this report has materially affected, or is reasonably likely to materially affect, their internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.Holders

~~PART II~~None. ~~OTHER INFORMATION~~

ITEM 15. ~~Legal~~Other ~~Proceedings~~Information

~~None~~The Audit Committee has approved certain non-audit services to be performed by our independent auditors, none of which would be prohibited services under the Sarbanes-Oxley Act of 2002.

~~ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds~~29

~~None~~ITEM 6. Exhibits

~~ITEM 3~~(a) Exhibits. ~~Defaults Upon Senior Securities~~

None.

Exhibit No.		Description

10.1		Amendment Number 1 to Insurance and Indemnity Agreement, dated as of June 28, 2005 by and among BRL Universal Compression Funding I 2002, L.P., Ambac Assurance Corporation, Universal Compression, Inc., UCO Compression 2002 LLC and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Minnesota, National Association.

10.2		Amendment Number 4 to Indenture, dated as of June 28, 2005 by and between BRL Universal Compression Funding I 2002, L.P. and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Minnesota, National Association.

10.3		Amendment Number 3 to Head Lessee Security Agreement dated as of June 28, 2005 by and between BRL Universal Compression Funding I 2002, L.P. and UCO Compression 2002 LLC.

31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.

31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.

32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~ITEM 4. Submission of Matters to a Vote of Security Holders~~30

~~None.~~SIGNATURES

~~ITEM~~Pursuant 5.to ~~Other~~the ~~Information~~requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

The Audit Committee has approved certain non-audit services to be performed by our independent auditors, none of which would be prohibited services under the Sarbanes-Oxley Act of 2002.

	UNIVERSAL COMPRESSION HOLDINGS, INC.

Date: August 5, 2005	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson,
			Senior Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

	By:	/s/ KENNETH R. BICKETT
			Kenneth R. Bickett
			Vice President, Accounting and Corporate Controller
			(Principal Accounting Officer)

	UNIVERSAL COMPRESSION, INC.

	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson,
			Senior Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

	By:	/s/ KENNETH R. BICKETT
			Kenneth R. Bickett
			Vice President, Accounting and Corporate Controller
			(Principal Accounting Officer)

3431

~~ITEM~~EXHIBIT ~~6. Exhibits~~INDEX

Exhibits.

Exhibit No.		Description

10.1		Amendment Number 1 to Insurance and Indemnity Agreement, dated as of June 28, 2005 by and among BRL Universal Compression Funding I 2002, L.P., Ambac Assurance Corporation, Universal Compression, Inc., UCO Compression 2002 LLC and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Minnesota, National Association.

10.2		Amendment Number 4 to Indenture, dated as of June 28, 2005 by and between BRL Universal Compression Funding I 2002, L.P. and Wells Fargo Bank, National Association, successor by merger to Wells Fargo Bank Minnesota, National Association.

10.3		Amendment Number 3 to Head Lessee Security Agreement dated as of June 28, 2005 by and between BRL Universal Compression Funding I 2002, L.P. and UCO Compression 2002 LLC.

31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.

31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.

32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit No.		Description
10.1		$650,000,000 Senior Secured Credit Agreement, dated as January 14, 2005, among Universal Compression, Inc., as Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and Guarantor, UC Canadian Partnership Holdings Company, as Canadian Borrower, Wachovia Bank, National Association, as US Administrative Agent, Congress Financial Corporation (Canada), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., The Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation Agents and the Lenders signatory thereto arranged by Wachovia Capital Markets, LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Runners and Deutsche Bank Securities Inc. as Co-Arranger.
10.2		Collateral Agreement, dated as of January 14, 2005, made by Universal Compression, Inc. and Universal Compression Holdings, Inc. in favor of Wachovia Bank, National Association, as Administrative Agent.
10.3		Pledge and Security Agreement (Assignment of Pledged Securities), dated as of January 14, 2005, made by Universal Compression International, Inc., Enterra Compression Investment Company, Universal Compression Services, LLC and Universal Compression Canadian Holdings, Inc., as Pledgors to Wachovia Bank, National Association, as Administrative Agent.
10.4		Amendment Number 1 to the Head Lessee Security Agreement, dated January 14, 2004, between UCO Compression 2002, as Grantor, and BRL Universal Compression Funding I 2002, L.P., as Secured Party, with respect to the ABS operating lease facility.
31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

	UNIVERSAL COMPRESSION HOLDINGS, INC.
Date: February 9, 2005	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson,
			Senior Vice President and
			Chief Financial Officer
			(Principal Financial Officer)
	By:	/s/ DENNIS S. BALDWIN
			Dennis S. Baldwin,
			Controller
			(Principal Accounting Officer)
	UNIVERSAL COMPRESSION, INC.
	By:	/s/ J. MICHAEL ANDERSON
			J. Michael Anderson,
			Senior Vice President and
			Chief Financial Officer
			(Principal Financial Officer)
	By:	/s/ DENNIS S. BALDWIN
			Dennis S. Baldwin,
			Vice President and Controller
			(Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description
10.1		$650,000,000 Senior Secured Credit Agreement, dated as January 14, 2005, among Universal Compression, Inc., as Co-US Borrower and Guarantor, Universal Compression Holdings, Inc., as Co-US Borrower and Guarantor, UC Canadian Partnership Holdings Company, as Canadian Borrower, Wachovia Bank, National Association, as US Administrative Agent, Congress Financial Corporation (Canada), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A., as Syndication Agent, Deutsche Bank Securities Inc., The Bank of Nova Scotia and The Royal Bank of Scotland plc as Co-Documentation Agents and the Lenders signatory thereto arranged by Wachovia Capital Markets, LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Runners and Deutsche Bank Securities Inc. as Co-Arranger.
10.2		Collateral Agreement, dated as of January 14, 2005, made by Universal Compression, Inc. and Universal Compression Holdings, Inc. in favor of Wachovia Bank, National Association, as Administrative Agent.
10.3		Pledge and Security Agreement (Assignment of Pledged Securities), dated as of January 14, 2005, made by Universal Compression International, Inc., Enterra Compression Investment Company, Universal Compression Services, LLC and Universal Compression Canadian Holdings, Inc., as Pledgors to Wachovia Bank, National Association, as Administrative Agent.
10.4		Amendment Number 1 to the Head Lessee Security Agreement, dated January 14, 2004, between UCO Compression 2002, as Grantor, and BRL Universal Compression Funding I 2002, L.P., as Secured Party, with respect to the ABS operating lease facility.
31.1		Certification of the Chief Executive Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.
31.3		Certification of the Chief Executive Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
31.4		Certification of the Chief Financial Officer of Universal Compression, Inc. pursuant to Rule 15d-14 under the Securities Exchange Act of 1934.
32.1		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of the Chief Executive Officer and Chief Financial Officer of Universal Compression, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Earnings per share

Reclassifications

Stock Options

Reclassifications

2. RecentStock Accounting PronouncementsOptions

Three months ended DecemberJune 3130, 20042005 compared to three months ended DecemberJune 3130, 20032004

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