<PAGE>

================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               -----------------

                                 Form 10-K/A-2

                               -----------------

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                    For fiscal year ended December 31, 1999

[_] 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. 1-3071

                               -----------------

                          Hanover Compressor Company
            (Exact name of registrant as specified in its charter)

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

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

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

                               -----------------

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

                                        Name of each exchange in
                Title of each class         which registered
                -------------------         ----------------
              Common Stock, $.001 par   New York Stock Exchange,
                       value                      Inc.

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

                                Title of class
                                     None

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

   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.  [_]

   The aggregate market value of the Common Stock of the registrant held by
nonaffiliates as of March 24, 2000: $648,119,000. This calculation does not
reflect a determination that such persons are affiliates for any other purpose.

   Number of shares of the Common Stock of the registrant outstanding as of
March 24, 2000: 57,661,652 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders held on May 18, 2000 (filed on April 19, 2000) are incorporated by
reference into Part II, as indicated herein.

   The Index to Exhibits is on page E-1.

================================================================================

<PAGE>

                               EXPLANATORY NOTE

   Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 1999 in order to
restate the Consolidated Financial Statements and make appropriate conforming
revisions to "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

   In April 2002, the Company restated its financial statements based upon an
investigation that was conducted by counsel under the direction of the Audit
Committee. The net effect of this restatement was as follows: (i) a decrease in
revenues of $37.7 million, from 603.8 million to 566.1 million; (ii) a decrease
in income before income taxes of $12.0 million, from $93.5 million to $81.5
million; (iii) a decrease in net income of $7.5 million, from $58.7 million to
$51.2 million; and (iv) a decrease in earnings per common share of $0.12 basic
and $0.11 diluted for the year ended December 31, 2000. While the Company did
not believe any additional matters would require restatement when it made its
April 2002 restatement, and although the amounts involved in the November 2002
restatement are small in the context of the Company's overall revenues and net
income, additional information came to light as part of the investigation
conducted by a special committee of the Board since the April 2002 restatement
that made the November 2002 restatement appropriate under the circumstances.

   Subsequent to the April 2002 restatement, a special committee of the Board
of Directors together with the Audit Committee of the Board and Company
management, aided by outside legal counsel, completed an extensive
investigation of certain transactions recorded during 2001, 2000 and 1999,
including those transactions restated by the Company in April 2002. As a result
of this investigation, the Company determined, with the concurrence of its
independent accountants, to restate its 2001, 2000 and 1999 financial
statements for several transaction, including one that was the subject of the
April 2002 restatement. The net effect of this restatement for the year ended
December 31, 2001 was as follows: (i) a decrease in revenues of $7.5 million,
from $1,078.2 million to $1,070.7 million; (ii) a decrease in income before
income taxes of $0.4 million, from $117.4 million to $117.0 million; (iii) a
decrease in net income of $0.2 million, from $72.6 million to $72.4 million;
and (iv) a decrease in diluted earnings per common share of $0.01.The net
effect of this restatement for the year ended December 31, 2000 was as follows:
(i) a decrease in revenues of $3.3 million, from $566.1 million to $562.8
million; (ii) a decrease in income before income taxes of $2.5 million, from
$81.5 million to $79.0 million; (iii) a decrease in net income of $1.6 million,
from $51.2 million to $49.6 million; and (iv) a decrease in earnings per common
share of $0.03 basic and $0.02 diluted. The net effect of this restatement for
the year ended December 31, 1999 was as follows: (i) a decrease in revenue of
$5.1 million, from $317.0 million to $311.9 million; (ii) a decrease in income
before income taxes of $3.1 million, from $63.6 million to $60.5 million; (iii)
a decrease in net income of $1.9 million, from $40.4 million to $38.5 million;
and (iv) a decrease in earnings per common share of $0.04 basic and $0.03
diluted. For additional detail concerning the transactions involved in the
restatements and their impact on the 1999 Consolidated Financial Statements,
see Note 19 of the Notes to Consolidated Financial Statements.

   The Company has provided, and will continue to provide, information
concerning its internal investigations to the Securities and Exchange
Commission.


                                      2

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                               TABLE OF CONTENTS

<TABLE>
<S>                                                                                       <C>
                                        PART II
                                                                                          Page
                                                                                          ----
ITEM 6
   Selected Financial Data...............................................................   4

ITEM 7
   Management's Discussion and Analysis of Financial Condition and Results of Operations.   6

ITEM 8
   Financial Statements and Supplementary Data...........................................  11

                                        PART IV

ITEM 14
   Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................  11
</TABLE>

                                      3

<PAGE>

Item 6.  Selected Financial Data

                     SELECTED FINANCIAL DATA (HISTORICAL)
           (Dollars and shares in thousands, except per share data)

   The following table presents certain selected financial data for the Company
for each of the five years in the period ended December 31, 1999. Certain
financial data for the years presented have been restated as described in Notes
18 and 19 to the Consolidated Financial Statements. The selected financial data
have been derived from the audited consolidated financial statements of the
Company. The following information should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company.

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                 -----------------------------------------------
                                                 1999(7)     1998   1997(6)   1996(6)  1995(1)(6)
                                                 --------  -------- -------- --------  ----------
                                                 Restated
<S>                                              <C>       <C>      <C>      <C>       <C>
Income Statement Data:
Revenues:
   Rentals...................................... $192,655  $147,609 $100,685 $ 72,897   $43,859
   Parts and service............................   31,073    23,870   10,254    6,458     4,495
   Compressor fabrication.......................   52,531    67,453   49,764   28,764    29,593
   Production equipment fabrication.............   27,255    37,466   37,052   26,903    16,960
   Gain on sale of property, plant & equipment..    5,927     2,552      148      352       412
   Other........................................    2,497     3,007      895      637       645
                                                 --------  -------- -------- --------   -------
Total revenues..................................  311,938   281,957  198,798  136,011    95,964
                                                 --------  -------- -------- --------   -------
Expenses:
   Rentals......................................   64,949    49,386   35,113   26,012    13,691
   Parts and service............................   20,312    17,341    6,360    4,788     4,122
   Compressor fabrication.......................   43,663    58,144   41,584   24,657    25,265
   Production equipment fabrication.............   20,278    25,781   26,375   19,574    13,178
   Selling, general and administrative..........   33,782    26,626   21,514   16,711    13,555
   Depreciation and amortization(2).............   37,337    37,154   28,439   20,722    13,494
   Leasing expense..............................   22,090     6,173       --       --        --
   Interest expense.............................    8,786    11,716   10,728    6,594     4,560
   Distributions on mandatorily redeemable
     convertible preferred securities...........      278        --       --       --        --
                                                 --------  -------- -------- --------   -------
       Total expenses...........................  251,475   232,321  170,113  119,058    87,865
                                                 --------  -------- -------- --------   -------
Income before income taxes......................   60,463    49,636   28,685   16,953     8,099
Provision for income taxes......................   22,008    19,259   11,043    6,730     3,109
                                                 --------  -------- -------- --------   -------
Net income......................................   38,455    30,377   17,642   10,223     4,990

Other comprehensive income (loss), net of tax:
   Foreign currency translation adjustment......     (463)      152       --       --        --
                                                 --------  -------- -------- --------   -------
Comprehensive income............................ $ 37,992  $ 30,529 $ 17,642 $ 10,223   $ 4,990
                                                 ========  ======== ======== ========   =======

Net income available to common stockholders:
   Net Income................................... $ 38,455  $ 30,377 $ 17,642 $ 10,223   $ 4,990
   Dividends on Series A and Series B preferred
     stock......................................       --        --       --   (1,773)     (832)
   Series A preferred stock exchange............       --        --       --   (3,794)       --
   Series B preferred stock conversion..........       --        --       --   (1,400)       --
                                                 --------  -------- -------- --------   -------
Net income available to common stockholders..... $ 38,455  $ 30,377 $ 17,642 $  3,256   $ 4,158
                                                 ========  ======== ======== ========   =======
</TABLE>

                                      4

<PAGE>

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                 ----------------------------------------------------
                                                 1999(7)     1998     1997(6)     1996(6)   1995(1)(6)
                                                 --------  --------  ---------  --------    ----------
                                                 Restated
<S>                                              <C>       <C>       <C>        <C>         <C>
Weighted average common and common equivalent
  shares outstanding:...........................
   Basic(5).....................................   57,048    56,936     51,246    40,996       28,746
                                                 --------  --------  ---------  --------     --------
   Diluted(5)...................................   61,054    60,182     54,690    44,046       30,716
                                                 --------  --------  ---------  --------     --------
Earnings per common share:
Basic(5)........................................ $   0.67  $   0.53  $    0.34  $   0.08     $   0.14
                                                 ========  ========  =========  ========     ========
Diluted(5)...................................... $   0.63  $   0.50  $    0.32  $   0.07(3)  $   0.14
                                                 ========  ========  =========  ========     ========
Other Data:
   EBITDA (4)................................... $128,954  $104,679  $  67,852  $ 44,269     $ 26,153
                                                 ========  ========  =========  ========     ========

Cash flows provided by (used in):
   Operating activities......................... $ 71,610  $ 31,147  $  32,219  $ 20,276     $  9,088
   Investing activities.........................  (95,502)  (14,699)  (164,490)  (87,683)     (68,474)
   Financing activities.........................   18,218    (9,328)   129,510    71,740       62,206
Balance Sheet Data (end of period):
   Working capital.............................. $103,431  $113,264  $  58,027  $ 41,513     $ 23,270
   Net property, plant and equipment............  498,877   392,498    394,070   266,406      198,074
   Total assets.................................  753,387   614,590    506,452   341,387      252,313
   Long-term debt...............................   69,681   156,943    158,838   122,756       50,451
   Mandatorily redeemable convertible preferred
     securities.................................   86,250        --         --        --           --
   Preferred stockholders' equity...............       --        --         --        --       26,894
   Common stockholders' equity..................  365,928   315,470    287,028   176,113      138,678
</TABLE>
--------
(1) The selected historical financial information includes the results of
    operations of the Company and its wholly-owned subsidiaries. During 1995,
    the Company acquired Astra Resources Compression, Inc., a significant
    subsidiary.
(2) In order to more accurately reflect the estimated useful lives of natural
    gas compressor units in the rental fleet; effective January 1, 1996 the
    Company changed the lives over which these units are depreciated from 12 to
    15 years. The effect of this change was a decrease in depreciation expense
    of $2.6 million and an increase in net income of $1.5 million ($.03 per
    diluted common share) for the year ended December 31, 1996.
(3) Diluted earnings per share in 1996 was $.23 per share before the effects of
    charging retained earnings for $1.8 million relating to dividends on
    redeemable preferred stock and one time charges to retained earnings for
    (i) $3.8 million related to the exchange of all Series A preferred stock
    for subordinated notes and (ii) $1.4 million related to the conversion of
    all Series B preferred stock to Common Stock.
(4) EBITDA consists of the sum of consolidated net income before interest
    expense, lease expense, distributions on mandatorily redeemable convertible
    preferred securities, income tax, and depreciation and amortization. The
    Company believes that EBITDA is a meaningful measure of its operating
    performance and is also used to measure the Company's ability to meet debt
    service requirements. EBITDA should not be considered as an alternative
    performance measure prescribed by generally accepted accounting principles.
(5) In June 2000, the Company completed a 2-for-1 stock split effected in the
    form of a 100% stock dividend. All weighted average and common equivalent
    shares and earnings per common share information have been restated for all
    periods presented to reflect this stock split.
(6) Restated as discussed in Note 18 to the Consolidated Financial Statements.
    The net effect of the restatement on the periods presented was an increase
    in selling, general and administrative expenses of $732,000, $272,000, and
    $1,013,000; a decrease in net income of $461,000, $158,000, and $624,000;
    and a decrease in

                                      5

<PAGE>

   earnings per common share of basic: $.01, $.00 and $.03 and diluted: $.01,
   $.01, and $.02 for the years ended December 31, 1997, 1996 and 1995,
   respectively.
(7) November 2002 Restatement-Subsequent to the April 2002 restatement, a
    special committee of the Board of Directors, together with the Audit
    Committee and Company management, aided by outside legal counsel, completed
    an extensive investigation of certain transactions recorded in 2001, 2000
    and 1999, including those transactions restated by the Company in April
    2002. The April 2002 restatement had no impact on the Company's 1999
    results of operations, cash flows or financial position. As a result of
    this investigation, the Company determined, with the concurrence of its
    independent accountants, to restate its financial statements for several
    transactions. The net effect of this restatement for the year ended
    December 31, 1999 was as follows: (i) a decrease in revenues of $5,090,000,
    from $317,028,000 to $311,938,000; (ii) a decrease in income before income
    taxes of $3,123,000, from $63,586,000 to $60,463,000; (iii) a decrease in
    net income of $1,986,000, from $40,441,000 to $38,455,000; and (iv) a
    decrease in earnings per common share of $0.04 basic and $0.03 diluted. See
    Note 19 of the Notes to Consolidated Financial Statements.

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

   The following discussion has been updated to reflect the restated results of
operations, cash flows and financial position, see Note 19 in the Notes to
Consolidated Financial Statements for details regarding the restatement.
Management's discussion and analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto.

General

   The Company's operations consist of providing gas compression services
through renting, maintaining and operating natural gas compressors and
engineering, fabricating and selling gas compression and oil and gas production
equipment. See "Business".

                                      6

<PAGE>

   The following table summarizes the Company's revenues, expenses and gross
profit percentages (Dollars in millions):

<TABLE>
<CAPTION>
                                               Year ended December 31,
                                               ----------------------
                                                1999    1998    1997
                                               ------  ------  ------
          <S>                                  <C>     <C>     <C>
          Revenues:
             Rentals--Domestic................ $136.5  $107.4  $ 78.7
             Rentals--International...........   56.2    40.2    22.0
             Parts and service................   31.1    23.9    10.3
             Compressor fabrication...........   52.5    67.5    49.8
             Production equipment fabrication.   27.2    37.5    37.1
             Other............................    8.4     5.5     0.9
                                               ------  ------  ------
                 Total........................ $311.9  $282.0  $198.8
                                               ======  ======  ======

          Expenses:
             Rentals--Domestic................ $ 46.2  $ 36.6  $ 27.5
             Rentals--International...........   18.7    12.9     7.6
             Parts and service................   20.3    17.3     6.3
             Compressor fabrication...........   43.7    58.1    41.6
             Production equipment fabrication.   20.3    25.8    26.4
                                               ------  ------  ------
                 Total........................ $149.2  $150.7  $109.4
                                               ======  ======  ======

          Gross profit percentage:
             Rentals--Domestic................   66.1%   66.0%   65.0%
             Rentals--International...........   66.6%   68.1%   65.5%
             Parts and service................   34.6%   27.4%   38.0%
             Compressor fabrication...........   16.9%   13.8%   16.4%
             Production equipment fabrication.   25.6%   31.2%   28.8%
</TABLE>

Year ended December 31, 1999 compared to year ended December 31, 1998.

  Revenues

   The Company's total revenues increased by $29.9 million, or 11%, to $311.9
million during 1999 from $282.0 million during 1998. The increase resulted from
growth of the Company's natural gas compressor rental fleet but was offset by
decreases in compressor fabrication and production equipment fabrication
revenues.

   Revenues from rentals increased by $45.1 million, or 31%, to $192.7 million
during 1999 from $147.6 million during 1998. Domestic revenues from rentals
increased by $29.1 million, or 27%, to $136.5 million during 1999 from $107.4
million during 1998. International revenues from rentals increased by $16.0
million, or 40%, to $56.2 million during 1999 from $40.2 million during 1998.
At December 31, 1999 the compressor rental fleet consisted of approximately
1,458,000 horsepower, a 37% increase over the 1,067,000 horsepower in the
rental fleet at December 31, 1998. Domestically, the rental fleet increased by
289,000 horsepower, or 32%, during 1999 and internationally by 103,000
horsepower, or 59%. The increase in both domestic and international rental
revenues resulted primarily from expansion of the Company's rental fleet.

   Revenue from parts and service increased by $7.2 million, or 30% to $31.1
million during 1999 from $23.9 million during 1998. Revenues from the
fabrication and sale of compressor equipment to third parties decreased by
$15.0 million, or 22%, to $52.5 million during 1999 from $67.5 million during
1998. An aggregate of 147,000 horsepower was sold during 1999. In addition,
130,000 horsepower was fabricated and placed in the rental fleet during 1999.
The Company believes the revenue decrease during 1999 was due in part to a
project where a

                                      7

<PAGE>

customer supplied its own engines, which are typically provided by the Company,
and in part to lower energy prices earlier in 1999, which reduced the demand
for compressors thereby adversely impacting sales prices.

   Revenues from the fabrication and sale of production equipment decreased by
$10.3 million, or 27%, to $27.2 million during 1999 from $37.5 million during
1998 primarily due to the decline in well completions resulting from lower
energy prices during the first half of 1999.

   The Company recognized gains on sales of property, plant and equipment of
$5.9 million during 1999 compared to $2.6 million during the 1998. The increase
is primarily due to the increase in horsepower sold from the rental fleet to
customers exercising options to purchase equipment they previously had rented.
During 1999 the Company sold approximately 20,000 horsepower compared to 14,000
horsepower during 1998.

  Expenses

   Operating expenses of the rentals segments increased by $15.5 million, or
31% to $64.9 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts and
service increased $3.0 million, or 17% to $20.3 million during 1999 from $17.3
million during 1998. The gross profit percentage from parts and service
increased to 35% during 1999 from 27% in 1998. Operating expenses of compressor
fabrication decreased by $14.4 million, or 25% to $43.7 million from $58.1
million during 1998. The gross profit margin on compression fabrication
increased to 17% during 1999, from 14% during 1998. Production equipment
fabrication operating expenses decreased by $5.5 million, or 21%, during 1999
to $20.3 million from $25.8 million during 1998. The decrease in operating
expenses is reflective of the corresponding change in production equipment
fabrication revenues during 1999. The gross profit margin attributable to
production equipment fabrication decreased to 26% during 1999, from 31% during
1998.

   Selling, general and administrative expenses increased by $7.2 million, or
27% to $33.8 million during 1999. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals business segments, as
described above.

   Depreciation and amortization expense increased by $0.2 million, or 1%
during 1999 to $37.3 million. The increase in depreciation on the additions to
the rental fleet was offset by the decrease in depreciation as a result of the
equipment leases entered into in July 1998 and June 1999.

   The Company incurred compression equipment lease expense of $22.1 million
during 1999 and $6.2 million during 1998. As a result of the Equipment Leases,
the Company expects to incur annual operating leasing expense of approximately
$30 million.

   Interest expense decreased by $2.9 million, or 25% during 1999 to $8.8
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment lease which was used to reduce indebtedness under
the Bank Credit Agreement and the capitalization of interest expense on assets
that are under construction.

  Income Taxes

   The provision for income taxes increased by $2.7 million, or 14%, to $22.0
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 36.4% during 1999 and 38.8% during
1998. The decrease in average effective income rates is due to expected
benefits from a foreign sales corporation established in 1998.

                                      8

<PAGE>

  Net Income and Earnings Per Share

   Net income increased $8.1 million, or 27%, to $38.5 million for 1999 from
$30.4 million in 1998 for the reasons discussed above.

Year ended December 31, 1998 compared to year ended December 31, 1997

  Revenues

   Revenues from rentals increased by $46.9 million, or 47% to $147.6 million
due to growth in the rental fleet. At December 31, 1998 the compressor rental
fleet consisted of approximately 1,067,000 horsepower, a 37% increase over the
781,000 horsepower in the rental fleet at December 31, 1997. Domestically, the
rental fleet increased by 224,000 horsepower, or 34%, during 1998 and
internationally by 61,000 horsepower, or 54%. Revenue from parts and service
increased by $13.6 million, or 133% to $23.9 million as a result of increased
marketing focus on parts and services and the increase in growth in the rental
fleet. Revenues from compressor fabrication amounted to $67.5 million,
increasing by 36% over 1997. An aggregate of 113,000 horsepower was sold during
1998. In addition, 88,000 horsepower was fabricated and placed in the rental
fleet during 1998. Revenues from the fabrication of production equipment
remained relatively unchanged with an increase of $0.4 million from 1997, or 1%
to $37.5 million during 1998. The change in 1998 production equipment revenue
was negligible as a result of declining well completions.

  Expenses

   Operating expenses of the rentals segments increased by $14.3 million, or
41% to $49.4 million during 1998. The gross profit percentage from rentals
increased to 67% during 1998 from 65% in 1997. Operating expenses of parts and
service increased $11.0 million, or 173% to $17.3 million during 1998, which
relates to the 133% increase in parts and service revenue. The gross profit
percentage from parts and service decreased to 27% during 1998 from 38% in
1997. Operating expenses of compressor fabrication increased by $16.5 million,
or 40% to $58.1 million, which relates to the 36% increase in compression
fabrication revenue achieved during 1998. In addition, the gross profit margin
on compression fabrication decreased to 14% during 1998, from 16% during 1997.
Production equipment fabrication operating expenses decreased by $0.6 million,
or 2%, during 1998 to $25.8 million. The decrease in operating expenses is
reflective of the corresponding change in production equipment fabrication
revenues during 1998. The gross profit margin attributable to production
equipment fabrication increased to 31% during 1998, up from 29% during 1997.

   Selling, general and administrative expenses increased by $5.1 million, or
24% to $26.6 million during 1998. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals and compression
fabrication operating segments as well as increased administrative costs
relating to being a public reporting entity.

   Depreciation and amortization expense increased by $8.7 million, or 31%
during 1998 to $37.1 million as the Company continued to expand its rental
fleet with capital expenditures and net business acquisitions that amounted to
approximately $212.0 million. In addition, the company sold certain compression
equipment with a book value of approximately $158.0 million in July, 1998 under
a sale and leaseback arrangement. See "LIQUIDITY AND CAPITAL RESOURCES" for a
description of the Equipment Lease. Consequently, the Company incurred
compression equipment lease expense of $6.2 million during 1998. As a result of
the Equipment Lease, the Company expects to incur annual operating lease
expense of approximately $14 million.

Interest expense increased by $1.0 million, or 9% during 1998 to $11.7 million.

  Income Taxes

   The Company's effective income tax rate was approximately 38.8% during 1998
and 38.5% during 1997. The provision for income taxes increased by $8.2
million, or 74%, during 1998 to $19.3 million as a result of income before
income taxes increasing by 73% during 1998 over 1997.

                                      9

<PAGE>

  Net Income and Earnings Per Share

   Net income increased $12.8 million, or 72%, to $30.4 million for 1998 from
$17.6 million in 1997 for the reasons discussed above. Weighted average shares
outstanding was affected by the additional shares issued in conjunction with
the Company's initial public offering which were outstanding for all of 1998.

Liquidity and capital resources

   In June 1999 and in July 1998, the Company completed two individual $200
million sale and leaseback transactions of certain compression equipment. The
transactions are recorded as a sale and leaseback of the equipment and are
recorded as operating leases. Under both agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the agreements (approximately $333
million for both transactions) that are due upon termination of the leases and
which may be satisfied by a cash payment or the exercise of the Company's
purchase options. The equipment sold in the June 1999 transaction had a book
value of approximately $162 million and resulted in a gain of approximately $38
million. The equipment sold in the July 1998 transaction had a book value of
$158 million and resulted in a gain of approximately $42 million. Both gains
are deferred until the end of the respective lease terms.

   In December 1999, the Company issued $86.3 million of 7.25% Convertible
Preferred Securities through Hanover Compressor Capital Trust, a Delaware
business trust and subsidiary of the Company. The Convertible Preferred
Securities have a liquidation amount of $50 per unit. The Convertible Preferred
Securities mature in 30 years but may be redeemed partially or in total any
time on or after December 20, 2002.

   The Company's cash balance amounted to $5.8 million at December 31, 1999
compared to $11.5 million at December 31, 1998. Primary sources of cash during
1999 were cash provided by internal operations of $71.6 million, net proceeds
of $200 million from the sale of compression equipment under the Equipment
Lease and net proceeds of $82.9 million from the private offering of the
Convertible Preferred Securities. Principal uses of cash during the year ended
December 31, 1999 were capital expenditures of $282.9 million, business
combinations and investments in unconsolidated entities of $40.2 million and
$72.8 million repayment of long-term debt.

   Total current assets increased from $165.1 million at December 31, 1998 to
$188.0 million at December 31, 1999 primarily as a result of increases in
accounts receivable and inventories. Accounts receivable at December 31, 1999
increased by $18.4 million to $88.6 million. In addition, inventories increased
by $4.1 million to $67.1 million at December 31, 1999. The increase in
inventories reflects increases in parts and supplies, work in progress and
finished goods as the level of activity in the Company's domestic and
international rentals increased over 1998. Working capital at December 31, 1999
was also affected by an $32.8 million increase in total current liabilities at
December 31, 1999 to $84.6 million. The 63% increase in total current
liabilities results largely from the increase in vendor accounts payable caused
by the expansion of the Company's operating activities and also due to the
Subordinated Notes in the aggregate principal amount of $15.4 million becoming
due on December 31, 2000.

   The amounts invested in property, plant and equipment and business
combinations during 1999 was $318.3 million which resulted in the addition of
approximately 391,000 horsepower to the rental fleet. At December 31, 1999, the
rental fleet consisted of 1,181,000 horsepower domestically and 277,000 in the
international rental fleet. Current plans are to spend in excess of $250
million during 2000, exclusive of any major acquisition, in continued expansion
of the rental fleet. Historically, the Company has funded capital expenditures
with a combination of internally generated cash flow, borrowings under the
revolving credit facility, lease transactions

                                      10

<PAGE>

and raising additional equity. As of December 31, 1999 the Company had
approximately $138 million of credit capacity remaining on its $200 million
Bank Credit Agreement (7.7% rate at December 31, 1999). In March 2000, the
Company finalized a third sale and leaseback transaction. Under the agreement,
the Company received $100 million proceeds from the sale of the compression
equipment at closing and may sell an additional $100 million of equipment to
the Trust during the next twelve months. The equipment sold will be leased back
by the Company for a five-year period and will continue to be deployed by the
Company under its normal operating procedures. Hanover has the option to
repurchase the equipment from the Trust at any time. The Company feels it has
adequate capital resources to fund its estimated level of capital expenditures
for the year 2000.

  Impact of Year 2000

   The Company did not experience any material problems during the rollover to
the year 2000 that affected operations and does not anticipate any year 2000
compliance problems in the future. The Company completed its year 2000
readiness in conjunction with normal expansion and upgrades of its computer
systems and hardware. The costs related to the year 2000 were not material to
the Company's operating results, cash flows or financial position.

  New Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that, upon
adoption, 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. SFAS 133 is effective for the Company
beginning in 2001. The impact of SFAS 133 on the Company's financial statements
will depend on a variety of factors, including future interpretive guidance
from the FASB, the future level of actual foreign currency transactions, the
extent of our hedging activities, the type of hedging instruments used and the
effectiveness of such instruments. However management does not believe the
effect of adoption will have a material effect on the Company's results of
operations, cash flows or financial position.

Item 8.  Financial Statements and Supplementary Data

   In this report, the consolidated financial statements and supplementary data
appearing on pages F-1 through F-25 are incorporated by reference.

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   (a)  The following documents are filed as part of this report:

       1. FINANCIAL STATEMENTS--The financial statements listed in the
          accompanying Index to Consolidated Financial Statements are filed as
          part of this annual report and such Index to Consolidated Financial
          Statements is incorporated herein by reference.

       2. FINANCIAL STATEMENT SCHEDULES--All schedules are omitted because the
          required information is inapplicable or the information is presented
          in the Consolidated Financial Statements or related notes.

                                      11

<PAGE>

       3. (a) EXHIBITS--The exhibits listed on the accompanying Index to
          Exhibits are filed as part of this annual report and such Index to
          Exhibits is incorporated herein by reference

           (b)  REPORTS ON FORM 8-K

              A report on Form 8-K was filed on December 3, 1999, which
              reported under the caption "Item 5--Other Events" that Hanover
              Compressor Company intends to adopt a new corporate legal
              structure.

              A report on Form 8-K was filed on December 3, 1999, which
              reported under the caption "Item 5--Other Events" the proposed
              private placement of $100 million of convertible trust preferred
              securities.

              A report on Form 8-K was filed on December 14, 1999, which
              reported under the caption "Item 5--Other Events" that Hanover
              Compressor Company had adopted a new holding company
              restructuring.

              A report on Form 8-K was filed on December 17, 1999, which
              reported under the caption "Item 5--Other Events" that Hanover
              Compressor Company had completed a $75 million private
              convertible trust preferred securities issue.

Other

   Contemporaneous with the filing of this Form 10-K/A for the year ended
December 31, 1999, the Company has provided to the Securities and Exchange
Commission the certifications of the chief executive officer and the chief
financial officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.


                                      12

<PAGE>

                                  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/  CHAD C. DEATON
                                                  -----------------------------
                                                         Chad C. Deaton
                                                  President and Chief Executive
                                                             Officer

Date: December 23, 2002

   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/  CHAD C. DEATON       President and Chief Executive  December 23, 2002
-----------------------------    Officer (Principal
       Chad C. Deaton            Executive Officer and
                                 Director)

    /s/  JOHN E. JACKSON       Chief Financial Officer and    December 23, 2002
-----------------------------    Treasurer (Principal
       John E. Jackson           Financial and Accounting
                                 Officer)

   /s/  VICTOR E. GRIJALVA     Director                       December 23, 2002
-----------------------------
     Victor E. Grijalva

    /s/  TED COLLINS, JR.      Director                       December 23, 2002
-----------------------------
      Ted Collins, Jr.

   /s/  ROBERT R. FURGASON     Director                       December 23, 2002
-----------------------------
     Robert R. Furgason

    /s/  MELVYN N. KLEIN       Director                       December 23, 2002
-----------------------------
       Melvyn N. Klein

  /s/  MICHAEL A. O'CONNOR     Director                       December 23, 2002
-----------------------------
     Michael A. O'Connor

   /s/  ALVIN V. SHOEMAKER     Director                       December 23, 2002
-----------------------------
     Alvin V. Shoemaker

     /s/  I. JON BRUMLEY       Director                       December 23, 2002
-----------------------------
       I. Jon Brumley

      /s/  GORDON HALL         Director                       December 23, 2002
-----------------------------
         Gordon Hall

       /s/  RENE HUCK          Director                       December 23, 2002
-----------------------------
          Rene Huck

                                      13

<PAGE>

                                Certifications

   I, Chad C. Deaton, certify that:

      1. I have reviewed this annual report on Form 10-K/A of Hanover
   Compressor Company;

      2. Based on my knowledge, this annual 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 annual report; and

      3. Based on my knowledge, the financial statements, and other financial
   information included in this annual 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 annual report.

Date: December 23, 2002


By:    /s/  CHAD C. DEATON
       -------------------------
Name:  Chad C. Deaton
Title: President and Chief
         Executive Officer
        (Principal Executive
       Officer)

   I, John E. Jackson, certify that:

      1. I have reviewed this annual report on Form 10-K/A of Hanover
   Compressor Company;

      2. Based on my knowledge, this annual 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 annual report; and

      3. Based on my knowledge, the financial statements, and other financial
   information included in this annual 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 annual report.

Date: December 23, 2002


By:    /s/  JOHN E. JACKSON
       -------------------------
Name:  John E. Jackson
Title: Senior Vice President and
       Chief Financial Officer
         (Principal
       Financial and Accounting
         Officer)

                                      14

<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
  No.                                               Description
-------                                             -----------
<C>     <S>

   3.1  Certificate of Incorporation of the Hanover Compressor Holding Co. (9)

   3.2  Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated
          December 9, 1999. (9)

   3.3  By-laws of Hanover Compressor Company(9)

   4.1  Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, among
          the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other
          stockholders of the Company party thereto (1) [4.1]

  4.10  Form of Warrant Agreement (1) [4.10]

  4.11  Specimen Stock Certificate (1) [4.11]

  4.12  Form of Second Amended and Restated Stockholders Agreement of Hanover Compressor Company
        dated as of June, 1997 (1) [4.12]

  4.13  Form of Amended and Restated Stockholders Agreement (JEDI) dated as of May, 1997 (1) [4.13]

  4.14  Form of Amended and Restated Stockholders Agreement (Westar Capital, Inc.) dated as of May,
          1997 (1) [4.14]

  4.15  Form of Amended and Restated Stockholders Agreement (HEHC) dated as of May, 1997 (1) [4.15]

  10.1  Credit Agreement, dated as of December 15, 1997, by and between the Company, The Chase
        Manhattan Bank, a New York banking corporation as Administrative Agent and several banks and
        other financial institutions that are parties thereto (2) [10.30]

  10.2  Subsidiaries' Guarantee, dated as of December 15, 1997, by certain of the Company's subsidiaries in
          favor of The Chase Manhattan Bank, as agent (2) [10.31]

  10.3  Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company (1)
          [10.3]

  10.4  Hanover Compressor Company Senior Executive Stock Option Plan (1) [10.4]

  10.5  1993 Hanover Compressor Company Management Stock Option Plan (1) [10.5]

  10.6  Hanover Compressor Company Incentive Option Plan (1) [10.6]

  10.7  Amendment and Restatement of Hanover Compressor Company Incentive Option Plan (1) [10.7]

  10.8  Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8]

  10.9  Hanover Compressor Company 1995 Management Stock Option Plan (1) [10.9]

 10.10  Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10]

 10.11  OEM Sales and Purchase Agreement, between Hanover Compressor Company and the Waukesha
          Engine Division of Dresser Industries, Inc. (1) [10.11]

 10.12  Distribution Agreement, dated February 23, 1995, between Ariel Corporation and Maintech
          Enterprises, Inc. (1) [10.12]

 10.13  Exclusive Distribution Agreement, dated as of February 23, 1995 by and between Hanover/Smith,
          Inc. and Uniglam Resources, Ltd. (1) [10.13]

 10.14  Lease Agreement, dated December 4, 1990, between Hanover Compressor Company and Ricardo J.
          Guerra and Luis J. Guerra as amended (1) [10.15]

 10.15  Indemnification Agreement, dated as of December 5, 1995, between Hanover Compressor Company
          and Western Resources (formerly Astra Resources, Inc.) (1) [10.18]
</TABLE>

                                      E-1

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                              Description
-------                                            -----------
<C>     <S>

 10.16  Put Agreement, dated December 5th, 1995, by and between WesternResources, Inc. (formerly Astra
          Resources, Inc.) an Hanover Compressor Company and Hanover Acquisition Corporation
          (formerly Astra Resources Compression, Inc.) (1) [10.19]

 10.17  Exchange and Subordinated Loan Agreement dated as of December 23, 1996, among the Company
          and GKH Partners, L.P., GK December 23, 1996, among the Company and GKH Partners, L.P.,
          GK Investments, L.P., IPP95, L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel,
          Ted Collins, Jr. and L.O. Ward (1) [10.20]

 10.18  1997 Stock Option Plan, as amended (1) [10.23]

 10.19  1997 Stock Purchase Plan (1) [10.24]

 10.20  Exchange Agreement by and between Hanover Compressor Company and JEDI, dated December 23,
          1996 (1) [10.27]

 10.21  Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A (the "Trust") and the
          Company. (3) [10.1]

 10.22  Guarantee dated as of July 22, 1998 and made by the Company, Hanover/Smith, Inc., Hanover
          Maintech, Inc. and Hanover Land Company. (3) [10.2]

 10.23  Lessee's and Guarantor's Consent dated as of July 20, 1998 made by the Company, Hanover/Smith,
          Inc., Hanover Maintech, Inc. and Hanover Land Company. (3) [10.3]

 10.24  Participation Agreement dated as of July 22, 1998 among the Company, the Trust, The Chase
          Manhattan Bank, as agent, Societe General & Financial Corporation, and Wilmington Trust
          Company. (3) [10.4]

 10.25  Security Agreement dated as of July 22, 1998 made by the Trust in favor of The Chase Manhattan
          Bank, as agent, with the Company joining by Joinder of Lessee. (3) [10.5]

 10.26  Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and the Company. (3) [10.6]

 10.27  1998 Stock Option Plan (4) [10.7]

 10.28  December 10, 1998 Stock Option Plan (5)

 10.29  1999 Stock Option Plan (5)

 10.30  1998 Amendments to Credit Agreement, dated as of December 15, 1997, with the Chase Manhattan
          Bank, a New York banking corporation as Administrative Agent and several banks and other
          financial institutions that are parties thereto (7) [10.35]

 10.31  Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 and the Company.
          (8)[10.36]

 10.32  Guarantee dated as of June 15, 1999 and made by the Company, Hanover/Smith, Inc., Hanover
          Maintech, Inc. and Hanover Land Company. (8) [10.37]

 10.33  Participation Agreement dated as of June 15, 1999 among the Company, the Trust, Societe Generale
          Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and
          Wilmington Trust Company. (8) [10.38]

 10.34  Security Agreement dated as of June 15, 1999 made by the Trust in favor The Chase Manhattan Bank,
          as agent. (8) [10.39]

 10.35  Lease supplement No. 1 dated June 15, 1999 between the Trust and the Company. (8) [10.40]

 10.36  Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the Company, Hanover/Smith,
          Inc. Hanover Maintech, Inc. and Hanover Land Company. (8) [10.41]
</TABLE>

                                      E-2

<PAGE>

<TABLE>
<CAPTION>
Exhibit
  No.                                              Description
-------                                            -----------
<C>     <S>

 10.37  Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of
          December 15, 1999, among Hanover Compressor Company, as sponsor, Wilmington Trust
          Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich,
          as administrative trustees. (6) [4.5]

 10.38  Indenture for the Convertible Junior Subordinated Indentures due 2029, dated as of December 15,
          1999 among Hanover Compressor Company, as issuer, and Wilmington Trust Company, as trustee.
          (6) [4.6]

 10.39  Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred Securities. (6) [4.8]

 10.40  Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029.
          (6) [4.9]

 10.41  Preferred Securities Guarantee, dated as of December 15, 1999, between Hanover Compressor
          Company, as guarantor, and Wilmington Trust Company, as guarantee trustee. (6) [4.10]

 10.42  Common Securities Guarantee dated as of December 15, 1999, by Hanover Compressor Company, as
          guarantor. (6) [4.11]

 10.43  Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A and the Hanover
          Compression Inc. (9)

 10.44  Guarantee dated as of March 13, 2000 and made by the Company, Hanover Compression Inc. and
          certain of their Subsidiaries. (9)

 10.45  Participation Agreement dated as of March 13, 2000 among the Company, the Hanover Equipment
          Trust 2000A and various banks. (9)

 10.46  Security Agreement dated as of March 13, 2000 made by the Trust in favor The Chase Manhattan
          Bank, as agent. (9)

 10.47  Assignment of leases, rents and Guarantee from Hanover Equipment Trust 2000A to The Chase
          Manhattan Bank dated as of March 13, 2000. (9)

  12.1  Computation of ratio of earnings to fixed charges*

  21.1  List of Subsidiaries(9)

  23.1  Consent of PricewaterhouseCoopers LLP*

  27.1  Financial Data Schedule(9)
</TABLE>
--------
(1) Such exhibit previously filed as an exhibit to the registration Statement
    (File No. 333-27953) on Form S-1, as amended, under the exhibit number
    indicated in brackets [    ], and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Annual Report
    on Form 10-K for the Year Ended 1997 under the exhibit number indicated in
    brackets [    ], and is incorporated by reference.
(3) Such exhibit previously filed as an exhibit to the Company's Current Report
    on Form 8-K dated July 22, 1998, under the exhibit number indicated in
    brackets [    ], and is incorporated by reference.
(4) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Third Quarter of 1998, under the exhibit number
    indicated in brackets [    ], and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed.
(6) Such exhibit previously filed as an exhibit to the Registration Statement
    (File No. 333-30344) on Form S-3 under the exhibit number indicated in
    brackets [    ], and is incorporated by reference.
(7) Such exhibit previously filed as an exhibit to the Company's Annual Report
    on Form 10-K for the Year Ended 1998 under the exhibit number indicated in
    brackets [    ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
    number indicated in brackets [    ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Annual Report
    on Form 10-K for the Year Ended 1999 and is incorporated by reference.

*Filed herewith.

                                      E-3

<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                   Page
                                                                   ----
       <S>                                                       <C>

       Report of Independent Accountants........................
                                                                 F-1

       Consolidated Balance Sheet...............................
                                                                 F-2

       Consolidated Statement of Income and Comprehensive Income
                                                                 F-3

       Consolidated Statement of Cash Flows.....................
                                                                 F-4, F-5

       Consolidated Statement of Common Stockholders' Equity....
                                                                 F-6

       Notes to Consolidated Financial Statements...............
                                                                 F-7

       Selected Quarterly Financial Data (unaudited)............
                                                                 F-25
</TABLE>

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Hanover Compressor Company

   In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, of cash flows and
of common stockholders' equity present fairly, in all material respects, the
financial position of Hanover Compressor Company and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit 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 described in Note 18, the December 31, 1997 consolidated financial
statements have been restated to record a liability to a stockholder. As
described in Note 19, the December 31, 1999 consolidated financial statements
have been restated for certain revenue recognition matters.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 8, 2000, except as to
the stock split described in
Note 16 which is as of
June 14, 2000, and except for
Notes 18 and 19, as to which the dates
are February 1, 2001 and November 18, 2002, respectively.

                                      F-1

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                          Consolidated Balance Sheet
                          December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                                 1999       1998
                                                                                               --------   --------
                                                                                               (See Notes 18 and 19)
                                                                                               (in thousands, except
                                                                                                 share amounts)
<S>                                                                                            <C>        <C>
                                          ASSETS
Current assets:
    Cash and cash equivalents................................................................. $  5,756   $ 11,503
    Accounts receivable, net..................................................................   88,625     70,205
    Inventory.................................................................................   67,117     63,044
    Costs and estimated earnings in excess of billings on uncompleted contracts...............    4,782      7,871
    Prepaid taxes.............................................................................   16,430      9,466
    Other current assets......................................................................    5,287      2,967
                                                                                               --------   --------
       Total current assets...................................................................  187,997    165,056
                                                                                               --------   --------
Property, plant and equipment:
    Compression equipment and facilities......................................................  521,815    422,896
    Land and buildings........................................................................   19,000     15,044
    Transportation and shop equipment.........................................................   27,616     21,667
    Other.....................................................................................   10,029     11,119
                                                                                               --------   --------
                                                                                                578,460    470,726
    Accumulated depreciation..................................................................  (79,583)   (78,228)
                                                                                               --------   --------
       Net property, plant and equipment......................................................  498,877    392,498
Intangible and other assets...................................................................   66,513     57,036
                                                                                               --------   --------
                                                                                               $753,387   $614,590
                                                                                               ========   ========
                        LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt...................................................... $ 15,967   $    444
    Accounts payable, trade...................................................................   32,308     23,361
    Accrued liabilities.......................................................................   22,065     17,599
    Advance billings..........................................................................   13,328      9,694
    Billings on uncompleted contracts in excess of costs and estimated earnings...............      898        694
                                                                                               --------   --------
       Total current liabilities..............................................................   84,566     51,792
Long-term debt................................................................................   69,681    156,943
Other liabilities.............................................................................   82,566     44,875
Deferred income taxes.........................................................................   64,396     45,510
                                                                                               --------   --------
       Total liabilities......................................................................  301,209    299,120
                                                                                               --------   --------
Commitments and contingencies (Note 15)
Mandatorily redeemable convertible preferred securities.......................................   86,250         --
Common stockholders' equity:
    Common stock, $.001 par value; 200,000,000 shares authorized; 57,505,874 and 57,180,944
     shares issued, respectively..............................................................       58         57
    Additional paid-in capital................................................................  272,944    268,977
    Notes receivable-- employee stockholders..................................................   (3,387)   (10,146)
    Accumulated other comprehensive income....................................................     (311)       152
    Retained earnings.........................................................................   98,210     59,755
    Treasury stock-- 167,394 and 351,094 common shares, respectively, at cost.................   (1,586)    (3,325)
                                                                                               --------   --------
       Total common stockholders' equity......................................................  365,928    315,470
                                                                                               --------   --------
                                                                                               $753,387   $614,590
                                                                                               ========   ========
</TABLE>

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

                                      F-2

<PAGE>

                          HANOVER COMPRESSOR COMPANY

           Consolidated Statement of Income and Comprehensive Income
                 Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                      1999          1998        1997
                                                                  -------------   --------  -------------
                                                                    Restated                  Restated
                                                                  (See Note 19)             (See Note 18)
                                                                  (in thousands, except per share amounts)
<S>                                                               <C>             <C>       <C>
Revenues:
   Rentals.......................................................   $192,655      $147,609    $100,685
   Parts and service.............................................     31,073        23,870      10,254
   Compressor fabrication........................................     52,531        67,453      49,764
   Production equipment fabrication..............................     27,255        37,466      37,052
   Gain on sale of property, plant and equipment.................      5,927         2,552         148
   Other.........................................................      2,497         3,007         895
                                                                    --------      --------    --------
                                                                     311,938       281,957     198,798
                                                                    --------      --------    --------
Expenses:
   Rentals.......................................................     64,949        49,386      35,113
   Parts and service.............................................     20,312        17,341       6,360
   Compressor fabrication........................................     43,663        58,144      41,584
   Production equipment fabrication..............................     20,278        25,781      26,375
   Selling, general and administrative...........................     33,782        26,626      21,514
   Depreciation and amortization.................................     37,337        37,154      28,439
   Leasing expense...............................................     22,090         6,173          --
   Interest expense..............................................      8,786        11,716      10,728
   Distributions on mandatorily redeemable convertible preferred
     securities..................................................        278            --          --
                                                                    --------      --------    --------
                                                                     251,475       232,321     170,113
                                                                    --------      --------    --------
Income before income taxes.......................................     60,463        49,636      28,685
Provision for income taxes.......................................     22,008        19,259      11,043
                                                                    --------      --------    --------
Net income.......................................................     38,455        30,377      17,642
Other comprehensive income (loss), net of tax: Foreign currency
  translation adjustment.........................................       (463)          152          --
                                                                    --------      --------    --------
Comprehensive income.............................................   $ 37,992      $ 30,529    $ 17,642
                                                                    ========      ========    ========
Net income available to common stockholders......................   $ 38,455      $ 30,377    $ 17,642
                                                                    ========      ========    ========
Weighted average common and common equivalent shares outstanding
   Basic.........................................................     57,048        56,936      51,246
                                                                    ========      ========    ========
   Diluted.......................................................     61,054        60,182      54,690
                                                                    ========      ========    ========
Earnings per common share........................................
   Basic.........................................................   $   0.67      $   0.53    $   0.34
                                                                    ========      ========    ========
   Diluted.......................................................   $   0.63      $   0.50    $   0.32
                                                                    ========      ========    ========
</TABLE>


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

                                      F-3

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     Consolidated Statement of Cash Flows
                 Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                   1999         1998        1997
                                                                               ------------- ---------  -------------
                                                                                 Restated                 Restated
                                                                               (See Note 19)            (See Note 18)
                                                                                           (in thousands)
<S>                                                                            <C>           <C>        <C>
Cash flows from operating activities:
  Net income..................................................................   $  38,455   $  30,377    $  17,642
  Adjustments:
    Depreciation and amortization.............................................      37,337      37,154       28,439
    Amortization of debt issuance costs and debt discount.....................         884         852          892
    Bad debt expense..........................................................       1,475         349          594
    Gain on sale of property, plant and equipment.............................      (3,951)     (2,552)        (148)
    Equity in income of nonconsolidated affiliates............................      (1,188)     (1,369)         206
    Deferred income taxes.....................................................      10,259      12,358        5,962
  Changes in assets and liabilities, net of effects of business combinations:
    Accounts receivable.......................................................     (18,884)    (28,337)     (13,604)
    Inventory.................................................................      (2,473)    (24,169)     (14,726)
    Costs and estimated earnings versus billings on uncompleted contracts.....       3,293      (3,000)       2,929
    Accounts payable and other liabilities....................................      11,969      14,358        7,728
    Advance billings..........................................................       3,634       2,942           51
    Other.....................................................................      (9,200)     (7,816)      (3,746)
                                                                                 ---------   ---------    ---------
       Net cash provided by operating activities..............................      71,610      31,147       32,219
                                                                                 ---------   ---------    ---------
Cash flows from investing activities:
  Capital expenditures........................................................    (282,940)   (169,498)    (150,995)
  Proceeds from sale of property, plant and equipment.........................     219,649     208,644        2,887
  Cash used for business acquisitions, net....................................     (35,311)    (42,581)      (6,287)
  Cash returned from unconsolidated subsidiary................................       8,000          --           --
  Cash used to acquire investments in unconsolidated subsidiaries.............      (4,900)    (11,264)     (10,095)
                                                                                 ---------   ---------    ---------
       Net cash used in investing activities..................................     (95,502)    (14,699)    (164,490)
                                                                                 ---------   ---------    ---------
Cash flows from financing activities:
  Net borrowings (repayments) on revolving credit facility....................     (64,400)     (4,700)      63,681
  Proceeds from issuance of long-term debt....................................          --       2,826        5,000
  Issuance of common stock, net...............................................          --          --       92,088
  Equity issuance costs.......................................................          --          --         (687)
  Proceeds from mandatorily redeemable convertible preferred securities, net..      82,940          --           --
  Proceeds from warrant conversions and stock option exercises................         545         120           --
  Repayment of long-term debt.................................................      (8,357)     (2,226)     (31,757)
  Purchase of treasury stock..................................................          --      (5,950)          --
  Repayments of shareholder notes.............................................       7,490         602        1,185
                                                                                 ---------   ---------    ---------
       Net cash provided by (used in) financing activities....................      18,218      (9,328)     129,510
                                                                                 ---------   ---------    ---------
Effect of exchange rate changes on cash and equivalents.......................         (73)       (178)          --
                                                                                 ---------   ---------    ---------
Net increase (decrease) in cash and cash equivalents..........................      (5,747)      6,942       (2,761)
Cash and cash equivalents at beginning of year................................      11,503       4,561        7,322
                                                                                 ---------   ---------    ---------
Cash and cash equivalents at end of year......................................   $   5,756   $  11,503    $   4,561
                                                                                 =========   =========    =========
</TABLE>

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

                                      F-4

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     Consolidated Statement of Cash Flows
                 Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                           1999     1998     1997
                                                         -------  --------  -------
                                                               (in thousands)
<S>                                                      <C>      <C>       <C>
Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized amounts............ $ 7,897  $ 10,992  $10,069
                                                         =======  ========  =======
   Income taxes paid.................................... $12,065  $  2,249  $ 5,857
                                                         =======  ========  =======
Supplemental disclosure of noncash transactions:
   Debt issued for property, plant and equipment........                    $   379
                                                                            =======
   Property sold in exchange for note receivable........ $ 3,538  $  1,500
                                                         =======  ========
   Common stock issued in exchange for notes receivable. $   731            $ 5,163
                                                         =======            =======
Acquisitions of businesses:
   Property, plant and equipment acquired............... $39,105  $ 31,015
                                                         =======  ========
   Other noncash assets acquired........................ $ 9,711  $ 28,301
                                                         =======  ========
   Liabilities assumed.................................. $(1,578) $ (1,261)
                                                         =======  ========
   Deferred taxes....................................... $(8,627) $(12,174)
                                                         =======  ========
   Common stock issued.................................. $(3,300) $ (3,300)
                                                         =======  ========
</TABLE>



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

                                      F-5

<PAGE>

                          HANOVER COMPRESSOR COMPANY

             Consolidated Statement of Common Stockholders' Equity
                 Years Ended December 31, 1999, 1998 and 1997
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                            Accumulated              Notes
                                Common Stock    Additional     Other               Receivable
                              -----------------  Paid-in   Comprehensive Treasury   Employee     Retained
                                Shares   Amount  Capital      Income      Stock   Stockholders   Earnings
                              ---------- ------ ---------- ------------- -------- ------------ -------------
                                                                                                 Restated
                                                                                               (See Notes 18
                                                                                                  and 19)
<S>                           <C>        <C>    <C>        <C>           <C>      <C>          <C>

Balance at January 1, 1997... 45,877,082  $46    $171,319      $  --     $  (218)   $ (6,770)     $11,736
Issuance of common stock..... 10,327,686   10      92,078         --          --          --           --
Issuance of common stock to
 employees...................    529,570    1       5,162         --          --      (5,163)          --
Repayment of employee
 shareholder notes...........         --   --          --         --          --       1,185           --
Net income...................         --   --          --         --          --          --       17,642
                              ----------  ---    --------      -----     -------    --------      -------
Balance at December 31,
 1997........................ 56,734,338   57     268,559         --        (218)    (10,748)      29,378
Conversion of warrants.......    396,960   --                     --          --          --           --
Exercise of stock options....     49,646   --         120         --          --          --           --
Other comprehensive
 income......................         --   --          --        152          --          --           --
Purchase of 588,400 treasury
 shares, at cost.............         --   --          --         --      (5,950)         --           --
Issuance of 300,000 treasury
 shares at $11.00 per share..         --   --         457         --       2,843          --           --
Repayment of employee
 shareholder notes...........         --   --          --         --          --         602           --
Other........................         --   --        (159)        --          --          --           --
Net income...................         --   --          --         --          --          --       30,377
                              ----------  ---    --------      -----     -------    --------      -------
Balance at December 31,
 1998........................ 57,180,944   57     268,977        152      (3,325)    (10,146)      59,755
Conversion of warrants.......     52,678    1          --         --          --          --           --
Exercise of stock options....    197,352   --         545         --          --          --           --
Other comprehensive loss.....         --   --          --       (463)         --          --           --
Issuance of common stock to
 employees...................     74,900   --         731         --          --        (731)          --
Issuance of 183,700 treasury
 shares at $17.96 per share..         --   --       1,561         --       1,739          --           --
Repayment of employee
 shareholder notes...........         --   --          --         --          --       7,490           --
Income tax benefit from stock
 options exercised...........         --   --       1,176         --          --          --           --
Other........................         --   --         (46)        --          --          --           --
Net income...................         --   --          --         --          --          --       38,455
                              ----------  ---    --------      -----     -------    --------      -------
Balance at December 31,
 1999........................ 57,505,874  $58    $272,944      $(311)    $(1,586)   $ (3,387)     $98,210
                              ==========  ===    ========      =====     =======    ========      =======
</TABLE>

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

                                      F-6

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 1999, 1998 and 1997

1.  The Company, Business and Significant Accounting Policies

   Hanover Compressor Company and its subsidiaries ("Hanover" or the "Company")
is a leading provider of a broad array of natural gas compression rental,
operations, parts and maintenance services in the United States and select
international markets. Hanover's compression services are complemented by its
compressor and oil and gas production equipment fabrication operations. Hanover
is a Delaware corporation originally formed on October 17, 1990. In December
1999, the Company adopted a holding company structure and merged into the new
holding company that assumed the name of Hanover Compressor Company. The
charter and by-laws of the new holding company are substantially the same as
the old Company.

   On June 6, 1997, the Board of Directors approved an increase of authorized
shares of preferred stock and common stock to 3,000,000 and 100,000,000 shares,
respectively. In addition, the Board of Directors approved a 158-for-1 stock
split of the Company's common stock. The stock split has been effected in the
form of a stock dividend. All share and per share information included herein
reflects the stock split.

   On June 30, 1997, Hanover issued 10,317,382 shares of common stock for cash
of $92,020,000 (net of approximately $1,771,000 of equity issuance costs) in
connection with the Company's initial public offering (the Offering).

  Principles of Consolidation

   The accompanying consolidated financial statements include Hanover and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

  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.

  Cash and Cash Equivalents

   The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

  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 and service revenue is recorded as products are delivered or
services are performed for the customer.

   Compressor and production equipment fabrication revenue is recognized using
the percentage-of-completion method. The Company estimates percentage-of-
completion for compressor fabrication on a direct labor hour-to-total labor
hour basis. Production equipment fabrication percentage-of-completion is
estimated using the cost-to-total cost basis.

                                      F-7

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997



  Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents and accounts receivable.
The Company believes that the credit risk in temporary cash investments that
the Company has with financial institutions is minimal. Trade accounts
receivable are due from companies of varying size engaged principally in oil
and gas activities in the United States, Canada and South America. The Company
reviews the financial condition of customers prior to extending credit and
generally does not obtain collateral for receivables. Payment terms are on a
short-term basis and in accordance with industry standards. Trade accounts
receivable are recorded net of estimated doubtful accounts of $1,730,000 and
$1,212,000 at December 31, 1999 and 1998, respectively. The Company considers
this credit risk to be limited due to these companies financial resources.

  Inventory

   Inventory consists of parts used for fabrication or maintenance of natural
gas compression units 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:

<TABLE>
             <S>                                      <C>
             Compression equipment and facilities.... 4 to 25 years
             Buildings...............................      30 years
             Transportation, shop equipment and other 3 to 12 years
</TABLE>

   Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost and related
accumulated depreciation are eliminated and the gain or loss is recognized.
Depreciation expense was $34,696,000, $35,768,000 and $27,789,000 in 1999, 1998
and 1997, respectively.

   Assets under construction of $18,937,000 and $6,984,000 are included in
compression equipment at December 31, 1999 and 1998, respectively. Interest is
capitalized in connection with the compression equipment and facilities that
are constructed for the Company's use in its rental operations. The capitalized
interest is recorded as part of the assets to which it relates and is amortized
over the asset's estimated useful life. In 1999, $1,533,000 of interest cost
was capitalized. No interest was capitalized for 1998 and 1997.

  Long-Lived Assets

   The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill 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 market
value.

                                      F-8

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


  Intangible and Other Assets

   Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired businesses is recorded as goodwill and
amortized on a straight-line basis over 15 years commencing on the dates of the
respective acquisitions. Accumulated amortization was $3,822,000 and $1,810,000
at December 31, 1999 and 1998, respectively.

   Included in intangible and other assets are debt issuance costs, net of
accumulated amortization, totaling $1,099,000 and $1,186,000 at December 31,
1999 and 1998, respectively. Such costs are amortized over the period of the
respective debt agreements.

  Stock-Based Compensation

   In accordance with Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and has provided in Note 12, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.

  Income Taxes

   The Company accounts 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 the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments
of changes in the tax law or rates.

  Foreign Currency Translation

   The financial statements of subsidiaries outside the U.S., except those
located in highly inflationary economies, are measured using the local currency
as the functional currency. Assets, including goodwill, and liabilities of
these subsidiaries are translated at the rates of exchange 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 located in
highly inflationary economies, translation gains and losses are included in net
income. The resulting translation adjustment for the year ended December 31,
1997 was not significant.

  Earnings Per Common Share

   Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common share
is computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock.

   Included in diluted shares are common stock equivalents relating to options
of 3,296,000, 2,460,000 and 2,306,000 in 1999, 1998 and 1997, respectively, and
warrants of 712,000, 786,000 and 1,138,000 in 1999, 1998

                                      F-9

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997

and 1997, respectively. The common stock equivalents excluded from the
computation of diluted earnings per share as the effect would be anti-dilutive
were approximately 212,000 and 292,000 in 1999 and 1998. No common stock
equivalents were anti-dilutive in 1997.

  Comprehensive Income

   Components of comprehensive income are net income and all changes in equity
during a period except those resulting from transactions with owners.
Accumulated other comprehensive income consists of the foreign currency
translation adjustment.

  Financial Instruments

   The Company utilizes off-balance sheet derivative financial instruments with
the principal objective being to minimize the risks and/or costs associated
with financial and global operating activities by managing its exposure to
interest rate fluctuation on a portion of its variable rate debt and leasing
obligations. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. The Company designates and assigns the
financial instruments as hedges of specific assets, liabilities or anticipated
transactions. 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. The carrying
amounts reported in the balance sheet for all financial instruments approximate
fair value. See Notes 7 and 8.

  Reclassifications

   Certain amounts in the prior years' financial statements have been
reclassified to conform to the 1999 financial statement classification. These
reclassifications have no impact on net income.

2.  Business Combinations

   Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates 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 define and
quantify 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. The Company's management does not
believe potential deviations between its fair value estimates and actual fair
values to be material.

  Year Ended December 31, 1999

   In July 1999, the Company purchased preferred stock and a purchase option
for the common stock of CDI Holdings, Inc. and its subsidiary Compressor
Dynamics, Inc. ("CDI"). In August 1999, the Company exercised its option to
purchase CDI. The total cost for CDI was approximately $18,525,000 in cash.

   In August 1999, the Company purchased the stock of Victoria Compression
Services, Inc., Contract Engineering and Operating, Inc. and Unit Partners,
Inc. ("CEO") for approximately $16,786,000 in cash, 183,700 shares of the
Company's treasury stock valued at $3,300,000 and notes payable of
approximately $452,000.

                                     F-10

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


  Year Ended December 31, 1998

   In June 1998, the Company purchased the stock of Arkoma Compression
Services, Inc. for approximately $17,245,000 in cash. In October 1998, the
Company purchased the stock of Eureka Energy Systems, Inc. for approximately
$25,335,000 in cash.

   The pro forma information set forth below assumes acquisitions in 1999 and
1998 are accounted for had the purchases occurred at the beginning of 1998. The
pro forma information is presented for informational purposes only and is not
necessarily indicative of the results of operations that actually would have
been achieved had the acquisitions been consummated at that time (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                    Years Ended
                                                   December 31,
                                              -----------------------
                                                 1999        1998
                                              ----------- -----------
                                               Restated
                                              (unaudited) (unaudited)
           <S>                                <C>         <C>
           Revenue...........................  $317,912    $308,870
           Net income........................    38,426      31,391
           Earnings per common share--basic..  $   0.67    $   0.55
           Earnings per common share--diluted  $   0.63    $   0.52
</TABLE>

  Year Ended December 31, 1997

   In September 1997, Hanover purchased Wagner Equipment, Inc. and Gas Tech
Compression Services, Inc. for approximately $6,287,000 in cash. Results of
operations for 1997 were not materially impacted by the transaction.

3.  Inventory

   Inventory consisted of the following amounts (in thousands):

<TABLE>
<CAPTION>
                                           December 31,
                                         ----------------
                                           1999    1998
                                         -------- -------
                                         Restated
                      <S>                <C>      <C>
                      Parts and supplies $44,613  $32,808
                      Work in progress..  18,677   19,962
                      Finished goods....   3,827   10,274
                                         -------  -------
                                         $67,117  $63,044
                                         =======  =======
</TABLE>

4.  Compressor and Production Equipment Fabrication Contracts

   Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                      December 31,
                                                   -----------------
                                                     1999     1998
                                                   -------  --------
           <S>                                     <C>      <C>
           Costs incurred on uncompleted contracts $11,041  $ 18,605
           Estimated earnings.....................   2,150     3,488
                                                   -------  --------
                                                    13,191    22,093
           Less--billings to date.................  (9,307)  (14,916)
                                                   -------  --------
                                                   $ 3,884  $  7,177
                                                   =======  ========
</TABLE>

                                     F-11

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


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

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                            --------------
                                                                             1999    1998
                                                                            ------  ------
<S>                                                                         <C>     <C>
Costs and estimated earnings in excess of billings on uncompleted contracts $4,782  $7,871
Billings on uncompleted contracts in excess of costs and estimated earnings   (898)   (694)
                                                                            ------  ------
                                                                            $3,884  $7,177
                                                                            ======  ======
</TABLE>

5.  Intangible and Other Assets

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

<TABLE>
<CAPTION>
                                                           December 31,
                                                         ----------------
                                                           1999     1998
                                                         -------  -------
      <S>                                                <C>      <C>
      Goodwill.......................................... $33,613  $26,686
      Investments in unconsolidated subsidiaries........  18,892   24,104
      Deferred debt issuance and other transaction costs  10,317    4,957
      Notes receivable..................................   9,214    3,799
      Other.............................................   1,862    3,237
                                                         -------  -------
                                                          73,898   62,783
      Accumulated amortization..........................  (7,385)  (5,747)
                                                         -------  -------
                                                         $66,513  $57,036
                                                         =======  =======
</TABLE>

   Amortization of goodwill and other intangible assets totaled $2,641,000,
$1,386,000 and $650,000 in 1999, 1998 and 1997, respectively.

   At December 31, 1999 and 1998, the Company's investments in unconsolidated
subsidiaries included a 35% interest in Collicutt Mechanical Services, Ltd.; a
35% interest in the Consortium Cosacol/Hanover (the "Consortium"); and a
non-controlling 60% interest in the Hanover/Enron Joint Venture. In September
1999, the Company acquired a 20% interest in Meter Acquisition Company LP, LLLP
for approximately $2,200,000 and a non-controlling 52.5% interest in Hanover
Measurement Services Company, LP for approximately $2,700,000. The Company had
a 33% interest in a joint venture with Wartsila Diesel International Ltd., OY
that was dissolved in 1999. There were no distributions or dividends received
during the years ended December 31, 1998 and 1999. Equity in income of joint
ventures was $1,188,000 and $1,369,000 for 1999 and 1998, respectively and a
loss of $206,000 for 1997 and is included in other revenues.

   In December 1998, the Company restructured its relationship in the
Consortium. The Company purchased all of the capitalized construction from the
Consortium for 300,000 shares of Hanover common stock valued at $3,300,000. The
capitalized construction was transferred to property, plant and equipment in
1999. In addition, the Company acquired a 10% interest in Cosacol for
$2,000,000 in cash.

   In December 1998, the Company advanced $8,000,000 to Transportadora de Gas
del Sur S.A., an Argentina company for a 25% interest in a joint venture. In
1999, the Company withdrew from the joint venture and the $8,000,000 was repaid.

                                     F-12

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. for approximately $5,608,000 in cash. The investment
is accounted for using the equity method of accounting. The excess of the
Company's investment over the underlying net equity of $703,000 is being
amortized on a straight-line basis over ten years and is included in other
assets at December 31, 1999 and 1998.

   The notes receivable result primarily from customers for sales of equipment
or advances to other parties in the ordinary course of business. The notes vary
in length, are non-interest bearing or bear interest at rates ranging from
prime to 15% and are collateralized by equipment.

6.  Accrued Liabilities

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

<TABLE>
<CAPTION>
                                                 December 31,
                                                ---------------
                                                 1999    1998
                                                ------- -------
                 <S>                            <C>     <C>
                 Accrued salaries and wages.... $   224 $ 1,055
                 Accrued bonuses...............   1,669   1,539
                 Accrued income and other taxes   8,033   6,105
                 Accrued leasing expense.......   3,496   2,336
                 Accrued other                    8,643   6,564
                                                ------- -------
                                                $22,065 $17,599
                                                ======= =======
</TABLE>

7.  Long-Term Debt

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

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                    ------------------
                                                                                      1999      1998
                                                                                    --------  --------
<S>                                                                                 <C>       <C>
Revolving credit facility.......................................................... $ 62,100  $126,500
Subordinated promissory notes, net of unamortized discount of $289 and
  $855.............................................................................   15,364    22,648
Real estate mortgage, interest at 7.5%, collateralized by certain land and
  buildings, payable through 2002..................................................    4,250     4,583
Other, interest at various rates, collateralized by equipment and other assets, net
  of unamortized discount..........................................................    3,934     3,656
                                                                                    --------  --------
                                                                                      85,648   157,387
Less--current maturities...........................................................  (15,967)     (444)
                                                                                    --------  --------
                                                                                    $ 69,681  $156,943
                                                                                    ========  ========
</TABLE>

   The Company's primary credit agreement provides for a $200,000,000 revolving
credit facility that matures on December 17, 2002. Advances bear interest at
the bank's prime or a negotiated rate (7.7% and 6.9% at December 31, 1999 and
1998, respectively). A commitment fee of 0.35% per annum on the average
available commitment is payable quarterly.

                                     F-13

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The credit agreement contains certain financial covenants and limitations
on, among other things, indebtedness, liens, leases and sales of assets. The
credit agreement also limits the payment of cash dividends on the Company's
common stock to 25% of net income for the respective period.

   The subordinated promissory notes mature on December 31, 2000 and bear
interest at 7%, payable semi-annually.

   Maturities of long-term debt at December 31, 1999 are (in thousands): 2000--
$15,967; 2001--$722; 2002--$66,093; 2003--$380; 2004--$328 and $2,158
thereafter.

   In January 1998 and in connection with the revolving credit facility, the
Company entered into a two-year interest rate swap transaction to manage
interest rate exposure with a notional amount of $75,000,000 and a strike rate
of 5.43%. The differential paid or received on the swap transaction was
recognized as an adjustment to interest expense. This swap transaction was
cancelled in July 1998.

8.  Leasing Transactions

   In June 1999 and in July 1998, the Company completed two individual
$200,000,000 sale and leaseback transactions of certain compression equipment.
The transactions are recorded as a sale and leaseback of the equipment and are
recorded as operating leases. Under both agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the agreements (approximately
$333,000,000 for both transactions) that are due upon termination of the leases
and which may be satisfied by a cash payment or the exercise of the Company's
purchase options. The equipment sold in the June 1999 transaction had a book
value of approximately $162,014,000 and resulted in a gain of approximately
$37,986,000. The equipment sold in the July 1998 transaction had a book value
of $158,007,000 and resulted in a gain of approximately $41,993,000. Both gains
are deferred until the end of the respective lease terms. Should the Company
not exercise its purchase options under the agreements, the deferred gains will
be recognized to the extent they exceed any required payments under the
residual value guarantees and any other requirements under the agreements. The
Company incurred transaction costs of approximately $1,799,000 and $1,423,000
for the 1999 and 1998 transactions, respectively. These costs are included in
intangible and other assets and are being amortized over the respective lease
terms.

   Both lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offered Rate. The following provides future minimum
lease payments under the leasing arrangement exclusive of any guarantee
payments (in thousands): 2000--$30,300; 2001--$30,700; 2002--$30,700; 2003--
23,300; 2004--$7,900.

   In July 1998 and in connection with the 1998 leasing transaction, the
Company entered into two-year swap transactions to manage lease rental exposure
with notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51%
and 5.56%, respectively. The differential paid or received on the swap
transactions is recognized as an adjustment to leasing expense. The
counterparty to this contractual arrangement is a major financial institution
with which the Company also has other financial relationships. The Company is
exposed to credit loss in the event of nonperformance by this counterparty.
However, the Company does not anticipate nonperformance by this party and no
material loss would be expected from their nonperformance. The fair market
value of these interest rate swaps at December 31, 1999 is approximately
$2,900,000 based on market quotes.

                                     F-14

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


9.  Income Taxes

   The components of income before income taxes were as follows (in thousands):

<TABLE>
<CAPTION>
                                Years ended December 31,
                                ------------------------
                                  1999    1998    1997
                                -------- ------- -------
                                Restated
                       <S>      <C>      <C>     <C>
                       Domestic $44,618  $39,160 $22,864
                       Foreign.  15,845   10,476   5,821
                                -------  ------- -------
                                $60,463  $49,636 $28,685
                                =======  ======= =======
</TABLE>

   The provision for income taxes consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                                         ------------------------
                                           1999    1998     1997
                                         -------- ------- -------
                                         Restated
              <S>                        <C>      <C>     <C>
              Current tax expense:
                 Federal................ $ 6,958  $ 3,421 $ 3,308
                 State..................   1,412    1,741   1,281
                 Foreign................   3,379    1,739     492
                                         -------  ------- -------
                     Total current......  11,749    6,901   5,081
                                         -------  ------- -------
              Deferred tax expense:
                 Federal................   9,533   10,312   4,272
                 State..................     151       85     (23)
                 Foreign................     575    1,961   1,713
                                         -------  ------- -------
                     Total deferred.....  10,259   12,358   5,962
                                         -------  ------- -------
              Total provision........... $22,008  $19,259 $11,043
                                         =======  ======= =======
</TABLE>

   The income tax expense for 1999, 1998 and 1997 resulted in effective tax
rates of 36.4%, 38.8% and 38.5%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                       Years Ended December 31
                                                      ------------------------
                                                        1999    1998     1997
                                                      -------- ------- -------
                                                      Restated
<S>                                                   <C>      <C>     <C>
Federal income tax at statutory rates................ $21,163  $17,373 $10,040
State income taxes, net of federal income tax benefit   1,016    1,187     817
Foreign income taxes.................................     211       33     226
Other, net...........................................    (382)     666     (40)
                                                      -------  ------- -------
                                                      $22,008  $19,259 $11,043
                                                      =======  ======= =======
</TABLE>

                                     F-15

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


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

<TABLE>
<CAPTION>
                                                      December 31,
                             -                     ------------------
                                                     1999      1998
                                                   --------  --------
                                                   Restated
          <S>                                      <C>       <C>
          Deferred tax assets:
             Net operating losses................. $  8,582  $  3,345
             Alternative minimum tax carryforward.   19,005    13,276
             Other................................    2,391     4,457
                                                   --------  --------
          Gross deferred tax assets...............   29,978    21,078
                                                   --------  --------
          Deferred tax liabilities:
             Property, plant and equipment........  (82,764)  (58,249)
             Other................................  (11,610)   (8,339)
                                                   --------  --------
          Gross deferred tax liabilities..........  (94,374)  (66,588)
                                                   --------  --------
                                                   $(64,396) $(45,510)
                                                   ========  ========
</TABLE>

   The Company has net operating loss carryforwards at December 31, 1999 of
$24,500,000 expiring in 2006 to 2018. In addition, the Company has an
alternative minimum tax credit carryforward of $19,005,000 that does not expire.

   In 1999, the company recorded approximately $8,627,000 additional deferred
income tax liability resulting from the CDI and CEO acquisitions. See Note 2
for a description of the transactions.

   The Company has not recorded a deferred income tax liability for additional
income taxes that would result from the distribution of earnings of its foreign
subsidiaries if they were actually repatriated. The Company intends to
indefinitely reinvest the undistributed earnings of its foreign subsidiaries.

10.  Mandatorily Redeemable Convertible Preferred Securities

   In December 1999, the Company issued $86,250,000 of unsecured 7.25%
Manditorily Redeemable Convertible Preferred Securities (the "Convertible
Preferred Securities") through Hanover Compressor Capital Trust, a Delaware
business trust and wholly owned finance subsidiary of the Company. The
Convertible Preferred Securities have a liquidation amount of $50 per unit. The
Convertible Preferred Securities mature in 30 years but the Company may redeem
the Convertible Preferred Securities partially or in total any time on or after
December 20, 2002. The Convertible Preferred Securities also provide for annual
cash distributions at the rate of 7.25%, payable quarterly in arrears, however,
payments may be deferred up to 20 quarters subject to certain restrictions.
During 1999, the Company accrued financing costs of approximately $288,000
related to Convertible Preferred Securities. Each Convertible Preferred
Security is convertible into 2.7972 shares of Hanover common stock, subject to
adjustment for certain events. The Company has fully and unconditionally
guaranteed the Convertible Preferred Securities. The Company incurred
transaction costs of approximately $3,310,000 which are included in other
assets and will be amortized over the term of the Convertible Preferred
Securities.

                                     F-16

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


11.  Common Stockholders' Equity

  Notes Receivable--Employee Stockholders

   Under various stock purchase plans, the Company's employees are eligible to
purchase shares of Hanover stock at fair market value in exchange for cash
and/or notes receivable. The notes are collateralized by the common stock and
the general credit of the employee, bear interest at a prime rate, and are
generally payable on demand or at the end of a four-year period. The notes have
been recorded as a reduction of common stockholders' equity.

   In addition and in connection with the Company's initial public offering,
the Company issued 529,570 shares of common stock to employees at the Offering
price of $9.75 in exchange for employee notes receivable.

  Other

   As of December 31, 1999, warrants to purchase approximately 688,000 shares
of common stock at $.01 per share were outstanding. The warrants expire in
August 2005.

   During 1998, the Company initiated a stock buyback program authorized to
repurchase up to 900,000 of the Company's outstanding shares to assist with
future business acquisitions and for general corporate purposes. In 1998, the
Company repurchased 588,400 shares at an average price of $10.11.

   In February 1997, Hanover issued 10,304 shares of common stock for cash to a
trust for the benefit of a member of the Company's outside legal counsel.

   See Notes 1, 2, 5, 12 and 16 for a description of other common stock
transactions.

12.  Stock Options

   The Company has employee stock option plans that provide for the granting of
options to purchase common shares. The options are generally issued at fair
market value on the date of grant and are exercisable over a ten-year period.
Vesting of stock options issued prior to June 1997 was accelerated as a result
of completion of the initial public offering. Accordingly, during 1997 the
Company recognized a charge of $269,000 related to unamortized compensation
expense on options issued at less than fair market value on the date of grant.
No compensation expense was recorded in 1999 and 1998.

   Of the options granted in 1999 and 1998, 700,000 vest 100% on July 1, 2001
and 320,000 vested immediately. The remaining options granted to employees vest
over the following schedule, which may accelerate upon a change in the
Company's controlling ownership.

<TABLE>
                                  <S>    <C>
                                  Year 1  10%
                                  Year 2  30%
                                  Year 3  60%
                                  Year 4 100%
</TABLE>

                                     F-17

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The following is a summary of stock option activity for the years ended
December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                         Weighted Average
                                                Shares   Price Per Share
                         -                    ---------  ----------------
       <S>                                    <C>        <C>
       Options outstanding, December 31, 1996 4,800,348       $ 2.56
          Options granted.................... 2,030,646         9.75
          Options canceled...................    (2,276)        5.28
          Options exercised..................        --
                                              ---------
       Options outstanding, December 31, 1997 6,828,718         4.70
          Options granted.................... 2,095,366        10.13
          Options canceled...................   (84,008)       10.61
          Options exercised..................   (49,646)        2.40
                                              ---------
       Options outstanding, December 31, 1998 8,790,430         5.95
          Options granted....................   272,156        13.79
          Options canceled...................   (68,230)        9.72
          Options exercised..................  (197,352)        2.76
                                              ---------
       Options outstanding, December 31, 1999 8,797,004         6.24
                                              ---------
</TABLE>

  Options Outstanding December 31, 1999

   The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1999:

<TABLE>
<CAPTION>
                                 Options Outstanding        Options Exercisable
                           -------------------------------- ------------------
                                       Weighted    Weighted            Weighted
                                        Average    Average             Average
                                       Remaining   Exercise            Exercise
  Range of Exercise Prices  Shares   Life in Years  Price    Shares     Price
  ------------------------ --------- ------------- -------- ---------  --------
  <S>                      <C>       <C>           <C>      <C>        <C>
       $0.01--$2.30....... 3,321,806      3.5       $ 2.23  3,321,806   $2.23
       $2.31--$3.48.......   842,842      4.0         2.67    842,842    2.67
       $3.49--$5.06.......   256,686      5.8         4.77    256,686    4.77
       $5.07--$6.96.......   139,880      6.7         5.94    139,880    5.94
       $9.75--$12.50...... 4,004,458      8.2        10.18  1,008,594    9.82
       $12.51--$14.50.....   231,332      9.9        14.50          0    0.00
                           ---------                        ---------
                           8,797,004                        5,569,808
                           =========                        =========
</TABLE>

                                     F-18

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The weighted average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date was
$6.10, $4.16 and $4.29, per option during 1999, 1998 and 1997, respectively.
The fair value of options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                    1999     1998     1997
                                  -------  -------  -------
                   <S>            <C>      <C>      <C>
                   Expected life. 6 years  6 years  6 years
                   Interest rate.     6.0%     4.8%     6.7%
                   Volatility....   29.36%    32.6%      30%
                   Dividend yield       0%       0%       0%
</TABLE>

   Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $2,194,000, $825,000 and $842,000 in 1999, 1998 and
1997, respectively. The pro forma impact on net income would have reduced basic
and diluted earnings per share by $.04 in 1999 and $.02 per share in 1998 and
1997. The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.

13.  Benefit Plans

   The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company made matching contributions of $399,000 and $273,000
during the years ended December 31, 1999 and 1998, respectively. The Company
did not make a matching contribution for the year ended December 31, 1997.

14.  Related Party Transactions

   Hanover and GKH Partners, L.P., a major stockholder of the Company, have
entered into an agreement (the "GKH Agreement") whereby in exchange for
investment banking and financial advisory services rendered and to be rendered
by the major stockholder, the Company has agreed to pay a fee to GKH Partners,
L.P. equal to .75% of the equity value of the Company determined and payable at
such time as (1) a disposition of shares of the Company's common stock
resulting in GKH Partners, L.P. owning less than 25% of the outstanding common
stock or (2) any other transaction occurs resulting in the effective sale of
the Company or its business by the current owners (see Note 18).

   In connection with stock offerings to management, the Company has received
notes from employees for shares purchased. The total amounts owed to the
Company at December 31, 1999 and 1998 are $3,387,000 and $10,146,000,
respectively. Total interest accrued on the loans is $203,000 and $548,000 as
of December 31, 1999 and 1998, respectively.

   The Company had a credit agreement with Joint Energy Developments
Investments Limited Partnership ("JEDI"), a common stockholder, that was repaid
in 1997. Interest expense in 1997 was $1,388,000. The Company also leases
compressors to affiliates of Enron Capital and Trade Resources Corp., an
affiliate of JEDI. Rentals of $8,776,000, $6,801,000 and $1,034,000 were paid
by affiliates of Enron in 1999, 1998 and 1997, respectively. In addition,
compression fabrication of $6,320,000 was paid by affiliates of Enron in 1999.
An affiliate of Enron also owns interests in Meter Acquisition Company LP, LLLP
and Hanover Measurement Services Company, L.P.

                                     F-19

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental revenues billed to these related
parties totaled $902,000, $859,000 and $1,035,000 during 1999, 1998 and 1997,
respectively.

   See Note 5 for related party investments and Note 11 for a description of
common stock transactions with related parties.

15.  Commitments and Contingencies

   Rent expense excluding lease payments for the leasing transactions described
in Note 8 for 1999, 1998 and 1997 was approximately $1,320,000, $455,000 and
$376,000, respectively. Commitments for future minimum rental payments
exclusive of those disclosed in Note 8 are not significant at December 31, 1999.

   In the ordinary course of business the Company is involved in various
pending or threatened legal actions. 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 the
Company's consolidated financial position, operating results or cash flows.

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

16.  Subsequent Events

   In March 2000, the Company completed a sale and leaseback of certain
compression equipment. The leaseback of the equipment will be recorded as an
operating lease. Under the agreement, the Company received $100 million
proceeds from the sale of the compression equipment at closing and may sell an
additional $100 million of equipment to the Trust during the next twelve
months. The equipment sold will be leased back by the Company for a five-year
period and will continue to be deployed by the Company under its normal
operating procedures. Hanover has the option to repurchase the equipment from
the Trust at any time and has substantial residual value guarantees.

   In June 2000, the Company completed a 2-for-1 split of its common stock
effected in the form of a 100% stock dividend. The Company also increased the
number of authorized shares of common stock from 100,000,000 to 200,000,000.
All common stock, additional paid-in capital and per share information has been
restated for all periods presented to reflect the stock split.

17.  Industry Segments and Geographic Information

   The Company manages its business segments primarily on the type of product
or service provided. The Company has four principal industry segments:
Rentals--Domestic, Rentals--International, Compressor Fabrication and
Production Equipment Fabrication. The Rentals Segments provide natural gas
compression rental and maintenance services to meet specific customer
requirements. The Compressor Fabrication Segment involves the design,
fabrication and sale of natural gas compression units to meet unique customer
specifications. The Production Equipment Fabrication Segment designs,
fabricates and sells equipment utilized in the production of crude oil and
natural gas.

                                     F-20

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include sales of property, plant and equipment,
results of other insignificant operations, corporate related items primarily
related to cash management activities and parts and service operations which
are not separately managed. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost and are
eliminated in consolidation. Identifiable assets are tangible and intangible
assets that are identified with the operations of a particular segment or
geographic region, or which are allocated when used jointly. Capital
expenditures include fixed asset purchases.

   No single customer accounts for 10% or more of the Company's revenues for
all periods presented. One vendor accounted for approximately $32,900,000 of
the Company's purchases in 1998.

   The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 1999,
1998 and 1997.

Industry Segments

<TABLE>
<CAPTION>
                                                             Production
                          Domestic International Compressor   Equipment
                          Rentals     Rentals    Fabrication Fabrication  Other  Eliminations Consolidated
                          -------- ------------- ----------- ----------- ------- ------------ ------------
                                                     (in thousands of dollars)
<S>                       <C>      <C>           <C>         <C>         <C>     <C>          <C>
1999 (Restated)
  Revenues from external
   customers............. $136,430   $ 56,225     $ 52,531     $27,255   $39,497  $      --     $311,938
  Intersegment sales.....       --      1,200       75,139       4,821    38,656   (119,816)          --
                          --------   --------     --------     -------   -------  ---------     --------
  Total revenues.........  136,430     57,425      127,670      32,076    78,153   (119,816)     311,938
  Gross profit...........   90,246     37,460        8,868       6,977    19,185         --      162,736
  Identifiable assets....  432,572    249,800       41,252      24,007     5,756         --      753,387
  Capital expenditures...  180,593     99,535        1,469       1,343        --         --      282,940
  Depreciation and
   amortization..........   24,448     11,158          702       1,029        --         --       37,337
1998:
  Revenues from external
   customers............. $107,420   $ 40,189     $ 67,453     $37,466   $29,429  $      --     $281,957
  Intersegment sales.....       --      1,200       54,369       2,902    10,735    (69,206)          --
                          --------   --------     --------     -------   -------  ---------     --------
  Total revenues.........  107,420     41,389      121,822      40,368    40,164    (69,206)     281,957
  Gross profit...........   70,850     27,373        9,309      11,685    12,088         --      131,305
  Identifiable assets....  377,090    159,214       41,189      25,594    11,503         --      614,590
  Capital expenditures...  111,289     54,830        2,524         855        --         --      169,498
  Depreciation and
   amortization..........   28,383      7,128          701         942        --         --       37,154
1997:
  Revenues from external
   customers............. $ 78,656   $ 22,029     $ 49,764     $37,052   $11,297  $      --     $198,798
  Intersegment sales.....       --      1,200       48,072         462     7,775    (57,509)          --
                          --------   --------     --------     -------   -------  ---------     --------
  Total revenues.........   78,656     23,229       97,836      37,514    19,072    (57,509)     198,798
  Gross profit...........   51,149     14,423        8,180      10,677     4,937         --       89,366
  Identifiable assets....  339,848    102,098       32,097      27,848     4,561         --      506,452
  Capital expenditures...  109,540     36,545          993       3,917        --         --      150,995
  Depreciation and
   amortization..........   23,261      3,912          554         712        --         --       28,439
</TABLE>

                                     F-21

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


Geographic Data

<TABLE>
<CAPTION>
                                      United
                                      States  International Consolidated
                                     -------- ------------- ------------
                                               (in thousands)
<S>                                  <C>      <C>           <C>
1999 (Restated):
   Revenues from external customers. $251,800   $ 60,138      $311,938
   Identifiable assets.............. $500,414   $252,973      $753,387
1998:
   Revenues from external customers. $230,605   $ 51,352      $281,957
   Identifiable assets.............. $454,682   $159,908      $614,590
1997:
   Revenues from external customers. $176,045   $ 22,753      $198,798
   Identifiable assets.............. $406,602   $ 99,850      $506,452
</TABLE>

18.  February 2001 Restatement

   The Company has determined that its obligation to GKH Partners, L.P. for
services performed under the GKH Agreement (see Note 14) should have been
accrued as a liability over the life of the agreement. The net effect of this
restatement was as follows: (1) an increase in selling, general and
administrative expenses of $732,000; a decrease in net income of $461,000; and
a decrease in earnings per common share of $.01 basic and $.01 diluted for the
year ended December 31, 1997 and (2) a reduction in retained earnings at
January 1, 1997 for amounts applicable to prior periods of $782,000, net of
tax, and a resultant $1,243,000 reduction in retained earnings at December 31,
1999 and 1998.

19.  November 2002 Restatement

   In October 2002, a special committee of the Board of Directors, together
with the Audit Committee of the Board and Company management, aided by outside
legal counsel, completed an extensive investigation of transactions recorded
during 2001, 2000 and 1999, including those transactions restated by the
Company in April 2002. The April 2002 restatement had no impact on the
Company's 1999 results of operations, cash flows or financial position. As a
result of this investigation, the Company determined, to restate its 1999
financial statements for several transactions. The net effect of this
restatement for the year ended December 31, 1999 was as follows: (i) a decrease
in revenues of $5,090,000, from $317,028,000 to $311,938,000; (ii) a decrease
in income before income taxes of $3,123,000, from $63,586,000 to $60,463,000;
(iii) a decrease in net income of $1,986,000, from $40,441,000 to $38,455,000;
and (iv) a decrease in earnings per common share of $0.04 basic and $0.03
diluted.

   The transactions affecting the Company's 1999 results of operations, cash
flows and financial position as a result of the November 2002 restatement are:
(i) sale of compression and production equipment; and (ii) a delay penalty, and
are detailed below.

                                     F-22

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


   The impact of the November 2002 restatement for the year ended December 31,
1999 is summarized below:

<TABLE>
<CAPTION>
                                                                      Sale of
                                                                    Compression
                                                                        and
                                                                    Production   Delay
                                                        As Filed     Equipment  Penalty Restated
                                                        --------    ----------- ------- --------
                                                        (in thousands, except per share amounts)
<S>                                                     <C>         <C>         <C>     <C>
Revenues:
   Rentals............................................. $192,655      $    --    $  --  $192,655
   Parts, service and used equipment...................   34,461       (3,388)      --    31,073
   Compressor fabrication..............................   52,531           --       --    52,531
   Production and processing equipment fabrication.....   28,037         (782)      --    27,255
   Gain on sale of property, plant and equipment.......    5,927           --       --     5,927
   Other...............................................    3,417           --     (920)    2,497
                                                        --------      -------    -----  --------
       Total revenues..................................  317,028       (4,170)    (920)  311,938
                                                        --------      -------    -----  --------
Expenses:
   Rentals.............................................   64,949           --       --    64,949
   Parts, service and used equipment...................   21,724       (1,412)      --    20,312
   Compressor fabrication..............................   43,663           --       --    43,663
   Production and processing equipment fabrication.....   20,833         (555)      --    20,278
   Selling, general and administrative.................   33,782           --       --    33,782
   Depreciation and amortization.......................   37,337           --       --    37,337
   Lease expense.......................................   22,090           --       --    22,090
   Interest expense....................................    8,786           --       --     8,786
   Distributions on mandatorily redeemable convertible
     preferred Securities..............................      278           --       --       278
                                                        --------      -------    -----  --------
       Total expenses..................................  253,442       (1,967)      --   251,475
                                                        --------      -------    -----  --------
Income before income taxes.............................   63,586       (2,203)    (920)   60,463
Provision for income taxes.............................   23,145         (802)    (335)   22,008
                                                        --------      -------    -----  --------
Net income............................................. $ 40,441      $(1,401)   $(585) $ 38,455
                                                        ========      =======    =====  ========
Earnings per common share:
   Basic............................................... $   0.71                        $   0.67
   Diluted ............................................ $   0.66                        $   0.63
</TABLE>

<TABLE>
<CAPTION>
                                                               Restatement
                                                      As filed    Items    Restated
                                                      -------- ----------- --------
                                                             (in thousands)
<S>                                                   <C>      <C>         <C>
Accounts receivable, net............................. $ 93,715   $(5,090)  $ 88,625
Inventory............................................   66,562       555     67,117
Property, plant and equipment, net...................  497,465     1,412    498,877
Total assets.........................................  756,510    (3,123)   753,387
Deferred income taxes................................   65,533    (1,137)    64,396
Total liabilities....................................  302,346    (1,137)   301,209
Retained earnings....................................  100,196    (1,986)    98,210
Total liabilities and common stockholders' equity....  756,510    (3,123)   753,387
</TABLE>

                                     F-23

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997


Sale of Compression and Production Equipment

   In the fourth quarter of 1999, the Company recorded three transactions
totaling $4,170,000 in revenue from the sale of used compression and production
equipment. An additional $310,000 in revenue was recorded on one of the
transactions in the second quarter of 2000. Based on further evaluation of the
terms of the three transactions, the Company determined that the sales were in
the nature of consignment sales and should not have recognized revenue or
income on these transactions. The receivables recorded by the Company in 1999
in two of the transactions were cleared in 2000 when the Company purchased the
buyer of the compression and production equipment in business acquisition
transactions. The Company ultimately repurchased the equipment sold in the
third transaction back from the buyer. In the second quarter of 2001, the
Company resold a portion of the compression equipment originally recorded as
sold in 1999 and should have recorded an additional $716,000 pre-tax expense on
the sale.

Delay Penalty

   In July 1999, the Company entered into a Contract Gas Processing Master
Equipment and Operating Agreement (the "Agreement") with a customer. The
customer failed to satisfy certain conditions of the Agreement for which it
later agreed to pay up to $1,100,000 as a delay penalty. The Company and the
customer executed an addendum to the original Agreement effective February 25,
2000 whereby the customer acknowledged the amount of penalty that would be
paid. In 1999, the Company recognized and recorded $920,000 of this penalty as
revenue. The Company determined that the penalty should not have been
recognized until it had executed the addendum to the Agreement in February
2000. Later in 2000, the Company entered into a Stock Issuance Agreement with
the customer whereby the Company received an equity interest in the customer in
exchange for the amount the customer owed to the Company for the delay payment.

                                     F-24

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                 Selected Quarterly Financial Data (unaudited)

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

<TABLE>
<CAPTION>
                                             1st     2nd     3rd     4th
                                           Quarter Quarter Quarter Quarter
                                           ------- ------- ------- -------
                                           (in thousands, except per share
                                                      amounts)
<S>                                        <C>     <C>     <C>     <C>
1999 Restated
 Revenue(2)............................... $64,444 $73,799 $84,462 $89,233
 Gross profit(2)..........................  36,947  38,681  43,373  43,735
 Net income(2)............................   8,639   8,482  10,388  10,946
 Earnings per common and common equivalent
 share:
   Basic(1)(2)............................  $ 0.15  $ 0.15  $ 0.18  $ 0.19
   Diluted(1)(2)..........................  $ 0.14  $ 0.14  $ 0.17  $ 0.18
1998
 Revenue.................................. $61,449 $68,933 $71,796 $79,779
 Gross profit.............................  28,411  31,963  34,841  36,090
 Net income...............................   6,251   6,972   8,048   9,106
 Earnings per common and common equivalent
 share:
   Basic(1)...............................  $ 0.11  $ 0.12  $ 0.14  $ 0.16
   Diluted(1).............................  $ 0.10  $ 0.12  $ 0.13  $ 0.15
</TABLE>
--------
(1) In June 2000, the Company completed a 2-for-1 stock split effected in the
    form of a 100% stock dividend. All weighted average and common equivalent
    shares and earnings per common share information has been restated for all
    periods presented to reflect this stock split.
(2) The Company restated the fourth quarter of 1999 for certain revenue
    recognition matters as disclosed in Note 19. The net effect of this
    restatement for the three months ended December 31, 1999 was as follows:
    (i) a decrease in revenues of $5.1 million, from $94.3 million to $89.2
    million; (ii) a decrease in gross profit of $3.2 million, from $46.9
    million to $43.7 million; (iii) a decrease in net income of $2.0 million,
    from $12.9 million to $10.9 million; and (iv) a decrease in earnings per
    common share of $0.04 basic and $0.03 diluted.

                                     F-25