10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For fiscal year ended December 31, 2005
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to           .

Commission file no. 1-13071

Hanover Compressor Company

(Exact name of registrant as specified in its charter)

Delaware	76-0625124
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

12001 North Houston Rosslyn, Houston, Texas 77086

(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code:

(281) 447-8787

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

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

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

Title of class:     None

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes þ          No o

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

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

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

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

      The aggregate market value of the Common Stock of the registrant held by non-affiliates as of June 30, 2005 was $636,366,000. For purposes of this disclosure, common stock held by persons who hold more than 5% of the outstanding voting shares and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes. With respect to persons holding more that 5% of our outstanding voting shares and common stock, we have relied upon statements filed by such persons on or prior to June 30, 2005 pursuant to Section 13(d) or 13(g) of the Securities Exchange Act of 1934, as amended.

      Number of shares of the Common Stock of the registrant outstanding as of February 27, 2006: 102,140,620 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s definitive proxy statement for the 2006 Annual Meeting of Stockholders to be held in 2006, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2005, are incorporated by reference into Part III.

HANOVER COMPRESSOR COMPANY

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business		3
	Item 1A.	Risk Factors		17
	Item 1B.	Unresolved Comments		26
	Item 2.	Properties		26
	Item 3.	Legal Proceedings		27
	Item 4.	Submission of Matters to a Vote of Security Holders		27
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		28
	Item 6.	Selected Financial Data		29
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		58
	Item 8.	Financial Statements and Supplementary Data		59
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		59
	Item 9A.	Controls and Procedures		59
	Item 9B.	Other Information		60
PART III
	Item 10.	Directors and Executive Officers of the Registrant		61
	Item 11.	Executive Compensation		61
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		61
	Item 13.	Certain Relationships and Related Transactions		63
	Item 14.	Principal Accounting Fees and Services		63
PART IV
	Item 15.	Exhibits, Financial Statement Schedules		63
SIGNATURES				70
Credit Agreement dated November 21, 2005
Guarantee and Collateral Agreement dated November 21, 2005
Computation of ratio of earnings to fixed charges
List of Subsidiaries
Consent of PricewaterhouseCoopers LLP
Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a)
Certification of CEO pursuant to Section 906
Certification of CFO pursuant to Section 906

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

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

•  changes in currency exchange rates;

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

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

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

•  integrating acquired businesses,

•  generating sufficient cash,

•  accessing the capital markets, and

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

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

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

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

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

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

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

Item 1. Business

General

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

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

      We are a major provider of rental natural gas compression equipment and services in the United States with 5,734 of our rental units in the United States having an aggregate capacity of approximately 2,438,000 horsepower at December 31, 2005. In addition, we operate 789 of our units internationally with an aggregate capacity of approximately 882,000 horsepower at December 31, 2005. As of December 31, 2005, approximately 73% of our natural gas compression horsepower was located in the United States and approximately 27% was located elsewhere, primarily in Latin America.

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

Industry trends

      We compete in the market for transportable natural gas compression units of up to 4,735 horsepower. The rental segment of that market has experienced significant growth over the past decade due to, among other things, a trend toward the outsourcing of compression needs, the improved productivity on compressors leased from specialists such as Hanover and an increase in demand for energy. We believe that outsourcing provides the customer greater financial and operating flexibility by minimizing the customer’s investment in equipment and enabling the customer to more efficiently resize their compression capabilities to meet changing reservoir conditions. In addition, we believe that outsourcing typically provides the customer with more timely and technically proficient service and maintenance, which often reduces operating costs. Nevertheless, a significant percentage of installed gas compression equipment continues to be purchased by the customer, rather than rented. Despite a deterioration of market conditions in 2002 and 2003, we believe the U.S. and international market conditions for both the purchase and rental of natural gas compression equipment have recently improved due to (1) an increase in natural gas prices, (2) the increased demand for natural gas,

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(3) the continued aging of the natural gas reserve base and the attendant decline of wellhead pressures, (4) the discovery of new reserves and (5) the continuing interest in outsourcing compression by independent producers. However, because the majority of oil and gas reserves are located outside of the United States, we believe that international markets will be a primary source of our growth opportunities in the gas compression market in the years to come.

      We believe growth opportunities for our products exist due to (1) increased worldwide energy consumption, (2) implementation of international environmental and conservation laws prohibiting the flaring of natural gas, which increases the need for gathering systems, (3) outsourcing by energy producers and processors, (4) the environmental soundness, economy and availability of natural gas as an alternative energy source, (5) continued aging of the worldwide natural gas reserve base and the attendant decline of wellhead pressures and (6) increased use of our products for reinjection in oilfield maintenance and the stripping of natural gas liquids from production streams. The rental compression business is capital intensive, and our ability to take advantage of these growth opportunities may be limited by our ability to raise capital to fund our expansion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in Item 7 of this Form 10-K and “Risk Factors” in Item 1A of this Form 10-K.

Notable Events in 2005

      During November 2005, we entered into a new $450 million revolving credit facility with a maturity date in November 2010.

      During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock described below. In connection with the redemption and repayment, the Company expensed $7.3 million related to the call premium and $2.5 million related to unamortized debt issuance costs. The $7.3 million of costs related to the call premium have been classified as debt extinguishment costs and the $2.5 million related to unamortized debt issuance costs have been classified as depreciation and amortization expense on the accompanying Consolidated Statements of Operations in Item 15 of this Form 10-K.

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

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

Industry Overview

Natural Gas Compression

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

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

      In addition to such wellhead and gas field gathering activities, natural gas compressors are used in a number of other applications, most of which are intended to enhance the productivity of oil and gas

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

      Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or change their compressor units to optimize the well production or pipeline efficiency. Due to the technical nature of the equipment, a dedicated local parts inventory, a diversified fleet of natural gas compressors and a highly trained staff of field service personnel are necessary to perform such functions in the most economic manner. These requirements, however, have typically proven to be an extremely inefficient use of capital and manpower for independent oil and natural gas producers and have caused producers, as well as oil and natural gas transporters and processors, to increasingly outsource their non-core compression activities to specialists such as us.

      The advent of rental and contract compression over forty years ago made it possible for oil and natural gas producers, natural gas transporters and processors to improve the efficiency and financial performance of their operations. We believe compressors leased from specialists generally have a higher rate of mechanical reliability and typically generate greater productivity than those owned by oil and gas operators. Furthermore, because compression needs of a well change over time, outsourcing of compression equipment enables an oil and gas producer to better match variable compression requirements to the production needs throughout the life of the well.

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

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

•  engineering, fabrication and assembly of the compressor unit;

•  installation and testing of the unit;

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

•  periodic maintenance and replacement parts supply.

Production and Processing Equipment

      Crude oil and natural gas are generally not marketable as produced at the wellhead and must be processed before they can be transported to market. Production and processing equipment is used to separate and treat oil and gas as it is produced to achieve a marketable quality of product. Production processing typically involves the separation of oil and gas and the removal of contaminants. The end result is “pipeline,” or “sales” quality oil and gas. Further processing or refining is almost always required before oil or gas is suitable for use as fuel or feedstock for petrochemical production. Production processing normally takes place in the “upstream” market, while refining and petrochemical production is referred to as the “downstream” market.

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

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

      In addition, through our ownership of Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalinization plants and tank farms, primarily for use in Europe and the Middle East.

Market Conditions

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

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

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

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

Business Segments

      Our revenues and income are derived from six business segments:

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

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

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

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

•  Production and processing — Belleli. Our production and processing — Belleli segment provides engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalinization plants and tank farms.

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

      The U.S. and international compression rentals segments have operations primarily in the United States and Latin America. For financial data relating to our business segments and financial data relating to the amount or percentage of revenue contributed by any class of similar products or services which accounted for 10% or more of consolidated revenue in any of the last three fiscal years, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K and Note 24 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K.

Compression Rentals, Maintenance Services and Compressor and Accessory Fabrication

      We provide our customers with a full range of compressor and associated equipment sales, rental, maintenance and contract compression services. As of December 31, 2005, our compressor fleet consisted of 6,523 units, ranging from 8 to 4,735 horsepower per unit. The size, type and geographic diversity of this rental fleet enable us to provide our customers with a range of compression units that can serve a wide variety of applications and to select the correct equipment for the job, rather than trying to “fit” the job to our fleet of equipment.

      We base our gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the length of the contract, market conditions and the inclusion of any other desired services, such as installation, transportation and the degree of daily operation. Since early 2003, we have selectively introduced price increases for our U.S. compression rental business. Such price increases, along with an improvement in market conditions, resulted in a 3% increase in revenue from our U.S. rental business in the year ended December 31, 2005 as compared to the year ended December 31, 2004. Substantially all of our units are operated pursuant to “contract compression” or “rental with full maintenance” agreements under which we perform all maintenance and repairs on such units while under contract. In the U.S. onshore market, compression rental fleet units are generally leased under contract with minimum terms of six months to two years, which convert to month-to-month at the end of the stipulated minimum period. Historically, the majority of our customers have extended the length of their contracts, on a month-to-month basis, well beyond the initial term. Typically, our compression rental units used in offshore and international applications carry substantially longer lease terms than those for onshore U.S. applications.

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

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

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

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

      Our compressor and accessory fabrication operations design, engineer and assemble compression units and accessories for sale to third parties as well as for placement in our compressor rental fleet. As of December 31, 2005, we had a compressor unit fabrication backlog for sale to third parties of $85.4 million compared to $56.7 million at December 31, 2004. Substantially all of our compressor and accessory fabrication backlog is expected to be produced within a twelve-month period. In general, units to be sold to third parties are assembled according to each customer’s specifications and sold on a turnkey basis. We acquire major components for these compressor units from third-party suppliers.

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Compressor Rental Fleet

      The size and horsepower of our compressor rental fleet owned or operated under lease on December 31, 2005 is summarized in the following table.

				Aggregate
		Number		Horsepower		% of
Range of Horsepower Per Unit		of Units		(In thousands)		Horsepower
Up to 100			1,840		123		4	%
101-200			1,385		210		6	%
201-500			1,132		369		11	%
501-800			562		358		11	%
801-1,100			480		482		15	%
1,101-1,500			876		1,201		36	%
1,501-2,500			169		309		9	%
2,501-4,735			79		268		8	%
	Total		6,523		3,320		100	%

Production and Processing Equipment Fabrication and Rental

      We design, engineer, fabricate, sell and rent a broad range of oil and gas production and processing equipment designed to heat, separate and dehydrate crude oil and natural gas. Our product line includes line heaters, oil and gas separators, glycol dehydration units and skid-mounted production packages designed for both onshore and offshore production facilities. Through our subsidiary, Belleli, we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalinization plants and tank farms, primarily for use in Europe and the Middle East. In addition, we purchase and recondition used production and processing equipment that is then sold or rented and generally maintain standard product inventories to meet most customers’ rapid response requirements and minimize customer downtime. As of December 31, 2005, we had a production and processing equipment fabrication backlog of $287.7 million compared to $234.2 million at December 31, 2004. Typically, we expect our production and processing equipment backlog to be produced within a three to thirty-six month period. At December 31, 2005, approximately $28.3 million of future revenue related to our production and processing equipment backlog was expected to be recognized after December 31, 2006.

Parts, Service and Used Equipment

      We often provide contract operations and related services for customers that prefer to own their production, gas treating and oilfield power generation or compression equipment. We believe that we are particularly well qualified to provide these services because our highly experienced operating personnel have access to the full range of our compression rental, production processing equipment and oilfield power generation equipment and facilities. As customers look to us to provide an ever-widening array of outsourced services, we will continue to build our core business with emerging business opportunities, such as turnkey gas treatment, installation services and oilfield-related power generation sales and services. In addition, we purchase and recondition used gas compression units, oilfield power generation and treating facilities and production and processing equipment that is then sold or rented to customers. We maintain parts inventories for our own use and to meet our customers’ needs. As of December 31, 2005, we had approximately $135.3 million in parts and supplies inventories.

Sources and Availability of Raw Materials

      Our fabrication operations consist of fabricating compressor and production and processing equipment from components and subassemblies, most of which we acquire from a wide range of vendors. These components represent a significant portion of the cost of our compressor and production and processing equipment products. In addition, we fabricate heavy wall reactors for refineries and other vessels used in production, processing and treating of crude oil and natural gas. Steel is a commodity

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which can have wide price fluctuations and represents a significant portion of the raw materials for these products. Increases in raw material costs cannot always be offset by increases in our products’ sales prices. We believe that all materials and components are available from multiple suppliers at competitive prices. Due to the recent increased demand for compression equipment, however, we have experienced longer lead times for components from our suppliers and have increased the amount of our purchases made in anticipation of future orders.

Market and Customers

      Our global customer base consists primarily of U.S. and international companies engaged in all aspects of the oil and gas industry, including major integrated oil and gas companies, national oil and gas companies, large and small independent producers and natural gas processors, gatherers and pipelines. Additionally, we have negotiated strategic alliances or preferred vendor relationships with key customers pursuant to which we receive preferential consideration in customer compressor and oil and gas production and processing equipment procurement decisions in exchange for providing enhanced product availability, product support, automated procurement practices and limited pricing concessions. No individual customer accounted for more than 10% of our consolidated revenues during 2005, 2004 or 2003.

      Our rental and sales activities are conducted throughout the continental United States, internationally and in offshore operations. International locations include Argentina, Canada, Italy, United Arab Emirates (“UAE”), Equatorial Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Mexico, Peru, Pakistan, Oman, Indonesia, Nigeria, Saudi Arabia, United Kingdom, China and Russia. We have fabrication facilities in the United States, Canada, Italy, UAE and the United Kingdom. In addition, we have representative offices in the Netherlands and the Cayman Islands. As of December 31, 2005, equipment representing approximately 27% of our aggregate compressor rental fleet horsepower was being used in international applications.

Sales and Marketing

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

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

Competition

      We are a major provider of rental natural gas compression equipment and services in the United States. However, the natural gas compression services and fabrication business is highly competitive. Overall, we experience considerable competition from companies who may be able to more quickly adapt to changes within our industry and changes in economic conditions as a whole, more readily take advantage of available opportunities and adopt more aggressive pricing policies.

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

      Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rental units increases in a rental fleet, the number of sales, engineering, administrative and maintenance personnel required does not increase proportionately.

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

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

International Operations

      We operate in many geographic markets outside the United States. At December 31, 2005, of the approximately 882,000 horsepower of compression we had deployed internationally, approximately 92% was located in Latin America (primarily in Venezuela, Argentina, Mexico and Brazil). Changes in local economic or political conditions, particularly in Venezuela, Argentina and other parts of Latin America and Nigeria, could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Additional risks inherent in our international business activities include the following:

•  difficulties in managing international operations;

•  unexpected changes in regulatory requirements;

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

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

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

•  potentially adverse tax consequences;

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

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

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

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

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

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

      We are involved in a project called the Cawthorne Channel Project in which we operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian coastal waterway as part of the performance of a contract between an affiliate of The Royal/ Dutch Group (“Shell”) and Global Gas and Refining Ltd., a Nigerian entity, (“Global”). We have completed the building of the required barge-mounted facilities and the project was declared commercial on November 15, 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option that is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between Global and Hanover, Shell, and several other counterparties, respectively, Global is responsible for the overall project.

      Recently, violence and local unrest have significantly increased in Nigeria. We were notified on February 24, 2006 that as a result of the recent events, Global declared Force Majeure with respect to the Cawthorne Channel Project. We have notified Global that we dispute their declaration of Force Majeure and that we believe it does not relieve Global’s obligations to make monthly rental payments or monthly operations and maintenance fee payments to Hanover under the contract. In light of this notification by Global, as well as the political environment in Nigeria, Global’s capitalization level, inexperience with projects of a similar nature and lack of a successful track record with respect to this project and other factors, there is no assurance that Global will comply with its obligations under these contracts.

      This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks including risks arising from the recent increase in violence and local unrest could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. If Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment. At December 31, 2005, we had an investment of approximately $70.9 million in projects in Nigeria, a substantial majority of which related to the Cawthorne Channel Project (including $13.3 million in advances to and receivables from Global).

      For financial data relating to our geographic concentrations, see Note 24 to the Notes to Consolidated Financial Statements included in Item 15 of this Form 10-K.

Government Regulation

      We are subject to various federal, state, local and international laws and regulations relating to occupational health and safety and the environment including regulations and permitting for air emissions, wastewater and storm water discharges and waste handling and disposal activities. From time to time as part of the regular overall evaluation of our operations, including newly acquired operations, we apply for or amend facility permits with respect to storm water or wastewater discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to new or revised permitting conditions that may be onerous or costly to comply with. In addition,

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certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks, or pipelines and other regulated units, all of which may impose additional regulatory compliance and permitting obligations. Failure to comply with these occupational health and safety and environmental laws and regulations or associated permits may result in the assessment of administrative, civil, and criminal penalties, the imposition of investigatory and remedial obligations, and the issuance of injunctions as to future compliance. Moreover, as with any owner or operator of real property, we are subject to clean-up costs and liability for regulated substances or any other toxic or hazardous wastes that may exist on or have been released under any of our properties.

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

      The Comprehensive Environmental Response, Compensation and Liability Act, also known as “CERCLA” or the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on persons who are considered to be responsible for the release of a “hazardous substance” into the environment. These persons include the owner or operator of the facility or disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances. Under CERCLA and similar state laws, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. Furthermore, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances or other pollutants released into the environment.

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

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

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at such sites that occurred prior to our acquisition of them. We are not currently under any order requiring that we undertake or pay for any clean-up activities, nor are we aware of any current environmental claims by governmental bodies or private parties against us demanding remedial action or alleging that we are liable for remedial costs already incurred. However, we cannot provide any assurance that we will not receive any such claims in the future.

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

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

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

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

Executive Officers of the Registrant

      The following sets forth, as of February 28, 2006, the name, age and prior business experience of each of our executive officers:

Name	Age		Position
John E. Jackson		47	President and Chief Executive Officer; Director
Brian A. Matusek		46	Senior Vice President — U.S. and Global Services
Gary M. Wilson		49	Senior Vice President, General Counsel and Secretary
Lee E. Beckelman		40	Vice President and Chief Financial Officer
Norman A. McKay		45	Vice President — Eastern Hemisphere
Anita H. Colglazier		50	Vice President — Controller
Peter G. Schreck		41	Vice President — Treasury and Planning
Stephen P. York		49	Vice President — Investor Relations and Technology
Steve W. Muck		53	Vice President — Latin America

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

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

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

      Gary M. Wilson was appointed Senior Vice President, General Counsel and Secretary in May 2004. Since 1985, Mr. Wilson served with Schlumberger Limited in various positions of increasing responsibility, including Deputy General Counsel of Schlumberger Oilfield Services. Most recently, Mr. Wilson acted as General Counsel of WesternGeco, a joint venture between Schlumberger and Baker Hughes Inc., a position he held since 2000. Mr. Wilson began his career in 1981 with the law firm of Richards Butler, based in Abu Dhabi and London. During his career, Mr. Wilson has been based in Houston as well as a number of international locations, including Abu Dhabi, Dubai, Jakarta, London, Paris and Singapore.

      Lee E. Beckelman was appointed Vice President and Chief Financial Officer on January 26, 2005. Mr. Beckelman joined Hanover in December 2002 and served as Vice President of Investor Relations and Corporate Development. Prior to joining Hanover, Mr. Beckelman was Vice President of J.P. Morgan Securities Inc. (previously Chase Securities Inc.) where he was responsible for the marketing and structuring of syndicated loans, primarily for companies in the energy industry. Prior to joining J.P. Morgan Securities Inc. in July 1995, Mr. Beckelman also worked in energy project finance and development for Bechtel Enterprises and Transworld Oil USA and began his career in 1988 with Texas Commerce Bank.

      Norman A. “Norrie” Mckay was appointed Vice President — Eastern Hemisphere in May 2005 and is based in Dubai. From 1981 to May 2005, Mr. Mckay served in a variety of engineering and management positions of increasing responsibility with Schlumberger Ltd. and its affiliates. During his career, Mr. Mckay has been based in Houston as well as a number of international locations, including Bolivia, Italy, Libya, France, Mexico, Venezuela, UK and Dubai. Immediately prior to joining Hanover, Mr. Mckay held the position of Global Account Director of Schlumberger Oilfield Services, based in Milan, Italy.

      Anita H. Colglazier was appointed Vice President — Controller on March 9, 2005. Ms. Colglazier joined Hanover in 2002 and served as Director, Financial Reporting and Policy until her recent appointment. Prior to joining Hanover, Ms. Colglazier held various management and accounting positions during her 18 years with Union Pacific Resources Company (“UPRC”), including Assistant Controller. Anadarko Petroleum acquired UPRC in July 2000. After the acquisition through her departure in 2002, Ms. Colglazier worked as an accounting manager supporting the transition and integration of UPRC into Anadarko. Prior to joining UPRC, Ms. Colglazier was an auditor with Deloitte, Haskins & Sells.

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

      Stephen P. York was appointed Vice President — Investor Relations and Technology on March 9, 2005. Mr. York joined Hanover in April 2002 and served as Vice President and Corporate Controller until his recent appointment. Prior to joining Hanover, Mr. York served as Director, Payroll Production of Exult, Inc., in Charlotte, NC. From 1981 to 2000, Mr. York held various management positions of increasing responsibility with Bank of America Corporation, including Vice President — Audit Director and Senior Vice President of — Personnel Operations, Controller/ Mortgage Accounting, and Corporate Accounts Payable/ Fixed Assets. Mr. York was a senior accountant with KPMG Peat Marwick from 1979 to 1981.

      Steve W. Muck has served as Vice President — Latin America since May 2005. Mr. Muck joined Hanover in 2000 as Vice President — International Operations. From 1997 to 2000, Mr. Muck served as Vice President of Worldwide Operations of Dresser-Rand Compressor Services. In addition, Mr. Muck held positions in sales, marketing and operations with Dresser-Rand and its predecessor, Ingersoll Rand, from 1975 to 1997.

Employees

      As of December 31, 2005, we had approximately 6,250 employees, approximately 300 of whom are represented by a labor union. Additionally, we had approximately 400 contract personnel. We believe that our relations with our employees and contract personnel are satisfactory.

Electronic Information

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

      A paper copy of any of the above-described filings is also available free of charge from the Company upon request by contacting Hanover Compressor Company, 12001 North Houston Rosslyn Road, Houston, Texas 77086, Attention: Corporate Secretary (281) 405-5175. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You can obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. Our SEC filings are also available at the offices of the New York Stock Exchange, Inc., 11 Wall Street, New York, New York 10005.

      Hanover has adopted “P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct” (“Code of Ethics”) that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics is posted on the Company’s website at http://www.hanover-co.com. Any changes to, and/or waivers granted, with respect to our Code of Ethics relating to our principal executive officer, principal financial officer, principal accounting officer, and other executive officers and directors of Hanover that we are required to disclose pursuant to applicable rules and regulations of the Securities and Exchange Commission will be posted on our website. Upon request the Company will provide a copy of our Code

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of Ethics without charge. Such request can be made in writing to the Corporate Secretary at Hanover Compressor Company, 12001 North Houston Rosslyn Road, Houston, Texas 77086.

Item 1A.     Risk Factors

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

      At December 31, 2005, we had approximately $1,478.9 million of debt, including approximately $48.0 million in borrowings and excluding outstanding letters of credit of approximately $118.6 million under our bank credit facility. Additional borrowings of up to $283.4 million were available under that facility as of December 31, 2005.

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

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

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

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

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

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

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

•  limit our ability to borrow additional funds.

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

      Our ability to make scheduled payments on our compression equipment lease obligations and our other debt, or to refinance our debt and other obligations, will depend on our ability to generate cash in the future. Our ability to generate cash in the future is subject to, among other factors, our operational performance, as well as general economic, financial, competitive, legislative and regulatory conditions.

      For the year ended December 31, 2005, we incurred interest expense of $136.9 million related to our debt, including our compression equipment lease obligations.

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

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

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

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

•  incur additional debt or issue guarantees;

•  create liens on our assets;

•  engage in mergers, consolidations and dispositions of assets;

•  enter into additional operating leases;

•  pay dividends on or redeem capital stock;

•  enter into derivative transactions;

•  make certain investments or restricted payments;

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

•  prepay or modify our debt facilities;

•  enter into transactions with affiliates; or

•  enter into sale leaseback transactions.

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

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

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

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

      As of February 24, 2006, our credit ratings as assigned by Moody’s and Standard & Poor’s were:

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

*  Rating is on the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover Compressor Capital Trust, a trust that we sponsored. Prior to adoption of FIN 46 in 2003, these securities were reported on our balance sheet as mandatorily redeemable convertible preferred securities. Because we only have a limited ability to make decisions about its activities and we are not the primary beneficiary of the trust, the trust is a variable interest entity (“VIE”) under FIN 46. As such, the Mandatorily Redeemable Convertible Preferred Securities issued by the trust are no longer reported on our balance sheet. Instead, we now report our subordinated notes payable to the trust as a debt. These notes have previously been eliminated in our consolidated financial statements. The changes related to our Mandatorily Redeemable Convertible Preferred Securities for our balance sheet are reclassifications and had no impact on our consolidated results of operations or cash flow.

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

We are still in the process of improving our infrastructure capabilities, including our internal controls and procedures, which were strained by our rapid growth, to reduce the risk of future accounting and financial reporting problems.

      We experienced rapid growth from 1998 through 2001, primarily as a result of acquisitions, particularly during 2000 and 2001, during which period our total assets increased from approximately $753 million as of December 31, 1999 to approximately $2.3 billion as of December 31, 2001. Our growth exceeded our infrastructure capabilities and strained our internal control environment. During 2002, we announced a series of restatements of transactions that occurred in 1999, 2000 and 2001. In November 2002, the SEC issued a Formal Order of Private Investigation relating to the transactions underlying and other matters relating to the restatements. In addition, during 2002, Hanover and certain of its officers and directors were named as defendants in a consolidated action in federal court that included a putative securities class action, a putative class action arising under the Employee Retirement Income Security Act and shareholder derivative actions. The litigation related principally to

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the matters involved in the transactions underlying the restatements of our financial statements. Both the SEC investigation and the litigation were settled in 2003.

      During 2002, a number of company executives involved directly and indirectly with the transactions underlying the restatements resigned, including our former Chief Executive Officer, Chief Financial Officer and Vice Chairman of our board of directors, Chief Operating Officer and the head of our international operations.

      Under the direction of our board of directors and new management, we have continued to review our internal controls and procedures for financial reporting and have substantially enhanced our controls and procedures. Even after making our improvements to our internal controls and procedures, Hanover’s internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the control system are met. Future accounting and financial reporting problems could result in, among other things, new securities litigation claims being brought against us, future investigations of us by the SEC and possible fines and penalties, including those resulting from a violation of the cease and desist order we entered into with the SEC in December 2003, and a loss of investor confidence which could adversely affect the trading prices of our debt and equity securities and adversely affect our ability to access sources of necessary capital.

Unforeseen difficulties with the implementation or operation of our enterprise resource planning system could adversely affect our internal controls and our business.

      We contracted with Oracle Corporation to assist us with the design and implementation of an enterprise resource planning system that supports our human resources, accounting, estimating, financial, fleet and job management and customer systems. We have substantially completed implementation of this system. The efficient execution of our business is dependent upon the proper functioning of our internal systems. Any significant failure or malfunction of our enterprise resource planning system may result in disruptions of our operations. Our results of operations could be adversely affected if we encounter unforeseen problems with respect to the operation of this system.

We require a substantial amount of capital to expand our compressor rental fleet and our complementary businesses.

      We invested $155.1 million in property, plant and equipment during the year ended December 31, 2005, primarily for maintenance capital and international rental projects. Historically, we have funded our capital expenditures through internally generated funds, sale and leaseback transactions and debt and equity financing. While we believe that cash flow from our operations and borrowings under our existing $450 million bank credit facility will provide us with sufficient cash to fund our planned 2006 capital expenditures, we cannot assure you that these sources will be sufficient. At December 31, 2005, we had $48.0 million in outstanding borrowings and $118.6 million in letters of credit outstanding under our bank credit facility. Additional borrowings of up to $283.4 million were available under that facility at December 31, 2005. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, could have a material adverse effect on our business, consolidated financial condition, results of operations or cash flows.

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

      As of December 31, 2005, we were the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting is equal to or greater than the value of the equipment that is being substituted. We generally substitute equipment when one of our lease customers exercises a contractual right or

20

otherwise desires to buy the leased equipment or when fleet equipment owned by the special purpose entities becomes obsolete or is selected by us for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to, among other restrictions, a percentage of the termination value under each lease. The termination value is equal to (1) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (2) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity or to the holders of the notes issued by the special purpose entity or their agents. In the following table, termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by our compression equipment operating leases. The aggregate amount of replacement equipment substituted (in dollars and percentage of termination value), the termination value and the substitution percentage limitation relating to each of our compression equipment operating leases as of December 31, 2005 are as follows:

								Substitution
								Limitation as
		Value of		Percentage of				Percentage of
		Substituted		Termination		Termination		Termination		Lease Termination
Lease		Equipment		Value(1)		Value(1)		Value		Date
						(dollars in
						millions)
2001A compression equipment lease		$	19.4		14.2%	$	137.1		25%		September 2008
2001B compression equipment lease			45.4		17.6%		257.7		25%		September 2011
	Total	$	64.8			$	394.8

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

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

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

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

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

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

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

•  difficulties in managing international operations;

•  unexpected changes in regulatory requirements;

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

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

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

•  potentially adverse tax consequences;

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

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

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

      We have substantial operations in Argentina and Venezuela. As a result, adverse political conditions in Argentina and Venezuela could materially and adversely affect our business.

      As a result of continued pressure by Argentina’s unions for increased compensation for workers, and related civil unrest, we have experienced an increase in operating costs in Argentina. In the past, we have been able to successfully renegotiate some of our contracts to recover a portion of cost increases. While we hope to recover cost increases that we incur, we can provide no assurance that we will be successful in renegotiating our Argentine contracts.

      In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production dropped. In addition, exchange controls have been put in place that put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, exchange controls remain in place, or economic and political conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income.

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

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Fluctuations in currency exchange rates in Italy, Argentina and Venezuela could adversely affect our business.

      We have significant operations that expose us to currency risk in Argentina and Venezuela. For the year ended December 31, 2005, our Argentine operations represented approximately 5% of our revenue and 8% of our gross profit. For the year ended December 31, 2005, our Venezuelan operations represented approximately 10% of our revenue and 18% of our gross profit. At December 31, 2005, we had approximately $17.3 million and $18.3 million in accounts receivable related to our operations in Argentina and Venezuela, respectively.

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

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

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

      In February 2003, the Venezuelan government fixed the exchange rate to 1,600 bolivars for each U.S. dollar. In February 2004 and March 2005, the Venezuelan government devalued the currency to 1,920 bolivars and 2,148 bolivars, respectively, for each U.S. dollar. The impact of any further devaluation on our results will depend upon the amount of our assets (primarily working capital and deferred taxes) exposed to currency fluctuation in Venezuela in future periods.

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

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

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

We operate in a highly competitive industry.

      We experience competition from companies that may be able to adapt more quickly to technological changes within our industry and throughout the economy as a whole, more readily take

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

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

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

Our ability to manage our business effectively will be weakened if we lose key personnel.

      We depend on the continuing efforts of our executive officers and senior management. The departure of any of our key personnel could have a material adverse effect on our business, operating results and financial condition. We do not maintain key man life insurance coverage with respect to our executive officers or key management personnel.

      In addition, we believe that our success depends on our ability to attract and retain qualified employees. There is significant demand in our industry for experienced qualified employees. If we fail to retain our skilled personnel and to recruit other skilled personnel, we could be unable to compete effectively.

Our business is subject to a variety of governmental regulations.

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

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

      As one of the largest natural gas compression companies in the United States, we conduct operations at numerous facilities in a wide variety of locations across the country. Our operations at many of these facilities require federal, state or local environmental permits or other authorizations. Additionally, natural gas compressors at many of our customer facilities require individual air permits or

24

general authorizations to operate under various air regulatory programs established by rule or regulation. These permits and authorizations frequently contain numerous compliance requirements, including monitoring and reporting obligations and operational restrictions, such as emission limits. Generally, our customers are contractually responsible for any permits on their facilities, however, given the large number of facilities in which we operate, and the numerous environmental permits and other authorizations applicable to our operations, we occasionally identify or are notified of technical violations of certain requirements existing in various permits and other authorizations, and it is likely that similar technical violations will occur in the future. Occasionally, we have been assessed penalties for our non-compliance, and we could be subject to such penalties in the future. While such penalties generally do not have a material financial impact on our business or operations, it is possible future violations could result in substantial penalties.

      We currently do not anticipate that any changes or updates in response to regulations relating to the environment, health and safety, export controls, currency exchange, labor and employment and taxation, or that any other anticipated ongoing regulatory compliance obligations will have a material adverse effect on our operations either as a result of any enforcement measures or through increased capital costs. Based on our experience to date, we believe that the future cost of compliance with existing laws and regulations will not have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. However, future events, such as compliance with more stringent laws, regulations or permit conditions, a major expansion of our operations into more heavily regulated activities, more vigorous enforcement policies by regulatory agencies, or stricter or different interpretations of existing laws and regulations could require us to make material expenditures.

Our business has acquired facilities in the past, which could subject us to future environmental liabilities.

      We have conducted preliminary environmental site assessments with respect to some, but not all, properties currently owned or leased by us, usually in a pre-acquisition context. These assessments have revealed that soils and/or groundwater at some of our facilities are contaminated with hydrocarbons, heavy metals and various other regulated substances. With respect to acquired properties, we do not believe that our operations caused or contributed to any such contamination in any material respect and we are not currently under any governmental orders or directives requiring us to undertake any remedial activity at such properties. We typically will develop a baseline of site conditions so we can establish conditions at the outset of our operations on such property. However, the handling of petroleum products and other regulated substances is a normal part of our operations and we have experienced occasional minor spills or incidental leakage below reportable quantity thresholds in connection with our operations. Certain properties previously owned or leased by us were determined to be affected by soil contamination. At one of our owned sites, we are working with the prior owner who has undertaken the full legal obligations to monitor and/or clean-up contamination at the sites that occurred prior to our acquisition of it. Where contamination was identified and determined by us to be our responsibility, we conducted remedial activities at these previously-held properties to the extent we believed necessary to meet regulatory standards and either sold the owned properties to third parties or returned the leased properties to the lessors. Based on our experience to date and the relatively minor nature of the types of contamination we have identified to date, we believe that the future cost of necessary investigation or remediation on our current properties will not have a material adverse effect on our business, consolidated financial condition, results of operations, and cash flows. We cannot be certain, however, that clean-up standards will not become more stringent, or that we will not be required to undertake any remedial activities involving any material costs on any of these current or previously held properties in the future or that the discovery of unknown or migratory contamination or third-party claims made with respect to current or previously owned or leased properties will not result in material costs.

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Our stock price may experience volatility.

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

Item 1B. Unresolved Comments

      None.

Item 2. Properties

      The following table describes the material facilities owned or leased by Hanover and our subsidiaries as of December 31, 2005:

			Square
Location	Status		Feet		Uses
Broken Arrow, Oklahoma		Owned		127,505	Compressor and accessory fabrication
Houston, Texas		Owned		190,531	Compressor and accessory fabrication; corporate office
Houston, Texas		Leased		51,941	Office
Anaco, Venezuela		Leased		129,000	Compressor rental and service
Barquisimeto, Venezuela		Owned		72,118	Compressor rental and service
Casacara Station, Colombia		Owned		14,000	Compressor rental and service
Casper, Wyoming		Owned		28,390	Compressor rental and service
Comodoro Rivadavia, Argentina		Leased		21,000	Compressor rental and service
Comodoro Rivadavia, Argentina		Owned		26,000	Compressor rental and service
Davis, Oklahoma		Owned		393,870	Compressor rental and service
El Tigre, Venezuela		Leased		18,299	Compressor rental and service
Farmington, New Mexico		Owned		20,361	Compressor rental and service
Farmington, New Mexico		Leased		18,691	Compressor rental and service
Gillette, Wyoming		Leased		10,200	Compressor rental and service
Kilgore, Texas		Owned		33,039	Compressor rental and service
Maturin, Venezuela		Owned		23,662	Compressor rental and service
Midland, Texas		Owned		53,300	Compressor rental and service
Neuquen, Argentina		Owned		30,000	Compressor rental and service
Oklahoma City, Oklahoma		Leased		18,125	Compressor rental and service
Pampa, Texas		Leased		24,000	Compressor rental and service
Pocola, Oklahoma		Owned		18,705	Compressor rental and service
Santa Cruz, Bolivia		Leased		57,414	Compressor rental and service
Victoria, Texas		Owned		28,609	Compressor rental and service
Walsall, UK — Redhouse		Owned		15,300	Compressor rental and service
Walsall, UK — Westgate		Owned		44,700	Compressor rental and service
Yukon, Oklahoma		Owned		22,453	Compressor rental and service
Bridgeport, Texas		Leased		13,500	Parts, service and used equipment
Broken Arrow, Oklahoma		Leased		19,000	Parts, service and used equipment
Houston, Texas		Leased		28,750	Parts, service and used equipment
Port Harcourt, Nigeria		Leased		32,808	Parts, service and used equipment
Broussard, Louisiana		Owned		74,402	Production and processing equipment fabrication
Calgary, Alberta, Canada		Owned		97,250	Production and processing equipment fabrication
Columbus, Texas		Owned		219,552	Production and processing equipment fabrication
Corpus Christi, Texas		Owned		11,000	Production and processing equipment fabrication
Dubai, UAE		Owned		112,374	Production and processing equipment fabrication
Hamriyah Free Zone, UAE		Owned		175,387	Production and processing equipment fabrication
Mantova, Italy		Owned		654,397	Production and processing equipment fabrication
Tulsa, Oklahoma		Owned		40,100	Production and processing equipment fabrication
Victoria, Texas		Owned		50,506	Production and processing equipment fabrication

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

Item 3. Legal Proceedings

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

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

      No matters were submitted to a vote of our shareholders during the fourth quarter of our fiscal year ended December 31, 2005.

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PART II

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

      Our common stock is listed on the New York Stock Exchange under the symbol “HC.” As of February 27, 2006, 102,140,620 shares of our common stock were issued and held by 6,276 holders of record. On February 27, 2006, the last reported sales price of our common stock on the New York Stock Exchange was $15.68. The following table presents, for the periods indicated, the range of high and low quarterly closing sales prices of our common stock, as reported on the New York Stock Exchange.

	Price
	High		Low
Year ended December 31, 2004
First Quarter	$	13.25	$	10.47
Second Quarter	$	12.44	$	10.26
Third Quarter	$	13.65	$	10.97
Fourth Quarter	$	14.60	$	12.43
Year ended December 31, 2005
First Quarter	$	14.72	$	11.56
Second Quarter	$	12.17	$	10.24
Third Quarter	$	15.34	$	11.72
Fourth Quarter	$	14.70	$	12.64

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

      See Item 12 of this report for disclosures regarding securities authorized for issuance under equity compensation plans.

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Item 6. Selected Financial Data

      In the table below we have presented certain selected financial data for Hanover for each of the five years in the period ended December 31, 2005. The historical consolidated financial data has been derived from Hanover’s audited consolidated financial statements. The following information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K and the Consolidated Financial Statements in Item 15 of this Form 10-K.

				Years Ended December 31,
				2005			2004			2003			2002			2001(1)
				(in thousands, except per share data)
Income Statement Data:
	Revenues and other income:
		U.S. rentals		$	351,128		$	341,570		$	324,186		$	328,600		$	269,679
		International rentals			232,587			214,598			191,301			175,337			116,990
		Parts, service and used equipment			225,636			180,321			164,935			223,685			214,867
		Compressor and accessory fabrication			179,954			158,629			106,896			114,009			223,519
		Production and processing equipment fabrication			360,267			270,284			260,660			149,656			184,040
		Equity in income of non-consolidated affiliates			21,466			19,780			23,014			18,554			9,607
		Other			4,551			3,413			4,088			3,600			7,796
			Total revenues and other income(2)		1,375,589			1,188,595			1,075,080			1,013,441			1,026,498
	Expenses:
		U.S. rentals			139,465			144,580			127,425			122,172			95,203
		International rentals			76,512			63,953			61,875			52,996			41,095
		Parts, service and used equipment			169,168			135,929			123,255			179,843			152,701
		Compressor and accessory fabrication			156,414			144,832			96,922			99,446			188,122
		Production and processing equipment fabrication			325,924			242,251			234,203			127,442			147,824
		Selling, general and administrative			182,198			173,066			159,870			150,863			90,214
		Foreign currency translation			7,890			(5,222	)		2,548			16,727			6,658
		Securities related litigation settlement(3)			—			(4,163	)		42,991			—			—
		Other			526			407			2,906			27,607			9,727
		Debt extinguishment costs(4)			7,318			—			—			—			—
		Depreciation and amortization(4)(5)(6)			182,681			175,308			169,164			148,141			85,762
		Goodwill impairment(5)			—			—			35,466			52,103			—
		Leasing expense(6)			—			—			43,139			90,074			78,031
		Interest expense(6)			136,927			146,978			89,175			43,352			23,904
					1,385,023			1,217,919			1,188,939			1,110,766			919,241
Income (loss) from continuing operations before income taxes					(9,434	)		(29,324	)		(113,859	)		(97,325	)		107,257
Provision for (benefit from) income taxes					27,714			24,767			3,629			(17,114	)		40,777
Income (loss) from continuing operations					(37,148	)		(54,091	)		(117,488	)		(80,211	)		66,480
Income (loss) from discontinued operations, net of tax(2)					(869	)		10,085			(3,861	)		(35,857	)		6,097
Cumulative effect of accounting change, net of tax(6)					—			—			(86,910	)		—			(164	)
Net income (loss)				$	(38,017	)	$	(44,006	)	$	(208,259	)	$	(116,068	)	$	72,413
Earnings (loss) per common share:
Basic earnings (loss) per common share from continuing operations				$	(0.41	)	$	(0.64	)	$	(1.45	)	$	(1.01	)	$	0.92
Diluted earnings (loss) per common share from continuing operations				$	(0.41	)	$	(0.64	)	$	(1.45	)	$	(1.01	)	$	0.82
Weighted average common and common equivalent shares:
Basic					91,556			84,792			81,123			79,500			72,355
Diluted					91,556			84,792			81,123			79,500			81,175

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		Years Ended December 31,
		2005			2004			2003			2002			2001(1)
		(in thousands)
Cash flows provided by (used in):
	Operating activities	$	122,487		$	131,837		$	164,735		$	195,717		$	152,774
	Investing activities		(104,027	)		11,129			(43,470	)		(193,703	)		(482,277	)
	Financing activities		(6,890	)		(162,350	)		(84,457	)		(4,232	)		307,259
Balance Sheet Data (end of period):
	Working capital	$	351,694		$	301,893		$	279,050		$	218,398		$	284,619
	Net property, plant and equipment(6)		1,823,100			1,876,348			2,027,654			1,167,675			1,151,513
	Total assets(6)		2,862,996			2,771,229			2,942,274			2,176,983			2,275,321
	Debt and mandatorily redeemable convertible preferred securities(6)		1,478,948			1,643,616			1,782,823			641,194			596,063
	Common stockholders’ equity		909,782			760,055			753,488			927,626			1,039,468

(1)  During 2002, we announced a series of restatements that ultimately reduced our initially reported pre-tax income by $0.4 million, or 0.3%, for the year ended December 31, 2001, although certain restatements resulted in a larger percentage adjustment on a quarterly basis. Amounts have been adjusted to reflect such restatements.

(2)  We have grown as a result of internal growth and acquisitions. For a description of significant business acquisitions, see Note 2 in Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K. In the fourth quarter of 2002, we decided to discontinue certain businesses. In November 2004, we sold the compression rental assets of our Canadian subsidiary for approximately $56.9 million. Additionally, in December 2004 we sold our ownership interest in Collicutt Energy Services Ltd. (“CES”) for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interest of CES. These businesses are reflected as discontinued operations in our consolidated statement of operations. For a description of discontinued operations, see Note 3 in Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K.

(3)	On October 23, 2003, we entered into a Stipulation of Settlement, which became final on March 10, 2004 and settled all of the claims underlying the putative securities class action, the putative ERISA class action and the shareholder derivative actions discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 — Provision for Cost of Litigation Settlement” in Item 7 of this Form 10-K.
(4)	During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations. In connection with the redemption and repayment, the Company expensed $7.3 million related to the call premium and $2.5 million through depreciation and amortization expense related to unamortized debt issuance costs.
(5)	In June 2001, the FASB issued Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Under SFAS 142, amortization of goodwill to earnings was discontinued. Instead, goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred. SFAS 142 was effective for us on January 1, 2002. For financial data relating to our goodwill, see Note 9 in Notes to the Consolidated Financial Statements in Item 15 of this Form 10-K.
(6)	In accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” as revised in December 2003 (“FIN 46”), for periods ending after June 30, 2003, we have included in our consolidated financial statements the special purpose entities that lease compression equipment to us. As a result, on July 1, 2003, we added approximately $897 million of compression equipment assets, net of accumulated depreciation, and approximately $1,139.6 million of our compression equipment lease obligations (including approximately $1,105.0 million in debt) to our balance sheet. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Leasing Transactions and Accounting Change for FIN 46” in Item 7 of this Form 10-K.

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

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

Overview

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

Competitive Strengths

      We believe we have the following key competitive strengths:

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

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

•  Provider of superior customer service: To facilitate our total solutions approach, we have adopted a geographical business unit concept and utilize a decentralized management and operating structure to provide superior customer service in a relationship-driven, service-intensive industry. We believe that our regionally-based network, local presence, experience and in-depth

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knowledge of customers’ operating needs and growth plans enable us to effectively meet their evolving demands on a more timely basis. Our salespeople pursue the rental and sales market for our products and services in their respective territories. Our efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through superior product design, fabrication, installation, customer service and after-market support.

•

International experience: We believe we are a leader in natural gas compression as well as service and fabrication of equipment for oil and natural gas processing and transportation services in Latin America, with an expanding presence in West Africa, the Middle and Far East and Russia. As of December 31, 2005, we had approximately 882,000 horsepower of compression deployed internationally, of which approximately 92% was located in Latin America (primarily in Venezuela, Argentina, Mexico and Brazil). During 2004, we opened offices in Nigeria, the Middle and Far East and Russia. We believe our experience in managing our international operations and our efforts to develop and expand our international sales force have created a global platform from which we can continue to grow in international markets.

Business Strategy

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

•  Focus on core operations. We have built our leading market position through our strengths in compression rentals, compressor fabrication, production and processing equipment rental and fabrication and parts and service. We are focusing our efforts on these businesses and on streamlining operations in our core markets. In an effort to intensify our focus on our core operations, during 2004 and 2005 we substantially completed the sale of our discontinued operations. We believe this focused approach will enable us to enhance our growth prospects and returns. In addition, we are actively pursuing improvements in our U.S. fleet utilization by prudently employing additional units, moving idle U.S. units into service in international markets and retiring less profitable units in order to improve our utilization and enhance the returns for our business. We have also converted one of our facilities to refurbish approximately 200,000 horsepower of idle U.S. compression assets so we can deploy these units in both our domestic and international rental businesses.

•  Expand international presence. International markets continue to represent the greatest growth opportunity for our business. We believe that these markets are underserved in the area of the products and services we offer. In addition, we typically see higher returns in international markets relative to the United States. We intend to allocate additional resources toward international markets, to open offices abroad, where appropriate, and to move idle U.S. units into service in international markets, where applicable.

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

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

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better evaluate our markets and business opportunities, operate and maintain our assets and make more informed and timely decisions.

•

Disciplined use of capital. We intend to continue to focus on our capital discipline, as we believe it will better position us for growth and enhanced returns. During 2005, we used proceeds from our equity offering to decrease our outstanding debt and compression equipment lease obligations by approximately $170 million. During 2004, we used cash flows from operations and asset sales to reduce our outstanding debt and compression equipment lease obligations by approximately $149 million. As a result, we achieved our objective to reduce our debt and compression equipment lease obligations by $180 million from 2004 through 2006.

Market Conditions

      Our operations depend upon the levels of activity in natural gas development, production, processing and transportation. Such activity levels typically decline when there is a significant reduction in oil and gas prices or significant instability in energy markets. In recent years, oil and gas prices have been extremely volatile. Due to a deterioration in market conditions, we experienced a decline in the demand for our products and services in 2002 and 2003, which, along with the distractions associated with our management reorganization, resulted in reductions in the utilization of our compressor rental fleet and our revenues, gross margins and profits. Our revenues increased during 2004 and 2005, which we believe resulted from an improvement in market conditions and our focus on sales success ratio. In 2006, we intend to continue our focus on improving our operating margins.

      The North American rig count increased by 21% to 2,045 at December 31, 2005 from 1,686 at December 31, 2004, and the twelve-month rolling average North American rig count increased by 18% to 1,838 at December 31, 2005 from 1,559 at December 31, 2004. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $8.62 per MMBtu at December 31, 2005 from $6.14 per MMBtu at December 31, 2004. Despite the increase in natural gas prices and the recent increase in the rig count, U.S. natural gas production levels have not significantly changed. Recently, we have not experienced any significant growth in U.S. rentals of equipment, which we believe is primarily the result of (i) the lack of immediate availability of compression equipment in the configuration currently in demand by our customers, (ii) increases in purchases of compression equipment by oil and gas companies that have available capital and (iii) the lack of a significant increase in U.S. natural gas production levels. However, improved market conditions have led to improved pricing and demand for equipment in the U.S. market.

Summary of Results

      Net losses. We recorded a consolidated net loss of $38.0 million for the year ended December 31, 2005, as compared to consolidated net losses of $44.0 million and $208.3 million for the years ended December 31, 2004 and 2003, respectively. Our results for the year ended 2003 were affected by a number of charges that may not necessarily be indicative of our core operations or our future prospects and impact comparability between years. These special items are discussed in “— Year Ended December 31, 2004 Compared to Year Ended December 31, 2003” below.

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

		Years Ended December 31,
		2005		2004		2003
Revenues and other income:
	U.S. rentals	$	351,128	$	341,570	$	324,186
	International rentals		232,587		214,598		191,301
	Parts, service and used equipment		225,636		180,321		164,935
	Compressor and accessory fabrication		179,954		158,629		106,896
	Production and processing equipment fabrication		360,267		270,284		260,660
	Equity in income of non-consolidated affiliate		21,466		19,780		23,014
	Other		4,551		3,413		4,088
		$	1,375,589	$	1,188,595	$	1,075,080
Expenses:
	U.S. rentals	$	139,465	$	144,580	$	127,425
	International rentals		76,512		63,953		61,875
	Parts, service and used equipment		169,168		135,929		123,255
	Compressor and accessory fabrication		156,414		144,832		96,922
	Production and processing equipment fabrication		325,924		242,251		234,203
		$	867,483	$	731,545	$	643,680
Gross profit margin:
	U.S. rentals		60%		58%		61%
	International rentals		67%		70%		68%
	Parts, service and used equipment		25%		25%		25%
	Compressor and accessory fabrication		13%		9%		9%
	Production and processing equipment fabrication		10%		10%		10%

Facility Consolidation

      We had previously announced our plan to reduce our U.S. headcount by approximately 500 employees worldwide and to close four fabrication facilities. During the year ended December 31, 2003, we paid approximately $2.0 million in employee separation costs, implemented further cost saving initiatives and closed two facilities in addition to the four fabrication facilities we closed pursuant to our original reduction plan. We completed this plan during the year ended December 31, 2004 and we paid an additional $0.7 million in employee separation costs related to the completion of these activities. From December 31, 2002 to December 31, 2004, our U.S. headcount decreased by approximately 600 employees under this plan.

Critical Accounting Estimates

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

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from these estimates under different assumptions or conditions and these differences can be material to our financial condition, results of operations and liquidity.

Allowances and Reserves

      We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review the adequacy of our allowance for doubtful accounts monthly. Balances aged greater than 90 days are reviewed individually for collectibility. In addition, all other balances are reviewed based on significance and customer payment histories. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2005, our largest account receivable from a customer was approximately $12.3 million. During 2005, 2004 and 2003, we recorded approximately $2.0 million, $2.7 million, and $4.0 million in additional allowances for doubtful accounts, respectively.

      We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those expected by management, additional inventory write-downs may be required. During 2005, 2004 and 2003, we recorded approximately $0.1 million, $1.1 million, and $1.5 million, respectively, in additional reserves for obsolete and slow moving inventory.

Long-Lived Assets and Investments

      We review for the impairment of long-lived assets, including property, plant and equipment and assets held for sale whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as compared to its estimated fair value and is charged to the period in which the impairment occurred. The determination of what constitutes an indication of possible impairment, the estimation of future cash flows and the determination of estimated fair value are all significant judgments. There were no significant impairment in 2005 or 2004. During 2003, as a result of the review of our rental fleet, we recorded $14.3 million in additional depreciation on equipment that was retired and equipment that was expected to be sold or abandoned.

      In addition, we perform an annual goodwill impairment test, pursuant to the requirements of SFAS 142, in the fourth quarter of each year or whenever events indicate impairment may have occurred, to determine if the estimated recoverable value of the reporting unit exceeds the net carrying value of the reporting unit, including the applicable goodwill. We determine the fair value of our reporting units using a combination of the expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast, the weighted average cost of capital and a market multiple on the reporting units’ earnings before interest, tax, depreciation and amortization. Changes in forecasts could affect the estimated fair value of our reporting units and result in a goodwill impairment charge in a future period. There were no impairments in 2005 or 2004 related to our annual goodwill impairment test. During 2003, we recorded $35.5 million in goodwill impairments as a result of evaluations of our goodwill. See Note 2 in the Notes to the Consolidated Financial Statements in Item 15 of this Form for a discussion of this impairment.

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

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decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Tax Assets

      We must estimate our expected future taxable income in order to assess the realizability of our deferred income tax assets. As of December 31, 2005, we reported a net deferred tax liability of $56.7 million, which included gross deferred tax assets of $378.7 million, net of a valuation allowance of $75.4 million and gross deferred tax liabilities of $360.0 million. Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions and future financial conditions.

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

      As a result of continued operating losses, we are in a net deferred tax asset position for U.S. income tax purposes. Due to our cumulative U.S. losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future and we have recorded a valuation allowance on our net U.S. deferred tax asset position. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 is not met. In addition, we have recorded valuation allowances for certain international jurisdictions. If we are required to record additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially, compared to the statutory rate. Our preliminary analysis leads us to believe that we will likely be required to record additional valuation allowances in 2006, unless we are able to generate additional taxable earnings or implement additional tax planning strategies that would minimize or eliminate the amount of such additional valuation allowance.

Revenue Recognition — Percentage of Completion Accounting

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

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

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      Factors that must be considered in estimating the work to be completed and ultimate profit include labor productivity and availability, the nature and complexity of work to be performed, the impact of change orders, availability of raw materials and the impact of delayed performance. If the aggregate combined cost estimates for all of our fabrication businesses had been higher or lower by 1% in 2005, our results of operations before tax would have been decreased or increased by approximately $4.8 million. As of December 31, 2005, we had recognized approximately $43.0 million in estimated earnings on uncompleted contracts.

Contingencies and Litigation

      We are substantially self-insured for worker’s compensation, employer’s liability, property, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages. We review these estimates quarterly and believe such accruals to be adequate. However, insurance liabilities are difficult to estimate due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, timely reporting of occurrences, ongoing treatment or loss mitigation, general trends in litigation recovery outcomes and the effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and would be recorded in the period that the experience becomes known. As of December 31, 2005 and 2004, we have recorded approximately $4.2 million and $3.2 million, respectively, in claim reserves.

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

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

Summary

      For the year ended December 31, 2005, revenue increased to $1,375.6 million over 2004 revenue of $1,188.6 million. Net loss for the year ended December 31, 2005 was $38.0 million, compared with a net loss of $44.0 million in 2004. As detailed in the chart below, included in the 2005 net loss was $9.8 million in pre-tax charges.

Included in the net loss for 2005 were the following pre-tax charges (in thousands):
Debt extinguishment costs		$	7,318
Write-off of deferred financing costs (in Depreciation and amortization)			2,500
	Total	$	9,818
Included in the net loss for 2004 were the following pre-tax charges/(benefit) (in thousands):
Securities-related litigation settlement		$	(4,163	)
Write-off of deferred financing costs (in Depreciation and amortization)			1,686
Cancellation of interest rate swap (in Interest expense)			2,028
	Total	$	(449	)

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Product Line Results

U.S. Rentals

(in thousands)

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

      U.S. rental revenue increased during the year ended December 31, 2005, compared to the year ended December 31, 2004, due primarily to improvement in market conditions that has led to an improvement in pricing. Gross profit and gross margin for the year ended December 31, 2005 increased compared to the year ended December 31, 2004, primarily due to improved pricing in 2005 and our efforts to reduce fleet maintenance and repair expenses. During the second half of 2005, we converted one of our facilities to repair and overhaul approximately 200,000 horsepower of idle compression equipment over the next two years. We incurred repair expenses in connection with this program that decreased our gross margin by approximately 1% for the year ended 2005.

International Rentals

(in thousands)

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

      During the year ended December 31, 2005, international rental revenue and gross profit increased, compared to the year ended December 31, 2004, due primarily to new rental projects that have come on-line in 2005. Gross margin was negatively impacted by approximately 1% due to lower margin projects in Nigeria and by approximately 2% due to an increase in maintenance and repair costs in Argentina. Our Argentine operations have experienced an increase in labor costs due to pressures from unions for increased compensation for workers. We hope to renegotiate our contracts to recover a portion of these cost increases in the future.

Parts, Service and Used Equipment

(in thousands)

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

      Our parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. Parts, service and used equipment revenue for the year ended December 31, 2005 were higher than the year ended December 31, 2004 primarily due to improved business conditions and an increase in used rental equipment and installation sales. For the year ended December 31, 2005, parts and service revenue was $152.4 million with a gross margin of 26%, compared to $139.2 million and 24%, respectively, for the year ended December 31, 2004. Used rental equipment and installation sales revenue for the year ended December 31, 2005 was $73.2 million

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with a gross margin of 22%, compared to $41.1 million with a 27% gross margin for the year ended December 31, 2004. In 2005, we sold used rental equipment related to a gas plant in Madisonville, Texas for $20.3 million and a margin of 25%. Our used rental equipment and installation sales revenue and gross margins vary significantly from period to period and are dependent on the sale of used rental equipment, the exercise of purchase options on rental equipment by customers and installation sales associated with the start-up of new projects by customers.

Compression and Accessory Fabrication

(in thousands)

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

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

Production and Processing Equipment Fabrication

(in thousands)

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

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

Other Revenue

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

Expenses

      Selling, general and administrative expenses (“SG&A”) as a percentage of revenue for the year ended December 31, 2005 decreased to 13% from 15% in the prior year. As a percentage of revenue, SG&A expense decreased due to our efforts to manage SG&A costs while achieving an increased level

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of business. SG&A expense in 2005 was $182.2 million compared to $173.1 million in 2004. The increase in SG&A expense for the year was due primarily to higher compensation expenses, partially offset by reduced auditing and consulting expense relating to Sarbanes-Oxley.

      Depreciation and amortization expense for 2005 was $182.7 million, compared to $175.3 million in 2004. The increase in depreciation and amortization was primarily due to net additions to property, plant and equipment placed in service during the year and approximately $2.5 million in additional amortization expense related to unamortized debt issuance costs from our partial redemption of the 2001A compression equipment lease obligations in September 2005. Depreciation and amortization expense for the year ended December 31, 2004 included $1.7 million in amortization to write-off deferred financing costs associated with the June 2004 refinancing of our 2000A compression equipment obligations and early payoff of a portion of our 2000B compression equipment lease obligations. There were no significant asset impairments in 2005 or 2004.

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

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

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

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

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

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

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

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

Income Taxes

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

      As a result of continued operating losses, we are in a net deferred tax asset position (for U.S. income tax purposes). Due to our cumulative U.S. tax losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future and we have recorded a valuation allowance on our net U.S. deferred tax asset position. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 is not met. In addition, we have provided valuation allowances for certain international jurisdictions. If we are required to record additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially compared to the statutory rate. Our preliminary analysis leads us to believe that we will likely be required to record additional valuation allowances in 2006, unless we are able to generate additional taxable earnings or implement additional tax planning strategies that would minimize or eliminate the amount of such additional valuation allowance. In addition, we may be required to record additional valuation allowances in future periods.

Discontinued Operations

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

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

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

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Summary

      For the year ended December 31, 2004, revenue increased to $1,188.6 million over 2003 revenue of $1,075.1 million. Net loss for the year ended December 31, 2004, was $44.0 million, compared with a net loss of $208.3 million in 2003. As detailed in the chart below, included in the 2003 net loss was $250.6 million in pre-tax charges.

      Included in the net loss for 2004 were the following pre-tax charges (in thousands):

Securities-related litigation settlement		$	(4,163	)
Write-off of deferred financing costs (in Depreciation and amortization)			1,686
Cancellation of interest rate swap (in Interest expense)			2,028
	Total	$	(449	)

      Included in the net loss for 2003 were the following pre-tax charges (in thousands):

Rental fleet asset impairment (in Depreciation and amortization)		$	14,334
Cumulative effect of accounting change-FIN 46			133,707
Securities-related litigation settlement			42,991
Belleli goodwill impairment (in Goodwill impairment)			35,466
Write-off of deferred financing costs (in Depreciation and amortization)			2,461
Loss on sale/write-down of discontinued operations			21,617
	Total	$	250,576

Product Line Results

U.S. Rentals

(in thousands)

	Years Ended December 31,
					Increase
	2004		2003		(Decrease)
Revenue	$	341,570	$	324,186		5%
Operating expense		144,580		127,425		13%
Gross profit	$	196,990	$	196,761		—
Gross margin		58%		61%		(3)%

      U.S. rental revenue increased during the year ended December 31, 2004, compared to the year ended December 31, 2003, due primarily to improvement in market conditions that has led to an improvement in pricing. Gross margin for the year ended December 31, 2004 decreased compared to the year ended December 31, 2003, primarily due to increased maintenance and repair expense.

International Rentals

(in thousands)

	Years Ended December 31,
					Increase
	2004		2003		(Decrease)
Revenue	$	214,598	$	191,301		12%
Operating expense		63,953		61,875		3%
Gross profit	$	150,645	$	129,426		16%
Gross margin		70%		68%		2%

      For 2004, international rental revenue and gross profit increased, compared to 2003, due to increased compression and processing plant rental activity, primarily in Argentina, Brazil and Mexico, and the addition of two gas processing plants in Mexico and Brazil added in the third quarter of 2003. The increase in revenues in these areas led to an increase in our international rental gross margin in 2004. Our 2003 revenue and gross margin were positively impacted by approximately $2.7 million in revenue that was related to services performed during 2002 but was not recognized until 2003 due to

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concerns about the ultimate receipt as a result of the strike by workers of the national oil company in Venezuela.

Parts, Service and Used Equipment

(in thousands)

	Years Ended December 31,
					Increase
	2004		2003		(Decrease)
Revenue	$	180,321	$	164,935		9	%
Operating expense		135,929		123,255		10	%
Gross profit	$	44,392	$	41,680		7	%
Gross margin		25%		25%		—

      Parts, service and used equipment revenue for the year ended December 31, 2004 was higher than the year ended December 31, 2003 due primarily to increased demand by our international parts and service business. Parts, service and used equipment revenue includes two business components: (1) parts and service and (2) used rental equipment and installation sales. For the year ended December 31, 2004, parts and service revenue was $139.2 million with a gross margin of 24%, compared to $125.5 million and 29%, respectively, for the year ended December 31, 2003. The decrease in margins was primarily due to a decrease in margins by our U.S. parts and service business, which has not performed as anticipated. Used rental equipment and installation sales revenue in the year ended December 31, 2004 was $41.1 million with a gross margin of 27%, compared to $39.4 million with a 14% gross margin for the year ended December 31, 2003. Our used rental equipment and installation sales and gross margins vary significantly from period to period and are dependent on the exercise of purchase options on rental equipment by customers and the start-up of new projects by customers.

Compression and Accessory Fabrication

(in thousands)

	Years Ended December 31,
					Increase
	2004		2003		(Decrease)
Revenue	$	158,629	$	106,896		48	%
Operating Expense		144,832		96,922		49	%
Gross Profit	$	13,797	$	9,974		38	%
Gross Margin		9%		9%		—

      For the year ended December 31, 2004, compression fabrication revenue and gross profit increased primarily due to our increased focus on fabrication sales and an improvement in market conditions. As of December 31, 2004, we had compression fabrication backlog of $56.7 million compared to $28.2 million at December 31, 2003.

Production and Processing Equipment Fabrication

(in thousands)

	Years Ended December 31,
					Increase
	2004		2003		(Decrease)
Revenue	$	270,284	$	260,660		4	%
Operating expense		242,251		234,203		3	%
Gross profit	$	28,033	$	26,457		6	%
Gross margin		10%		10%		—

      Production and processing equipment fabrication revenue for the year ended December 31, 2004 was greater than for the year ended December 31, 2003, primarily due to our increased focus on fabrication sales and an improvement in market conditions. We have focused on improving our sales success ratio on new bid opportunities which has resulted in the 2004 improvement in our production

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and processing equipment backlog. As of December 31, 2004, we had a production and processing equipment fabrication backlog of $234.2 million compared to $124.8 million at December 31, 2003, including Belleli’s backlog of $150.0 million and $106.7 million at December 31, 2004 and 2003, respectively.

Other Revenue

      Equity in income of non-consolidated affiliates decreased by $3.2 million to $19.8 million during the year ended December 31, 2004, from $23.0 million during the year ended December 31, 2003. This decrease is primarily due to the sale of Hanover Measurement in the first quarter of 2004 and a decrease in results from our equity interest in the Simco and PIGAP II joint ventures. PIGAP II experienced an increase in interest expense during the year ended December 31, 2004 compared to the year ended December 31, 2003 as a result of the completion of PIGAP II’s project financing in October 2003. The decrease in equity earnings for the Simco/ Harwat Consortium was due to a major plant refurbishment during 2004. The decrease in equity earnings of unconsolidated entities was partially offset by the $3.3 million increase in El Furrial earnings for the year ended December 31, 2004 due to an improvement in operating results. In 2003, El Furrial experienced a fire which negatively impacted operating results.

      On March 5, 2004, we sold our 50.384% limited partnership interest and 0.001% general partnership interest in Hanover Measurement to EMS Pipeline Services, L.L.C. for $4.9 million. We accounted for our interest in Hanover Measurement under the equity method. As a result of the sale, we recorded a $0.3 million gain that is included in other revenue.

Expenses

      SG&A for both 2004 and 2003, as a percentage of revenue, was 15%. SG&A expense in 2004 was $173.1 million compared to $159.9 million in 2003. The increase over 2003 was primarily due to the inclusion of approximately $6.4 million of additional auditing and consulting costs related to our efforts in connection with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, increased severance expense of approximately $2.3 million, increased relocation and office start up expenses for new offices and personnel in Russia and increased municipal taxes due to increased business activity, primarily in Latin America.

      Depreciation and amortization expense for 2004 was $175.3 million, compared to $169.2 million in 2003. The increase in depreciation and amortization was primarily due to: (1) net additions to property, plant and equipment placed in service during the year; (2) approximately $8.5 million in additional depreciation expense associated with the compression equipment operating leases that were consolidated into our financial statements in the third quarter of 2003; and (3) $1.7 million in amortization to write-off deferred financing costs associated with the June 2004 refinancing of our 2000A compression equipment obligations and early payoff of a portion of our 2000B compression equipment lease obligations. There were no significant asset impairments in 2004. During 2003, we recorded $14.3 million of impairments for idle rental fleet assets to be sold or scrapped.

      Beginning in July 2003, payments accrued under our sale leaseback transactions are included in interest expense as a result of consolidating on our balance sheet the entities that lease compression equipment to us. As a result, during the year ended December 31, 2004 as compared to the year ended December 31, 2003, our interest expense increased $57.8 million to $147.0 million and our leasing expense decreased $43.1 million to $0. The increase in our combined interest and leasing expense was primarily due to an increase in the overall effective interest rate on outstanding debt to 8.4% from 7.3% during the years ended December 31, 2004 and 2003, respectively.

      Foreign currency translation for the year ended December 31, 2004 was a gain of $5.2 million, compared to a loss of $2.5 million for the year ended December 31, 2003. For the year ended December 31, 2004, foreign currency translation included $5.5 million in translation gains related to the re-measurement of our international subsidiaries’ dollar denominated inter-company debt.

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

		Year Ended
		December 31,
		2004			2003
Italy		$	4,170		$	221
Argentina			(624	)		494
Venezuela			1,165			(2,443	)
All other countries			511			(820	)
	Exchange gain (loss)	$	5,222		$	(2,548	)

      At December 31, 2004 we had intercompany advances outstanding to our subsidiary in Italy of approximately $55.0 million. These advances are denominated in U.S. dollars. The impact of the remeasurement of these advances on our statement of operations by our subsidiary will depend on the outstanding balance in future periods. The remeasurement of these advances in 2004 resulted in a translation gain of approximately $3.7 million.

      For the year ended December 31, 2003, other expenses included $2.9 million in charges primarily recorded to write-off certain non-revenue producing assets and to record the settlement of a contractual obligation.

      During 2003, we recorded a $35.5 million non-cash charge for goodwill impairment associated with Belleli. As a result of the war in Iraq, the strengthening of the Euro and generally unfavorable economic conditions, we believe that the estimated fair value of Belleli declined significantly during 2003. Upon gaining complete control of Belleli and assessing our long-term growth strategy, we determined that these general factors in combination with the specific economic factors impacting Belleli had significantly and adversely impacted the timing and amount of the future cash flows that we expected Belleli to generate. During 2003, we determined the present value of Belleli’s expected future cash flows was less than our carrying value of Belleli.

Provision for Securities Litigation Settlement

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

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

45

owning more than 1% but less than 10% of our outstanding common stock to participate in the process to appoint two independent directors to our board of directors (pursuant to which on February 4, 2004 we appointed Margaret K. Dorman and Stephen M. Pazuk to our board of directors), and made certain enhancements to our code of conduct.

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

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

      On February 9, 2004, the United States District Court for the Southern District of Texas entered three Orders and Final Judgments, approving the settlement on the terms agreed upon in the Stipulation of Settlement with respect to all of the claims described above. The court also entered an Order and Final Judgment approving the plans of allocation with respect to each action, as well as an Order and Final Judgment approving the schedule of attorneys’ fees for counsel for the settling plaintiffs. The time in which these Orders and Final Judgments may be appealed expired on March 10, 2004 without any appeal being lodged. The settlement has therefore become final and has been implemented according to its terms. In March 2004, we issued and delivered to the escrow agent for the settlement fund 2.5 million shares of Hanover common stock, as required by the settlement.

      Based on the terms of the settlement agreement and the individual components of the settlement, we recorded the cost of the litigation settlement. The details of the litigation settlement charge were as follows (in thousands):

Cash	$	30,050
Estimated fair value of note to be issued		3,633
Common stock to be issued by Hanover		29,800
Legal fees and administrative costs		6,178
Total		69,661
Less: insurance recoveries		(26,670	)
Net litigation settlement	$	42,991

      The $3.6 million estimated fair value of the note issued was based on the present value of the future cash flows discounted at borrowing rates which were available to us for debt with similar terms and maturities. Using a market-borrowing rate of 9.3%, the principal value and the stipulated interest rate required by the note of 5% per annum, a discount of $0.8 million was computed on the note to be issued. Upon the issuance of the note, the discount was amortized to interest expense over the term of the note. Because the note could be extinguished without a payment (if our common stock traded at or above the average price of $12.25 per share for 15 consecutive trading days at any time between March 31, 2004 and March 31, 2007), we were required to record an asset when the note was issued for the value of the embedded derivative, as required by SFAS 133. We estimated the value of the derivative and reduced the amount we included for the estimate of the value of the note by approximately $2.3 million at December 31, 2003. This asset was marked to market with any increase

46

or decrease included in our statement of operations until extinguished. As a result of the cancellation of the note in the third quarter of 2004, we reversed the note and the embedded derivative, which resulted in a $4.0 million reduction to the cost of the securities-related litigation.

Income Taxes

      The provision for income taxes increased $21.2 million, to $24.8 million for the year ended December 31, 2004 from $3.6 million for the year ended December 31, 2003. The average effective income tax rates during the year ended December 31, 2004 and December 31, 2003 were (84.5%) and (3.2%), respectively. The change in rate was primarily due to the following factors: (1) significant decrease in losses before tax during the year ended December 31, 2004, (2) decrease in the valuation allowance recorded for U.S. deferred tax assets where realization is uncertain, and (3) inclusion in taxable income of earnings repatriated from Canada.

      As a result of operating losses in 2003, we were in a net deferred tax asset position (for U.S. income tax purposes) for the first time in 2003. Due to our cumulative U.S. tax losses, we cannot reach the conclusion that it is “more likely than not” that certain of our U.S. deferred tax assets will be realized in the future. We will be required to record additional valuation allowances if our U.S. deferred tax asset position is increased and the “more likely than not” criteria of SFAS 109 is not met. In addition, we have provided valuation allowances for certain international jurisdictions. If we are required to record additional valuation allowances in the United States or any other jurisdictions, our effective tax rate will be impacted, perhaps substantially compared to the statutory rate.

Discontinued Operations

      Income from discontinued operations decreased $3.9 million, to net income of $6.3 million during the year ended December 31, 2004, from income of $10.2 million during the year ended December 31, 2003. The decrease in income from discontinued operations was due to the dispositions that occurred in 2004 and 2003.

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

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

      During the fourth quarter of 2002, we reviewed our business lines and the board of directors approved management’s recommendation to exit and sell our non-oilfield power generation and certain used equipment business lines. In 2003, we recorded an additional $14.1 million charge (net of tax) to write-down our investment in discontinued operations to their current estimated market value.

Cumulative Effect of Accounting Change

      We recorded a cumulative effect of accounting change of $86.9 million, net of tax, related to the adoption of FIN 46 on July 1, 2003.

      Prior to July 1, 2003, we had entered into lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the five special

47

purpose entities that leased compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets.

Leasing Transactions and Accounting Change for FIN 46

      As of December 2005, we are the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (1) enabled us to affordably extend the duration of our financing arrangements and (2) reduced our cost of capital.

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

      In October 2000, we completed a $172.6 million sale leaseback transaction of compression equipment. In March 2000, we entered into a separate $200 million sale leaseback transaction of compression equipment. Under the March transaction, we received proceeds of $100 million from the sale of compression equipment at the first closing in March 2000, and in August 2000, we completed the second half of the equipment lease and received an additional $100 million for the sale of additional compression equipment. Under our 2000 lease agreements, the equipment was sold and leased back by us for a five-year term and was used by us in our business. The 2000 lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.1 million in transaction costs for the leases entered into in 2000, which were included in intangible and other assets on the balance sheet and were amortized over the respective lease terms of the respective transactions.

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

      During 2004, we used cash flow from operations and proceeds from asset dispositions to exercise our purchase option and to reduce our outstanding debt and minority interest obligations by $115.0 million under our 2000B compressor equipment lease. In June 2004 we issued SEC-registered

48

notes under a then-effective shelf registration statement and exercised our purchase options under the March and August 2000 compression equipment operating leases. As of December 31, 2005, the remaining compression assets owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $352.3 million, including improvements made to these assets after the sale leaseback transactions.

      The following table summarizes, as of December 31, 2005, the residual value guarantee, lease termination date and minority interest obligations for our equipment leases (in thousands):

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

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

      In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights and the determination of when and which business enterprise should consolidate a VIE in its financial statements. FIN 46 applies to an entity in which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As revised, FIN 46 was effective immediately for VIE’s created after January 31, 2003. For special-purposes entities created prior to February 1, 2003, FIN 46 was effective at the first interim or annual reporting period ending after December 15, 2003, or December 31, 2003 for us. For entities, other than special purpose entities, created prior to February 1, 2003, FIN 46 was effective for us as of March 31, 2004. In addition, FIN 46 allowed companies to elect to adopt early the provisions of FIN 46 for some, but not all, of the variable interest entities they own.

      Prior to July 1, 2003, these lease transactions were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the five special purpose entities that leased compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets.

      The minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2005, the yield rates on the outstanding equity

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certificates ranged from 12.2% to 12.7%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2005, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

Liquidity and Capital Resources

      Our unrestricted cash balance amounted to $48.2 million at December 31, 2005 compared to $38.1 million at December 31, 2004. Working capital increased to $351.7 million at December 31, 2005 from $301.9 million at December 31, 2004. The increase in working capital was primarily the result of an increase in accounts receivable and inventory, partially offset by an increase in accounts payable and advanced billings, and resulted from an improvement in market conditions that has led to increased sales in our businesses.

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

For the Year Ended December 31:	2005			2004
Net cash provided by (used in) continuing operations:
Operating activities	$	122,870		$	123,722
Investing activities		(105,247	)		(61,818	)
Financing activities		(6,890	)		(162,350	)
Effect of exchange rate changes on cash and cash equivalents		(1,413	)		841
Net cash provided by discontinued operations		837			81,062
Net change in cash and cash equivalents	$	10,157		$	(18,543	)

      The decrease in cash provided by operating activities for the year ended December 31, 2005 as compared to the year ended December 31, 2004 was primarily due to an increase in accounts receivable and inventory, partially offset by an increase in accounts payable and advance billings and resulted from an improvement in market conditions that has led to increased sales in our businesses.

      The increase in cash used in investing activities during the year ended December 31, 2005 as compared to the year ended December 31, 2004 was primarily attributable to an increase during 2005 in capital expenditures to support the increased sales in our businesses.

      The decrease in cash used in financing activities during the year ended December 31, 2005 as compared to the year ended December 31, 2004 was primarily due a net decrease in cash used to pay off debt. During 2004, cash flows from operating activities were primarily used to pay down debt.

      The decrease in cash provided by discontinued operations during the year ended December 31, 2005 was principally related to the sale of our Canadian rental fleet which was discontinued and sold in November 2004.

      We may carry out new customer projects through rental fleet additions and other related capital expenditures. We generally invest funds necessary to make these rental fleet additions when our idle equipment cannot economically fulfill a project’s requirements and the new equipment expenditure is matched with long-term contracts whose expected economic terms exceed our return on capital targets. We currently plan to spend approximately $175 million to $225 million on net capital expenditures during 2006 including (1) rental equipment fleet additions and (2) approximately $60 million to $70 million on equipment maintenance capital. Projected maintenance capital for 2006 includes the cost of our program to refurbish approximately 200,000 horsepower of idle U.S. compression equipment.

      We have not paid any cash dividends on our common stock since our formation and do not anticipate paying such dividends in the foreseeable future. The Board of Directors anticipates that all

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cash flow generated from operations in the foreseeable future will be retained and used to pay down debt or develop and expand our business. Any future determinations to pay cash dividends on our common stock will be at the discretion of the our Board of Directors and will be dependent upon our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by the Board of Directors. Our bank credit facility, with JPMorgan Chase Bank, N.A. as agent, prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock.

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

      The following summarizes our cash contractual obligations at December 31, 2005 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

			Total		2006		2007-2008		2009-2010		Thereafter
Cash Contractual Obligations:
			(In thousands)
Long term Debt(1)
	4.75% convertible senior notes due 2008		$	192,000	$	—	$	192,000	$	—	$	—
	4.75% convertible senior notes due 2014			143,750		—		—		—		143,750
	7.25% subordinated convertible securities due 2029			86,250		—		—		—		86,250
	8.625% senior notes due 2010			200,000		—		—		200,000		—
	9.0% senior notes due 2014			200,000		—		—		—		200,000
	11% zero coupon subordinated notes due 2007(2)			262,622		—		262,622		—		—
	Bank credit facility due 2010			48,000		—		—		48,000		—
	Other long-term debt			1,751		1,309		267		103		72
	2001A equipment lease notes, due 2008			133,000		—		133,000		—		—
	2001B equipment lease notes, due 2011			250,000		—		—		—		250,000
		Total long-term debt		1,517,373		1,309		587,889		248,103		680,072
Interest on long-term debt(3)				657,243		98,737		186,639		155,721		216,146
Minority interest obligations(1)(4)				11,873		—		4,123		—		7,750
Purchase commitments				214,379		213,101		1,278		—		—
Facilities and other equipment operating leases				8,556		3,834		3,796		864		62
Total contractual cash obligations			$	2,409,424	$	316,981	$	783,725	$	404,688	$	904,030

(1)	For more information on our long-term debt and minority interest obligations, see Notes 11 and 12 to the Notes to Consolidated Financial Statements in Item 15 of this Form 10-K.
(2)	Balance payable at December 31, 2005, including 11% discount per annum, was $229.8 million.
(3)	Interest amounts calculated using interest rates in effect as of December 31, 2005, including the effect of interest rate swaps. The interest amounts do not include original issue discount that accretes under our 11% zero coupon subordinated notes due 2007.
(4)	Represents third party equity interest of lease equipment trusts that was required to be consolidated into our financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Leasing Transactions and Accounting Change for FIN 46” in Item 7 of this Form 10-K.

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

      Debt Refinancing/Repayment. In June 2003, we filed a shelf registration statement with the SEC pursuant to which we registered delayed public offerings of equity, debt or other securities in an

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aggregate amount not to exceed $700 million. The SEC declared the shelf registration statement effective on November 19, 2003.

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

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

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

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

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

      Bank Credit Facility. In November 2005, we entered into a $450 million bank credit facility having a maturity date of November 21, 2010. Our prior $350 million bank credit facility that was scheduled to mature in December 2006 was terminated upon closing of the new facility. The new facility also provides for an incremental term loan facility of up to $300 million. The incremental term loan was undrawn at December  31, 2005 and was not syndicated with the credit facility. The new agreement prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock. Borrowings under the new facility are secured by substantially all of our unencumbered personal property and real property assets. In addition, all of the capital stock of domestic subsidiaries and 66% of the capital stock of the first tier international subsidiaries has been pledged to secure the obligations under the new credit facility. Up to $75 million of the credit facility can be borrowed in loans denominated in Euros. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets.

      Our bank credit facility provides for a $450 million revolving credit in which U.S. dollar-denominated advances bear interest at our option, at (a) the greater of the Administrative Agent’s prime rate or the federal funds effective rate plus 0.50% (“ABR”), or (b) the eurodollar rate

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(“LIBOR”), in each case plus an applicable margin ranging from 0.375% to 1.5%, with respect to ABR loans, and 1.375% to 2.5%, with respect to LIBOR loans, in each case depending on our consolidated leverage ratio. Euro-denominated advances bear interest at the eurocurrency rate, plus an applicable margin ranging from 1.375% to 2.5%, depending on our consolidated leverage ratio. A commitment fee ranging from 0.375% to 0.5%, depending on our consolidated leverage ratio, times the average daily amount of the available commitment under the bank credit facility is payable quarterly to the lenders participating in the bank credit facility.

      As of December 31, 2005, we were in compliance with all covenants and other requirements set forth in our bank credit facility, the indentures and agreements related to our compression equipment lease obligations and the indentures and agreements relating to our other long-term debt. While there is no assurance, we believe based on our current projections for 2006 that we will be in compliance with the financial covenants in these agreements. A default under our bank credit facility or a default under certain of the various indentures and agreements would in some situations trigger cross-default provisions under our bank credit facilities or the indentures and agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

      We expect that our bank credit facility and cash flow from operations will provide us adequate capital resources to fund our estimated level of capital expenditures for 2006. As of December 31, 2005, we had $48.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facilities bore interest at a weighted average rate of 6.1% and 5.2% at December 31, 2005 and 2004, respectively. As of December 31, 2005, we also had approximately $118.6 million in letters of credit outstanding under our new bank credit facility. Our new bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $450 million credit limit, plus, in addition to certain other indebtedness, an additional (a) $50 million in unsecured indebtedness, (b) $100 million of indebtedness of international subsidiaries and (c) $35 million of secured purchase money indebtedness. Additional borrowings of up to $283.4 million were available under that facility as of December 31, 2005.

      In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010 and our 9% Senior Notes due 2014 permit us (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility, plus an additional $75 million in unsecured indebtedness and (2) to incur additional indebtedness, including further secured debt under our bank credit facility, so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements governing such obligations), or our “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereof. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, our 8.625% Senior Notes due 2010 and our 9% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of December 31, 2005, Hanover’s coverage ratio exceeded 2.25 to 1.0.

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      Credit Ratings. As of February 24, 2006, our credit ratings as assigned by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“Standard & Poor’s”) were:

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

*  Rating is on the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover Compressor Capital Trust, a trust that we sponsored. Prior to adoption of FIN 46 in 2003, these securities were reported on our balance sheet as mandatorily redeemable convertible preferred securities. Because we only have a limited ability to make decisions about its activities and we are not the primary beneficiary of the trust, the trust is a VIE under FIN 46. As such, the Mandatorily Redeemable Convertible Preferred Securities issued by the trust are no longer reported on our balance sheet. Instead, we now report our subordinated notes payable to the trust as a debt. These notes have previously been eliminated in our consolidated financial statements. The changes related to our Mandatorily Redeemable Convertible Preferred Securities for our balance sheet are reclassifications and had no impact on our consolidated results of operations or cash flow.

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

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

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

      In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk of changes in fair value of our 8.625% Senior Notes due 2010 resulting from changes in interest rates. These interest rate swaps, under which we receive fixed payments and make floating payments, result in the conversion of the hedged obligation into floating rate debt. The following table

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summarizes, by individual hedge instrument, these interest rate swaps as of December 31, 2005 (dollars in thousands):

							Fair Value of
			Fixed Rate to be				Swap at
Floating Rate to be Paid	Maturity Date		Received		Notional Amount		December 31, 2005
Six Month LIBOR +4.72%		December 15, 2010		8.625%	$	100,000	$	(4,975	)
Six Month LIBOR +4.64%		December 15, 2010		8.625%	$	100,000	$	(4,711	)

      As of December 31, 2005, a total of approximately $1.9 million in accrued liabilities, $7.8 million in long-term liabilities and a $9.7 million reduction of long-term debt was recorded with respect to the fair value adjustment related to these two swaps. We estimate the effective floating rate, that is determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of December 31, 2005 we estimated that the effective rate for the six-month period ending in June 2006 would be approximately 9.5%.

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

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

      These swaps, which we designated as cash flow hedging instruments, met the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income. During the years ended December 31, 2005, 2004 and 2003, we recorded other comprehensive income of approximately $0.6 million, $9.2 million and $7.9 million, respectively, related to these swaps ($0.6 million, $9.2 million and $5.1 million, respectively, net of tax).

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

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

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

Off-Balance Sheet Arrangements

      We have agreed to guarantee obligations of indebtedness of the Simco/Harwat Consortium and of El Furrial, each of which are joint ventures that we acquired interests in pursuant to our acquisition of POC. Each of these joint ventures is a non-consolidated affiliate of Hanover and our guarantee obligations are not recorded on our accompanying balance sheet. Our guarantee obligation is a

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percentage of the total debt of the non-consolidated affiliate equal to our ownership percentage in such affiliate. We have issued the following guarantees of the indebtedness of our non-consolidated affiliates (in thousands):

			Maximum Potential
			Undiscounted
			Payments as of
	Term		December 31, 2005
Simco/Harwat Consortium		2006	$	7,476
El Furrial		2013	$	32,017

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

New Accounting Pronouncements

      In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position 150-3 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $11.9 million in sale leaseback obligations that, as of December 31, 2005, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

      These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2005, the yield rates on the outstanding equity certificates ranged from 12.2% to 12.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2005, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

      In October 2004, the Emerging Issues Task Force reached a consensus on Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds,” which clarifies the guidance in paragraph 19 of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” According to EITF Issue No. 04-10, operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria listed in items (a)-(e) in paragraph 17 of SFAS No. 131. In November 2004, the Task Force delayed the effective date of this consensus. In 2005, the Task Force agreed the consensus in this Issue should be applied for fiscal years ending after September 15, 2005. The adoption of EITF 04-10 did not have a material effect on the determination of and disclosures relating to our operating segments.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). This standard provides clarification that abnormal amounts of idle

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facility expense, freight, handling costs, and spoilage should be recognized as current-period charges. Additionally, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this standard are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of the new standard to have a material effect on our consolidated results of operations, cash flows or financial position.

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R) is not expected to have a significant effect on our financial position or cash flows, but will impact our results of operations. An illustration of the impact on our net income and earnings per share is presented in the “Stock Options and Stock-Based Compensation” section of Note 1 assuming we had applied the fair value recognition provisions of SFAS 123(R) using the Black-Scholes methodology.

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

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

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

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We are exposed to interest rate and foreign currency risk. Hanover and its subsidiaries periodically enter into interest rate swaps to manage our exposure to fluctuations in interest rates. At December 31, 2005, the fair market value of our interest rate swaps, excluding the portion attributable to and included in accrued interest, was a net liability of approximately $9.7 million, of which $1.9 million was recorded in accrued liabilities and $7.8 million in other long-term liabilities.

      At December 31, 2005 we were a party to two interest rate swaps to convert fixed rate debt to floating rate debt as follows (dollars in thousands):

								Fair Value of
			Fixed Rate					Swap at
			to be			Notional		December 31,
Floating Rate to be Paid	Maturity Date		Received			Amount		2005
Six Month LIBOR +4.72%		December 15, 2010		8.625	%	$	100,000	$	(4,975	)
Six Month LIBOR +4.64%		December 15, 2010		8.625	%	$	100,000	$	(4,711	)

      At December 31, 2005, due to these two swaps, we were exposed to variable interest rates, which fluctuate with market interest rates, on $200.0 million in notional debt. Assuming a hypothetical 10% increase in the variable rates from those in effect at December 31, 2005, the increase in our annual interest expense with respect to such swaps would be approximately $1.9 million.

      At December 31, 2005, we were exposed to variable rental rates, which fluctuate with market interest rate, on a portion of the equipment leases we entered into in 2001. Assuming a hypothetical 10% increase in the variable rates from those in effect at year end, the increase in annual interest expense on the equipment lease notes would be approximately $0.1 million.

      We are also exposed to interest rate risk on borrowings under our floating rate bank credit facility. At December 31, 2005, $48.0 million was outstanding bearing interest at a weighted average effective rate of 6.1% per annum. Assuming a hypothetical 10% increase in the weighted average interest rate from those in effect at December 31, 2005, the increase in annual interest expense for advances under this facility would be approximately $0.3 million.

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

      In February 2003, the Venezuelan government fixed the exchange rate to 1,600 bolivars for each U.S. dollar. In February 2004 and March 2005, the Venezuelan government devalued the currency to 1,920 bolivars and 2,148 bolivars, respectively, for each U.S. dollar. The impact of the devaluation on our results will depend upon the amount of our assets (primarily working capital and deferred taxes) exposed to currency fluctuation in Venezuela in future periods.

      For the year ended December 31, 2005, our Argentine operations represented approximately 5% of our revenue and 8% of our gross profit. For the year ended December 31, 2005, our Venezuelan operations represented approximately 10% of our revenue and 18% of our gross profit. At December 31, 2005, we had approximately $17.3 million and $18.3 million in accounts receivable related to our Argentine and Venezuelan operations.

      In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production dropped. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an accord between the Venezuelan government and its opponents. Although the accord does offer the prospect of

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stabilizing Venezuela’s economy, if another national strike is staged, exchange controls remain in place, or economic and political conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income.

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

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

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

      At December 31, 2005 we had intercompany advances outstanding to our subsidiary in Italy of approximately $68.7 million. These advances are denominated in U.S. dollars. The impact of the remeasurement of these advances on our statement of operations by our subsidiary will depend on the outstanding balance in future periods. A 10% increase or decrease in the Euro would result in a foreign currency translation gain or loss of approximately $6.9 million.

Item 8. Financial Statements and Supplementary Data

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

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

      None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

      Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of December 31, 2005. Based on the evaluation, our principal executive officer and principal financial officer believe that our disclosure controls and procedures were effective to ensure that material information was accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to assure that the information has been properly recorded, processed, summarized and reported and to allow timely decisions regarding disclosure.

Management’s Report on Internal Control Over Financial Reporting

      Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework

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

      Based on the results of our evaluation under the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

      Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

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

Item 9B. Other Information

      On February 27, 2006, the Board approved the cash bonuses to our executive officers for services performed during the year ended December 31, 2005. The following table sets forth the current base salary and the amount of the cash bonus to be paid to each of our executive officers. We expect the bonus payment to be made on or about March 10, 2006. The compensation reflected in the table below does not reflect all compensation and other perquisites paid to our executive officers during the year ended December 31, 2005. Such information will be included under the caption “Information Regarding Executive Compensation” in the definitive proxy statement for our 2006 Annual Meeting of Stockholders.

				2005 Bonus
				Approved
		Current		For Payment
Name	Position	Base Salary		in 2006
John E. Jackson	President and Chief Executive Officer; Director	$	540,000	$	600,000
Brian A. Matusek	Senior Vice President — U.S. and Global Services	$	275,000	$	135,000
Gary M. Wilson	Senior Vice President, General Counsel and Secretary	$	295,000	$	140,000
Lee E. Beckelman	Vice President and Chief Financial Officer	$	250,000	$	120,000
Norman A. McKay	Vice President — Eastern Hemisphere	$	275,000	$	110,000
Anita H. Colglazier	Vice President — Controller	$	175,000	$	63,000
Peter G. Schreck	Vice President — Treasury and Planning	$	193,000	$	67,000
Stephen P. York	Vice President — Investor Relations and Technology	$	190,000	$	69,000
Steve W. Muck	Vice President — Latin America	$	225,000	$	110,000

Election of Director

      On February 23, 2006, Hanover Compressor Company temporarily increased the size of its Board of Directors from 9 to 10 members and has taken action to fill the resulting vacancy by appointing Mr. Ali Sheikh to the Board of Directors effective March 20, 2006. The Board intends to reduce its size again by one member on May 11, 2006, the effective date of Mr. Al Shoemaker’s retirement from our Board of Directors. We expect that Mr. Sheikh will be appointed to one or more committees of the Board of Directors at the Board meeting following the Annual Meeting of Stockholders to be held on May 11, 2006. The Board has reviewed the qualifications of Mr. Sheikh and has determined that he

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meets the independence standards of the Securities and Exchange Commission, the New York Stock Exchange and Hanover’s Corporate Governance Principles.

      Mr. Sheikh, age 57, is the Co-Founder, President, and Chief Executive Officer of SND Energy Company, Inc., SND Operating, LLC, SND Energy Acquisition, L.P., Topcat Oilfield Services, LLC and Topcat Wells Services, LLC. All of these entities are privately-held oil and gas production and service companies headquartered in Texas. Prior to creating SND Energy Company, Inc. in 1989, Mr. Sheikh held various positions with companies engaged in the energy industry, including Vice President and General Manager of Sun Malaysia Oil Company, Vice President and General Manager of Sun Sudan Oil Company, Resident Operations Manager of Sun Tanzania Oil Company, Manager of Planning and International Exploration Ventures for Sun Exploration and Production Company, and Area Manager for Southeast Asia and South America for Sun Exploration and Production Company. Mr. Sheikh holds a Bachelors Degree (with honors) and a Masters Degree in Geology from the University of the Panjab in Lahore, Pakistan.

PART III

Item 10. Directors and Executive Officers of the Registrant

      The information included or to be included in the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders under the captions “Nominees for Election as Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference herein. Please see Item 1 of this Form 10-K for identification of our executive officers.

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

Item 11. Executive Compensation

      The information included or to be included under the caption “Information Regarding Executive Compensation” in the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders is incorporated by reference herein.

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

      The information included or to be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders is incorporated by reference herein.

EQUITY COMPENSATION PLAN INFORMATION

      The equity compensation plans and agreements discussed in this section are referred to collectively as the “Equity Compensation Plans.” The table below provides information as of December 31, 2005 with respect to shares of our common stock that may be issued under the following Equity Compensation Plans of the Company: 1997 Stock Option Plan, the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, the 1999 Stock Option Plan, the 2001 Equity Incentive Plan and

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the 2003 Stock Incentive Plan. The Compensation Committee has authority to make future grants only under the 1997 Stock Option Plan, the 2001 Equity Incentive Plan and the 2003 Stock Incentive Plan. The table also includes information with respect to shares of our common stock subject to outstanding options that were granted prior to our initial public offering in 1997 under the 1996 Employee Stock Option Plan and a Stock Option Agreement entered into by and between Hanover and Glenn Wind (the “Wind Agreement”).

			Weighted-		Number of securities
			average exercise		remaining available for
	Number of securities to be		price of		future issuance under
	issued upon exercise of		outstanding		equity compensation plans
	outstanding options,		options, warrants		(excluding securities
	warrants and rights		and rights		reflected in column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders(1)		2,453,906	$	11.78		1,167,715	(3)
Equity compensation plans not approved by security holders(2)(3)		566,851	$	11.73		—	(4)
Total		3,020,757	$	11.77		1,167,715

(1)	Composed of the 2003 Stock Incentive Plan, the 2001 Equity Incentive Plan and the 1997 Stock Option Plan. In addition, as of December 31, 2005, there are 1,357,202 shares of restricted stock outstanding granted under the 2003 Stock Incentive Plan and the 2001 Equity Incentive Plan.
(2)	Composed of all of the Equity Compensation Plans except the 2003 Stock Incentive Plan, the 2001 Equity Incentive Plan and the 1997 Stock Option Plan.
(3)	Under terms of the 1997 Stock Option Plan, Hanover may grant awards of restricted stock in addition to options. Under the terms of the 2001 Equity Incentive Plan, Hanover may grant awards of restricted stock in addition to options, although no more than 1.0 million of the 1.5 million shares authorized under such plan may be issued pursuant to awards of restricted stock. Under the terms of the 2003 Stock Incentive Plan, Hanover may grant awards of restricted stock and performance awards in addition to options.
(4)	The Board of Directors terminated any existing authority to make future grants under these plans on May 15, 2003.

      The Equity Compensation Plans that have not been approved by security holders are described below. The 1996 Employee Stock Option Plan, the 1998 Stock Option Plan, the December 9, 1998 Stock Option Plan, and the 1999 Stock Option Plan have the following material features: (1) awards under such plans are limited to stock options and may be made, depending on the terms of each plan, to the Company’s officers, directors, employees, advisors and consultants; (2) unless otherwise set forth in any applicable stock option agreement and depending on the terms of each plan, the stock options vest over a period of up to five years; (3) the term of the stock options granted under the plans may not exceed 10 years; and (4) no additional grants may be made under these plans. The Wind Agreement has the following material features: (1) awards are limited to stock options and were made to the specific person named in the agreement; (2) the stock options vest over a period of five years from the date of the agreement; (3) the term of the stock options granted under the agreements is 10 years; and (4) no additional grants may be made under these agreements.

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      Additional information as of December 31, 2005, about the Equity Compensation Plans that have not been approved by stockholders is provided in the following table.

					Number of Shares
			Shares Previously		Reserved for Issuance		Weighted-		Shares
	Number of		Issued Pursuant to		Upon the Exercise of		Average		Available
	Shares		Stock Option		Outstanding Stock		Exercise		for Future
Plan or Agreement Name	Issuable(#)		Exercises(#)		Options(#)		Price($)		Grants(#)
1996 Employee Stock Option Plan		116,920		66,148		47,084	$	5.70		*
Glenn Wind Stock Option Agreement		47,400		41,472		5,928	$	0.003		*
1998 Stock Option Plan		520,000		45,678		224,373	$	13.37		**
December 9, 1998 Stock Option Plan		700,000		436,060		172,138	$	9.75		**
1999 Stock Option Plan		600,000		27,532		117,328	$	14.50		**

*  The authority to make future grants under these plans was terminated upon our initial public offering in 1997.

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

Item 13. Certain Relationships and Related Transactions

      The information included or to be included under the caption “Certain Relationships and Transactions” in the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders is incorporated by reference herein.

Item 14. Principal Accounting Fees and Services

      The information included or to be included under the caption “Principal Accounting Fees and Services” in the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders is incorporated by reference herein.

PART IV

Item 15. Exhibits, Financial Statement Schedules

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

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

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Comprehensive Income (Loss)	F-5
Consolidated Statements of Cash Flows	F-6
Consolidated Statements of Common Stockholders’ Equity	F-8
Notes to Consolidated Financial Statements	F-9
Selected Quarterly Unaudited Financial Data	F-49

      2. Financial Statement Schedule

Schedule II — Valuation and Qualifying Accounts	S-1
All other schedules have been omitted because they are not required under the relevant instructions.

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      3. Exhibits

Exhibit
Number			Description
	3	.1	Certificate of Incorporation of the Hanover Compressor Holding Co., incorporated by reference to Exhibit 3.1 to Hanover Compressor Company’s (the “Company”) Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.2	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.3	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Company, dated July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.4	Amended and Restated Bylaws of the Company, dated March 10, 2004, incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.1	Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, by and between the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other stockholders of the Company party thereto, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.2	Form of Warrant Agreement, dated as of August 7, 1995, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.3	Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.4	Form of Hanover Compressor Capital Trust 71/4% Convertible Preferred Securities, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	4	.5	Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15, 1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000.
	4	.6	Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029, incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	4	.7	Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of March 15, 2001, between the Company and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.8	Form of 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.9	Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the 2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	4	.10	Form of 8.50% Senior Secured Notes due 2008, incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.11	Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the 2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

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Exhibit
Number			Description
	4	.12	Form of 8.75% Senior Secured Notes due 2011, incorporated by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.13	Indenture for the Zero Coupon Subordinated Notes due March 31, 2007, dated as of May 14, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-106384) on Form S-3, as filed with the SEC on June 23, 2003.
	4	.14	Form of Zero Coupon Subordinated Notes due March 31, 2007, incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.15	Senior Indenture, dated as of December 15, 2003, among the Company, Subsidiary Guarantors named therein and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, as filed with the SEC on December 15, 2003.
	4	.16	First Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 8.625% Senior Notes due 2010, dated as of December 15, 2003, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A, as filed with the SEC on December 15, 2003.
	4	.17	Form of 8.625% Senior Notes due 2010, incorporated by reference to Exhibit 4.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.18	Second Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 4.75% Convertible Senior Notes due 2014, dated as of December 15, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, as filed with the SEC on December 16, 2003.
	4	.19	Form of 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.20	Third Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 9.0% Senior Notes due 2014, dated as of June 1, 2004, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.21	Form of 9% Senior Notes due 2014, incorporated by reference to Exhibit 4.3 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	10	.1	Stipulation and Agreement of Settlement, dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
	10	.2	PIGAP Settlement Agreement, dated as of May 14, 2003, by and among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	10	.3	Credit Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership, The Royal Bank of Scotland plc as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent, and the several lenders parties thereto.*
	10	.4	Guarantee and Collateral Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership and certain of their subsidiaries in favor of JPMorgan Chase Bank, N.A. as Collateral Agent.*

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Exhibit
Number			Description
	10	.5	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the “2001A Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.6	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.7	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.66 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.8	Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.67 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.9	Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.10	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the “2001B Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.11	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.12	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.72 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.13	Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.73 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.14	Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.15	Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees, incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000.
	10	.16	Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	10	.17	Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	10	.18	Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

66

Exhibit
Number			Description
	10	.19	Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2003.
	10	.20	Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2001.
	10	.21	Amendment No. 2, dated as of July 8, 2005 to Purchase Agreement by and among the Company, Hanover Compression Limited Partnership and Schlumberger Technology Corporation, for itself and as successor in interest to Camco International Inc., Schlumberger Surenco S.A. and Schlumberger Oilfield Holdings Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.
	10	.22	Most Favored Supplier and Alliance Agreement, dated August 31, 2001, among Schlumberger Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2001.
	10	.23	Agreement by and among SJMB, L.P., Charles Underbrink, John L. Thompson, Belleli Energy S.r.l. and Hanover Compressor Company and certain of its subsidiaries dated September 20, 2002, incorporated by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.24	Hanover Compressor Company Stock Compensation Plan, incorporated by reference to Exhibit 10.63 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.††
	10	.25	Hanover Compressor Company Senior Executive Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.26	Hanover Compressor Company 1993 Management Stock Option Plan, incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.27	Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	10	.28	Amendment and Restatement of the Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.29	Hanover Compressor Company 1995 Employee Stock Option Plan, incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.30	Hanover Compressor Company 1995 Management Stock Option Plan, incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.31	Form of Stock Option Agreement for DeVille and Mcneil, incorporated by reference to Exhibit 10.70 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.32	Form of Stock Option Agreements for Wind Bros, incorporated by reference to Exhibit 10.71 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.33	Hanover Compressor Company 1996 Employee Stock Option Plan, incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††

67

Exhibit
Number			Description
	10	.34	Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.35	1997 Stock Purchase Plan, incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.36	Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
	10	.37	First Amendment to the Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.38	Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.††
	10	.39	Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-32092) on Form S-8 filed with the SEC on March 10, 2000.††
	10	.40	First Amendment to the Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.41	Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-73904) on Form S-8 filed with the SEC on November 21, 2001.††
	10	.42	First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.43	Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 15, 2003.††
	10	.44	First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.45	Employment Letter with Peter Schreck, dated August 22, 2000, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.††
	10	.46	Employment Letter with Stephen York, dated March 6, 2002, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.††
	10	.47	Promissory Note and Indenture dated April 21, 2004 relating to $6,650,000 payable to Milberg, Weiss, Bershad, Hynes & Lerach LLP as Escrow Agent with respect to the settlement fund as defined in that certain Stipulation and Agreement and Settlement dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
	10	.48	Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.††
	10	.49	Employment Letter with John E. Jackson dated October 5, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on October 6, 2004.††

68

Exhibit
Number			Description
	10	.50	Change of Control and Severance Agreement dated July 29, 2005 between John E. Jackson and the Company, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.††
	10	.51	Employment Letter with Lee E. Beckelman dated January 31, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on February 1, 2005.††
	10	.52	Employment Letter with Anita H. Colglazier dated April 4, 2002 with explanatory note. ††
	10	.53	Letter to Brian Matusek regarding employment terms, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2005. ††
	10	.54	Employment Letter with Norrie Mckay effective as of May 16, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.††
	10	.55	Form of Change of Control Agreement dated July 29, 2005 between the Company and each of Messrs. Lee E. Beckelman, Brian A. Matusek, Gary M. Wilson, Steven W. Muck, Norman A. Mckay, Stephen P. York and Peter G. Schreck and Ms. Anita H. Colglazier, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q For the quarter ended June 30, 2005.††
	12	.1	Computation of ratio of earnings to fixed charges.*
	14	.1	P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct (the “Code of Ethics”), incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	14	.2	Amendment to the Code of Ethics, incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on January 20, 2005.
	21	.1	List of Subsidiaries.*
	23	.1	Consent of PricewaterhouseCoopers LLP.*
	31	.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	31	.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	99	.1	Letter from GKH partners regarding wind-up of GKH Investments, L.P. and GKH Private Limited, dated October 15, 2001, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 2001.
	99	.2	Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the Company, dated November 12, 2002, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2002.
	99	.3	Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the Company, dated March 11, 2004, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2004.

*  Filed herewith

††  Management contract or compensatory plan or arrangement

69

SIGNATURES

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

Hanover Compressor Company

By:/s/ John E. Jackson

John E. Jackson

President and Chief Executive Officer

Date: March 1, 2006

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

Signature	Title	Date
/s/ John E. Jackson John E. Jackson	President, Chief Executive Officer and Director (Principal Executive Officer)	March 1, 2006
/s/ Lee E. Beckelman Lee E. Beckelman	Vice President and Chief Financial Officer (Principal Financial Officer)	March 1, 2006
/s/ Anita H. Colglazier Anita H. Colglazier	Vice President and Controller (Principal Accounting Officer)	March 1, 2006
/s/ I. Jon Brumley I. Jon Brumley	Director	March 1, 2006
/s/ Ted Collins, Jr. Ted Collins, Jr.	Director	March 1, 2006
/s/ Margaret K. Dorman Margaret K. Dorman	Director	March 1, 2006
/s/ Robert R. Furgason Robert R. Furgason	Director	March 1, 2006
/s/ Victor E. Grijalva Victor E. Grijalva	Director	March 1, 2006
/s/ Gordon Hall Gordon Hall	Director	March 1, 2006
/s/ Stephen M. Pazuk Stephen M. Pazuk	Director	March 1, 2006
/s/ Alvin V. Shoemaker Alvin V. Shoemaker	Director	March 1, 2006

70

Report of Independent Registered Public Accounting Firm

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

      We have completed integrated audits of Hanover Compressor Company and its subsidiaries’ (the “Company”) 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) on page 63, present fairly, in all material respects, the financial position of Hanover Compressor Company and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) on page 63 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 12 to the financial statements, the Company changed its method of accounting for variable interest entities in 2003.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

F-1

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

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

PricewaterhouseCoopers LLP

Houston, Texas

February 28, 2006

F-2

HANOVER COMPRESSOR COMPANY

CONSOLIDATED BALANCE SHEETS

			December 31,
			2005			2004
			(in thousands, except par
			value and share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	48,233		$	38,076
	Accounts receivable, net of allowance of $4,751 and $7,573			243,672			205,644
	Inventory, net			251,069			184,798
	Costs and estimated earnings in excess of billings on uncompleted contracts			99,166			70,103
	Prepaid taxes			8,194			6,988
	Current deferred income taxes			13,842			12,583
	Assets held for sale			2,020			5,169
	Other current assets			38,189			25,674
		Total current assets		704,385			549,035
Property, plant and equipment, net				1,823,100			1,876,348
Goodwill, net				184,364			183,190
Intangible and other assets				60,406			65,939
Investments in non-consolidated affiliates				90,741			90,326
Assets held for sale, non-current				—			6,391
		Total assets	$	2,862,996		$	2,771,229
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term debt		$	4,080		$	5,106
	Current maturities of long-term debt			1,309			1,430
	Accounts payable, trade			92,980			57,402
	Accrued liabilities			128,805			119,843
	Advance billings			89,513			42,588
	Liabilities held for sale			878			517
	Billings on uncompleted contracts in excess of costs and estimated earnings			35,126			20,256
		Total current liabilities		352,691			247,142
Long-term debt				1,473,559			1,637,080
Other liabilities				38,976			47,232
Deferred income taxes				76,115			60,942
		Total liabilities		1,941,341			1,992,396
Commitments and contingencies (Note 19)
Minority interest				11,873			18,778
Common stockholders’ equity:
	Common stock, $.001 par value; 200,000,000 shares authorized; 102,392,918 and 87,653,970 shares issued, respectively			102			88
	Additional paid-in capital			1,097,766			913,007
	Deferred employee compensation—restricted stock grants			(13,249	)		(15,180	)
	Accumulated other comprehensive income			15,214			17,518
	Accumulated deficit			(186,088	)		(148,071	)
	Treasury stock—366,091 and 661,810 common shares, at cost, respectively			(3,963	)		(7,307	)
	Total common stockholders’ equity			909,782			760,055
		Total liabilities and common stockholders’ equity	$	2,862,996		$	2,771,229

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

F-3

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

		Years Ended December 31,
		2005			2004			2003
		(In thousands, except per share amounts)
Revenues and other income:
	U.S. rentals	$	351,128		$	341,570		$	324,186
	International rentals		232,587			214,598			191,301
	Parts, service and used equipment		225,636			180,321			164,935
	Compressor and accessory fabrication		179,954			158,629			106,896
	Production and processing equipment fabrication		360,267			270,284			260,660
	Equity in income of non-consolidated affiliates		21,466			19,780			23,014
	Other		4,551			3,413			4,088
			1,375,589			1,188,595			1,075,080
Expenses:
	U.S. rentals		139,465			144,580			127,425
	International rentals		76,512			63,953			61,875
	Parts, service and used equipment		169,168			135,929			123,255
	Compressor and accessory fabrication		156,414			144,832			96,922
	Production and processing equipment fabrication		325,924			242,251			234,203
	Selling, general and administrative		182,198			173,066			159,870
	Foreign currency translation		7,890			(5,222	)		2,548
	Securities related litigation settlement		—			(4,163	)		42,991
	Other		526			407			2,906
	Debt extinguishment costs		7,318			—			—
	Depreciation and amortization		182,681			175,308			169,164
	Goodwill impairment		—			—			35,466
	Leasing expense		—			—			43,139
	Interest expense		136,927			146,978			89,175
			1,385,023			1,217,919			1,188,939
Loss from continuing operations before income taxes			(9,434	)		(29,324	)		(113,859	)
Provision for income taxes			27,714			24,767			3,629
Loss from continuing operations			(37,148	)		(54,091	)		(117,488	)
Income (loss) from discontinued operations, net of tax			(756	)		6,314			10,190
Gain (loss) from sales or write-downs of discontinued operations, net of tax			(113	)		3,771			(14,051	)
Loss before cumulative effect of accounting changes			(38,017	)		(44,006	)		(121,349	)
Cumulative effect of accounting changes, net of tax			—			—			(86,910	)
Net loss		$	(38,017	)	$	(44,006	)	$	(208,259	)
Basic and diluted earnings (loss) per common share:
	Loss from continuing operations	$	(0.41	)	$	(0.64	)	$	(1.45	)
	Income (loss) from discontinued operations, net of tax		(0.01	)		0.12			(0.05	)
	Cumulative effect of accounting changes, net of tax		—			—			(1.07	)
Net loss		$	(0.42	)	$	(0.52	)	$	(2.57	)
Weighted average common and equivalent shares outstanding:
	Basic		91,556			84,792			81,123
	Diluted		91,556			84,792			81,123

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

F-4

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

		Years Ended December 31,
		2005			2004			2003
		(in thousands)
Net loss		$	(38,017	)	$	(44,006	)	$	(208,259	)
Other comprehensive income (loss):
	Change in fair value of derivative financial instruments, net of tax		608			8,638			5,693
	Foreign currency translation adjustment		(2,912	)		(347	)		17,230
Comprehensive loss		$	(40,321	)	$	(35,715	)	$	(185,336	)

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

F-5

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

					Years Ended December 31,
					2005			2004			2003
					(In thousands)
Cash flows from operating activities:
	Net loss				$	(38,017	)	$	(44,006	)	$	(208,259	)
	Adjustments:
		Depreciation and amortization				182,681			175,308			169,164
		(Income) loss from discontinued operations, net of tax				869			(10,085	)		3,861
		Cumulative effect of accounting changes, net of tax				—			—			86,910
		Bad debt expense				1,955			2,658			4,028
		Gain on sale of property, plant and equipment				(13,183	)		(6,076	)		(6,012	)
		Equity in income of non-consolidated affiliates, net of dividends received				(2,783	)		(10,112	)		(4,563	)
		(Gain) loss on derivative instruments				416			1,886			(4,606	)
		(Gain) loss on remeasurement of intercompany balances				12,155			(5,456	)		(1,607	)
		Securities related litigation settlement, in excess of cash paid				—			(6,326	)		39,494
		Goodwill impairment				—			—			35,466
		Gain on sale of non-consolidated affiliates				—			(300	)		—
		Gain on sale of business				(367	)		—			—
		Restricted stock compensation expense				5,676			2,599			1,178
		Pay-in-kind interest on long-term notes payable				23,336			20,966			21,048
		Deferred income taxes				19,304			11,627			(9,787	)
		Changes in assets and liabilities, excluding business combinations:
			Accounts receivable and notes			(45,061	)		(4,021	)		17,537
			Inventory			(73,936	)		(21,966	)		7,168
			Costs and estimated earnings versus billings on uncompleted contracts			(21,117	)		(5,733	)		16,455
			Prepaid and other current assets			(15,840	)		(561	)		21,026
			Accounts payable and other liabilities			41,037			(3,806	)		(33,259	)
			Advance billings			47,549			16,130			(4,213	)
			Other			(1,804	)		10,996			(965	)
				Net cash provided by continuing operations		122,870			123,722			150,064
				Net cash provided by (used in) discontinued operations		(383	)		8,115			14,671
				Net cash provided by operating activities		122,487			131,837			164,735
Cash flows from investing activities:
	Capital expenditures					(155,146	)		(90,496	)		(142,466	)
	Payments for deferred lease transaction costs					—			—			(1,246	)
	Proceeds from sale of property, plant and equipment					51,101			24,265			23,009
	Proceeds from the sale of business					2,724			—			—
	Proceeds from sale of non-consolidated affiliates					—			4,663			500
	Cash used for business acquisitions, net					(3,426	)		—			(15,000	)
	Cash returned from non-consolidated affiliates					—			—			64,837
	Cash used to acquire investments in and advances to non-consolidated affiliates					(500	)		(250	)		(500	)
				Net cash used in continuing operations		(105,247	)		(61,818	)		(70,866	)
				Net cash provided by discontinued operations		1,220			72,947			27,396
				Net cash provided by (used in) investing activities		(104,027	)		11,129			(43,470	)
Cash flows from financing activities:
	Borrowings on revolving credit facilities					152,000			52,200			145,000
	Repayments on revolving credit facilities					(111,000	)		(72,200	)		(274,500	)
	Payments for debt issue costs					(2,592	)		(253	)		(7,464	)
	Proceeds from stock options exercised					4,990			9,549			6,699
	Issuance of convertible senior notes, net					—			—			138,941
	Issuance of senior notes, net					—			194,125			193,698
	Proceeds from equity offering, net of issuance costs					179,100			—			—
	Payments of 1999 compression equipment lease obligations					—			—			(200,000	)
	Payments of 2000A compression equipment lease obligations					—			(200,000	)		—
	Payments of 2000B compression equipment lease obligations					(57,589	)		(115,000	)		—
	Payments of 2001A compression equipment lease obligations					(172,177	)		—			—
	Borrowings of other debt					2,180			—			—
	Repayment of other debt					(1,802	)		(30,771	)		(68,293	)
				Net cash used in continuing operations		(6,890	)		(162,350	)		(65,919	)
				Net cash used in discontinued operations		—			—			(18,538	)
				Net cash used in financing activities		(6,890	)		(162,350	)		(84,457	)
Effect of exchange rate changes on cash and equivalents						(1,413	)		841			800
Net increase (decrease) in cash and cash equivalents						10,157			(18,543	)		37,608
Cash and cash equivalents at beginning of year						38,076			56,619			19,011
Cash and cash equivalents at end of year					$	48,233		$	38,076		$	56,619

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

F-6

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Years Ended December 31,
		2005		2004		2003
		(in thousands)
Supplemental disclosure of cash flow information:
	Interest paid, net of capitalized amounts	$	118,787	$	125,047	$	49,011
	Income taxes paid, net	$	18,471	$	15,830	$	1,129
Supplemental disclosure of noncash transactions:
	Assets (received) sold in exchange for note receivable	$	1,600	$	1,314	$	3,300
	Common stock issued in exchange for notes receivable		—		—	$	35
	Conversion of deferred stock option liability	$	282	$	334	$	289
	Common stock issued for securities settlement	$	—	$	29,800		—
	Issuance of restricted stock grants, net of forfeitures	$	3,745	$	12,327	$	4,345
Acquisitions of businesses:
	Cash		—		—	$	209
	Property, plant and equipment acquired	$	359		—	$	267
	Other assets acquired, net of cash acquired	$	286		—	$	3,918
	Investments in and advances to non-consolidated affiliates		—		—	$	(4,673	)
	Goodwill	$	2,781		—	$	15,558
	Liabilities assumed		—		—	$	(279	)

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

F-7

HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITY

							Accumulated									Deferred			Retained
	Common stock				Additional		other			Treasury stock						compensation-			earnings/
					paid-in		comprehensive									restricted			(accumulated
	Shares		Amount		capital		income (loss)			Shares			Amount			stock grants			deficit)
	(in thousands, except share data)
Balance at December 31, 2002		80,815,209	$	81	$	841,657	$	(13,696	)		(252,815	)	$	(2,325	)	$	(2,285	)	$	104,194
Exercise of stock options		1,432,636		1		6,987		—			—			—			—			—
Cumulative translation adjustment		—		—		—		17,230			—			—			—			—
Change in fair value of derivative financial instrument, net of tax		—		—		—		5,693			—			—			—			—
Issuance of restricted stock grants, net of forfeitures, net of amortization expense		400,384		1		4,345		—			—			—			(3,167	)		—
Issuance of common stock to employees		1,400		—		35		—			—			—			—			—
Income tax benefit from stock options exercised		—		—		2,996		—			—			—			—			—
Net loss		—		—		—		—			—			—			—			(208,259	)
Balance at December 31, 2003		82,649,629	$	83	$	856,020	$	9,227			(252,815	)	$	(2,325	)	$	(5,452	)	$	(104,065	)
Exercise of stock options		1,140,073		1		9,882		—			—			—			—			—
Cumulative translation adjustment		—		—		—		(347	)		—			—			—			—
Change in fair value of derivative financial instrument, net of tax		—		—		—		8,638			—			—			—			—
Issuance of restricted stock grants, net of forfeitures, net of amortization expense		1,364,268		1		17,308		—			(408,995	)		(4,982	)		(9,728	)		—
Issuance of common stock for shareholder litigation		2,500,000		3		29,797		—			—			—			—			—
Net loss		—		—		—		—			—			—			—			(44,006	)
Balance at December 31, 2004		87,653,970	$	88	$	913,007	$	17,518			(661,810	)	$	(7,307	)	$	(15,180	)	$	(148,071	)
Exercise of stock options		1,564,363		1		5,271		—			—			—			—			—
Cumulative translation adjustment		—		—		—		(2,912	)		—			—			—			—
Change in fair value of derivative financial instrument, net of tax		—		—		—		608			—			—			—			—
Issuance of restricted stock grants, net of forfeitures, net of amortization expense		20,200		—		401		—			295,719			3,344			1,931			—
Equity offering, net of issuance costs		13,154,385		13		179,087		—			—			—			—
Net loss		—		—		—		—			—			—			—			(38,017	)
Balance at December 31, 2005		102,392,918	$	102	$	1,097,766	$	15,214			(366,091	)	$	(3,963	)	$	(13,249	)	$	(186,088	)

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

F-8

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005, 2004 and 2003

1. The Company, Business and Significant Accounting Policies

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

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

Principles of Consolidation

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

Use of Estimates in the Financial Statements

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

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

Cash and Cash Equivalents

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

F-9

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

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

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

Concentrations of Credit Risk

      Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, advances to non-consolidated affiliates and notes receivable. We believe that the credit risk in temporary cash investments that we have with financial institutions is minimal. Trade accounts and notes receivable are due from companies of varying size engaged principally in oil and gas activities throughout the world. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of products and the services we provide them and the terms of our rental contracts. Trade accounts receivable is recorded net of estimated doubtful accounts of approximately $4.8 million and $7.6 million at December 31, 2005 and 2004, respectively.

      The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review the adequacy of our allowance for doubtful accounts monthly. Balances aged greater than 90 days are reviewed individually for collectibility. In addition, all other balances are reviewed based on significance and customer payment histories. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. During the years ended December 31, 2005, 2004, and 2003, our bad debt expense was $2.0 million, $2.7 million and $4.0 million, respectively.

Inventory

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

Property, Plant and Equipment

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

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

F-10

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Computer software

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

Long-Lived Assets, other than Intangibles

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

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

Goodwill and Other Intangibles

      Goodwill is reviewed for impairment annually or whenever events indicate impairment may have occurred pursuant to Statement of Financial Accounting Standard (“SFAS”) 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Identifiable intangibles are amortized over the assets’ estimated useful lives.

Advance Billings

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

Sale Leaseback Transactions

      We have entered into sale leaseback transactions of compression equipment with special purpose entities. Sale leaseback transactions of compression equipment are evaluated for lease classification in accordance with SFAS No. 13 “Accounting for Leases.” Prior to the adoption in 2003 of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” as revised in December 2003 (“FIN 46”), these special purpose entities were not consolidated by Hanover when the owners of the special purposes entities made a substantial residual equity investment of at least three percent that was at risk during the entire term of the lease. (See Notes 6 and 12.)

F-11

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

      We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, all expected future events are considered other than enactments that would change the tax law or rates. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized.

Foreign Currency Translation

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

Earnings Per Common Share

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

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

		Years Ended December 31,
		2005		2004		2003
Weighted average common shares outstanding — used in basic loss per common share			91,556		84,792		81,123
Net dilutive potential common stock issuable:
	On exercise of options and vesting of restricted stock		**		**		**
	On exercise of warrants		**		**		**
	On conversion of convertible subordinated notes due 2029		**		**		**
	On conversion of convertible senior notes due 2008		**		**		**
	On conversion of convertible senior notes due 2014		**		**		**
Weighted average common shares and dilutive potential common shares — used in dilutive loss per common share			91,556		84,792		81,123

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

F-12

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

		Years Ended December 31,
		2005		2004		2003
Net dilutive potential common shares issuable:
	On exercise of options and vesting of restricted stock		2,378		2,512		1,264
	On exercise of options-exercise price greater than average market value at end of period		935		995		3,929
	On exercise of warrants		2		4		4
	On conversion of convertible subordinated notes due 2029		4,825		4,825		4,825
	On conversion of convertible senior notes due 2008		4,370		4,370		4,370
	On conversion of convertible senior notes due 2014		9,583		9,583		420
			22,093		22,289		14,812

Stock Options and Stock-Based Compensation

      Certain of our employees participate in stock incentive plans that provide for the granting of options to purchase shares of Hanover common stock and grants of restricted stock. In accordance with Statement of Financial Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), Hanover measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Except for shares that vest based on performance, we recognize compensation expense equal to the fair value of the restricted stock at the date of grant over the vesting period related to these grants. For restricted shares that vest based on performance, we will record an estimate of the compensation expense to be expensed over three years related to these restricted shares. The compensation expense that will be recognized in our statement of operations will be adjusted for changes in our estimate of the number of restricted shares that will vest. The treasury stock received from forfeitures of restricted stock is recorded based on the value used to measure our compensation expense for such shares. The following pro forma net loss and loss per share data illustrates the effect on net loss and net loss per share if the fair value method had been applied to all outstanding and unvested stock options in each period (in thousands).

		Years Ended December 31,
		2005			2004			2003
Net loss as reported		$	(38,017	)	$	(44,006	)	$	(208,259	)
	Add back: Restricted stock grant expense, net of tax		5,676			2,599			766
	Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax		(8,098	)		(4,817	)		(2,628	)
Pro forma net loss		$	(40,439	)	$	(46,224	)	$	(210,121	)
Loss per share:
	Basic, as reported	$	(0.42	)	$	(0.52	)	$	(2.57	)
	Basic, pro forma	$	(0.44	)	$	(0.55	)	$	(2.59	)
	Diluted, as reported	$	(0.42	)	$	(0.52	)	$	(2.57	)
	Diluted, pro forma	$	(0.44	)	$	(0.55	)	$	(2.59	)

      In 2005, 2004 and 2003 we granted approximately 374,000, 1,328,000 and 439,000 shares, respectively, of restricted Hanover common stock under our stock incentive plans to certain employees, including our executive officers, as part of an incentive compensation plan. During the years ended December 31, 2005, 2004 and 2003, we recognized $5.7 million, $2.6 million and $1.2 million,

F-13

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

respectively, in compensation expense related to restricted stock grants. As of December 31, 2005 and 2004, approximately 1,357,000 and 1,344,000 shares, respectively, of restricted stock were outstanding under our incentive compensation plans.

      The restricted shares granted during 2005 vest subject to continued employment over a three-year period at the rate of one-third per year, beginning on the first anniversary of the grant date. Approximately 60% of the shares of restricted stock that were granted during 2004 will vest subject to continued employment over a three-year period at a rate of one-third per year, beginning on the first anniversary of the date of the grant, and approximately 40% of the shares of restricted stock that were granted will vest in July 2007, subject to continued employment and subject to the achievement of certain pre-determined performance based criteria. In the event of a change of control of Hanover, these grants are subject to accelerated vesting. The restricted shares granted during 2003 vest subject to continued employment over a four-year period at the rate of one-fourth per year, beginning on the first anniversary of the date of grant.

Comprehensive Income

      Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Accumulated other comprehensive income (loss) consists of the foreign currency translation adjustment and changes in the fair value of derivative financial instruments, net of tax. The following table summarizes our accumulated other comprehensive income (loss) (in thousands):

	December 31,
	2005		2004
Fair value of derivative financial instruments, net of tax	$	—	$	(608	)
Foreign currency translation adjustment		15,214		18,126
	$	15,214	$	17,518

      Income taxes included in the fair value of derivative financial investments was $0.0 million and $0.9 million at December 31, 2005 and 2004, respectively.

Financial Instruments

      Our financial instruments include cash, receivables, payables, and debt. Except as described below, the estimated fair value of such financial instruments at December 31, 2005 and 2004 approximate their carrying value as reflected in our consolidated balance sheet. The fair value of our debt has been estimated based on year-end quoted market prices.

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

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

F-14

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reclassifications

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

2. Business Acquisitions

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

Year Ended December 31, 2005

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

Year Ended December 31, 2003

      Belleli Acquisition. In 2002, we increased our ownership of Belleli to 51% from 20.3% by converting $13.4 million in loans, together with approximately $3.2 million in accrued interest thereon, into additional equity ownership and in November 2002 began consolidating the results of Belleli’s operations. Belleli has three manufacturing facilities, one in Mantova, Italy and two in the United Arab Emirates (Jebel Ali and Hamriyah). In connection with our increase in ownership in 2002, we entered into an agreement with the minority owner of Belleli that provided the minority owner the right, until June 30, 2003, to purchase our interest for an amount that approximated our investment in Belleli. The agreement also provided us with the right, beginning in July 2003, to purchase the minority owner’s interest in Belleli. In addition, the minority owner historically had been unwilling to provide its proportionate share of capital to Belleli. We believed that our ability to maximize value would be enhanced if we were able to exert greater control through the exercise of our purchase right. Thus, in August 2003, we exercised our option to acquire the remaining 49% interest in Belleli for approximately $15.0 million in order to gain complete control of Belleli. As a result of these transactions and intervening foreign exchange rate changes, we recorded $4.8 million in identifiable intangible assets, with a weighted average life of approximately 17 years, and $35.5 million in goodwill.

      As a result of the war in Iraq, the strengthening of the Euro and generally unfavorable economic conditions, we believe that the estimated fair value of Belleli declined significantly during 2003. Upon gaining complete control of Belleli and assessing our long-term growth strategy, we determined that these general factors in combination with the specific economic factors impacting Belleli had significantly and adversely impacted the timing and amount of the future cash flows that we expected Belleli to generate. During 2003, we determined the present value of Belleli’s expected future cash flows was less than our carrying value of Belleli. This resulted in a full impairment charge for the $35.5 million in goodwill associated with Belleli.

F-15

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In December 2003, we acquired the remaining 50% interest in Servi Compressores, CA and cancelled the note receivable related to the sale of such interest in June 2000.

3. Discontinued Operations and Other Assets Held for Sale

      During the fourth quarter of 2002, Hanover’s Board of Directors approved management’s plan to dispose of our non-oilfield power generation projects, which were part of our U.S. rental business, and certain used equipment businesses, which were part of our parts and service business. These disposals meet the criteria established for recognition as discontinued operations under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”). SFAS 144 specifically requires that such amounts must represent a component of a business comprised of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. These businesses are reflected as discontinued operations in our consolidated statement of operations. Due to changes in market conditions, we have made valuation adjustments and the disposal plan for a small piece of our original non-oilfield power generation business was not completed in 2005. In the year ended December 31, 2005, we sold certain assets related to our discontinued operations for total sales proceeds of $1.2 million that resulted in $0.1 million in income. In the year ended December 31, 2005, we sold certain other assets held for sale, including a fabrication facility that was closed as part of the consolidation of our fabrication operations in 2003. We received proceeds of $6.5 million from these sales that resulted in a $0.2 million loss and is reflected in other revenue. We are continuing to actively market these assets and we expect to sell the remaining assets within the next three to six months and the assets and liabilities are reflected as held-for-sale on our consolidated balance sheet.

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

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

      In 2003, we recorded a $21.6 million ($14.1 million after tax) charge to write-down our investment in discontinued operations to their current estimated market value.

      In 2003, we announced that we had agreed to sell our 49% membership interest in Panoche and our 92.5% membership interest in Gates to Hal Dittmer and Fresno Power Investors Limited Partnership, who owned the remaining interests in Panoche and Gates. Panoche and Gates own gas-fired peaking power plants of 49 megawatts and 46 megawatts, respectively. These assets met the criteria to be recognized as discontinued operations. The Panoche transaction closed in June 2003 and the Gates transaction closed in September 2003. Total consideration for the transactions was approximately $27.2 million consisting of approximately $6.4 million in cash, $2.8 million in notes that matured in May 2004, a $0.5 million note that matured in September 2005 and the release of our obligations under a capital lease from GE Capital to Gates that had an outstanding balance of approximately $17.5 million at the time of the Gates closing. In addition, we were released from a

F-16

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$12 million letter of credit from us to GE Capital that was provided as additional credit support for the Gates capital lease.

      Summary of operating results of the discontinued operations (in thousands):

		Years Ended December 31,
		2005			2004			2003
Revenues and other:
	U.S. rentals	$	446		$	261		$	4,490
	International rentals		—			12,930			15,103
	Parts, service and used equipment		—			9,663			21,311
	Equity in income of non-consolidated affiliates		—			123			624
	Other		79			695			928
			525			23,672			42,456
Expenses:
	U.S. rentals		855			914			1,176
	International rentals		—			5,827			5,590
	Parts, service and used equipment		—			7,010			14,698
	Selling, general and administrative		321			1,657			8,297
	Foreign currency translation		—			(1,087	)		—
	Depreciation and amortization		—			2,964			3,438
	Interest expense		105			—			796
	Other		—			468			433
			1,281			17,753			34,428
Income (loss) from discontinued operations before income taxes			(756	)		5,919			8,028
Benefit from income taxes			—			(395	)		(2,162	)
Income (loss) from discontinued operations		$	(756	)	$	6,314		$	10,190

      Summary balance sheet data for assets held for sale as of December 31, 2005 (in thousands):

					Non-
					Oilfield
			Used		Power
			Equipment		Generation		Facilities		Total
Current assets			$	—	$	2,020	$	—	$	2,020
Property plant and equipment				—		—		—		—
	Assets held for sale			—		2,020		—		2,020
Current liabilities				—		878		—		878
	Liabilities held for sale			—		878		—		878
		Net assets held for sale	$	—	$	1,142	$	—	$	1,142

F-17

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Summary balance sheet data for assets held for sale as of December 31, 2004 (in thousands):

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

4. Inventory

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

	December 31,
	2005		2004
Parts and supplies	$	135,310	$	135,751
Work in progress		105,405		42,708
Finished goods		10,354		6,339
	$	251,069	$	184,798

      During the year ended December 31, 2005, 2004 and 2003 we recorded approximately $0.1 million, $1.1 million and $1.5 million, respectively, in inventory write-downs and reserves for parts inventory which was either obsolete, excess or carried at a price above market value. As of December 31, 2005 and 2004, we had inventory reserves of $11.8 million and $11.7 million, respectively.

5. Compressor and Production and Processing Equipment Fabrication Contracts

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

	December 31,
	2005			2004
Costs incurred on uncompleted contracts	$	372,675		$	268,088
Estimated earnings		42,976			31,131
		415,651			299,219
Less — billings to date		(351,611	)		(249,372	)
	$	64,040		$	49,847

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

	December 31,
	2005			2004
Costs and estimated earnings in excess of billings on uncompleted contracts	$	99,166		$	70,103
Billings on uncompleted contracts in excess of costs and estimated earnings		(35,126	)		(20,256	)
	$	64,040		$	49,847

F-18

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. Property, plant and equipment

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

	December 31,
	2005			2004
Compression equipment, facilities and other rental assets	$	2,441,119		$	2,360,799
Land and buildings		87,604			89,573
Transportation and shop equipment		77,507			78,577
Other		53,824			51,054
		2,660,054			2,580,003
Accumulated depreciation		(836,954	)		(703,655	)
	$	1,823,100		$	1,876,348

      Depreciation expense was $171.5 million, $162.0 million and $157.2 million in 2005, 2004 and 2003, respectively. Depreciation expense for 2003 includes $14.3 million for the impairment of certain idle units of our compression fleet that are being retired and the acceleration of depreciation of certain plants and facilities expected to be sold or abandoned. Assets under construction of $88.5 million and $61.7 million are included in compression equipment, facilities and other rental assets at December 31, 2005 and 2004, respectively. We capitalized $0.4 million, $0.3 million and $1.0 million of interest related to construction in process during 2005, 2004, and 2003, respectively.

      On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. As a result, at July 1, 2003, we added approximately $1,089.4 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. See Note 12 for a discussion of the impact of our adoption of FIN 46.

      During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. During February 2005, we repaid our 2000B compression equipment lease obligations using borrowings from our bank credit facility. During 2004, we used cash flow from operations and proceeds from asset sales to exercise our purchase option and reduce our outstanding debt and minority interest obligations by $115.0 million under our 2000B compression equipment operating leases. In June 2004 and December 2003, we exercised our purchase options under the 2000A and 1999 compression equipment operating leases (See Note 11). As of December 31, 2005, the remaining compression assets owned by the entities that lease equipment to us but, pursuant to our adoption of FIN 46 are included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $352.3 million, including improvements made to these assets after the sale leaseback transactions.

F-19

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. Intangible and Other Assets

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

	December 31,
	2005		2004
Deferred debt issuance and leasing transactions costs	$	28,331	$	35,891
Notes and other receivables		13,284		7,300
Intangibles		4,682		6,070
Deferred taxes		7,999		8,869
Other		6,110		7,809
	$	60,406	$	65,939

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

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

	As of December 31, 2005					As of December 31, 2004
	Gross					Gross
	carrying		Accumulated			carrying		Accumulated
	amount		amortization			amount		amortization
	(in thousands)
Deferred debt issuance transaction costs	$	54,205	$	(25,874	)	$	52,674	$	(16,783	)
Marketing related (3-20 yr life)		2,063		(324	)		4,581		(2,435	)
Customer related (20 yr life)		2,724		(423	)		3,684		(889	)
Technology based (5 yr life)		868		(355	)		1,529		(567	)
Contract based (17 yr life)		650		(521	)		650		(483	)
	$	60,510	$	(27,497	)	$	63,118	$	(21,157	)

      Amortization of intangible and deferred debt issuance transaction costs totaled $11.2 million, $13.3 million and $12.0 million in 2005, 2004 and 2003, respectively. Estimated future intangible amortization expense is (in thousands):

	2006	$	5,760
	2007		5,746
	2008		4,613
	2009		3,893
	2010		3,691
Thereafter			9,310
		$	33,013

8. Investments in Non-Consolidated Affiliates

      Investments in affiliates that are not controlled by Hanover but where we have the ability to exercise significant influence over the operations are accounted for using the equity method. Our share of net income or losses of these affiliates is reflected in the Consolidated Statement of Operations as Equity in income of non-consolidated affiliates. Our primary equity method investments are comprised of entities that own, operate, service and maintain compression and other related facilities. Our equity method investments totaled approximately $90.7 million and $89.2 million at December 31, 2005 and 2004, respectively.

F-20

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Our ownership interest and location of each equity method investee at December 31, 2005 is as follows:

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

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

	December 31,
	2005		2004
Current assets	$	137,936	$	148,938
Non-current assets		495,071		528,669
Current liabilities, excluding debt		37,403		35,407
Debt payable		301,384		349,030
Other non-current liabilities		51,752		41,053
Owners’ equity		242,468		252,117

      Summarized earnings information for these entities for the years ended December 31, 2005, 2004 and 2003 follows (on a 100% basis, in thousands):

	Years Ended December 31,
	2005		2004		2003
Revenues	$	193,153	$	186,457	$	277,575
Operating income		134,777		127,698		136,998
Net income		54,473		57,775		60,526

      PIGAP II, El Furrial and Simco/ Harwat Consortium were acquired in connection with the Production Operators Corporation (“POC”) acquisition completed in August 2001. During 2005, 2004 and 2003, we received approximately $18.7 million, $9.8 million and $18.5 million in dividends from these joint ventures. At December 31, 2005, 2004 and 2003 we had cumulatively recognized approximately $31.0 million, $28.0 million and $17.4 million, respectively, of earnings in excess of distributions from these joint ventures. We also hold interests in companies in which we do not exercise significant influence over the operations. These investments are accounted for using the cost method. Cost method investments totaled approximately $0.0 and $1.1 million at December 31, 2005 and 2004, respectively.

      The financial statements of PIGAP II and El Furrial are required by Rule 3-09 of Regulation S-X and will be filed as an amendment to this Form 10-K by June 29, 2006.

      In connection with our investment in El Furrial and Simco/ Harwat Consortium, we guaranteed our portion of the debt in the joint venture related to these projects. At December 31, 2005 and 2004 we have guaranteed approximately $39.5 million and $48.3 million, respectively, of the debt which is on the books of these joint ventures. These amounts are not recorded on Hanover’s books.

      In December 2004, we sold our ownership interest in Collicutt Energy Services Ltd. (“CES”) for approximately $2.6 million to an entity owned by Steven Collicutt. Hanover owned approximately 2.6 million shares in CES, which represented approximately 24.1% of the ownership interest of CES. (See Note 3.) In the normal course of business, we engage in purchase and sale transactions with Collicutt Energy Services Ltd. During the years ended December 31, 2004 and 2003, we had sales to

F-21

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

this related party of $0.0 million and $0.3 million, respectively; and purchases of $6.1 million and $6.1 million, respectively.

      On March 5, 2004, we sold our 50.384% limited partnership interest and 0.001% general partnership interest in Hanover Measurement Services Company, L.P. to EMS Pipeline Services, L.L.C. for $4.9 million, of which $0.2 million was put in escrow subject to the outcome of post closing working capital adjustments and other matters that have resulted in the $0.2 million being returned to the purchaser. We had no obligation to the purchaser with respect to any post-closing adjustment in excess of the escrowed amount. We accounted for our interest in Hanover Measurement under the equity method. As a result of the sale, we recorded a $0.3 million gain that is included in other revenue.

      In October 2003, the PIGAP II joint venture engaged in a project financing and distributed approximately $78.5 million to us, of which approximately $59.9 million was used to repay a non-recourse promissory note that had been secured by our interest in PIGAP II (See Note 11.)

9. Goodwill

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

      There were no impairments in 2005 and 2004 related to our annual impairment test. During 2003, we performed an impairment review of goodwill and because the present value of Belleli’s expected cash flows was less than the book value of our investment in Belleli, we determined that a $35.5 million impairment charge should be recorded on the goodwill associated with Belleli. (See Note 2.)

      The table below presents the change in the net carrying amount of goodwill for the years ended December 31, 2005 and 2004 (in thousands):

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

							Purchase
							Adjustment and
		December 31,		Acquisitions/			Other		December 31,
		2003		Dispositions(2)			Adjustments(3)		2004
U.S. rentals		$	95,597	$	—		$	4,859	$	100,456
International rentals			34,282		(2,145	)		2,948		35,085
Parts, service and used equipment			32,870		—			206		33,076
Compressor and accessory fabrication			14,573		—			—		14,573
	Total	$	177,322	$	(2,145	)	$	8,013	$	183,190

F-22

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1)	Additions to goodwill for our international rentals segment in 2005 relates to our acquisition of PTS.
(2)	Relates to sale of the compression rental assets of our Canadian subsidiary.
(3)	Relates primarily to purchase price adjustments for taxes related to acquisitions.

10. Accrued Liabilities

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

	December 31,
	2005		2004
Accrued salaries, bonuses and other employee benefits	$	36,823	$	30,323
Accrued income and other taxes		26,868		31,182
Current portion of interest rate swaps		1,849		1,061
Accrued interest		19,838		25,386
Accrued other		43,427		31,891
	$	128,805	$	119,843

11. Debt

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

	December 31,
	2005		2004
Belleli— factored receivables	$	1,129	$	1,011
Belleli— revolving credit facility		2,951		4,095
Short-term debt	$	4,080	$	5,106

      Belleli’s factoring arrangements are typically short term in nature and bore interest at a weighted average rate of 3.0% and 4.0% at December 31, 2005 and 2004. Belleli’s revolving credit facilities bore interest at a weighted average rate of 3.9% and 4.0% at December 31, 2005 and 2004, respectively. These revolving credit facilities are callable during 2006.

F-23

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	December 31,
	2005			2004
Bank credit facility due November 2010	$	48,000		$	7,000
4.75% convertible senior notes due 2008*		192,000			192,000
4.75% convertible senior notes due 2014*		143,750			143,750
8.625% senior notes due 2010**		200,000			200,000
9.0% senior notes due 2014**		200,000			200,000
2000B compression equipment lease notes, interest at 5.2%, due October 2005		—			55,861
2001A compression equipment lease notes, interest at 8.5%, due September 2008		133,000			300,000
2001B compression equipment lease notes, interest at 8.75%, due September 2011		250,000			250,000
Zero coupon subordinated notes, interest at 11%, due March 2007*		229,803			206,467
7.25% convertible subordinated notes due 2029*		86,250			86,250
Fair value adjustment— fixed to floating interest rate swaps		(9,686	)		(5,996	)
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		1,751			3,178
		1,474,868			1,638,510
Less— current maturities		(1,309	)		(1,430	)
Long-term debt	$	1,473,559		$	1,637,080

  *  Securities issued by Hanover (parent company)

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

     Maturities of long-term debt (excluding interest to be accrued thereon) at December 31, 2005 are (in thousands):

	December 31,
	2005
2006	$	1,309
2007		230,025
2008		325,045
2009		49
2010		238,368
Thereafter		680,072
	$	1,474,868

Bank Credit Facility

      In November 2005, we entered into a $450 million bank credit facility having a maturity date of November 21, 2010. Our prior $350 million bank credit facility that was scheduled to mature in December 2006 was terminated upon closing of the new facility. The new facility also provides for an incremental term loan facility of up to $300 million. The incremental term loan was undrawn at December 31, 2005 and was not syndicated with the credit facility. The new agreement prohibits us (without the lenders’ prior approval) from declaring or paying any dividend (other than dividends payable solely in our common stock or in options, warrants or rights to purchase such common stock) on, or making similar payments with respect to, our capital stock. Borrowings under the new facility are secured by substantially all of our unencumbered personal property and real property assets. In addition, all of the capital stock of domestic subsidiaries and 66% of the capital stock of the first tier international subsidiaries has been pledged to secure the obligations under the new credit facility. Up to

F-24

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$75 million of the credit facility can be borrowed in loans denominated in euros. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets.

      Our bank credit facility provides for a $450 million revolving credit in which U.S. dollar-denominated advances bear interest at our option, at (a) the greater of the Administrative Agent’s prime rate or the federal funds effective rate plus 0.50% (“ABR”), or (b) the eurodollar rate (“LIBOR”), in each case plus an applicable margin ranging from 0.375% to 1.5%, with respect to ABR loans, and 1.375% to 2.5%, with respect to LIBOR loans, in each case depending on our consolidated leverage ratio. Euro-denominated advances bear interest at the eurocurrency rate, plus an applicable margin ranging from 1.375% to 2.5%, depending on our consolidated leverage ratio. A commitment fee ranging from 0.375% to 0.5%, depending on our consolidated leverage ratio, times the average daily amount of the available commitment under the bank credit facility is payable quarterly to the lenders participating in the bank credit facility.

      As of December 31, 2005, we had $48.0 million in outstanding borrowings under our bank credit facility. Outstanding amounts under our bank credit facilities bore interest at a weighted average rate of 6.1% and 5.2% at December 31, 2005 and 2004, respectively. As of December 31, 2005, we also had approximately $118.6 million in letters of credit outstanding under our new bank credit facility. Our new bank credit facility permits us to incur indebtedness, subject to covenant limitations, up to a $450 million credit limit, plus, in addition to certain other indebtedness, an additional (a) $50 million in unsecured indebtedness, (b) $100 million of indebtedness of international subsidiaries and (c) $35 million of secured purchase money indebtedness. Additional borrowings of up to $283.4 million were available under that facility as of December 31, 2005.

      As of December 31, 2005, we were in compliance with all covenants and other requirements set forth in our bank credit facility, the indentures and agreements related to our compression equipment lease obligations and the indentures and agreements relating to our other long-term debt. A default under our bank credit facility or a default under certain of the various indentures and agreements would in some situations trigger cross-default provisions under our bank credit facilities or the indentures and agreements relating to certain of our other debt obligations. Such defaults would have a material adverse effect on our liquidity, financial position and operations.

      In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions, our 8.625% Senior Notes due 2010 and our 9% Senior Notes due 2014 permit us (1) to incur indebtedness, at any time, of up to $400 million under our bank credit facility, plus an additional $75 million in unsecured indebtedness and (2) to incur additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements governing such obligations), or our “coverage ratio,” is greater than 2.25 to 1.0, and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereof. The indentures and agreements for our 2001A and 2001B compression equipment lease obligations, our 8.625% Senior Notes due 2010 and our 9% Senior Notes due 2014 define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of December 31, 2005, Hanover’s coverage ratio exceeded 2.25 to 1.0.

F-25

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.0% Senior Notes due 2014

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

      The 2014 Senior Notes are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 2014 Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the senior notes. The 2014 Senior Notes are guaranteed on a senior subordinated basis by HCLP. The 2014 Senior Notes rank equally in right of payment with the 2010 Senior Notes described below and the guarantee of the 2014 Senior Notes by HCLP ranks equally in right of payment with the guarantee of the 2010 Senior Notes by HCLP. The indenture under which the 2014 Senior Notes were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets. The fair value of the 2014 Senior Notes is approximately $219.0 million at December 31, 2005.

8.625% Senior Notes due 2010

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

      The 2010 Senior Notes are our general unsecured senior obligations and rank equally in right of payment with all of our other senior debt. The 2010 Senior Notes are effectively subordinated to all existing and future liabilities of our subsidiaries that do not guarantee the 2010 Senior Notes. The 2010 Senior Notes are guaranteed on a senior subordinated basis by HCLP. The 2010 Senior Notes rank equally in right of payment with the 2014 Senior Notes and the guarantee of the 2010 Senior Notes by HCLP ranks equally in right of payment with the guarantee of the 2014 Senior Notes by HCLP. The indenture under which the 2010 Senior Notes were issued contains various financial covenants which limit, among other things, our ability to incur additional indebtedness or sell assets. The fair value of the 2010 Senior Notes is approximately $212.0 million at December 31, 2005.

4.75% Convertible Senior Notes due 2014

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

F-26

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

      The convertible senior notes are our general unsecured obligations and rank equally in right of payment with all of our other senior debt. The convertible senior notes are effectively subordinated to all existing and future liabilities of our subsidiaries. The fair value of the 2014 convertible senior notes is approximately $164.7 million at December 31, 2005.

4.75% Convertible Senior Notes due 2008

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

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

      The convertible senior notes are our general unsecured obligations and rank equally in right of payment with all of our other senior debt. The convertible senior notes are effectively subordinated to all existing and future liabilities of our subsidiaries. The fair value of the 2008 convertible senior notes is approximately $189.1 million at December 31, 2005.

Zero Coupon Subordinated Notes due March 31, 2007

      On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We had previously given notice of our intent to exercise the PIGAP put in January 2003. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from Hanover in August 2001 as part of the purchase price for the acquisition of POC’s natural gas compression business, ownership interest in certain joint venture projects in Latin America, and related assets. As a result, we retained our interest in PIGAP. As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. We restructured the $150 million subordinated note as our Zero Coupon Subordinated Notes due March 31, 2007, which notes were issued to Schlumberger in such transaction and were sold by Schlumberger in a registered public offering in December 2003. Original issue discount accretes under the zero coupon notes at a rate of 11.0% per annum for their remaining life, up to a total principal amount of approximately $263 million payable at maturity. The zero coupon notes will accrue additional interest at a rate of 2.0% per annum upon the occurrence and during the continuance of an event of default under the zero coupon notes. The zero coupon notes will also accrue additional interest at a rate of 3.0% per annum if our consolidated leverage ratio, as defined in the indenture governing the

F-27

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

zero coupon notes, exceeds 5.18 to 1.0 as of the end of any two consecutive fiscal quarters. Notwithstanding the preceding, in no event will the total additional interest accruing on the zero coupon notes exceed 3.0% per annum if both of the previously mentioned circumstances occur. The zero coupon notes also contain a covenant that limits our ability to incur additional indebtedness if our consolidated leverage ratio exceeds 5.6 to 1.0, subject to certain exceptions. The zero coupon notes may be redeemed at any time beginning March 31, 2006.

      The zero coupon notes are our general subordinated unsecured obligations and rank junior in right of payment to all of our senior debt and senior subordinated debt. The zero coupon notes are not guaranteed by any of our subsidiaries and therefore are effectively subordinated to all obligations of our existing and future subsidiaries. The fair value of the 2007 zero coupon notes is approximately $236.4 million at December 31, 2005.

7.25% Convertible Subordinated Notes due 2029

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

      The Mandatorily Redeemable Convertible Preferred Securities are convertible at the option of the holder into 2.7972 shares of our common stock, subject to adjustment for certain events, have a liquidation amount of $50 per security and mature in 30 years, but we may redeem them, in whole or in part, at any time. We are required to pay annual cash distributions at the rate of 7.25%, payable quarterly in arrears. However, such payments may be deferred for up to 20 consecutive quarters subject to certain restrictions. We recorded approximately $6.3 million in interest expense, during 2005, 2004 and 2003, for distributions related to convertible preferred securities. During any periods in which payments are deferred, in general, we cannot pay any dividend or distribution on our capital stock or redeem, purchase, acquire or make any liquidation on any of our capital stock.

      Prior to December 31, 2003, these securities were reported on our balance sheet as Mandatorily Redeemable Convertible Preferred Securities. Because we only have a limited ability to make decisions about its activities and we are not the primary beneficiary of Hanover Compressor Capital Trust, Hanover Compressor Capital Trust is a VIE under FIN 46. As such, the Mandatorily Redeemable Convertible Preferred Securities issued by Hanover Compressor Capital Trust are no longer reported on our balance sheet. Instead, we now report our subordinated notes payable to Hanover Compressor Capital Trust as a debt. These intercompany notes had previously been eliminated in our consolidated financial statements. The changes related to our Mandatorily Redeemable Convertible Preferred Securities on our balance sheet are reclassifications and had no impact on our consolidated results of operations or cash flow. The fair value of the 2008 convertible senior notes is approximately $83.4 million at December 31, 2005.

2001 Sale Leaseback Transactions

      In August 2001 and in connection with the POC acquisition, HCLP completed two sale leaseback transactions with two separate trusts involving certain compression equipment. Under the first transaction, HCLP received proceeds of $309.3 million from Hanover Equipment Trust 2001A (the “Trust 2001A”) from the sale of compression equipment. Simultaneously, the Trust 2001A issued notes in the principal amount of $300 million. The notes are secured by an assignment of the lease and a security interest in the equipment. The agreements under which the notes were issued contain various financial covenants which require, among other things, that we meet our specified quarterly financial

F-28

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ratios and restricts, among other things, our ability to incur additional indebtedness or sell assets. The notes, which bear interest at 8.5% paid semiannually, mature on September 1, 2008. The fair value of the Trust 2001A compression equipment lease obligations is approximately $138.0 million at December 31, 2005.

      Under the second sale leaseback transaction, HCLP received additional proceeds of $257.8 million from Hanover Equipment Trust 2001B (the “Trust 2001B”) from the sale of compression equipment. Simultaneously, the Trust 2001B issued notes in the principal amount of $250 million. The notes are secured by an assignment of the lease and a security interest in the equipment. The notes, which bear interest at 8.75% paid semiannually, mature on September 1, 2011. The fair value of the Trust 2001B compression equipment lease obligations is approximately $262.5 million at December 31, 2005.

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

      As of December 31, 2005, HCLP had residual value guarantees in the amount of approximately $277.9 million under the agreements associated with our two sale leaseback transactions that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of HCLP’s purchase options.

      We are entitled under the compression equipment operating lease agreements to substitute equipment that we own for equipment owned by the special purpose entities, provided that the value of the equipment that we are substituting is equal to or greater than the value of the equipment that is being substituted. We generally substitute equipment when one of our lease customers exercises a contractual right or otherwise desires to buy the leased equipment or when fleet equipment owned by the special purpose entities becomes obsolete or is selected by us for transfer to international projects. Each lease agreement limits the aggregate amount of replacement equipment that may be substituted to, among other restrictions, a percentage of the termination value under each lease. The termination value is equal to (1) the aggregate amount of outstanding principal of the corresponding notes issued by the special purpose entity, plus accrued and unpaid interest and (2) the aggregate amount of equity investor contributions to the special purpose entity, plus all accrued amounts due on account of the investor yield and any other amounts owed to such investors in the special purpose entity or to the holders of the notes issued by the special purpose entity or their agents. In the following table, termination value does not include amounts in excess of the aggregate outstanding principal amount of notes and the aggregate outstanding amount of the equity investor contributions, as such amounts are periodically paid as supplemental rent as required by our compression equipment operating leases. The aggregate amount of replacement equipment substituted (in dollars and percentage of termination value), the termination value and the substitution percentage limitation relating to each of our compression equipment operating leases as of December 31, 2005 are as follows:

F-29

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

								Substitution
								Limitation as
		Value of		Percentage of				Percentage of
		Substituted		Termination		Termination		Termination		Lease Termination
Lease		Equipment		Value(1)		Value(1)		Value		Date
						(dollars in
						millions)
2001A compression equipment lease		$	19.4		14.2%	$	137.1		25%		September 2008
2001B compression equipment lease			45.4		17.6%		257.7		25%		September 2011
	Total	$	64.8			$	394.8

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

      During September 2005, we redeemed $167.0 million in indebtedness and repaid $5.2 million in minority interest obligations under our 2001A compression equipment lease obligations using proceeds from the August 2005 public offering of our common stock. In connection with the redemption and repayment, the Company expensed $7.3 million related to the call premium and $2.5 million related to unamortized debt issuance costs. The $7.3 million of costs related to the call premium have been classified as debt extinguishment costs and the $2.5 million related to unamortized debt issuance costs have been classified as depreciation and amortization expense on the accompanying Consolidated Statements of Operations.

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

12. Leasing Transactions and Accounting Change for FIN 46

      As of December 31, 2005, we are the lessee in two transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (1) enabled us to affordably extend the duration of our financing arrangements and (2) reduced our cost of capital.

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

      In October 2000, we completed a $172.6 million sale leaseback transaction of compression equipment. In March 2000, we entered into a separate $200 million sale leaseback transaction involving

F-30

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

certain compression equipment. Under the March transaction, we received proceeds of $100 million from the sale of compression equipment at the first closing in March 2000, and in August 2000, we completed the second half of the equipment lease and received an additional $100 million for the sale of additional compression equipment. Under our 2000 lease agreements, the equipment was sold and leased back by us for a five-year term and was used by us in our business. The 2000 lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.1 million in transaction costs for the leases entered into in 2000, which were included in intangible and other assets on the balance sheet and were amortized over the respective lease terms of the respective transactions.

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

      During 2004, we used cash flow from operations and proceeds from asset sales to exercise our purchase option and reduce our outstanding debt and minority interest obligations by $115.0 million under our 2000B compression equipment operating leases. In June 2004, we exercised our purchase options under the 2000A compression equipment operating leases (See Note 11.) As of December 31, 2005, the remaining compression assets owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $352.3 million, including improvements made to these assets after the sale leaseback transactions.

      The following table summarizes as of December 31, 2005 the residual value guarantee, lease termination date and minority interest obligations for equipment leases (in thousands):

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

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

      Prior to July 1, 2003, these lease transactions were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets.

F-31

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2005, the yield rates on the outstanding equity certificates ranged from 12.2% to 12.7%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2005, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

      In connection with the compression equipment leases entered into in August 2001, we were obligated to prepare registration statements and complete an exchange offer to enable the holders of the notes issued by the lessors to exchange their notes with notes registered under the Securities Act of 1933. Because of the restatement of our financial statements at this time, the exchange offer was not completed within the timeframe required by the agreements related to the compression equipment lease obligations and we were required to pay additional lease expense in an amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense increased our lease expense by $1.1 million during 2003. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

13. Income Taxes

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

	Years Ended December 31,
	2005			2004			2003
U.S.	$	(33,146	)	$	(69,475	)	$	(115,937	)
International		23,712			40,151			2,078
	$	(9,434	)	$	(29,324	)	$	(113,859	)

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

			Years Ended December 31,
			2005		2004			2003
Current tax provision (benefit):
	Federal		$	—	$	168		$	—
	State			8		(27	)		245
	International			8,402		12,999			13,171
		Total current		8,410		13,140			13,416
Deferred tax provision (benefit):
	Federal			273		(4,380	)		(18,334	)
	State			1,477		1,959			—
	International			17,554		14,048			8,547
		Total deferred		19,304		11,627			(9,787	)
Total provision for income taxes			$	27,714	$	24,767		$	3,629

F-32

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The provision for income taxes for 2005, 2004 and 2003 resulted in effective tax rates on continuing operations of (293.8)%, (84.5)%, and (3.2)%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35% are as follows (in thousands):

	Years Ended December 31,
	2005			2004			2003
Federal income tax at statutory rate	$	(3,302	)	$	(10,263	)	$	(39,851	)
State income taxes, net of federal benefit		965			1,256			159
International effective rate/ U.S. rate differential (including international valuation allowances)		12,819			8,195			13,975
Release of tax issues based reserve		(4,254	)		(2,783	)		—
U.S. impact of international operations, net of federal benefit		13,201			14,877			5,270
U.S. valuation allowances		7,596			10,880			25,746
Other, net		689			2,605			(1,670	)
	$	27,714		$	24,767		$	3,629

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

		December 31,
		2005			2004
Deferred tax assets:
	Net operating losses carryforward	$	322,906		$	303,754
	Investment in joint ventures		737			737
	Inventory		5,983			5,048
	Alternative minimum tax credit carryforward		5,345			5,337
	Derivative instruments		—			722
	Accrued liabilities		5,253			3,809
	Intangibles		7,727			11,209
	Capital loss carryforward		11,611			10,293
	Other		19,148			22,057
Gross deferred tax assets			378,710			362,966
	Valuation allowance		(75,420	)		(65,441	)
			303,290			297,525
Deferred tax liabilities:
	Property, plant and equipment		(355,111	)		(332,294	)
	Other		(4,901	)		(6,135	)
Gross deferred tax liabilities			(360,012	)		(338,429	)
		$	(56,722	)	$	(40,904	)

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

	Year Ended December 31,
	2005			2004
Current deferred income taxes	$	13,842		$	12,583
Intangibles and other assets		7,999			8,869
Accrued liabilities		(2,448	)		(1,414	)
Deferred income taxes		(76,115	)		(60,942	)
Net deferred tax liabilities	$	(56,722	)	$	(40,904	)

      We had a U.S. net operating loss carryforward at December 31, 2005 of approximately $852.1 million of which, $7.6 million is subject to expiration from 2006 through 2010, and the remainder expires from 2011 to 2025. At December 2005, we had a capital loss carryforward of approximately $33.2 million that will expire in future years through 2010. In addition we had an

F-33

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

alternative minimum tax credit carryforward of approximately $5.3 million that does not expire. At December 31, 2005, we had approximately $70.5 million of net operating loss carryforwards in certain international jurisdictions, of which approximately $15.5 million have no expiration date, $15.0 million are subject to expiration from 2006 to 2009; and the remainder expires in future years through 2015.

      The valuation allowance increased by $10.0 million primarily due to: (1) a $8.1 million valuation allowance recorded against our U.S. deferred tax assets related to our net operating loss and capital loss carryforwards and (2) a $4.9 million valuation allowance recorded for certain international tax jurisdictions, offset by (3) a $3.0 million reduction due to utilization of prior year valuation allowances in the current year primarily in certain other international tax jurisdictions. Realization of deferred tax assets associated with net operating loss carryforwards is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to their expiration. Management believes it is more likely than not that the remaining deferred tax asset, not subject to valuation allowance, will be realized through future taxable income. Upon the release of the U.S. valuation allowance, approximately $6.0 million tax effect will be recorded to equity primarily related to stock options and restricted stock.

      We plan to reinvest the undistributed earnings of our international subsidiaries of approximately $177 million. Accordingly, U.S. deferred taxes have not been provided on these earnings. Calculating the tax effect of distributing these amounts is not practicable at this time.

14. Accounting for Derivatives

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

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

      In March 2004, we entered into two interest rate swaps, which we designated as fair value hedges, to hedge the risk of changes in fair value of our 8.625% Senior Notes due 2010 resulting from changes in interest rates. These interest rate swaps, under which we receive fixed payments and make floating payments, result in the conversion of the hedged obligation into floating rate debt. The following table summarizes, by individual hedge instrument, these interest rate swaps as of December 31, 2005 (dollars in thousands):

								Fair Value of
			Fixed Rate to be					Swap at
Floating Rate to be Paid	Maturity Date		Received			Notional Amount		December 31, 2005
Six Month LIBOR +4.72%		December 15, 2010		8.625	%	$	100,000	$	(4,975	)
Six Month LIBOR +4.64%		December 15, 2010		8.625	%	$	100,000	$	(4,711	)

      As of December 31, 2005, a total of approximately $1.9 million in accrued liabilities, $7.8 million in long-term liabilities and a $9.7 million reduction of long-term debt was recorded with respect to the fair value adjustment related to these two swaps. We estimate the effective floating rate, that is

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

determined in arrears pursuant to the terms of the swap, to be paid at the time of settlement. As of December 31, 2005 we estimated that the effective rate for the six-month period ending in June 2006 would be approximately 9.5%.

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

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

      These two swaps, which we designated as cash flow hedging instruments, met the specific hedge criteria and any changes in their fair values were recognized in other comprehensive income. During the years ended December 31, 2005, 2004 and 2003, we recorded other comprehensive income of approximately $0.6 million, $9.2 million and $7.9 million, respectively, related to these swaps ($0.6 million, $9.2 million and $5.1 million, respectively, net of tax).

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

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

      Prior to 2001, we entered into two interest rate swaps with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense until expiration in July 2003. Because management decided not to designate the interest rate swaps as hedges, we recognized an unrealized gain of approximately $4.1 million related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during 2003 and recognized an unrealized gain of approximately $0.5 million in interest expense in 2003.

      During 2003, we entered into forward exchange contracts with a notional value of $10.0 million to mitigate the risk of changes in exchange rates between the Euro and the U.S. dollar. These contracts matured during 2004. As of December 31, 2003, a total of approximately $0.6 million was recorded in other current assets and other comprehensive income with respect to the fair value adjustment related to these three contracts. The counterparties to our interest rate swap agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non- performance by any counterparty, although such non-performance could have a material adverse effect on us.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. Common Stockholders’ Equity

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

Other

      In March 2004, we issued and delivered to the escrow agent for the settlement fund 2.5 million shares of Hanover common stock, as required by the settlement. The settlement fund shares were distributed in August 2005. In July 2005 and 2004, we granted approximately 0.4 million and 1.2 million shares, respectively, of restricted Hanover common stock under our 2003 Stock Incentive Plan to certain employees, including our executive officers, as part of an incentive compensation plan.

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

      See Note 1 for a description of other common stock transactions.

16. Stock Options

      Hanover has employee stock incentive plans that provide for the granting of restricted stock and options to purchase common shares. Options are generally issued with an exercise price equal to the fair market value on the date of grant and are exercisable over a ten-year period. Options granted typically vest over a three to four year period. No compensation expense related to stock options was recorded in 2005, 2004 and 2003. At December 31, 2005, approximately 1.2 million shares were available for grant in future periods under our employee stock incentive plans.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a summary of stock option activity for the years ended December 31, 2005, 2004 and 2003:

					Weighted average
		Shares			price per share
Options outstanding, December 31, 2002			7,478,008		$	8.21
	Options granted(1)		539,285			11.41
	Options canceled		(652,963	)		11.06
	Options exercised		(1,432,636	)		4.68
Options outstanding, December 31, 2003			5,931,694			9.07
	Options granted(1)		77,474			11.47
	Options canceled		(624,656	)		13.19
	Options exercised		(1,140,073	)		8.38
Options outstanding, December 31, 2004			4,244,439			8.67
	Options granted(1)		477,940			11.98
	Options canceled		(139,354	)		14.44
	Options exercised		(1,562,268	)		3.19
Options outstanding, December 31, 2005			3,020,757			11.77

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

      The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2005:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
			Life in		Exercise				Exercise
Range of exercise prices	Shares		Years		Price		Shares		Price
$0.00-2.50		5,928		0.1	$	0.00		5,928	$	0.00
$5.01-7.50		47,084		0.3		5.70		47,084		5.70
$7.51-10.00		1,168,472		2.9		9.76		1,116,762		9.76
$10.01-12.50		1,050,122		7.9		11.75		349,476		11.72
$12.51-15.00		615,451		5.9		14.46		454,963		14.46
$15.01-17.50		75,000		6.2		17.25		75,000		17.25
$17.51-20.00		21,000		6.1		18.95		19,400		18.95
$22.51-25.00		37,700		5.7		25.00		37,700		25.00
		3,020,757						2,106,313

      The weighted-average fair value of options at date of grant was $5.08, $5.56, and $5.00 per option during 2005, 2004 and 2003, respectively.

      The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

measure of the fair value of our employee stock options. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:

	2005		2004		2003
Expected life		7  years		7.5  years		6  years
Interest rate		4.0%		4.2%		3.2%
Volatility		32.0%		38.0%		40.3%
Dividend yield		0%		0%		0%

      See Note 1 for stock based compensation pro forma impact on net income.

17. Benefit Plans

      Our 401(k) retirement plan provides for optional employee contributions up to the IRS limitation and discretionary employer matching contributions. We recorded matching contributions of $2.9 million, $2.7 million, and $2.6 million during the years ended December 31, 2005, 2004 and 2003, respectively.

18. Related Party and Certain Other Transactions

Transactions with GKH Entities

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

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

Transactions with Schlumberger Entities

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

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

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

representative to sit on our Board of Directors. Schlumberger currently has no representative who sits on the Company’s board of directors.

      As of December 31, 2005, Schlumberger sold all of their Hanover common stock and is no longer considered a related party.

      For the years ended December 31, 2005, 2004, and 2003, Hanover generated revenues of approximately $0.0 million, $0.0 million, and $0.5 million in business dealings with Schlumberger. In addition, Hanover made purchases of equipment and services of approximately $0.5 million, $0.5 million and $0.0 million from Schlumberger during 2005, 2004 and 2003, respectively.

      As part of the purchase agreement entered into with respect to the POC Acquisition, we were required to make a payment of up to $58.0 million plus interest from the proceeds of and due upon the completion of a financing of PIGAP II, a Latin American joint venture acquired by Hanover from Schlumberger. (See Note 8.) Because the joint venture failed to execute the financing on or before December 31, 2002, Hanover had the right to put its interest in the joint venture back to Schlumberger in exchange for a return of the purchase price allocated to the joint venture, plus the net amount of any capital contributions by us to the joint venture. In January 2003, we gave notice of our intent to exercise our right to put our interest in the joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. In May 2003, we agreed with Schlumberger Surenco, an affiliate of Schlumberger, to the modification of the repayment terms of the $58.0 million obligation. The obligation was converted into a non-recourse promissory note with a 6% interest rate compounding semi-annually until maturity in December 2053. In October 2003, the PIGAP II joint venture closed on the project’s financing and distributed approximately $78.5 million to Hanover, of which approximately $59.9 million was used to pay off the PIGAP Note.

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

      In August 2001, we entered into a five-year strategic alliance with Schlumberger intended to result in the active support of Schlumberger in fulfilling certain of our business objectives. The principal components of the strategic alliance include (1) establishing Hanover as Schlumberger’s most favored supplier of compression, natural gas treatment and gas processing equipment worldwide, (2) Schlumberger’s coordination and cooperation in further developing Hanover’s international business by placing Hanover personnel in Schlumberger’s offices in six top international markets and (3) providing Hanover with access to consulting advice and technical assistance in enhancing its field automation capabilities.

Other Related Party Transactions

      In connection with the restatements announced by Hanover in 2002, certain present and former officers and directors were named as defendants in putative stockholder class actions, stockholder derivative actions and were involved with the investigation that was conducted by the Staff of the SEC. Pursuant to the indemnification provisions of our certificate of incorporation and bylaws, we paid legal fees on behalf of certain employees, officers and directors involved in these proceedings. In connection with these proceedings, we advanced, on behalf of indemnified officers and directors, during 2004 and 2003, $0.1 million and $1.2 million, respectively, in the aggregate.

      During 2003, $0.3 million was advanced on behalf of former director and officer William S. Goldberg; $0.2 million was advanced on behalf of former director and officer Michael J. McGhan; $0.1 million was advanced on behalf of former officers Charles D. Erwin and Joe S. Bradford; and $0.5 million was advanced on behalf of various employees of the Company.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      During 2004, $0.1 million was advanced in total on behalf of former directors and officers in connection with the proceedings mentioned above.

      On July 30, 2003, HCLP entered into a Membership Interest Redemption Agreement pursuant to which its 10% interest in Energy Transfer Group, LLC (“ETG”) was redeemed, and as a result HCLP withdrew as a member of ETG. In consideration for the surrender of HCLP’s 10% membership interest in ETG, pursuant to a Partnership Interest Purchase Agreement dated as of July 30, 2003, subsidiaries of ETG sold to subsidiaries of the Company their entire 1% interest in Energy Transfer Hanover Ventures, L.P. (“Energy Ventures”). As a result of the transaction, the Company now owns, indirectly, 100% of Energy Ventures. The Company’s 10% interest in ETG was carried on the Company’s books for no value. Ted Collins, Jr., a Director of the Company, owns 100% of Azalea Partners, which owns approximately 15% of ETG. In 2005, 2004 and 2003, ETG billed Hanover $0.0 million, $0.0 million and $0.5 million for services rendered to reimburse ETG for expenses incurred on behalf of Energy Ventures, respectively. In 2005, 2004 and 2003, we recorded sales of approximately $25.5 million, $7.7 million and $4.1 million, respectively, related to equipment leases and sales to ETG. As of December 31, 2005 and 2004, we had receivable balances due from ETG of $1.1 million and $0.3 million, respectively. In addition, Hanover and ETG are co-owners of a power generation facility in Venezuela. Under the agreement of co-ownership each party is responsible for its obligations as a co-owner. In addition, Hanover is the designated manager of the facility. As manager, Hanover received revenues related to the facility and distributed to ETG its net share of the operating cash flow of $0.5 million, $0.8 million, and $0.5 million during 2005, 2004 and 2003, respectively.

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

19. Commitments and Contingencies

      Rent expense, excluding lease payments for the leasing transactions described in Note 12, for 2005, 2004 and 2003 was approximately $6.3 million, $6.9 million, and $5.0 million, respectively. Commitments for future minimum rental payments with terms in excess of one year at December 31, 2005 are: 2006  — $3.8 million; 2007 — $2.3 million; 2008 — $1.4 million; 2009 — $0.5 million; 2010 — $0.4 million and $0.1 million thereafter.

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

				Maximum Potential
				Undiscounted
				Payments as of
		Term		December 31, 2005
Indebtedness of non-consolidated affiliates:
	Simco/Harwat Consortium(1)		2006	$	7,476
	El Furrial(1)		2013		32,017
Other:
	Performance guarantees through letters of credit(2)		2006-2007		108,598
	Standby letters of credit		2006-2007		20,249
	Commercial letters of credit		2006		2,741
	Bid bonds and performance bonds(2)		2006-2011		123,569
				$	294,650

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

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

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

      We are involved in a project called the Cawthorne Channel Project in which we operate barge-mounted gas compression and gas processing facilities stationed in a Nigerian coastal waterway as part of the performance of a contract between an affiliate of The Royal/ Dutch Group (“Shell”) and Global Gas and Refining Ltd., a Nigerian entity, (“Global”). We have completed the building of the required barge-mounted facilities and the project was declared commercial on November 15, 2005. The contract runs for a ten-year period which commenced when the project was declared commercial, subject to a purchase option that is exercisable for the remainder of the term of the contract. Under the terms of a series of contracts between Global and Hanover, Shell, and several other counterparties, respectively, Global is responsible for the overall project.

      Recently, violence and local unrest have significantly increased in Nigeria. We were notified on February 24, 2006 that as a result of the recent events, Global declared Force Majeure with respect to the Cawthorne Channel Project. We have notified Global that we dispute their declaration of Force Majeure and that we believe it does not relieve Global’s obligations to make monthly rental payments or monthly operations and maintenance fee payments to Hanover under the contract. In light of this notification by Global, as well as the political environment in Nigeria, Global’s capitalization level, inexperience with projects of a similar nature and lack of a successful track record with respect to this project and other factors, there is no assurance that Global will comply with its obligations under these contracts.

      This project and our other projects in Nigeria are subject to numerous risks and uncertainties associated with operating in Nigeria. Such risks include, among other things, political, social and economic instability, civil uprisings, riots, terrorism, kidnapping, the taking of property without fair compensation and governmental actions that may restrict payments or the movement of funds or result in the deprivation of contract rights. Any of these risks including risks arising from the recent increase in

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

violence and local unrest could adversely impact any of our operations in Nigeria, and could affect the timing and decrease the amount of revenue we may realize from our investments in Nigeria. If Shell were to terminate its contract with Global for any reason or if we were to terminate our involvement in the project, we would be required to find an alternative use for the barge facility which could result in a write-down of our investment. At December 31, 2005, we had an investment of approximately $70.9 million in projects in Nigeria, a substantial majority of which related to the Cawthorne Channel Project (including $13.3 million in advances to and receivables from Global).

20. Securities Class Action Settlement

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

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

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

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

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HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On February 9, 2004, the United States District Court for the Southern District of Texas entered three Orders and Final Judgments, approving the settlement on the terms agreed upon in the Stipulation of Settlement with respect to all of the claims described above. The court also entered an Order and Final Judgment approving the plans of allocation with respect to each action, as well as an Order and Final Judgment approving the schedule of attorneys’ fees for counsel for the settling plaintiffs. The time in which these Orders and Final Judgments may be appealed expired on March 10, 2004 without any appeal being lodged. The settlement has therefore become final and has been implemented according to its terms. In March 2004, we issued and delivered to the escrow agent for the settlement fund 2.5 million shares of Hanover common stock, as required by the settlement. The settlement fund shares were distributed in August 2005.

      Based on the terms of the settlement agreement and the individual components of the settlement, we recorded the cost of the litigation settlement in 2003. The details of the litigation settlement charge were as follows (in thousands):

Cash	$	30,050
Estimated fair value of note to be issued		3,633
Common stock to be issued by Hanover		29,800
Legal fees and administrative costs		6,178
Total		69,661
Less: insurance recoveries		(26,670	)
Net litigation settlement	$	42,991

      The $3.6 million estimated fair value of the note issued was based on the present value of the future cash flows discounted at borrowing rates which were available to us for debt with similar terms and maturities. Using a market-borrowing rate of 9.3%, the principal value and the stipulated interest rate required by the note of 5% per annum, a discount of $0.8 million was computed on the note to be issued. Upon the issuance of the note, the discount was amortized to interest expense over the term of the note. Because the note could be extinguished without a payment (if our common stock traded at or above the average price of $12.25 per share for 15 consecutive trading days at any time between March 31, 2004 and March 31, 2007), we were required to record an asset when the note was issued for the value of the embedded derivative, as required by SFAS 133. We estimated the value of the derivative and reduced the amount we included for the estimate of the value of the note by approximately $2.3 million at December 31, 2003. The note was extinguished with no money owing under it during the third quarter 2004 resulting in a decrease in the settlement related cost of $4.0 million. This asset was marked to market with any increase or decrease included in our statement of operations until extinguished.

      As of December 31, 2003, the balance sheet included a $33.4 million long-term liability related to the Hanover common stock and the fair value of the contingent note payable in connection with the securities settlement. In addition, as of December 31, 2003, the balance sheet included approximately $32.7 million in accrued liabilities and $29.6 million in restricted cash related to the securities related settlement. In the first quarter of 2004, the escrow settlement fund was released, which was included on the balance sheet as restricted cash and securities settlement accrual, issued the shares and reclassified $29.8 million, the estimated value of the common stock issued, from other liabilities to stockholders’ equity and included the shares in the weighted average outstanding shares used for earnings per share calculations.

21. Other Expense

      For the year ended December 31, 2003, other expenses included $2.9 million in charges primarily recorded to write off certain non-revenue producing assets and to record the settlement of a contractual obligation.

F-43

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

22. Restructuring, Impairment and Other Charges

      Included in the net loss for 2005 were the following pre-tax charges (in thousands):

Debt extinguishment costs		$	7,318
Write-off of deferred financing costs (in Depreciation and amortization)			2,500
	Total	$	9,818

      Included in the net loss for 2004 were the following pre-tax charges/(benefit) (in thousands):

Securities-related litigation settlement		$	(4,163	)
Write-off of deferred financing costs (in Depreciation and amortization)			1,686
Cancellation of interest rate swap (in Interest expense)			2,028
	Total	$	(449	)

      Included in the net loss for 2003 were the following pre-tax charges (in thousands):

Rental fleet asset impairment (in Depreciation and amortization)		$	14,334
Cumulative effect of accounting change — FIN 46			133,707
Securities-related litigation settlement			42,991
Belleli goodwill impairment (in Goodwill impairment)			35,466
Write-off of deferred financing costs (in Depreciation and amortization)			2,461
Loss on sale/write-down of discontinued operations			21,617
	Total	$	250,576

      For a further description of these charges see Notes 3, 6, 7, 9, 11 and 20.

23. New Accounting Pronouncements

      In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2004. On November 7, 2003, the FASB issued Staff Position 150-3 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $11.9 million in sale leaseback obligations that, as of December 31, 2005, were reported as “Minority interest” on our consolidated balance sheet pursuant to FIN 46.

      These minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of December 31, 2005, the yield rates on the outstanding equity certificates ranged from 12.2% to 12.7%. Equity certificate holders may receive a return of capital payment upon termination of the lease or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At December 31, 2005, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

      In October 2004, the Emerging Issues Task Force reached a consensus on Issue No. 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative

F-44

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Thresholds,” which clarifies the guidance in paragraph 19 of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” According to EITF Issue No. 04-10, operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS No. 131, the segments have similar economic characteristics, and the segments share a majority of the aggregation criteria listed in items (a)-(e) in paragraph 17 of SFAS No. 131. In November 2004, the Task Force delayed the effective date of this consensus. In 2005, the Task Force agreed the consensus in this Issue should be applied for fiscal years ending after September 15, 2005. The adoption of EITF 04-10 did not have a material effect on the determination of and disclosures relating to our operating segments.

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

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This standard addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. SFAS 123(R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123(R) would be changed to the first annual reporting period that begins after June 15, 2005. The adoption of SFAS 123(R) is not expected to have a significant effect on our financial position or cash flows, but will impact our results of operations. An illustration of the impact on our net income and earnings per share is presented in the “Stock Options and Stock-Based Compensation” section of Note 1 assuming we had applied the fair value recognition provisions of SFAS 123(R) using the Black-Scholes methodology.

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

      In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 requires uncertainty about the timing or method of settlement of a conditional asset retirement obligation to be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective

F-45

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on our consolidated results of operations, cash flows or financial position.

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

24. Industry Segments and Geographic Information

      We manage our business segments primarily based upon the type of product or service provided. We have six principal industry segments: U.S. Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; Production and Processing — Belleli; and Production and Processing — Surface Equipment Fabrication. The U.S. and International Rentals segments primarily provide natural gas compression and production and processing equipment rental and maintenance services to meet specific customer requirements on Hanover-owned assets. The Parts, Service and Used Equipment segment provides a full range of services to support the surface production needs of customers from installation and normal maintenance and services to full operation of a customer’s owned assets and surface equipment as well as sales of used equipment. The Compressor and Accessory Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet unique customer specifications. The Production and Processing — Surface Equipment Fabrication segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas. Production and Processing — Belleli provides engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalinization plants and tank farms. During 2005, we determined that Production and Processing — Belleli became a separate reportable segment from our Production and Processing — Surface Equipment Fabrication reportable segment due to differing long term economic characteristics. We have adjusted prior periods to conform to the 2005 presentation.

      We evaluate the performance of our segments based on segment gross profit. Segment gross profit for each segment includes direct revenues and operating expenses. Costs excluded from segment gross profit include selling, general and administrative, depreciation and amortization, leasing, interest, foreign currency translation, provision for cost of litigation settlement, goodwill impairment, other expenses and income taxes. Amounts defined as “Other income” include equity in income of non-consolidated affiliates, and corporate related items primarily related to cash management activities. Revenues include sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments. Our chief executive officer does not review asset information by segment.

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

F-46

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following tables present sales and other financial information by industry segment and geographic region for the years ended December 31, 2005, 2004 and 2003.

									Production and
									Processing
							Compressor
					Parts, service		and		Surface
			International		and used		accessory		equipment
	U.S. rentals		rentals		equipment		fabrication		fabrication		Belleli		Other(1)		Consolidated
	(In thousands of dollars)
2005
Revenues from external customers	$	351,128	$	232,587	$	225,636	$	179,954	$	179,951	$	180,316	$	26,017	$	1,375,589
Gross profit		211,663		156,075		56,468		23,540		21,957		12,386		26,017		508,106
Total assets		1,415,879		669,421		63,909		70,170		48,880		105,302		489,435		2,862,996
Capital expenditures		61,370		87,858		—		—		123		4,577		1,218		155,146
2004
Revenues from external customers	$	341,570	$	214,598	$	180,321	$	158,629	$	131,195	$	139,089	$	23,193	$	1,188,595
Gross profit		196,990		150,645		44,392		13,797		13,099		14,934		23,193		457,050
Total assets		1,468,060		616,339		61,078		56,825		45,185		99,964		423,778		2,771,229
Capital expenditures		40,271		36,713		—		—		139		7,768		5,605		90,496
2003
Revenues from external customers	$	324,186	$	191,301	$	164,935	$	106,896	$	140,753	$	119,907	$	27,102	$	1,075,080
Gross profit		196,761		129,426		41,680		9,974		13,570		12,887		27,102		431,400
Total assets		1,643,375		768,397		60,843		73,897		74,246		70,857		250,659		2,942,274
Capital expenditures		73,007		59,200		24		2,735		1,158		6,342		—		142,466

Geographic Data

	United States		International(2)		Consolidated
	(In thousands of dollars)
2005
Revenues from external customers	$	715,069	$	660,520	$	1,375,589
Property, plant and equipment, net	$	1,255,935	$	567,165	$	1,823,100
2004
Revenues from external customers	$	619,981	$	568,614	$	1,188,595
Property, plant and equipment, net	$	1,315,610	$	560,738	$	1,876,348
2003
Revenues from external customers	$	647,176	$	427,904	$	1,075,080
Property, plant and equipment, net	$	1,408,154	$	619,500	$	2,027,654

(1)	Includes equity in income of non-consolidated affiliates and other income.
(2)	International operations include approximately $131.7 million, $141.6 million and $124.5 million of revenues and $192.9 million, $197.6 million and $217.8 million of property, plant and equipment, net for 2005, 2004 and 2003, respectively, related to operations and investments in Venezuela.

25. Impact of Hurricanes

      Hurricanes Katrina and Rita caused operational disruptions, including the shutdown of our Gulf Coast facilities for a few days, that negatively impacted our financial performance in the third quarter. During the year ended December 31, 2005, we recorded $0.2 million in depreciation expense and

F-47

HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$0.6 million of U.S. Rentals repair expense to record the insurance deductibles related to our estimate of the damage done to units impacted by Hurricanes Katrina and Rita.

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

26. Subsequent Event

      In February 2006, we sold our U.S. amine treating rental assets to Crosstex Energy Services L.P. (“Crosstex”) for approximately $51.5 million which we expect to result in a gain of approximately $27 to $32 million, a portion of which may be deferred into future periods. Our U.S. amine treating rental assets had revenues of approximately $7.6 million in 2005 and net plant, property and equipment and allocated goodwill of approximately $18 million at December 31, 2005. Estimated liabilities and deferred gain associated with the sale were approximately $1 to $5 million. Hanover will lease back from Cross-tex one of the facilities sold in this transaction. We also entered into a three-year strategic alliance with Crosstex.

F-48

HANOVER COMPRESSOR COMPANY

SELECTED QUARTERLY UNAUDITED FINANCIAL DATA

      The table below sets forth selected unaudited financial information for each quarter of the two years:

			1st			2nd			3rd			4th
			Quarter			Quarter			Quarter			Quarter
			(In thousands, except per share amounts)
2005(1):
	Revenue		$	301,626		$	344,782		$	369,846		$	359,335
	Gross profit			116,246			129,423			131,630			130,807
	Net loss			(12,464	)		(6,416	)		(14,938	)		(4,199	)
	Loss per common and common equivalent share:
		Basic	$	(0.15	)	$	(0.07	)	$	(0.16	)	$	(0.04	)
		Diluted	$	(0.15	)	$	(0.07	)	$	(0.16	)	$	(0.04	)
2004(2):
	Revenue		$	269,831		$	292,876		$	315,811		$	310,077
	Gross profit			112,941			118,254			116,588			109,267
	Net loss			(9,454	)		(9,061	)		(5,274	)		(20,217	)
	Loss per common and common equivalent share:
		Basic	$	(0.11	)	$	(0.11	)	$	(0.06	)	$	(0.24	)
		Diluted	$	(0.11	)	$	(0.11	)	$	(0.06	)	$	(0.24	)

(1)	During the third quarter of 2005, we recorded a $7.3 million charge for debt extinguishment costs and a $2.5 million write-off of deferred financing costs.
(2)	Amounts reflect reclassifications for discontinued operations. (See Note 3.)

F-49

SCHEDULE II

HANOVER COMPRESSOR COMPANY

VALUATION AND QUALIFYING ACCOUNTS

				Additions
		Balance at		Charged to					Balance at
		Beginning		Costs and					End of
Description		of Period		Expenses		Deductions			Period
		(In thousands)
Allowance for doubtful accounts deducted from accounts receivable in the balance sheet
	2005	$	7,573	$	1,955	$	4,777	(1)	$	4,751
	2004		5,460		2,658		545	(1)		7,573
	2003		5,162		4,028		3,730	(1)		5,460
Allowance for obsolete and slow moving inventory deducted from inventories in the balance sheet
	2005	$	11,699	$	148	$	50	(2)	$	11,797
	2004		12,729		1,062		2,092	(2)		11,699
	2003		14,211		1,536		3,018	(2)		12,729
Allowance for deferred tax assets not expected to be realized
	2005	$	65,441	$	13,015	$	3,036	(3)	$	75,420
	2004		55,015		23,429		13,003	(3)		65,441
	2003		23,371		46,824		15,180	(3)		55,015
Allowance for employee loans
	2003	$	6,021	$	—	$	6,021	(4)	$	—

(1)	Uncollectible accounts written off, net of recoveries.
(2)	Obsolete inventory written off at cost, net of value received.
(3)	Reflects utilization of tax assets that previously had a valuation allowance.
(4)	During 2003, the notes receivable for loans to employees who were not executive officers were forgiven.

S-1

EXHIBIT INDEX

Exhibit
Number			Description
	3	.1	Certificate of Incorporation of the Hanover Compressor Holding Co., incorporated by reference to Exhibit 3.1 to Hanover Compressor Company’s (the “Company”) Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.2	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.3	Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Company, dated July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 5, 2001.
	3	.4	Amended and Restated Bylaws of the Company, dated March 10, 2004, incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.1	Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, by and between the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other stockholders of the Company party thereto, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.2	Form of Warrant Agreement, dated as of August 7, 1995, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.3	Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	4	.4	Form of Hanover Compressor Capital Trust 71/4% Convertible Preferred Securities, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	4	.5	Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15, 1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000.
	4	.6	Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029, incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	4	.7	Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of March 15, 2001, between the Company and Wilmington Trust Company, as trustee, incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.8	Form of 4.75% Convertible Senior Notes due 2008, incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.9	Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the 2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	4	.10	Form of 8.50% Senior Secured Notes due 2008, incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.11	Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the 2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

Exhibit
Number			Description
	4	.12	Form of 8.75% Senior Secured Notes due 2011, incorporated by reference to Exhibit 4.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.13	Indenture for the Zero Coupon Subordinated Notes due March 31, 2007, dated as of May 14, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-106384) on Form S-3, as filed with the SEC on June 23, 2003.
	4	.14	Form of Zero Coupon Subordinated Notes due March 31, 2007, incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.15	Senior Indenture, dated as of December 15, 2003, among the Company, Subsidiary Guarantors named therein and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, as filed with the SEC on December 15, 2003.
	4	.16	First Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 8.625% Senior Notes due 2010, dated as of December 15, 2003, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form 8-A, as filed with the SEC on December 15, 2003.
	4	.17	Form of 8.625% Senior Notes due 2010, incorporated by reference to Exhibit 4.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.18	Second Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 4.75% Convertible Senior Notes due 2014, dated as of December 15, 2003, between the Company and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K, as filed with the SEC on December 16, 2003.
	4	.19	Form of 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	4	.20	Third Supplemental Indenture to the Senior Indenture dated as of December 15, 2003, relating to the 9.0% Senior Notes due 2014, dated as of June 1, 2004, among Hanover Compressor Company, Hanover Compression Limited Partnership and Wachovia Bank, National Association, as trustee, incorporated by reference to Exhibit 4.2 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	4	.21	Form of 9% Senior Notes due 2014, incorporated by reference to Exhibit 4.3 to the Registration Statement of Hanover Compressor Company and Hanover Compression Limited Partnership on Form 8-A under the Securities Act of 1934, as filed on June 2, 2004.
	10	.1	Stipulation and Agreement of Settlement, dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
	10	.2	PIGAP Settlement Agreement, dated as of May 14, 2003, by and among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	10	.3	Credit Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership, The Royal Bank of Scotland plc as Syndication Agent, JPMorgan Chase Bank, N.A. as Administrative Agent, and the several lenders parties thereto.*
	10	.4	Guarantee and Collateral Agreement, dated as of November 21, 2005, among the Company, Hanover Compression Limited Partnership and certain of their subsidiaries in favor of JPMorgan Chase Bank, N.A. as Collateral Agent.*
	10	.5	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the “2001A Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

Exhibit
Number			Description
	10	.6	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.7	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.66 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.8	Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.67 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.9	Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.10	Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the “2001B Trust”) and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.11	Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.12	Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to Exhibit 10.72 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.13	Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington Trust FSB as collateral agent, incorporated by reference to Exhibit 10.73 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.14	Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
	10	.15	Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative trustees, incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 filed with the SEC on February 14, 2000.
	10	.16	Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to Exhibit 4.10 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	10	.17	Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust, incorporated by reference to Exhibit 4.11 to the Company’s Registration Statement (File No. 333-30344) on Form S-3 as filed with the SEC on February 14, 2000.
	10	.18	Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
	10	.19	Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 6, 2003.

Exhibit
Number			Description
	10	.20	Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2001.
	10	.21	Amendment No. 2, dated as of July 8, 2005 to Purchase Agreement by and among the Company, Hanover Compression Limited Partnership and Schlumberger Technology Corporation, for itself and as successor in interest to Camco International Inc., Schlumberger Surenco S.A. and Schlumberger Oilfield Holdings Ltd., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.
	10	.22	Most Favored Supplier and Alliance Agreement, dated August 31, 2001, among Schlumberger Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2001.
	10	.23	Agreement by and among SJMB, L.P., Charles Underbrink, John L. Thompson, Belleli Energy S.r.l. and Hanover Compressor Company and certain of its subsidiaries dated September 20, 2002, incorporated by reference to Exhibit 10.62 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.24	Hanover Compressor Company Stock Compensation Plan, incorporated by reference to Exhibit 10.63 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.††
	10	.25	Hanover Compressor Company Senior Executive Stock Option Plan, incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.26	Hanover Compressor Company 1993 Management Stock Option Plan, incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.27	Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.
	10	.28	Amendment and Restatement of the Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.29	Hanover Compressor Company 1995 Employee Stock Option Plan, incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.30	Hanover Compressor Company 1995 Management Stock Option Plan, incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.31	Form of Stock Option Agreement for DeVille and Mcneil, incorporated by reference to Exhibit 10.70 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.32	Form of Stock Option Agreements for Wind Bros, incorporated by reference to Exhibit 10.71 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	10	.33	Hanover Compressor Company 1996 Employee Stock Option Plan, incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.34	Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††
	10	.35	1997 Stock Purchase Plan, incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement (File No. 333-24953) on Form S-1, as amended.††

Exhibit
Number			Description
	10	.36	Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
	10	.37	First Amendment to the Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.38	Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.††
	10	.39	Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-32092) on Form S-8 filed with the SEC on March 10, 2000.††
	10	.40	First Amendment to the Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.41	Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement (File No. 333-73904) on Form S-8 filed with the SEC on November 21, 2001.††
	10	.42	First Amendment to the Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.43	Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A, as filed with the SEC on April 15, 2003.††
	10	.44	First Amendment to the Hanover Compressor Company 2003 Stock Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on July 13, 2005.††
	10	.45	Employment Letter with Peter Schreck, dated August 22, 2000, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.††
	10	.46	Employment Letter with Stephen York, dated March 6, 2002, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.††
	10	.47	Promissory Note and Indenture dated April 21, 2004 relating to $6,650,000 payable to Milberg, Weiss, Bershad, Hynes & Lerach LLP as Escrow Agent with respect to the settlement fund as defined in that certain Stipulation and Agreement and Settlement dated as of October 23, 2003, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
	10	.48	Employment Letter with Gary M. Wilson dated April 9, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.††
	10	.49	Employment Letter with John E. Jackson dated October 5, 2004, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on October 6, 2004.††
	10	.50	Change of Control and Severance Agreement dated July 29, 2005 between John E. Jackson and the Company, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.††
	10	.51	Employment Letter with Lee E. Beckelman dated January 31, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on February 1, 2005.††
	10	.52	Employment Letter with Anita H. Colglazier dated April 4, 2002 with explanatory note.††

Exhibit
Number			Description
	10	.53	Letter to Brian Matusek regarding employment terms, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2005. ††
	10	.54	Employment Letter with Norrie Mckay effective as of May 16, 2005, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.††
	10	.55	Form of Change of Control Agreement dated July 29, 2005 between the Company and each of Messrs. Lee E. Beckelman, Brian A. Matusek, Gary M. Wilson, Steven W. Muck, Norman A. Mckay, Stephen P. York and Peter G. Schreck and Ms. Anita H. Colglazier, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q For the quarter ended June 30, 2005.††
	12	.1	Computation of ratio of earnings to fixed charges.*
	14	.1	P.R.I.D.E. in Performance — Hanover’s Guide to Ethical Business Conduct (the “Code of Ethics”), incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
	14	.2	Amendment to the Code of Ethics, incorporated by reference to Exhibit 14.1 to the Company’s Current Report on Form 8-K, as filed with the SEC on January 20, 2005.
	21	.1	List of Subsidiaries.*
	23	.1	Consent of PricewaterhouseCoopers LLP.*
	31	.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	31	.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
	32	.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	32	.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
	99	.1	Letter from GKH partners regarding wind-up of GKH Investments, L.P. and GKH Private Limited, dated October 15, 2001, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 18, 2001.
	99	.2	Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the Company, dated November 12, 2002, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 15, 2002.
	99	.3	Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the Company, dated March 11, 2004, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2004.

*  Filed herewith

††  Management contract or compensatory plan or arrangement

EX-10.3

Exhibit 10.3

CREDIT AGREEMENT

among

HANOVER COMPRESSOR COMPANY,

HANOVER COMPRESSION LIMITED PARTNERSHIP,

THE ROYAL BANK OF SCOTLAND PLC
as SYNDICATION AGENT

JPMORGAN CHASE BANK, N.A.
as ADMINISTRATIVE AGENT

and

THE SEVERAL LENDERS PARTIES HERETO

Dated as of November 21, 2005

J.P. MORGAN SECURITIES INC. and

RBS SECURITIES CORPORATION, as

CO-LEAD ARRANGERS

Table of Contents

			Page
SECTION 1.		DEFINITIONS		1
	1.1	Defined Terms		1
	1.2	Other Definitional Provisions		24
SECTION 2.		AMOUNT AND TERMS OF COMMITMENTS		25
	2.1	Revolving Commitments		25
	2.2	Procedure for Revolving Borrowing		25
	2.3	Incremental Term Loan Commitments		26
SECTION 3.		INTEREST RATE PROVISIONS, FEES, CONVERSIONS AND PAYMENTS		27
	3.1	Interest Rates and Payments Dates		27
	3.2	Commitment Fees; Other Fees and Compensation		27
	3.3	Termination or Reduction of the Revolving Commitments		28
	3.4	Joint and Several Obligation for Repayment of Loans; Optional Prepayments and other Repayments		28
	3.5	Conversion and Continuation Options		29
	3.6	Minimum Amounts		30
	3.7	Computation of Interest and Fees		30
	3.8	Inability to Determine Interest Rate		30
	3.9	Pro Rata Treatment and Payments		31
	3.10	Illegality		32
	3.11	Requirements of Law		32
	3.12	Taxes		33
	3.13	Indemnity		35
	3.14	Replacement of Lenders		35
	3.15	Change of Lending Office		36
	3.16	Determination of Dollar Equivalent		36
	3.17	Reallocation Option		36
SECTION 4.		LETTERS OF CREDIT		37
	4.1	L/C Commitment		37
	4.2	Procedure for Issuance of Letters of Credit		37
	4.3	Fees, Commissions and Other Charges		37
	4.4	L/C Participations		38
	4.5	Reimbursement Obligation of HCLP		39
	4.6	Obligations Absolute		39
	4.7	Letter of Credit Payments		40
	4.8	Application		40
	4.9	Letters of Credit Denominated in Available Foreign Currencies		40
	4.10	Change in Law; Availability of Foreign Currencies		40
SECTION 5.		REPRESENTATIONS AND WARRANTIES		40
	5.1	Financial Condition		40
	5.2	No Change		41
	5.3	Corporate Existence; Compliance with Law		41
	5.4	Corporate Power; Authorization; Enforceable Obligations		41
	5.5	No Legal Bar		42
	5.6	No Material Litigation		42
	5.7	No Default		42
	5.8	Ownership of Property; Liens; Leases of Equipment		42

i

			Page
	5.9	Intellectual Property		42
	5.10	Taxes		42
	5.11	Federal Regulations		43
	5.12	ERISA		43
	5.13	Investment Company Act; Other Regulations		43
	5.14	Subsidiaries		43
	5.15	Purpose of Loans		43
	5.16	Environmental Matters		44
	5.17	Accuracy and Completeness of Information		45
	5.18	Senior Indebtedness		45
	5.19	Security Documents		45
	5.20	Regulation H		46
SECTION 6.		CONDITIONS PRECEDENT		46
	6.1	Conditions to Each Extension of Credit		46
	6.2	Conditions to Initial Extension of Credit		46
SECTION 7.		AFFIRMATIVE COVENANTS		48
	7.1	Financial Statements		48
	7.2	Certificates; Other Information		49
	7.3	Payment of Obligations		50
	7.4	Conduct of Business and Maintenance of Existence		50
	7.5	Maintenance of Property; Insurance		50
	7.6	Inspection of Property; Books and Records; Discussions		50
	7.7	Notices		50
	7.8	Environmental Laws		51
	7.9	Additional Collateral, etc		52
	7.10	Maintenance of Flood Insurance		53
SECTION 8.		NEGATIVE COVENANTS		53
	8.1	Financial Condition Covenants		53
	8.2	Limitation on Indebtedness		54
	8.3	Limitation on Liens		55
	8.4	Limitation on Guarantee Obligations		57
	8.5	Limitations on Fundamental Changes		58
	8.6	Limitation on Sale or Lease of Assets		58
	8.7	Limitation on Leases		60
	8.8	Limitation on Dividends		60
	8.9	Limitation on Derivatives		60
	8.10	Limitation on Investments, Loans and Advances		60
	8.11	Limitation on Optional Payments and Modifications of Debt Instruments		62
	8.12	Transactions with Affiliates		63
	8.13	Sale and Leaseback		63
	8.14	Fiscal Year		63
	8.15	Nature of Business		63
	8.16	Unqualified Subsidiaries		64
	8.17	Negative Pledge Clauses		64
	8.18	Clauses Restricting Subsidiary Distributions		64
SECTION 9.		EVENTS OF DEFAULT		65
SECTION 10.		THE ADMINISTRATIVE AGENT		68
	10.1	Appointment		68
	10.2	Delegation of Duties		68
	10.3	Exculpatory Provisions		68
	10.4	Reliance by Administrative Agent		68

ii

			Page
	10.5	Notice of Default		69
	10.6	Non-Reliance on Administrative Agent and Other Lenders		69
	10.7	Indemnification		69
	10.8	Administrative Agent in Its Individual Capacity		70
	10.9	Successor Administrative Agent		70
SECTION 11.		MISCELLANEOUS		70
	11.1	Amendments and Waivers		70
	11.2	Notices		71
	11.3	No Waiver; Cumulative Remedies		72
	11.4	Survival of Representations and Warranties		73
	11.5	Payment of Expenses and Taxes		73
	11.6	Successors and Assigns; Participations and Assignments		73
	11.7	Adjustments; Set-off		76
	11.8	Counterparts		77
	11.9	Severability		77
	11.10	Integration		77
	11.11	GOVERNING LAW		77
	11.12	Submission To Jurisdiction; Waivers		77
	11.13	Acknowledgments		78
	11.14	WAIVERS OF JURY TRIAL		78
	11.15	Judgment		78
	11.16	Usury		78
	11.17	Conflicts		79
	11.18	Releases of Guarantees and Liens		79
	11.19	Confidentiality		79
	11.20	Patriot Act Notice		80
	11.21	Waiver under Existing Credit Agreement		80
	11.22	True Up		80

iii

		Page
Annexes
A	Pricing Grid
B	Existing Letters of Credit
Schedules
Schedule 1.1A	Revolving Lenders and Revolving Commitments
Schedule 1.1B	Mortgaged Property
Schedule 3.17	Agreed Percentage of Euro Revolving Commitments
Schedule 5.2	Material Changes; Restricted Payments
Schedule 5.4	Required Consents
Schedule 5.14	Subsidiaries
Schedule 5.16	Environmental Matters
Schedule 5.19(a)	UCC Filing Jurisdictions
Schedule 5.19(b)	Mortgage Filing Jurisdictions
Schedule 8.2(c)	Existing Indebtedness
Schedule 8.3(l)	Existing Liens
Schedule 8.6(h)	Lease of Assets
Schedule 8.6(i)	Asset Sales
Schedule 8.10A	Investments in Unqualified Subsidiaries
Schedule 8.10B	Permitted Business Acquisitions
Schedule 8.12	Affiliate Transactions
Schedule 8.13	Sale and Leaseback Transactions
Exhibits
Exhibit A-1	Form of US Revolving Note
Exhibit A-2	Form of Euro Revolving Note
Exhibit A-3	Form of Incremental Term Loan Note
Exhibit B	Form of Assignment and Assumption
Exhibit C	Form of Guarantee and Collateral Agreement
Exhibit D	Form of Mortgage

iv

          CREDIT AGREEMENT, dated as of November 21, 2005 (as amended, supplemented or otherwise modified from time to time, this “Agreement”), among Hanover Compressor Company, a Delaware corporation (“Hanover”), Hanover Compression Limited Partnership (“HCLP”; and, together with Hanover, the “Borrowers”), The Royal Bank of Scotland plc, as syndication agent, the several banks and other financial institutions from time to time parties to this Agreement (the “Lenders”) and JPMorgan Chase Bank, N.A., as agent for the Lenders hereunder (the “Administrative Agent”).

W I T N E S S E T H :

          WHEREAS, Hanover and HCLP are parties to the Credit Agreement, dated as of December 15, 2003 (as heretofore amended, supplemented or otherwise modified, the “Existing Credit Agreement”), with the several banks and other financial institutions from time to time parties thereto and JPMorgan Chase Bank, N.A., as administrative agent; and

          WHEREAS, the Borrowers have requested that the Existing Credit Agreement be terminated and replaced with a new credit facility as set forth herein;

          NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree as follows:

SECTION 1. DEFINITIONS

     1.1   Defined Terms.

     As used in this Agreement, the following terms shall have the following meanings:

     “ABR”: for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus ¹/2 of 1%. For purposes hereof: “Prime Rate” shall mean the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by JPMorgan Chase Bank, N.A. in connection with extensions of credit to debtors); and “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the ABR shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

     “ABR Loans”: Loans the rate of interest applicable to which is based upon the ABR.

     “Adjusted EBITDA Companies”: HCLP and each of its wholly-owned Subsidiaries which is organized under an Approved Jurisdiction.

     “Adjustment Date”: as defined in the Pricing Grid.

     “Administrative Agent”: JPMorgan Chase Bank, N.A., together with its affiliates, as the administrative agent for the Lenders under this Agreement and the other Loan Documents, together with any of its successors. It is understood and agreed that matters concerning Euro Revolving Loans may be administered by J. P. Morgan Europe Limited and therefore all notices concerning such Euro Revolving Loans will be required to be given at the London funding office set forth in Section 11.2.

     “Affiliate”: as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote 30% or more of the securities having ordinary voting power for the election of directors of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

     “Agents”: the collective reference to the Administrative Agent and the Syndication Agent.

     “Aggregate Exposure”: with respect to any Lender at any time, an amount equal to (a) until the Closing Date, the aggregate amount of such Lender’s Commitments at such time and (b) thereafter, the sum of (i) the aggregate then unpaid principal amount of such Lender’s Incremental Term Loans, (ii) the amount of such Lender’s US Revolving Commitment then in effect or, if the US Revolving Commitments have been terminated, the amount of such Lender’s US Revolving Extensions of Credit then outstanding and (iii) the amount of such Lender’s Euro Revolving Commitment then in effect or, if the Euro Revolving Commitments have been terminated, the amount of such Lender’s Euro Revolving Extensions of Credit then outstanding.

     “Agreement”: as defined in the preamble.

     “Agreement Currency”: as defined in subsection 11.15(b).

     “Applicable Margin”: for each day, (a) with respect to US Revolving Loans and Euro Revolving Loans, the rate per annum determined pursuant to the Pricing Grid and (b) with respect to Incremental Term Loans, the rate per annum set forth in the applicable Incremental Assumption Agreement.

     “Applicable Margin Certificate”: as defined in subsection 7.2(d).

     “Applicable Percentage”: for any Lender, (a) with respect to Incremental Term Loans, such Lender’s Incremental Term Loan Percentage, (b) with respect to US Revolving Commitments and US Revolving Loans, such Lender’s US Revolving Percentage and (c) with respect to Euro Revolving Commitments and Euro Revolving Loans, such Lender’s Euro Revolving Percentage.

     “Application”: an application, in such form as the relevant Issuing Lender may reasonably specify from time to time, requesting such Issuing Lender to issue a Letter of Credit.

     “Approved Jurisdiction”: the United States, Canada, the United Kingdom, Mexico and other country approved by the Required Lenders.

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     “Assignee”: as defined in subsection 11.6(b).

     “Assignment and Assumption”: an Assignment and Assumption, in substantially the form of Exhibit B.

     “Available Euro Revolving Commitment”: as to any Euro Revolving Lender, at any time, an amount equal to the excess, if any, of (a) such Euro Revolving Lender’s Euro Revolving Commitment over (b) such Euro Revolving Lender’s Euro Revolving Extensions of Credit.

     “Available Revolving Commitment”: as to any Revolving Lender, at any time, the sum of (a) such Revolving Lender’s Available US Revolving Commitment and (b) such Revolving Lender’s Available Euro Revolving Commitment.

     “Available US Revolving Commitment”: as to any US Revolving Lender, at any time, an amount equal to the excess, if any, of (a) such US Revolving Lender’s US Revolving Commitment over (b) such US Revolving Lender’s US Revolving Extensions of Credit.

     “Available Foreign Currencies”: Canadian Dollar, Euro, Japanese Yen and Pound Sterling and such other currency as is acceptable to the relevant Issuing Lender.

     “Average Life”: as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness multiplied by the amount of such payment by (b) the sum of all such payments.

     “Benefitted Lender”: as defined in subsection 11.7(a).

     “Board”: the Board of Governors of the Federal Reserve System.

     “Borrowers”: as defined in the preamble.

     “Borrowing Date”: any Business Day specified in a notice pursuant to Section 2.2, as a date on which the relevant Borrower requests the Revolving Lenders to make Revolving Loans hereunder.

     “Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close, provided, that (i) with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market and (ii) with respect to notices and determinations in connection with, and payments of principal and interest on, Eurocurrency Loans, such day is also a day on which banks in London are open for general banking business, including dealings in foreign currency and exchange.

     “Calculation Date”: with respect to Euros or any other Available Foreign Currency, the fifteenth and last day of each calendar month (or, if such day is not a Business Day, the next succeeding Business Day) and such other days from time to time as the Administrative Agent shall designate as a “Calculation Date”

     “Capital Stock”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests

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in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing.

     “Cash Equivalents”: (a) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit, bankers acceptances and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank maintaining an office in an Approved Jurisdiction and having capital and surplus in excess of $500,000,000 (or the equivalent thereof in other currencies), (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-2 by Standard and Poor’s Rating Group (“S&P”) or P-2 by Moody’s Investors Services, Inc. (“Moody’s”), (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any political subdivision or taxing authority of any such state, commonwealth or territory or any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s, (f) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition, (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition or (h) in the case of any Unqualified Subsidiary, deposits maintained in the ordinary course of business with banks or trust companies organized in the jurisdiction where such Subsidiary is organized or doing business denominated in local currencies.

     “Closing Date”: the date on which all the conditions precedent specified in Section 6.2 shall have been satisfied, which date was November 21, 2005.

     “Code”: the Internal Revenue Code of 1986, as amended from time to time.

     “Co-Lead Arrangers”: the collective reference to JPMorgan and RBS Securities.

     “Collateral”: all property of Hanover and its Subsidiaries, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document.

     “Commitment”: as to any Lender, the sum of the Incremental Term Loan Commitment and the Revolving Commitment of such Lender.

     “Commitment Fee Rate”: the rate per annum determined pursuant to the Pricing Grid.

     “Commonly Controlled Entity”: an entity, whether or not incorporated, which is under common control with HCLP within the meaning of Section 4001(a)(14) of ERISA or is part of a group which includes HCLP and which is treated as a single employer under Section 414 of the Code.

     “Conduit Lender”: any special purpose corporation organized and administered by any Lender for the purpose of making Loans otherwise required to be made by such Lender and designated by such Lender in a written instrument; provided, that the designation by any Lender of a Conduit Lender shall not relieve the designating Lender of any of its obligations to fund a

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Loan under this Agreement if, for any reason, its Conduit Lender fails to fund any such Loan, and the designating Lender (and not the Conduit Lender) shall have the sole right and responsibility to deliver all consents and waivers required or requested under this Agreement with respect to its Conduit Lender, and provided, further, that no Conduit Lender shall (a) be entitled to receive any greater amount pursuant to Section 3.11, 3.12, 3.13 or 11.5 than the designating Lender would have been entitled to receive in respect of the extensions of credit made by such Conduit Lender or (b) be deemed to have any Commitment.

     “Consolidated Adjusted EBITDA”: for any period, the sum of (a) Consolidated EBITDA for the Adjusted EBITDA Companies attributable to assets and/or operations of such Adjusted EBITDA Companies in any Approved Jurisdiction and (b) all general and administrative and other overhead expenses by Hanover or any Adjusted EBITDA Company directly attributable to Persons who are not Adjusted EBITDA Companies; provided, that the aggregate amount of any such general and administrative and other overhead expenses which may be included in clause (b) above shall not exceed $20,000,000 during any period of four consecutive fiscal quarters of Hanover.

     “Consolidated Earnings Before Interest and Taxes”: for any period, with respect to any Person, the sum of (a) Consolidated Net Income for such period, (b) all amounts attributable to provision for taxes measured by income (to the extent that such amounts have been deducted in determining Consolidated Net Income for such period) and (c) Consolidated Interest Expense for such period (to the extent that such amounts have been deducted in determining Consolidated Net Income for such period).

     “Consolidated EBITDA”: for any period, with respect to any Person, the sum of, without duplication, (a) Consolidated Earnings Before Interest and Taxes for such Person for such period plus (b) all amounts attributable to depreciation and amortization, determined in accordance with GAAP (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period) plus (c) all amounts classified as extraordinary charges for such period (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period) plus (d) Designated Distributions (as such term is hereinafter defined) plus (e) any non-recurring non-cash expenses or losses (including, non-cash currency charges) (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period) plus (f) any non-cash losses under FASB Statement No. 133 as a result of changes in the fair market value of derivatives (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period); plus (g) any non-cash losses attributable to write-downs of assets, including write-downs under FASB Statements Nos. 142 and 144 (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period); plus (h) any charges related to any premium or penalty paid, write off of deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity (to the extent such amounts have been deducted in determining Consolidated Earnings Before Interest and Taxes for such period), and minus (i) any increase in Consolidated Earnings Before Interest and Taxes to the extent that such increase is a result of the actions underlying the charges referred to in clause (e) above subsequent to the fiscal quarter in which the relevant non-cash expenses or losses were reflected as a charge in the statement of Consolidated Earnings Before Interest and Taxes, all as determined on a consolidated basis, (ii) all amounts classified as extraordinary income for such period (to the extent such amounts have been included in determining Consolidated Earnings Before Interest and Taxes for such period), (iii) any non-cash gains under FASB Statement No. 133 as a result of changes in the fair market value of derivatives (to the extent such amounts have been included in

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determining Consolidated Earnings Before Interest and Taxes for such period) and (iv) any non-cash gains attributable to write-ups of assets, including write-ups under FASB Statements Nos. 142 and 144 (to the extent such amounts have been included in determining Consolidated Earnings Before Interest and Taxes for such period); provided, that, if during such period such Person shall have made a Material Acquisition or a Material Disposition, Consolidated EBITDA for such period shall be calculated after giving pro forma effect to such Material Acquisition or Material Disposition as if such Material Acquisition or Material Disposition, as applicable, had occurred on the first day of such period; provided, further, that, the foregoing proviso shall have effect only if the Administrative Agent has been furnished with unaudited, or, if available, audited, consolidated financial statements of any acquired property for such period, such financial statements to include the balance sheet and statements of income and cash flows reflecting the historical performance of the acquired property for such period to the extent applicable. As used in this definition, “Material Acquisition” means any acquisition of property or series of related acquisitions of property that (a) constitutes assets or constitutes all or substantially all of the Capital Stock of a Person and (b) involves the payment of consideration of at least $15,000,000. As used in this definition, “Material Disposition” means any Disposition of property or series of related Dispositions of property that involves the receipt of net cash proceeds of at least $15,000,000. In calculating Consolidated EBITDA, the financial performance of Joint Ventures, Unrestricted Subsidiaries and Unqualified Subsidiaries that have any Permitted Unqualified Subsidiary Indebtedness shall be disregarded except as provided in clause (d) above, with respect to “Designated Distributions”, which shall mean cash dividends and cash payments with respect to intercompany Indebtedness, in each case received by Hanover or any Restricted Subsidiary from any Joint Venture or from any Unrestricted Subsidiary or Unqualified Subsidiary that has any Permitted Unqualified Subsidiary Indebtedness.

     “Consolidated Indebtedness”: at a particular date, as to any Person, the sum of (without duplication) (a) all Indebtedness of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP (including, without limitation, outstandings under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction), excluding (i) for purposes of Section 8.1 only, Permitted Unqualified Subsidiary Indebtedness and (ii) intercompany Indebtedness, plus (b) Guarantee Obligations of such Person and its Subsidiaries in respect of Indebtedness of any other Person.

     “Consolidated Intangibles”: at any time, all amounts included in Consolidated Net Worth of any Person at such time which, in accordance with GAAP, would be classified as intangible assets on a consolidated balance sheet of such Person and its Subsidiaries, including, without limitation but without duplication, goodwill (other than negative goodwill), any amounts (however designated on the balance sheet) representing the cost of acquisitions in excess of underlying net tangible assets, and patents, trademarks, copyrights and other intangibles.

     “Consolidated Interest Expense”: for any period, with respect to any Person, the amount which, in conformity with GAAP, would be set forth opposite the caption “interest expense” or any like caption (including, without limitation, imputed interest included in Financing Lease payments) on a consolidated income statement of such Person and its Subsidiaries for such period, plus, (a) to the extent not so included, payments by such Person and its Subsidiaries under the Equipment Leases attributable to interest payments and yield to Investors under the Equipment Lease Transactions and minus, (b) to the extent so included and for purposes of calculating the ratio in Section 8.1(d) only, payment in kind of interest on each of the Hanover Zero Coupon Subordinated Notes, and the TIDES or the TIDES Debentures and any Refinancing Indebtedness incurred in respect thereof, (iii) any charges related to any premium or penalty paid, write off of deferred financing costs or other financial recapitalization charges in connection with

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redeeming or retiring any indebtedness prior to its stated maturity; provided that if Hanover or any of its Subsidiaries has Indebtedness outstanding at the beginning of such period for which Consolidated Interest Expense is being calculated, but which Indebtedness during such period is repaid, repurchased, redeemed, defeased or otherwise discharged with the net cash proceeds of one or more Dispositions or one or more sales of Capital Stock of Hanover or which Indebtedness is converted into Capital Stock of Hanover during such period, then Consolidated Interest Expense shall be calculated on a pro forma basis as if such Indebtedness had been discharged as of the first day of the relevant period and (iv) interest income of such Person and its Subsidiaries.

     “Consolidated Lease Expense”: for any period as to any Person, the aggregate rental obligations of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP payable in respect of such period under leases of real and/or personal property (net of income from sub-leases thereof, but including taxes, insurance, maintenance and similar expenses which the lessee is obligated to pay under the terms of said leases), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of such Person and its Subsidiaries or in the notes thereto, and whether or not such leases constitute Financing Leases, but excluding obligations of such Person and its Subsidiaries with respect to the Equipment Leases.

     “Consolidated Leverage Ratio”: as defined in subsection 8.1(c).

     “Consolidated Net Income”: for any period as to any Person, the consolidated net income (or loss) of such Person and its Subsidiaries, determined on a consolidated basis in accordance with GAAP, provided that for purposes of determining Consolidated Net Income, payments under Equipment Leases attributable to interest payments and yield to the Investors in connection with the Equipment Lease Transactions shall, in each case, be considered interest expense.

     “Consolidated Net Worth”: at a particular date, as to any Person, the amount which would be included under stockholders’ equity on a consolidated balance sheet of such Person and its Subsidiaries determined on a consolidated basis in accordance with GAAP plus any charges related to any premium or penalty paid, write off of deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity and without regard to any gains or losses resulting from an change in GAAP.

     “Consolidated Senior Secured Indebtedness”: at a particular date, as to any Person, Consolidated Indebtedness of such Person and its Subsidiaries that, as of such date, is secured by any Lien on any asset or property of such Person or its Subsidiaries; provided, that, for the avoidance of doubt, “Consolidated Senior Secured Indebtedness” shall include outstandings under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction and all Indebtedness incurred hereunder.

     “Consolidated Tangible Net Worth”: at any date, an amount equal to Consolidated Net Worth at such date less Consolidated Intangibles at such date.

     “Contractual Obligation”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

     “Credit Parties”: the collective reference to Hanover, HCLP and the Subsidiary Guarantors.

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     “Default”: any of the events specified in Section 9, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied.

     “Derivatives”: any swap, hedge, cap, collar, or similar arrangement providing for the exchange of risks related to price changes in any commodity, including money.

     “Derivatives Agreement”: any agreement in respect of Derivatives entered into by Hanover or any of its Subsidiaries with a Lender or any Affiliate of a Lender permitted by Section 8.9.

     “Disposition”: with respect to any property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof. The terms “Dispose” and “Disposed of” shall have correlative meanings.

     “Dollar Equivalent”: with respect to an amount denominated in any currency other than Dollars, the equivalent in Dollars of such amount determined at the Exchange Rate on the date of determination of such equivalent. In making any determination of the Dollar Equivalent for purposes of calculating the amount of Loans to be borrowed from the respective Lenders on any Borrowing Date, the Administrative Agent shall use the relevant Exchange Rate in effect on the date on which the interest rate for such Loans is determined pursuant to the provisions of this Agreement and the other Loan Documents.

     “Dollars” and “$”: dollars in lawful currency of the United States of America.

     “EMU”: Economic and Monetary Union as contemplated in the Treaty on European Union.

     “Environmental Laws”: any and all Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning environmental protection matters, including without limitation, Hazardous Materials, as now or may at any time hereafter be in effect.

     “Equipment Lease Guarantees”: (i) the Guarantee dated as of August 31, 2001 (as amended, supplemented or otherwise modified from time to time, the “2001A Lease Guarantee”), made by Hanover, HCLP and certain of their subsidiaries listed on the signature pages thereto, in favor of Hanover Equipment Trust 2001A, The Chase Manhattan Bank, as agent, and certain lenders and investors, (ii) the Guarantee dated as of August 31, 2001 (as amended, supplemented or otherwise modified from time to time, the “2001B Lease Guarantee”), made by Hanover, HCLP and certain of their subsidiaries listed on the signature pages thereto, in favor of Hanover Equipment Trust 2001B, The Chase Manhattan Bank, as agent, and certain lenders and investors and (iii) any Guarantee in connection with and dated as of the date of an Additional Participation Agreement (as amended, supplemented or otherwise modified from time to time), to be made by Hanover, HCLP and certain of their subsidiaries that will be listed on the signature pages thereto, in favor of a Delaware business trust, the agent and certain lenders and investors.

     “Equipment Lease Participation Agreements”: (i) the Participation Agreement dated as of August 31, 2001 (as amended, supplemented or otherwise modified from time to time, the “2001A Participation Agreement”), among HCLP, Hanover Equipment Trust 2001A, General Electric Capital Corporation as investor, The Chase Manhattan Bank, as agent, and the lenders parties thereto, and (ii) the Participation Agreement dated as of August 31, 2001 (as amended,

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supplemented or otherwise modified from time to time, the “2001B Participation Agreement”), among HCLP, Hanover Equipment Trust 2001B, General Electric Capital Corporation as investor, The Chase Manhattan Bank, as agent, and the lenders parties thereto.

     “Equipment Lease Transactions”: the transactions whereby HCLP leases natural gas compressors from the Lessors as described in each of the Equipment Lease Participation Agreements and any Operative Document (as defined in such Equipment Lease Participation Agreements).

     “Equipment Leases”: (i) the Lease dated as of August 31, 2001 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 2001A, as lessor, and HCLP, as lessee (the “2001A Synthetic Lease”), (ii) the Lease dated as of August 31, 2001 (as amended, supplemented or otherwise modified from time to time), between Hanover Equipment Trust 2001B, as lessor, and HCLP, as lessee (the “2001B Synthetic Lease”) and (iii) any Lease in connection with and dated as of the date of any Additional Participation Agreement (as amended, supplemented or otherwise modified from time to time), between a Delaware business trust, as lessor, and HCLP, as lessee (the “Additional Lease”).

     “Equipment True Lease”: any natural gas compressors leased by Hanover or HCLP as lessee under any leases other than the Equipment Leases.

     “ERISA”: the Employee Retirement Income Security Act of 1974, as amended from time to time.

     “Euro” and “€”: the single currency of the European Union as constituted by the Treaty on European Union and as referred to in EMU Legislation.

     “Euro Revolving Commitment”: as to any Euro Revolving Lender, the obligation of such Euro Revolving Lender to make Euro Revolving Loans to HCLP hereunder in an aggregate principal and/or stated amount at any one time outstanding not to exceed the amount set forth opposite such Euro Revolving Lender’s name on Schedule 1.1A, as such amount may be reduced or increased from time to time in accordance with the terms of this Agreement (including, without limitation, Section 3.17); collectively, as to all of the Euro Revolving Lenders, the “Euro Revolving Commitments”. The original amount of the total Euro Revolving Commitments is $75,000,000.

     “Euro Revolving Extensions of Credit”: as to any Euro Revolving Lender at any time, an amount equal to the Dollar Equivalent of the aggregate principal amount of all Euro Revolving Loans held by such Lender then outstanding.

     “Euro Revolving Facility”: the Euro Revolving Commitments and the Euro Revolving Extensions of Credit made thereunder.

     “Euro Revolving Lender”: each Lender that has a Euro Revolving Commitment or that holds Euro Revolving Loans; provided, that, for the avoidance of doubt, any institution that serves as a Euro Revolving Lender hereunder shall also serve as a US Revolving Lender hereunder (either in its individual capacity or through one of its Affiliates).

     “Euro Revolving Loans”: as defined in subsection 2.1(b).

     “Euro Revolving Note”: a promissory note in substantially the form of Exhibit A-2.

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     “Euro Revolving Percentage”: as to any Euro Revolving Lender at any time, the percentage of the aggregate Euro Revolving Commitments then constituted by such Euro Revolving Lender’s Euro Revolving Commitment.

     “Eurocurrency Loans”: Loans the rate of interest applicable to which is based upon the Eurocurrency Rate.

     “Eurocurrency Rate”: with respect to each day during each Interest Period pertaining to a Eurocurrency Loan, the EURIBOR Rate for the period beginning on the first day of such Interest Period and ending on the last day of such Interest Period which appears on Telerate page 248 (or, if no such quotation appears on such Telerate Page, on the appropriate Reuters Screen) as of 11:00 a.m., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on the Telerate screen, the “Eurocurrency Rate” shall be determined by reference to such other comparable publicly available service for displaying eurocurrency rates as may be reasonably selected by the Administrative Agent or, in the absence of such availability, by reference to the rate at which the Administrative Agent is offered deposits in Euros at or about 11:00 a.m., London time, two Business Days prior to the beginning of such Interest Period in the interbank eurocurrency market where its relevant eurocurrency and foreign currency and exchange operations are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein.

     “Eurocurrency Reserve Requirements”: for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board) maintained by a member bank of such System.

     “Eurodollar Base Rate”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate screen (or otherwise on such screen), the “Eurodollar Base Rate” shall be determined by reference to such other comparable publicly available service for displaying eurodollar rates as may be selected by the Administrative Agent or, in the absence of such availability, by reference to the rate at which the Administrative Agent is offered Dollar deposits at or about 11:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where its eurodollar and foreign currency and exchange operations are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein.

     “Eurodollar Loans”: Loans the rate of interest applicable to which is based upon the Eurodollar Rate.

     “Eurodollar Rate”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%):

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Eurodollar Base Rate
1.00 — Eurocurrency Reserve Requirements

     “Event of Default”: any of the events specified in Section 9, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied.

     “Exchange Act” as defined in subsection 9(k).

     “Exchange Rate”: with respect to any non-Dollar currency on any date, the rate at which such currency may be exchanged into Dollars, as set forth on such date on the relevant Reuters currency page at or about 11:00 A.M., London time, on such date. In the event that such rate does not appear on any Reuters currency page, the “Exchange Rate” with respect to such non-Dollar currency shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the relevant Borrower or, in the absence of such agreement, such “Exchange Rate” shall instead be the Administrative Agent’s spot rate of exchange in the interbank market where its foreign currency exchange operations in respect of such non-Dollar currency are then being conducted, at or about 10:00 A.M., local time, on such date for the purchase of Dollars with such non-Dollar currency, for delivery two Business Days later; provided, that if at the time of any such determination, no such spot rate can reasonably be quoted, the Administrative Agent may use any reasonable method as it deems applicable to determine such rate, and such determination shall be conclusive absent manifest error.

     “Excluded Unqualified Subsidiary”: any Unqualified Subsidiary not organized under a jurisdiction of the United States in respect of which either (a) the pledge of all of the Capital Stock of such Subsidiary as Collateral or (b) the guaranteeing by such Subsidiary of the Obligations, or the pledging of assets by such Subsidiary to secure the Obligations, could, in the good faith judgment of Hanover, reasonably be expected to result in adverse tax consequences to Hanover; provided, that notwithstanding the foregoing, Hanover Cayman Limited and Production Operators Cayman Inc. shall be deemed to be Excluded Unqualified Subsidiaries.

     “Existing Credit Agreement”: as defined in the recitals hereto.

     “Existing Issuing Lender”: JPMorgan Chase Bank, N.A., as issuer of the Existing Letters of Credit.

     “Existing Letter of Credit”: each letter of credit issued under the Existing Credit Agreement that (a) was issued for the account of HCLP or one of its Subsidiaries under the Existing Credit Agreement, (b) is outstanding on the Closing Date and (c) is listed on Annex B.

     “Facility”: each of (a) the Incremental Term Loan Facility, (b) the US Revolving Facility and (c) the Euro Revolving Facility.

     “Final Maturity Date”: the later of (a) the Revolving Termination Date and (b) if any Incremental Term Loans are outstanding, the date by which all outstanding Incremental Term Loans are scheduled to mature.

     “Financing Lease”: any lease of property, real or personal, the obligations of the lessee in respect of which are required in accordance with GAAP to be capitalized on a balance sheet of the lessee, but excluding all obligations with respect to any Equipment Leases.

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     “GAAP”: generally accepted accounting principles in the United States of America consistent with those utilized in preparing the audited financial statements referred to in Section 7.1.

     “Governmental Authority”: any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

     “Guarantee and Collateral Agreement”: the Guarantee and Collateral Agreement to be executed and delivered by Hanover, HCLP and each Subsidiary Guarantor, in substantially the form of Exhibit C, as the same may be amended, supplemented or otherwise modified from time to time.

     “Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation of (a) the guaranteeing person or (b) another Person (including without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counter indemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person’s maximum reasonably anticipated liability in respect thereof as determined by Hanover, as the case may be, in good faith.

     “Guarantor”: a Guarantor under this Agreement.

     “Hanover”: as defined in the preamble.

     “Hanover 2008 Convertible Notes”: the 4.75% convertible senior notes due 2008 issued by Hanover in an aggregate principal amount equal to $192,000,000 pursuant to the Hanover 2008 Convertible Notes Indenture.

     “Hanover 2008 Convertible Notes Indenture”: the Indenture, dated as of March 15, 2001, among Hanover and Wilmington Trust Company, as trustee.

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     “Hanover 2010 Senior Notes”: the 8.625% senior notes due 2010 issued by Hanover in an aggregate principal amount equal to $200,000,000 pursuant to the Hanover 2010 Senior Notes Indenture.

     “Hanover 2010 Senior Notes Indenture”: the First Supplemental Indenture, dated as of December 15, 2003, to the Senior Indenture, dated as of December 15, 2003, among Hanover, as issuer and Wachovia Bank, National Association, as trustee.

     “Hanover 2014 Convertible Notes”: the 4.75% convertible senior notes due 2014 issued by Hanover in an aggregate principal amount equal to $143,750,000 pursuant to the Hanover 2014 Convertible Notes Indenture.

     “Hanover 2014 Convertible Notes Indenture”: the Second Supplemental Indenture, dated as of December 15, 2003, to the Senior Indenture, dated as of December 15, 2003, among Hanover, as issuer and Wachovia Bank, National Association, as trustee.

     “Hanover 2014 Senior Notes”: the 9% senior notes due 2014 issued by Hanover in an aggregate principal amount equal to $200,000,000 pursuant to the Hanover 2014 Senior Notes Indenture.

     “Hanover 2014 Senior Notes Indenture”: the Third Supplemental Indenture, dated as of June 1, 2004, to the Senior Indenture, dated as of December 15, 2003, among Hanover, as issuer and Wachovia Bank, National Association, as trustee.

     “Hanover Senior Notes Guarantees”: the guarantees by HCLP and one or more Subsidiary Guarantors of the Hanover 2010 Senior Notes, the Hanover 2014 Senior Notes and any Refinancing Indebtedness in respect thereof.

     “Hanover Zero Coupon Subordinated Notes”: the zero coupon subordinated notes due March 31, 2007 issued by Hanover in an aggregate principal amount equal to $262,621,810 pursuant to the Hanover Zero Coupon Subordinated Notes Indenture.

     “Hanover Zero Coupon Subordinated Notes Indenture”: the Indenture, dated as of May 14, 2003, among Hanover and Wachovia Bank, National Association, as trustee.

     “Hazardous Materials”: any hazardous materials, hazardous waste, hazardous constituents, hazardous or toxic substances, petroleum products (including crude oil or any fraction thereof), defined or regulated as such in or under any Environmental Law, including, without limitation, polychlorinated biphenyls.

     “HCLP”: as defined in the preamble.

     “Incremental Amount”: at any time, the excess, if any, of (a) $300,000,000 over (b) the aggregate amount of all Incremental Term Loan Commitments established prior to such time pursuant to Section 2.3.

     “Incremental Assumption Agreement”: an Incremental Assumption Agreement in form and substance reasonably satisfactory to the Administrative Agent, among Hanover, as guarantor, HCLP, as borrower, the Administrative Agent and one or more Incremental Term Loan Lenders.

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     “Incremental Term Loan Commitment”: the commitment of any Lender, established pursuant to Section 2.3, to make Incremental Term Loans to HCLP.

     “Incremental Term Loan Facility”: the Incremental Term Loan Commitments and the Incremental Term Loans made thereunder.

     “Incremental Term Loan Lender”: a Lender with an Incremental Term Loan Commitment or an outstanding Incremental Term Loan.

     “Incremental Term Loan Maturity Date”: the final maturity date of any Incremental Term Loan, as set forth in the applicable Incremental Assumption Agreement.

     “Incremental Term Loan Note”: a promissory note in substantially the form of Exhibit A-3.

     “Incremental Term Loan Percentage”: as to any Lender at any time, the percentage which the aggregate principal amount of such Lender’s Incremental Term Loans then outstanding constitutes of the aggregate principal amount of the Incremental Term Loans then outstanding.

     “Incremental Term Loans”: as defined in subsection 2.3(a).

     “Indebtedness”: of any Person at any date, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current liabilities incurred in the ordinary course of business and payable in accordance with customary trade practices) or which is evidenced by a note, bond, debenture or similar instrument, (b) all obligations of such Person under Financing Leases, (c) all obligations of such Person in respect of bankers acceptances issued or created for the account of such Person, (d) all liabilities secured by any Lien (other than any Lien permitted under Section 8.3) on any property owned by such Person even though it has not assumed or otherwise become liable for the payment thereof, (e) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (f) the liquidation value of all mandatorily redeemable preferred Capital Stock of such Person having a mandatory redemption date on or prior to the 91^st day after the Final Maturity Date, (g) for the purposes of Section 9(f) only, all obligations of such Person in respect of Derivatives, and (h) the aggregate drawable amount of letters of credit issued for the account of such Person; provided, that (x) solely for the purposes of Section 8.1 and calculating the Pricing Grid, the definition of “Indebtedness” shall not include Performance Letters of Credit and (y) for the avoidance of doubt, amounts outstanding under the Equipment Lease Transactions shall constitute “Indebtedness” hereunder.

     “indemnified liabilities”: as defined in Section 11.5.

     “Insolvency”: with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.

     “Insolvent”: pertaining to a condition of Insolvency.

     “Intellectual Property”: as defined in Section 5.9.

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     “Interest Payment Date”: (a) as to any ABR Loan, the last day of each March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan or Eurocurrency Loan having an Interest Period of three months or less, the last day of such Interest Period, and (c) as to any Eurodollar Loan or Eurocurrency Loan having an Interest Period longer than three months, each day which is three months or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period.

     “Interest Period”: with respect to any Eurodollar Loan or Eurocurrency Loan:

     (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan or Eurocurrency Loan, as applicable, and ending two weeks or one, two, three or six months (or, to the extent it may be offered by all relevant Lenders, nine or twelve months) thereafter, as selected by the relevant Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and

     (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan or Eurocurrency Loan, as applicable, and ending two weeks or one, two, three or six months (or, to the extent it may be offered by all relevant Lenders, nine or twelve months) thereafter, as selected by the relevant Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto;

provided that, all of the foregoing provisions relating to the Interest Periods are subject to the following:

     (i) if an Interest Period pertaining to a Eurodollar Loan or Eurocurrency Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

     (ii) any Interest Period that would otherwise extend beyond the Revolving Termination Date or the Incremental Term Loan Maturity Date, as applicable, shall end on the Revolving Termination Date or the Incremental Term Loan Maturity Date, as applicable; and

     (iii) any Interest Period pertaining to a Eurodollar Loan or a Eurocurrency Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month.

“Investments”: as defined in Section 8.10.

“Investors”: the parties that hold the beneficial interest in the respective Lessors.

“Issuing Lender”: the Existing Issuing Lender, JPMorgan Chase Bank, N.A., The Royal Bank of Scotland plc or any other Revolving Lender (with such Revolving Lender’s consent), as applicable, in its capacity as issuer of any Letter of Credit.

“Joint Venture”: any Person in which Hanover or one or more Subsidiaries own Capital Stock representing 1% or more but 50% or less of the aggregate Capital Stock of such Person.

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     “JPMorgan”: J.P. Morgan Securities Inc.

     “Judgment Currency”: as defined in subsection 11.15(b).

     “L/C Commitment”: $350,000,000; provided, that (a) JPMorgan Chase Bank, N.A. shall not be obligated to issue more than $175,000,000 of such amount and (b) The Royal Bank of Scotland plc shall not be obligated to issue more than $175,000,000 of such amount. For the purposes of calculating the available amount of the L/C Commitment, the Existing Letters of Credit shall be treated as being issued and outstanding under this Agreement.

     “L/C Fee Payment Date”: the last day of each March, June, September and December.

     “L/C Obligations”: at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit issued in Dollars, (b) the aggregate then undrawn and unexpired Dollar Equivalent of the then outstanding Letters of Credit issued in any Available Foreign Currency and (c) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 4.5.

     “L/C Participants”: with respect to any Letter of Credit, the collective reference to all the Revolving Lenders other than the relevant Issuing Lender.

     “Lenders”: as defined in the preamble (which, for the avoidance of doubt shall include any Incremental Term Loan Lenders).

     “Lessors”: the lessors under the Equipment Leases.

     “Letters of Credit”: as defined in subsection 4.1(a).

     “Lien”: any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any Financing Lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing).

     “Loan”: any loan made by any Lender pursuant to this Agreement (which, for the avoidance of doubt shall include any Incremental Term Loans).

     “Loan Documents”: this Agreement, the Security Documents, the Notes, the Applications, and any amendment, waiver, supplement or other modification to any of the foregoing.

     “London Funding Office”: the Administrative Agent’s office located at 125 London Wall, London, or such other office in London as may be designated by the Administrative Agent by written notice to HCLP and the Lenders.

     “Majority Facility Lenders”: with respect to any Facility, the holders of more than 50% of the aggregate unpaid principal amount of the Incremental Term Loans or the total Revolving Extensions of Credit, as the case may be, outstanding under such Facility (or, in the case of the US Revolving Facility or the Euro Revolving Facility, prior to any termination of the US

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Revolving Commitments or the Euro Revolving Commitments, as applicable, the holders of more than 50% of the total US Revolving Commitments or the total Euro Revolving Commitments, as applicable).

     “Material Adverse Effect”: a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of Hanover and its Subsidiaries taken as a whole, (b) the ability of the Credit Parties, taken as a whole, to perform their respective obligations under this Agreement or the other Loan Documents, or (c) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder.

     “Material Subsidiary”: at any particular date, each Subsidiary of Hanover (which is not an Unrestricted Subsidiary) for which the aggregate value of all assets owned by such Subsidiary is greater than $5,000,000.

     “Mortgaged Properties”: the real properties listed on Schedule 1.1B, as to which the Administrative Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages.

     “Mortgages”: each of the mortgages and deeds of trust made by any Credit Party in favor of, or for the benefit of, the Administrative Agent for the benefit of the Lenders, in substantially the form of Exhibit D (with such changes thereto as shall be advisable under the law of the jurisdiction in which such mortgage or deed of trust is to be recorded), as the same may be amended, supplemented or otherwise modified from time to time.

     “Multiemployer Plan”: a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “Net Unqualified Subsidiary Investments”: Investments in Unqualified Subsidiaries (whether existing, newly formed, or acquired) made by Hanover and its Qualified Subsidiaries pursuant to the provisions of subsection 8.10(e).

     “Non-Excluded Taxes”: as defined in subsection 3.12(a).

     “Non-U.S. Lender”: as defined in subsection 3.12(d).

     “Notes”: the collective reference to the Revolving Notes and the Incremental Term Loan Notes.

     “Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to each Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of each Borrower to the Administrative Agent or to any Lender (or, in the case of Derivatives Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Derivatives Agreement or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative

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Agent or to any Lender that are required to be paid by the Borrowers pursuant hereto) or otherwise.

     “Other Taxes”: any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

     “Participant”: as defined in subsection 11.6(c).

     “Participating Member State”: any member state of the EMU which has the euro as its lawful currency.

     “Patriot Act”: as defined in Section 11.20.

     “PBGC”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).

     “Performance Letter of Credit”: any Letter of Credit issued to support contractual obligations for supply, service or construction contracts, including, but not limited to, bid, performance, advance payment, warranty, retention, availability and defects liability obligations.

     “Permitted Business Acquisition”: the formation of a new Qualified Subsidiary or any acquisition of all or substantially all the assets of, or 50% or more of the shares of Capital Stock in, or the acquisition of any compression and/or oil and gas production equipment assets of, a Person or division or line of business of a Person (or any subsequent Investment made in a Person previously acquired in a Permitted Business Acquisition), if immediately after giving effect thereto: (a) no Default or Event of Default shall have occurred and be continuing or would result therefrom, (b) all transactions related thereto shall be consummated in accordance with applicable laws, (c) such acquired or newly formed Person shall be a Qualified Subsidiary and all actions required to be taken, if any, with respect to such acquired or newly formed Qualified Subsidiary under the Loan Documents shall have been taken, (d) Hanover and HCLP shall be in compliance, on a pro forma basis after giving effect to such acquisition or formation, with Section 8.1 computed as at the last day of the fiscal quarter most recently ended prior to such acquisition or formation and (e) Hanover shall have delivered to the Administrative Agent a certificate of a Responsible Officer certifying as to the matters set forth in clauses (a) to (d), together with all relevant financial information for such Person or assets. Notwithstanding the foregoing, Investments by Unqualified Subsidiaries of Hanover in Qualified Subsidiaries of Hanover (whether existing, newly formed or acquired) shall be governed by subsection 8.10(f). The Lenders acknowledge that (a) Investments listed on Schedule 8.10B constitute Permitted Business Acquisitions, and (b) to the extent that any such Investments listed on such Schedule 8.10B constitute Indebtedness, the creation, incurrence, assumption or sufferance to exist of such Indebtedness is in compliance with the provisions of Section 8.2.

     “Permitted Unqualified Subsidiary Indebtedness”: as defined in subsection 8.2(f).

     “Person”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

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     “Plan”: at a particular time, any employee benefit plan which is covered by ERISA and in respect of which HCLP or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Pricing Grid”: the pricing grid attached hereto as Annex A.

     “Properties”: as defined in Section 5.16.

     “Qualified Subsidiary”: each Subsidiary of Hanover organized under a jurisdiction of the United States and having assets

     primarily in the United States.

     “RBS Securities”: RBS Securities Corporation.

     “Reallocation Option”: as defined in Section 3.17.

     “Refinanced Incremental Term Loans”: as defined in Section 11.1.

     “Refinancing Indebtedness”: any Indebtedness (other than Loans) that exists (with respect to any amendments, modifications or supplements thereof) or that is incurred to refund, refinance, replace, exchange, renew, repay, extend, modify, amend or supplement (including pursuant to any defeasance or discharge mechanism) (collectively, “refinance”, “refinances” and “refinanced” shall have a correlative meaning) any other specified Indebtedness, including any Indebtedness that refinances Refinancing Indebtedness, provided, however, that:

(i)	the Refinancing Indebtedness has a Stated Maturity no earlier than 91 days later than the Final Maturity Date;
(ii)	the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is incurred equal to or greater than the Average Life of the Indebtedness being refinanced;
(iii)	such Refinancing Indebtedness is incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate accreted value) that is equal to or less than the sum of the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced (plus, without duplication, any additional Indebtedness incurred to pay interest or premiums required by instruments governing such existing Indebtedness and fees and initial purchase discounts incurred in connection therewith);
(iv)	if the Indebtedness being refinanced is subordinated in right of payment to any of the Obligations, such Refinancing Indebtedness is subordinated in right of payment to such Obligations on terms at least as favorable to the Lenders as those contained in the documentation governing the Indebtedness that is being refinanced; provided, that any (i) any Refinancing Indebtedness (and Guarantee Obligations in respect of any such Refinancing Indebtedness) of the 2001A Equipment Lease Transaction, the 2001B Equipment Lease Transaction, the Hanover 2008 Convertible Notes, the Hanover 2010 Senior Notes, the Hanover 2014 Senior Notes or the Hanover Zero Coupon Subordinated Notes shall not be

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	required to be subordinated and (ii) the Hanover Senior Notes Guarantees may be amended to remove the subordination provisions set forth therein;
(v)	after giving effect to the incurrence of such Refinancing Indebtedness, no Default or Event of Default would exist hereunder;
(vi)	the obligor(s) of such Refinancing Indebtedness shall be no different than the obligors of the Indebtedness being refinanced; provided, that notwithstanding the foregoing, (i) Hanover shall be permitted to become the obligor of Refinancing Indebtedness in which HCLP, the equipment trust engaged in the 2001A Equipment Lease Transaction, the equipment trust engaged in the 2001B Equipment Lease Transaction or any of HCLP’s Subsidiaries was the prior obligor and (ii) HCLP shall be permitted to become the obligor of Refinancing Indebtedness in which the equipment trust engaged in the 2001A Equipment Lease Transaction or the equipment trust engaged in the 2001B Equipment Lease Transaction was the prior obligor;
(vii)	the terms and conditions of such Refinancing Indebtedness shall be no less favorable in any material respect than the terms and conditions of the Indebtedness being refinanced; provided, that it is understood and agreed that this clause (vii) shall not prohibit any Refinancing Indebtedness (or Guarantee Obligations in respect thereof) which constitutes senior unsecured Indebtedness and which is subject to commercially reasonable terms for high yield public debt securities; and
(viii)	the security interest(s) granted in connection with such Refinancing Indebtedness, if any, shall not cover more collateral, in any material respect, than the security interest(s), if any, granted in connection with the Indebtedness being refinanced.

     “Register”: as defined in subsection 11.6(b).

     “Regulation U”: Regulation U of the Board.

     “Reimbursement Obligation”: the obligation of HCLP to reimburse the relevant Issuing Lender pursuant to subsection 4.5(a) for amounts drawn under Letters of Credit.

     “Reorganization”: with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.

     “Replacement Incremental Term Loans”: as defined in Section 11.1.

     “Reportable Event”: any of the events set forth in Section 4043(l) of ERISA, other than those events as to which the thirty day notice period is waived by the PBGC.

     “Required Lenders”: at any time, the holders of more than 50% of the sum of (i) the aggregate unpaid principal amount of the Incremental Term Loans then outstanding, (ii) the total US Revolving Commitments then in effect or, if the US Revolving Commitments have been terminated, the total US Revolving Extensions of Credit then outstanding, and (iii) the total Euro Revolving Commitments then in effect or, if the Euro Revolving Commitments have been terminated, the total Euro Revolving Extensions of Credit then outstanding.

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     “Requirement of Law”: as to any Person, the Certificate of Incorporation and By-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

     “Reset Date”: as defined in Section 3.16.

     “Responsible Officer”: the chief executive officer, president, the executive vice president, treasurer or secretary of the applicable Credit Party, or, with respect to financial matters, the chief financial officer or treasurer of the applicable Credit Party; provided, for the purposes of subsection 7.7(a), the term “Responsible Officer” shall also include any vice president, the general counsel and all attorneys working under the supervision of the general counsel.

     “Restricted Payments”: as defined in Section 8.8.

     “Restricted Subsidiary”: any Subsidiary other than an Unrestricted Subsidiary.

     “Revolving Commitments”: the collective reference to the US Revolving Commitments and the Euro Revolving Commitments. As of the Closing Date, the total Revolving Commitments are $450,000,000.

     “Revolving Commitment Period”: the period from and including the date hereof to but not including the Revolving Termination Date or such earlier date on which the Revolving Commitments shall terminate as provided herein.

     “Revolving Extensions of Credit”: as to any Revolving Lender at any time, an amount equal to the sum of (a) such Revolving Lender’s US Revolving Extensions of Credit and (b) such Revolving Lender’s Euro Revolving Extensions of Credit.

     “Revolving Lenders”: the collective reference to the US Revolving Lenders and the Euro Revolving Lenders.

     “Revolving Loans”: the collective reference to the US Revolving Loans and the Euro Revolving Loans.

     “Revolving Termination Date”: November 21, 2010.

     “Sale and Leaseback Transaction”: as defined in Section 8.13.

     “SEC”: the Securities and Exchange Commission.

     “Security Documents”: the collective reference to the Guarantee and Collateral Agreement, the Mortgages and all other security documents hereafter delivered to the Administrative Agent or any collateral agent therefore granting a Lien on any property of any Person to secure the obligations and liabilities of any Credit Party under any Loan Document.

     “Single Employer Plan”: any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan.

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     “Stated Maturity”: with respect to any Indebtedness, the date specified in the documents or instruments evidencing such Indebtedness as the fixed date on which the payment of principal of such Indebtedness is due and payable, including pursuant to any mandatory prepayment or redemption provision, but shall not include any contingent obligations to repay, prepay, redeem or repurchase any such principal prior to the date originally scheduled for the payment thereof.

     “Subordinated Debt”: as to any Person, any unsecured Indebtedness (including (a) with respect to HCLP, the 2001A Lease Guarantee, the 2001B Lease Guarantee and, prior to the date the subordination provisions are removed in accordance with Section 8.11, the Hanover Senior Notes Guarantees, and (b) with respect to Hanover, the TIDES Debentures and the Hanover Zero Coupon Subordinated Notes) the terms of which provide that such Indebtedness is subordinate and junior in right of payment to the payment of all obligations and liabilities of such Person to the Administrative Agent and the Lenders under the Loan Documents; provided, that prior to an Event of Default, Hanover and any Subsidiary may make regularly scheduled interest payments in respect of such Indebtedness.

     “Subordinated Guarantee Obligation”: as to any Person, any unsecured Guarantee Obligation the terms of which provide that such Guarantee Obligation is subordinate and junior in right to the payment of the HCLP Obligations and the Guarantor Obligations (as each such term is defined in the Guarantee and Collateral Agreement).

     “Subsidiary”: as to any Person, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified (i) all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of Hanover and (ii) all references to a “Subsidiary” or to “Subsidiaries” in this Agreement shall exclude Unrestricted Subsidiaries unless Unrestricted Subsidiaries are expressly included.

     “Subsidiary Guarantor”: each Subsidiary of Hanover other than (a) HCLP, (b) any Excluded Unqualified Subsidiary and (c) any Unrestricted Subsidiary.

     “TIDES”: the Term Income Deferrable Equity Securities (TIDES) issued pursuant to the TIDES Declaration of Trust.

     “TIDES Debentures”: the convertible junior subordinated debentures due 2029 issued by Hanover pursuant to the TIDES Indenture.

     “TIDES Declaration of Trust”: the Amended and Restated Declaration of Trust, dated as of December 15, 1999, by Hanover, the holders of interests in the Trust from time to time and the trustees thereof.

     “TIDES Guarantees”: (i) the Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between Hanover and Wilmington Trust Company, as guarantee trustee, and (ii) the Common Securities Guarantee Agreement, dated as of December 15, 1999, by Hanover.

     “TIDES Indenture”: the Indenture, dated as of December 15, 1999, between Hanover and Wilmington Trust Company, as trustee thereunder.

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     “TIDES Trust”: Hanover Compressor Capital Trust, a Delaware business trust, and its successors and assigns.

     “2001A Equipment Lease Securities”: as defined in the definition of “2001A Equipment Lease Transaction”.

     “2001A Equipment Lease Transaction”: the synthetic lease financing consummated on August 31, 2001 pursuant to the 2001A Participation Agreement

     “2001B Equipment Lease Securities”: as defined in the definition of “2001B Equipment Lease Transaction”.

     “2001B Equipment Lease Transaction”: the synthetic lease financing consummated on August 31, 2001 pursuant to the 2001B Participation Agreement.

     “Type”: as to any Loan, its nature as an ABR Loan, a Eurocurrency Loan or a Eurodollar Loan.

     “Uniform Customs”: the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500; and in respect of stand-by Letters of Credit, the International Standby Practices (ISP98), International Chamber of Commerce Publication No. 590, in each case, as the same may be amended, revised or replaced from time to time.

     “Unqualified Subsidiary”: any Subsidiary of Hanover other than Qualified Subsidiaries.

     “Unrestricted Subsidiary”: (i) any Subsidiary of Hanover that exists on the Closing Date and is so designated as an Unrestricted Subsidiary by Hanover in writing to the Administrative Agent, (ii) any Subsidiary of Hanover formed or acquired after the Closing Date that at the time of determination shall be an Unrestricted Subsidiary (as designated by the Board of Directors of Hanover, as provided below), and (iii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of Hanover (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the following conditions apply and continue to apply following such designation: (a) neither Hanover nor any of its Subsidiaries (other than another Unrestricted Subsidiary) provides credit support for Indebtedness or other obligations of such Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness or obligations) except as permitted by Section 8.10 and (b) the Investments by Hanover or the Subsidiaries in such Subsidiary made on or prior to the date of designation of such Subsidiary as an Unrestricted Subsidiary shall not violate the provisions described under Section 8.10 and such Unrestricted Subsidiary is not party to any agreement, contract, arrangement or understanding at such time with Hanover or any other Subsidiary (other than another Unrestricted Subsidiary) of Hanover unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Hanover or such other Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Hanover or, in the event such condition is not satisfied, the value of such agreement, contract, arrangement or understanding to such Unrestricted Subsidiary shall be deemed an Investment. Any such designation by the Board of Directors shall be evidenced to the Administrative Agent by filing with the Administrative Agent a resolution of the Board of Directors of Hanover giving effect to such designation and an officer’s certificate certifying that such designation complies with the foregoing conditions and any Investment by Hanover in such Unrestricted Subsidiary shall be deemed the making of an Investment on the date of designation in an amount equal to the greater

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of (1) the net book value of such Investment or (2) the fair market value of such Investment as determined in good faith by the Board of Directors (and evidenced by a resolution of the Board of Directors). The Board of Directors may designate any Unrestricted Subsidiary as a Subsidiary; provided, (i) that, if such Unrestricted Subsidiary has any Indebtedness, immediately after giving effect to such designation, no Default or Event of Default would result, and (ii) that all Indebtedness of such Subsidiary shall be deemed to be incurred on the date such Unrestricted Subsidiary becomes a Subsidiary. Unrestricted Subsidiaries shall be deemed to be Affiliates of Hanover, HCLP and their Subsidiaries. Any Subsidiary of an Unrestricted Subsidiary shall also be deemed to be an Unrestricted Subsidiary. As used in this definition, the term “Board of Directors” shall include any committees that the Board of Directors has authorized to deal with Unrestricted Subsidiaries. As of the Closing Date, the only Unrestricted Subsidiaries are HCC Holdings, Inc., a Delaware corporation and Hanover Compressor Capital Trust, a Delaware statutory trust.

     “US Revolving Commitment”: as to any US Revolving Lender, the obligation of such US Revolving Lender to make US Revolving Loans to and/or participate in Letters of Credit issued on behalf of the Borrowers hereunder in an aggregate principal and/or stated amount at any one time outstanding not to exceed the amount set forth opposite such US Revolving Lender’s name on Schedule 1.1A, as such amount may be reduced or increased from time to time in accordance with the terms of this Agreement (including, without limitation, Section 3.17); collectively, as to all of the US Revolving Lenders, the “US Revolving Commitments”. The original amount of the total US Revolving Commitments is $375,000,000.

     “US Revolving Extensions of Credit”: as to any US Revolving Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all US Revolving Loans held by such Lender then outstanding and (b) the Dollar Equivalent of such US Revolving Lender’s US US Revolving Percentage of the L/C Obligations then outstanding.

     “US Revolving Facility”: the US Revolving Commitments and the US Revolving Extensions of Credit made thereunder.

     “US Revolving Lenders”: each Lender that has a US Revolving Commitment or that holds US Revolving Loans.

     “US Revolving Loans”: as defined in Section 2.1(a).

     “US Revolving Note”: a promissory note in substantially the form of Exhibit A-1.

     “US Revolving Percentage”: as to any US Revolving Lender at any time, the percentage of the aggregate US Revolving Commitments then constituted by such US Revolving Lender’s US Revolving Commitment.

     1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto.

     (b) As used herein and in the Notes, and any certificate or other document made or delivered pursuant hereto, accounting terms relating to Hanover and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP.

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          (c) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified.

          (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

SECTION 2. AMOUNT AND TERMS OF COMMITMENTS

          2.1 Revolving Commitments. (a) Subject to the terms and conditions hereof, each US Revolving Lender severally agrees to make Revolving Loans in Dollars (the “US Revolving Loans”) to each Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding such that, after giving effect to such borrowing, such US Revolving Lender’s US Revolving Extensions of Credit do not exceed the amount of such US Revolving Lender’s US Revolving Commitment. During the Revolving Commitment Period, each Borrower may use the US Revolving Commitments by borrowing, prepaying the US Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof.

          (b) Subject to the terms and conditions hereof, each Euro Revolving Lender severally agrees to make Revolving Loans in Euros (the “Euro Revolving Loans”) to HCLP from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding such that, after giving effect to such borrowing, such Euro Revolving Lender’s Euro Revolving Extensions of Credit do not exceed the amount of such Euro Revolving Lender’s Euro Revolving Commitment. During the Revolving Commitment Period, HCLP may use the Euro Revolving Commitments by borrowing, prepaying the Euro Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof.

          (c) The US Revolving Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the relevant Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 3.5. The Euro Revolving Loans shall be Eurocurrency Loans.

          2.2 Procedure for Revolving Borrowing. (a) Each Borrower may borrow US Revolving Loans during the Revolving Commitment Period on any Business Day; provided, that the relevant Borrower shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 11:00 A.M., New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Revolving Loans are to be initially Eurodollar Loans, or (b) on the requested Borrowing Date, otherwise), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans, or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Period therefor. Each borrowing of US Revolving Loans shall be in an amount equal to (x) in the case of ABR Loans, $200,000 or a whole multiple of $100,000 in excess thereof (or, if the then Available US Revolving Commitments are less than $200,000, such lesser amount) and (y) in the case of Eurodollar Loans, $500,000 or a whole multiple of $100,000 in excess thereof. Upon receipt of any such notice from the relevant Borrower, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the relevant Borrower at the domestic office of the Administrative Agent specified in Section 11.2 prior to 12:00 noon, New York City time, on the Borrowing Date requested by the relevant Borrower

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in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the relevant Borrower by the Administrative Agent crediting the account of the relevant Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Revolving Lenders and in like funds as received by the Administrative Agent.

          (b) HCLP may borrow Euro Revolving Loans during the Revolving Commitment Period on any Business Day; provided, that HCLP shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 11:00 A.M., London time three Business Days prior to the requested Borrowing Date), specifying (i) the amount to be borrowed, (ii) the requested Borrowing Date and (iii) the length of the initial Interest Period therefor. Each borrowing of Euro Revolving Loans shall be in an amount equal to €500,000 or a whole multiple of €100,000 in excess thereof. Upon receipt of any such notice from HCLP, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro rata share of each Euro borrowing available to the Administrative Agent for the account of HCLP at the London office of the Administrative Agent specified in Section 11.2 prior to 12:00 noon, London time on the Borrowing Date requested by HCLP in funds immediately available to the Administrative Agent. Such borrowing will then be made available to HCLP by the Administrative Agent crediting the account of HCLP on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Revolving Lenders and in like funds as received by the Administrative Agent.

          2.3 Incremental Term Loan Commitments. (a) Subject to the terms and conditions hereof and in the applicable Incremental Assumption Agreement, the Incremental Term Loan Lenders severally agree to make incremental term loans (each, an “Incremental Term Loan”) to HCLP in an amount for each Incremental Term Loan Lender not to exceed the amount of the Incremental Term Loan Commitment of such Incremental Term Loan Lender. The Incremental Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by HCLP and notified to the Administrative Agent in accordance with the terms of the Incremental Assumption Agreement and Section 3.5

          (b) HCLP may, by written notice to the Administrative Agent from time to time, request Incremental Term Loan Commitments in an amount not to exceed the Incremental Amount from one or more Incremental Term Loan Lenders (which may include any existing Lender) willing to provide such Incremental Term Loans in their own discretion; provided, that each Incremental Term Loan Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent (which approval shall not be unreasonably withheld). Such notice shall set forth (i) the amount of the Incremental Term Loan Commitments being requested (which shall be in minimum increments of $1,000,000 and a minimum amount of $5,000,000 or equal to the remaining Incremental Amount) and (ii) the date on which such Incremental Term Loan Commitments are requested to become effective.

          (c) HCLP and each Incremental Term Loan Lender shall execute and deliver to the Administrative Agent an Incremental Assumption Agreement and such other documentation as the Administrative Agent shall reasonably specify to evidence the Incremental Term Loan Commitment of such Incremental Term Loan Lender. Each Incremental Assumption Agreement shall specify the terms of the Incremental Term Loans to be made thereunder; provided, that no Incremental Term Loans shall be made unless the following conditions are met: (i) Hanover and HCLP shall be in pro forma compliance with Section 8.1 after giving effect to the incurrence of such Incremental Term Loans (and any repayment of any Indebtedness from the proceeds of such Incremental Term Loans), (ii) no Default or Event of Default would exist prior to or after giving pro forma effect to the incurrence of such Incremental Term Loans (and any repayment of Indebtedness from the proceeds of such Incremental Term Loans), (iii) pro forma for the incurrence of such Incremental Term Loans, Available Revolving Commitments shall not be less than $100,000,000, (iv) the final maturity of the Incremental Term Loans shall be no earlier than the seven-year anniversary of the Closing Date, (v) the weighted average life to maturity of the

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Incremental Term Loans shall be no shorter than the six-year anniversary of the Closing Date, (vi) as of the date of such borrowing (or promptly thereafter, in the event that the proceeds of such borrowing shall be used to repay the 2001A Equipment Lease Transaction and/or the 2001B Equipment Lease Transactions), the assets pledged, as of the Closing Date, to secure the 2001A Equipment Lease Transaction and 2001B Equipment Lease Transactions shall secure the Obligations on a first priority basis, (vii) on the date of such effectiveness, the conditions set forth in Section 6.1 shall be satisfied, and (viii) the Administrative Agent shall have received legal opinions, board resolutions and other closing certificates and documentation as required by the relevant Incremental Assumption Agreement. The Administrative Agent shall promptly notify each Lender as to the effectiveness of each Incremental Assumption Agreement.

          (d) HCLP shall repay the Incremental Term Loans on the dates (including the relevant Incremental Term Loan Maturity Date) and in the amounts set forth in the relevant Incremental Assumption Agreement.

SECTION 3. INTEREST RATE PROVISIONS, FEES,

CONVERSIONS AND PAYMENTS

          3.1 Interest Rates and Payments Dates. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin.

          (b) Each ABR Loan shall bear interest at a rate per annum equal to ABR plus the Applicable Margin.

          (c) Each Euro Revolving Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurocurrency Rate determined for such day plus the Applicable Margin.

          (d) (i) If all or a portion of the principal amount of any (A) Loan or Reimbursement Obligation or (B) any interest payable on the principal amount of any such Loan shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% or (y) in the case of Reimbursement Obligations, the rate applicable to ABR Loans under the US Revolving Facility plus 2%, and (ii) if all or a portion of any interest payable on any Loan or Reimbursement Obligation or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate then applicable to ABR Loans under the relevant Facility plus 2% (or, in the case of any such other amounts that do not relate to a particular Facility, the rate then applicable to ABR Loans under the US Revolving Facility plus 2%), in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment).

          (e) Interest shall be payable in arrears on each Interest Payment Date; provided, that interest accruing pursuant to subsection 3.1(d) shall be payable on demand.

          3.2 Commitment Fees; Other Fees and Compensation. (a) Each Borrower agrees to pay to the Administrative Agent for the account of each US Revolving Lender a commitment fee for the period from and including the first day of the Revolving Commitment Period to the Revolving Termination Date, computed at the rate per annum equal to the Commitment Fee Rate on the average daily amount of the Available US Revolving Commitment of such US Revolving Lender during the

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period for which payment is made. Such commitment fee shall be payable quarterly in arrears on the last day of each March, June, September and December and on the Revolving Termination Date or such earlier date as the US Revolving Commitments shall terminate as provided herein.

          (b) HCLP agrees to pay to the Administrative Agent for the account of each Euro Revolving Lender a commitment fee for the period from and including the first day of the Revolving Commitment Period to the Revolving Termination Date, computed at the rate per annum equal to the Commitment Fee Rate on the average daily amount of the Available Euro Revolving Commitment of such Euro Revolving Lender during the period for which payment is made. Such commitment fee shall be payable quarterly in arrears on the last day of each March, June, September and December and on the Revolving Termination Date or such earlier date as the Euro Revolving Commitments shall terminate as provided herein.

          (c) HCLP agrees to pay to the Administrative Agent the fees and other compensation, in the amounts and on the dates specified in the fee letter separately agreed to between HCLP and the Administrative Agent.

          3.3 Termination or Reduction of the Revolving Commitments. The Borrowers shall have the right during the Revolving Commitment Period, upon not less than five Business Days’ notice to the Administrative Agent by the Borrowers to terminate the Revolving Commitments or, from time to time, to reduce the amount of the Revolving Commitments; provided, that, (i) any such reduction notice shall specify how such reduction is to be applied between the US Revolving Commitments and the Euro Revolving Commitments and (ii) no such termination or reduction of Revolving Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Loans made on the effective date thereof, either (x) the total US Revolving Extensions of Credit would exceed the total US Revolving Commitments then in effect or (y) the total Euro Revolving Extensions of Credit would exceed the total Euro Revolving Commitments then in effect. Any such reduction shall be in an amount equal to $100,000 or a whole multiple thereof and shall reduce permanently the US Revolving Commitments or Euro Revolving Commitments, as applicable, then in effect. Any such reduction may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrowers (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied.

          3.4 Joint and Several Obligation for Repayment of Loans; Optional Prepayments and other Repayments. (a) Each Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Revolving Lender the then unpaid principal amount of the Revolving Loans and L/C Obligations on the Revolving Termination Date in the currency in which such Revolving Loan was originally denominated. Each Borrower agrees that such Borrower is severally and jointly liable for the repayment of all Revolving Loans made to, and Reimbursement Obligations owing from, the other Borrower (together with interest and fees thereon).

          (b) The relevant Borrower may, at any time and from time to time, prepay the Loans in whole or in part, without premium or penalty upon at least three Business Days’ irrevocable notice, in the case of Eurodollar Loans and Eurocurrency Loans, and one Business Day’s irrevocable notice, in the case of ABR Loans, by the relevant Borrower to the Administrative Agent, specifying the date and amount of prepayment and whether the prepayment is of Eurocurrency Loans or Eurodollar Loans, ABR Loans or a combination thereof, and if of a combination thereof, the amount allocable to each. If any such prepayment with respect to a Eurodollar Loan or a Eurocurrency Loan is made on a day other than the last day of an Interest Period, such prepayment shall be accompanied by any amounts required to be paid pursuant to Section 3.13. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due

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and payable on the date specified therein. Partial prepayments of US Revolving Loans shall be in an aggregate principal amount of $200,000 or a whole multiple of $100,000 in excess thereof. Partial prepayments of Euro Revolving Loans shall be in an aggregate principal amount of €200,000 or a whole multiple of €100,000 in excess thereof.

          (c) Each Borrower shall repay at any time after giving effect to any reduction in the Revolving Commitments pursuant to Section 3.3, and there shall be due and payable at such time, such principal amount (together with accrued interest thereon), if any, of outstanding Revolving Loans as may be necessary so that, after such repayment, (i) the aggregate US Revolving Extensions of Credit do not exceed the total US Revolving Commitments then in effect and (ii) the aggregate Euro Revolving Extensions of Credit do not exceed the total Euro Revolving Commitments then in effect.

          (d) If, on any Calculation Date, for any reason the aggregate L/C Obligations exceed 105% of the L/C Commitment then in effect, HCLP shall, within two Business Days following written demand from the Administrative Agent terminate or reduce the Letters of Credit or provide Cash equivalents as additional Collateral and/or repay the Reimbursement Obligations in an amount equal to such excess.

          (e) If, on any Calculation Date, for any reason the total Euro Revolving Extensions of Credit exceeds 105% of the total Euro Revolving Commitments then in effect, HCLP shall, within two Business Days following written demand from the Administrative Agent, immediately prepay the Euro Revolving Loans in an amount equal to such excess.

          3.5 Conversion and Continuation Options. (a) Each Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent at least one Business Days’ prior irrevocable notice of such election; provided, that any such conversion of Eurodollar Loans which does not occur on the last day of an Interest Period shall be subject to Section 3.13. Each Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days’ prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Rate Loans may be converted as provided herein; provided, that (i) no Loan may be converted into a Eurodollar Loan when any Event of Default has occurred and is continuing and the Administrative Agent has determined that such a conversion is not appropriate and (ii) any such conversion may only be made if, after giving effect thereof, Section 3.6 shall not have been contravened. For the avoidance of doubt, no conversion of Eurocurrency Loans shall be permitted hereunder.

          (b) Any Eurodollar Loans or Eurocurrency Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the relevant Borrower giving notice to the Administrative Agent, in accordance with the applicable provisions of the term “Interest Period” set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, provided that no Eurodollar Loan or Eurocurrency Loan may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has determined that such a continuation is not appropriate, (ii) if, after giving effect thereto, Section 3.6 would be contravened or (iii) after the date that is one month prior to the Revolving Termination Date or the Incremental Term Loan Maturity Date, as applicable, and provided, further, that, with respect to Eurodollar Loans only, if the relevant Borrower shall fail to give any required notice as described above in this subsection 3.5(b) or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period.

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          3.6 Minimum Amounts. All borrowings, conversions and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Loans comprising (a) each Eurodollar Loan shall be equal to $500,000 or a whole multiple of $100,000 in excess thereof and (b) each Eurocurrency Loan shall be equal to €500,000 or a whole multiple of €100,000 in excess thereof.

          3.7 Computation of Interest and Fees. (a) Commitment fees and interest on ABR Loans the rate of interest on which is calculated on the basis of the Prime Rate shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed, and interest on Eurodollar Loans and Eurocurrency Loans shall be calculated on the basis of a 360 day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrowers and the Lenders of each determination of a Eurodollar Rate or Eurocurrency Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrowers and the Lenders of the effective date and the amount of each such change in interest rate.

          (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrowers and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrowers, deliver to the Borrowers a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to subsections 3.1(a) and (c) and, with respect to determinations of the ABR based on the Federal Funds Effective rate, subsection 3.1(b).

            3.8 Inability to Determine Interest Rate. In the event that prior to the first day of any Interest Period:

(a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrowers absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate or Eurocurrency Rate for such Interest Period, or

(b) the Administrative Agent shall have received notice from the Majority Facility Lenders in respect of the relevant Facility that the Eurodollar Rate or Eurocurrency Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the costs to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period,

the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrowers and the Lenders as soon as practicable thereafter. If such notice is given with respect to Eurodollar Loans, (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Eurodollar Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be converted to or continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice with respect to Eurodollar Loans has been withdrawn by the Administrative Agent, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrowers have the right to convert Loans to Eurodollar Loans. If such notice is given with respect to Eurocurrency Loans, no further Eurocurrency Loans shall be continued as such at the end of the then current Interest Periods or shall be made.

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          3.9 Pro Rata Treatment and Payments. (a) Each borrowing by each Borrower from the Lenders hereunder, each payment by each Borrower on account of any commitment fee hereunder and any reduction of the US Revolving Commitments and/or Euro Revolving Commitments of the Lenders shall be made pro rata according to the respective Applicable Percentages of the Lenders. Each payment (including each prepayment) by each Borrower on account of principal of and interest on the Loans shall be made pro rata according to the respective outstanding principal amounts of the US Revolving Loans, Euro Revolving Loans or Incremental Term Loans, as applicable, then held by the Lenders. All payments (including prepayments) to be made by each Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without set off or counterclaim and shall be made prior to 12:00 Noon, New York City time (or London time, with respect to Euro Revolving Loans), on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent’s office specified in Section 11.2 in Dollars (or, with respect to prepayments or repayments of Euro Revolving Loans and the payment of interest thereon, Euros; provided, that commitment fees payable under the Euro Revolving Facility shall be paid in Dollars) and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans or Eurocurrency Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan or Eurocurrency Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.

          (b) A payment in Euros shall be deemed to have been made by the Administrative Agent on the date on which it is required to be made under this Agreement if the Administrative Agent has, on or before that date, taken all relevant steps to make that payment. With respect to the payment of any amount denominated in Euros, the Administrative Agent shall not be liable to HCLP or any of the Lenders in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Administrative Agent if the Administrative Agent shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds in the euro unit to the account with the bank in the principal financial center in the Participating Member State which HCLP or, as the case may be, any Lender shall have specified for such purpose. In this paragraph (b), “all relevant steps” means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Administrative Agent may from time to time determine for the purpose of clearing or settling payments of euro.

          (c) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date that such Lender will not make the amount that would constitute its Applicable Percentage of the borrowing on such date available to the Administrative Agent, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such Borrowing Date, and the Administrative Agent may, in reliance upon such assumption, make available to the relevant Borrower a corresponding amount. If such amount is made available to the Administrative Agent on a date after such Borrowing Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the daily average Federal funds rate during such period as quoted by the Administrative Agent (or, with respect to Euro Revolving Loans, the General Administrative Agent’s reasonable estimate of its average daily cost of funds), times (ii) the amount of such Lender’s Applicable Percentage of such borrowing, times (iii) a fraction the numerator of which is the number of days that elapse from and including such Borrowing Date to the date on which such Lender’s Applicable Percentage of such borrowing shall have become immediately available to the

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Administrative Agent and the denominator of which is 360. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error. If such Lender’s Applicable Percentage of such borrowing is not in fact made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall be entitled to recover such amount with interest thereon at the rate per annum applicable to such Loan, on demand, from the relevant Borrower and any such payment by the relevant Borrower shall not constitute a waiver of any right or remedy the relevant Borrower may have with respect to any such Lender.

          3.10 Illegality. Notwithstanding any other provision herein, if any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans or Eurocurrency Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make Eurodollar Loans or Eurocurrency Loans, as applicable, continue Eurodollar Loans or Eurocurrency Loans, as applicable, as such and convert ABR Loans to Eurodollar Loans shall forthwith be canceled, (b) such Lender’s Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to ABR Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law and (c) such Lender’s Loans then outstanding as Eurocurrency Loans shall be prepaid on the last day of the then current Interest Period with respect thereto. If any such conversion of a Eurodollar Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the relevant Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 3.13.

          3.11 Requirements of Law. (a) In the event that any change in any Requirement of Law as in existence on the date hereof or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

          (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Letter of Credit, any Application or any Eurodollar Loan or Eurocurrency Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for taxes covered by Section 3.12 and changes in the rate of tax on the overall net income of such Lender or tax imposed in lieu of net income taxes);

          (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate or Eurocurrency Rate hereunder; or

          (iii) shall impose on such Lender any other condition;

and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or Eurocurrency Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the relevant Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the relevant Borrower, through the Administrative Agent, by delivery of a certificate setting forth the amounts due and a description of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable

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pursuant to this Section submitted by such Lender, through the Administrative Agent, to the relevant Borrower shall be conclusive in the absence of manifest error.

          (b) In the event that any Lender shall have determined that the adoption after the date hereof of or any change in any Requirement of Law as in existence on the date hereof regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the relevant Borrower (with a copy to the Administrative Agent) of a written request therefor, the relevant Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.

          (c) Notwithstanding anything to the contrary in this Section, no Borrower shall be required to compensate a Lender pursuant to this Section for any amounts incurred more than nine months prior to the date that such Lender notifies such Borrower of such Lender’s intention to claim compensation therefor; provided that, if the circumstances giving rise to such claim have a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrowers pursuant to this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

          3.12 Taxes. (a) All payments made by the Borrowers under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings or Other Taxes, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings (“Non-Excluded Taxes”) or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrowers shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender’s failure to comply with the requirements of subsections 3.12 (d) or (e) or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement, except to the extent that such Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrowers with respect to such Non-Excluded Taxes pursuant to this subsection 3.12(a).

          (b) In addition, the Borrowers shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

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          (c) Whenever any Non-Excluded Taxes or Other Taxes are payable by any Borrower, as promptly as possible thereafter such Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by such Borrower showing payment thereof. If such Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, such Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure unless such failure was caused by the gross negligence or willful misconduct of the Administrative Agent or such Lender.

          (d) Each Lender (or Transferee) that is not a “U.S. Person” as defined in Section 7701(a)(30) of the Code (a “Non-U.S. Lender”) shall deliver to the Borrowers and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest”, a statement substantially in the form of Exhibit H and a Form W-8BEN, or any subsequent versions thereof or successors thereto, properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrowers under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrowers at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrowers (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this subsection 3.12(d), a Non-U.S. Lender shall not be required to deliver any form pursuant to this subsection 3.12(d) that such Non-U.S. Lender is not legally able to deliver.

          (e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrowers are located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrowers (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrowers, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding, provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender’s judgment such completion, execution or submission would not materially prejudice the legal position of such Lender.

          (f) If the Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by any Borrower or with respect to which any Borrower has paid additional amounts pursuant to this Section 3.12, it shall pay over such refund to such Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by such Borrower under this Section 3.12 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided, that such Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to such Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to

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repay such refund to such Governmental Authority. This subsection 3.12(f) shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to such Borrower or any other Person.

          (g) The agreements in this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

          3.13 Indemnity. Each Borrower agrees to indemnify each Lender and to hold each Lender harmless from any reasonable loss or expenses which such Lender may sustain or incur as a consequence of (a) default by such Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans or Eurocurrency Loans after such Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by such Borrower in making any prepayment after such Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) conversion of or the making of a prepayment of Eurodollar Loans or Eurocurrency Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to such Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

          3.14 Replacement of Lenders. If any Lender asserts an illegality under Section 3.10 or requests compensation under Section 3.11, or if any Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.12, or if any Lender defaults in its obligation to fund Loans hereunder, then such Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 11.6), all its interests, rights and obligations under this Agreement and the other Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) such Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld or delayed, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in Letters of Credit, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or such Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 3.11 or payments required to be made pursuant to Section 3.12, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling such Borrower to require such assignment and delegation cease to apply.

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          3.15 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 3.10, 3.11 or 3.12(a) with respect to such Lender, it will, if requested by either Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided, that such designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section shall affect or postpone any of the obligations of either Borrower or the rights of any Lender pursuant to Section 3.11 or 3.12(a).

          3.16 Determination of Dollar Equivalent. No later than 1:00 P.M., New York City time, on each Calculation Date with respect to any Euro Revolving Loan or any Letter of Credit denominated in any Available Foreign Currency, the Administrative Agent shall determine the Dollar Equivalent as of such Calculation Date with respect to such Euro Revolving Loan or Letter of Credit denominated in an Available Foreign Currency. The US Dollar Equivalent so determined shall become effective on the relevant Calculation Date (a “Reset Date”), shall remain effective until the next succeeding Reset Date, except as otherwise provided, and shall for all purposes of this Agreement be the Dollar Equivalent employed in converting any amounts between (x) Dollars or (y) Euros and other Available Foreign Currencies.

          3.17 Reallocation Option. So long as no Event of Default shall have occurred and be continuing, HCLP shall have the option (such option, the “Reallocation Option”) from time to time (but no more often than once per calendar quarter) to increase the total US Revolving Commitments (with a corresponding reduction in the total Euro Revolving Commitments) or increase the total Euro Revolving Commitments (with a corresponding reduction in the total US Revolving Commitments); provided, that (i) the total Revolving Commitments shall remain unchanged and (ii) in no event shall the total Euro Revolving Commitments exceed $75,000,000. To effectuate a Reallocation Option, HCLP shall deliver to the Administrative Agent written notice on or prior to the date which is three (3) Business Days prior to the end of any calendar quarter setting forth the proposed revisions to the total US Revolving Commitments and the total Euro Revolving Commitments to come into effect at the beginning of the next calendar quarter. Any modification to the total US Revolving Commitments or the total Euro Revolving Commitments pursuant to a Reallocation Option shall be in effect for the period beginning on the first date of the following calendar quarter (i.e., January 1, April 1, July 1 or October 1) and shall remain in effect for each calendar quarter thereafter until such time as HCLP chooses to give notice of another Reallocation Option. Following any Reallocation Option, the Revolving Commitments of each Revolving Lender shall remain unchanged. Each of the Revolving Lenders (and any Assignee of any Revolving Lender pursuant to Section 9.6) agrees that Schedule 3.17 hereto sets forth the percentage of the total Euro Revolving Commitments that such Revolving Lender will have before and after giving effect to any Reallocation Option. Following any Reallocation Option, each party hereto (including all Lenders who become party hereto after the Closing Date pursuant to Section 9.6) hereby agrees as follows: (i) each Revolving Lender’s Euro Revolving Commitment shall equal the product of (x) the percentage set forth for such Revolving Lender on Schedule 3.17 and (y) the total Euro Revolving Commitments then in effect and (ii) such Revolving Lender’s US Revolving Commitment shall equal the difference between (x) such Revolving Lender’s Revolving Commitment (as in effect prior to such Reallocation Option) minus (y) such Revolving Lender’s Euro Revolving Commitment; provided, that it is understood and agreed that no Revolving Lender’s Revolving Commitment shall be changed after giving effect to any Reallocation Option and that any increase in any Revolving Lender’s US Revolving Commitment or Euro Revolving Commitment must be offset by a corresponding decrease in such Revolving Lender’s US Revolving Commitment or Euro Revolving Commitment, as applicable.

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SECTION 4. LETTERS OF CREDIT

          4.1 L/C Commitment. (a) Prior to the Closing Date, the Existing Issuing Lender has issued the Existing Letters of Credit which, from and after the Closing Date, shall constitute Letters of Credit issued hereunder. Subject to the terms and conditions hereof, each Issuing Lender, in reliance on the agreements of the other Lenders set forth in subsection 4.4(a), agrees to issue letters of credit (the letters of credit issued on and after the Closing Date pursuant to this Section 4, together with the Existing Letters of Credit, collectively, the “Letters of Credit”) for the account of HCLP on any Business Day during the Revolving Commitment Period in such form as may be approved from time to time by such Issuing Lender; provided, that no Issuing Lender shall have any obligation to issue any Letter of Credit if, after giving effect to such issuance, the L/C Obligations would exceed the L/C Commitment or the Available US Revolving Commitment.

          (b) Each Letter of Credit shall:

          (i) be denominated in Dollars or any Available Foreign Currency and shall be either (A) a standby letter of credit issued to support obligations of HCLP or its Subsidiaries, or (B) a commercial letter of credit issued in respect of the purchase of goods or services by HCLP and its Subsidiaries in the ordinary course of business; and

          (ii) expire at or prior to the close of business on the date that is five Business Days prior to the Revolving Termination Date.

          (c) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York.

          (d) No Issuing Lender shall at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause such Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law.

          (e) Each Issuing Lender shall from time to time provide the Administrative Agent with information reasonably requested by the Administrative Agent with respect to each Letter of Credit issued by such Issuing Lender, including stated amount, currency, beneficiary and expiry date.

          4.2 Procedure for Issuance of Letters of Credit. HCLP may from time to time request that any Issuing Lender issue a Letter of Credit by delivering to such Issuing Lender, with a copy to the Administrative Agent, at their respective addresses for notices specified herein an Application therefor, completed to the satisfaction of such Issuing Lender, and such other certificates, documents and other papers and information as such Issuing Lender may reasonably request. Upon receipt of any Application, such Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall such Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by such Issuing Lender and HCLP. Such Issuing Lender shall furnish a copy of such Letter of Credit to HCLP and the Administrative Agent promptly following the issuance thereof.

          4.3 Fees, Commissions and Other Charges. (a) HCLP shall pay to the Administrative Agent, for the account of the relevant Issuing Lender and the L/C Participants, a letter of credit commission with respect to each Letter of Credit, computed for the period from the date such Letter of

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Credit is issued to the date upon which the next such payment is due hereunder at the rate per annum equal to the Applicable Margin in effect from time to time for Eurodollar Loans, calculated on the basis of a 365 (or 366-, as the case may be) day year, of the daily aggregate amount available to be drawn under such Letter of Credit for the period covered by such payment. In addition, HCLP shall pay to the relevant Issuing Lender a fronting fee in the amount equal to 0.125% of the face amount of such Letter of Credit. Such commissions shall be payable in arrears on each L/C Fee Payment Date (and the Revolving Termination Date) and shall be nonrefundable. Such commissions with respect to each Letter of Credit denominated in an Available Foreign Currency shall be paid in Dollars, and for purposes of calculating the amount of such commissions applicable to each Letter of Credit denominated in an Available Foreign Currency, the face amount of such Letter of Credit shall be the Dollar Equivalent of such amount calculated at the Exchange Rate as of the relevant L/C Fee Payment Date.

          (b) In addition to the foregoing fees and commissions, HCLP shall pay or reimburse each Issuing Lender for such reasonable, normal and customary costs and expenses as are actually incurred or charged by such Issuing Lender in issuing, effecting payment under, amending or otherwise administering any Letter of Credit.

          (c) The Administrative Agent shall, promptly following its receipt thereof, distribute to each Issuing Lender and the L/C Participants all fees and commissions received by the Administrative Agent for their respective accounts pursuant to this Section.

          4.4 L/C Participations. (a) Each Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce each Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from each Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant’s own account and risk an undivided interest equal to such L/C Participant’s US Revolving Percentage in each Issuing Lender’s obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by each Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with each Issuing Lender that, if a draft is paid under any Letter of Credit for which such Issuing Lender is not reimbursed in full by HCLP in accordance with the terms of this Agreement, such L/C Participant shall pay to such Issuing Lender upon demand at such Issuing Lender’s address for notices specified herein an amount in Dollars equal to such L/C Participant’s US Revolving Percentage of the amount of the Dollar Equivalent of such draft (calculated on the date such draft is paid by such Issuing Lender), or any part thereof, which is not so reimbursed.

          (b) If any amount required to be paid by any L/C Participant to the relevant Issuing Lender pursuant to subsection 4.4(a) in respect of any unreimbursed portion of any payment made by such Issuing Lender under any Letter of Credit is paid to such Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to such Issuing Lender on demand an amount equal to the product of (1) such amount, (2) the daily average Federal funds rate, as quoted by such Issuing Lender, during the period from and including the date such payment is required to the date on which such payment is immediately available to such Issuing Lender, and (3) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to subsection 4.4(a) is not in fact made available to such Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, such Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to ABR Loans hereunder. A certificate of such Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this subsection shall be conclusive in the absence of manifest error.

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          (c) Whenever, at any time after any Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro rata share of such payment in accordance with subsection 4.4(a), such Issuing Lender receives any payment related to such Letter of Credit (whether directly from HCLP or otherwise), or any payment of interest on account thereof, such Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, however, that in the event that any such payment received by such Issuing Lender shall be required to be returned by such Issuing Lender, such L/C Participant shall return to such Issuing Lender the portion thereof previously distributed by such Issuing Lender to it.

          4.5   Reimbursement Obligation of HCLP. (a) HCLP agrees to reimburse each Issuing Lender on each date on which such Issuing Lender notifies HCLP of the date and amount of a draft presented under any Letter of Credit and paid by such Issuing Lender for the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses reasonably incurred by such Issuing Lender in connection with such payment. Each such payment shall be made to such Issuing Lender at its address for notices specified herein in Dollars and in immediately available funds. Such reimbursement may be made pursuant to a borrowing pursuant to subsection 4.5(c).

          (b) Interest shall be payable on any and all amounts remaining unpaid by HCLP under this subsection from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding ABR Loans which were then overdue.

          (c) Each drawing under any Letter of Credit shall constitute a request by HCLP to the Administrative Agent for a borrowing pursuant to Section 2.2 of ABR Loans in the amount of such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing.

          4.6   Obligations Absolute. (a) HCLP’s obligations under this Section 4 shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which HCLP may have or have had against the relevant Issuing Lender or any beneficiary of a Letter of Credit.

          (b) HCLP also agrees with each Issuing Lender that such Issuing Lender shall not be responsible for, and HCLP’s Reimbursement Obligations under subsection 4.5(a) shall not be affected by, among other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or among HCLP and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of HCLP against any beneficiary of such Letter of Credit or any such transferee.

          (c) No Issuing Lender shall be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by such Issuing Lender’s gross negligence or willful misconduct.

          (d) HCLP agrees that any action taken or omitted by any Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York, shall be binding on HCLP and shall not result in any liability of such Issuing Lender to HCLP.

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          4.7   Letter of Credit Payments. If any draft shall be presented for payment under any Letter of Credit, the relevant Issuing Lender shall promptly notify HCLP of the date and amount thereof. The responsibility of such Issuing Lender to HCLP in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit.

          4.8   Application. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 4, the provisions of this Section 4 shall apply.

          4.9   Letters of Credit Denominated in Available Foreign Currencies. Notwithstanding any other provision of this Section 4, in the event that any Letter of Credit is denominated in any currency other than Dollars, the amount of the Reimbursement Obligation of HCLP pursuant to Section 4.5 in respect of such Letter of Credit shall bear interest as provided in Section 4.5 with respect to amounts owing in Dollars; provided, that (i) the interest rate on such amounts shall be the rate reasonably determined by the relevant Issuing Lender to be the equivalent rate, in respect of the relevant non-Dollar currency, to the applicable rate provided in Section 4.5 with respect to amounts denominated in Dollars and (ii) if HCLP fails to pay any such Reimbursement Obligation required by Section 4.5 on or prior to the third Business Day following the date of the drawing to which such Reimbursement Obligation relates, then, on the fourth Business Day following such date of drawing, the relevant Issuing Lender, in cooperation with the Administrative Agent, shall determine the Dollar Equivalent of the amount of such Reimbursement Obligation, and HCLP’s obligation in respect of such Reimbursement Obligation shall be converted to such Dollar Equivalent, with interest thereon as provided in Section 4.5 (provided, that if the Application in respect of such Letter of Credit provides for conversion of such amount into Dollars on any earlier date or at any other conversion rate, the provisions of such Application shall control with respect to such conversion).

          4.10   Change in Law; Availability of Foreign Currencies. Notwithstanding any other provision of this Agreement, if, after the date hereof, (a) any change in law shall make it unlawful for any Issuing Lender to issue Letters of Credit denominated in an Available Foreign Currency, or (b) there shall have occurred any change in national or international financial, political or economic conditions (including the imposition of or any change in exchange controls) or currency exchange rates that would make it impracticable for any Issuing Lender to issue Letters of Credit denominated in such Available Foreign Currency, then by prompt written notice thereof to HCLP and to the Administrative Agent (which notice shall be withdrawn whenever such circumstances no longer exist), such Issuing Lender may declare that Letters of Credit will not thereafter be issued by it in the affected Available Foreign Currency or Available Foreign Currencies, whereupon the affected Available Foreign Currency or Available Foreign Currencies shall be deemed (for the duration of such declaration) not to constitute an Available Foreign Currency for purposes of the issuance of Letters of Credit by such Issuing Lender.

SECTION 5. REPRESENTATIONS AND WARRANTIES

          To induce the Agents and the Lenders to enter into this Agreement and to make Loans and issue or participate in the Letters of Credit, Hanover and HCLP hereby jointly and severally represent and warrant to the Administrative Agent and each Lender that:

          5.1   Financial Condition. The audited consolidated balance sheets of Hanover and its consolidated Subsidiaries as at December 31, 2003and December 31, 2004 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and

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accompanied by an unqualified report from PricewaterhouseCoopers LLP, present fairly in all material respects the consolidated financial condition of Hanover and its consolidated Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the fiscal years then ended. The unaudited consolidated balance sheet of Hanover and its consolidated Subsidiaries as at September 30, 2005 and the related unaudited consolidated statements of income and cash flows for the nine-month period ended on such date, present fairly in all material respects the consolidated financial condition of Hanover and its consolidated Subsidiaries, as at such date, and the consolidated results of its operations and its consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). Hanover, HCLP and its Subsidiaries do not have any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any material long-term leases or unusual forward or material long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of Derivatives, that are not reflected in the most recent financial statements referred to in this Section 5.1. During the period from September 30, 2005 to and including the date hereof there has been no Disposition by Hanover or any of its Subsidiaries, as applicable, of any material part of their business or property (other than to Hanover or any of its Subsidiaries).

          5.2   No Change. Since September 30, 2005 (a) there has been no development or event nor any prospective development or event, which has had or would reasonably be expected to have a Material Adverse Effect and (b) except as disclosed on Schedule 5.2 to this Agreement, as of the date of this Agreement, no Restricted Payments have been declared, paid or made upon the Capital Stock of Hanover or HCLP.

          5.3   Corporate Existence; Compliance with Law. Each Credit Party (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing would not reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

          5.4   Corporate Power; Authorization; Enforceable Obligations. Each Credit Party has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party. Each Borrower has the corporate power and authority, and the legal right, to borrow hereunder and has taken all necessary corporate action to authorize the borrowings on the terms and conditions of this Agreement and the Applications. Each Credit Party has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with or other act by or in respect of, any Governmental Authority or any other Person (other than consents or authorizations the failure to obtain would not, in the aggregate, reasonably be expected to have a Material Adverse Effect) is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement, the Applications or any of the other Loan Documents, except consents, authorizations, filings and notices described in Schedule 5.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect. This Agreement has been, and, each Application and each other Loan Document will be, duly executed and delivered on behalf of the Credit Parties party thereto. This Agreement constitutes, and each Note, each Application and each other Loan Document

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when executed and delivered will constitute, a legal, valid and binding obligation of the Credit Parties party thereto enforceable against such Credit Parties in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law).

          5.5   No Legal Bar. The execution, delivery and performance of this Agreement, the Applications, and the other Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of any Credit Party thereto and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except as contemplated hereby or thereby and except to the extent any such violation or creation or imposition of a Lien would not reasonably be expected to have a Material Adverse Effect.

          5.6   No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of Hanover or HCLP, threatened by or against any Credit Party or against any of their respective properties or revenues (a) with respect to this Agreement, or the other Loan Documents or any of the transactions contemplated hereby, or (b) which would reasonably be expected to have a Material Adverse Effect.

          5.7   No Default. None of the Credit Parties nor any of their respective Subsidiaries is in default under or with respect to any of their respective Contractual Obligations in any respect which if not cured would reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing.

          5.8   Ownership of Property; Liens; Leases of Equipment. Each of the Credit Parties has good record and indefeasible title in fee simple (except for exceptions to title as will not in the aggregate materially interfere with the present or contemplated use of the property affected thereby) to, or a valid leasehold interest in, all its real property, and good title to all its other property, and none of such property is subject to any Lien except as permitted by Section 8.3. As used herein, Equipment or Inventory leased by a Credit Party under a Financing Lease shall be deemed “owned” by such Credit Party.

          5.9   Intellectual Property. Each Credit Party owns, or is licensed to use, all trademarks, tradenames, trade secrets, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which would not reasonably be expected to have a Material Adverse Effect (the “Intellectual Property”). To the knowledge of Hanover or HCLP, no claim has been asserted and is pending by any Person challenging or questioning their use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does Hanover or HCLP know of any valid basis for any such claim, which, in each case, would reasonably be expected to have a Material Adverse Effect. The use of such Intellectual Property by the Credit Parties does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, would not reasonably be expected to have a Material Adverse Effect.

          5.10   Taxes. Each of the Credit Parties has filed or caused to be filed all tax returns which, to the knowledge of Hanover and HCLP, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of any of the Credit Parties); no tax Lien has been filed against the property of any Credit Party, and, to the knowledge of Hanover and HCLP, no claim is being asserted, with respect to any such tax, fee

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or other charge, except, in each case, for Governmental Authorities outside of the United States, Canada or the European Union, where the failure to file or cause to be filed such tax returns, the failure to pay such taxes, assessments, fees or other charges, the existence of such tax Liens, or the assertion of such claims would not reasonably be expected to result in a Material Adverse Effect.

          5.11   Federal Regulations. No part of the proceeds of any Loans will be used for “purchasing” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U of the Board as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrowers will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 referred to in said Regulation U.

          5.12   ERISA. Neither a Reportable Event nor an “accumulated funding deficiency” (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred and no Lien in favor of the PBGC or a Plan has arisen during the five-year period prior to the date on which this representation is deemed made. The present value of all accrued benefits under each Single Employer Plan maintained by HCLP, or any Commonly Controlled Entity (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither HCLP nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither HCLP nor any Commonly Controlled Entity would become subject to any material liability under ERISA if HCLP or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. The present value (determined using actuarial and other assumptions which are reasonable in respect of the benefits provided and the employees participating) of the liability of HCLP and each Commonly Controlled Entity for post retirement benefits to be provided to their current and former employees under Plans which are welfare benefit plans (as defined in Section 3(1) of ERISA) does not, in the aggregate, exceed the assets under all such Plans allocable to such benefits by a material amount.

          5.13   Investment Company Act; Other Regulations. None of the Credit Parties is an “investment company”, or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended. None of the Credit Parties is subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness or change rates or change tariffs. None of the Credit Parties are “holding companies” or “subsidiary companies” of a “holding company” or a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

          5.14   Subsidiaries. As of the Closing Date, Hanover has no Subsidiaries other than as set forth on Schedule 5.14. With respect to each Unqualified Subsidiary that is not a Credit Party, substantially all tangible assets (other than cash or Cash Equivalents) owned by such Unqualified Subsidiary as of the date hereof are located within jurisdictions other than the United States of America or any territory thereof.

          5.15   Purpose of Loans. (a) The proceeds of the Revolving Loans shall be used for working capital and general corporate purposes of Hanover and its subsidiaries, including refinancing the Existing Credit Agreement.

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          (b) The proceeds of the Incremental Term Loans shall (and, for the avoidance of doubt, borrowings under the US Revolving Facility or the Euro Revolving Facility may) be used to defease, purchase, prepay or redeem the Hanover Zero Coupon Subordinated Notes, the Hanover 2008 Convertible Notes, the Hanover 2010 Senior Notes, the Hanover 2014 Senior Notes, the 2001A Equipment Lease Transaction or the 2001B Equipment Lease Transaction at par or with a premium, to pay accrued and unpaid interest and to pay related fees and expenses; provided, that (i) the aggregate amount of borrowings under the US Revolving Facility, the Euro Revolving Facility and the Incremental Term Loan Facility used to prepay such Indebtedness (and to pay related fees and expenses) shall not exceed $400,000,000, (ii) no more than $50,000,000 of the amount referred to in clause (i) above may be used to defease, purchase, prepay or redeem the Hanover 2010 Senior Notes and the Hanover 2014 Senior Notes and (iii) after giving pro forma effect to any borrowing of Loans and any such defeasance, purchase, prepayment or redemption of any of the Indebtedness described above, the sum of (A) the cash and Cash Equivalents (to the extent such cash and Cash Equivalents are free of any Liens other than customary banker’s liens and the Liens created by the Security Documents) then held by Hanover and its Qualified Subsidiaries in an aggregate amount not to exceed $10,000,000 and (B) the lesser of (x) Available Revolving Commitments of all the Lenders hereunder and (y) the aggregate amount of additional Indebtedness which HCLP would be able to incur under Section 8.1, equals at least $100,000,000.

          5.16   Environmental Matters. Each of the representations and warranties set forth in subsections 5.16(a) through (e) is true and correct with respect to each parcel of real property owned or operated by any of the Credit Parties (the “Properties”), except to the extent that the facts and circumstances giving rise to any such failure to be so true and correct would not reasonably be expected to have a Material Adverse Effect:

    (a) Except as set forth on Schedule 5.16, the Properties do not contain, and have not previously contained, in, on, or under, including, without limitation, the soil and groundwater thereunder, any Hazardous Materials in concentrations which violate Environmental Laws.

    (b) Except as set forth on Schedule 5.16, the Properties and all operations and facilities at the Properties are in compliance with all Environmental Laws, and there is no Hazardous Materials contamination or violation of any Environmental Law which would reasonably be expected to interfere with the continued operation of any of the Properties or impair the fair saleable value of any thereof.

    (c) Except as set forth on Schedule 5.16, none of the Credit Parties has received any complaint, notice of violation, alleged violation, investigation or advisory action or of potential liability or of potential responsibility regarding environmental protection matters or environmental permit compliance with regard to the Properties which has not been resolved, nor is HCLP aware that any Governmental Authority is contemplating delivering to any Credit Party any such notice.

    (d) Hazardous Materials have not been generated, treated, stored, disposed of, at, on or under any of the Properties in concentrations that violate Environmental Laws, nor have any Hazardous Materials been transferred to any other location, in violation of any Environmental Laws from the Properties or as a result of the sale or lease of any equipment or inventory of any Credit Party.

    (e) There are no governmental, administrative actions or judicial proceedings pending or, to HCLP’s knowledge, contemplated under any Environmental Laws to which any Credit Party is or to HCLP’s knowledge will be named as a party with respect to the Properties,

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nor to HCLP’s knowledge are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to any of the Properties.

          5.17   Accuracy and Completeness of Information. The factual statements contained in the Loan Documents and each other agreement, instrument, certificate and document related thereto and any other certificates or documents furnished or to be furnished to the Administrative Agent or the Lenders by any Credit Party from time to time in connection with this Agreement, taken as a whole, and taking into consideration all corrections or substituted documents, do not and will not, as of the date when made, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which the same were made, all except as otherwise qualified herein; provided, that any financial information with respect to Hanover’s or HCLP’s projections furnished to the Administrative Agent and/or the Lenders were prepared in good faith on the basis of the assumptions stated therein, which assumptions were believed by Hanover or Hanover (as the case may be) to be reasonable in all material respects at the time made.

          5.18   Senior Indebtedness. The Obligations of Hanover constitute “Senior Indebtedness” or “Senior Debt” under (i) if applicable, terms of the Hanover Zero Coupon Subordinated Notes, (ii) if applicable, the documentation for the 2001A Equipment Lease Transaction and (iii) if applicable, the documentation for the 2001B Equipment Lease Transaction. The Obligations of HCLP constitute “Senior Indebtedness” or “Guarantor Senior Indebtedness” under (i) if applicable, under the documentation for the 2001A Equipment Lease Transaction and (ii) if applicable, under the documentation for the 2001B Equipment Lease Transaction. The obligations of each Subsidiary under the Guarantee and Collateral Agreement constitute “Guarantor Senior Indebtedness” under the documentation relating to the 2001A Equipment Lease Transaction (if applicable) and to the 2001B Equipment Lease Transaction (if applicable).

          5.19   Security Documents. (a) The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in Part II.A. of Schedule 4 to the Guarantee and Collateral Agreement, when stock certificates representing such Pledged Stock, together with stock powers duly executed in blank, are delivered to the Administrative Agent, and in the case of the other Collateral described in the Guarantee and Collateral Agreement, when financing statements and other filings specified on Schedule 5.19(a) in appropriate form are filed in the offices specified on Schedule 5.19(a), the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Credit Parties in such Collateral and the proceeds thereof, as security for the Obligations (as defined in the Guarantee and Collateral Agreement) to the extent that the aforementioned Lien on the Collateral can be perfected through the filing of UCC financing statements or through the “control” of Pledged Stock and Pledged Notes, in each case prior and superior in right to any other Person (except, in the case of Collateral other than Pledged Stock and Pledged Notes, Liens permitted by Section 8.3).

          (b) Each of the Mortgages is effective to create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged Properties described therein and proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 5.19(b), each such Mortgage shall constitute a valid mortgage Lien enforceable against third parties on, and security interest in, all right, title and interest of the Credit Parties in the Mortgaged Properties and the proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage), in each case prior and superior in right to any other Person (except as permitted by such Mortgage). Schedule 1.1B lists, as of the Closing Date, each parcel of owned real property and each leasehold interest

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in real property located in the United States and held by Hanover or any of its Subsidiaries (other than Unrestricted Subsidiaries) that has a value, in the reasonable opinion of HCLP, in excess of $1,000,000.

          5.20   Regulation H. Except with respect to the improved real property located at (i) 2019 Highway 135, Kilgore, TX, and (ii) 301 Cummings Avenue, Pocola, OK, no Mortgage encumbers improved real property that is located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968.

SECTION 6. CONDITIONS PRECEDENT

          6.1   Conditions to Each Extension of Credit. The agreement of each Lender to make any extension of credit requested to be made by it on any date is subject to the satisfaction of the following conditions precedent:

    (a) Representations and Warranties. Each of the representations and warranties made by the Credit Parties in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date (unless any such representations and warranties specifically refer to another date).

    (b) No Default. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date.

Each borrowing by and Letter of Credit issued on behalf of any Borrower hereunder shall constitute a representation and warranty by such Borrower as of the date of such Loan that the conditions contained in this Section 6.1 have been satisfied.

          6.2   Conditions to Initial Extension of Credit. The Closing Date shall be the date of satisfaction of the following conditions precedent:

    (a) Agreement. The Administrative Agent shall have executed this Agreement and shall have received counterparts hereof executed by Hanover, HCLP and the Lenders. The Administrative Agent shall have received the Guarantee and Collateral Agreement executed by each Credit Party thereto.

    (b) Fees. The Lenders, the Co-Lead Arrangers and the Administrative Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented (including reasonable fees, disbursements and other charges of counsel to the Administrative Agent), on or before the Closing Date.

    (c) Termination of Existing Credit Agreement. The Administrative Agent shall have received satisfactory evidence that the Existing Credit Agreement shall have been terminated and all amounts thereunder shall have been paid in full.

    (d) Resolutions. The Administrative Agent shall have received, with a counterpart for each Lender, a copy of the resolutions, in form and substance reasonably satisfactory to the Administrative Agent, of the Board of Directors of each Credit Party authorizing the execution of this Agreement and the performance of the Borrowers’ obligations hereunder and any borrowings hereunder from time to time, certified by the Secretary or an Assistant Secretary of each such

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Credit Party, as of the Closing Date, which certificate shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded as of the date of such certificate.

    (e) Incumbency Certificate. The Administrative Agent shall have received, to the extent that it has not previously received, a certificate of the Secretary or Assistant Secretary of each Credit Party, dated the Closing Date, as to the authority, incumbency and signature of each of the officers signing this Agreement, and any other instrument or document delivered by such Credit Party in connection herewith, together with evidence of the incumbency of such Secretary or Assistant Secretary.

    (f) Pledged Stock; Stock Powers; Pledged Notes. Subject to subsection 7.9(b), the Administrative Agent shall have received (i) the certificates representing the shares of Capital Stock pledged pursuant to the Guarantee and Collateral Agreement and identified on Part II.A. of Schedule 4 thereto, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof and (ii) each promissory note (if any) pledged to the Administrative Agent pursuant to the Guarantee and Collateral Agreement endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.

    (g) Filings, Registrations and Recordings. Each document (including any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Administrative Agent, for the benefit of the Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 8.3), shall be in proper form for filing, registration or recordation.

    (h) Mortgages, etc.

    (i) Subject to subsection 7.9(c), the Administrative Agent shall have received a Mortgage with respect to each Mortgaged Property, executed and delivered by a duly authorized officer of each party thereto.

    (ii) If requested by the Administrative Agent, the Administrative Agent shall have received (A) a policy of flood insurance that (1) covers any parcel of improved real property that is encumbered by any Mortgage (2) is written in an amount not less than the fair market value of such Mortgaged Property or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less, and (3) has a term reasonably satisfactory to the Administrative Agent and (B) confirmation that the relevant Credit Party has received the notice required pursuant to Section 208.25(i) of Regulation H of the Board.

    (i) Legal Opinions. The Administrative Agent shall have received the legal opinion of Vinson & Elkins LLP, in form and substance reasonably satisfactory to the Administrative Agent (or its counsel).

    (j) Patriot Act. The Lenders shall have received, sufficiently in advance of the Closing Date, all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the Patriot Act.

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    (k) Financial Statements. The Lenders shall have received (i) reasonably satisfactory audited consolidated financial statements of Hanover for the 2002, 2003 and 2004 fiscal years and (ii) reasonably satisfactory unaudited interim consolidated financial statements of Hanover; provided, that any financial statements that have been publicly filed shall be deemed delivered pursuant to subsection 6.2(k).

    (l) Additional Documents. The Administrative Agent shall have received each additional document, instrument or item of information reasonably requested by it to further effect the purposes of this Agreement, including, without limitation, a copy of any debt instrument, security agreement or other material contract to which any Credit Party may be a party.

    (m) Additional Matters. All corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request to further effect the purposes of this Agreement.

SECTION 7. AFFIRMATIVE COVENANTS

          Hanover hereby agrees that, so long as the Commitments remain in effect, any Loan or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, Hanover shall and Hanover (except in the case of delivery of financial information, reports, certificates and notices) shall cause each of its Subsidiaries to:

          7.1   Financial Statements. Furnish to each Lender or post on Hanover’s website (with notice of such posting being provided by Hanover to the Administrative Agent):

    (a) as soon as available for distribution to shareholders and creditors generally, but in any event within 90 days (provided that, to the extent an extension is granted by the SEC, up to 15 additional days may be taken) after the end of each fiscal year of Hanover, a copy of the consolidated balance sheet of Hanover and its consolidated Subsidiaries and the related consolidating balance sheet schedule each as at the end of such year and the related consolidated statement of income of Hanover and consolidating schedule of income and consolidated statement of owner’s equity and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year (provided, that such consolidating statements shall not include statements of owner’s equity or cash flows and will not set forth in comparative form the figures for the previous year but will include a column for the consolidated balance sheet and consolidated statement of income of HCLP and its subsidiaries), the consolidated financial statements of Hanover shall be reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the audit, by PricewaterhouseCoopers or other independent certified public accountants of nationally recognized standing not unacceptable to the Required Lenders; and

    (b) as soon as available, but in any event not later than 45 days (provided that, to the extent an extension is granted by the SEC, up to 5 additional days may be taken) after the end of each of the first three quarterly periods of each fiscal year of Hanover, the unaudited consolidated balance sheet of Hanover and its consolidated Subsidiaries and the related consolidating balance sheet schedule of Hanover and its Subsidiaries, each as at the end of such quarter, and the related unaudited consolidated statements of income and cash flows of Hanover and its consolidated

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Subsidiaries and the related consolidating schedule of income and consolidated cash flows of Hanover and its Subsidiaries, for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the corresponding period of the previous year (provided, that such consolidating statements shall not include statements of cash flows and will not set forth in comparative form the figures for the previous year but will include a column for the consolidated balance sheet and consolidated statement of income of HCLP and its subsidiaries), certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated financial statements of Hanover and its consolidated Subsidiaries or the consolidated financial statements of HCLP and its Subsidiaries, as applicable, (subject to normal year-end audit adjustments), and setting forth in the consolidated balance sheet, statement of income or cash flows a comparative of the figures for such periods as shown on the consolidated budgets of Hanover for such year;

all such financial statements to be complete and correct in all material respects and to be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein).

7.2   Certificates; Other Information. Furnish to each Lender (or, in the case of subsection 7.2(c), post on Hanover’s website, with notice thereof being given by Hanover to the Administrative Agent):

     (a) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and 7.1(b), a certificate of a Responsible Officer (i) stating that, to the best of such officer’s knowledge, Hanover during such period has observed or performed all of its covenants and other agreements, and satisfied every material condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, such certificate to include the original total dollar amount of any Equipment True Leases (as such term is defined in the definition of “Equipment Lease Participation Agreements”) and (ii) setting forth calculations showing compliance with Sections 8.1, 8.2(f), (g), (m) and (n), 8.3(u), 8.6(g) and (j), 8.7 and 8.10(c), (e), (g), (h), (i) and (n);

     (b) not later than 45 days (provided that, to the extent an extension is granted by the SEC, up to 5 additional days may be taken) following the end of each fiscal year of Hanover, a copy of the projections by Hanover of the operating budget and cash flow budget of Hanover and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on the basis of reasonable assumptions and that such officer has no reason to believe they are incorrect or misleading in any material respect;

     (c) (i) within five days after the same are sent, copies of all financial statements and reports which Hanover, if at such time any class of its securities are held by the public, sends to its stockholders generally, or, if otherwise, such financial statements and reports as are made generally available to the public, and (ii) within five days after the same are filed, copies of all financial statements and reports which HCLP may make to, or file with, the SEC or any successor or analogous Governmental Authority;

     (d) within 45 days (provided, that to the extent an extension is granted by the SEC, up to 5 additional days may be taken) after the end of each quarter in each fiscal year of Hanover, a certificate of a Responsible Officer showing both the Consolidated Leverage Ratio as of the end

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of the most recent fiscal quarter and the resulting Applicable Margin pursuant to the Pricing Grid (an “Applicable Margin Certificate”); and

(e) promptly, such additional financial and other information as any Lender may from time to time reasonably request.

          7.3   Payment of Obligations. Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Hanover or any Subsidiary of Hanover, as the case may be.

          7.4   Conduct of Business and Maintenance of Existence. Continue to engage in business of the same general type as now conducted by it and preserve, renew and keep in full force and effect its corporate existence and take all reasonable action to maintain all material rights, privileges and franchises necessary or desirable in the normal conduct of its business except as otherwise permitted pursuant to Section 8.5; comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith would not, in the aggregate, reasonably be expected to have a Material Adverse Effect.

          7.5   Maintenance of Property; Insurance. (a) Keep and maintain all property material to the conduct of its business in accordance with prudent industry practice in all material respects, ordinary wear and tear excepted.

          (b) Maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.

          (c) Make sure all such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Administrative Agent of written notice thereof, (ii) name the Administrative Agent as insured party or loss payee, and (iii) be reasonably satisfactory in all other respects to the Administrative Agent.

          7.6   Inspection of Property; Books and Records; Discussions. Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of Hanover and its Subsidiaries with officers and employees of Hanover and its Subsidiaries and with its independent certified public accountants; provided, however, that no such visit, inspection or examination or discussion shall unreasonably disrupt or interfere with normal operations of Hanover or any of its Subsidiaries and any such representatives of the Administrative Agent and the Lenders shall be accompanied by a Responsible Officer of Hanover. No failure to comply with any request for the exercise of rights hereunder shall be cause for any Event of Default unless such request is submitted in writing to Hanover with reference to this Section 7.6.

          7.7   Notices. Promptly give notice to the Administrative Agent and each Lender of:

(a) the occurrence of any Default or Event of Default of which any Responsible Officer of Hanover or HCLP has actual knowledge;

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     (b) any (i) default or event of default by Hanover or any of its Subsidiaries under or with respect to any of their respective Contractual Obligations in any respect which, if not cured, would reasonably be expected to have a Material Adverse Effect, or to Hanover’s knowledge any default or event of default by any third party under or with respect to any Contractual Obligation of said third party with Hanover or any of its Subsidiaries in a respect which, if not cured, would reasonably be expected to have a Material Adverse Effect (ii) litigation, investigation or proceeding of which Hanover has actual knowledge which may exist at any time between Hanover or any Subsidiary of Hanover and any Governmental Authority, which in either case, would reasonably be expected to have a Material Adverse Effect;

     (c) any litigation or proceeding affecting Hanover or any Subsidiary of Hanover of which Hanover has actual knowledge in which the amount involved is $5,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought and which, in each case, if adversely determined would reasonably be expected to have a Material Adverse Effect;

     (d) the following events, as soon as possible and in any event within 30 days after Hanover or any of its Subsidiaries has actual knowledge thereof: (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PGBC or a Plan, or any withdrawal from, or the termination, Reorganization or Insolvency of any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC, Hanover, HCLP or any Commonly Controlled Entity with respect to the withdrawal from, or the termination, Reorganization or Insolvency of any Plan (other than pursuant to Section 4041(b) of ERISA); and

     (e) a development or event which has had or would reasonably be expected to have a Material Adverse Effect.

Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action Hanover proposes to take with respect thereto.

7.8   Environmental Laws. Comply in all material respects with, and undertake all reasonable efforts to ensure material compliance by all tenants and subtenants, if any, with, all Environmental Laws and obtain and comply in all material respects with and maintain, and undertake all reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, registrations or permits required by Environmental Laws, and upon discovery of any material non-compliance, undertake all reasonable efforts to attain full material compliance;

     (a) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities respecting Environmental Laws, except, in each case, to the extent that the failure to so conduct, complete or take such actions, or to comply with such orders and directives, would not in the aggregate reasonably be expected to have a Material Adverse Effect;

     (b) Defend, indemnify and hold harmless the Administrative Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of or noncompliance with any Environmental Laws applicable to the real property

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owned or operated by Hanover or any Subsidiary of Hanover, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney’s and consultant’s fees, investigation and laboratory fees, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor; and

     (c) Maintain a program to identify and promote substantial compliance with and to minimize prudently any material liabilities or material potential liabilities under any Environmental Law that may affect Hanover or any of its Qualified Subsidiaries.

7.9   Additional Collateral, etc. (a) With respect to any new Subsidiary (other than an Excluded Unqualified Subsidiary or an Unrestricted Subsidiary) created or acquired after the Closing Date by Hanover or any of its Qualified Subsidiaries (which, for the purposes of this subsection 7.9(a), shall include any existing Subsidiary that ceases to be an Excluded Unqualified Subsidiary or is hereafter designated as an Unrestricted Subsidiary), promptly (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by Hanover or any of its Subsidiaries, (ii) if requested by the Administrative Agent or the Required Lenders, deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of Hanover or the relevant Subsidiary, and (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement and (B) to take such actions necessary or advisable to grant to the Administrative Agent for the benefit of the Lenders a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement with respect to such new Subsidiary, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Administrative Agent.

          (b) With respect to any new Excluded Unqualified Subsidiary created or acquired after the Closing Date by Hanover or any Subsidiary, promptly, and with respect to any Excluded Unqualified Subsidiary identified as a Post-Closing Pledged Subsidiary in the Guarantee and Collateral Agreement, within forty-five (45) days of the Closing Date (or within an additional time period not to exceed one ninety (90) days from the Closing Date, so long as Hanover and its Subsidiaries are diligently attempting to satisfy their obligations under this subsection 7.9(b)), (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary that is owned by Hanover or any Subsidiary that is not an Excluded Unqualified Subsidiary (provided that in no event shall (a) more than 66% of the total outstanding voting Capital Stock of any such new Subsidiary be required to be so pledged and (b) the Capital Stock of Subsidiaries not directly owned by Hanover, HCLP or any Qualified Subsidiary be required to be pledged), and (ii) if requested by the Administrative Agent or the Required Lenders, deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of Hanover or the relevant Subsidiary, and take such other action as may be necessary or, in the opinion of the Administrative Agent, desirable to perfect the Administrative Agent’s security interest therein.

          In addition, pledge the Capital Stock of any Unqualified Subsidiaries identified on Part II.A of Schedule 4 to the Guarantee and Collateral Agreement that were not previously pledged to secure obligations under the Existing Credit Agreement within forty-five days of the Closing Date in a manner in form and substance reasonably satisfactory to the Administrative Agent.

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          (c) With respect to any fee interest in any real property located in the United States having a book value (together with improvements thereof) of at least $1,000,000 acquired after the Closing Date by Hanover or any Subsidiary (other than (x) any such real property subject to a Lien expressly permitted by Section 8.3(o) and (y) real property acquired by any Excluded Unqualified Subsidiary or an Unrestricted Subsidiary), promptly (i) execute and deliver a first priority Mortgage, in favor of the Administrative Agent, for the benefit of the Lenders, covering such real property and (ii) if requested by the Administrative Agent, provide the Lenders with legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent.

          In addition, grant a mortgage Lien and security interest in any Mortgaged Properties that were not previously mortgaged to secure obligations under the Existing Credit Agreement within forty-five (45) days of the Closing Date in a manner in form and substance reasonably satisfactory to the Administrative Agent.

          7.10   Maintenance of Flood Insurance. With respect to any policy of flood insurance received by the Administrative Agent on the Closing Date pursuant to subsection 6.2(h)(ii) or any policy of flood insurance otherwise required to be obtained hereunder, maintain all such flood insurance policies in existence throughout the term of this Agreement, which flood insurance policies shall meet the terms and conditions set forth in subsection 6.2(h)(ii).

SECTION 8. NEGATIVE COVENANTS

          Hanover hereby agrees that, so long as the Commitments remain in effect, any Note or any Letter of Credit remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, Hanover shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:

          8.1   Financial Condition Covenants: (a) Consolidated Senior Secured Indebtedness to Consolidated Adjusted EBITDA. Permit the ratio of Consolidated Senior Secured Indebtedness of HCLP to Consolidated Adjusted EBITDA of HCLP for the four consecutive fiscal quarters of HCLP most recently ended to be greater than the ratio set forth below opposite such fiscal quarter:

Fiscal Quarter Ending	Ratio
December 31, 2005 through September 30, 2007	5.00 to 1.0
December 31, 2007 through September 30, 2008	4.50 to 1.0
December 31, 2008 and thereafter	4.00 to 1.0

          (b) Minimum Consolidated Tangible Net Worth. Permit Consolidated Tangible Net Worth of Hanover to be less than $579,685,224.

          (c) Consolidated Indebtedness to Consolidated EBITDA. Permit the ratio of Consolidated Indebtedness of Hanover to Consolidated EBITDA of Hanover for the four consecutive fiscal quarters of Hanover ending with any fiscal quarter set forth below (the “Consolidated Leverage Ratio”) to be greater than the ratio set forth below opposite such fiscal quarter:

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Fiscal Quarter Ending	Ratio
December 31, 2005 through September 30, 2007	6.00 to 1.0
December 31, 2007 through September 30, 2008	5.50 to 1.0
December 31, 2008 and thereafter	5.00 to 1.0

(d) Interest Coverage Ratio. Permit the ratio of Consolidated EBITDA of Hanover to Consolidated Interest Expense of Hanover for the period of four consecutive fiscal quarters of Hanover most recently ended to be less than 2.00 to 1.0.

8.2   Limitation on Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except:

     (a) Indebtedness in respect of the Loans, and other obligations of the Credit Parties under this Agreement and the other Loan Documents;

     (b) Indebtedness of Hanover or HCLP to any of its Subsidiaries and of any such Subsidiary which is a Credit Party to Hanover or any other Subsidiary of Hanover;

     (c) Indebtedness outstanding as of the Closing Date and listed on Schedule 8.2(c) and any Refinancing Indebtedness incurred in respect thereof;

     (d) Indebtedness in respect of Financing Leases; provided that, after giving effect thereto, Section 8.7 is not contravened;

     (e) Indebtedness in respect of Subordinated Debt, the terms and conditions of which have been approved in writing by the Agents and any Refinancing Indebtedness incurred in respect thereof;

     (f) Indebtedness of Unqualified Subsidiaries in an aggregate amount not to exceed $100,000,000 at any time (such Indebtedness, the “Permitted Unqualified Subsidiary Indebtedness”);

     (g) Indebtedness of a Person which becomes a Subsidiary after the date hereof in an aggregate principal amount not exceeding as to Hanover and its Subsidiaries $20,000,000 at any time outstanding, provided that (i) such indebtedness existed at the time such Person became a Subsidiary and was not created in anticipation thereof and (ii) immediately after giving effect to the acquisition of such Person by Hanover or any of its Subsidiaries no Default or Event of Default shall have occurred and be continuing;

     (h) Indebtedness of Hanover in respect of the Hanover 2010 Senior Notes, the Hanover 2014 Senior Notes, the Hanover 2008 Convertible Notes, the Hanover 2014 Convertible Notes, the Hanover Zero Coupon Subordinated Notes and any Refinancing Indebtedness incurred in respect thereof;

     (i) Guarantee Obligations permitted by Section 8.4;

     (j) Indebtedness of Hanover or any of its Subsidiaries incurred as Refinancing Indebtedness of the 2001A Equipment Lease Transaction and/or the 2001B Equipment Lease Transaction; provided, that (a) the equipment trusts party to such Equipment Lease Transactions shall be permitted to substitute equipment subject to the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction from time to time in accordance therewith and (b) the

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aggregate principal amount of Indebtedness outstanding under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction, respectively, shall not exceed the aggregate principal amount of Indebtedness outstanding under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transactions, respectively, as of the Closing Date;

     (k) Investments permitted to be made pursuant to Section 8.10 in the form of Indebtedness;

     (l) to the extent constituting Indebtedness, obligations under Derivatives permitted under Section 8.9;

     (m) Indebtedness secured by Liens permitted by subsection 8.3(r) in an aggregate principal amount not to exceed $35,000,000 at any one time outstanding; and

     (n) unsecured Indebtedness not otherwise permitted hereunder not exceeding $50,000,000 in the aggregate at any time outstanding.

8.3   Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for:

     (a) Liens for taxes, assessments, governmental charges or levies (but excluding judgment Liens) not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of Hanover or any Subsidiary of Hanover, as the case may be, in conformity with GAAP;

     (b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlord’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith by appropriate proceedings;

     (c) pledges or deposits in connection with workers’ compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self insurance arrangements;

     (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

     (e) immaterial irregularities in title, easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of Hanover or any of its Subsidiaries;

     (f) leases or subleases granted to third Persons not interfering in any material respect with the business of Hanover or any of its Subsidiaries;

     (g) Liens arising from UCC financing statements regarding leases permitted by this Agreement or the Equipment Leases;

     (h) any interest or title of a lessor or sublessor under any lease permitted by this Agreement or the Equipment Leases;

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     (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with the importation of goods so long as such Liens attach only to the imported goods;

     (j) Liens arising out of consignment or similar arrangements for the sale of goods entered into by Hanover or any of its Subsidiaries in the ordinary course of business;

     (k) Liens created pursuant to Financing Leases permitted pursuant to subsection 8.2(d);

     (l) Liens in existence on the Closing Date listed on Schedule 8.3(l), securing Indebtedness permitted by subsection 8.2(c) including any Refinancing Indebtedness incurred in respect thereof;

     (m) Liens on (i) natural gas compressors and related equipment, and usual accessories and improvements and proceeds thereof, and (ii) oil and gas production equipment, in each case, the acquisition of which were financed with the proceeds of the Indebtedness permitted by subsection 8.2(d) and which secures only such Indebtedness, provided that any such Lien is placed upon such natural gas compressor or related equipment or such oil and gas production equipment at the time of the acquisition of such natural gas compressors or related equipment or such oil and gas production equipment by Hanover or any of its Subsidiaries and the Lien extends to no other property, and provided, further, that no such Lien is spread to cover any additional property after the date such Lien attaches and that the amount of Indebtedness secured thereby is not increased;

     (n) Liens on the assets of Unqualified Subsidiaries of Hanover securing Permitted Unqualified Subsidiary Indebtedness;

     (o) Liens on the property or assets of a Person which becomes a Subsidiary after the date hereof securing Indebtedness permitted by subsection 8.2(g), provided that (i) such Liens existed at the time such Person became a Subsidiary and were not created in anticipation thereof, (ii) any such Lien is not spread to cover any property or assets of such Person after the time such Person becomes a Subsidiary, and (iii) the amount of Indebtedness secured thereby is not increased;

     (p) Liens that arise in connection with the Equipment Lease Transactions and Refinancing Indebtedness in respect thereof;

     (q) Liens created pursuant to the Security Documents (including Liens securing Derivatives Agreements which are permitted under Section 8.9);

     (r) Liens securing Indebtedness of HCLP or any other Subsidiary incurred pursuant to Section 8.2(m) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, and (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness;

     (s) judgment Liens against Hanover or any of its Subsidiaries which do not result in a Default under clause (i) of Section 9; and

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     (t) Liens not otherwise permitted hereunder securing Indebtedness not exceeding $2,500,000 in the aggregate.

8.4   Limitation on Guarantee Obligations. Create, incur, assume or suffer to exist any Guarantee Obligation except:

     (a) the Equipment Lease Guarantees (and any Refinancing Indebtedness incurred in respect thereof) or any Guarantee Obligation in respect of any Equipment Lease Refinancing (and any Refinancing Indebtedness incurred in respect thereof), the joint and several obligations of each Borrower for the repayment of Indebtedness incurred hereunder of the other Borrower and the guarantees made by the Credit Parties pursuant to the Guarantee and Collateral Agreement;

     (b) up to $5,000,000 in the aggregate of Guarantee Obligations of HCLP or any of its Subsidiaries in connection with Indebtedness incurred by customers of HCLP or any of its Subsidiaries; provided, that the proceeds of any such Indebtedness shall be used by such customers to purchase natural gas compressors or oil and gas production equipment from HCLP or any of its Subsidiaries;

     (c) Guarantee Obligations (in respect of obligations not constituting Indebtedness) arising under agreements entered into by HCLP or any of its Subsidiaries in the ordinary course of business;

     (d) Guarantee Obligations in respect of Indebtedness permitted under this Agreement (other than Permitted Unqualified Subsidiary Indebtedness); provided, that the Hanover Senior Notes Guarantees made by HCLP and any Subsidiary Guarantors shall remain subordinated to the Obligations until such time as the Hanover 2010 Senior Notes Indenture and the Hanover 2014 Senior Notes Indenture are amended to remove the subordination provisions set forth therein in accordance with Section 8.11;

     (e) unsecured Guarantee Obligations by Hanover or any of its Qualified Subsidiaries of Permitted Unqualified Subsidiary Indebtedness;

     (f) (i) subordinated Guarantee Obligations by Hanover and its Subsidiaries of the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction; provided, that (A) the equipment trusts party to such Equipment Lease Transactions shall be permitted to substitute equipment subject to the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction from time to time in accordance therewith and (B) the aggregate principal amount of Indebtedness outstanding under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction, respectively, shall not exceed the aggregate principal amount of Indebtedness outstanding under the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transactions, respectively, as of the Closing Date; and (ii) Guarantee Obligations by Hanover and its Subsidiaries of Refinancing Indebtedness of the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction; and

     (g) the Subordinated Guarantee Obligations of Hanover arising under the TIDES Guarantees, and any Refinancing Indebtedness incurred in respect thereof.

Notwithstanding the foregoing, Subsidiaries of Hanover may not provide Guarantee Obligations in respect of the Hanover 2014 Convertible Notes (or any Refinancing Indebtedness in respect thereof), the Hanover Zero Coupon Subordinated Notes or other indebtedness issued by Hanover (other than (a) the Hanover 2010 Senior Notes, (b) the Hanover 2014 Senior Notes, (c) any Refinancing

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Indebtedness of the 2001A Equipment Lease Transaction and/or the 2001B Equipment Lease Transaction in which Hanover becomes the obligor, (d) any Refinancing Indebtedness of the Hanover Zero Coupon Subordinated Notes and (e) any Refinancing Indebtedness incurred in respect of clauses (a) through (b)).

8.5   Limitations on Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, except:

     (a) any Subsidiary may be merged or consolidated with or into any Qualified Subsidiary; provided, that a Qualified Subsidiary shall be the continuing or surviving corporation;

     (b) Hanover or any Qualified Subsidiary may be merged or consolidated with any other Person organized under a jurisdiction of the United States with assets held primarily in the United States; provided, that (i) Hanover or such Qualified Subsidiary shall be the continuing or surviving corporation, the Administrative Agent is provided with written notice, and after giving effect thereto no Default or Event of Default would exist and (ii) in any merger or consolidation involving Hanover, Hanover must be the surviving corporation;

     (c) any Qualified Subsidiary may sell, lease, assign, transfer or otherwise dispose of any or all of its assets to Hanover or any Qualified Subsidiary;

     (d) any Unqualified Subsidiary may be merged or consolidated with or into any other Person and/or may sell, lease, assign, transfer or otherwise dispose of any of its assets (upon voluntary liquidation or otherwise) to any other Person; provided that, if merged or consolidated with or into a Qualified Subsidiary, the Qualified Subsidiary will remain as a ‘Qualified Subsidiary’ after the merger;

     (e) pursuant to the Equipment Lease Transactions;

     (f) the TIDES Trust may wind up or dissolve itself (or suffer a liquidation or dissolution), or convey, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, as contemplated by the TIDES Declaration of Trust;

     (g) any Qualified or Unqualified Subsidiary that sells, leases, assigns, transfers or otherwise disposes of substantially all of its assets in accordance with the provisions of subsection 8.5(c) or (d) may then dissolve, liquidate or be wound up;

     (h) any Investment expressly permitted by Section 8.10 may be structured as a merger, consolidation or amalgamation; and

     (i) any merger, consolidation, amalgamation, liquidation, winding up, dissolution, conveyance, sale, lease, assignment, transfer, disposition or material change that is undertaken in a series of steps and that, after giving effect to all such steps, would be permitted under one or more of subsection 8.5(a) through (h) above.

8.6   Limitation on Sale or Lease of Assets. Dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, except:

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     (a) sales, transfers or other Dispositions of personal property in the ordinary course of business when, in the reasonable judgment of Hanover, such property is no longer used or useful in the conduct of its business or the business of its Subsidiaries, provided that the aggregate value of obsolete or worn out natural gas compressors and oil and gas production equipment disposed of in the ordinary course of business does not exceed $40,000,000 during any fiscal year of Hanover;

     (b) the sale of inventory and other similar assets in the ordinary course of business, provided that if such inventory is comprised of natural gas compressors or oil and gas production equipment, such natural gas compressors or oil and gas production equipment were never part of the natural gas compressors or oil and gas production equipment leased or held for lease by HCLP or any of its Subsidiaries;

     (c) the lease or sublease by HCLP or any of its Subsidiaries as lessor of equipment in the ordinary course of business;

     (d) the sale or discount without recourse of defaulted accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof and of Investments held under subsection 8.10(m);

     (e) as permitted by Section 8.5 and Section 8.10;

     (f) the sale of natural gas compressors and oil and gas production equipment owned by HCLP or any other Qualified Subsidiaries, other than Disposals covered by subsections 8.6(a), (b) and (i), provided that on the date of any proposed Disposition under this subsection 8.6(f), the fair market value of natural gas compressors and oil and gas production equipment sold (determined for each piece of equipment as of the date of such equipment was disposed) during the term of this Agreement does not exceed ten percent (10%) of the aggregate fair market value of all natural gas compressors and oil and gas production equipment owned by HCLP and the other Qualified Subsidiaries (determined as of the date of such proposed Disposition); provided, further, that if the proceeds are reinvested in natural gas compressors or oil and gas production equipment to be owned by HCLP or any other Qualified Subsidiary within twelve (12) months after the sale of the assets which produced such proceeds, such proceeds shall not be included for purposes of this subsection 8.6(f);

     (g) the sale or exchange of natural gas compressors to the Lessor in connection with the Equipment Lease Transactions; and provided (i) that each such sale or exchange is for fair market value and (ii) the aggregate fair market value of natural gas compressors so sold or exchanged after the Closing Date does not exceed $65,000,000 per fiscal year;

     (h) the lease of assets as listed on Schedule 8.6(h);

     (i) asset sales made on or after the Closing Date consisting of sales of assets described on Schedule 8.6(i) hereto for fair market value;

     (j) the sale of natural gas compressors and oil and gas production equipment owned by Unqualified Subsidiaries, other than Disposals covered by subsections 8.6(a), (b) and (i), provided that on the date of any proposed Disposition under this subsection 8.6(j), the fair market value of natural gas compressors and oil and gas production equipment sold (determined for each piece of equipment as of the date of such equipment was disposed) during the term of this Agreement does not exceed ten percent (10%) of the aggregate fair market value of all natural gas

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compressors and oil and gas production equipment owned by the Unqualified Subsidiaries; provided, further, that if the proceeds are reinvested in natural gas compressors or oil and gas production equipment to be owned by HCLP or its Subsidiaries within twelve (12) months after the sale of the assets which produced such proceeds, such proceeds shall not be included for purposes of this subsection 8.6(j)

          (k) the Disposition of other property having a fair market value not to exceed $5,000,000 in the aggregate for any fiscal year of Hanover.

          8.7 Limitation on Leases. Permit Consolidated Lease Expense for any fiscal year of Hanover to exceed $30,000,000, except to the extent any such excess results from expenses relating to any Equipment True Leases.

          8.8 Limitation on Dividends. Declare or pay any dividend (other than dividends payable solely in common stock of such Person or in options, warrants or rights to purchase such common stock) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of such Person or any warrants or options to purchase any such stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Hanover or any Subsidiary of Hanover (collectively, “Restricted Payments”), except that if no Default or Event of Default exists or would result from making such Restricted Payment under Section 8.1, then: (i) Hanover may repurchase or redeem shares of Hanover common stock from its employees and former employees so long as the aggregate amount of all such repurchases since the Closing Date does not exceed $7,500,000, and (ii) any Subsidiary may make Restricted Payments to Hanover, HCLP or to any Subsidiary of HCLP.

          8.9 Limitation on Derivatives. Enter into or assume any obligations with respect to any Derivatives except for Derivatives used by Hanover or any of its Subsidiaries in the ordinary course of business and for non-speculative purposes in managing the interest rate risk exposure, or reducing interest expense, commodity risk exposure or foreign currency risk exposure of Hanover and its Subsidiaries; provided, that (i) the aggregate amounts of the Derivatives in respect of interest rates permitted by this Section 8.9 shall not exceed 60% of the aggregate principal amount of Indebtedness of Hanover and its Subsidiaries outstanding at the time such Derivative is entered, (ii) no foreign currency Derivatives shall have a term of more than two years and (iii) no commodity risk Derivative shall be entered into with respect to hydrocarbons. For the purposes of this Section 8.9, with respect to Derivatives for managing interest rate risk or reducing interest expense, the “amount” thereof shall be the aggregate notional amounts.

          8.10 Limitation on Investments, Loans and Advances. Make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, sell or contribute personal property or other assets to, or make any other investment in (all of the foregoing being herein collectively referred to as “Investments”), any Person, except:

          (a) extensions of trade credit in the ordinary course of business;

          (b) Investments in Cash Equivalents;

          (c) loans and advances to employees of such Person or its Subsidiaries for travel, entertainment and relocation expenses in the ordinary course of business in an aggregate amount for Hanover and its Subsidiaries not to exceed $5,000,000 at any one time outstanding;

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     (d) Investments by Hanover in its Subsidiaries which are or become Credit Parties and investments by such Subsidiaries which are or become Credit Parties in other Subsidiaries of Hanover which are or become Credit Parties;

     (e) Net Unqualified Subsidiary Investments, provided that (i) at the time of each such Net Unqualified Subsidiary Investment, no Default or Event of Default shall have occurred and be continuing or result from such Net Unqualified Subsidiary Investment, (ii) all transactions related to such Net Unqualified Subsidiary Investment shall be consummated in accordance with applicable law, (iii) with respect to any acquired or newly formed Unqualified Subsidiary relating to such Net Unqualified Subsidiary Investment, such acquired or newly formed Unqualified Subsidiary shall take all actions required to be taken, if any, with respect to such acquired or newly formed Unqualified Subsidiary under the Loan Documents, (iv) Hanover and HCLP shall be in compliance, on a pro forma basis after giving effect to such Net Unqualified Subsidiary Investment, with the Section 8.1 computed as at the last day of the fiscal quarter most recently ended prior to the date of such Investment, (v) after giving effect to the consummation of the transactions contemplated by such Net Unqualified Subsidiary Investment, the Loans to be made and the Letters of Credit to be issued hereunder, the sum of (A) the cash and Cash Equivalents (to the extent such cash and Cash Equivalents are free of any Liens other than customary banker’s liens and the Liens created by the Security Documents) then held by Hanover and its Qualified Subsidiaries in an aggregate amount not to exceed $10,000,000 and (B) the lesser of (x) Available Revolving Commitments of all the Lenders hereunder and (y) the aggregate amount of Indebtedness which the relevant Borrower would be able to incur under Section 8.1 on a pro forma basis, equals at least $60,000,000, and (vi) Hanover shall have delivered to the Administrative Agent a certificate or a Responsible Officer certifying as the to the matters set forth in clauses (i) through (v);

     (f) Investments by Unqualified Subsidiaries of Hanover in other Unqualified Subsidiaries of Hanover (whether existing, newly formed or acquired) or in Qualified Subsidiaries (whether existing, newly formed or acquired) of Hanover provided that (i) at the time of each such Investment, no Default or Event of Default shall have occurred and be continuing or result from such Investment, (ii) all transactions related to such Investment shall be consummated in accordance with applicable law, (iii) any such acquired or newly formed Subsidiary shall take all actions required to be taken, if any, with respect to such acquired or newly formed Subsidiary under the Loan Documents, (iv) Hanover and HCLP shall be in compliance, on a pro forma basis after giving effect to such Investment, with Section 8.1 computed as at the last day of the fiscal quarter most recently ended prior to the date of such Investment and (v) Hanover shall have delivered to the Administrative Agent a certificate or a Responsible Officer certifying as the to the matters set forth in clauses (i) through (iv);

     (g) Investments constituting Permitted Business Acquisitions so long as, (a) after giving effect to the consummation of the transactions contemplated by each Permitted Business Acquisition, the Loans to be made and the Letters of Credit to be issued hereunder, the sum of (A) the cash and Cash Equivalents (to the extent such cash and Cash Equivalents are free of any Liens other than customary banker’s liens and the Liens created by the Security Documents) then held by Hanover and its Qualified Subsidiaries in an aggregate amount not to exceed $10,000,000 and (B) the lesser of (x) Available Revolving Commitments of all the Lenders hereunder and (y) the aggregate amount of Indebtedness which the relevant Borrower would be able to incur under Section 8.1 on a pro forma basis, equals at least $60,000,000, and (b) the aggregate amount of Investments (x) constituting Permitted Business Acquisitions and (y) made pursuant to Section 8.10(h) for any fiscal year shall not exceed $100,000,000 in the aggregate;

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     (h) Investments or acquisitions by Hanover or its Subsidiaries in (i) up to 50% of the shares of Capital Stock in, a Person (other than a Subsidiary), or (ii) loans or advances to a Person (other than a Subsidiary), provided that (a) after giving effect to the consummation of the transactions contemplated by each such Investment or acquisition, the Loans to be made and the Letters of Credit to be issued hereunder, the sum of (A) the cash and Cash Equivalents (to the extent such cash and Cash Equivalents are free of any Liens other than customary banker’s liens and the Liens created by the Security Documents) then held by Hanover and its Qualified Subsidiaries in an aggregate amount not to exceed $10,000,000 and (B) the lesser of (x) Available Revolving Commitments of all the Lenders hereunder and (y) the aggregate amount of Indebtedness which the relevant Borrower would be able to incur under Section 8.1 on a pro forma basis, equals at least $60,000,000, and (b) the aggregate amount of Investments (A) constituting Permitted Business Acquisitions and (B) made pursuant to this subsection 8.10(h) for any fiscal year shall not exceed $100,000,000 in the aggregate;

     (i) Loans to employees, officers and directors of Hanover and its Subsidiaries to acquire shares of capital stock of Hanover not to exceed $8,000,000;

     (j) the purchase by the TIDES Trust of the TIDES Debentures, as contemplated under the TIDES Declaration of Trust;

     (k) Investments in Unqualified Subsidiaries listed in Schedule 8.10A; and

     (l) Investments in securities of foreign governments rated less than A by S&P and Moody’s in an aggregate principal amount not to exceed $3,000,000 at any time;

     (m) Investments in securities of Persons received in settlement of claims or insolvency proceedings; and

     (n) Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $10,000,000 at any one time.

8.11 Limitation on Optional Payments and Modifications of Debt Instruments. (a) Other than (i) as permitted by Section 5.15, (ii) with the net cash proceeds of the sale of any Capital Stock of Hanover, (iii) with the net cash proceeds of any asset sale permitted pursuant to Section 8.6(i) and (iv) in connection with the incurrence of any Refinancing Indebtedness which is otherwise permitted hereunder, prepay any interest or make any optional payment or optional prepayment on or optional redemption, optional purchase or optional defeasance of any portion of (A) the Hanover Zero Coupon Subordinated Notes or any Refinancing Indebtedness incurred in respect thereof (other than an Offset Prepayment, as such term is defined in the Indenture related to the Hanover Zero Coupon Subordinated Notes), (B) the Hanover 2008 Convertible Notes or any Refinancing Indebtedness incurred in respect thereof, (C) the Hanover 2014 Convertible Notes or any Refinancing Indebtedness incurred in respect thereof, (D) the Hanover 2010 Senior Notes or any Refinancing Indebtedness incurred in respect thereof, (E) the Hanover 2014 Senior Notes or any Refinancing Indebtedness incurred in respect thereof, (F) the 2001A Equipment Lease Securities or any Refinancing Indebtedness incurred in respect thereof, (G) the 2001B Equipment Lease Securities or any Refinancing Indebtedness incurred in respect thereof, (H) lease and guarantee payments in respect of the 2001A Equipment Lease Transaction or any Refinancing Indebtedness incurred in respect thereof, (I) lease and guarantee payments in respect of the 2001B Equipment Lease Transaction or any Refinancing Indebtedness incurred in respect thereof or (J) any other Subordinated Debt.

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          (b) So long as no Default or Event of Default shall have occurred and be continuing, with respect to any Indebtedness not described in clause (a) above, make any optional payment or optional prepayment on (or optional redemption, optional purchase or optional defeasance of) any portion of any Indebtedness or Guarantee Obligation thereof in an aggregate amount in excess of $15,000,000 per calendar year; provided, that this subsection 8.11(b) shall not prohibit any optional payment or optional prepayment on (or optional redemption, optional purchase or optional defeasance of) any portion of any Indebtedness or Guarantee Obligation thereof to the extent that such Indebtedness has a Stated Maturity on or prior to the date which is the one-year anniversary of the date on which such optional prepayment, optional redemption, optional purchase or optional defeasance is made.

          (c) Amend, modify or change, or consent or agree to any amendment, modification or change to any of the terms of any Indebtedness or any Guarantee Obligations in respect thereof other than in connection with any Refinancing Indebtedness that is permitted to be incurred (or exists) pursuant to the provisions of Section 8.2 if the effect of such amendment, modification or change is to (i) shorten the Stated Maturity or Average Life of such Indebtedness, (ii) increase the stated rate of interest or principal amount of such Indebtedness, (iii) with respect to any Indebtedness subject to subsection 8.11(a), add covenants or other restrictions which impose terms on Hanover and its Subsidiaries which are materially more onerous on Hanover or any of its Subsidiaries than the covenants and/or restrictions in place prior to such amendment or modification (unless this Agreement is amended to add substantially similar covenants), (iv) cause any Subsidiary to incur a Guarantee Obligation in respect thereof which is not permitted by Section 8.4 or remove or modify the terms of subordination associated with such Indebtedness, if any exist or (v) provide for additional collateral in any material respect; provided, that for the avoidance of doubt, (x) clause (iv) above shall not prohibit any amendment to remove the subordination provisions set forth in the Hanover Senior Notes Guarantees, (y) any agreement evidencing Indebtedness described in subsection 8.11(a) may be amended to delete provisions in connection with an “exit consent” associated with a tender offer for such Indebtedness and (z) this subsection 8.11(c) shall not prohibit any Refinancing Indebtedness otherwise permitted hereunder.

          8.12 Transactions with Affiliates. Except for the transactions of a type set forth on Schedule 8.12, enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction is not otherwise prohibited under this Agreement, is in the ordinary course of Hanover’s or such Subsidiary’s business and is upon fair and reasonable terms no less favorable to Hanover or such Subsidiary, as the case may be, than it would obtain in a comparable arm’s length transaction with a Person not an Affiliate.

          8.13 Sale and Leaseback. Except for the transactions of a type set forth on Schedule 8.13, enter into any arrangement with any Person where Hanover or any of its Subsidiaries is the lessee of real or personal property which has been or is to be sold or transferred by Hanover or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Hanover or such Subsidiary (any of such arrangements, a “Sale and Leaseback Transaction”), except that (i) Hanover and its Subsidiaries may enter into Financing Leases as lessee for natural gas compressors and oil and gas production equipment if after giving effect thereto Section 8.2 is not contravened and (ii) Hanover may enter into Sale and Leaseback Transactions as lessee for natural gas compressors in connection with the Equipment Lease Transactions.

          8.14 Fiscal Year. Permit the fiscal year of Hanover to end on a day other than December 31.

          8.15 Nature of Business. (A) In the case of any Subsidiary (other than an Unrestricted Subsidiary), engage in any business other than (a) the leasing, maintenance, purchase, sale and operation of natural gas compressor units and oil and gas production equipment, (b) the design, engineering and

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fabrication of natural gas compressor units, (c) the design, engineering and fabrication of oil and gas production equipment, desalinization plants and other related equipment, (d) the provision of contract compression and related services, (e) the provision of gas measurement and related services, (f) the design, engineering, fabrication, maintenance, leasing, purchase and sale of 0- to 50-megawatt skid-mounted, engine-driven generators, together with services related thereto and (g) any activities related thereto which are consistent with past practice and conducted in the ordinary course of business; and (B) in the case of Hanover, notwithstanding anything to the contrary contained herein, engage in any business other than (i) the direct or indirect ownership of HCLP together with any activities related thereto, (ii) the performance of its obligations under the Loan Documents, (iii) the performance of its obligations under the Hanover 2008 Convertible Notes, the Hanover 2014 Convertible Notes, the Hanover 2010 Senior Notes, the Hanover 2014 Senior Notes or the Hanover Zero Coupon Subordinated Notes and, in each case, any Refinancing Indebtedness incurred in respect thereof (or any Refinancing Indebtedness in respect of the 2001A Equipment Lease Transaction and the 2001B Equipment Lease Transaction in which Hanover becomes the obligor), (iv) the performance of its obligations in connection with the TIDES, including, without limitation, its obligations under the TIDES Indenture, the TIDES Guarantees and the TIDES Declaration of Trust, (v) the formation and ownership of Subsidiaries for the purpose of making acquisitions to the extent permitted under the Loan Documents, (vi) any actions required by law or the rules of any securities exchange on which its securities are listed and/or traded, and (vii) any other actions that Hanover is expressly permitted to take pursuant to the provisions of the Loan Documents.

          8.16 Unqualified Subsidiaries. Permit any Unqualified Subsidiary to directly or indirectly own any material tangible assets (other than cash or Cash Equivalents located in bank or securities accounts) which are located in the United States of America or any territory thereof.

          8.17 Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of Hanover or any Subsidiary of Hanover to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, to secure its obligations under the Loan Documents to which it is a party other than (a) this Agreement and the other Loan Documents, (b) the Equipment Lease Transactions and any Refinancing Indebtedness thereof (provided, that any limitation on Liens set forth in any Refinancing Indebtedness of the Equipment Lease Transactions shall be not be materially more onerous on Hanover and its Subsidiaries than the limitation which exists in the Equipment Lease Transactions on the date hereof), (c) any agreements governing any purchase money Liens or capital lease obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby), (d) agreements entered into by Subsidiaries not directly owned by Hanover, HCLP or any Qualified Subsidiary, (e) agreements entered into by Unqualified Subsidiaries with respect to Permitted Unqualified Subsidiary Indebtedness and (f) with respect to property or revenues that do not constitute Collateral (as such term is defined in the Guarantee and Collateral Agreement), negative pledges covering property or revenues with a de minimis value; provided, that, notwithstanding Section 9, any negative pledge clauses covering properties or revenues that do not constitute Collateral may be cured within ninety (90) days.

          8.18 Clauses Restricting Subsidiary Distributions. Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Hanover to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, Hanover or any other Subsidiary of Hanover, (b) make loans or advances to, or other Investments in, Hanover or any other Subsidiary of Hanover or (c) transfer any of its assets to Hanover or any other Subsidiary of Hanover, except for (i) such encumbrances or restrictions existing under or by reason of (x) any restrictions existing under the Loan Documents and the Equipment Lease Transactions (and any Refinancing Indebtedness of the Equipment Lease Transactions; provided, that any such restrictions set forth in any Refinancing Indebtedness of the Equipment Lease Transactions shall be

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not be materially more onerous on Hanover and its Subsidiaries than the limitation which exists in the Equipment Lease Transactions on the date hereof) and (y) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (ii) encumbrances or restrictions which do not adversely affect the ability of Hanover and its Subsidiaries to repay the Loans hereunder, (iii) agreements entered into by Subsidiaries not directly owned by Hanover, HCLP or any Qualified Subsidiary, (iv) agreements entered into by Unqualified Subsidiaries with respect to Permitted Unqualified Subsidiary Indebtedness and (v) provisions in indentures governing Indebtedness permitted hereunder comparable in all material respects to Section 703 of each of the Hanover 2010 Senior Notes Indenture and the Hanover 2010 Senior Notes Indenture.

SECTION 9. EVENTS OF DEFAULT

     If any of the following events shall occur and be continuing:

     (a) Either Borrower shall fail to pay any principal of any Note or any Reimbursement Obligation when due in accordance with the terms thereof or hereof; or either Borrower shall fail to pay any interest payable hereunder, or any other amount payable hereunder, within five days after any such interest or other amount becomes due in accordance with the terms thereof or hereof; or

     (b) Any representation or warranty made or deemed made by any Credit Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or

     (c) Hanover or HCLP shall default in the observance or performance of any agreement contained in Section 8 of this Agreement; or

     (d) Hanover or HCLP shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section 9) and such default shall continue unremedied for a period of 30 days after the earlier of (i) a Responsible Officer of either Hanover or HCLP obtains actual knowledge thereof, or (ii) written notice thereof shall have been given to Hanover or HCLP by any Lender, any Issuing Bank or the Administrative Agent; or

     (e) Any of the Security Documents shall, at any time, cease to be in full force and effect (unless released by the Administrative Agent or any collateral agent therefor) or shall be declared null and void, or the validity or enforceability thereof shall be contested by any Credit Party or any Lien created by any of the Security Document shall cease to be enforceable and of the same effect and priority purported to be created thereby; or

     (f) Hanover or any of its Subsidiaries (other than Unrestricted Subsidiaries) shall (i) default in any payment of principal of or interest of any Indebtedness (including any Guarantee Obligation, but excluding the Loans) or in the payment of any Guarantee Obligation, in excess of $25,000,000 in the aggregate, beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee Obligation in excess of $25,000,000 or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall

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occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable; or

     (g) (i) Hanover or any Material Subsidiary shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or any of Hanover or any Material Subsidiary shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any of Hanover or any Material Subsidiary any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any of Hanover or any Material Subsidiary any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any of Hanover or any Material Subsidiary shall take any action for the purpose of effecting its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any of Hanover or any Material Subsidiary shall generally not, or shall admit in writing its inability to, pay its debts as they become due; or

     (h) (i) Any Person shall engage in any non-exempt “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien shall arise on the assets of HCLP or any Commonly Controlled Entity in favor of PBGC or a Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) HCLP or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or

     (i) One or more judgments or decrees shall be entered against Hanover or any its Subsidiaries (other than Unrestricted Subsidiaries) involving in the aggregate a liability (not paid or fully covered by insurance) of $25,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or

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     (j) If at any time, Hanover or any of its Subsidiaries (other than Unrestricted Subsidiaries) shall become liable for remediation and/or environmental compliance expenses and/or fines, penalties or other charges which, in the aggregate, are in excess of $25,000,000; or

     (k) (i) A “change of control” (however denominated) with respect to Hanover or HCLP shall have occurred under, or for purposes of, the 2001A Equipment Lease Securities, the 2001B Equipment Lease Securities, the Hanover 2008 Convertible Notes, the Hanover 2014 Convertible Notes, the Hanover Zero Coupon Subordinated Notes, the Hanover 2008 Senior Notes, the Hanover 2014 Senior Notes or any Refinancing Indebtedness of any such Indebtedness; (ii) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 35% of the outstanding common stock of Hanover; or (iii) Hanover shall cease to own and control, beneficially, 100% of each class of outstanding Capital Stock of HCLP free and clear of all Liens (except Liens created by the Security Documents); or

     (l) the obligations of Hanover and its Subsidiaries, if any, under the Hanover Senior Notes Guarantees, the Hanover Zero Coupon Subordinated Notes, the lease related to the 2001A Equipment Lease Transaction, the lease related to the 2001B Equipment Lease Transaction or any guarantees thereof shall cease, for any reason, to be validly subordinated to the Obligations or the obligations of the Guarantors under the Guarantee and Collateral Agreement, as the case may be, as provided in the applicable documentation, or any Credit Party, Affiliate of a Credit Party, trustee or holders (representing at least 30% of any series of such subordinated obligations) shall so assert in writing); provided, that, for the avoidance of doubt, there shall be no Event of Default hereunder in the event that the subordination provisions set forth in any such Indebtedness are removed (i) in accordance with the incurrence of Refinancing Indebtedness permitted hereunder with respect to any such Indebtedness or (ii) pursuant to subsection 8.11(b); or

     (m) the 2001A Equipment Lease Transaction shall remain outstanding on or after June 30, 2008;

then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (g) above with respect to HCLP or Hanover, the Revolving Commitments shall immediately terminate automatically and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrowers declare the Revolving Commitments to be terminated forthwith, whereupon the Revolving Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice of default to the Borrowers declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding sentence, HCLP shall at such time deposit in a cash collateral account opened

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by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. HCLP hereby grants to the Administrative Agent, for the benefit of the relevant Issuing Lender and the L/C Participants, a security interest in such cash collateral to secure all obligations of HCLP under this Agreement and the other Loan Documents. Amounts held in such cash collateral account shall be applied by the Administrative Agent first to the payment of drafts drawn under such Letters of Credit. HCLP shall execute and deliver to the Administrative Agent, for the account of the relevant Issuing Lender and the L/C Participants, such further documents and instruments as the Administrative Agent may reasonably request to evidence the creation and perfection of the within security interest in such cash collateral account. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived.

SECTION 10. THE ADMINISTRATIVE AGENT

          10.1 Appointment. Each Lender hereby irrevocably designates and appoints JPMorgan Chase Bank, N.A. as the Administrative Agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes JPMorgan Chase Bank, N.A., as the Administrative Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent.

          10.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care.

          10.3 Exculpatory Provisions. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person’s own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Credit Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Credit Party to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Credit Party.

          10.4 Reliance by Administrative Agent . The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including,

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without limitation, counsel to any Credit Party), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans.

          10.5   Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or any Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders.

          10.6   Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of any Credit Party shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrowers and each other Credit Party and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrowers and each other Credit Party. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Credit Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates.

          10.7   Indemnification. The Lenders agree to indemnify the Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrowers or the other Credit Parties and without limiting the obligation of the Borrowers and each other Credit Party to do so), ratably according to their Aggregate Exposure, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time

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(including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the Administrative Agent’s gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder.

          10.8   Administrative Agent in Its Individual Capacity. The Administrative Agent and its Affiliates may make loans to, accept deposits from, hold equity securities of, and generally engage in any kind of business with any Credit Party as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to its Loans made or renewed by it and any Note issued to it and with respect to any Letter of Credit issued or participated in by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms “Lender” and “Lenders” shall include the Administrative Agent in its individual capacity.

          10.9   Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 10 days’ notice to the Lenders. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be subject to the approval of the Borrowers. Upon receipt of such approval from the Borrowers, such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term “Administrative Agent” shall mean such successor agent effective upon its appointment, and the former Administrative Agent’s rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Administrative Agent’s resignation as Administrative Agent, the provisions of this Section shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents.

SECTION 11. MISCELLANEOUS

          11.1   Amendments and Waivers. Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section. With the written consent of the Required Lenders, the Administrative Agent, the Borrowers and any other Credit Party thereto, may, from time to time, enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Credit Parties party thereto hereunder or thereunder or waiving, on such terms and conditions as the Administrative Agent may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (a) reduce the amount or extend the maturity of any Loan or any installment thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any fee payable to any Lender hereunder, or change the amount of any Lender’s Commitments, in each case without the consent of the Lender affected thereby, or (b) amend, modify or waive any provision of this Section or reduce the percentage specified in the definitions of “Required Lenders” or “Majority Facility Lenders”, or consent

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to the assignment or transfer by any Credit Party of any of its rights and obligations under this Agreement and the other Loan Documents or release all or substantially all of the Collateral or release all or substantially all of the Guarantors from their obligations under either the Guarantee and Collateral Agreement, in each case without the written consent of all the Lenders (except as contemplated by this Agreement), or (c) amend, modify or waive any provision of Section 10 without the written consent of the then Administrative Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon each of the Credit Parties, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, each of the Credit Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under any other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon.

          In addition, notwithstanding the foregoing, this Agreement may be amended with the written consent of the Administrative Agent, each Borrower and the Lenders providing the relevant Replacement Incremental Term Loans (as defined below) to permit the refinancing, replacement or modification of all outstanding Incremental Term Loans (“Refinanced Incremental Term Loans”) with a replacement term loan tranche hereunder (“Replacement Incremental Term Loans”), provided that (a) the aggregate principal amount of such Replacement Incremental Term Loans shall not exceed the aggregate principal amount of such Refinanced Incremental Term Loans, (b) the Applicable Margin for such Replacement Incremental Term Loans shall not be higher than the Applicable Margin for such Refinanced Incremental Term Loans and (c) the weighted average life to maturity of such Replacement Incremental Term Loans shall not be shorter than the weighted average life to maturity of such Refinanced Incremental Term Loans at the time of such refinancing.

          11.2   Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice or overnight courier service, when received, addressed as follows in the case of the Borrowers, each Issuing Lender and the Administrative Agent, and as set forth in Schedule 1.1A in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto:

Hanover and HCLP:	Hanover Compressor Company
	12001 North Houston-Rosslyn
	Houston, Texas 77086
	Attention: Chief Financial Officer
	Telecopy: (713) 447-8781
The Administrative Agent:
Domestic Funding Office:	JPMorgan Chase Bank, N.A.
	Loan and Agency Services Group
	1111 Fannin, 10th Floor
	Houston, TX 77002
	Attention: Janene English
	Telephone: (713) 750-2501
	Telecopy: (713) 427-6307
with a copy to:	JPMorgan Chase Bank, N.A.
	600 Travis St., 20th Floor

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	Houston, TX 77002
	Attention: June Brand
	Telephone: (713) 216-4327
	Telecopy: (713) 216-4117
London Funding Office:	J. P. Morgan Europe Limited
	Loan & Agency Services, 9th Floor
	125 London Wall
	London EC2Y 5AJ
	United Kingdom
	Attention: The Manager, Loan & Agency Services
	Telephone: 44-207-777-2355
	Telecopy: 44-207-777-2360/2085
Issuing Lender (JPMorgan):	JPMorgan Chase Bank, N.A.
	1111 Fannin, 10th Floor
	Houston, TX 77002
	Attention: Rosalyn Jackson
	Telephone: (713) 750-2424
	Telecopy: (713) 427-6307
with a copy to:	JPMorgan Chase Bank, N.A.
	10420 Highland Manor Drive, Floor 4
	Tampa, FL 33610
	Attention: James Alonzo
	Telephone: 813-432-6339
	Telecopy: 813-432-5161
Issuing Lender (RBS):	The Royal Bank of Scotland plc
	101 Park Avenue
	New York, NY 10178
	Attention: Celeste Lindsey
	Telephone: 212-401-3411
	Telecopy: 212-401-1494

Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Section 2 unless otherwise agreed by the Administrative Agent and the applicable Lender. The Administrative Agent or the Borrowers may, in their discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

          11.3   No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

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          11.4   Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans and other extensions of credit hereunder.

          11.5   Payment of Expenses and Taxes. Each Borrower agrees (a) to pay or reimburse the Agents and the Co-Lead Arrangers for all of their reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to the Administrative Agent and to the several Lenders, and (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender, each Agent and each Co-Lead and their respective directors, officers, employees and agents harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents or the use or the proposed use of proceeds thereof (all the foregoing, collectively, the “indemnified liabilities”); provided, that no Borrower shall have any obligation hereunder to any Agent, any Co-Lead Arranger or any Lender with respect to indemnified liabilities arising from (i) the gross negligence or willful misconduct of any such Agent, any such Co-Lead Arranger or any such Lender, (ii) legal proceedings commenced against any such Agent, any such Co-Lead Arranger or any such Lender by any security holder or creditor thereof arising out of and based upon rights afforded any such security holder or creditor solely in its capacity as such, or (iii) legal proceedings commenced against any such Agent, any such Co-Lead Arranger or any such Lender by any other Lender or by any Transferee (as defined in Section 11.6). The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder and under the other Loan Documents.

          11.6   Successors and Assigns; Participations and Assignments. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any affiliate of any Issuing Lender that issues any Letter of Credit), except that (i) neither Borrower may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by any Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section.

          (b) (i) Subject to the conditions set forth in subsection 11.6(b)(ii), any Lender may assign to one or more assignees (each, an “Assignee”) all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of:

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     (A) the Borrowers, provided that no consent of the Borrowers shall be required for an assignment to a Lender, an affiliate of a Lender, an Approved Fund (as defined below) or, if an Event of Default has occurred and is continuing, any other Person; and

     (B) the Administrative Agent and, with respect to any assignment of Revolving Commitments, each Issuing Lender, provided that no consent of the Administrative Agent or any Issuing Lender shall be required for an assignment of any Commitment or of any Loan to an assignee that is a Lender with a Commitment or outstanding Loan immediately prior to giving effect to such assignment or any assignment of an Incremental Term Loan.

(ii) Assignments shall be subject to the following additional conditions:

     (A) except in the case of an assignment to a Lender, an affiliate of a Lender or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than (a) with respect to any assignment of Revolving Commitments, $5,000,000 and (b) with respect to any assignment of Incremental Term Loans, $1,000,000, unless the Borrowers and the Administrative Agent otherwise consent, provided that (1) no such consent of the Borrowers shall be required if an Event of Default has occurred and is continuing and (2) such amounts shall be aggregated in respect of each Lender and its affiliates or Approved Funds, if any;

     (B) with respect to any assignment of Revolving Commitments, (i) the applicable Assignment and Assumption shall specify the aggregate amount of US Revolving Commitments and Euro Revolving Commitments being assigned (provided, that any Revolving Lender with both US Revolving Commitments and Euro Revolving Commitments may only assign its US Revolving Commitments and Euro Revolving Commitments on a pro rata basis) and (ii) each Assignee agrees that, following any Reallocation Option, it shall maintain Euro Revolving Commitments hereunder consistent with the percentage of the assigning Revolving Lender set forth in Schedule 3.17;

     (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; and

     (D) the Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an administrative questionnaire.

     For the purposes of this Section 11.6, the terms “Approved Fund” has the following meaning:

     “Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

(iii) Subject to acceptance and recording thereof pursuant to subsection 11.6(b)(iv), from and after the effective date specified in each Assignment and Assumption the Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the

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extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.13, 3.14, 3.15 and 11.5). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 11.6 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection 11.6(c).

          (iv) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amount of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrowers, the Administrative Agent, each Issuing Lender and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.

          (v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an Assignee, the Assignee’s completed administrative questionnaire (unless the Assignee shall already be a Lender hereunder), the processing and recordation fee referred to in subsection 11.6(b) and any written consent to such assignment required by subsection 11.6(b), the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this subsection 11.6(b).

          (c) (i) Any Lender may, without the consent of the Borrowers or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrowers, the Administrative Agent, each Issuing Lender and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver that (1) requires the consent of each Lender directly affected thereby pursuant to the proviso to the second sentence of Section 11.1 and (2) directly affects such Participant. Subject to subsection 11.6(c)(ii), each Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.11, 3.12 and 3.13 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection 11.6(b). To the extent permitted by law, each Participant also shall be entitled to the benefits of subsection 11.7(b) as though it were a Lender, provided such Participant shall be subject to subsection 11.7(a) as though it were a Lender.

          (ii) A Participant shall not be entitled to receive any greater payment under Section 3.11, 3.12 or 3.13 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrowers’ prior written consent. Any Participant that is a Non-U.S. Lender shall not be entitled to the benefits of Section 3.12 unless such Participant complies with Section 3.12(d).

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          (d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or Assignee for such Lender as a party hereto.

          (e) Each Borrower, upon receipt of written notice from the relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type described in subsection 11.6(d).

          (f) Notwithstanding the foregoing, any Conduit Lender may assign any or all of the Loans it may have funded hereunder to its designating Lender without the consent of the Borrowers or the Administrative Agent and without regard to the limitations set forth in subsection 11.6(b). Each Borrower, each Lender and the Administrative Agent hereby confirms that it will not institute against a Conduit Lender or join any other Person in instituting against a Conduit Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any state bankruptcy or similar law, for one year and one day after the payment in full of the latest maturing commercial paper note issued by such Conduit Lender; provided, however, that each Lender designating any Conduit Lender hereby agrees to indemnify, save and hold harmless each other party hereto for any loss, cost, damage or expense arising out of its inability to institute such a proceeding against such Conduit Lender during such period of forbearance.

11.7   Adjustments; Set-off. (a) If any Lender (a “Benefited Lender”) shall at any time receive any payment of all or part of its Loans or the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 9(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender’s Loans or Reimbursement Obligations, or interest thereon, such Benefited Lender shall purchase for cash from the other Lenders such portion of each such other Lender’s Loans or the Reimbursement Obligations owing to it, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Each Borrower agrees that each Lender so purchasing a portion of another Lender’s Loans may exercise all rights of payment (including, without limitation, rights of set-off) with respect to such portion as fully as if such Lender were the direct holder of such portion.

          (b) Upon the occurrence and during the continuance of any Event of Default, each Borrower hereby irrevocably authorizes each Lender at any time and from time to time without notice to such Borrower, any such notice being expressly waived by such Borrower, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender to or for the credit or the account of such Borrower, or any part thereof in such amounts as such Lender may elect, against and on account of the obligations and liabilities of such Borrower to such Lender hereunder and claims of every nature and description of such Lender against such Borrower, in any currency, whether arising hereunder, under the Credit Agreement, any Note, any Letter of Credit or any Loan Document, as such Lender may elect, whether or not the Administrative Agent or any Lender has made any demand for payment and

76

although such obligations, liabilities and claims may be contingent or unmatured. The Administrative Agent and each Lender shall notify such Borrower promptly of any such set-off and the application made by the Administrative Agent or such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Lender may have.

          11.8   Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with HCLP and the Administrative Agent.

          11.9   Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

          11.10   Integration. This Agreement represents the agreement of Hanover, HCLP, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents and the fee letter referred to in Section 3.2.

          11.11   GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

11.12   Submission To Jurisdiction; Waivers. Each of Hanover and HCLP hereby irrevocably and unconditionally:

     (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;

     (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

     (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Person at its address set forth in Section 11.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto;

     (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

77

(e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Agreement any special, exemplary, punitive or consequential damages.

11.13   Acknowledgments. Each of Hanover and HCLP hereby acknowledge that:

(a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents;

(b) neither the Administrative Agent nor any Lender has any fiduciary relationship to any Credit Party, and the relationship between Administrative Agent and Lenders, on one hand, and Hanover and HCLP, on the other hand, is solely that of debtor and creditor; and

(c) no joint venture exists among the Lenders or among any Credit Party and the Lenders.

          11.14   WAIVERS OF JURY TRIAL. EACH OF HANOVER, HCLP, THE ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE NOTES OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

          11.15   Judgment. (a) If for the purpose of obtaining judgment in any court it is necessary to convert a sum due hereunder in one currency into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency in the city in which it normally conducts its foreign exchange operation for the first currency on the Business Day preceding the day on which final judgment is given.

          (b) The obligation of each Borrower in respect of any sum due from it to any Lender hereunder shall, notwithstanding any judgment in a currency (the “Judgment Currency”) other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the “Agreement Currency”), be discharged only to the extent that on the Business Day following receipt by such Lender of any sum adjudged to be so due in the Judgment Currency such Lender may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency; if the amount of Agreement Currency so purchased is less than the sum originally due to such Lender in the Agreement Currency, such Borrower agrees notwithstanding any such judgment to indemnify such Lender against such loss, and if the amount of the Agreement Currency so purchased exceeds the sum originally due to any Lender, such Lender agrees to remit to such Borrower such excess.

          11.16   Usury. It is expressly stipulated and agreed to be the intent of Hanover, HCLP, the Administrative Agent and the Lenders at all times to comply with the applicable law governing the maximum rate or amount of interest payable on or in connection with the Loans. If the applicable law is ever judicially interpreted so as to render usurious any amount or compensation called for under this Agreement or any of the other Loan Documents, or contracted for, charged, taken, reserved or received with respect to any of the Loans, or if acceleration of the maturity of any of the Loans, any prepayment by any Borrower, or any other circumstance whatsoever, results in the Lenders, or any of them, having been paid any interest in excess of that permitted by applicable law, then it is the express intent of the Borrowers, the Administrative Agent and the Lenders that all excess amounts theretofore collected by the Lenders be credited on the principal balances of the Loans (or, if the Loans have been or would thereby be paid in full, refunded to the relevant Borrower), and the other applicable Loan Documents immediately

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be deemed reformed and the amounts thereafter collectible hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. The right to accelerate the maturity of any or all of the Loans does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Lenders do not intend to collect any unearned interest in the event of acceleration. All sums or other compensation paid or agreed to be paid to the Lenders for the use, forbearance or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread with respect to all of the Loans throughout the full term of such indebtedness until payment in full of all such indebtedness so that the rate or amount of interest on account of such indebtedness under all of the Loans does not exceed the Maximum Lawful Rate or maximum amount of interest permitted under applicable law. The term “Maximum Lawful Rate” as used herein as to any Lender means the maximum non-usurious rate of interest which may be lawfully contracted for, charged, taken, reserved, or received by such Lender from the relevant Borrower in connection with the Loans evidenced hereby under applicable law. The provisions of this Section 11.16 shall control all agreements between the Borrowers and the Lenders.

          11.17   Conflicts. In the event that there exists a conflict between provisions in this Agreement and provisions in any other Loan Document, the provisions of this Agreement shall control.

          11.18   Releases of Guarantees and Liens. (a) Notwithstanding anything to the contrary contained herein or in any other Loan Document, the Administrative Agent is hereby irrevocably authorized by each Lender (without requirement of notice to or consent of any Lender except as expressly required by Section 11.1) to take any action requested by Hanover having the effect of releasing any Collateral or guarantee obligations (i) to the extent necessary to permit consummation of any transaction not prohibited by any Loan Document or that has been consented to in accordance with Subsection 11.1 or (ii) under the circumstances described in subsection 11.18(b).

     (b) At such time as the Loans, the Reimbursement Obligations and the other obligations under the Loan Documents shall have been paid in full, the Commitments have been terminated and no Letters of Credit (or cash or Cash Equivalents shall have been deposited with the relevant Issuing Bank in an amount of not less than 105% of the outstanding face amount of such outstanding Letters of Credit) shall be outstanding, the Collateral shall be released from the Liens created by the Security Documents, and the Security Documents and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and each Credit Party under the Security Documents shall terminate, all without delivery of any instrument or performance of any act by any Person.

          11.19   Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or any self-regulating body (i.e., the NASD), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to Hanover or any of is Subsidiaries and its respective obligations, (g) with the consent of Hanover or any of is Subsidiaries or (h) to the extent such Information

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(i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than Hanover or any of its Subsidiaries. For the purposes of this Section, “Information” means all information received from Hanover or any of its Subsidiaries relating to Hanover or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by Hanover or any of its Subsidiaries. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. The obligations of the parties under this Section 11.19 shall survive termination of this Agreement for one year.

          11.20   Patriot Act Notice. Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies each Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Patriot Act”), it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of such Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Borrower in accordance with the Act. Each Borrower shall, and shall cause each of its Subsidiaries to, provide, to the extent commercially reasonable, such information and take such actions as are reasonably requested by each Lender and the Administrative Agent to maintain compliance with the Patriot Act.

          11.21   Waiver under Existing Credit Agreement. Each of the Lenders which are party to the Existing Credit Agreement hereby agree to waive (i) the requirement set forth in Section 3.3 of the Existing Credit Agreement that HCLP provide five Business Days’ notice to the administrative agent thereunder to terminate the commitments thereunder and (ii) the related requirement set forth in subsection 3.4(b) of the Existing Credit Agreement that HCLP provide three Working Days’ (as such term is defined in the Existing Credit Agreement) notice with respect to any prepayment of eurodollar loans thereunder; provided, that it is understood and agreed that HCLP shall nevertheless be required to provide at least one Business Day’s notice to the administrative agent under the Existing Credit Agreement in connection with the termination of the commitments thereunder.

          11.22   True Up. Notwithstanding anything to the contrary contained herein, in the event that, from and after the time of any Event of Default, any US Revolving Lender or Euro Revolving Lender, or group of US Revolving Lenders or Euro Revolving Lenders, recovers a higher pro rata share on account of its Loans and Reimbursement Obligations than another Lender or group, such Lender or group shall make payments to the other in exchange for participation in their Loans and/or Reimbursement Obligations, as the case may be, in order to ensure equivalent recoveries from the time of such continuing Event of Default, as well as determined in accordance with reasonable procedures as established by the Administrative Agent.

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          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first written above.

HANOVER COMPRESSOR COMPANY
By:	/s/   LEE E. BECKELMAN
	Name: Lee E. Beckelman
	Title: Senior Vice President and Chief Financial Officer
HANOVER COMPRESSION LIMITED PARTNERSHIP
By:	/s/    LEE E. BECKELMAN
	Name: Lee E. Beckelman
	Title: Senior Vice President and Chief Financial Officer
JPMORGAN CHASE BANK, N.A., as Administrative Agent, US Revolving Lender and Euro Revolving Lender
By:	/s/    ROBERT W. TRABAND
	Name: Robert W. Traband
	Title: Vice President
THE ROYAL BANK OF SCOTLAND PLC, as Syndication Agent, US Revolving Lender and Euro Revolving Lender
By:	/s/    KEITH JOHNSON
	Name: Keith Johnson
	Title: Managing Director

Signature Page to Hanover Credit Agreement

FORTIS BANK, as US Revolving Lender and Euro Revolving Lender
By:	/s/   TROND ROKHOLT
	Name:   Trond Rokholt
	Title:     Managing Director
By:	/s/   JOSEPH MAXWELL
	Name:   Joseph Maxwell
	Title:     Senior Vice President

Signature Page to Hanover Credit Agreement

WELLS FARGO BANK, N.A., as US Revolving Lender and Euro Revolving Lender
By:	/s/   PHILIP C. LAUINGER III
	Name:   Philip C. Lauinger III
	Title:     Vice President

Signature Page to Hanover Credit Agreement

DEUTSCHE BANK AG, NEW YORK BRANCH, as US Revolving Lender and Euro Revolving Lender
By:	/s/   OMAYRA LAUCELLA
	Name:   Omayra Laucella
	Title:     Vice President
By:	/s/   SUSAN LEFEVRE
	Name:   Susan LeFevre
	Title:     Director

Signature Page to Hanover Credit Agreement

CITICORP NORTH AMERICA, INC., as US Revolving Lender and Euro Revolving Lender
By:	/s/     SHIRLEY E. BURROW
	Name:	Shirley E. Burrow
	Title:	Vice President

Signature Page to Hanover Credit Agreement

NATEXIS BANQUES POPULAIRES, as US Revolving Lender
By:	/s/     DONOVAN C. BROUSSSARD
	Name:	Donovan C. Broussard
	Title:	Vice President and Group Manager
By:	/s/     LOUIS P. LAVILLE, III
	Name:	Louis P. Laville, III
	Title:	Vice President and Group Manager

Signature Page to Hanover Credit Agreement

WACHOVIA BANK, NATIONAL ASSOCIATION, as US Revolving Lender and Euro Revolving Lender
By:	/s/     DAVID HUMPHREYS
	Name:	David Humphreys
	Title:	Director

Signature Page to Hanover Credit Agreement

CREDIT SUISSE, CAYMAN ISLANDS BRANCH, as US Revolving Lender and Euro Revolving Lender
By:	/s/ VANESSA GOMEZ     /s/ DAVID DODD
	Name:	Vanessa Gomez                    David Dodd
	Title:	Vice President                       Vice President

Signature Page to Hanover Credit Agreement

THE BANK OF NOVA SCOTIA, as US Revolving Lender and Euro Revolving Lender
By:	/s/     N. BELL
	Name:	N. Bell
	Title:	Senior Manager

Signature Page to Hanover Credit Agreement

MORGAN STANLEY BANK, as US Revolving Lender and Euro Revolving Lender
By:	/s/     DANIEL TWENGE
	Name:	Daniel Twenge
	Title:	Vice President

Signature Page to Hanover Credit Agreement

SUNTRUST BANK, as US Revolving Lender and Euro Revolving Lender
By:	/s/ KELLEY BRUNSON
	Name:	Kelley Brunson
	Title:	Vice President

Signature Page to Hanover Credit Agreement

NATIONAL CITY BANK, as US Revolving Lender and Euro Revolving Lender
By:	/s/ TOM GURBACH
	Name:	Tom Gurbach
	Title:	Vice President

Signature Page to Hanover Credit Agreement

CALYON NEW YORK BRANCH, as US Revolving Lender and Euro Revolving Lender
By:	/s/ PAGE DILLEHUNT
	Name:	Page Dillehunt
	Title:	Director

By:	/s/ MICHAEL WILLIS
	Name:	Michael Willis
	Title:	Director

Signature Page to Hanover Credit Agreement

BANK OF AMERICA, N.A., as US Revolving Lender and Euro Revolving Lender
By:	/s/ CLAIRE M. LIU
	Name:	Claire M. Liu
	Title:	Senior Vice President

Signature Page to Hanover Credit Agreement

ANNEX A

PRICING GRID

US Revolving Facility and Euro Revolving Facility

							US Revolving
							Facility and Euro
	Applicable Margin-						Revolving
	Revolving Loans and						Facility-
Consolidated Leverage	Eurocurrency Revolving			Applicable Margin-			Commitment Fee
Ratio	Loans			Base Rate Loans			Rate
>5.75 to 1.0		2.500	%		1.500	%		0.500	%
£5.75 to 1.0 and
>5.25 to 1.0		2.000	%		1.000	%		0.500	%
£5.25 to 1.0 and
>4.75 to 1.0		1.750	%		0.750	%		0.375	%
£4.75 to 1.0 and
>4.25 to 1.0		1.625	%		0.625	%		0.375	%
£4.25 to 1.0 and
>3.75 to 1.0		1.500	%		0.500	%		0.375	%
£3.75 to 1.0		1.375	%		0.375	%		0.375	%

Changes in the Applicable Margin and Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on each date which is the start of the succeeding fiscal quarter (each, an “Adjustment Date”) for which an Applicable Margin Certificate of Hanover is delivered to the Lenders pursuant to Section 7.2(d) (but in any event not later than the 50th day after the end of each of each quarter of each fiscal year) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any Applicable Margin Certificate referred to above is not delivered within the time periods specified above, then the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 5.75.0 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the highest rate set forth in each column of the Pricing Grid shall apply. Each determination of the Consolidated Leverage Ratio pursuant to this Pricing Grid shall be made for the periods and in the manner contemplated by Section 8.1(c). For the period from the Closing Date until the first Adjustment Date, the Consolidated Leverage Ratio shall be deemed to be greater than 4.75, but less than 5.25.

ANNEX B

EXISTING LETTERS OF CREDIT

LC Number	Expiration	Amount		LC Number	Expiration	Amount		LC Number	Expiration	Amount
6216995	21-May-06		103,877.00	P246832	28-Feb-06		536,764.22	TPTS671366	01-Apr-06		2,350,000.00
6216996	21-May-06		120,875.00	P246979	31-Dec-05		241,060.00	TPTS671643	05-May-06		82,055.26
6218929	27-Jul-06		308,303.00	P246980	31-Dec-05		1,500,000.00	TPTS672052	30-Sep-06		333,850.00
6220220	12-Aug-06		123,185.00	P247675	28-Mar-06		255,655.90	TPTS672135	31-May-06		3,400,000.00
6220434	27-Jul-06		21,406.00	P248188	28-Feb-06		457,708.16	TPTS672388	15-Jun-06		193,721.00
6221340	01-Jan-06		2,500,000.00	P248190	07-May-06		356,000.00	TPTS672993	23-Oct-06		45,569.60
6221457	30-Oct-06		2,518,300.00	P248782	19-Dec-05		3,375,430.29	TPTS673338	09-Jun-06		1,536,175.20
6225289	01-Nov-06		5,150,000.00	P249012	13-Apr-06		172,125.00	TPTS673524	30-Jun-06		3,731,310.80
P200359	25-Nov-06		83,242.00	P250034	11-Dec-05		266,878.30	TPTS673526	31-Jan-06		55,398.12
P201169	21-Jul-06		34,355.00	P250131	30-Nov-05		2,168,153.60	TPTS673535	15-Feb-06		60,000.00
P201738	30-Dec-05		2,000,000.00	P250378	31-Jan-06		1,355,338.85	TPTS673540	26-Feb-06		291,079.00
P203852	21-Jul-06		50,487.00	P293592	13-Jul-06		853,272.00	TPTS674105	29-Dec-06		52,712.50
P205023	02-Feb-06		2,124,386.84	P295860	09-Sep-06		170,937.00	TPTS674114	30-Dec-05		50,667.17
P205945	30-Sep-06		795,000.00	P612882	01-Feb-06		989,340.00	TPTS674191	09-Jan-06		326,132.04
P205992	28-Sep-06		1,505,000.00	P612885	11-Jan-06		266,638.23	TPTS674231	15-Jan-06		344,026.90
P215543	21-Jul-06		63,000.00	P613138	31-Jan-06		322,824.64	TPTS674242	15-May-06		1,530,750.00
P216377	10-Aug-06		150,000.00	P614199	15-Aug-06		75,738.52	TPTS674665	28-Feb-06		6,857.25
P229481	14-Jan-06		59,174.34	P615518	13-Jun-06		1,000,000.00	TPTS674735	31-Jan-06		50,000.00
P230918	19-Jul-06		140,000.00	P615623	30-Jul-06		126,427.45	TPTS674928	28-Mar-06		1,010,000.00
P234809	23-Apr-06		10,630,000.00	P670231	15-Jun-06		48,024.60	TPTS674929	17-Feb-06		600,000.00
P237502	16-May-06		3,500,000.00	P670742	30-Sep-06		845,000.00	TPTS674933	12-Feb-06		80,000.00
P237974	15-May-06		212,000.00	P671009	30-May-06		241,000.00	TPTS675045	30-Aug-06		119,987.60
P238562	30-Oct-05		73,313.00	P695209	30-Nov-05		2,581,596.00	TPTS675277	31-Aug-06		794,037.60
P238651	02-Jul-06		179,475.45	P695394	01-Nov-05		185,637.49	TPTS675355	21-Dec-06		1,039,889.08
P238653	02-Jul-06		46,972.85	P695964	17-Jan-06		81,690.00	TPTS675545	30-Jan-06		900,000.00
P238962	31-Jan-06		75,258.07	P696062	29-Dec-06		399,932.00	TPTS675552	31-Jan-06		135,000.00
P239571	30-Jun-06		410,000.00	P696262	31-May-06		7,914,720.00	TPTS675556	28-Mar-06		260,580.40
P240209	26-Jan-06		834,060.00	P696858	19-Dec-05		1,322,615.77	TPTS675560	24-Apr-06		3,097,417.50
P241242	20-Sep-06		12,000,000.00	TBTI673395	27-Jan-06		2,580,000.00	TPTS675564	10-May-06		1,032,472.50
P242798	24-Nov-06		61,700.00	TBTI675304	21-Jan-06		164,072.51	TPTS675661	23-Jun-06		1,000,000.00
P244546	11-Mar-06		3,999,800.00	TBTI675304			54,690.84	TPTS675747	12-Feb-06		80,000.00
P246431	30-Nov-05		1,195,122.72	TBTI675304			328,145.01	TPTS676013	28-Feb-06		300,000.00
P246432	31-Jan-06		1,441,920.00	TPTS670027	30-Sep-06		1,081,400.00	TPTS676301	13-Nov-06		207,600.00
P246831	20-May-06		368,100.44	TPTS670671	01-Apr-06		5,311,200.00	TPTS676328	01-Aug-06		6,159,204.40

EX-10.4

Exhibit  10.4

GUARANTEE AND COLLATERAL AGREEMENT

made by

HANOVER COMPRESSOR COMPANY

HANOVER COMPRESSION LIMITED PARTNERSHIP

and certain of their Subsidiaries

in favor of

JPMORGAN CHASE BANK, N.A.,

as Administrative Agent

Dated as of November 21, 2005

TABLE OF CONTENTS

			Page
SECTION 1.		DEFINED TERMS		1
	1.1	Definitions		1
	1.2	Other Definitional Provisions		5
SECTION 2.		GUARANTEE		5
	2.1	Guarantee		5
	2.2	Right of Contribution		6
	2.3	No Subrogation		6
	2.4	Amendments, etc. with respect to Borrower Obligations		6
	2.5	Guarantee Absolute and Unconditional		6
	2.6	Reinstatement		7
	2.7	Payments		7
SECTION 3.		GRANT OF SECURITY INTEREST		7
SECTION 4.		REPRESENTATIONS AND WARRANTIES		8
	4.1	Title; No Other Liens		9
	4.2	Jurisdiction of Organization; Chief Executive Office		9
	4.3	Inventory and Equipment		9
	4.4	Farm Products		9
	4.5	Investment Property		9
	4.6	Receivables		9
	4.7	Intellectual Property		9
SECTION 5.		COVENANTS		9
	5.1	Delivery of Instruments, Certificated Securities and Chattel Paper		10
	5.2	Maintenance of Perfected Security Interest; Further Documentation		10
	5.3	Changes in Locations, Name, etc		10
	5.4	Notices		11
	5.5	Investment Property		11
	5.6	Receivables		11
	5.7	Intellectual Property		12
	5.8	Vehicles		13
	5.9	Commercial Tort Claims		13
SECTION 6.		REMEDIAL PROVISIONS		13
	6.1	Certain Matters Relating to Receivables		13
	6.2	Communications with Obligors; Grantors Remain Liable		13
	6.3	Pledged Stock		14
	6.4	Proceeds to be Turned Over To Administrative Agent		14
	6.5	Application of Proceeds		15
	6.6	Code and Other Remedies		15
	6.7	Private Sales		16
	6.8	Deficiency		16
SECTION 7.		THE ADMINISTRATIVE AGENT		16
	7.1	Administrative Agent’s Appointment as Attorney-in-Fact, etc		16

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			Page
	7.2	Duty of Administrative Agent		18
	7.3	Execution of Financing Statements		18
	7.4	Authority of Administrative Agent		18
SECTION 8.		MISCELLANEOUS		19
	8.1	Amendments in Writing		19
	8.2	Notices		19
	8.3	No Waiver by Course of Conduct; Cumulative Remedies		19
	8.4	Enforcement Expenses; Indemnification		19
	8.5	Successors and Assigns		19
	8.6	Set-Off		19
	8.7	Counterparts		20
	8.8	Severability		20
	8.9	Section Headings		20
	8.10	Integration		20
	8.11	GOVERNING LAW		20
	8.12	Submission To Jurisdiction; Waivers		20
	8.13	Acknowledgements		21
	8.14	Additional Grantors		21
	8.15	Releases		21
	8.16	WAIVER OF JURY TRIAL		22

SCHEDULES

Schedule 1	Notice Addresses
Schedule 2	Perfection Matters
Schedule 3	Jurisdictions of Organization and Chief Executive Offices
Schedule 4	Investment Property
Schedule 5	Location of Inventory and Equipment Held for Lease or Sale
Schedule 6	Post-Closing Pledged Subsidiaries

ANNEXES

Annex 1 Form of Assumption Agreement

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GUARANTEE AND COLLATERAL AGREEMENT

          GUARANTEE AND COLLATERAL AGREEMENT, dated as of November 21, 2005, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the “Grantors”), in favor of JPMorgan Chase Bank, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the Secured Parties (as hereinafter defined).

W I T N E S S E T H:

          WHEREAS, pursuant to the Credit Agreement, dated as of November 21, 2005 (as may be amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Hanover Compressor Company (“Hanover”), Hanover Compression Limited Partnership (“HCLP”; Hanover and HCLP being collectively referred to herein as the “Borrowers”), the banks and other financial institutions parties thereto from time to time (the “Lenders”), The Royal Bank of Scotland plc, as syndication agent and JPMorgan Chase Bank, N.A. as administrative agent, whether or not with the same parties, the Lenders have severally agreed to make extensions of credit to the Borrowers upon the terms and subject to the conditions set forth therein;

          WHEREAS, Hanover is a member of an affiliated group of companies that includes each other Grantor;

          WHEREAS, the proceeds of the extensions of credit under the Loan Documents (as hereinafter defined) have been and will continue to be used in part to enable the Borrowers to make valuable transfers to one or more of the other Grantors in connection with the operation of their respective businesses;

          WHEREAS, the Borrowers and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the continued making of the extensions of credit under the Loan Documents; and

          WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrowers under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Secured Parties;

          NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and make their respective extensions of credit to the Borrowers under the Loan Documents, each Grantor hereby agrees with the Administrative Agent, for the ratable benefit of the Secured Parties, as follows:

SECTION 1. DEFINED TERMS

    1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined, and the following terms are used herein as defined in the New York UCC: Accounts, Certificated Security, Chattel Paper, Commercial Tort Claims, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory, Letter-of-Credit Rights and Supporting Obligations.

    (b) The following terms shall have the following meanings:

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          “Agreement”: this Guarantee and Collateral Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

          “Borrower Obligations”: the collective reference to the unpaid principal of and interest on the Loans and Reimbursement Obligations and all other obligations and liabilities of the Borrowers (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) to the Administrative Agent or any Lender (or, in the case of any Derivatives Agreements, any Affiliate of any such Lender) whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, this Agreement, the other Loan Documents, any Letter of Credit, any Derivatives Agreements or any other document made, delivered or given in connection with any of the foregoing, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Lenders that are required to be paid by any Borrower pursuant to the terms of any of the foregoing agreements).

          “Collateral”: as defined in Section 3.

          “Collateral Account”: any collateral account established by the Administrative Agent as provided in Section 6.1 or 6.4.

          “Copyright Licenses”: any written agreement naming any Grantor as licensor or licensee, granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.

          “Copyrights”: (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof.

          “Default”: any default or event of default under any Loan Document.

          “Deposit Account”: as defined in the Uniform Commercial Code of any applicable jurisdiction and, in any event, including, without limitation, any demand, time, savings, passbook or like account maintained with a depositary institution.

          “Derivatives Agreements”: any agreement in respect of Derivatives entered into by Hanover or any of its Subsidiaries with a Lender or any Affiliate of a Lender permitted by Section 8.9 of the Credit Agreement.

          “Excluded Equipment Lease Property”: any property or assets of any Grantor that is subject to a Lien created under the documentation governing the 2001A Equipment Lease Transaction or the 2001B Equipment Lease Transaction; provided, that any such property or assets shall cease to be “Excluded Equipment Lease Property” at such time as Incremental Term Loans are borrowed.

          “Excluded Foreign Subsidiary Stock”: any shares of Capital Stock of Foreign Subsidiaries exceeding 66% of the outstanding voting Capital Stock of each Foreign Subsidiary. For the

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avoidance of doubt, it is understood and agreed that such Excluded Foreign Subsidiary Stock shall in no event be pledged hereunder or required to be pledged hereunder. Notwithstanding anything herein to the contrary, (a) the shares of Capital Stock of Production Operators Cayman Inc. and Hanover Cayman, Limited, (b) the shares of Capital Stock of Subsidiaries of Production Operators Cayman Inc. and Hanover Cayman, Limited that are directly owned by HCLP to the extent these shares do not exceed 1% of the outstanding voting Capital Stock of any such Subsidiary, (c) the shares of Capital Stock of HCC Mantova S.r.l. that are directly owned by HCLP to the extent these shares do not exceed 0.01% of the outstanding voting Capital Stock of such Subsidiary, (d) the shares of Capital Stock of Foreign Subsidiaries that are not directly owned by Hanover, HCLP or any Qualified Subsidiaries and (e) the shares of Capital Stock of Post-Closing Pledged Subsidiaries shall also be deemed to be “Excluded Foreign Subsidiary Stock”.

          “Foreign Subsidiary”: any Subsidiary organized under the laws of any jurisdiction outside the United States of America.

          “Foreign Subsidiary Voting Stock”: the voting Capital Stock of any Foreign Subsidiary.

          “Guarantor Obligations”: with respect to any Guarantor, all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement (including, without limitation, Section 2), any other Loan Document, or any Derivatives Agreement to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Secured Parties that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any such Loan Document).

          “Guarantors”: the collective reference to (a) each Grantor other than the Borrowers, (b) with respect to all Borrower Obligations of HCLP, Hanover and (c) with respect to all Borrower Obligations of Hanover, HCLP.

          “Intellectual Property”: the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

          “Intercompany Note”: any promissory note evidencing loans made by any Grantor to Hanover or any of its Subsidiaries.

          “Investment Property”: the collective reference to (i) all “investment property” as such term is defined in Section 9-102(a)(49) of the New York UCC (other than Excluded Foreign Subsidiary Stock) and (ii) whether or not constituting “investment property” as so defined, all Pledged Notes and all Pledged Stock.

          “Issuers”: the collective reference to each issuer of any Investment Property.

          “Loan Documents”: the Loan Documents (as defined in the Credit Agreement) and the Derivatives Agreements, as the same may be amended from time to time.

          “New York UCC”: the Uniform Commercial Code as from time to time in effect in the State of New York.

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          “Obligations”: (i) in the case of each Borrower, its Borrower Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations.

          “Patent License”: all agreements, whether written or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent.

          “Patents”: (i) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, (ii) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, and (iii) all rights to obtain any reissues or extensions of the foregoing.

          “Pledged Notes”: all promissory notes listed on Schedule 4, all Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business or promissory notes received in connection with Dispositions permitted by Section 8.6(d) of the Credit Agreement).

          “Pledged Stock”: the shares of Capital Stock listed on Schedule 4, together with any other shares, stock certificates, options, interests or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect, but excluding the Excluded Foreign Subsidiary Stock.

          “Post-Closing Pledged Subsidiary”: Each Foreign Subsidiary identified on Schedule 6 hereto.

          “Proceeds”: all “proceeds” as such term is defined in Section 9-102(a)(64) of the New York UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or distributions or payments with respect thereto.

          “Receivable”: any right to payment for goods sold or leased or for services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account).

          “Secured Parties”: the collective reference to the Administrative Agent, the Lenders and any Affiliate of any Lender to which Borrower Obligations or Guarantor Obligations, as applicable, are owed.

          “Securities Act”: the Securities Act of 1933, as amended.

          “Subsidiary Guarantor”: each Guarantor which is a Subsidiary of Hanover.

          “Trademark License”: any agreement, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark.

          “Trademarks”: (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, and (ii) the right to obtain all renewals thereof.

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          “Vehicles”: all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title law of any state and all tires and other appurtenances to any of the foregoing.

    1.2 Other Definitional Provisions. (a) The words “hereof,” “herein”, “hereto” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified.

    (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

    (c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor’s Collateral or the relevant part thereof.

SECTION 2. GUARANTEE

    2.1 Guarantee. (a) Each of the Guarantors hereby, jointly and severally, unconditionally and irrevocably, guarantees to the Administrative Agent, for the ratable benefit of the Secured Parties and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrowers when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations.

    (b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2).

    (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of the Administrative Agent or any Secured Party hereunder.

    (d) The guarantee contained in this Section 2 shall remain in full force and effect until all the Borrower Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full, no Letter of Credit shall be outstanding (or any outstanding Letters of Credit shall have been cash collateralized in accordance with subsection 11.18(b) of the Credit Agreement) and the Commitments shall be terminated, notwithstanding that, from time to time during the term of the Loan Documents, either Borrower may be free from any Borrower Obligations.

    (e) No payment made by the Borrowers, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent or any Secured Party from any Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder (other than any payment made by such Person in respect of Borrower Obligations or any payment received or collected from such Person in respect of Borrower Obligations). Each Guarantor shall remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated

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    2.2 Right of Contribution. Each Subsidiary Guarantor hereby agrees that to the extent that a Subsidiary Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Subsidiary Guarantor shall be entitled to seek and receive contribution from and against any other Subsidiary Guarantor hereunder which has not paid its proportionate share of such payment. Each Subsidiary Guarantor’s right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Subsidiary Guarantor to the Administrative Agent and the Secured Parties, and each Subsidiary Guarantor shall remain liable to the Administrative Agent and the Secured Parties for the full amount guaranteed by such Subsidiary Guarantor hereunder.

    2.3 No Subrogation. Notwithstanding any payment made by any Guarantor hereunder or any set-off or application of funds of any Guarantor by the Administrative Agent or any Secured Party, no Guarantor shall be entitled to be subrogated to any of the rights of the Administrative Agent or any Secured Party against any Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Administrative Agent or any Secured Party for the payment of Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from any Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Administrative Agent and the Secured Parties by the Borrowers on account of Borrower Obligations are paid in full, no Letter of Credit shall be outstanding (or any outstanding Letters of Credit shall have been cash collateralized in accordance with subsection 11.18(b) of the Credit Agreement) and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Administrative Agent and the Secured Parties, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Administrative Agent, if required), to be applied against Borrower Obligations, whether matured or unmatured, in the order set forth in Section 6.5.

    2.4 Amendments, etc. with respect to Borrower Obligations. Each Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of Borrower Obligations made by the Administrative Agent or any Secured Party may be rescinded by the Administrative Agent or such Secured Party and any of the Borrower Obligations continued, and Borrower Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Secured Party, and the Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Lenders, the applicable Majority Facility Lenders or all Secured Parties, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any Secured Party for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Secured Party shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this Section 2 or any property subject thereto.

    2.5 Guarantee Absolute and Unconditional. Each Guarantor waives any and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by the Administrative Agent or any Secured Party upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended,

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amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrowers and any of the Guarantors, on the one hand, and the Administrative Agent and the Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon any of the Borrowers or any of the Guarantors with respect to the Borrower Obligations. Each Guarantor understands and agrees that, to the fullest extent permitted under applicable law, the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Loan Documents, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Secured Party, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by any Borrower or any other Person against the Administrative Agent or any Secured Party, or (c) any other circumstance whatsoever (with or without notice to or knowledge of such Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of either Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the Administrative Agent or any Secured Party may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against any Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Secured Party to make any such demand, to pursue such other rights or remedies or to collect any payments from any Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of any Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent or any Secured Party against any Guarantor. For the purposes hereof “demand” shall include the commencement and continuance of any legal proceedings.

    2.6 Reinstatement. The guarantee contained in this Section 2 shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Secured Party upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any other Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Borrower or any other Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made.

    2.7 Payments. Each Guarantor hereby guarantees that payments hereunder will be paid to the Administrative Agent without set-off or counterclaim in the Agreement Currency at the applicable funding office set forth in Section 11.2 of the Credit Agreement.

SECTION 3. GRANT OF SECURITY INTEREST

          Each Grantor hereby assigns and transfers to the Administrative Agent, and hereby grants to the Administrative Agent, for the ratable benefit of the Secured Parties, a security interest in, all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the “Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor’s Obligations,:

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    (a) all Accounts;

    (b) all Chattel Paper;

    (c) all Deposit Accounts;

    (d) all Documents;

    (e) all Equipment;

    (f) all General Intangibles;

    (g) all Instruments;

    (h) all Intellectual Property;

    (i) all Inventory;

    (j) all Investment Property;

    (k) all Letter-of-Credit Rights;

    (l) all Commercial Tort Claims to the extent they have been notified to the Administrative Agent pursuant to Section 5.9;

    (m) all other property not otherwise described above (except for any property specifically excluded from any clause in this section above, and any property specifically excluded from any defined term used in any clause of this section above);

    (n) all books and records pertaining to the Collateral; and

    (o) to the extent not otherwise included, all Proceeds, Supporting Obligations and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing;

          provided, however, that notwithstanding any of the other provisions set forth in this Section 3, (i) this Agreement shall not constitute a grant of a security interest in any property to the extent that such grant of a security interest is prohibited by any Requirements of Law, requires a consent not obtained of any Governmental Authority pursuant to such Requirement of Law or is prohibited by, or constitutes a breach or default under or results in the termination of or requires any consent not obtained under, any contract, license, agreement, instrument or other document evidencing or giving rise to such property or, in the case of any Investment Property, Pledged Stock or Pledged Note, any applicable shareholder or similar agreement, except to the extent that such Requirement of Law or the term in such contract, license, agreement, instrument or other document or shareholder or similar agreement providing for such prohibition, breach, default or termination or requiring such consent is ineffective under applicable law and (ii) the Collateral shall in no event include the Excluded Foreign Subsidiary Stock or the Excluded Equipment Lease Property.

SECTION 4. REPRESENTATIONS AND WARRANTIES

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          To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective extensions of credit to the Borrowers, each Grantor hereby represents and warrants to the Administrative Agent and each Secured Party that:

    4.1 Title; No Other Liens. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement or as are permitted by the Credit Agreement (or, if the Credit Agreement shall have been paid in full or terminated, by the last version of the Credit Agreement as in effect immediately prior to such payment in full or termination). For the avoidance of doubt, it is understood and agreed that any Grantor may, as part of its business, grant licenses to third parties to use Intellectual Property owned or developed by a Grantor. For purposes of this Agreement and the other Loan Documents, such licensing activity shall not constitute a “Lien” on such Intellectual Property. Each of the Administrative Agent and each Secured Party understands that any such licenses may be exclusive to the applicable licensees, and such exclusivity provisions may limit the ability of the Administrative Agent to utilize, sell, lease or transfer the related Intellectual Property or otherwise realize value from such Intellectual Property pursuant hereto.

    4.2 Jurisdiction of Organization; Chief Executive Office. On the date hereof, such Grantor’s jurisdiction of organization, identification number from the jurisdiction of organization (if any), and the location of such Grantor’s chief executive office or sole place of business or principal residence, as the case may be, are specified on Schedule 3. Such Grantor has furnished to the Administrative Agent a certified charter, certificate of incorporation or other organization document and good standing certificate as of a date which is recent to the date hereof.

    4.3 Inventory and Equipment. On the date hereof, all Inventory and Equipment (other than mobile goods) held for lease or sale in the United States are kept at the locations listed on Schedule 5.

    4.4 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products.

    4.5 Investment Property. (a) The shares of Pledged Stock covered by the grant of the security interest in Section 3 hereof constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by each Grantor (except for the Excluded Foreign Subsidiary Stock).

    (b) All the shares of the Pledged Stock have been duly and validly issued and, with respect to each Issuer that is a corporation, are fully paid and nonassessable.

    (c) Each of the Pledged Notes constitutes the legal, valid and binding obligation of the Issuer thereof, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.

    4.6 Receivables. The amounts represented by such Grantor to the Secured Parties from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate in all material respects.

    4.7 Intellectual Property. On the date hereof, all material Intellectual Property is valid, subsisting, unexpired and enforceable and has not been abandoned.

SECTION 5. COVENANTS

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          Each Grantor covenants and agrees with the Administrative Agent and the Secured Parties that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding (or any outstanding Letters of Credit shall have been cash collateralized in accordance with subsection 11.18(b) of the Credit Agreement) and the Commitments shall have terminated:

    5.1 Delivery of Instruments, Certificated Securities and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper in excess of $100,000 shall, if requested by the Administrative Agent or the Required Lenders, be promptly delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement.

    5.2 Maintenance of Perfected Security Interest; Further Documentation. (a) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest (it being agreed that, unless other means of perfection have been requested by the Administrative Agent or the Required Lenders, such perfected security interest is only to the extent that perfection may be achieved through the filing of a Uniform Commercial Code financing statement in the appropriate filing office) having at least the priority described in Section 5.19(a) of the Credit Agreement and shall defend such security interest against the claims and demands of all Persons whomsoever (other than Persons holding Liens permitted by Section 8.3 of the Credit Agreement), subject to the rights of such Grantor under the Loan Documents to Dispose of the Collateral.

    (b) Such Grantor will furnish to the Administrative Agent and the Secured Parties from time to time statements and schedules further identifying and describing the assets and property of such Grantor and such other reports in connection therewith as the Administrative Agent may reasonably request, all in reasonable detail.

    (c) At any time and from time to time, upon the written and reasonable request of the Administrative Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, (i) filing any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby and (ii) in the case of Investment Property, Deposit Accounts, Letter-of-Credit Rights and any other relevant Collateral, taking any actions necessary to enable the Administrative Agent to obtain “control” (within the meaning of the applicable Uniform Commercial Code) with respect thereto.

    (d) Notwithstanding any other provision of the Loan Documents to the contrary, the Grantors shall not be required to take any action to perfect the security interests created hereunder except for filing of properly completed Uniform Commercial Code financing statements in appropriate filing offices unless otherwise requested by the Administrative Agent or the Required Lenders.

    5.3 Changes in Locations, Name, etc. Such Grantor will not, except upon 15 days’ prior written notice to the Administrative Agent and delivery to the Administrative Agent of all additional executed financing statements and other documents reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the security interests provided for herein:

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     (i) change its jurisdiction of organization or the location of its chief executive office or sole place of business or principal residence from that referred to in Section 4.2; or

     (ii) change its name.

     5.4 Notices. Such Grantor will advise the Administrative Agent and the Secured Parties promptly, in reasonable detail, of any Lien (other than security interests created hereby or Liens permitted under the Credit Agreement (or, if the Credit Agreement shall have been paid in full or terminated, by the last version of the Credit Agreement as in effect immediately prior to such payment in full or termination)) on any of the Collateral which would adversely affect the ability of the Administrative Agent to exercise any of its remedies hereunder.

     5.5 Investment Property. (a) If such Grantor shall become entitled to receive or shall receive any certificate (including, without limitation, any certificate representing a dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock (other than Excluded Foreign Subsidiary Stock) of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall, if requested by the Administrative Agent or the Required Lenders, accept the same as the agent of the Administrative Agent and the Secured Parties, hold the same in trust for the Administrative Agent and the Secured Parties and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by such Grantor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Investment Property upon the liquidation or dissolution of any Issuer shall be paid over to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Investment Property or any property shall be distributed upon or with respect to the Investment Property pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Administrative Agent, if requested by the Administrative Agent or the Required Lenders, be delivered to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Investment Property shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Administrative Agent, if requested by the Administrative Agent or the Required Lenders, hold such money or property in trust for the Administrative Agent and the Secured Parties, segregated from other funds of such Grantor, as additional collateral security for the Obligations.

     (b) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Investment Property issued by it and will comply with such terms insofar as such terms are applicable to it and (ii) the terms of Sections 6.3(c) and 6.7(b) shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7(b) with respect to the Investment Property issued by it.

     5.6 Receivables. Other than in the ordinary course of business or as permitted by Section 8.6(d) or 8.10(m) of the Credit Agreement, such Grantor will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof.

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     5.7 Intellectual Property. (a) Such Grantor (either itself or through licensees) will not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material Trademark may become invalidated or impaired in any material way.

     (b) Such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any material Patent may become forfeited, abandoned or dedicated to the public.

     (c) Such Grantor (either itself or through licensees) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any material portion of the Copyrights may become invalidated or otherwise materially impaired. Such Grantor will not (either itself or through licensees) do any act whereby any material portion of the Copyrights may fall into the public domain.

     (d) Such Grantor (either itself or through licensees) will not do any act that knowingly uses any material Intellectual Property to infringe, in any material way, the intellectual property rights of any other Person.

     (e) Such Grantor will notify the Administrative Agent and the Secured Parties promptly if it knows, or has reason to know, that any application or registration relating to any material Intellectual Property may become forfeited, abandoned or dedicated to the public, or of any material and adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor’s ownership of, or the validity of, any material Intellectual Property or such Grantor’s right to register the same or to own and maintain the same.

     (f) Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall, if so requested by the Administrative Agent, report such filing to the Administrative Agent within five Business Days after the last day of the fiscal quarter in which such filing occurs. Upon request of the Administrative Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Administrative Agent may request to evidence the Administrative Agent’s and the Secured Parties’ security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby.

     (g) Such Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

     (h) In the event that any material Intellectual Property is infringed, misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Administrative Agent after a Responsible Officer of such Grantor learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution.

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     5.8 Vehicles. No Grantor shall be required to take any action to perfect any security interest in Vehicles created pursuant to this Agreement.

     5.9 Commercial Tort Claims. If such Grantor shall obtain an interest in any Commercial Tort Claim with a potential value in excess of $1,000,000, such Grantor shall within 30 days of obtaining such interest sign and deliver documentation acceptable to the Administrative Agent granting a security interest under the terms and provisions of this Agreement in and to such Commercial Tort Claim.

SECTION 6. REMEDIAL PROVISIONS

     6.1 Certain Matters Relating to Receivables. (a) The Administrative Agent hereby authorizes each Grantor to collect such Grantor’s Receivables, and the Administrative Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of Default. If required by the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Administrative Agent if required, in a Collateral Account maintained under the sole dominion and control of the Administrative Agent, subject to withdrawal by the Administrative Agent for the account of the Secured Parties only as provided in Section 6.5, and (ii) until so turned over, shall be held by such Grantor in trust for the Administrative Agent and the Secured Parties, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit.

     (b) At the Administrative Agent’s request after the occurrence and during the continuance of an Event of Default, each Grantor shall deliver to the Administrative Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all original orders, invoices and shipping receipts.

     6.2 Communications with Obligors; Grantors Remain Liable. (a) The Administrative Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables to verify with them to the Administrative Agent’s satisfaction the existence, amount and terms of any Receivables.

     (b) Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Administrative Agent for the ratable benefit of the Secured Parties and that payments in respect thereof shall be made directly to the Administrative Agent.

     (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Secured Party shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Secured Party of any payment relating thereto, nor shall the Administrative Agent or any Secured Party be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to

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enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

     6.3 Pledged Stock. (a) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Grantor of the Administrative Agent’s intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer, and to exercise all voting and corporate or other organizational rights with respect to the Investment Property; provided, however, that no vote shall be cast or corporate or other organizational right exercised or other action taken which would result in any violation of any provision of this Agreement or any other Loan Documents.

     (b) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the Administrative Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Investment Property and make application thereof to the Obligations in the order set forth in Section 6.5, and (ii) any or all of the Investment Property shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Investment Property at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Investment Property upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate or other organizational structure of any Issuer, or upon the exercise by any Grantor or the Administrative Agent of any right, privilege or option pertaining to such Investment Property, and in connection therewith, the right to deposit and deliver any and all of the Investment Property with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing.

     (c) Each Grantor hereby authorizes and instructs each Issuer of any Investment Property pledged by such Grantor hereunder to (i) comply with any instruction received by it from the Administrative Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Investment Property directly to the Administrative Agent.

     6.4 Proceeds to be Turned Over To Administrative Agent. In addition to the rights of the Administrative Agent and the Secured Parties specified in Section 6.1 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Administrative Agent and the Secured Parties, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Administrative Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Administrative Agent in a Collateral Account (or by such Grantor in trust for the Administrative Agent

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and the Secured Parties) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 6.5.

     6.5 Application of Proceeds. At such intervals as may be agreed upon by the Borrowers and the Administrative Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent’s election, the Administrative Agent shall apply all or any part of Proceeds constituting Collateral, whether or not held in any Collateral Account, and any proceeds of the guarantee set forth in Section 2, in payment of the Obligations in the following order:

     First, to pay incurred and unpaid fees and expenses of the Administrative Agent under the Loan Documents;

     Second, to the Administrative Agent, for application by it towards payment of amounts then due and owing and remaining unpaid in respect of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then due and owing and remaining unpaid to the Secured Parties;

     Third, to the Administrative Agent, for application by it towards prepayment of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then held by the Secured Parties; and

     Fourth, any balance remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding (other than Letters of Credit cash collateralized in accordance with subsection 11.18(b) of the Credit Agreement) and the Commitments shall have terminated shall be paid over to the relevant Borrower or to whomsoever may be lawfully entitled to receive the same.

     6.6 Code and Other Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Administrative Agent or any Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Administrative Agent’s request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Grantor’s premises or elsewhere. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Secured Parties hereunder, including, without limitation,

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reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in the order set forth in Section 6.5, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-615(a)(3) of the New York UCC, need the Administrative Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Administrative Agent or any Secured Party arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition.

     6.7 Private Sales. (a) Each Grantor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.

     (b) Each Grantor agrees to use its commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Administrative Agent and the Secured Parties, that the Administrative Agent and the Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement.

     6.8 Deficiency. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Secured Party to collect such deficiency.

SECTION 7. THE ADMINISTRATIVE AGENT

     7.1 Administrative Agent’s Appointment as Attorney-in-Fact, etc. (a) Each Grantor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Administrative Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following:

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     (i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable;

     (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Administrative Agent may request to evidence the Administrative Agent’s and the Secured Partys’ security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby;

     (iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;

     (iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and

     (v) (1) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (2) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (3) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (4) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (5) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (6) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; (7) assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; and (8) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent’s and the Secured Partys’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.

     Anything in this Section 7.1(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing.

     (b) Upon the occurrence and continuance of an Event of Default, if any Grantor fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

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     (c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the highest rate per annum at which interest would then be payable on any category of past due ABR Loans under the Credit Agreement (or, if the Credit Agreement shall have been paid in full or terminated, by the last version of the Credit Agreement as in effect immediately prior to such payment in full or termination), from the date of payment by the Administrative Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Administrative Agent on demand.

     (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

     7.2 Duty of Administrative Agent. The Administrative Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. Neither the Administrative Agent, any Secured Party nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Secured Parties hereunder are solely to protect the Administrative Agent’s and the Secured Partys’ interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Secured Party to exercise any such powers. The Administrative Agent and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

     7.3 Execution of Financing Statements. Pursuant to any applicable law, each Grantor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Administrative Agent determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. Each Grantor authorizes the Administrative Agent to use the collateral description “all personal property” or “all personal property, whether now owned or hereafter acquired” in any such financing statements. Each Grantor hereby ratifies and authorizes the filing by the Administrative Agent of any financing statement with respect to the Collateral made prior to the date hereof.

     7.4 Authority of Administrative Agent. Each Grantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Secured Parties, be governed by the Loan Documents and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Grantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority.

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SECTION 8. MISCELLANEOUS

     8.1 Amendments in Writing. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 11.1 of the Credit Agreement, notwithstanding any provisions of the Loan Documents to the contrary.

     8.2 Notices. All notices, requests and demands to or upon the Administrative Agent or any Grantor hereunder shall be effected in the manner provided for in Section 11.2 of the Credit Agreement; provided that any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1.

     8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the Administrative Agent nor any Secured Party shall by any act (except by a written instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law.

     8.4 Enforcement Expenses; Indemnification. (a) Each Grantor agrees to pay or reimburse the Administrative Agent and each Secured Party for all its reasonable costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement and the other Loan Documents to which such Grantor is a party, including, without limitation, reasonable fees and disbursements of counsel to the Administrative Agent and the several Secured Parties.

     (b) Each Grantor agrees to pay, and to save the Administrative Agent and the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.

     (c) Each Grantor agrees to pay, and to save the Administrative Agent and the Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent that either Borrower would be required to do so pursuant to Section 11.5 of the Credit Agreement, mutatis mutandis.

     (d) The agreements in this Section 8.4 shall survive repayment of the Obligations and all other amounts payable under the Loan Documents.

     8.5 Successors and Assigns. This Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Administrative Agent and the Secured Parties and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent.

     8.6 Set-Off. Each Grantor hereby irrevocably authorizes the Administrative Agent and each Secured Party at any time and from time to time while an Event of Default shall have occurred and be

20

continuing, without notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Administrative Agent or such Secured Party to or for the credit or the account of such Grantor, or any part thereof in such amounts as the Administrative Agent or such Secured Party may elect, against and on account of the obligations and liabilities of such Grantor to the Administrative Agent or such Secured Party hereunder and claims of every nature and description of the Administrative Agent or such Secured Party against such Grantor, in any currency, whether arising hereunder, under any Loan Document or otherwise, as the Administrative Agent or such Secured Party may elect, whether or not the Administrative Agent or any Secured Party has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Administrative Agent and each Secured Party shall notify such Grantor promptly of any such set-off and the application made by the Administrative Agent or such Secured Party of the proceeds thereof, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Administrative Agent and each Secured Party under this Section 8.6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Secured Party may have.

     8.7 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

     8.8 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     8.9 Section Headings. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

     8.10 Integration. This Agreement and the other Loan Documents represent the agreement of the Grantors, the Administrative Agent and the Secured Parties with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Secured Party relative to subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents.

     8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

     8.12 Submission To Jurisdiction; Waivers. Each Grantor hereby irrevocably and unconditionally:

     (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;

21

     (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

     (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Grantor at its address referred to in Section 8.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto;

     (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

     (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages.

     8.13 Acknowledgements. Each Grantor hereby acknowledges that:

     (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

     (b) neither the Administrative Agent nor any Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Administrative Agent and Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and

     (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Parties or among the Grantors and the Secured Parties.

     8.14 Additional Grantors. Each Subsidiary of Hanover that is required to become a party to this Agreement pursuant to Section 7.9 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto.

     8.15 Releases. (a) At such time as the Loans, the Reimbursement Obligations and the other Obligations (other than Obligations in respect of Derivatives Agreements) shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding (other than Letters of Credit cash collateralized in accordance with subsection 11.18(b) of the Credit Agreement), the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Administrative Agent shall deliver to such Grantor any Collateral held by the Administrative Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination.

     (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Loan Documents, then the Administrative Agent, at the request and sole

22

expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Borrowers, a Subsidiary Guarantor shall be released from its obligations hereunder in the event that all the Capital Stock of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Loan Documents.

     8.16 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

     IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee and Collateral Agreement to be duly executed and delivered as of the date first above written.

HANOVER COMPRESSOR COMPANY
By:	/s/ LEE E. BECKELMAN
	Name: Lee E. Beckelman
	Title: Senior Vice President and Chief Financial Officer
HANOVER COMPRESSION LIMITED
PARTNERSHIP
By:	/s/ LEE E. BECKELMAN
	Name: Lee E. Beckelman
	Title: Senior Vice President and Chief Financial Officer

Signature Page to Guarantee and Collateral Agreement

EQUITY LEASING CORPORATION
ENERGY TRANSFER – HANOVER VENTURES L.P.
HANOVER ASIA, INC.
HANOVER AUSTRALIA, L.L.C.
HANOVER COLOMBIA LEASING, LLC
HANOVER COMPRESSED NATURAL GAS SERVICES, LLC
HANOVER COMPRESSOR NIGERIA, INC.
HANOVER COMPRESSION GENERAL HOLDINGS LLC
HANOVER ECUADOR L.L.C.
HANOVER GENERAL ENERGY TRANSFER, LLC
HANOVER IDR, INC.
HANOVER LIMITED ENERGY TRANSFER, LLC
HANOVER PARTNERS NIGERIA LLC
HANOVER SPE L.L.C.
HANOVER/TRINIDAD, L.L.C.
HC CAYMAN LLC
HC LEASING, INC.
HCL COLOMBIA, INC.
KOG, INC.
NIGERIAN LEASING, LLC
SOUTHWEST INDUSTRIES, INC.
By:	/s/ LEE E. BECKELMAN
	Name: Lee E. Beckelman
	Title: Vice President & Treasurer
HANOVER HL HOLDINGS, LLC
HANOVER HL, LLC
By:	/s/ CHARLES R. SCOTT
	Name: Charles R. Scott
	Title: Manager

Signature Page to Guarantee and Collateral Agreement

ACKNOWLEDGEMENT AND CONSENT

     The undersigned hereby acknowledges receipt of a copy of the Guarantee and Collateral Agreement dated as of November 21, 2005 (the “Agreement”), made by the Grantors parties thereto for the benefit of JPMorgan Chase Bank, N.A., as Administrative Agent. The undersigned agrees for the benefit of the Administrative Agent and the Secured Parties as follows:

          1. The undersigned will be bound by the terms of the Agreement and will comply with such terms insofar as such terms are applicable to the undersigned.

          2. The terms of Sections 6.3(c) and 6.7(b) of the Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it pursuant to Section 6.3(c) or 6.7(b) of the Agreement.

[NAME OF ISSUER]
 

By:
	Name:
	Title:

Address for Notices:

Fax:

Annex 1 to

Guarantee and Collateral Agreement

     ASSUMPTION AGREEMENT, dated as of _____________, 200_, is made by _______________________(the “Additional Grantor”), in favor of JPMorgan Chase Bank, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”) for the banks and other financial institutions or entities (the “Secured Parties”) parties to the Loan Documents referred to below. All capitalized terms not defined herein shall have the meaning ascribed to them in such Credit Agreement.

W I T N E S S E T H
:

     WHEREAS, Hanover Compressor Company (“Hanover”), Hanover Compression Limited Partnership (“HCLP”) and the Secured Parties have entered into the Loan Documents (as defined in the Guarantee and Collateral Agreement referred to below);

     WHEREAS, in connection with the Loan Documents, Hanover and certain of its Subsidiaries (other than the Additional Grantor) have entered into the Guarantee and Collateral Agreement, dated as of November 21, 2005 (and as may be further amended, supplemented or otherwise modified from time to time, the “Guarantee and Collateral Agreement”) in favor of the Administrative Agent for the benefit of the Secured Parties;

     WHEREAS, the Credit Agreement requires the Additional Grantor to become a party to the Guarantee and Collateral Agreement; and

     WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guarantee and Collateral Agreement;

     NOW, THEREFORE, IT IS AGREED:

     1. Guarantee and Collateral Agreement. By executing and delivering this Assumption Agreement, the Additional Grantor, as provided in Section 8.14 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as a Grantor thereunder with the same force and effect as if originally named therein as a Grantor and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor thereunder. The information set forth in Annex 1-A hereto is hereby added to the information set forth in the Schedules to the Guarantee and Collateral Agreement. The Additional Grantor hereby represents and warrants that each of the representations and warranties contained in Section 4 of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date.

     2. Governing Law. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

2

     IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written.

[ADDITIONAL GRANTOR]
By:
	Name:
	Title:

Annex 1-A to

Assumption Agreement

Supplement to Schedule 1

Supplement to Schedule 2

Supplement to Schedule 3

EX-12.1

Exhibit 12.1

Hanover Compressor Company
Computation of Ratio of Earnings to Fixed Charges
(Amounts in thousands of dollars, except ratio amounts)

	Year Ended December 31,
	2005 (1)			2004 (2)			2003 (3)			2002 (4)			2001
Earnings:
Income (loss) from continuing operations before taxes		(9,434	)		(29,324	)		(113,859	)		(97,325	)		107,257
Add:
Interest on indebtedness, amortization of capitalized interest and amortization of capitalized debt expense and discount		147,796			158,241			95,341			46,639			34,738
Leasing expense and the estimated interest factor attributable to rents		3,234			3,450			49,818			95,362			71,315
Equity in income of non-consolidated affiliates in excess of distributions of income		(2,763	)		(10,112	)		(4,563	)		(1,966	)		(9,607	)
Earnings as adjusted		138,833			122,255			26,737			42,710			203,703
Fixed charges:
Interest on indebtedness, amortization of capitalized debt expense and discount and capitalized interest		147,344			157,502			95,850			48,763			37,228
Leasing expense and the estimated interest factor attributable to rents		3,234			3,450			49,818			95,362			71,315
Total fixed charges		150,578			160,952			145,668			144,125			108,543
Ratio of earnings to fixed charges		—			—			—			—			1.88

(1)	Due to Hanover’s loss for the year ended December 31, 2005, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of $11.7 million to achieve coverage of 1:1. During the year, we recorded $9.8 million in pre-tax charges. For a description of these pre-tax charges, see Note 22 in the notes to the consolidated financial statements included in Hanover’s Annual Report on Form 10-K for the year ended December 31, 2005.
(2)	Due to Hanover’s loss for the year ended December 31, 2004, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of $38.7 million to achieve coverage of 1:1. During the year, we recorded $0.4 million in pre-tax benefit. For a description of this pre-tax benefit, see Note 22 in the notes to the consolidated financial statements included in Hanover’s Annual Report on Form 10-K for the year ended December 31, 2005.
(3)	Due to Hanover’s loss for the year ended December 31, 2003, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of $118.9 million to achieve coverage of 1:1. During the year, we recorded $250.6 million in pre-tax charges. For a description of these pre-tax charges, see Note 22 in the notes to the consolidated financial statements included in Hanover’s Annual Report on Form 10-K for the year ended December 31, 2005.
(4)	Due to Hanover’s loss for the year ended December 31, 2002, the ratio was less than 1:1. Hanover would have had to generate additional pre-tax earnings of $101.4 million to achieve coverage of 1:1. During the year, we recorded $182.7 million in pre-tax charges. For a description of these pre-tax charges, see Note 22 in the notes to the consolidated financial statements included in Hanover’s Annual Report on Form 10-K for the year ended December 31, 2004.

EX-21.1

Exhibit 21.1

HANOVER COMPRESSOR COMPANY & SUBSIDIARIES (FEIN: 76-0625124)
COMPANY LISTING AS OF 12/31/2005

		Place of Incorporation	Ownership
1	Aurora (Barbados), SRL	Barbados	100% Wholly owned
2	Belleli Energy Djibouti F.Z.E.	Djibouti	99% Owned
3	Belleli Energy F.Z.E.	United Arab Emirates	100% Wholly owned
4	Belleli Energy S.P.A.	Italy	99.997% Owned
5	Energy Transfer-Hanover Ventures, L.P.	Delaware	100% Wholly owned
6	EI Venezuela Development Ltd.	Cayman Islands	100% Wholly owned
7	Hanover Argentina S.A.	Argentina	100% Wholly owned
8	Hanover Asia, Inc.	Delaware	100% Wholly owned
9	Hanover Australia, L.L.C.	Delaware	100% Wholly owned
10	Hanover Bolivia Ltda.	Bolivia	100% Wholly owned
11	Hanover Brasil Ltda.	Brazil	100% Wholly owned
12	Hanover Canada Corporation	Alberta, Canada	100% Wholly owned
13	Hanover Cayman Limited	Cayman Islands	100% Wholly owned
14	Hanover Colombia Leasing, LLC	Delaware	100% Wholly owned
15	Hanover Compressed Natural Gas Services, LLC	Delaware	100% Wholly owned
16	Hanover Compression General Holdings, LLC	Delaware	100% Wholly owned
17	Hanover Compression Limited Partnership	Delaware	100% Wholly owned
18	Hanover Compressor Capital Trust	Delaware	100% Wholly owned
19	Hanover Compressor Company	Delaware	Parent
21	Hanover Compressor Holding Company NL B.V.	Netherlands	100% Wholly owned
22	Hanover Compressor de Mexico, S. de R.L. de C.V.	Mexico	100% Wholly owned
23	Hanover Compressor Nigeria, Inc.	Delaware	100% Wholly owned
24	Hanover Compressor Peru S.A.C.	Peru	100% Wholly owned
25	Hanover de Mexico, S. de R.L. de C.V. (f/k/a HCM Compression, S. de R.L. de C.V.)	Mexico	100% Wholly owned
26	Hanover Ecuador L.L.C.	Delaware	100% Wholly owned
27	Hanover (GB) Limited	United Kingdom	100% Wholly owned
28	Hanover General Energy Transfer, LLC	Delaware	100% Wholly owned
29	Hanover HL Holdings, LLC	Delaware	100% Wholly owned
30	Hanover HL, LLC	Delaware	100% Wholly owned
31	Hanover IDR, Inc.	Delaware	100% Wholly owned
32	Hanover International SA	Switzerland	100% Wholly owned
33	Hanover Limited Energy Transfer, LLC	Delaware	100% Wholly owned
34	Hanover (Malaysia) SDN BHD	Malaysia	60% Owned
35	Hanover Middle East LLC	Oman	100% Wholly owned
36	Hanover Nigeria Energy Services Limited	Nigeria	100% Wholly owned
37	Hanover Partners Nigeria LLC	Delaware	100% Wholly owned
38	Hanover Peru Selva S.R.L.	Peru	100% Wholly owned
39	Hanover Services (GB) Ltd.	United Kingdom	100% Wholly owned
40	Hanover SPE, L.L.C.	Delaware	100% Wholly owned
41	Hanover Venezuela Ltd.	Cayman Islands	100% Wholly owned
42	Hanover Venezuela C.A.	Venezuela	100% Wholly owned
43	HC Cayman Ltd.	Cayman Islands	100% Wholly owned
44	HC Cayman LLC	Delaware	100% Wholly owned
45	H.C.C. Compressor de Venezuela, C.A.	Venezuela	100% Wholly owned
46	HC Leasing, Inc.	Delaware	100% Wholly owned
47	HCC Mantova S.r.l.	Italy	99.99% Owned
48	HCL Colombia, Inc.	Delaware	100% Wholly owned
49	HG Compression Services Nigeria Limited	Nigeria	51% Owned
50	KOG, Inc.	Delaware	100% Wholly owned
51	Nigerian Leasing, LLC	Delaware	100% Wholly owned
52	Production Operators Argentina S.A.	Argentina	100% Wholly owned
53	Production Operators Cayman Inc	Cayman Islands	100% Wholly owned
54	Production Operators Cayman (Pigap II) Limited	Cayman Islands	100% Wholly owned
55	P.T. Hanover Indonesia	Indonesia	100% Wholly owned
56	Servi-Compresores, C.A.	Venezuela	100% Wholly owned
57	Servicios Tipsa S.A.	Argentina	100% Wholly owned
58	WilPro Energy Services (Guara) Limited	Cayman Islands	100% Wholly owned

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-125862, 333-107659, 333-73904, 333-55978, 333-53446, 333-32096, 333-32092 and 333-65923) of Hanover Compressor Company of our report dated February 28, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

 
PricewaterhouseCoopers LLP

Houston, Texas
March 1, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John E. Jackson, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hanover Compressor Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2006

By:	/s/ JOHN E. JACKSON
	Name:	John E. Jackson
	Title:	Chief Executive Officer and President
		(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Lee E. Beckelman, certify that:

1. I have reviewed this Annual Report on Form 10-K of Hanover Compressor Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2006

By:	/s/ LEE E. BECKELMAN
	Name:	Lee E. Beckelman
	Title:	Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Hanover Compressor Company (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John E. Jackson, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ JOHN E. JACKSON
Name:	John E. Jackson
Title:	Chief Executive Officer

Date: March 1, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Hanover Compressor Company (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Lee E. Beckelman, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ LEE E. BECKELMAN
Name:	Lee E. Beckelman
Title:	Chief Financial Officer

Date: March 1, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.