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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For fiscal year ended December 31,
    2003                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                 

Commission file no. 1-13071

Hanover Compressor Company


(Exact name of registrant as specified in its
charter)


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

12001 North Houston Rosslyn, Houston, Texas
77086

(Address of principal executive offices, zip
code)


Registrants telephone number, including
area code:

(281) 447-8787


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

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange in Which Registered
|                              |  |                                          
|Common Stock, $.001 par value |  | New York Stock Exchange                  

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 þ          No o

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

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

The aggregate market value of the Common Stock of
the registrant held by non-affiliates as of June 30, 2003
was $659,857,000. For purposes of this disclosure, common stock
held by persons who hold more than 5% of the outstanding voting
shares and common stock held by executive officers and directors
of the registrant have been excluded in that such persons may be
deemed to be affiliates as that term is defined
under the rules and regulations promulgated under the Securities
Act of 1933. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. With
respect to persons holding more that 5% of our outstanding
voting shares and common stock, we have relied upon statement
filed by such persons on or prior to June 30, 2003 pursuant
to Section 13(d) or 13(g) of the Securities Exchange Act of
1934, as amended.

Number of shares of the Common Stock of the
registrant outstanding as of March 19, 2004:
85,536,605 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive
proxy statement for the 2004 Annual Meeting of Stockholders to
be held in 2004, which will be filed with the Securities and
Exchange Commission within 120 days after December 31,
2003, are incorporated by reference into Part III.

The Index to Exhibits begins on page 72.



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HANOVER COMPRESSOR COMPANY

TABLE OF CONTENTS






|                                                  |          |  |                                                                                                        |      |  |    | 
|------------------------------------------------- | -------- |  | ------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|                                                  |          |  |                                                                                                        | Page
|                                                  |          |  |                                                                                                        |     
|PART I                                           
|                                                  | Item 1.  |  | Business                                                                                               |      |  | 3  | 
|                                                  | Item 2.  |  | Properties                                                                                             |      |  | 19 | 
|                                                  | Item 3.  |  | Legal Proceedings                                                                                      |      |  | 20 | 
|                                                  | Item 4.  |  | Submission of Matters to a
    Vote of Security Holders                                                |      |  | 23 | 
|PART II                                          
|                                                  | Item 5.  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |      |  | 24 | 
|                                                  | Item 6.  |  | Selected Financial Data                                                                                |      |  | 25 | 
|                                                  | Item 7.  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |      |  | 27 | 
|                                                  | Item 7A. |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |      |  | 67 | 
|                                                  | Item 8.  |  | Financial Statements and
    Supplementary Data                                                        |      |  | 68 | 
|                                                  | Item 9.  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |      |  | 68 | 
|                                                  | Item 9A. |  | Controls and Procedures                                                                                |      |  | 68 | 
|PART III                                         
|                                                  | Item 10. |  | Directors and Executive
    Officers of Hanover                                                        |      |  | 69 | 
|                                                  | Item 11. |  | Executive Compensation                                                                                 |      |  | 69 | 
|                                                  | Item 12. |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |      |  | 69 | 
|                                                  | Item 13. |  | Certain Relationships and
    Related Transactions                                                     |      |  | 71 | 
|                                                  | Item 14. |  | Principal Accounting Fees
    and Services                                                             |      |  | 71 | 
|PART IV                                          
|                                                  | Item 15. |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |      |  | 72 | 
|SIGNATURES                                        |          |  | 80                                                                                                     |     
|Amended Bylaws                                   
|Indenture for 4.75% Convertible Senior Notes     
|Form of 4.75% Convertible Senior Notes           
|Form of 8.50% Senior Secured Notes               
|Form of 8.75% Senior Secured Notes               
|Form of Zero Coupon Subordinated Notes           
|Form of 8.625% Senior Notes                      
|Form 4.75% Convertible Senior Notes              
|Registration Rights Agreement                    
|PIGAP Settlement Agreement                       
|Offset Rights Agreement                          
|Hanover Guarantee                                
|Subsidiaries' Guarantee                          
|Amend.to Guarantees,Credit & Participation Agmt  
|Amend.No.1 to Agreement and Plan of Merger       
|Amend.No.2 to Agreement and Plan of Merger       
|Separation Agreement with Mark Berg              
|Computation of Ratio of Earnings to Fixed Charges
|Guide to Ethical Business Conduct                
|List of Subsidiaries                             
|Consent of PricewaterhouseCoopers LLP            
|Certification of CEO Pursuant to Section 302     
|Certification of CFO Pursuant to Section 302     
|Certification of CEO Pursuant to Section 906     
|Certification of CFO Pursuant to Section 906     



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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

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



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our inability to renew our short-term leases of
    equipment with our customers so as to fully recoup our cost of
    the equipment;                                               
|
| |  | a prolonged substantial reduction in oil and
    natural gas prices, which could cause a decline in the demand
    for our compression and oil and natural gas production equipment;
|
| |  | reduced profit margins or the loss of market
    share resulting from competition or the introduction of
    competing technologies by other companies;                             
|
| |  | legislative changes or changes in economic or
    political conditions in the countries in which we do business;                                                                    
|
| |  | the inherent risks associated with our
    operations, such as equipment defects, malfunctions and failures
    and natural disasters;                                              
|
| |  | our inability to implement certain business
    objectives, such as:                                                                                                                



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | integrating acquired businesses,                                                                                                                 
|
| |  | implementing our new enterprise resource planning
    systems,                                                                                   
|
| |  | generating sufficient cash,                                                                                                                      
|
| |  | accessing capital markets,                                                                                                                       
|
| |  | refinancing existing or incurring additional
    indebtedness to fund our business, and                                                          
|
| |  | executing our exit and sale strategy with respect
    to assets classified on our balance sheet as discontinued
    operations and held for sale;



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | governmental safety, health, environmental and
    other regulations, which could require us to make significant
    expenditures; and             
|
| |  | our inability to comply with covenants in our
    debt agreements and the decreased financial flexibility
    associated with our substantial debt.

Other factors in addition to those described in
this Form 10-K could also affect our actual results. You
should carefully consider the risks and uncertainties described
above and those discussed in Item 1 Business
and in Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Factors That May Affect Our Financial
Condition and Future Results, of this Form 10-K in
evaluating our forward-looking statements.

You should not unduly rely on these
forward-looking statements, which speak only as of the date of
this Form 10-K. We undertake no obligation to publicly
revise any forward-looking statement to reflect circumstances or
events after the date of this Form 10-K or to reflect the
occurrence of unanticipated events. You should, however, review
the factors and risks we describe in the reports we file from
time to time with the SEC after the date of this Form 10-K.
All forward-looking statements attributable to us are expressly
qualified in their entirety by this cautionary statement.

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|        |         
|------- | --------
|Item 1. | Business

General

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

Substantially all of our assets and operations
are owned or conducted by our wholly-owned subsidiary, Hanover
Compression Limited Partnership (HCLP). In December
2001 and 2002, HCLP and its subsidiaries completed various
internal restructuring transactions pursuant to which certain of
the domestic subsidiaries of HCLP were merged, directly or
indirectly, with and into HCLP.

We believe that we are currently the largest
natural gas compression company in the United States on the
basis of aggregate rental horsepower, with approximately
6,071 rental units in the United States having an aggregate
capacity of approximately 2,588,000 horsepower at
December 31, 2003. In addition, we estimate that we are one
of the largest providers of compression services in the Latin
American and Canadian markets, operating approximately
835 units internationally with approximately 925,000
horsepower at December 31, 2003. As of December 31,
2003, approximately 74% of our natural gas compression
horsepower was located in the United States and approximately
26% was located elsewhere, primarily in Latin America and Canada.

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

Industry trends

We compete primarily in the market for
transportable natural gas compression units of up to 4,500
horsepower. The market for rental compression has experienced
significant growth over the past decade. Although recently we
have not experienced any significant growth in domestic rentals
or purchases of equipment and services by our customers, which
we believe is primarily a result of the lack of a significant
increase in U.S. natural gas production levels, we believe
that the U.S. gas compression market will continue to grow
due to the increased demand for natural gas, the continued aging
of the natural gas reserve base and the attendant decline of
wellhead pressures, the discovery of new reserves and the
continuing interest in outsourcing compression by independent
producers. However, because the majority of oil and gas reserves
are located outside of the United States, we believe that
international markets will be a primary source of our growth
opportunities in the gas compression market in the years to come.

As of December 31, 2003, the rental portion
of the domestic gas compression market was estimated by industry
sources to be approximately 5.0 million horsepower, which
we estimate accounts for approximately 30% of aggregate
U.S. horsepower, having doubled since 1996. Growth of the
rental

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compression capacity in the U.S. market has
been primarily driven by the trend toward outsourcing by energy
producers and processors. We believe that outsourcing provides
the customer greater financial and operating flexibility by
minimizing the customers investment in equipment and
enabling the customer to more efficiently resize their
compression capabilities to meet changing reservoir conditions.
In addition, we believe that outsourcing typically provides the
customer with more timely and technically proficient service and
maintenance, which often reduces operating costs. We believe
growth opportunities for compressor rental and sales exist due
to (1) increased worldwide energy consumption,
(2) implementation of international environmental and
conservation laws prohibiting the flaring of natural gas, which
increases the need for gathering systems, (3) increased
outsourcing by energy producers and processors, (4) the
environmental soundness, economy and availability of natural gas
as an alternative energy source and (5) continued aging of
the worldwide natural gas reserve base and the attendant decline
of wellhead pressures. The rental compression business is
capital intensive, and our ability to take advantage of these
growth opportunities may be limited by our ability to raise
capital to fund our expansion. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources in
Item 7 of this Form 10-K.


Recent Events

Securities
Class Actions.On
October 23, 2003, we entered into a Stipulation of
Settlement, which settled all of the claims underlying the
putative securities class action, the putative ERISA class
action and the shareholder derivative actions which were filed
against the Company and are more fully described in Item 3
Legal Proceedings in this Form 10-K. The terms
of the settlement provide for us to: (1) make a cash
payment of approximately $30 million (of which
$26.7 million was funded by payments from Hanovers
directors and officers insurance carriers), (2) issue
2.5 million shares of our common stock, and (3) issue
a contingent note with a principal amount of $6.7 million.
The note is payable, together with accrued interest, on
March 31, 2007 but will be extinguished (with no money
owing under it) if our common stock trades at or above the
average price of $12.25 per share for 15 consecutive
trading days at any time between March 31, 2004 and
March 31, 2007. In addition, upon the occurrence of a
change of control that involves us, if the change of control or
shareholder approval of the change of control occurs before
February 9, 2005, which is twelve months after final court
approval of the settlement, we will be obligated to contribute
an additional $3 million to the settlement fund.

As part of the settlement, we have also agreed to
implement corporate governance enhancements, including allowing
shareholders owning more than 1% but less than 10% of our
outstanding common stock to participate in the process to
appoint two independent directors to our board of directors
(pursuant to which on February 4, 2004 we appointed
Margaret K. Dorman and Stephen M. Pazuk to our board
of directors) and making certain changes to our code of conduct.

GKH Investments, L.P. and GKH Private Limited
(collectively GKH), which, as of December 31,
2003, together owned approximately 10% of our outstanding common
stock and which sold shares in our March 2001 secondary offering
of common stock, are parties to the settlement and have agreed
to settle claims against them that arise out of that offering as
well as other potential securities, ERISA, and derivative
claims. The terms of the settlement provide for GKH to transfer
2.5 million shares of our common stock from their holdings
or from other sources to the settlement fund.

We received a letter on March 11, 2004 from
the administrative trustee of the GKH Liquidating Trust
indicating it and one of its affiliates had decided to
distribute 5.8 million shares of the 8.3 million
shares of Hanover common stock owned by the GKH Liquidating
Trust (formerly held by GKH) and its affiliate to the relevant
beneficiaries. The remaining 2.5 million shares held by GKH
will be paid as part of the global shareholder litigation
settlement.

On February 9, 2004, the United States
District Court for the Southern District of Texas entered three
Orders and Final Judgments, approving the settlement on the
terms agreed upon in the Stipulation of Settlement with respect
to all of the claims described above. The court also entered an
Order and Final Judgment approving the plans of allocation with
respect to each action, as well as an Order and Final

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Judgment approving the schedule of
attorneys fees for counsel for the settling plaintiffs.
The time in which these Orders and Final Judgments may be
appealed expired on March 10, 2004 without any appeal being
lodged. The settlement has therefore become final and will be
implemented according to its terms. Our independent auditor,
PricewaterhouseCoopers LLP, is not a party to the settlement and
remains a party to the securities class action. (See Item 3
Legal Proceedings and Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Year ended December 31, 2003
compared to year ended December 31, 2002 
Provision for securities litigation settlement.)


SEC Settlement.In
December 2003, we entered into a settlement with the Securities
and Exchange Commission (SEC), concluding the
previously disclosed SEC investigation into the transactions
underlying, and other matters relating to, the restatement of
our financial statements for fiscal years 1999, 2000 and 2001.
Without admitting or denying any of the SECs findings, we
consented to the entry of a cease and desist order requiring
future compliance with certain periodic reporting, record
keeping and internal control provisions of the securities laws.
The settlement did not impose any monetary penalty on us and
required no additional restatements of our historical financial
statements.

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

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

New Bank Credit
Facility.Effective December 15,
2003, we entered into a new $350 million bank credit
facility having a maturity date of December 29, 2006 and
made conforming amendments related to the compression equipment
lease obligations that we entered into in 2000. Our prior
$350 million bank credit facility that was scheduled to
mature in November 2004, was terminated upon closing of the new
facility. The new bank credit facility modified certain
covenants that were contained in the prior facility and
eliminated certain covenants entirely. The new agreement
prohibits us (without the lenders prior approval) from
declaring or paying any dividend (other than dividends payable
solely in our common stock or in options, warrants or rights to
purchase such common stock) on, or making similar payments with
respect to, our capital stock. The new agreement clarifies and
provides certain thresholds with respect to our ability to make
investments in our foreign subsidiaries. In addition, under the
new agreement, we granted the lenders a security interest in the
inventory, equipment and certain other property of Hanover and
its domestic subsidiaries (with certain exceptions), and pledged
66% of the equity interest in certain of our foreign
subsidiaries. We believe that this new bank credit facility will
provide flexibility in accessing the capacity under the facility
to support our short-term liquidity needs.

Panoche/ Gates
Dispositions.In May 2003, we
announced that we had agreed to sell our 49% membership interest
in Wellhead Power Panoche, LLC (Panoche) and our
92.5% membership interest in Wellhead Power Gates, LLC
(Gates) to Hal Dittmer and Fresno Power Investors
Limited Partnership, who owned the remaining interests in
Panoche and Gates. Panoche and Gates own gas-fired peaking power
plants of 49 megawatts and 46 megawatts, respectively. The
Panoche transaction closed in June 2003 and the Gates
transaction closed in September 2003. Total consideration for
the transactions was approximately $27.2 million consisting
of approximately $6.4 million in cash, $2.8 million in
notes that mature in May 2004, a $0.5 million note that
matures in September 2005 and the release of our obligations
under a capital lease from GE Capital to Gates that had an
outstanding balance of

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approximately $17.5 million at the time of
the Gates closing. In addition, we were released from a
$12 million letter of credit from us to GE Capital that was
provided as additional credit support for the Gates capital
lease.


PIGAP II Restructuring and Our Zero
Coupon Subordinated Notes due March 31,
2007.On May 14, 2003, we entered
into an agreement with Schlumberger Limited to terminate our
right to put our interest in the PIGAP II joint venture to
Schlumberger. As a result, we retained our interest in
PIGAP II. We had previously given notice of our intent to
exercise the PIGAP put in January 2003. PIGAP II is a joint
venture, currently owned 70% by a subsidiary of Williams
Companies Inc. and 30% by Hanover, which operates a natural gas
compression facility in Venezuela. The natural gas processed by
PIGAP II is re-injected into oil reservoirs for enhanced
oil recovery.

Also on May 14, 2003, we agreed with
Schlumberger Surenco, an affiliate of Schlumberger, to the
modification of the repayment terms of a $58.0 million
obligation that was accrued as a contingent liability on our
balance sheet since the acquisition of Production Operators
Corporation (POC) and was associated with the
PIGAP II joint venture. The obligation was converted into a
non-recourse promissory note (the PIGAP Note)
payable by Hanover Cayman Limited, our indirect wholly-owned
consolidated subsidiary, with a 6% interest rate compounding
semi-annually until maturity in December 2053. In October 2003,
the PIGAP II joint venture closed on the projects
financing and distributed approximately $78.5 million to
Hanover, of which approximately $59.9 million was used to
repay the PIGAP Note.

In connection with the agreement to terminate our
right to put our interest in PIGAP II back to Schlumberger,
we also agreed with Schlumberger to restructure the
$150 million subordinated note that Schlumberger received
from Hanover in August 2001 as part of the purchase price for
our acquisition of POCs natural gas compression business,
ownership interest in certain joint venture projects in South
America (including PIGAP II), and related assets. As of
March 31, 2003, the date from which the interest rate was
adjusted, the $150 million subordinated note had an
outstanding principal balance of approximately
$171 million, including accrued interest. We restructured
the $150 million subordinated note as our Zero Coupon
Subordinated Notes due March 31, 2007, which notes were
issued to Schlumberger and were sold by Schlumberger in a
registered public offering in December 2003. Original issue
discount accretes under the zero coupon notes at a rate of
11.0% per annum for their remaining life, up to a total
principal amount of $262.6 million payable at maturity. The
notes will accrue additional interest at a rate of 2.0% per
annum upon the occurrence and during the continuance of an event
of default under the notes. The notes will also accrue
additional interest at a rate of 3.0% per annum if our
consolidated leverage ratio, as defined in the indenture
governing the notes, exceeds 5.18 to 1.0 as of the end of any
two consecutive fiscal quarters. Notwithstanding the preceding,
in no event will the total additional interest accruing on the
notes exceed 3.0% per annum if both of the previously
mentioned circumstances occur. The notes also contain a covenant
that limits our ability to incur additional indebtedness if our
consolidated leverage ratio exceeds 5.6 to 1.0, subject to
certain exceptions.

Belleli Acquisition.In 2002, we increased our ownership of
Belleli to 51% from 20.3% by converting $13.4 million in
loans, together with approximately $3.2 million in accrued
interest thereon, into additional equity ownership and in
November 2002 began consolidating the results of Bellelis
operations. Belleli has three manufacturing facilities, one in
Mantova, Italy and two in the United Arab Emirates (Jebel Ali
and Hamriyah). During 2002, we also purchased certain operating
assets used by Belleli for approximately $22.4 million from
a bankruptcy estate of Bellelis former parent and leased
these assets to Belleli for approximately $1.2 million per
year, for a term of seven years.

In connection with our increase in ownership in
2002, we entered into an agreement with the minority owner of
Belleli that provided the minority owner the right, until
June 30, 2003, to purchase our interest for an amount that
approximated our investment in Belleli. The agreement also
provided us with the right, beginning in July 2003, to purchase
the minority owners interest in Belleli. In addition, the
minority owner historically had been unwilling to provide its
proportionate share of capital to Belleli. We believed that our
ability to maximize value would be enhanced if we were able to
exert greater control through the exercise of our purchase
right. Thus, in August 2003, we exercised our option to acquire
the remaining 49% interest

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in Belleli for approximately $15.0 million
in order to gain complete control of Belleli. As a result of
these transactions and intervening foreign exchange rate
changes, we recorded $4.8 million in identifiable
intangible assets, with a weighted average life of approximately
17 years, and $35.5 million in goodwill.


As a result of the war in Iraq, the strengthening
of the Euro and generally unfavorable economic conditions, we
believe that the estimated fair value of Belleli declined
significantly during 2003. Upon gaining complete control of
Belleli and assessing our long-term growth strategy, we
determined that these general factors in combination with the
specific economic factors impacting Belleli had significantly
and adversely impacted the timing and amount of the future cash
flows that we expected Belleli to generate. We currently do not
expect to realize our original growth expectations for Belleli
in the timeframe that we originally forecasted.

During the performance of our annual goodwill
impairment review in the fourth quarter of 2003, we determined
the present value of Bellelis expected future cash flows
was less than our carrying value of Belleli. This resulted in a
full impairment charge for the $35.5 million in goodwill
associated with Belleli. Upon further analysis, it was
determined that the factors resulting in the goodwill impairment
charge were also present during the third quarter of 2003 and
that the exercise of our purchase option in the third quarter of
2003 and the presence of such factors should have resulted in an
interim goodwill impairment test under SFAS 142 and an
impairment charge at that time. We have adjusted our third
quarter results accordingly.

Industry Overview

Gas Compression

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

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

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

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

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as well as natural gas transporters and
processors, to increasingly outsource their non-core compression
activities to specialists such as us.


The advent of rental and contract compression
roughly 40 years ago made it possible for natural gas
producers, transporters and processors to improve the efficiency
and financial performance of their operations. We believe
compressors leased from specialists generally have a higher rate
of mechanical reliability and typically generate greater
productivity than those owned by oil and gas operators.
Furthermore, because compression needs of a well change over
time, outsourcing of compression equipment enables an oil and
gas producer to better match variable compression requirements
to the production needs throughout the life of the well. Also,
certain major domestic oil companies are seeking to streamline
their operations and reduce their capital expenditures and other
costs. To this end, they have sold certain domestic energy
reserves to independent energy producers and are outsourcing
facets of their operations. We believe that such initiatives are
likely to contribute to increased rentals of compression
equipment.

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

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



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | engineering, fabrication and assembly of the
    compressor unit;                 
|
| |  | installation and testing of the unit;                                             
|
| |  | ongoing performance review to assess the need for
    a change in compression; and
|
| |  | periodic maintenance and replacement parts supply.                                

Production and Processing Equipment

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

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

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

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

Market Conditions

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

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

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

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

Business Segments

Our revenues and income are derived from five
business segments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Domestic rentals.Our domestic rentals segment primarily provides natural gas
    compression and production and processing equipment rental and
    maintenance services to meet specific customer requirements on
    Hanover-owned assets located within the United States.                                                                                                                     
|
| |  | International
    rentals.Our international rentals
    segment provides substantially the same services as our domestic
    rentals segment except it services locations outside the United
    States.                                                                                                                                                                                          
|
| |  | Compressor and accessory
    fabrication.Our compressor and
    accessory fabrication segment involves the design, fabrication
    and sale of natural gas compression units and accessories to
    meet unique customer specifications.                                                                                                                                                          
|
| |  | Production and processing equipment
    fabrication.Our production and
    processing equipment fabrication segment includes the design,
    fabrication and sale of equipment used in the production and
    treating of crude oil and natural gas; and the engineering,
    procurement and manufacturing of heavy wall reactors for
    refineries and the construction of desalination plants.
|
| |  | Parts, service and used
    equipment.Our parts, service and used
    equipment segment provides a full range of services to support
    the surface production needs of customers, from installation and
    normal maintenance and services to full operation of a
    customers owned assets and surface equipment as well as
    sales of used equipment.                                    

The domestic and international compression
rentals segments have operations primarily in the United States,
Canada and South America. For financial data relating to our
business segments and financial data relating to the amount or
percentage of revenue contributed by any class of similar
products or services

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which accounted for 10% or more of consolidated
revenue in any of the last three fiscal years, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this
Form 10-K and Note 23 to the Notes to Consolidated
Financial Statements in Item 15 of this Form 10-K.


Compression Rentals, Maintenance Services and
Compressor and Accessory Fabrication

We provide our customers with a full range of
compressor and associated equipment sales, rental, maintenance
and contract compression services. As of December 31, 2003,
our compressor fleet consisted of approximately
6,906 units, ranging from 8 to 4,450 horsepower per unit.
The size, type and geographic diversity of this rental fleet
enable us to provide our customers with a range of compression
units that can serve a wide variety of applications and to
select the correct equipment for the job, rather than trying to
fit the job to our fleet of equipment.

We base our gas compressor rental rates on
several factors, including the cost and size of the equipment,
the type and complexity of service desired by the customer, the
length of the contract and the inclusion of any other desired
services, such as installation, transportation and the degree of
daily operation. In early 2003, we began to selectively
introduce price increases for our domestic compression rental
business. Such price increases, along with a slight improvement
in market conditions, resulted in a 3% increase in revenue from
our domestic rentals business in the six months ended
December 31, 2003 as compared to the six months ended
December 31, 2002. Substantially all of our units are
operated pursuant to contract compression or
rental with full maintenance agreements under which
we perform all maintenance and repairs on such units while under
contract. In the U.S. onshore market, compression rental
fleet units are generally leased under contract with minimum
terms of six months to two years, which convert to
month-to-month at the end of the stipulated minimum period.
Historically, the majority of our customers have extended the
length of their contracts, on a month-to-month basis, well
beyond the initial term. Typically, our compression rental units
used in offshore and international applications carry
substantially longer lease terms than those for onshore domestic
applications.

An essential element of our success is our
ability to provide compression services to customers with
contractually committed compressor run-times of between 95% and
98%. Historically, our incidence of failing to meet run-time
commitments (the penalty for which is paid in credits to the
customers account) has been insignificant, due largely to
our rigorous preventive maintenance program and extensive field
service network that permits us to promptly address maintenance
requirements. Our team of experienced maintenance personnel
performs our rental compression maintenance services both at our
facilities and in the field. Such maintenance facilities are
situated in close proximity to actual rental fleet deployment to
permit superior service response times.

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

Our field service mechanics provide all operating
and maintenance services for our compression units leased on a
contract compression or full maintenance basis and are on-call
24 hours a day. Those field

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


We believe our competitive position has benefited
from the managerial parity that our sales and field service
organizations enjoy within the company, enabling these two vital
organizations to work together in a highly coordinated fashion
in order to deliver maximum customer service, responsiveness and
reliability. The foundation for our successful field operations
effort is the experience and responsiveness of our compressor
rental field service and shop staff of compressor mechanics. Our
field service mechanics are coordinated and supported by
regional operations managers who have supervisory responsibility
for specific geographic areas.

Our compressor and accessory fabrication
operations design, engineer and assemble compression units and
accessories for sale to third parties as well as for placement
in our compressor rental fleet. As of December 31, 2003, we
had a compressor unit fabrication backlog for sale to third
parties of $28.2 million compared to $29.8 million at
December 31, 2002. Substantially all of our compressor and
accessory fabrication backlog is expected to be produced within
a three-month to six-month period. In general, units to be sold
to third parties are assembled according to each customers
specifications and sold on a turnkey basis. We acquire major
components for these compressor units from third-party suppliers.

Compressor Rental Fleet

The size and horsepower of our compressor rental
fleet owned or operated under lease on December 31, 2003 is
summarized in the following table.

|                             |       |          |       |                |  |            |       |       |  |  |      |       |  
|---------------------------- | ----- | -------- | ----- | -------------- |  | ---------- | ----- | ----- |  |  | ---- | ----- | -
|                             |       |          |       | Aggregate      |  |           
|                             |       | Number   |       | Horsepower     |  | % of      
|Range of Horsepower Per Unit |       | of Units |       | (In thousands) |  | Horsepower
|                             |       |          |       |                |  |           
|                             |       |          |       |                |  |           
|0-100                        |       |          | 2,006 |                |  |            | 119   |       |  |  | 3.4  | %    
|101-200                      |       |          | 1,387 |                |  |            | 221   |       |  |  | 6.3  | %    
|201-500                      |       |          | 1,200 |                |  |            | 408   |       |  |  | 11.6 | %    
|501-800.                     |       |          | 765   |                |  |            | 503   |       |  |  | 14.3 | %    
|801-1,100                    |       |          | 372   |                |  |            | 374   |       |  |  | 10.6 | %    
|1,101-1,500                  |       |          | 903   |                |  |            | 1,271 |       |  |  | 36.2 | %    
|1,501-2,500                  |       |          | 197   |                |  |            | 364   |       |  |  | 10.4 | %    
|2,501-4,450                  |       |          | 76    |                |  |            | 253   |       |  |  | 7.2  | %    
|                             |       |          |       |                |  |            |       |       |  |  |      |      
|                             | Total |          |       | 6,906          |  |            |       | 3,513 |  |  |      | 100.0 | %
|                             |       |          |       |                |  |            |       |       |  |  |      |      

Production
and Processing Equipment Fabrication

Through our production and processing equipment
fabrication division, we design, engineer, fabricate, sell and
rent a broad range of oil and gas production equipment designed
to heat, separate, dehydrate and measure crude oil and natural
gas. Our product line includes line heaters, oil and gas
separators, glycol dehydration units and skid-mounted production
packages designed for both onshore and offshore production
facilities. We also purchase and recondition used production and
processing equipment that is then sold or rented and generally
maintain standard product inventories to meet most
customers rapid response requirements and minimize
customer downtime. As of December 31, 2003, we had a
production and processing equipment fabrication backlog of
$18.1 million (excluding Bellelis backlog of
$106.7 million at December 31, 2003) compared to
$56.0 million at December 31, 2002. Substantially all
of our production equipment backlog is expected to be produced
within a three to thirty-six month period. In addition, through
our subsidiary, Belleli, we provide engineering, procurement and
construction services

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primarily related to the manufacturing of heavy
wall reactors for refineries and construction of desalination
plants, primarily for use in Europe and the Middle East.


Parts,
Service and Used Equipment

We purchase and recondition used gas compression
units, oilfield power generation and treating facilities and
production equipment that is then sold or rented to customers.
In addition, we often provide contract operations and related
services for customers that prefer to own their production, gas
treating and oilfield power generation or compression equipment.
We believe that we are particularly well qualified to provide
these services because our highly experienced operating
personnel have access to the full range of our compression
rental, production processing equipment and oilfield power
generation equipment and facilities. As customers look to us to
provide an ever-widening array of outsourced services, we will
continue to build our core business with emerging business
opportunities, such as turnkey gas treatment, gas measurement
and oilfield-related power generation sales and services. We
maintain parts inventories for our own use and to meet our
customers needs. As of December 31, 2003, we had
approximately $114.1 million in parts and supplies
inventories.

Sources and
Availability of Raw Materials

Our fabrication operations consist of fabricating
compressor and production and processing equipment from
components and subassemblies, most of which we acquire from a
wide range of vendors. These components represent a significant
portion of the cost of our compressor and production and
processing equipment products. Although our products are
generally shipped within 180 days following their order
date, increases in raw material costs cannot always be offset by
increases in our products sales prices. We believe that
all materials and components are readily available from multiple
suppliers at competitive prices.

Market and
Customers

Our global customer base consists of U.S. and
international companies engaged in all aspects of the oil and
gas industry, including major integrated oil and gas companies,
national oil and gas companies, large and small independent
producers and natural gas processors, gatherers and pipelines.
Additionally, we have negotiated strategic alliances or
preferred vendor relationships with key customers pursuant to
which we receive preferential consideration in customer
compressor and oil and gas production equipment procurement
decisions in exchange for providing enhanced product
availability, product support, automated procurement practices
and limited pricing concessions. No individual customer
accounted for more than 10% of our consolidated revenues during
2003, 2002 or 2001.

Our compressor leasing activities are located
throughout the continental United States, internationally and in
offshore operations. International locations include Argentina,
Barbados, Egypt, United Arab Emirates, Equatorial
Guinea, India, Venezuela, Colombia, Trinidad, Bolivia,
Brazil, Mexico, Peru, Pakistan, Indonesia, Nigeria, United
Kingdom, Russia and Canada. In addition, we have representative
offices in the Netherlands and the Cayman Islands. As of
December 31, 2003, equipment representing approximately 26%
of our compressor rental fleet horsepower was being used in
international applications.

Sales and
Marketing

Our salespeople pursue the rental and sales
market for compressors and production equipment and other
products in their respective territories. Each salesperson is
assigned a customer list on the basis of the experience and
personal relationships of the salesperson and the individual
service requirements of the customer. This customer and
relationship-focused strategy is communicated through frequent
direct contact, technical presentations, print literature, print
advertising and direct mail. Our advertising and promotion
strategy is a concentrated approach, tailoring specific messages
into a very focused presentation methodology.

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Additionally, our salespeople coordinate with
each other to effectively pursue customers who operate in
multiple regions. The salespeople maintain contact with our
operations personnel in order to promptly respond to and satisfy
customer needs. Our sales efforts concentrate on demonstrating
our commitment to enhancing the customers cash flow
through superior product design, fabrication, installation,
customer service and after-market support.

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

Competition

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

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

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

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

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

Government
Regulation

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

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


In connection with our due diligence
investigation of potential new properties for acquisition, we
typically perform an evaluation to identify potentially
significant environmental issues and take measures to have such
issues addressed by the seller or ourselves, as appropriate
under the circumstances. We cannot be certain, however, that all
such possible environmental issues will be identified and fully
addressed prior to our acquisition of new properties. Moreover,
the handling of petroleum products and other regulated
substances is a normal part of our operations and we have
experienced occasional minor spills or incidental leakages in
connection with our operations. As part of the regular overall
evaluation of our operations, including newly acquired
facilities, we assess the compliance and permitting status of
these operations and facilities with applicable environmental
laws and regulations and seek to address identified issues in
accordance with applicable law.

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

The Resource Conservation and Recovery Act
(RCRA) and regulations promulgated by it govern the
generation, storage, transfer and disposal of hazardous wastes.
We must comply with RCRA regulations for any of our operations
that involve the generation, management or disposal of hazardous
wastes (such as painting activities or the use of solvents). In
addition, to the extent we operate underground tanks on behalf
of specific customers, such operations may be regulated under
RCRA. We believe we are in substantial compliance with RCRA and
are not aware of any current claims against us alleging RCRA
violations. We cannot provide any assurance, however, that we
will not receive such notices of potential liability in the
future.

We currently own or lease, and in the past have
owned or leased, a number of properties that have been used in
support of our operations for a number of years. Although we
have utilized operating and disposal practices that were
standard in the industry at the time, hydrocarbons, hazardous
substances, or other regulated wastes may have been disposed of
or released on or under the properties owned or leased by us or
on or under other locations where such materials have been taken
for disposal. In addition, many of these properties have been
operated by third parties whose treatment and disposal or
release of hydrocarbons, hazardous substances or other regulated
wastes was not under our control. These properties and the
materials released or disposed thereon may be subject to CERCLA,
RCRA, and analogous state laws. Under such laws, we could be
required to remove or remediate historical property
contamination, or to perform remedial plugging or pit closure
operations to prevent future contamination. We are not currently
under any order requiring that we undertake or pay for any
clean-up activities, nor are we aware of any current
environmental claims by the government or private parties
against us demanding remedial action or alleging that we are
liable for remedial costs already incurred. However, we cannot
provide any assurance that we will not receive any such claims
in the future.

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

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

On June 25, 1999, we notified the Air
Quality Bureau of the Environmental Protection Division, New
Mexico Environment Department, of potential violations of
regulatory and permitting requirements. The potential violations
included failure to conduct required performance tests, failure
to file required notices and failure to pay fees for compressor
units located on sites for more than one year. We promptly paid
the required fees and corrected the potential violations. On
June 12, 2001, after the potential violations had been
corrected, the Director of the Division issued a compliance
order to us in connection with the potential violations. The
compliance order assessed a civil penalty of $15,000 per
day per alleged regulatory violation and permit; no total
penalty amount was proposed in the compliance order. On
October 3, 2003, the Division notified us that the total
proposed penalty would be $759,072. However, since the alleged
violations had been self-disclosed, that amount was reduced to
$189,768. We have responded to the penalty assessment,
challenging some of the calculations, and have proposed an
alternative settlement amount. We are currently negotiating with
the New Mexico Environment Department on the method of
calculation and proposed settlement amounts, and the issue is
not yet resolved. A Stipulated Motion for Extension of Time to
File Answer has been filed which extends the deadline for filing
our response to March 22, 2004.

We believe that we are currently in substantial
compliance with environmental laws and regulations and that the
phasing-in of recent more stringent air emission controls on
off-road engines and other known regulatory requirements in the
time periods currently contemplated by such laws and regulations
will not have a material adverse effect on our business,
consolidated financial condition, results of operations and cash
flows. It is possible that stricter environmental laws and
regulations may be imposed in the future, such as more stringent
air emission requirements or proposals to make currently
non-hazardous wastes subject to more stringent and costly
handling, disposal and clean-up requirements. While we may be
able to pass on the additional costs of complying with such laws
to our customers, there can be no assurance that attempts to do
so will be successful. Accordingly, new laws or regulations or
amendments to existing laws or regulations might require us to
undertake significant capital expenditures and otherwise have a
material adverse effect on our business, consolidated financial
condition, results of operations and cash flows.

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

International Operations

We operate in many different geographic markets,
some of which are outside the United States. At
December 31, 2003, of the approximately 925,000 horsepower
of compression we had deployed

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##### Table of Contents



internationally, approximately 84% was located in
Latin America (primarily in Venezuela, Argentina and Mexico) and
approximately 11% was located in Canada. Changes in local
economic or political conditions, particularly in Venezuela,
Argentina and other parts of Latin America, could have a
material adverse effect on our business, consolidated financial
condition, results of operations and cash flows. Additional
risks inherent in our international business activities include
the following:




| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | difficulties in managing international operations;                                            
|
| |  | unexpected changes in regulatory requirements;                                                
|
| |  | tariffs and other trade barriers which may
    restrict our ability to enter into new markets;
|
| |  | changes in political conditions;                                                              
|
| |  | potentially adverse tax consequences;                                                         
|
| |  | restrictions on repatriation of earnings or
    expropriation of property;                    
|
| |  | the burden of complying with foreign
    laws; and                                            
|
| |  | fluctuations in currency exchange rates and the
    value of the U.S. dollar.                 

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

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

Although the operating environment in Argentina
has since stabilized, in January 2002, Argentina devalued its
peso against the U.S. dollar and imposed significant
restrictions on fund transfers internally and outside the
country. In addition, the Argentine government enacted
regulations to temporarily prohibit enforcement of contracts
with exchange rate-based purchase price adjustments. Instead,
payment under such contracts could either be made at an exchange
rate negotiated by the parties or, if no such agreement were
reached, a preliminary payment could be made based on a one
dollar to one peso equivalent pending a final agreement. The
Argentine government also required the parties to such contracts
to renegotiate the price terms within 180 business days of the
devaluation. We have renegotiated all of our agreements in
Argentina. As a result of these negotiations, we received
approximately $11.2 million in reimbursements in 2002 and
$0.7 million in 2003. For the year ended December 31,
2003, our Argentine operations represented approximately 5% of
our revenue and 9% of our gross profit. During the years ended
December 31, 2003 and 2002, we recorded an exchange gain of
approximately $0.5 million and an exchange loss of
approximately $9.9 million, respectively, for assets
exposed to currency translation in Argentina. The economic
situation in Argentina is subject to change. To the extent that
the situation in Argentina deteriorates, exchange controls
continue in place and the value of the peso against the dollar
is reduced further, our results of operations in Argentina could
be materially and adversely affected which could result in
reductions in our net income.

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

16



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##### Table of Contents



be materially and adversely affected, which could
result in reductions in our net income. As a result of the
disruption in our operations in Venezuela, during the fourth
quarter of 2002, our international rental revenues decreased by
approximately $2.7 million. In the twelve months ended
December 31, 2003, we recognized approximately
$2.7 million of billings to Venezuelan customers that were
not recognized in 2002 due to concerns about the ultimate
receipt of those revenues. In addition, a recent movement to
remove President Chávez has resulted in renewed civil
strife in Venezuela. If such strife continues or escalates, our
results of operations in Venezuela could be further materially
and adversely affected.


During the years ended December 31, 2003 and
2002, we recorded exchange losses of approximately
$2.4 million and $5.8 million, respectively, for
assets exposed to currency translation in Venezuela. For the
year ended December 31, 2003, our Venezuelan operations
represented approximately 11% of our revenue and 18% of our
gross profit. At December 31, 2003, we had approximately
$23.0 million in accounts receivable related to our
Venezuelan operations.

In February 2003, the Venezuelan government fixed
the exchange rate to 1,600 bolivars for each U.S. dollar.
In February 2004, the government devalued the currency by
approximately 17%. The impact of the devaluation on our results
will depend upon the amount of our assets (primarily working
capital) exposed to currency fluctuation in Venezuela in future
periods. As of December 31, 2003, we had approximately
$6.0 million in net assets exposed to currency fluctuation
in Venezuela. Based on these assets, a 10% change in exchange
rates would result in a $0.5 million gain or loss in
Venezuela.

As part of our acquisition of the gas compression
business of Schlumberger, we acquired minority interests in
three joint ventures in Venezuela. As a minority investor in
these joint ventures, we will not be able to control their
operations and activities, including, without limitation,
whether and when they distribute cash or property to their
holders. In January 2003, we gave notice of our intent to
exercise our right to put our interest in one of these joint
ventures, the PIGAP II joint venture, back to Schlumberger
Surenco. If not exercised, the put right would have expired as
of February 1, 2003. On May 14, 2003, we entered into
an agreement with Schlumberger Surenco to terminate the
PIGAP II put and thus have retained our ownership interest
in PIGAP II.

We are involved in a project to build and operate
barge-mounted gas compression and gas processing facilities to
be stationed in a Nigerian coastal waterway as part of the
performance of a contract between an affiliate of The
Royal/Dutch Shell Group (Shell) and Global Energy
and Refining Ltd. (Global), a Nigerian company. We
have completed the building of the required barge-mounted
facilities. We understand that Global must complete a
significant financing for part of the project in the near term
or Shell would be able to terminate its contract with Global.
Global has orally informed us that they have completed a
financing, although it is not clear to us whether the funds
raised will be sufficient to perform their obligations under the
Shell contract. In light of the political environment in
Nigeria, Globals lack of a successful track record with
respect to this project and other factors, there is no assurance
that Global will be able to comply with its obligations under
the Shell contract. We believe that Global is in default with
respect to certain agreements they have with us, as a result of
which we believe we have certain termination rights.

If Shell were to terminate its contract with
Global for any reason or we were to terminate our involvement in
the project, we would be required to find an alternative use for
the barge facility which could result in a write-down of our
investment. We currently have an investment of approximately
$29.8 million associated with the barge facility and
approximately $4.1 million associated with advances to, and
our investment in, Global.

For financial data relating to the Companys
geographic concentrations, see Note 23 to the Notes to
Consolidated Financial Statements included in Item 15 of
this Form 10-K.

17



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##### Table of Contents



Executive Officers of the Registrant

The following sets forth, as of March 12,
2004, the name, age and business experience for the last five
years of each of our executive officers:

|                 |  |     |    |          |  |                                                         
|---------------- |  | --- | -- | -------- |  | --------------------------------------------------------
|Name             |  | Age |    | Position
|                 |  |     |    |         
|Chad C. Deaton   |  |     | 51 |          |  | President and Chief Executive Officer; Director         
|John E. Jackson  |  |     | 45 |          |  | Senior Vice President Chief Financial
    Officer      
|Mark S. Berg*    |  |     | 45 |          |  | Senior Vice President General Counsel and
    Secretary
|Peter G. Schreck |  |     | 40 |          |  | Vice President Treasury and Planning                   
|Stephen P. York  |  |     | 47 |          |  | Vice President and Corporate Controller                 

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

Chad C. Deatonwas
elected President, Chief Executive Officer and director in
August 2002. From 1976 through 1984, Mr. Deaton served in a
variety of positions with the Dowell Division of Dow Chemical.
Following Schlumbergers acquisition of Dowell in 1984,
Mr. Deaton served in management positions with Schlumberger
in Europe, Russia and the United States. Mr. Deaton was
executive vice president of Schlumberger Oilfield Services from
1998 to 1999. From September 1999 to September 2001,
Mr. Deaton served as a Senior Advisor to Schlumberger
Oilfield Services.

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

Mark S. Berg*has
served as Senior Vice President, General Counsel and Secretary
since May 2002. From 1997 through 2001, Mr. Berg was an
executive officer of American General Corporation, a Fortune 500
diversified financial services company, most recently serving in
the position of Executive Vice President, General Counsel and
Secretary. Mr. Berg began his career in 1983 as an
associate with the Houston-based law firm of Vinson &
Elkins L.L.P. and served as a partner from 1990 through 1997.

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

Stephen P. Yorkhas
served as Vice President and Corporate Controller since April
2002. Prior to joining Hanover, Mr. York served as
Director, Payroll Production of Exult, Inc., a provider of
web-enabled human resources management services in Charlotte,
NC, since 2001. From 1981 to 2000, Mr. York held various
management positions with Bank of America Corporation, including
Senior Vice President  Personnel Operations, Senior
Vice President  Controller/ General Accounting,
Senior Vice President  Corporate Accounts Payable/
Fixed Assets, and Vice President  Audit Director.
Mr. York was an accountant with KPMG Peat Marwick in Waco,
TX, from 1979 to 1981.




* On February 27, 2004, Mr. Berg
entered into a Separation Agreement with us and we announced
that Mr. Berg plans to step down from his position at
Hanover effective March 31, 2004.

Employees

As of December 31, 2003 we had approximately
5,500 employees, approximately 500 of whom are represented by a
labor union. Furthermore, we had approximately 850 contract
personnel. We believe that our relations with our employees and
contract personnel are satisfactory.

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##### Table of Contents



Electronic Information

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

A paper copy of any of the above-described
filings is also available free of charge from the Company upon
request by contacting Hanover Compressor Company, 12001 North
Houston Rosslyn Road, Houston, Texas 77086, Attention: Corporate
Secretary (281) 405-5175. You may also read and copy any
document we file with the SEC at its public reference facilities
at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can obtain copies of the
documents at prescribed rates by writing to the Public Reference
Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the
public reference facilities. Our SEC filings are also available
at the offices of the New York Stock Exchange, Inc.,
11 Wall Street, New York, New York 10005.






|        |           
|------- | ----------
|Item 2. | Properties

The following table describes the material
facilities owned or leased by Hanover and our subsidiaries as of
December 31, 2003:

|                              |  |        |        |        |  |      |         |  |  |                                                
|----------------------------- |  | ------ | ------ | ------ |  | ---- | ------- |  |  | -----------------------------------------------
|                              |  |        |        | Square |  |     
|Location                      |  | Status |        | Feet   |  | Uses
|                              |  |        |        |        |  |     
|Broken Arrow, Oklahoma        |  |        | Owned  |        |  |      | 127,505 |  |  | Compressor and accessory fabrication           
|Davis, Oklahoma               |  |        | Owned  |        |  |      | 393,870 |  |  | Compressor and accessory fabrication           
|Houston, Texas                |  |        | Owned  |        |  |      | 256,505 |  |  | Compressor and accessory fabrication           
|Houston, Texas                |  |        | Leased |        |  |      | 51,941  |  |  | Office                                         
|Anaco, Venezuela              |  |        | Leased |        |  |      | 10,000  |  |  | Compressor rental and service                  
|Casper, Wyoming               |  |        | Owned  |        |  |      | 28,390  |  |  | Compressor rental and service                  
|Comodoro Rivadavia, Argentina |  |        | Leased |        |  |      | 21,000  |  |  | Compressor rental and service                  
|Comodoro Rivadavia, Argentina |  |        | Owned  |        |  |      | 26,000  |  |  | Compressor rental and service                  
|Farmington, New Mexico        |  |        | Owned  |        |  |      | 20,361  |  |  | Compressor rental and service                  
|Gillette, Wyoming             |  |        | Leased |        |  |      | 10,200  |  |  | Compressor rental and service                  
|Houston, Texas                |  |        | Leased |        |  |      | 13,200  |  |  | Compressor rental and service                  
|Kilgore, Texas                |  |        | Owned  |        |  |      | 33,039  |  |  | Compressor rental and service                  
|Maturin, Venezuela            |  |        | Owned  |        |  |      | 20,000  |  |  | Compressor rental and service                  
|Midland, Texas                |  |        | Owned  |        |  |      | 53,300  |  |  | Compressor rental and service                  
|Neuquen, Argentina            |  |        | Owned  |        |  |      | 30,000  |  |  | Compressor rental and service                  
|Pampa, Texas                  |  |        | Leased |        |  |      | 24,000  |  |  | Compressor rental and service                  
|Pocola, Oklahoma              |  |        | Owned  |        |  |      | 18,705  |  |  | Compressor rental and service                  
|Santa Cruz, Bolivia           |  |        | Leased |        |  |      | 32,200  |  |  | Compressor rental and service                  
|Victoria, Texas               |  |        | Owned  |        |  |      | 21,840  |  |  | Compressor rental and service                  
|Victoria, Texas               |  |        | Leased |        |  |      | 18,083  |  |  | Compressor rental and service                  
|Walsall, UKRedhouse          |  |        | Owned  |        |  |      | 15,300  |  |  | Compressor rental and service                  
|Walsall, UKWestgate          |  |        | Owned  |        |  |      | 44,700  |  |  | Compressor rental and service                  
|Yukon, Oklahoma               |  |        | Owned  |        |  |      | 22,453  |  |  | Compressor rental and service                  
|Odessa, Texas                 |  |        | Owned  |        |  |      | 15,751  |  |  | Parts, service and used equipment              
|Houston, Texas                |  |        | Leased |        |  |      | 28,750  |  |  | Parts, service and used equipment              
|Houston, Texas                |  |        | Leased |        |  |      | 73,450  |  |  | Parts, service and used equipment              
|Odessa, Texas                 |  |        | Owned  |        |  |      | 30,281  |  |  | Parts, service and used equipment              
|Broussard, Louisiana          |  |        | Owned  |        |  |      | 74,402  |  |  | Production and processing equipment fabrication
|Calgary, Alberta, Canada      |  |        | Owned  |        |  |      | 95,000  |  |  | Production and processing equipment fabrication
|Columbus, Texas               |  |        | Owned  |        |  |      | 219,552 |  |  | Production and processing equipment fabrication
|Corpus Christi, Texas         |  |        | Owned  |        |  |      | 11,000  |  |  | Production and processing equipment fabrication
|Dubai, UAE                    |  |        | Owned  |        |  |      | 33,128  |  |  | Production and processing equipment fabrication
|Hamriyah Free Zone, UAE       |  |        | Owned  |        |  |      | 12,628  |  |  | Production and processing equipment fabrication

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##### Table of Contents



|                |  |        |       |        |  |      |         |  |  |                                                
|--------------- |  | ------ | ----- | ------ |  | ---- | ------- |  |  | -----------------------------------------------
|                |  |        |       | Square |  |     
|Location        |  | Status |       | Feet   |  | Uses
|                |  |        |       |        |  |     
|Mantova, Italy  |  |        | Owned |        |  |      | 198,037 |  |  | Production and processing equipment fabrication
|Tulsa, Oklahoma |  |        | Owned |        |  |      | 40,100  |  |  | Production and processing equipment fabrication
|Victoria, Texas |  |        | Owned |        |  |      | 50,506  |  |  | Production and processing equipment fabrication

Our corporate headquarters and compressor
fabrication facility in Houston, Texas and our production
equipment manufacturing facility in Columbus, Texas are
mortgaged to secure the repayment of approximately
$2.9 million (as of December 31, 2003) in indebtedness
to a commercial bank.

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Commencing in February 2002, approximately 15
putative securities class action lawsuits were filed against us
and certain of our current and former officers and directors in
the United States District Court for the Southern District of
Texas. These class actions (together with subsequently filed
actions) were consolidated into one case, Pirelli Armstrong
Tire Corporation Retiree Medical Benefits Trust, On Behalf of
Itself and All Others Similarly Situated, Civil Action
No. H-02-0410, naming as defendants Hanover,
Mr. Michael J. McGhan, Mr. William S. Goldberg and
Mr. Michael A. OConnor. The complaints asserted
various claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and sought unspecified amounts
of compensatory damages, interest and costs, including legal
fees. The court entered an order appointing Pirelli Armstrong
Tire Corporation Retiree Medical Benefits Trust and others as
lead plaintiffs on January 7, 2003 and appointed Milberg,
Weiss, Bershad, Hynes & Lerach LLP as lead counsel. On
September 5, 2003, lead plaintiffs filed an amended
complaint in which they sought relief under Sections 10(b)
of the Securities Exchange Act and Section 11 of the
Securities Act against Hanover, certain former officers and
directors and our auditor, PricewaterhouseCoopers LLP, on behalf
of themselves and the class of persons who purchased Hanover
securities between May 4, 1999 and December 23, 2002.

In the securities action, the plaintiffs allege
generally that the defendants violated the federal securities
laws by making misstatements and omissions in Hanovers
periodic filings with the SEC as well as in other public
statements in connection with the transactions that were
restated in 2002.

Commencing in February 2002, four derivative
lawsuits were filed in the United States District Court for the
Southern District of Texas, two derivative lawsuits were filed
in state district court for Harris County, Texas (one of which
was nonsuited and the second of which was removed to Federal
District Court for the Southern District of Texas) and one
derivative lawsuit was filed in the Court of Chancery for the
State of Delaware in and for New Castle County. These derivative
lawsuits, which were filed by certain of our shareholders
purportedly on behalf of Hanover, alleged, among other things,
that our directors breached their fiduciary duties to
shareholders in connection with certain of the transactions that
were restated in 2002, and sought unspecified amounts of
damages, interest and costs, including legal fees. The
derivative lawsuits in the United States District Court for the
Southern District of Texas were consolidated on August 19
and August 26, 2002 into the Harbor Finance Partners
derivative lawsuit. With that consolidation, the pending
derivative lawsuits were:

|                                                                                          |  |                                                                                                                                                                                                                              |  |                  |           |       |  |                                                                                      |  |  |          | 
|----------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ----- |  | ------------------------------------------------------------------------------------ |  |  | -------- | 
|                                                                                          |  |                                                                                                                                                                                                                              |  |                  |           |       |  | Date                                                                                
|Plaintiff                                                                                 |  | Defendants                                                                                                                                                                                                                   |  | Civil Action No. |           | Court |  | Instituted                                                                          
|                                                                                          |  |                                                                                                                                                                                                                              |  |                  |           |       |  |                                                                                     
|Harbor Finance Partners,
    derivatively on behalf of
    Hanover Compressor
    Company |  | Michael J. McGhan, William S. Goldberg,
    Ted Collins, Jr., Robert R. Furgason,
    Melvyn N. Klein, Michael A. OConnor, and
    Alvin V. Shoemaker, Defendants and
    Hanover Compressor Company, Nominal
    Defendant |  |                  | H-02-0761 |       |  | United States District Court
    for the Southern District of
    Texas              |  |  | 03/01/02 | 
|Coffelt Family, LLC,
    derivatively on behalf of
    Hanover Compressor
    Company     |  | Michael A. OConnor, Michael J. McGhan,
    William S. Goldberg, Ted Collins, Jr.,
    Melvyn N. Klein, Alvin V. Shoemaker and
    Robert R. Furgason, Defendants and
    Hanover Compressor Company, Nominal
    Defendant  |  |                  | 19410-NC  |       |  | Court of Chancery for the
    State of Delaware State
    Court in New Castle County |  |  | 02/15/02 | 

20



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##### Table of Contents



On October 2, 2003, the Harbor Finance
Partners derivative lawsuit was consolidated into the Pirelli
Armstrong Tire Corporation Retiree Medical Benefits Trustsecurities class action.

On and after March 26, 2003, three
plaintiffs filed separate putative class actions against
Hanover, certain named individuals and other purportedly unknown
defendants, in the United States District Court for the Southern
District of Texas. The alleged class was composed of persons who
participated in or were beneficiaries of The Hanover Companies
Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal
Revenue Code of 1986, as amended. The purported class action
sought relief under ERISA based upon Hanovers and the
individual defendants alleged mishandling of
Hanovers 401(k) Plan. The three ERISA putative class
actions are entitled: Kirkley v. Hanover, Case
No. H-03-1155; Angleopoulos v. Hanover, Case
No. H-03-1064; and Freeman v. Hanover, Case
No. H-03-1095. On August 1, 2003, the three ERISA
class actions were consolidated into the Pirelli Armstrong
Tire Corporation Retiree Medical Benefits Trustfederal
securities class action. On October 9, 2003, a consolidated
amended complaint was filed by the plaintiffs in the ERISA class
action against Hanover, Michael McGhan, Michael OConnor
and William Goldberg, which included the same allegations as
indicated above, and was filed on behalf of themselves and a
class of persons who purchased or held Hanover securities in
their 401(k) Plan between May 4, 1999 and December 23,
2002.

These actions alleged generally that, in
connection with the transactions that were restated in 2002, we
and certain individuals acting as fiduciaries of Hanovers
401(k) Plan breached our fiduciary duties to the plan
participants by offering Hanover common stock as an investment
option, failing to provide material information to plan
participants regarding the suitability of Hanover common stock
as an investment alternative, failing to monitor the performance
of plan fiduciaries, and failing to provide material information
to other fiduciaries.

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

GKH Investments, L.P. and GKH Private Limited
(collectively GKH) which, as of December 31,
2003, together owned approximately 10% of Hanovers
outstanding common stock and which sold shares in our March 2001
secondary offering of common stock, are parties to the
settlement and have agreed to settle claims against them that
arise out of that offering as well as other potential
securities, ERISA, and derivative claims. The terms of the
settlement provide for GKH to transfer 2.5 million shares
of Hanover common stock from their holdings or from other
sources to the settlement fund.

On October 24, 2003, the parties moved the
United States District Court for the Southern District of Texas
for preliminary approval of the proposed settlement and sought
permission to provide notice to the potentially affected persons
and to set a date for a final hearing to approve the proposed
settlement. On December 5, 2003, the court held a hearing
and granted the parties motion for preliminary approval of
the proposed settlement and, among other things, ordered that
notice be provided to appropriate persons and

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set the date for the final hearing. The final
hearing was held on February 6, 2004, and no objections to
the settlement or requests to be excluded from the terms of the
settlement had been received prior to the deadline set by the
court.


On February 9, 2004, the United States
District Court for the Southern District of Texas entered three
Orders and Final Judgments, approving the settlement on the
terms agreed upon in the Stipulation of Settlement with respect
to all of the claims described above including the dismissal of
each of the actions other than the Coffelt Family derivative
action filed in the Delaware Chancery Court. The court also
entered an Order and Final Judgment approving the plans of
allocation with respect to each action, as well as an Order and
Final Judgment approving the schedule of attorneys fees
for counsel for the settling plaintiffs. The time in which these
Orders and Final Judgments may be appealed expired on
March 10, 2004 without any appeal being lodged. In
addition, on March 16, 2004, the Delaware Chancery Court
dismissed the Coffelt Family derivative action. The settlement
has therefore become final and will be implemented according to
its terms. In March 2004, we issued and delivered to the escrow
agent for the settlement fund 2.5 million shares of Hanover
common stock, as required by the settlement. Our independent
auditor, PricewaterhouseCoopers, is not a party to the
settlement and remains a party to the securities class action.

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

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

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

As of December 31, 2003, our accompanying
balance sheet included a $33.4 million long-term liability
and $32.7 million in accrued liabilities related to amounts
that are expected to be paid in the next twelve months. During
the second quarter of 2003, the $26.7 million receivable
from the insurance carriers and $2.8 million of our portion
of the cash settlement was paid into an escrow fund and is
included in the accompanying balance sheet as restricted cash.
In the first quarter of 2004, we will reclassify
$29.8 million, the value accrued for the stock to be paid,
from other liabilities to stockholders equity and will
include the shares in our outstanding shares used for earnings
per share calculations.

On November 14, 2002, the SEC issued a
Formal Order of Private Investigation relating to the
transactions underlying and, other matters relating to, the
restatements of our financial statements. In December 2003, we
entered into a settlement with the SEC. Without admitting or
denying any of the SECs findings, we consented to the
entry of a cease and desist order requiring future compliance
with

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certain periodic reporting, record keeping and
internal control provisions of the securities laws. The
settlement did not impose any monetary penalty on us, and
required no additional restatements of our historical financial
statements.


As of December 31, 2003, we had incurred
approximately $15.1 million in legal related expenses in
connection with the internal investigations, the putative class
action securities and ERISA lawsuits, the derivative lawsuits
and the SEC investigation. Of this amount, we advanced
approximately $2.3 million on behalf of certain current and
former officers and directors in connection with the above-named
proceedings. We intend to advance any litigation costs of our
current and former officers and directors, subject to the
limitations imposed by Delaware and other applicable law and
Hanovers certificate of incorporation and bylaws. We do
not expect additional legal fees and administrative costs in
connection with the settlement of the litigation, advances on
behalf of current and former officers and directors for legal
fees and other related costs to exceed $2.5 million, the
remaining balance of the accrual.

On June 25, 1999, we notified the Air
Quality Bureau of the Environmental Protection Division, New
Mexico Environment Department, of potential violations of
regulatory and permitting requirements. The potential violations
included failure to conduct required performance tests, failure
to file required notices and failure to pay fees for compressor
units located on sites for more than one year. We promptly paid
the required fees and corrected the potential violations. On
June 12, 2001, after the potential violations had been
corrected, the Director of the Division issued a compliance
order to us in connection with the potential violations. The
compliance order assessed a civil penalty of $15,000 per
day per alleged regulatory violation and permit; no total
penalty amount was proposed in the compliance order. On
October 3, 2003, the Division notified us that the total
proposed penalty would be $759,072. However, since the alleged
violations had been self-disclosed, that amount was reduced to
$189,768. We have responded to the penalty assessment,
challenging some of the calculations, and have proposed an
alternative settlement amount. We are currently negotiating with
the New Mexico Environment Department on the method of
calculation and proposed settlement amounts, and the issue is
not yet resolved. A Stipulated Motion for Extension of Time to
File Answer has been filed which extends the deadline for filing
our response to March 22, 2004.

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





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

No matters were submitted to a vote of our
shareholders during the fourth quarter of our fiscal year ended
December 31, 2003.

23



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##### Table of Contents





PART II





|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock is listed on the New York
Stock Exchange under the symbol HC. As of
March 19, 2004, 85,536,605 shares of our common stock
were issued and held of record by approximately
700 holders. On March 19, 2004, the last reported
sales price of our common stock on the New York Stock
Exchange was $10.87. The following table presents, for the
periods indicated, the range of high and low quarterly closing
sales prices of our common stock, as reported on the
New York Stock Exchange.

|                             |  |       |       |     |  |   |       | 
|---------------------------- |  | ----- | ----- | --- |  | - | ----- | 
|                             |  |      
|                             |  | Price
|                             |  |      
|                             |  | High  |       | Low
|Year ended December 31, 2002 |  |       |       |     |  |   |       | 
|First Quarter                |  | $     | 25.52 |     |  | $ | 10.50 | 
|Second Quarter               |  | $     | 20.33 |     |  | $ | 11.56 | 
|Third Quarter                |  | $     | 13.50 |     |  | $ | 6.80  | 
|Fourth Quarter               |  | $     | 11.98 |     |  | $ | 6.20  | 
|Year ended December 31, 2003 |  |       |       |     |  |   |       | 
|First Quarter                |  | $     | 10.10 |     |  | $ | 6.00  | 
|Second Quarter               |  | $     | 11.70 |     |  | $ | 6.85  | 
|Third Quarter                |  | $     | 12.19 |     |  | $ | 9.00  | 
|Fourth Quarter               |  | $     | 11.50 |     |  | $ | 9.21  | 

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

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

24



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

SELECTED FINANCIAL DATA (HISTORICAL)

In the table below we have presented certain
selected financial data for Hanover for each of the five years
in the period ended December 31, 2003. The historical
consolidated financial data has been derived from Hanovers
audited consolidated financial statements. The following
information should be read together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K and the
Consolidated Financial Statements in Item 15 of this
Form 10-K.

|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |   |         |         | 
|----------------------------------------------------------------------- | -------------------------- | ------------------------------------------------------------ | ------------------ | ---- | ------- | --------- | --------- | ------- | ------- | --------- | ------- | - | ------- | --------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | 
|                                                                        |                            |                                                             
|                                                                        |                            | Years Ended December 31,                                    
|                                                                        |                            |                                                             
|                                                                        |                            | 2003                                                         |                    | 2002 |         | 2001(1)   |           | 2000(1) |         | 1999(1)  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |          
|                                                                        |                            |                                                             
|                                                                        |                            | (in thousands, except per share data)                       
|Income Statement Data:                                                  |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|                                                                        | Revenues and other income: |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |   |        
|                                                                        |                            | Domestic rentals                                             |                    | $    | 324,186 |           |           | $       | 328,600 |           |         | $ | 269,679 |           |         | $ | 172,517 |         |         | $ | 136,430 |        
|                                                                        |                            | International rentals                                        |                    |      | 206,404 |           |           |         | 189,700 |           |         |   | 131,097 |           |         |   | 81,320  |         |         |   | 56,225  |        
|                                                                        |                            | Parts, service and used equipment                            |                    |      | 169,023 |           |           |         | 223,845 |           |         |   | 214,872 |           |         |   | 113,526 |         |         |   | 39,130  |        
|                                                                        |                            | Compressor and accessory fabrication                         |                    |      | 106,896 |           |           |         | 114,009 |           |         |   | 223,519 |           |         |   | 90,270  |         |         |   | 52,531  |        
|                                                                        |                            | Production and processing equipment fabrication              |                    |      | 260,660 |           |           |         | 149,656 |           |         |   | 184,040 |           |         |   | 79,121  |         |         |   | 27,255  |        
|                                                                        |                            | Equity in income of non-consolidated affiliates              |                    |      | 23,088  |           |           |         | 18,811  |           |         |   | 9,350   |           |         |   | 3,518   |         |         |   | 1,188   |        
|                                                                        |                            | Gain on change in interest in non-consolidated
    affiliate |                    |      |        |           |           |         |        |           |         |   |        |           |         |   | 864     |         |         |   |        |        
|                                                                        |                            | Other                                                        |                    |      | 5,093   |           |           |         | 4,189   |           |         |   | 8,403   |           |         |   | 5,688   |         |         |   | 5,371   |        
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|                                                                        |                            |                                                              | Total revenues (2) |      |         | 1,095,350 |           |         |         | 1,028,810 |         |   |         | 1,040,960 |         |   |         | 546,824 |         |   |         | 318,130 | 
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|                                                                        | Expenses:                  |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |   |        
|                                                                        |                            | Domestic rentals                                             |                    |      | 127,425 |           |           |         | 122,172 |           |         |   | 95,203  |           |         |   | 60,336  |         |         |   | 46,184  |        
|                                                                        |                            | International rentals                                        |                    |      | 67,465  |           |           |         | 57,579  |           |         |   | 45,795  |           |         |   | 27,656  |         |         |   | 18,765  |        
|                                                                        |                            | Parts, service and used equipment                            |                    |      | 126,619 |           |           |         | 179,844 |           |         |   | 152,701 |           |         |   | 79,958  |         |         |   | 26,504  |        
|                                                                        |                            | Compressor and accessory fabrication                         |                    |      | 96,922  |           |           |         | 99,446  |           |         |   | 188,122 |           |         |   | 76,754  |         |         |   | 43,663  |        
|                                                                        |                            | Production and processing equipment fabrication              |                    |      | 234,203 |           |           |         | 127,442 |           |         |   | 147,824 |           |         |   | 62,684  |         |         |   | 20,278  |        
|                                                                        |                            | Selling, general and administrative                          |                    |      | 161,655 |           |           |         | 153,676 |           |         |   | 92,172  |           |         |   | 51,768  |         |         |   | 33,782  |        
|                                                                        |                            | Foreign currency translation                                 |                    |      | 2,548   |           |           |         | 16,753  |           |         |   | 6,658   |           |         |   |        |         |         |   |        |        
|                                                                        |                            | Provision for cost of litigation
    settlement (5)          |                    |      | 42,991  |           |           |         |        |           |         |   |        |           |         |   |        |         |         |   |        |        
|                                                                        |                            | Other                                                        |                    |      | 2,906   |           |           |         | 27,607  |           |         |   | 9,727   |           |         |   |        |         |         |   |        |        
|                                                                        |                            | Depreciation and amortization (3)(4)                         |                    |      | 172,602 |           |           |         | 151,181 |           |         |   | 88,823  |           |         |   | 52,188  |         |         |   | 37,337  |        
|                                                                        |                            | Goodwill impairment (3)                                      |                    |      | 35,466  |           |           |         | 52,103  |           |         |   |        |           |         |   |        |         |         |   |        |        
|                                                                        |                            | Leasing expense (4)                                          |                    |      | 43,139  |           |           |         | 90,074  |           |         |   | 78,031  |           |         |   | 45,484  |         |         |   | 22,090  |        
|                                                                        |                            | Interest expense (4)                                         |                    |      | 89,175  |           |           |         | 43,352  |           |         |   | 23,904  |           |         |   | 15,048  |         |         |   | 9,064   |        
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|                                                                        |                            |                                                              | 1,203,116          |      |         |           | 1,121,229 |         |         |           | 928,960 |   |         |           | 471,876 |   |         |         | 257,667 |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Income (loss) from continuing operations before
    income taxes        |                            |                                                              | (107,766           | )    |         |           | (92,419   | )       |         |           | 112,000 |   |         |           | 74,948  |   |         |         | 60,463  |  
|Provision for (benefit from) income taxes                               |                            |                                                              | 784                |      |         |           | (17,576   | )       |         |           | 42,388  |   |         |           | 27,818  |   |         |         | 22,008  |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Income (loss) from continuing operations                                |                            |                                                              | (108,550           | )    |         |           | (74,843   | )       |         |           | 69,612  |   |         |           | 47,130  |   |         |         | 38,455  |  
|Income (loss) from discontinued operations, net
    of tax(2)           |                            |                                                              | (12,799            | )    |         |           | (41,225   | )       |         |           | 2,965   |   |         |           | 2,509   |   |         |         |        |  
|Cumulative effect of accounting change, net of
    tax(4)               |                            |                                                              | (86,910            | )    |         |           |          |         |         |           | (164    | ) |         |           |        |   |         |         |        |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Net income (loss)                                                       |                            | $                                                            | (208,259           | )    |         | $         | (116,068  | )       |         | $         | 72,413  |   |         | $         | 49,639  |   |         | $       | 38,455  |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Earnings (loss) per common share:                                       |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Basic earnings (loss) per common share from
    continuing operations   |                            | $                                                            | (1.34              | )    |         | $         | (0.94     | )       |         | $         | 0.96    |   |         | $         | 0.76    |   |         | $       | 0.67    |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Diluted earnings (loss) per common share from
    continuing operations |                            | $                                                            | (1.34              | )    |         | $         | (0.94     | )       |         | $         | 0.91    |   |         | $         | 0.71    |   |         | $       | 0.63    |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Weighted average common and common equivalent
    shares:               |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Basic                                                                   |                            |                                                              | 81,123             |      |         |           | 79,500    |         |         |           | 72,355  |   |         |           | 61,831  |   |         |         | 57,048  |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  
|Diluted                                                                 |                            |                                                              | 81,123             |      |         |           | 79,500    |         |         |           | 81,175  |   |         |           | 66,366  |   |         |         | 61,054  |  
|                                                                        |                            |                                                              |                    |      |         |           |           |         |         |           |         |   |         |           |         |   |         |         |         |  

25



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|                                    |                                                                         |                          |   |           |   |         |   |           |   |         |   |           |   |  |   |           |   |  |   |         |  
|----------------------------------- | ----------------------------------------------------------------------- | ------------------------ | - | --------- | - | ------- | - | --------- | - | ------- | - | --------- | - |  | - | --------- | - |  | - | ------- | -
|                                    |                                                                         |                         
|                                    |                                                                         | Years Ended December 31,
|                                    |                                                                         |                         
|                                    |                                                                         | 2003                     |   | 2002      |   | 2001(1) |   | 2000(1)   |   | 1999(1)
|                                    |                                                                         |                          |   |           |   |         |   |           |   |        
|                                    |                                                                         |                         
|                                    |                                                                         | (in thousands)          
|Cash flows provided by (used in):   |                                                                         |                          |   |           |   |         |   |           |   |         |   |           |   |  |   |           |   |  |   |        
|                                    | Operating activities                                                    |                          | $ | 164,735   |   |         | $ | 195,717   |   |         | $ | 152,774   |   |  | $ | 29,746    |   |  | $ | 71,610  |  
|                                    | Investing activities                                                    |                          |   | (43,470   | ) |         |   | (193,703  | ) |         |   | (482,277  | ) |  |   | (67,481   | ) |  |   | (95,502 | )
|                                    | Financing activities                                                    |                          |   | (84,457   | ) |         |   | (4,232    | ) |         |   | 307,259   |   |  |   | 77,589    |   |  |   | 18,218  |  
|Balance Sheet Data (end of period): |                                                                         |                          |   |           |   |         |   |           |   |         |   |           |   |  |   |           |   |  |   |        
|                                    | Working capital                                                         |                          | $ | 255,242   |   |         | $ | 195,444   |   |         | $ | 275,074   |   |  | $ | 282,730   |   |  | $ | 103,431 |  
|                                    | Net property, plant and equipment(4)                                    |                          |   | 2,027,654 |   |         |   | 1,167,675 |   |         |   | 1,151,513 |   |  |   | 574,703   |   |  |   | 498,877 |  
|                                    | Total assets(4)                                                         |                          |   | 2,918,466 |   |         |   | 2,154,029 |   |         |   | 2,265,776 |   |  |   | 1,246,172 |   |  |   | 753,387 |  
|                                    | Debt and mandatorily redeemable convertible
    preferred securities(4) |                          |   | 1,782,823 |   |         |   | 641,194   |   |         |   | 596,063   |   |  |   | 199,608   |   |  |   | 171,898 |  
|                                    | Common stockholders equity                                             |                          |   | 753,488   |   |         |   | 927,626   |   |         |   | 1,039,468 |   |  |   | 628,947   |   |  |   | 365,928 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During 2002, we announced a series of
    restatements that ultimately reduced our initially reported
    pre-tax income by $0.4 million, or 0.3%, for the year ended
    December 31, 2001, by $14.5 million, or 15.5%, for the
    year ended December 31, 2000, and by $3.1 million, or
    4.9%, for the year ended December 31, 1999, although
    certain restatements resulted in a larger percentage adjustment
    on a quarterly basis.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | For a description of significant business
    acquisitions, see Note 2 in Notes to the Consolidated
    Financial Statements in Item 15 of this Form 10-K. In
    the fourth quarter of 2002, we decided to discontinue certain
    businesses. For a description of the discontinued operations,
    see Note 3 in Notes to the Consolidated Financial
    Statements in Item 15 of this Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | In June 2001, the FASB issued Statement of
    Financial Accounting Standards 142, Goodwill and Other
    Intangible Assets (SFAS 142). Under
    SFAS 142, amortization of goodwill to earnings is
    discontinued. Instead, goodwill is reviewed for impairment
    annually or whenever events indicate impairment may have
    occurred. SFAS 142 was effective for us on January 1,
    2002. For financial data relating to our goodwill and other
    intangible assets, see Managements Discussion and
    Analysis of Financial Condition and Results of Operations
    and Note 9 in Notes to the Consolidated Financial
    Statements in Item 15 of this Form 10-K.                                                                                                                                                                                             
|   
|(4) | In accordance with FASB Interpretation
    No. 46, Consolidation of Variable Interest Entities,
    an interpretation of ARB 51 as revised in December 2003
    (FIN 46), for periods ending after
    June 30, 2003, we have included in our consolidated
    financial statements the special purpose entities that lease
    compression equipment to us. As a result, on July 1, 2003,
    we added approximately $897 million of compression
    equipment assets, net of accumulated depreciation, and
    approximately $1,139.6 million of our compression equipment
    lease obligations (including approximately $1,105.0 million
    in debt) to our balance sheet. See Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Leasing Transactions and Accounting
    Change for FIN 46 in Item 7 of this
    Form 10-K.
|   
|(5) | On October 23, 2003, we entered into a
    Stipulation of Settlement, which became final on March 10,
    2004 and settled all of the claims underlying the putative
    securities class action, the putative ERISA class action and the
    shareholder derivative actions discussed in Legal
    Proceedings in Item 3 of this Form 10-K and
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  Year Ended
    December 31, 2003 Compared to Year Ended December 31,
    2002  Provision for Cost of Litigation
    Settlement in Item 7 of this Form 10-K.                                                                                                                                                                                                                                                                    

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Managements discussion and analysis of the
results of operations and financial condition of Hanover
Compressor Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.

Overview

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



| |                       
| | ----------------------
| | Impact of Rapid Growth

We experienced rapid growth from 1998 through
2001 primarily as a result of significant acquisitions during
2000 and 2001, during which period our total assets increased
from approximately $753 million as of December 31,
1999 to approximately $2.3 billion as of December 31,
2001, and our debt, including compression equipment leases
obligations, increased from approximately $572 million at
December 31, 1999 to approximately $1,736 million at
December 31, 2001.

In addition to substantially increasing our
outstanding debt, our growth exceeded our infrastructure
capabilities and strained our internal control environment.
During 2002, we announced a series of restatements of certain
transactions that occurred in 1999, 2000 and 2001. In November
2002, the SEC issued a Formal Order of Private Investigation
relating to the transactions underlying and other matters
relating to the restatements. In addition, during 2002, Hanover
and certain of its past and present officers and directors were
named as defendants in a consolidated action pending in federal
court that included a putative securities class action, a
putative class action arising under the Employee Retirement
Income Security Act and shareholder derivate actions. The
litigation related principally to the matters involved in the
transactions underlying the restatements of our financial
statements. As discussed below, both the SEC investigation and
the litigation have recently been settled. For a more detailed
discussion of the SEC investigation and the securities
litigation, see Legal Proceedings in Item 3 of
this Form 10K.



| |                    
| | -------------------
| | Industry Conditions

Our operations depend upon the levels of activity
in natural gas development, production, processing and
transportation. Such activity levels typically decline when
there is a significant reduction in oil and gas prices or
significant instability in energy markets. In recent years, oil
and gas prices have been extremely volatile. In addition,
domestic natural gas consumption fell in 2001 and 2002 as a
result of the recent economic slowdown in the United States. Due
to a deterioration in market conditions, we experienced a
decline in the demand for our products and services in 2002 and
2003, which, along with the distractions associated with our
management reorganization, resulted in reductions in the
utilization of our compressor rental fleet and our revenues,
gross margins and profits in those years.

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The North American rig count increased by 27% to
1,531 at December 31, 2003 from 1,204 at December 31,
2002, and the twelve-month rolling average North American rig
count increased by 28% to 1,404 at December 31, 2003 from
1,097 at December 31, 2002. In addition, the twelve-month
rolling average New York Mercantile Exchange wellhead
natural gas price increased to $5.39 per Mcf at
December 31, 2003 from $3.22 per Mcf at
December 31, 2002. Despite the increase in natural gas
prices and the recent increase in the rig count,
U.S. natural gas production levels have not significantly
changed. Recently, we have not experienced any significant
growth in domestic rentals or purchases of equipment and
services by our customers, which we believe is primarily the
result of the lack of a significant increase in
U.S. natural gas production levels. However, with several
non-operational issues behind us, we are focused on improving
our sales success ratio on new bid opportunities and anticipate
some revenue growth in 2004.



| |                                                  
| | -------------------------------------------------
| | Management Reorganization and New
    Initiatives

During 2002, a number of our executives involved
directly or indirectly with the transactions underlying the
restatements described above resigned, including our former
Chief Executive Officer, Chief Financial Officer, Vice Chairman
of our board of directors, Chief Operating Officer and the head
of our international operations. During and after 2002, we hired
and appointed a new Chief Executive Officer and Chief Financial
Officer, hired and appointed our first General Counsel, hired a
new Controller, and hired new managers of Human Resources,
Financial Reporting and Policy Administration. During 2002, we
added three independent directors to our board of directors and
elected an independent Chairman of the Board from among the
three new directors. In addition, on February 4, 2004, we
added two new independent directors to our board of directors.
Our new management team has undertaken the following initiatives
to improve our operations and our liquidity position.

Focus on core
business.We have built our leading
market position through our strengths in compression rentals,
compressor fabrication, production and processing equipment
rental and fabrication and parts and service. We are focusing
our efforts on these businesses and on streamlining operations
in our core markets. In connection with these efforts, we have
decided to exit and sell certain non-core business lines. In
December 2002, our board of directors approved managements
recommendation to exit and sell our non-oilfield power
generation assets and certain used equipment business lines. In
2003, we sold our interests in two non-oilfield power generation
facilities for approximately $27.2 million, consisting of
$6.4 million in cash, $3.3 million in notes that
mature in 2004 and 2005 and the release from a capital lease
that had an outstanding balance of approximately
$17.2 million.

Enhance return on
capital.We are seeking to deploy our
capital more effectively in order to improve the total returns
from our investments. To achieve this objective, we intend to
work to improve our operating performance and profitability by
focusing on the following initiatives:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Improve our domestic fleet utilization by
    limiting the addition of new units, where applicable and
    permissible under our bank credit facility and the conforming
    amendments to our compression equipment lease obligations,
    moving idle domestic units into service in international markets
    and retiring less profitable units. During 2003, we renewed
    several key domestic customer alliances involving approximately
    300,000 horsepower, retired approximately 41,000 horsepower,
    moved approximately 36,000 horsepower to international markets
    and increased compression under contract by approximately 50,000
    horsepower. As a result, domestic utilization increased to 76%
    at December 31, 2003 from 72% at December 31, 2002.
|
| |  | Increase prices selectively for our domestic
    rental business. In early 2003, we began to selectively
    introduce price increases for our domestic compression rental
    business. Such price increases, along with a slight improvement
    in market conditions, resulted in a 3% increase in revenue from
    our domestic rentals business in the six months ended
    December 31, 2003 as compared to the six months ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                       
|
| |  | Improve operating efficiencies by consolidating
    certain of our operations. During 2003, we shut down six
    facilities and reduced our U.S. headcount by approximately
    550 employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase activity in our fabrication sales and
    parts and service operations to take advantage of our available
    fabrication capacity and field technician manpower.

Exploit international
opportunities.International markets
continue to represent the greatest growth opportunity for our
business. We believe that these markets are underserved. In
addition, we typically see higher pricing in international
markets relative to the domestic market. During 2003, we added
approximately 50,000 horsepower to our international rental
fleet under contract. We intend to allocate additional resources
toward international markets, to open offices abroad, where
appropriate, and to move idle domestic units into service in
international markets, where applicable. However, our ability to
invest capital resources and allocate assets into international
markets is restricted by our new bank credit facility and the
conforming amendments to our compression equipment lease
obligations and by our intentions to reduce outstanding debt as
described below.

Improve our capital
discipline.We plan to improve our
capital discipline by lowering the working capital we have
employed and reducing our substantial level of debt with both
excess operating cash flow and proceeds from asset sales. We are
also focused on improving the management of our working capital
by lowering the number of days outstanding for our accounts
receivable and reducing inventory levels. To reduce debt, we are
committed to under-spending cash flow, and we are currently
planning to allocate approximately $180 million of our
operating cash flow generated from 2004 through 2006 to debt
repayment.

As part of our plans to address our substantial
level of debt resulting from our growth through acquisitions, we
engaged in a number of refinancing transactions in 2003 to
address liquidity issues associated with our debt. In December
2003, we issued $200 million aggregate principal amount of
our 8.625% Senior Notes due 2010 and $143.8 million
aggregate principal amount of our 4.75% Convertible Senior
Notes due 2014. The net proceeds from these offerings were used
to repay outstanding indebtedness under our 1999A equipment
lease notes due June 2004 and a portion of the outstanding
indebtedness under our previous bank credit facility. In
addition, in December 2003, we entered into a new
$350 million bank credit facility that matures in December
2006. The new bank credit facility replaced our previous bank
credit facility that matured in November 2004. The new bank
credit facility provides additional flexibility to support our
short-term liquidity needs. Also, in October 2003, the
PIGAP II joint venture, in which we have a 30% interest,
engaged in a project financing and distributed approximately
$78.5 million to us, of which approximately
$59.9 million was used to pay off a non-recourse promissory
note issued by one of our subsidiaries that had been secured by
our interest in PIGAP II. We also restructured a
$150 million subordinated note that had been issued to
Schlumberger in connection with an acquisition. We restructured
the note as our Zero Coupon Subordinated Notes due
March 31, 2007 and reduced the implicit interest rate.

Resolved pending litigation and
investigations.In 2003, we entered
into an agreement to settle the pending securities litigation.
On February 9, 2004, the United States District Court for
the Southern District of Texas entered three Orders and Final
Judgments, approving the settlement on the terms agreed upon in
the Stipulation of Settlement with respect to all of the pending
claims. The court also entered an Order and Final Judgment
approving the plans of allocation with respect to each action,
as well as an Order and Final Judgment approving the schedule of
attorneys fees for counsel for the settling plaintiffs.
The time in which these Orders and Final Judgments may be
appealed expired on March 10, 2004 without any appeal being
lodged. The settlement has therefore become final and will be
implemented according to its terms.

The settlement provides for us to (1) make a
cash payment of approximately $30 million (of which
$26.7 million was funded by payments from our directors and
officers insurance carriers), (2) issue 2.5 million
shares of our common stock, and (3) issue a contingent note
with a principal amount of $6.7 million, which may be
extinguished in certain circumstances. In addition, upon the
occurrence of a change of control that involves us, if the
change of control or shareholder approval of the change of
control occurs before February 9, 2005, which is twelve
months after final court approval of the settlement, we will be
obligated to contribute an additional $3 million to the
settlement fund. Also, in December 2003, a

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settlement between the SEC and us was entered by
the SEC. Without admitting or denying any of the SECs
findings, we consented to the entry of a cease and desist order
requiring future compliance with certain periodic reporting,
record keeping and internal control provisions of the securities
laws. The settlement with the SEC did not impose any monetary
penalty on us.




| |                   
| | ------------------
| | Summary of Results

Net losses.We
recorded a consolidated net loss of $208.3 million for the
year ended December 31, 2003, as compared to a consolidated
net loss of $116.1 million and consolidated net income of
$72.4 million for the years ended December 31, 2002
and 2001, respectively. Our results for each of the last two
years have been affected by a number of charges that may not
necessarily be indicative of our core operations or our future
prospects and impact comparability between years. These special
items are discussed in Results of Operations below.

Results by Segment.The following table summarizes revenues, expenses and gross
profit margin percentages for each of our business segments
(dollars in thousands):

|                           |                                                 |                          |           |         |   |      |           |         |   |   |           |         |  
|-------------------------- | ----------------------------------------------- | ------------------------ | --------- | ------- | - | ---- | --------- | ------- | - | - | --------- | ------- | -
|                           |                                                 |                         
|                           |                                                 | Years ended December 31,
|                           |                                                 |                         
|                           |                                                 | 2003                     |           | 2002    |   | 2001
|                           |                                                 |                          |           |         |   |     
|Revenues and other income: |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|                           | Domestic rentals                                |                          | $         | 324,186 |   |      | $         | 328,600 |   |   | $         | 269,679 |  
|                           | International rentals                           |                          |           | 206,404 |   |      |           | 189,700 |   |   |           | 131,097 |  
|                           | Parts, service and used equipment               |                          |           | 169,023 |   |      |           | 223,845 |   |   |           | 214,872 |  
|                           | Compressor and accessory fabrication            |                          |           | 106,896 |   |      |           | 114,009 |   |   |           | 223,519 |  
|                           | Production and processing equipment fabrication |                          |           | 260,660 |   |      |           | 149,656 |   |   |           | 184,040 |  
|                           | Equity in income of non-consolidated affiliate  |                          |           | 23,088  |   |      |           | 18,811  |   |   |           | 9,350   |  
|                           | Other                                           |                          |           | 5,093   |   |      |           | 4,189   |   |   |           | 8,403   |  
|                           |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|                           |                                                 | $                        | 1,095,350 |         |   | $    | 1,028,810 |         |   | $ | 1,040,960 |        
|                           |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|Expenses:                  |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|                           | Domestic rentals                                |                          | $         | 127,425 |   |      | $         | 122,172 |   |   | $         | 95,203  |  
|                           | International rentals                           |                          |           | 67,465  |   |      |           | 57,579  |   |   |           | 45,795  |  
|                           | Parts, service and used equipment               |                          |           | 126,619 |   |      |           | 179,844 |   |   |           | 152,701 |  
|                           | Compressor and accessory fabrication            |                          |           | 96,922  |   |      |           | 99,446  |   |   |           | 188,122 |  
|                           | Production and processing equipment fabrication |                          |           | 234,203 |   |      |           | 127,442 |   |   |           | 147,824 |  
|                           |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|                           |                                                 | $                        | 652,634   |         |   | $    | 586,483   |         |   | $ | 629,645   |        
|                           |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|Gross profit margin:       |                                                 |                          |           |         |   |      |           |         |   |   |           |        
|                           | Domestic rentals                                |                          |           | 61      | % |      |           | 63      | % |   |           | 65      | %
|                           | International rentals                           |                          |           | 67      | % |      |           | 70      | % |   |           | 65      | %
|                           | Parts, service and used equipment               |                          |           | 25      | % |      |           | 20      | % |   |           | 29      | %
|                           | Compressor and accessory fabrication            |                          |           | 9       | % |      |           | 13      | % |   |           | 16      | %
|                           | Production and processing equipment fabrication |                          |           | 10      | % |      |           | 15      | % |   |           | 20      | %



| |                    
| | -------------------
| | Belleli Acquisition

Belleli Acquisition.In 2002, we increased our ownership of
Belleli to 51% from 20.3% by converting $13.4 million in
loans, together with approximately $3.2 million in accrued
interest thereon, into additional equity ownership and in
November 2002 began consolidating the results of Bellelis
operations. Belleli has three manufacturing facilities, one in
Mantova, Italy and two in the United Arab Emirates (Jebel Ali
and Hamriyah). During 2002, we also purchased certain operating
assets used by Belleli for approximately $22.4 million from
a bankruptcy estate of Bellelis former parent and leased
these assets to Belleli for approximately $1.2 million per
year, for a term of seven years.

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In connection with our increase in ownership in
2002, we entered into an agreement with the minority owner of
Belleli that provided the minority owner the right, until
June 30, 2003, to purchase our interest for an amount that
approximated our investment in Belleli. The agreement also
provided us with the right, beginning in July 2003, to purchase
the minority owners interest in Belleli. In addition, the
minority owner historically had been unwilling to provide its
proportionate share of capital to Belleli. We believed that our
ability to maximize value would be enhanced if we were able to
exert greater control through the exercise of our purchase
right. Thus, in August 2003, we exercised our option to acquire
the remaining 49% interest in Belleli for approximately
$15.0 million in order to gain complete control of Belleli.
As a result of these transactions and intervening foreign
exchange rate changes, we recorded $4.8 million in
identifiable intangible assets, with a weighted average life of
approximately 17 years, and $35.5 million in goodwill.

As a result of the war in Iraq, the strengthening
of the Euro and generally unfavorable economic conditions, we
believe that the estimated fair value of Belleli declined
significantly during 2003. Upon gaining complete control of
Belleli and assessing our long-term growth strategy, we
determined that their general factors in combination with the
specific economic factors impacting Belleli had significantly
and adversely impacted the timing and amount of the future cash
flows that we expected Belleli to generate. We currently do not
expect to realize our original growth expectations for Belleli
in the timeframe that we originally forecasted.

During the performance of our annual goodwill
impairment review in the fourth quarter of 2003, we determined
the present value of Bellelis expected future cash flows
was less than our carrying value of Belleli. This resulted in a
full impairment charge for the $35.5 million in goodwill
associated with Belleli. Upon further analysis, it was
determined that the factors resulting in the goodwill impairment
charge were also present during the third quarter of 2003 and
that the exercise of our purchase option in the third quarter of
2003 and the presence of such factors should have resulted in an
interim goodwill impairment test under SFAS 142 and an
impairment charge at that time. We have adjusted our third
quarter results accordingly.



| |                       
| | ----------------------
| | Facility Consolidation

We had previously announced our plan to reduce
our U.S. headcount by approximately 500 employees worldwide
and to close four fabrication facilities. During the year ended
December 31, 2002, we accrued approximately
$2.7 million in employee separation costs related to the
reduction in workforce. During the year ended December 31,
2003, we paid approximately $2.0 million in employee
separation costs, implemented further cost saving initiatives
and closed two additional facilities. We expect to incur an
additional $0.7 million in employee separation costs
related to the completion of these activities. Since
December 31, 2002, our U.S. workforce has decreased by
approximately 550 employees.

During the fourth quarter of 2002, we reviewed
our business lines and our board of directors approved
managements recommendation to exit and sell our
non-oilfield power generation facilities and certain used
equipment business lines. The results from these businesses are
reflected as discontinued operations in our consolidated
financial statements. Additionally, during 2003 and 2002, we
recorded certain write-downs, asset impairments and
restructuring costs. A summary of these charges and the related
impact on our financial results is discussed below.

Critical Accounting Estimates

This discussion and analysis of our financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates and accounting
policies, including those related to bad debts, inventories,
fixed assets, investments, intangible assets, income taxes,
warranty obligations, sale leaseback transactions, revenue
recognition and contingencies and litigation. We base our
estimates on historical experience and on other assumptions that
we

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believe are reasonable under the circumstances.
The results of this process form the basis of our judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions
and these differences can be material to our financial
condition, results of operations and liquidity.




| |                        
| | -----------------------
| | Allowances and Reserves

We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. If the financial condition of a
customer deteriorates, resulting in an impairment of its ability
to make payments, additional allowances may be required. As of
December 31, 2003, our largest account receivable from a
customer was approximately $10.3 million. During 2003, 2002
and 2001, we recorded approximately $4.0 million,
$7.1 million and $4.9 million in additional allowances
for doubtful accounts, respectively. A 10% increase in bad debt
expense would have resulted in approximately $0.4 million
in additional selling, general and administrative expense for
2003.

We write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated market value
based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than
those expected by management, additional inventory write-downs
may be required. During 2003, 2002 and 2001, we recorded
approximately $3.0 million, $13.9 million and
$2.3 million, respectively, in additional reserves for
obsolete and slow moving inventory.



| |                                      
| | -------------------------------------
| | Long-Lived Assets and
    Investments

We review for the impairment of long-lived
assets, including property, plant and equipment, assets held for
sale and investments in non-consolidated affiliates whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss
exists when estimated undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are less
than its carrying amount. When necessary, an impairment loss is
recognized and represents the excess of the assets
carrying value as compared to its estimated fair value and is
charged to the period in which the impairment occurred. The
determination of what constitutes an indication of possible
impairment, the estimation of future cash flows and the
determination of estimated fair value are all significant
judgments. During 2003 and 2002, as a result of the review of
our rental fleet, we recorded $14.3 million and
$34.5 million, respectively, in additional depreciation on
equipment that was retired and equipment that was expected to be
sold or abandoned.

In addition, we perform an annual goodwill
impairment test, pursuant to the requirements of SFAS 142,
in the fourth quarter of each year, to determine if the
estimated recoverable value of the reporting unit exceeds the
net carrying value of the reporting unit, including the
applicable goodwill. We determine the fair value of our
reporting units using a combination of the expected present
value of future cash flows and the market approach. The present
value of future cash flows is estimated using our most recent
five-year forecast, the weighted average cost of capital and a
market multiple on the reporting units earnings before interest,
tax, depreciation and amortization. Changes in forecasts could
effect the estimated fair value of our reporting units and
result in a goodwill impairment charge in a future period. We
used a 12% weighted average cost of capital in our analysis of
the present value of future cash flows. During 2003 and 2002, we
recorded $35.5 million and $52.1 million,
respectively, in goodwill impairments as a result of our
goodwill evaluations.

We hold minority interests in companies having
operations or technology in areas that relate to our business,
one of which is publicly traded and may experience volatile
share prices. We record an investment impairment charge when we
believe an investment has experienced a decline in value that is
other than temporary. Future adverse changes in market
conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an
investments current carrying value, thereby possibly
requiring an impairment charge

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in the future. During 2002, we recorded
approximately $16.0 million in write-downs and charges
related to our interest in non-consolidated affiliates.




| |           
| | ----------
| | Tax Assets

We must estimate our expected future taxable
income in order to assess the realizability of our deferred
income tax assets. As of December 31, 2003, we reported a
net deferred tax liability of $28.3 million, which included
gross deferred tax assets of $320.0 million, net of a
valuation allowance of $55.0 million and gross deferred tax
liabilities of $293.3 million. Numerous assumptions are
inherent in the estimation of future taxable income, including
assumptions about matters that are dependent on future events,
such as future operating conditions and future financial
conditions.

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

As a result of current year operating losses and
charges in 2003, we were in a net deferred tax asset position
(for U.S. income tax purposes) for the first time in 2003.
Due to our cumulative domestic losses over the past three years,
we could not reach the conclusion that it was more likely
than not that certain of our U.S. deferred tax assets
will be realized in the future. Accordingly, we provided a
$25.7 million deferred tax valuation allowance against our
net U.S. deferred tax asset. We will be required to record
additional valuation allowances if our domestic deferred tax
asset position is increased and the more likely than
not criteria of SFAS 109 is not met. If we are
required to record additional valuation allowances, our
effective tax rate will be increased, perhaps substantially
above the statutory rate. Our preliminary analysis leads us to
believe that we will likely be required to record additional
valuation allowances in the first quarter of 2004, unless we are
able to implement tax planning strategies that would minimize or
eliminate the amount of such additional valuation allowance
prior to the end of the first quarter, and may be required to
record additional valuation allowances in future periods.



| |                                                              
| | -------------------------------------------------------------
| | Revenue Recognition  Percentage
    of Completion Accounting

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

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

Factors that must be considered in estimating the
work to be completed and ultimate profit include labor
productivity and availability, the nature and complexity of work
to be performed, the impact of

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change orders, availability of raw materials and
the impact of delayed performance. If the aggregate combined
cost estimates for all of our fabrication businesses had been
higher or lower by 1% in 2003, our results of operations before
tax would have been decreased or increased by approximately
$3.3 million. As of December 31, 2003, we had
approximately $41.7 million in costs and estimated earnings
on uncompleted contracts in excess of billings to our customers.




| |                             
| | ----------------------------
| | Contingencies and Litigation

In the ordinary course of business, we are
involved in various pending or threatened legal actions. While
we are unable to predict the ultimate outcome of these actions,
SFAS 5, Accounting for Contingencies requires
management to make judgments about future events that are
inherently uncertain. We are required to record (and have
recorded) a loss during any period in which we, based on our
experience, believe a contingency is likely to result in a
financial loss to us. In making its determinations of likely
outcomes of pending or threatened legal matters, management
considers the evaluation of counsel knowledgeable about each
matter. See Legal Proceedings in Item 3 of this
Form 10-K.

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002



| |        
| | -------
| | Summary

For the year ended December 31, 2003,
revenue increased to $1,095.4 million over 2002 revenue of
$1,028.8 million. Included in 2003 revenue was
$116.8 million of production and processing equipment
fabrication revenue from Belleli, compared to $15.4 million
for the same period a year earlier. We began including Belleli
in our consolidated financial results in November 2002.

Net loss for the year ended December 31,
2003, was $208.3 million, compared with a net loss of
$116.1 million in 2002. As detailed in the chart below,
included in the 2003 net loss was $250.6 million in
pre-tax charges. In addition, we recorded a $25.7 million
U.S. deferred tax valuation allowance that was included in
the provision for income taxes. The net loss in 2002 included
$182.7 million in pre-tax charges for the write-down of our
investment in discontinued operations, the write-down of a
portion of our domestic compression rental fleet, severance
costs and bad debt reserves.

In addition, 2003 net loss increased due to
a decrease in gross margin percentages for both our domestic and
international rental fleet and our fabrication businesses and an
increase in selling, general and administrative expense and
depreciation expense which are discussed further below. Our
2003 net loss included a $39.2 million pre-tax loss
from the inclusion of Belleli, including a $35.5 million
goodwill impairment discussed further below.

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

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

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| |                         
| | ------------------------
| | Business Segment Results

Domestic Rentals

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | --- | -
|                  |  |                          |         |         
|                  |  | Years ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2003                     |         | 2002     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 324,186 |          |  | $          | 328,600 |  |  |  | (1) | %
|Operating expense |  |                          | 127,425 |          |  |            | 122,172 |  |  |  | 4   | %
|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|Gross profit      |  | $                        | 196,761 |          |  | $          | 206,428 |  |  |  | (5) | %
|Gross margin      |  |                          | 61%     |          |  |            | 63%     |  |  |  | (2) | %

For 2003, domestic rental revenues and gross
profit decreased from 2002 due to weaker demand, stronger
competition, which resulted in lower fleet utilization in the
first six months of the year relative to the same period a year
earlier, and higher operating expenses including higher repairs
and maintenance and start up costs for a large gas plant in
2003. As a result of lower fleet utilization in the first half
of the year, our average domestic utilization for 2003 was
approximately 3% lower than our average utilization for 2002.
However, our domestic rental horsepower utilization rate at
December 31, 2003 was 76% compared to 72% at
December 31, 2002. The increase in utilization was due to
an increase in contracted units, which led to a 2% increase in
utilization, the retirement of units to be sold or scrapped and
the deployment of units into international operations.

International Rentals

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | --- | -
|                  |  |                          |         |         
|                  |  | Years ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2003                     |         | 2002     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 206,404 |          |  | $          | 189,700 |  |  |  | 9   | %
|Operating expense |  |                          | 67,465  |          |  |            | 57,579  |  |  |  | 17  | %
|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|Gross profit      |  | $                        | 138,939 |          |  | $          | 132,121 |  |  |  | 5   | %
|Gross margin      |  |                          | 67%     |          |  |            | 70%     |  |  |  | (3) | %

For 2003, international rental revenue and gross
profit increased, compared to 2002, due to increased compression
rental activity, primarily in Argentina and Mexico, and the
addition in 2003 of two gas processing plants in Mexico and
Brazil. As of December 31, 2003, we had approximately
925,000 horsepower of compression deployed internationally
compared to 860,000 horsepower deployed at December 31,
2002.

Our 2003 revenue and gross margin were positively
impacted by approximately $2.7 million in revenue that was
not recognized until 2003 due to concerns about the ultimate
receipt as a result of the strike by workers of the national oil
company in Venezuela. Our 2002 international revenue and gross
margin benefited from the inclusion of approximately
$9.7 million in revenues from partial reimbursement of
foreign currency losses from the renegotiations of contracts
with our Argentine customers, discussed further below, but was
negatively impacted by approximately $2.7 million in
revenues from Venezuelan customers that was not recognized until
2003. These items increased our 2002 revenue by
approximately $7.0 million and our gross margin by
approximately 2%, net. Excluding these items from our 2002
revenues, our 2003 revenues and operating expenses increased by
approximately 13% and 17%, respectively. Gross margin for 2003
decreased, when compared to 2002, due primarily to the inclusion
of these revenue items in 2002 and an increase in start-up costs
in 2003.

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Parts, Service and Used Equipment

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | ---- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2003                     |         | 2002     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 169,023 |          |  | $          | 223,845 |  |  |  | (25) | %
|Operating expense |  |                          | 126,619 |          |  |            | 179,844 |  |  |  | (30) | %
|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|Gross profit      |  | $                        | 42,404  |          |  | $          | 44,001  |  |  |  | (4)  | %
|Gross margin      |  |                          | 25%     |          |  |            | 20%     |  |  |  | 5    | %

For 2003, parts, service, and used equipment
revenue was lower than 2002 results due primarily to lower used
rental equipment and installation sales. Parts, service and used
equipment revenue includes two business components:
(1) parts and service and (2) used rental equipment
and installation sales. Parts and service revenue was
$125.9 million with a gross margin of 29% for 2003,
compared to $144.1 million in revenue with a gross margin
of 22% in 2002. Parts and service revenue declined by
approximately $18.2 million due to weaker market
conditions. Used rental equipment and installation sales revenue
was $43.1 million with a gross margin of 14% compared to
$79.8 million with a gross margin of 16% in 2002. The
decrease in used rental equipment and installation sales was
primarily due to a large gas plant sale transaction that
occurred during 2002. Our used rental equipment and installation
sales (which usually have a lower margin than our parts and
service sales) decreased our parts, service and used equipment
gross margin by approximately 4% in 2003 and by 2% in 2002. In
addition, the 2002 parts, service, and used equipment gross
margin was negatively impacted by approximately 3% due to the
$6.8 million inventory write-down and reserves recorded
during 2002 for parts, which were either obsolete, excess or
carried at a price above market value.

Compression and Accessory
Fabrication

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | ---- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2003                     |         | 2002     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 106,896 |          |  | $          | 114,009 |  |  |  | (6)  | %
|Operating Expense |  |                          | 96,922  |          |  |            | 99,446  |  |  |  | (3)  | %
|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|Gross Profit      |  | $                        | 9,974   |          |  | $          | 14,563  |  |  |  | (32) | %
|Gross Margin      |  |                          | 9%      |          |  |            | 13%     |  |  |  | (4)  | %

For 2003, compression fabrication revenue and
gross margin declined, compared to 2002, due primarily to strong
competition for new orders which negatively affected the selling
price and the resulting gross margin and sales and operational
disruptions associated with the consolidation of our fabrication
facilities.

Production and Processing Equipment
Fabrication

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | --- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2003                     |         | 2002     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 260,660 |          |  | $          | 149,656 |  |  |  | 74  | %
|Operating expense |  |                          | 234,203 |          |  |            | 127,442 |  |  |  | 84  | %
|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|Gross profit      |  | $                        | 26,457  |          |  | $          | 22,214  |  |  |  | 19  | %
|Gross margin      |  |                          | 10%     |          |  |            | 15%     |  |  |  | (5) | %

Production and processing equipment revenue for
2003 increased over 2002 revenue because of the inclusion of a
full year of revenue from Belleli. Included in 2003 was
$116.8 million in revenue and $105.3 million in
expense for Belleli, compared to $15.4 million in revenue
and $13.7 million in expense in 2002. In November 2002, we
increased our ownership percentage of Belleli to 51% and began
including Belleli in our consolidated financial results. Gross
margin for production and processing equipment fabrication
declined, compared to the same period a year earlier, due
primarily to increased competition for our high specification
equipment lines, cost overruns on certain projects that we were
not able to pass on

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to respective customers, project delays in
anticipated orders, a slow-down in sales activity at Belleli
early in the year caused by the war in Iraq, and increased
foreign currency exposure due to the strengthening of the Euro
and Canadian dollar relative to the U.S. dollar.




| |              
| | -------------
| | Other Revenue

Equity in income of non-consolidated affiliates
increased by $4.3 million to $23.1 million during the
year ended December 31, 2003, from $18.8 million
during the year ended December 31, 2002. This increase is
primarily due to a improvement in results from our equity
interest in Hanover Measurement and PIGAP II joint venture.
During 2002, Hanover Measurement had recorded a goodwill
impairment charge and PIGAP II results were negatively
impacted by foreign exchange losses.



| |         
| | --------
| | Expenses

Selling, general, and administrative expense
(SG&A) for both 2003 and 2002, as a percentage
of revenue, was 15%. SG&A expense in 2003 was
$161.7 million compared to $153.7 million in 2002. The
increase over 2002 was primarily due to the inclusion of
Bellelis SG&A expense of $11.0 million, compared
to $1.2 million in 2002.

Depreciation and amortization expense for 2003
was $172.6 million, compared to $151.2 million in
2002. The increase in depreciation and amortization was
primarily due to: (1) additions to the rental fleet,
including maintenance capital, placed in service during the
year; (2) the inclusion of $3.0 million of
depreciation and amortization from the inclusion of Belleli for
a full year; (3) $14.3 million of impairments recorded
for idle rental fleet assets to be sold or scrapped;
(4) approximately $8.5 million in additional
depreciation expense associated with the compression equipment
operating leases that were consolidated into our financial
statements in the third quarter of 2003; and
(5) $2.5 million in amortization to write-off deferred
financing costs associated with the our old bank credit facility
and compression equipment lease obligations that were refinanced
in December 2003. Depreciation and amortization expense for 2002
included $34.5 million in impairment charges for the
reduction in the carrying value of certain idle compression
equipment that was retired and the acceleration of depreciation
related to certain plants and facilities that were expected to
be sold or abandoned. After a review of our idle rental fleet
assets in 2002 and 2003, we determined that certain assets
should be scrapped or sold rather than repaired. A number of
these units were acquired in business acquisitions over the last
several years and given our utilization level, we determined not
to repair or rebuild them to bring them up to Hanovers
standards.

Beginning in July 2003, payments accrued under
our sale leaseback transactions are included in interest expense
as a result of consolidating the entities that lease compression
equipment to us. See  Cumulative Effect Of
Accounting Change below. As a result of this, our interest
expense increased $45.8 million, to $89.2 million, and
our leasing expense decreased $46.9 million to
$43.1 million for the year ended December 31, 2003.

Our interest and leasing expense increased due to
the increase in the outstanding balance of our zero coupon note,
the inclusion of approximately $1.5 million in interest
expense from Belleli and higher effective rates as a result of
the February 2003 amendment to our bank credit facility and
compression equipment operating leases. These increases were
offset by lower interest on our bank credit facility as a result
of lower balances outstanding and by a decrease in additional
interest paid on leases, explained below.

In connection with the compression equipment
leases entered into in August 2001, we were obligated to prepare
registration statements and complete an exchange offer to enable
the holders of the notes issued by the lessors to exchange their
notes with notes registered under the Securities Act of 1933.
Because of the restatement of our financial statements, the
exchange offer was not completed pursuant to the time line
required by the agreements related to the compression equipment
lease obligations and we were required to pay additional lease
expense in an amount equal to $105,600 per week until the
exchange offering was completed. The additional lease expense
began accruing on January 28, 2002 and increased our lease
expense by $1.1 million and $5.1 million during 2003
and 2002, respectively. The registration

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statements became effective in February 2003. The
exchange offer was completed and the requirement to pay the
additional lease expense ended on March 13, 2003.


Foreign currency translation expense for the year
ended December 31, 2003 was $2.5 million, compared to
a $16.8 million for the year ended December 31, 2002.
In January 2002, Argentina devalued its peso against the
U.S. dollar and imposed significant restrictions on fund
transfers internally and outside the country. In addition, the
Argentine government enacted regulations to temporarily prohibit
enforcement of contracts with exchange rate-based purchase price
adjustments. Instead, payment under such contracts could either
be made at an exchange rate negotiated by the parties or, if no
such agreement were reached, a preliminary payment could be made
based on a one dollar to one peso equivalent pending a final
agreement. The Argentine government also required the parties to
such contracts to renegotiate the price terms within 180
business days of the devaluation. We have renegotiated all of
our agreements in Argentina. As a result of these negotiations,
we received approximately $11.2 million in reimbursements
in 2002 and $0.7 million in 2003. During the years ended
December 31, 2003 and 2002, we recorded an exchange gain of
approximately $0.5 million and an exchange loss of
approximately $9.9 million, respectively, for assets
exposed to currency translation in Argentina.

In addition, during the years ended
December 31, 2003 and 2002, we recorded exchange losses of
approximately $2.4 million and $5.8 million,
respectively, for assets exposed to currency translation in
Venezuela and recorded translation losses of approximately
$0.6 million and $1.1 million, respectively, for all
other countries.

Other expenses decreased by $24.7 million to
$2.9 million during the year ended December 31, 2003
from $27.6 million for the year ended December 31,
2002. For the year ended December 31, 2003, other expenses
included $2.9 million in charges primarily recorded to
write-off certain non-revenue producing assets and to record the
settlement of a contractual obligation. For the year ended
December 31, 2002, other expenses included
$15.9 million of write-downs and charges related to
investments in four non-consolidated affiliates that had
experienced a decline in value that we believed to be other than
temporary, a $0.5 million write-off of a purchase option
for an acquisition that we had abandoned, $2.7 million in
other non-operating costs and a $8.5 million write-down of
notes receivable, including a $6.0 million reserve
established for loans to employees who were not executive
officers.

During 2003, we recorded a $35.5 million
non-cash charge for goodwill impairment associated with Belleli.
As a result of the war in Iraq, the strengthening of the Euro
and generally unfavorable economic conditions, we believe that
the estimated fair value of Belleli declined significantly
during 2003. Upon gaining complete control of Belleli and
assessing our long-term growth strategy, we determined that
these general factors in combination with the specific economic
factors impacting Belleli had significantly and adversely
impacted the timing and amount of the future cash flows that we
expected Belleli to generate. We currently do not expect to
realize our original growth expectations for Belleli in the
timeframe that we originally forecasted.

During the performance of our annual goodwill
impairment review in the fourth quarter of 2003, we determined
the present value of Bellelis expected future cash flows
was less than our carrying value of Belleli. This resulted in a
full impairment charge for the $35.5 million in goodwill
associated with Belleli. Upon further analysis, it was
determined that the factors resulting in the goodwill impairment
charge were also present during the third quarter of 2003 and
that the exercise of our purchase option in the third quarter of
2003 and the presence of such factors should have resulted in an
interim goodwill impairment test under SFAS 142 and an
impairment charge at that time. We have adjusted our third
quarter results accordingly.

In the fourth quarter 2002, we recorded a
$4.6 million goodwill impairment charge related to the
write-down of the goodwill associated with our pump division. In
addition, in the second quarter 2002, we recorded a
$47.5 million goodwill impairment charge on the goodwill
associated with our production and processing equipment
fabrication business.

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| |                                                   
| | --------------------------------------------------
| | Provision for Securities Litigation
    Settlement

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

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

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

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

On February 9, 2004, the United States
District Court for the Southern District of Texas entered three
Orders and Final Judgments, approving the settlement on the
terms agreed upon in the Stipulation of Settlement with respect
to all of the claims described above. The court also entered an
Order and Final Judgment approving the plans of allocation with
respect to each action, as well as an Order and Final Judgment
approving the schedule of attorneys fees for counsel for
the settling plaintiffs. The time in which these Orders and
Final Judgments may be appealed expired on March 10, 2004
without any appeal being lodged. The settlement has therefore
become final and will be implemented according to its terms. In
March 2004, we issued and delivered to the escrow agent for the
settlement fund 2.5 million shares of Hanover common stock,
as required by the settlement. Our independent auditor,
PricewaterhouseCoopers, is not a party to the settlement and
remains a party to the securities class action.

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

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

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



| |             
| | ------------
| | Income Taxes

The provision for income taxes increased
$18.4 million, to $0.8 million during the year ended
December 31, 2003 from a benefit of $17.6 million
during the year ended December 31, 2002. The average
effective income tax rates during the year ended
December 31, 2003 and December 31, 2002 were (0.7%)
and 19%, respectively. The decrease in rate was primarily due to
a $25.7 million valuation allowance recorded for
U.S. deferred tax assets where near-term future realization
is uncertain and the non-deductible Belleli goodwill impairment.

As a result of current year operating losses in
2003, we were in a net deferred tax asset position (for
U.S. income tax purposes) for the first time in 2003. Due
to our cumulative domestic tax losses over the past three years,
we could not reach the conclusion that it was more likely
than not that certain of our U.S. deferred tax assets
will be realized in the future. Accordingly, we provided a
$25.7 million deferred tax valuation allowance against our
net U.S. deferred tax asset. We will be required to record
additional valuation allowances if our domestic deferred tax
asset position is increased and the more likely than
not criteria of SFAS 109 is not met. If we are
required to record additional valuation allowances, our
effective tax rate will be increased, perhaps substantially
above the statutory rate.



| |                        
| | -----------------------
| | Discontinued Operations

During the fourth quarter of 2002, we reviewed
our business lines and the board of directors approved
managements recommendation to exit and sell our
non-oilfield power generation and certain used equipment
business lines. Income from discontinued operations increased
$2.1 million, to net income of $1.2 million during the
year ended December 31, 2003, from a loss of
$0.9 million during the year ended December 31, 2002.
In 2003, we recorded an additional $14.1 million charge
(net of tax) to write-down our investment in discontinued
operations to their current estimated market value. During 2002,
we recorded a $40.4 million charge (net of tax) related to
write-downs of our investment in discontinued operations.

40



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| |                                           
| | ------------------------------------------
| | Cumulative Effect of Accounting
    Change

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

In January 2003, the FASB issued FIN 46. The
primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved by
means other than through voting rights and the determination of
when and which business enterprise should consolidate a variable
interest entity (VIE) in its financial statements.
FIN 46 applies to an entity in which either (1) the
equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is
insufficient to finance that entitys activities without
receiving additional subordinated financial support from other
parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. As
revised, FIN 46 was effective immediately for VIEs
created after January 31, 2003. For special-purposes entities
created prior to February 1, 2003, FIN 46 is effective
at the first interim or annual reporting period ending after
December 15, 2003, or December 31, 2003 for us. For
entities, other than special purpose entities, created prior to
February 1, 2003, FIN 46 is effective for us as of
March 31, 2004. In addition, FIN 46 allows companies
to elect to adopt early the provisions of FIN 46 for some,
but not all, of the variable interest entities they own. Because
we are still evaluating whether we will be required to make any
other potential changes in connection with our adoption of
FIN 46, we have not adopted the provisions of FIN 46
other than discussed here and under Management Discussion
and Analysis of Financial Condition  New Accounting
Pronouncements in Item 7 of this Form 10-K.

Prior to July 1, 2003, we had entered into
lease transactions that were recorded as a sale and leaseback of
the compression equipment and were treated as operating leases
for financial reporting purposes. On July 1, 2003, we
adopted the provisions of FIN 46 as they relate to the
special purpose entities that lease compression equipment to us.
As a result of the adoption, we added approximately
$1,089 million in compressor equipment assets,
$192.3 million of accumulated depreciation (including
approximately $58.6 million of accumulated depreciation
related to periods before the sale and leaseback of the
equipment), $1,105.0 million in debt and $34.6 million
in minority interest obligations to our balance sheet, and we
reversed $108.8 million of deferred gains that were
recorded on our balance sheet as a result of the sale leaseback
transactions. On July 1, 2003, we recorded a
$133.7 million charge ($86.9 million net of tax) to
record the cumulative effect from the adoption of FIN 46
related to prior period depreciation of the compression
equipment assets. Additionally, we estimate that we will record
approximately $17 million per year in additional
depreciation expense on our leased compression equipment as a
result of the inclusion of the compression equipment on our
balance sheet and will also record the payments made under our
compression equipment leases as interest expense.

In December 2003, we exercised our purchase
option under the 1999 compression equipment operating lease. As
of December 31, 2003, the remaining compression assets
owned by the entities that lease equipment to us but are now
included in property, plant and equipment in our consolidated
financial statements had a net book value of approximately
$804.0 million, including improvements made to these assets
after the sale leaseback transactions.

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001



| |        
| | -------
| | Summary

Our total revenues decreased by
$12.2 million to $1,028.8 million during the year
ended December 31, 2002 from $1,041.0 million during
2001, as declining revenues in our fabrication businesses more
than offset increases in revenues from our domestic and
international rental revenues.

Revenues from rentals increased by
$117.5 million, or 29%, to $518.3 million during 2002
from $400.8 million during 2001. The increase in both
domestic and international rental revenues resulted from
expansion of our rental fleet and business acquisitions
completed in 2001. During 2001, we completed two significant
acquisitions: (1) in March 2001 we acquired OEC Compression
Corporation, which increased

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our rental fleet by approximately 175,000
horsepower, and (2) in August 2001 we acquired Production
Operators Corporation, which increased our rental fleet by
approximately 860,000 horsepower. At December 31, 2002, the
compressor rental fleet consisted of approximately 3,514,000
horsepower, a 1% increase over the 3,477,000 horsepower in the
rental fleet at December 31, 2001.


Net income decreased $188.5 million, or
260%, to a net loss of $116.1 million during 2002 from net
income of $72.4 million during 2001 primarily due to
(1) the decline in market conditions which impacted our
compressor and accessory fabrication and production and
processing equipment sales and gross profits, (2) an
inventory write-down, (3) a charge included in depreciation
and amortization expense for reductions in the carrying value of
certain idle units of our compression fleet that are being
retired and the acceleration of depreciation related to certain
plants and facilities expected to be sold or abandoned,
(4) an increase in selling, general and administrative
expenses, depreciation expense, leasing expense, foreign
currency translation expense and interest expense, (5) a
goodwill impairment and (6) a charge to write-down
investments in discontinued operations to their estimated fair
market values.

Included in the net loss for 2002 were the
following pre-tax charges (in thousands):

|                                                                                                      |       |   |        |         | 
|----------------------------------------------------------------------------------------------------- | ----- | - | ------ | ------- | 
|Inventory reserves (in Parts and service and used
    equipment expense)                              |       | $ | 6,800  |        
|Severance and other charges (in Selling, general
    and administrative)                              |       |   | 6,160  |        
|Write-off of idle equipment and assets to be sold
    or abandoned (in Depreciation and amortization) |       |   | 34,485 |        
|Goodwill impairments                                                                                  |       |   | 52,103 |        
|Non-consolidated affiliate write-downs/charges
    (in Other expense)                                 |       |   | 15,950 |        
|Write-down of discontinued operations                                                                 |       |   | 58,282 |        
|Note receivable reserves (in Other expense)                                                           |       |   | 8,454  |        
|Write-off of abandoned purchase option (in Other
    expense)                                         |       |   | 500    |        
|                                                                                                      |       |   |        |        
|                                                                                                      | Total |   | $      | 182,734 | 
|                                                                                                      |       |   |        |        



| |                         
| | ------------------------
| | Business Segment Results

Domestic Rentals

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | --- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2002                     |         | 2001     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 328,600 |          |  | $          | 269,679 |  |  |  | 22  | %
|Operating expense |  |                          | 122,172 |          |  |            | 95,203  |  |  |  | 28  | %
|                  |  |                          |         |          |  |            |         |  |  |  |     |  
|Gross profit      |  | $                        | 206,428 |          |  | $          | 174,476 |  |  |  | 18  | %
|Gross margin      |  |                          | 63%     |          |  |            | 65%     |  |  |  | (2) | %

The increase in domestic rental revenues and
expenses for the year 2002 over the year 2001 were primarily the
result of the expansion of our rental fleet and acquisitions.
The increase in revenues was more than offset by higher
operating expenses creating a decrease in the gross margin of
approximately 2% for the year 2002 compared to 2001. The higher
operating expenses were primarily due to lower horsepower
utilization brought on by weaker domestic market conditions
without a decrease in overhead. Domestic horsepower decreased by
2% to approximately 2,654,000 horsepower at December 31,
2002 from approximately 2,696,000 horsepower at
December 31, 2001. Domestic horsepower utilization rate at
December 31, 2002 was 72% compared to 80% at
December 31, 2001.

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##### Table of Contents



International Rentals

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |    |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | -- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2002                     |         | 2001     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 189,700 |          |  | $          | 131,097 |  |  |  | 45 | %
|Operating expense |  |                          | 57,579  |          |  |            | 45,795  |  |  |  | 26 | %
|                  |  |                          |         |          |  |            |         |  |  |  |    |  
|Gross profit      |  | $                        | 132,121 |          |  | $          | 85,302  |  |  |  | 55 | %
|Gross margin      |  |                          | 70%     |          |  |            | 65%     |  |  |  | 5  | %

The increase in international rentals resulted
from the expansion of our rental fleet and business acquisitions
completed in 2001. International horsepower increased by 10% to
approximately 860,000 horsepower at December 31, 2002 from
approximately 781,000 horsepower at December 31, 2001. The
increase in revenues was offset in part by decreased revenues
from our Venezuelan operations. In December 2002, certain
opposition groups in Venezuela initiated an unofficial national
strike. This caused economic conditions in Venezuela to
deteriorate, including a substantial reduction in the production
of oil in Venezuela. As a result, during the fourth quarter of
2002, our international rental revenues were decreased by
approximately $2.7 million as a result of the disruption in
our operations in Venezuela. However, our 2002 international
gross margin benefited from approximately $9.7 million in
partial reimbursement of foreign currency losses from the
renegotiations of contracts with our Argentine customers,
discussed further below, but was negatively impacted by
approximately $2.7 million in revenues from Venezuelan
customers that was not recognized until 2003. We estimate that
these items increased our 2002 gross margin by
approximately 2%.

International horsepower utilization rate at
December 31, 2002 was 96% compared to 97% at
December 31, 2001.

Parts Service and Used Equipment

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | ---- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2002                     |         | 2001     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 223,845 |          |  | $          | 214,872 |  |  |  | 4    | %
|Operating expense |  |                          | 179,844 |          |  |            | 152,710 |  |  |  | 18   | %
|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|Gross profit      |  | $                        | 44,001  |          |  | $          | 62,162  |  |  |  | (29) | %
|Gross margin      |  |                          | 20%     |          |  |            | 29%     |  |  |  | (9)  | %

The increase in revenues from parts, service and
used equipment was due to a $26.5 million gas plant sale
transaction and a $20.1 million compression equipment sale
transaction offset by lower revenues as a result of weaker
market conditions.

The increase in operating expenses of our parts,
service and used equipment segment and the decrease in the gross
profit margin from parts, service and used equipment was
primarily due to lower profit margins on used equipment sales in
2002 compared to used equipment sales in 2001. In 2002, parts
and service revenue included $62.4 million in used
equipment sales at a 13% gross margin, compared to
$28.0 million in 2001, with a 31% gross margin.
Approximately four percentage points of the decrease in gross
margin for parts, service and used equipment was due to a low
margin gas plant sale transaction and a low margin compressor
sale transaction. In addition, approximately three percentage
points of the decrease in gross margin was due to
$6.8 million in inventory write-downs and reserves for
parts that were either obsolete, excess or carried at a price
above market value. The remainder of the decrease was primarily
due to the impact of weaker market conditions on sales volume
and margins.

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##### Table of Contents



Compressor and Accessory Fabrication

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | ---- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2002                     |         | 2001     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 114,009 |          |  | $          | 223,519 |  |  |  | (49) | %
|Operating expense |  |                          | 99,446  |          |  |            | 188,122 |  |  |  | (47) | %
|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|Gross profit      |  | $                        | 14,563  |          |  | $          | 35,397  |  |  |  | (59) | %
|Gross margin      |  |                          | 13%     |          |  |            | 16%     |  |  |  | (3)  | %

Revenues, operating expenses and gross profit
from the compressor and accessory fabrication segment decreased
due to weaker market conditions. During 2002, an aggregate of
approximately 150,900 horsepower of compression equipment was
fabricated and sold compared to approximately 366,000 horsepower
fabricated and sold during 2001. The decrease in gross profit
margin for compression and accessory fabrication was
attributable to lower sales levels without a corresponding
decrease in overhead and the impact of weaker market conditions
on sales margins.

Production and Processing Equipment
Fabrication

(in thousands)


|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|----------------- |  | ------------------------ | ------- | -------- |  | ---------- | ------- |  |  |  | ---- | -
|                  |  |                          |         |         
|                  |  | Years Ended December 31, |         |         
|                  |  |                          |         | Increase
|                  |  | 2002                     |         | 2001     |  | (Decrease)
|                  |  |                          |         |          |  |           
|Revenue           |  | $                        | 149,656 |          |  | $          | 184,040 |  |  |  | (19) | %
|Operating expense |  |                          | 127,442 |          |  |            | 147,824 |  |  |  | (14) | %
|                  |  |                          |         |          |  |            |         |  |  |  |      |  
|Gross profit      |  | $                        | 22,214  |          |  | $          | 36,216  |  |  |  | (39) | %
|Gross margin      |  |                          | 15%     |          |  |            | 20%     |  |  |  | (5)  | %

Production and processing equipment revenues
include $15.4 million in revenues from the consolidation of
Belleli since November 2002. In November 2002, we increased our
ownership in Belleli to 51% and began consolidating the results
of Bellelis operations. Excluding Belleli, revenues from
our fabrication businesses declined by 27% due to decreased
capital spending by our customers in 2002 caused by weak
economic market conditions and recent political and economic
events in South America resulting in lower drilling and new well
completion activity by oil and gas producers. The average North
and South American rig count decreased by 27% in 2002 to 1,097
from 1,497 in 2001 and the twelve-month rolling average Henry
Hub natural gas price decreased to $3.22 per Mcf in
December 2002 from $4.26 per Mcf in December 2001.

Production and processing equipment fabrication
operating expenses and gross profit decreased due to lower sales
levels. The decrease in gross profit margin for production and
processing equipment fabrication was attributable to lower sales
levels without a corresponding decrease in overhead and the
impact of weaker market conditions on sales margins.



| |              
| | -------------
| | Other Revenue

Equity in earnings in subsidiaries increased
$9.4 million, or 101%, to $18.8 million during 2002,
from $9.4 million during 2001. This increase is primarily
due to our acquisition of POC, which included interests in three
joint venture projects in South America. These joint ventures
contributed $21.7 million in equity earnings for 2002
compared to $8.1 million in 2001 and was partially offset
by a decrease in equity earnings from Hanover Measurement
Services Company LP which decreased to a loss of
$2.2 million in 2002 from $0.8 million in income in
2001.



| |         
| | --------
| | Expenses

SG&A expenses increased $61.5 million,
or 67%, to $153.7 million in 2002 from $92.2 million
in 2001. The increase was attributable to increased personnel
and other selling and administrative activity in our business
segments resulting from the acquisitions completed during 2001.
We also recorded $3.8 million in employee separation costs
relating to our announced reduction in our work force and

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management changes and approximately
$11.6 million in additional legal and accounting costs, a
significant portion of which was associated with our board of
directors and Special Litigation Committee review of certain
transactions, the restatement of our financial results and the
SEC investigation.


Depreciation and amortization increased by
$62.4 million, or 70%, to $151.2 million during 2002
compared to $88.8 million during 2001. During 2002 we
recorded a $34.5 million charge included in depreciation
and amortization expense for reductions in the carrying value of
certain idle compression equipment that is being retired and the
acceleration of depreciation related to certain plants and
facilities expected to be sold or abandoned. The remaining
increase in depreciation was due to the additions to the rental
fleet, partially offset by the change in estimated lives of
certain compressors. After a review of the estimated economic
lives of our compression fleet, on July 1, 2001 we changed
our estimate of the useful life of certain compression equipment
to range from 15 to 30 years instead of a uniform 15-year
depreciable life. Our new estimated lives are based upon our
experience, maintenance program and the different types of
compressors presently in our rental fleet. We believe our new
estimate reflects the economic useful lives of the compressors
more accurately than a uniform useful life applied to all
compressors regardless of their age or performance
characteristics. The effect of this change in estimate on 2002
was a decrease in depreciation expense of approximately
$14.4 million and an increase in net income of
approximately $8.6 million ($0.11 per share).

In addition, because we sold compressors in sale
leaseback transactions in August 2001, depreciation expense was
reduced by approximately $36 million in 2002 compared to
approximately $43 million in 2001. The decrease in
depreciation in 2002 from 2001 was due to our change in estimate
of useful lives of our compressors on July 1, 2001 as
discussed above.

The increase in depreciation was also offset by
the decrease in goodwill amortization due to our adoption of
SFAS 142. Under SFAS 142, amortization of goodwill
over an estimated useful life was discontinued. Instead,
goodwill amounts became subject to a fair value-based annual
impairment assessment. During 2001, approximately
$10.1 million in goodwill amortization was recorded.

We incurred leasing expense of $90.1 million
during 2002 compared to $78.0 million during 2001. The
increase of $12.1 million was attributable to the sale
leaseback transactions we entered into in August 2001 and was
partially offset by the unrealized gains and losses recorded
related to two of our interest rate swaps. In connection with
these leases, we were obligated to prepare registration
statements and complete an exchange offer to enable the holders
of the notes issued by the lessors to exchange their notes for
notes that were registered under the Securities Act of 1933.
Because the exchange offer was not completed until
March 13, 2003, we were required to pay additional leasing
expense in the amount of approximately $105,600 per week
until March 13, 2003. The additional leasing expense began
accruing on January 28, 2002. In 2002, we recorded
additional leasing expense of approximately $5.1 million
related to the registration and exchange offering obligations.

The fair value of our derivative instruments
(interest rate swaps) increased by $3.2 million during 2002
while the fair value decreased by $7.6 million in 2001.
These changes in fair value were due to the recognition of an
unrealized change in the fair value of our interest rate swaps
that we had not designated as cash flow hedges under
SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. The unrealized gains and losses are
reflected in our leasing expense.

Interest expense increased by $19.5 million
to $43.4 million during 2002 from $23.9 million during
2001. The increase in interest expense was due to higher levels
of outstanding debt partially offset by lower effective interest
rates.

Foreign currency translation expense increased by
$10.1 million, or 152%, to $16.8 million during 2002
compared to $6.7 million during 2001. The increase was
primarily due to our operations in Argentina and Venezuela. In
January 2002, Argentina devalued its peso against the
U.S. dollar and imposed significant restrictions on funds
transfers internally and outside the country. In addition, the
Argentine government enacted regulations to temporarily prohibit
enforcement of contracts with exchange rate-based purchase price
adjustments. Instead, payment under such contracts could either
be made at an exchange

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rate negotiated by the parties or, if no such
agreement was reached, a preliminary payment could be made based
on a one dollar to one peso equivalent pending a final
agreement. The Argentine government also required the parties to
such contracts to renegotiate the price terms within
180 days of the devaluation. We have renegotiated all of
our agreements in Argentina. As a result of these negotiations,
we received approximately $11.2 million in partial
reimbursements in 2002. We recorded $1.5 million of these
partial reimbursements in translation expense and
$9.7 million in revenues from international rentals. During
2002, we recorded an exchange loss of approximately
$9.9 million and $5.8 million for assets exposed to
currency translation in Argentina and Venezuela, respectively,
and recorded a translation loss of approximately
$1.1 million for all other countries.


Due to a downturn in our business and changes in
the business environment in which we operate, we completed a
goodwill impairment analysis as of June 30, 2002. As a
result of the test performed as of June 30, 2002, we
recorded an estimated $47.5 million impairment of goodwill
attributable to our production and processing equipment
fabrication business in the second quarter of 2002. We estimated
the fair value of our reporting units using a combination of the
expected present value of future cash flows and the market
approach, which uses actual market sales. In the fourth quarter
of 2002, we also recorded a $4.6 million goodwill
impairment related to our pump division, which is expected to be
sold.

Other expenses increased $17.9 million, or
184%, to $27.6 million during 2002 compared to
$9.7 million during 2001. Other expenses in 2002 included
$15.9 million of write-downs and charges related to
investments in four non-consolidated affiliates that had
experienced a decline in value that we believed to be other than
temporary, a $0.5 million write-off of a purchase option
for an acquisition that we had abandoned, $2.7 million in
other non-operating costs and a $8.5 million write-down of
notes receivable, including a $6.0 million reserve
established for loans to employees who were not executive
officers. Other expenses in 2001 included a $2.7 million
bridge loan commitment fee associated with our acquisition of
POC, a $5.0 million write-down of an investment in Aurion
Technologies, Inc., a $1.0 million litigation
settlement and $1.0 million in other non-operating expenses.



| |             
| | ------------
| | Income Taxes

The provision for income taxes decreased by
$60.0 million, or 141%, to a tax benefit of
$17.6 million during 2002 from $42.4 million of tax
expense during 2001. The decrease resulted primarily from the
corresponding decrease in income before income taxes. The
average effective income tax rates during 2002 and 2001 were
19.0% and 37.8%, respectively. The decrease in the effective tax
rate was due primarily to a nondeductible goodwill impairment
charge, U.S. impact of foreign operations, and valuation
allowances against certain net operating losses. The effective
tax rate benefited from non-U.S. foreign exchange losses
deductible for tax in excess of book losses.



| |                        
| | -----------------------
| | Discontinued Operations

During the fourth quarter of 2002, we reviewed
our business lines and the board of directors approved
managements recommendation to exit and sell our
non-oilfield power generation and certain used equipment
business lines. During 2002, we recorded a $40.4 million
charge (net of tax) to write-down our investment in discontinued
operations to current estimated fair market values. Discontinued
operations include three non-oilfield power generation projects
in California and related inventory, and certain of our used
equipment divisions.

Income (loss) from discontinued operations
decreased $3.9 million, or 130%, to a net loss of
$0.9 million during 2002 from net income of
$3.0 million during 2001. The decrease in net income was
primarily attributable to weaker market conditions that impacted
sales volume and gross margins.

Leasing Transactions and Accounting Change for
FIN 46

As of December 2003, we are the lessee in four
transactions involving the sale of compression equipment by us
to special purpose entities, which in turn lease the equipment
back to us. At the time we entered into the leases, these
transactions had a number of advantages over other sources of
capital then

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available to us. The sale leaseback transactions
(1) enabled us to affordably extend the duration of our
financing arrangements and (2) reduced our cost of capital.


In August 2001 and in connection with the
acquisition of POC, we completed two sale leaseback transactions
involving certain compression equipment. Under one sale
leaseback transaction, we received $309.3 million in
proceeds from the sale of certain compression equipment. Under
the second sale leaseback transaction, we received
$257.8 million in proceeds from the sale of additional
compression equipment. Under the first transaction, the
equipment was sold and leased back by us for a seven-year period
and will continue to be deployed by us in the normal course of
our business. The agreement calls for semi-annual rental
payments of approximately $12.8 million in addition to
quarterly rental payments of approximately $0.2 million.
Under the second transaction, the equipment was sold and leased
back by us for a ten-year period and will continue to be
deployed by us in the normal course of our business. The
agreement calls for semi-annual rental payments of approximately
$10.9 million in addition to quarterly rental payments of
approximately $0.2 million. We have options to repurchase
the equipment under certain conditions as defined by the lease
agreements. Through December 31, 2003, we incurred
transaction costs of approximately $18.6 million related to
these transactions. These costs are included in intangible and
other assets and are being amortized over the respective lease
terms.

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

The following table summarizes, as of
December 31, 2003, the proceeds, residual guarantee, lease
termination date and minority interest obligations for our
equipment leases (in thousands):

|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 
|--------------------- |  | -------- | ------- | --------- |  | ---------------- | ------- | ---------- |  |  | -------------- |  |  | - | ------ | 
|                      |  |          |         | Residual  |  |                  |         | Minority  
|                      |  | Sale     |         | Value     |  | Lease            |         | Interest  
|                      |  | Proceeds |         | Guarantee |  | Termination Date |         | Obligation
|Lease                 |  |          |         |           |  |                  |         |           
|March and August 2000 |  | $        | 200,000 |           |  | $                | 166,000 |            |  |  | March 2005     |  |  | $ | 6,400  | 
|October 2000          |  |          | 172,589 |           |  |                  | 142,299 |            |  |  | October 2005   |  |  |   | 5,178  | 
|August 2001           |  |          | 309,300 |           |  |                  | 232,000 |            |  |  | September 2008 |  |  |   | 9,300  | 
|August 2001           |  |          | 257,750 |           |  |                  | 175,000 |            |  |  | September 2011 |  |  |   | 7,750  | 
|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 
|                      |  | $        | 939,639 |           |  | $                | 715,299 |            |  |  |                |  |  | $ | 28,628 | 
|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 

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

Prior to July 1, 2003, these lease
transactions were recorded as a sale and leaseback of the
compression equipment and were treated as operating leases for
financial reporting purposes. On July 1, 2003, we adopted
the provisions of FIN 46 as they relate to the special
purpose entities that lease compression equipment to us. As a
result of the adoption, we added approximately
$1,089 million in compressor equipment assets,
$192.3 million of accumulated depreciation (including
approximately $58.6 million of accumulated depreciation
related to periods before the sale and leaseback of the

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equipment), $1,105.0 million in debt and
$34.6 million in minority interest obligations to our
balance sheet, and we reversed $108.8 million of deferred
gains that were recorded on our balance sheet as a result of the
sale leaseback transactions. On July 1, 2003, we recorded a
$133.7 million charge ($86.9 million net of tax) to
record the cumulative effect from the adoption of FIN 46
related to prior period depreciation of the compression
equipment assets. Additionally, we estimate that we will record
approximately $17 million per year in additional
depreciation expense on our leased compression equipment as a
result of the inclusion of the compression equipment on our
balance sheet and will also record the payments made under our
compression equipment leases as interest expense.


In December 2003 we exercised our purchase option
under the 1999 compression equipment operating lease. As of
December 31, 2003, the remaining compression assets owned
by the entities that lease equipment to us but are now included
in property, plant and equipment in our consolidated financial
statements had a net book value of approximately
$804.0 million, including improvements made to these assets
after the sale leaseback transactions.

The minority interest obligations represent the
equity of the entities that lease compression equipment to us.
In accordance with the provisions of our compression equipment
lease obligations, the equity certificate holders are entitled
to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of December 31, 2003,
the yield rates on the outstanding equity certificates ranged
from 4.4% to 9.5%. Equity certificate holders may receive a
return of capital payment upon lease termination or our purchase
of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression
equipment to us. At December 31, 2003, the carrying value
of the minority interest obligations approximated the fair
market value of assets that would be required to be transferred
to redeem the minority interest obligations

In connection with the compression equipment
leases entered into in August 2001, we were obligated to prepare
registration statements and complete an exchange offer to enable
the holders of the notes issued by the lessors to exchange their
notes with notes registered under the Securities Act of 1933.
Because of the restatement of our financial statements, the
exchange offer was not completed within the time frame required
by the agreements related to the compression equipment lease
obligations and we were required to pay additional lease expense
in an amount equal to $105,600 per week until the exchange
offering was completed. The additional lease expense began
accruing on January 28, 2002 and increased our lease
expense by $1.1 million and $5.1 million during 2003
and 2002, respectively. The registration statements became
effective in February 2003. The exchange offer was completed and
the requirement to pay the additional lease expense ended on
March 13, 2003.

In February 2003, in connection with an amendment
to our bank credit facility and, in December 2003, in connection
with the closing on our new bank credit facility we executed
conforming amendments to the compression equipment leases
entered into in 2000. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources in
Item 7 of this Form 10-K.

Liquidity and Capital Resources

Our unrestricted cash balance amounted to
$56.6 million at December 31, 2003 compared to
$19.0 million at December 31, 2002. Working capital
increased to $255.2 million at December 31, 2003 from
$195.4 million at December 31, 2002. The increase in
working capital was primarily due to modification and subsequent
payment of a $58.0 million obligation associated with the
PIGAP II joint venture that was accrued as a contingent
liability on our balance sheet since the acquisition of POC. The
obligation was converted into the PIGAP Note with a
6% interest rate compounding semi-annually until maturity
in December 2053. In October 2003, the PIGAP II joint
venture closed on the projects financing and distributed
approximately $78.5 million to Hanover, of which
approximately $59.9 million was used to pay off the PIGAP
Note.

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

|                                                                 |  |      |         |      |  |   |          |  
|---------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | -------- | -
|For the Year Ended December 31:                                  |  | 2003 |         | 2002
|                                                                 |  |      |         |     
|Net cash provided by (used in) continuing
    operations:        |  |      |         |      |  |   |          |  
|Operating activities                                             |  | $    | 161,529 |      |  | $ | 194,876  |  
|Investing activities                                             |  |      | (67,177 | )    |  |   | (175,064 | )
|Financing activities                                             |  |      | (65,919 | )    |  |   | (3,348   | )
|Effect of exchange rate changes on cash and cash
    equivalents |  |      | 800     |      |  |   | (1,962   | )
|Net cash provided by (used in) discontinued
    operations       |  |      | 8,375   |      |  |   | (18,682  | )
|                                                                 |  |      |         |      |  |   |          |  
|Net change in cash and cash equivalents                          |  | $    | 37,608  |      |  | $ | (4,180   | )
|                                                                 |  |      |         |      |  |   |          |  

The decrease in net cash provided by operating
activities for the year ended December 31, 2003 as compared
to the year ended December 31, 2002 was primarily due to
the reduction in net income discussed above.

The decrease in cash used in investing activities
during the year ended December 31, 2003 as compared to the
year ended December 31, 2002 was primarily attributable to
a decrease in capital expenditures and the return of some of our
investment in PIGAP II as a result of the financing
discussed above. We are seeking to deploy our capital more
effectively in order to improve our returns from our
investments, and we decreased our capital expenditures in the
year ended December 31, 2003 by $107.7 million from
the year ended December 31, 2002. We invested
$142.5 million in property plant and equipment during the
year ended December 31, 2003, primarily for international
rental projects and maintenance capital.

The increase in cash used in financing activities
was primarily due to the repayment of the PIGAP Note from the
cash distributed from the financing discussed above.

The increase in cash provided by discontinued
operations was related to the proceeds from the sale of Gates
and Panoche which were approximately $27.2 million.

We may carry out new customer projects through
rental fleet additions and other related capital expenditures.
We generally invest funds necessary to make these rental fleet
additions when our idle equipment cannot economically fulfill a
projects requirements and the new equipment expenditure is
matched with long-term contracts whose expected economic terms
exceed our return on capital targets. During 2004, we plan to
spend approximately $100 to $150 million on capital
expenditures including (1) rental equipment fleet additions
and (2) approximately $50 to $60 million on equipment
maintenance capital. Since capital expenditures are largely
discretionary, we believe we would be able to significantly
reduce them, in a reasonably short time frame, if expected cash
flows from operations were not realized.

As a result of our agreement to settle the
securities-related litigation, we expect to incur approximately
$2.5 million in additional legal fees and administrative
costs over the next 12 months in addition to the amount
held in escrow and reported as restricted cash on our condensed
consolidated balance sheet. Historically, we have funded our
capital requirements with a combination of internally generated
cash flow, borrowings under a bank credit facility, sale
leaseback transactions, raising additional equity and issuing
long-term debt.

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The following summarizes our cash contractual
obligations at December 31, 2003 and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods:

|                                                |                                                        |                      |           |         |           |           |        |           |       |            |         |         |         |   |         |         |         |   |         |         |         | 
|----------------------------------------------- | ------------------------------------------------------ | -------------------- | --------- | ------- | --------- | --------- | ------ | --------- | ----- | ---------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                |                                                        | Total                |           | 2004    |           | 2005-2006 |        | 2007-2008 |       | Thereafter
|Cash Contractual Obligations:                   |                                                        |                      |           |         |           |           |        |           |       |           
|                                                |                                                        |                     
|                                                |                                                        | (In thousands)      
|Long term Debt                                  |                                                        |                      |           |         |           |           |        |           |       |            |         |         |         |   |         |         |         |   |         |        
|                                                | 4.75% convertible senior notes due 2008                |                      | $         | 192,000 |           |           | $      |          |       |            | $       |        |         |   | $       | 192,000 |         |   | $       |        |        
|                                                | 4.75% convertible senior notes due 2014                |                      |           | 143,750 |           |           |        |          |       |            |         |        |         |   |         |        |         |   |         | 143,750 |        
|                                                | 7.25% subordinated convertible securities
    due 2029 |                      |           | 86,250  |           |           |        |          |       |            |         |        |         |   |         |        |         |   |         | 86,250  |        
|                                                | 8.625% senior notes due 2010                           |                      |           | 200,000 |           |           |        |          |       |            |         |        |         |   |         |        |         |   |         | 200,000 |        
|                                                | 11% zero coupon subordinated notes due 2007(1)         |                      |           | 262,622 |           |           |        |          |       |            |         |        |         |   |         | 262,622 |         |   |         |        |        
|                                                | Bank credit facility due 2006                          |                      |           | 27,000  |           |           |        |          |       |            |         | 27,000  |         |   |         |        |         |   |         |        |        
|                                                | Other long-term debt                                   |                      |           | 4,792   |           |           |        | 3,511     |       |            |         | 1,018   |         |   |         | 86      |         |   |         | 177     |        
|                                                | 2000A equipment lease notes, due 2005                  |                      |           | 193,600 |           |           |        |          |       |            |         | 193,600 |         |   |         |        |         |   |         |        |        
|                                                | 2000B equipment lease notes, due 2005                  |                      |           | 167,411 |           |           |        |          |       |            |         | 167,411 |         |   |         |        |         |   |         |        |        
|                                                | 2001A equipment lease notes, due 2008                  |                      |           | 300,000 |           |           |        |          |       |            |         |        |         |   |         | 300,000 |         |   |         |        |        
|                                                | 2001B equipment lease notes, due 2011                  |                      |           | 250,000 |           |           |        |          |       |            |         |        |         |   |         |        |         |   |         | 250,000 |        
|                                                |                                                        |                      |           |         |           |           |        |           |       |            |         |         |         |   |         |         |         |   |         |        
|                                                |                                                        | Total long-term debt |           |         | 1,827,425 |           |        |           | 3,511 |            |         |         | 389,029 |   |         |         | 754,708 |   |         |         | 680,177 | 
|Minority interest obligations(2)                |                                                        |                      | 28,628    |         |           |           |       |           |       |            | 11,578  |         |         |   | 9,300   |         |         |   | 7,750   |        
|Purchase commitments                            |                                                        |                      | 45,181    |         |           |           | 42,139 |           |       |            | 2,816   |         |         |   | 226     |         |         |   |        |        
|Facilities and other equipment operating leases |                                                        |                      | 12,698    |         |           |           | 4,447  |           |       |            | 4,921   |         |         |   | 2,735   |         |         |   | 595     |        
|                                                |                                                        |                      |           |         |           |           |        |           |       |            |         |         |         |   |         |         |         |   |         |        
|Total contractual cash obligations              |                                                        | $                    | 1,913,932 |         |           | $         | 50,097 |           |       | $          | 408,344 |         |         | $ | 766,969 |         |         | $ | 685,522 |        
|                                                |                                                        |                      |           |         |           |           |        |           |       |            |         |         |         |   |         |         |         |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amount represents $262.6 million zero coupon
    note. Balance payable at December 31, 2003, including 11%
    discount per annum, was $185.5 million.                                                                                                                                                                                   
|   
|(2) | Represents third party equity interest of lease
    equipment trusts that was required to be consolidated into our
    financial statements. See Managements Discussion and
    Analysis of Financial Condition and Results of
    Operations  Leasing Transactions and Accounting
    Change for FIN 46 in Item 7 of this Form 10-K.

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

Debt Refinancing.In
June 2003, we filed a shelf registration statement with the SEC
pursuant to which we may from time to time publicly offer
equity, debt or other securities in an aggregate amount not to
exceed $700 million. The SEC subsequently declared the
shelf registration statement effective on November 19,
2003. Subject to market conditions, the remaining shelf
registration statement will be available to offer one or more
series of additional debt or other securities.

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

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

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New Bank Credit
Facility.Effective December 15,
2003, we entered into a new $350 million bank credit
facility with a maturity date of December 29, 2006 and made
conforming amendments related to the compression equipment lease
obligations that we entered into in 2000. Our prior
$350 million bank credit facility that was scheduled to
mature in November 2004 was terminated upon closing of the new
facility. The new bank credit facility, modified certain
covenants that were contained in the prior facility and
eliminated certain covenants entirely. The new agreement
prohibits us (without the lenders prior approval) from
declaring or paying any dividend (other than dividends payable
solely in our common stock or in options, warrants or rights to
purchase such common stock) on, or making similar payments with
respect to, our capital stock. The new agreement clarifies and
provides certain thresholds with respect to our ability to make
investments in our foreign subsidiaries. In addition, under the
new agreement we granted the lenders a security interest in the
inventory, equipment and certain other property of Hanover and
its domestic subsidiaries (with certain exceptions), and pledged
66% of the equity interest in certain of our foreign
subsidiaries. We believe that this new bank credit facility will
provide flexibility in accessing the capacity under the facility
to support our short-term liquidity needs.

Our new bank credit facility provides for a
$350 million revolving credit facility in which advances
bear interest at (a) the greater of the administrative
agents prime rate, the federal funds effective rate, or
the base CD rate, or (b) a eurodollar rate, plus, in each
case, a specified margin (4.2% weighted average interest rate at
December 31, 2003). A commitment fee equal to 0.625% times
the average daily amount of the available commitment under the
bank credit facility is payable quarterly to the lenders
participating in the bank credit facility. Our bank credit
facility contains certain financial covenants and limitations
on, among other things, indebtedness, liens, leases and sales of
assets.

As of December 31, 2003, we were in
compliance with all material covenants and other requirements
set forth in our bank credit facility, agreements related to our
compression equipment lease obligations and indentures. Giving
effect to the covenant limitations in our bank credit facility,
the liquidity available under that facility as of
December 31, 2003 was approximately $223 million.
While there is no assurance, we believe based on our current
projections for 2004 that we will be in compliance with the
financial covenants in our bank credit facility and the
agreements related to our compression equipment lease
obligations. A default under our bank credit facility or these
agreements would trigger cross-default provisions under the
agreements relating to certain of our other debt obligations.
Such defaults would have a material adverse effect on our
liquidity, financial position and operations.

We expect that our new bank credit facility and
cash flow from operations will provide us adequate capital
resources to fund our estimated level of capital expenditures
for the short term. As of December 31, 2003, we had
approximately $27.0 million in borrowings and approximately
$77.1 million in letters of credit outstanding under our
bank credit facility (4.2% weighted average effective rate at
December 31, 2003). Our bank credit facility permits us to
incur indebtedness, subject to covenant limitations described
above, up to a $350 million credit limit, plus, in addition
to certain other indebtedness, an additional
(1) $40 million in unsecured indebtedness,
(2) $50 million of nonrecourse indebtedness of
unqualified subsidiaries, and (3) $25 million of
secured purchase money indebtedness.

In addition to purchase money and similar
obligations, the indentures and the agreements related to our
compression equipment lease obligations for our 2001A and 2001B
sale leaseback transactions and our 8.625% Senior Notes due
2010 permit us to incur indebtedness up to the $350 million
credit limit under our bank credit facility, plus (1) an
additional $75 million in unsecured indebtedness and
(2) any additional indebtedness so long as, after incurring
such indebtedness, our ratio of the sum of consolidated net
income before interest expense, income taxes, depreciation
expense, amortization of intangibles, certain other non-cash
charges and rental expense to total fixed charges (all as
defined and adjusted by the agreements), or our coverage
ratio, is greater than 2.25 to 1.0 and no default or event
of default has occurred or would occur as a consequence of
incurring such additional indebtedness and the application of
the proceeds thereon. The indentures and agreements related to
our compression equipment lease obligations for our 2001A and
2001B sale leaseback transactions define indebtedness to include
the present value of our rental obligations under sale leaseback
transactions and under facilities similar to our compression
equipment operating leases. As of December 31, 2003,
Hanovers coverage ratio was less than

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2.25 to 1.0 and therefore as of such date we
could not incur indebtedness other than under our bank credit
facility and up to an additional $75 million in unsecured
indebtedness and certain other permitted indebtedness, including
certain refinancing indebtedness.


PIGAP II Restructuring and our Zero
Coupon Subordinated Notes due March 31,
2007.On May 14, 2003, we entered
into an agreement with Schlumberger to terminate our right to
put our interest in the PIGAP II joint venture to
Schlumberger. As a result, we retained our interest in
PIGAP II. We had previously given notice of our intent to
exercise the PIGAP put in January 2003. PIGAP II is a joint
venture, currently owned 70% by a subsidiary of Williams
Companies Inc. and 30% by Hanover, which operates a natural gas
compression facility in Venezuela. The natural gas processed by
PIGAP II is re-injected into oil reservoirs for enhanced
oil recovery.

Also on May 14, 2003, we agreed with
Schlumberger Surenco, an affiliate of Schlumberger, to the
modification of the repayment terms of a $58.0 million
obligation that was accrued as a contingent liability on our
balance sheet since the acquisition of POC and was associated
with the PIGAP II joint venture. The obligation was
converted into the PIGAP Note payable by Hanover Cayman Limited,
our indirect wholly-owned consolidated subsidiary, with a 6%
interest rate compounding semi-annually until maturity in
December 2053. In October 2003, the PIGAP II joint venture
closed on the projects financing and distributed
approximately $78.5 million to Hanover, of which
approximately $59.9 million was used to repay the PIGAP
Note.

In connection with the agreement to terminate our
right to put our interest in PIGAP II back to Schlumberger,
we also agreed with Schlumberger to restructure the
$150 million subordinated note that Schlumberger received
from Hanover in August 2001 as part of the purchase price for
our acquisition of POCs natural gas compression business,
ownership interest in certain joint venture projects in South
America (including PIGAP II), and related assets. As of
March 31, 2003, the date from which the interest rate was
adjusted, the $150 million subordinated note had an
outstanding principal balance of approximately
$171 million, including accrued interest. We restructured
the $150 million subordinated note as our Zero Coupon
Subordinated Notes due March 31, 2007, which notes were
issued to Schlumberger and were sold by Schlumberger in a
registered public offering in December 2003. Original issue
discount accretes under the zero coupon notes at a rate of
11.0% per annum for their remaining life, up to a total
principal amount of $262.6 million payable at maturity. The
notes will accrue additional interest at a rate of 2.0% per
annum upon the occurrence and during the continuance of an event
of default under the notes. The notes will also accrue
additional interest at a rate of 3.0% per annum if our
consolidated leverage ratio, as defined in the indenture
governing the notes, exceeds 5.18 to 1.0 as of the end of any
two consecutive fiscal quarters. As of December 31, 2003,
we estimate that our debt balance could have increased by
approximately $53 million in additional indebtedness and
not exceeded the 5.18 to 1.0 ratio. Notwithstanding the
preceding, in no event will the total additional interest
accruing on the notes exceed 3.0% per annum if both of the
previously mentioned circumstances occur. The notes also contain
a covenant that limits our ability to incur additional
indebtedness if our consolidated leverage ratio exceeds 5.6 to
1.0, subject to certain exceptions.

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Credit Ratings.As
of March 5, 2004, our credit ratings as assigned by
Moodys Investors Service, Inc. (Moodys)
and Standard & Poors Ratings Services (Standard
& Poors) were:

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



---



|  |                                                                                                                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Rating is on the Mandatorily Redeemable
    Convertible Preferred Securities which were issued by Hanover
    Compressor Capital Trust, our wholly-owned subsidiary. See
    discussion of the impact of FIN 46 in
    Managements Discussion and Analysis of Financial
    Condition and Results of Operations  New Accounting
    Pronouncements under Item 7 of this Form 10-K.



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



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



SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by
SFAS 137, SFAS 138 and SFAS 149, requires that
all derivative instruments (including certain derivative
instruments embedded in other contracts) be recognized in the
balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging
criteria are met. Changes in the values of derivatives that meet
these hedging criteria will ultimately offset related earnings
effects of the hedged item pending recognition in earnings.
Prior to 2001, we entered into two interest rate swaps with
notional amounts of $75 million and $125 million and
strike rates of 5.51% and 5.56%, respectively. These swaps were
to expire in July 2001; however, they were extended for an
additional two years at the option of the swap counterparty and
expired in July 2003. The difference paid or received on the
swap transactions was recorded as an accrued liability and
recognized in leasing expense in all periods before July 1,
2003, and in interest expense thereafter. Because management
decided not to designate the interest rate swaps as hedges at
the time they were extended by the counterparty, we recognized
unrealized gains of approximately $4.1 million and
approximately $3.2 million related to the change in the
fair value of these interest rate swaps in lease expense in our
statement of operations during the years ended December 31,
2003 and 2002, respectively, and recognized an unrealized gain
of approximately $0.5 million in interest expense during
2003. The fair value of these interest rate swaps fluctuated
with changes in interest rates over their terms and the
fluctuations were recorded in our statement of operations.

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

|             |  |                  |  |             |  |                
|------------ |  | ---------------- |  | ----------- |  | ---------------
|Lease        |  | Maturity Date    |  | Strike Rate |  | Notional Amount
|             |  |                  |  |             |  |                
|March 2000   |  | March 11, 2005   |  | 5.2550%     |  | $100,000,000   
|August 2000  |  | March 11, 2005   |  | 5.2725%     |  | $100,000,000   
|October 2000 |  | October 26, 2005 |  | 5.3975%     |  | $100,000,000   

These three swaps, which we have designated as
cash flow hedging instruments, meet the specific hedge criteria
and any changes in their fair values have been recognized in
other comprehensive income. During the years ended
December 31, 2003 and 2002, we recorded income of
approximately $7.9 million and a loss of
$13.6 million, respectively, related to these three swaps
($5.1 million and $8.9 million, net of tax) in other
comprehensive income. As of December 31, 2003 and December
31, 2002, a total of approximately $11.7 million and
$11.5 million, respectively, was recorded in current
liabilities and approximately $3.4 million and
$11.5 million, respectively, in long-term liabilities with
respect to the fair value adjustment related to these three
swaps.

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

During 2003, we entered into forward exchange
contracts with a notional value of $10.0 million to
mitigate the risk of changes in exchange rates between Euro and
the U.S. dollar. These contracts mature during 2004. As of
December 31, 2003, a total of approximately
$0.6 million was recorded in other current assets and other
comprehensive income with respect to the fair value adjustment
related to these three contracts.

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

For the year ended December 31, 2003, our
Argentine operations represented approximately 5% of our revenue
and 9% of our gross profit. During the years ended
December 31, 2003 and 2002, we recorded an exchange gain of
approximately $0.5 million and an exchange loss of
approximately $9.9 million, respectively, for assets
exposed to currency translation in Argentina.

In addition, during the years ended
December 31, 2003 and 2002, we recorded exchange losses of
approximately $2.4 million and $5.8 million,
respectively, for assets exposed to currency translation in
Venezuela and recorded translation losses of approximately
$0.6 million and $1.1 million, respectively, for all
other countries. For the year ended December 31, 2003, our
Venezuelan operations represented approximately 11% of our
revenue and 18% of our gross profit. At December 31, 2003,
we had approximately $23.0 million in accounts receivable
related to our Venezuelan operations.

In December 2002, opponents of Venezuelan
President Hugo Chávez initiated a country-wide strike by
workers of the national oil company in Venezuela. This strike, a
two-month walkout, had a significant negative impact on
Venezuelas economy and temporarily shut down a substantial
portion of Venezuelas oil industry. As a result of the
strike, Venezuelas oil production dropped substantially.
In addition, exchange controls have been put in place that put
limitations on the amount of Venezuelan currency that can be
exchanged for foreign currency by businesses operating inside
Venezuela. In May 2003, after six months of negotiation, the
Organization of the American States brokered an agreement
between the Venezuelan government and its opponents. Although
the accord does offer the prospect of stabilizing
Venezuelas economy, if another national strike is staged,
exchange controls remain in place, or economic and political
conditions in Venezuela continue to deteriorate, our results of
operations in Venezuela could be materially and adversely
affected, which could result in reductions in our net income. As
a result of the disruption in our operations in Venezuela,
during the fourth quarter of 2002, our international rental
revenues decreased by approximately $2.7 million. In the
year ended December 31, 2003, we recognized

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approximately $2.7 million of billings to
Venezuelan customers that were not recognized in 2002 due to
concerns about the ultimate receipt of those revenues. In
addition, a recent movement to remove President Chávez has
resulted in renewed civil strife in Venezuela. If such strife
continues or escalates, our results of operations in Venezuela
could be further materially and adversely affected.




In February 2003, the Venezuelan government fixed
the exchange rate to 1,600 bolivars for each U.S. dollar.
In February 2004, the government devalued the currency by
approximately 17%. The impact of the devaluation on our results
will depend upon the amount of our assets (primarily working
capital) exposed to currency fluctuation in Venezuela in future
periods. As of December 31, 2003, we had approximately
$6.0 million in net assets exposed to currency fluctuation
in Venezuela. Based on these assets, a 10% change in exchange
rates would result in a $0.5 million gain or loss in
Venezuela.



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



We are involved in a project to build and operate
barge-mounted gas compression and gas processing facilities to
be stationed in a Nigerian coastal waterway as part of the
performance of a contract between an affiliate of The Royal/
Dutch Shell Group (Shell) and Global Energy and
Refining Ltd. (Global), a Nigerian company. We have
completed the building of the required barge-mounted facilities.
We understand that Global must complete a significant financing
for part of the project in the near term or Shell would be able
to terminate its contract with Global. Global has orally
informed us that they have completed a financing, although it is
not clear to us whether the funds raised will be sufficient to
perform their obligations under the Shell contract. In light of
the political environment in Nigeria, Globals lack of a
successful track record with respect to this project and other
factors, there is no assurance that Global will be able to
comply with its obligations under the Shell contract. We believe
that Global is in default with respect to certain agreements
they have with us, as a result of which we believe we have
certain termination rights.



If Shell were to terminate its contract with
Global for any reason or we were to terminate our involvement in
the project, we would be required to find an alternative use for
the barge facility which could result in a write-down of our
investment. We currently have an investment of approximately
$29.8 million associated with the barge facility and
approximately $4.1 million associated with advances to, and
our investment in, Global.



Off-Balance Sheet Arrangements



We agreed to assume from certain affiliates of
Schlumberger the guarantee obligations of indebtedness of the
Simco/ Harwat Consortium and of El Furrial, each of which are
joint ventures that we acquired interests in pursuant to our
acquisition of POC from Schlumberger. Each of these joint
ventures are non-consolidated affiliates of Hanover and our
guarantee obligations are not recorded on our accompanying
balance sheet. Our guarantee obligation is a percentage of the
total debt of the non-consolidated affiliate equal to our
ownership percentage in such affiliate. We have issued the
following guarantees of the indebtedness of our non-consolidated
affiliates (in thousands):



|                         |  |      |      |                   |  |   |        | 
|------------------------ |  | ---- | ---- | ----------------- |  | - | ------ | 
|                         |  |      |      | Maximum Potential
|                         |  |      |      | Undiscounted     
|                         |  |      |      | Payments as of   
|                         |  | Term |      | December 31, 2003
|                         |  |      |      |                  
|Simco/ Harwat Consortium |  |      | 2005 |                   |  | $ | 12,285 | 
|El Furrial               |  |      | 2013 |                   |  | $ | 40,021 | 



Our obligation to perform under the guarantees
arises only in the event that our non-consolidated affiliate
defaults under the agreements governing the indebtedness. We
currently have no reason to believe that either of these
non-consolidated affiliates will default on their indebtedness.

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Factors That May Affect Our Financial
Condition and Future Results



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

As of December 31, 2003, we had
approximately $1,782.8 million of debt.

Our substantial debt and compression equipment
lease commitments could have important consequences. For
example, these commitments could:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our
    contractual obligations;                                                                                                                                                    
|
| |  | increase our vulnerability to general adverse
    economic and industry conditions;                                                                                                                                          
|
| |  | limit our ability to fund future working capital,
    capital expenditures, acquisitions or other general corporate
    requirements;                                                                                        
|
| |  | increase our vulnerability to interest rate
    fluctuations because the interest payments on a portion of our
    debt are at, and a portion of our compression equipment leasing
    expense is based upon, variable rates;
|
| |  | limit our flexibility in planning for, or
    reacting to, changes in our business and our industry;                                                                                                                         
|
| |  | place us at a disadvantage compared to our
    competitors that have less debt or fewer operating lease
    commitments; and                                                                                                 
|
| |  | limit our ability to borrow additional funds.                                                                                                                                                                                



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

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

For the year ended December 31, 2003, we
incurred interest and leasing expense of $132.3 million
related to our debt, including our compression equipment lease
obligations.

As of December 31, 2003, we had outstanding
borrowings of approximately $27.0 million (4.2% rate at
December 31, 2003) and outstanding letters of credit of
approximately $77.1 million under our bank credit facility
and approximately $223 million of credit capacity remaining
(after giving effect to the covenant limitations in our bank
credit facility).

Approximately $397.5 million of our debt
will mature within two years from December 31, 2003. Our
ability to refinance this debt and other financial obligations
at a reasonable cost will be affected by the factors discussed
herein and by the general market at the time we refinance.

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

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

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



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | incur additional debt or issue guarantees;                                 
|
| |  | create liens on our assets;                                                
|
| |  | engage in mergers, consolidations and
    dispositions of assets;          
|
| |  | enter into additional operating leases;                                    
|
| |  | pay dividends on or redeem capital stock;                                  
|
| |  | enter into derivative transactions;                                        
|
| |  | make certain investments or restricted payments;                           
|
| |  | make capital expenditures above certain limits;                            
|
| |  | make investments, loans or advancements to
    certain of our subsidiaries;
|
| |  | prepay or modify our debt facilities;                                      
|
| |  | enter into transactions with affiliates; or                                
|
| |  | enter into sale leaseback transactions.                                    

In addition, under our bank credit facility and
the agreements related to certain of our compression equipment
lease obligations that we entered into in 2000, we have granted
the lenders a security interest in our inventory, equipment and
certain of our other property and the property of our domestic
subsidiaries and pledged 66% of the equity interest in certain
of our foreign subsidiaries.

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

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

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

As of March 5, 2004, our credit ratings as
assigned by Moodys and Standard & Poors were:

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



---



|  |                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Rating is on the Mandatorily Redeemable
    Convertible Preferred Securities issued by Hanover Compressor
    Capital Trust, our wholly-owned subsidiary.(See discussion of
    the impact of FIN 46 in  New Accounting
    Pronouncements.

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



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

We experienced rapid growth from 1998 through
2001 primarily as a result of acquisitions, particularly during
2000 and 2001, during which period our total assets increased
from approximately $753 million as of December 31,
1999 to approximately $2.3 billion as of December 31,
2001. Our growth exceeded our infrastructure capabilities and
strained our internal control environment. During 2002, we
announced a series of restatements of transactions that occurred
in 1999, 2000 and 2001. These restatements of our financial
statements ultimately reduced our initially reported pre-tax
income by $3.1 million, or 4.9%, for the year ended
December 31, 1999, by $14.5 million, or 15.5%, for the
year ended December 31, 2000, and by $0.4 million, or
0.3%, for the year ended December 31, 2001, although
certain restatements resulted in a larger percentage adjustment
on a quarterly basis.

During 2002, a number of company executives
involved directly and indirectly with the transactions
underlying the restatements resigned, including our former Chief
Executive Officer, Chief Financial Officer and Vice Chairman of
our board of directors, Chief Operating Officer and the head of
our international operations. During and after 2002, we hired
and appointed a new Chief Executive Officer and Chief Financial
Officer, hired and appointed our first General Counsel, and
hired a new Controller and managers of Human Resources,
Financial Reporting and Policy Administration. During 2002, we
added three independent directors to our board of directors and
elected an independent Chairman of the Board from among the
three new directors. In addition, on February 4, 2004 we
added two new independent directors to our board of directors.

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Under the direction of our board of directors and
new management, we have been reviewing and continue to review
our internal controls and procedures for financial reporting and
have substantially enhanced certain of our controls and
procedures. We have begun to implement a new enterprise resource
planning system to better integrate our accounting functions,
particularly to better integrate acquired companies. We have
made personnel changes and hired additional qualified staff in
the legal, accounting, finance and human resource areas and are
utilizing third parties to assist with certain aspects of our
integration. We have hired a third party to perform internal
audit functions for us and anticipate hiring internal personnel
to perform this function. Our new management has also adopted
policies and procedures, including disseminating a new code of
conduct applicable to all employees, to better assure compliance
with applicable laws, regulations and ethical standards.

Although we have had certain financial reporting
problems in recent months that required us, to amend our
Form 10-Q for the third quarter of 2003, adjust our income
tax provision for the fourth quarter from what we had previously
announced and delay the filing of our Form 10-K for 2003,
we do not believe these problems resulted from any material
deficiency in our internal controls and procedures or financial
reporting process. However, we are continuing to implement
improvements to our internal controls and procedures. Full
implementation of these improvements will be accomplished over a
period of time and, unless and until these efforts are
successfully completed, we could experience future accounting
and financial reporting problems. Accounting and financial
reporting problems could result in, among other things, new
securities litigation claims being brought against us, future
investigations of us by the SEC and possible fines and
penalties, including those resulting from a violation of the
cease and desist order we entered into with the SEC in December
2003, and a loss of investor confidence which could adversely
affect the trading prices of our debt and equity securities and
adversely affect our ability to access sources of necessary
capital.



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

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



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

We invested $142.5 million in property plant
and equipment during the year ended December 31, 2003,
primarily for international rental projects and maintenance
capital. During 2004 we plan to spend approximately $100 to
$150 million on continued expansion and maintenance of our
rental fleet and other businesses, including $50 to
$60 million on equipment maintenance capital. The amount of
these expenditures may vary depending on conditions in the
natural gas industry and the timing and extent of any
significant acquisitions we may make.

Historically, we have funded our capital
expenditures through internally generated funds, sale leaseback
transactions and debt and equity financing. While we believe
that cash flow from our operations and borrowings under our
existing $350 million bank credit facility will provide us
with sufficient cash to fund our planned 2004 capital
expenditures, we cannot assure you that these sources will be
sufficient. As of December 31, 2003, we had approximately
$223 million of credit capacity remaining (after giving
effect to the covenant limitations in our bank credit facility)
under our bank credit facility (4.2% weighted average effective
interest rate at December 31, 2003). Failure to generate
sufficient cash flow, together with the absence of alternative
sources of capital, could have a material adverse effect on our
business, consolidated financial condition, results of
operations or cash flows.

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

We are the lessee in four transactions involving
the sale of compression equipment by us to special purpose
entities, which in turn lease the equipment back to us. We are
entitled under the compression equipment operating lease
agreements to substitute equipment that we own for equipment
owned by the special purpose entities, provided that the value
of the equipment that we are substituting is equal to or greater
than the value of the equipment that is being substituted. We
generally substitute equipment when one of our lease customers
exercises a contractual right or otherwise desires to buy the
leased equipment or when fleet equipment owned by the special
purpose entities becomes obsolete or is selected by us for
transfer to international projects. Each lease agreement limits
the aggregate amount of replacement equipment that may be
substituted to, among other restrictions, a percentage of the
termination value under each lease. The termination value is
equal to (1) the aggregate amount of outstanding principal
of the corresponding notes issued by the special purpose entity,
plus accrued and unpaid interest and (2) the aggregate
amount of equity investor contributions to the special purpose
entity, plus all accrued amounts due on account of the investor
yield and any other amounts owed to such investors in the
special purpose entity or to the holders of the notes issued by
the special purpose entity or their agents. In the following
table, termination value does not include amounts in excess of
the aggregate outstanding principal amount of notes and the
aggregate outstanding amount of the equity investor
contributions, as such amounts are periodically paid as
supplemental rent as required by our compression equipment
operating leases. The aggregate amount of replacement equipment
substituted (in dollars and percentage of termination value),
the termination value and the substitution percentage limitation
relating to each of our compression equipment operating leases
as of December 31, 2003 are as follows:

|                      |       |                       |      |               |  |             |       |               |  |             |       |       |  |  |     |  |  |  |                |  | 
|--------------------- | ----- | --------------------- | ---- | ------------- |  | ----------- | ----- | ------------- |  | ----------- | ----- | ----- |  |  | --- |  |  |  | -------------- |  | 
|                      |       |                       |      |               |  |             |       | Substitution  |  |            
|                      |       |                       |      |               |  |             |       | Limitation as |  |            
|                      |       | Value of              |      | Percentage of |  |             |       | Percentage of |  | Lease      
|                      |       | Substituted           |      | Termination   |  | Termination |       | Termination   |  | Termination
|Lease                 |       | Equipment             |      | Value(1)      |  | Value(1)    |       | Value         |  | Date       
|                      |       |                       |      |               |  |             |       |               |  |            
|                      |       |                      
|                      |       | (dollars in millions)
|March and August 2000 |       | $                     | 26.1 |               |  |             | 13.1% |               |  | $           | 200.0 |       |  |  | 25% |  |  |  | March 2005     | 
|October 2000          |       |                       | 24.0 |               |  |             | 13.9% |               |  |             | 172.6 |       |  |  | 25% |  |  |  | October 2005   | 
|August 2001           |       |                       | 27.3 |               |  |             | 8.8%  |               |  |             | 309.3 |       |  |  | 25% |  |  |  | September 2008 | 
|August 2001           |       |                       | 25.2 |               |  |             | 9.8%  |               |  |             | 257.7 |       |  |  | 25% |  |  |  | September 2011 | 
|                      |       |                       |      |               |  |             |       |               |  |             |       |       |  |  |     |  |  |  |                | 
|                      | Total |                       | $    | 102.6         |  |             |       |               |  |             | $     | 939.6 |  |  |     |  |  |  |                |  | 
|                      |       |                       |      |               |  |             |       |               |  |             |       |       |  |  |     |  |  |  |                | 






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

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



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

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

Erosion of the financial condition of our
customers can also adversely affect our business. During times
when the oil or natural gas market weakens, the likelihood of
the erosion of the financial condition of these customers
increases. If and to the extent the financial condition of our
customers declines, our customers could seek to preserve capital
by canceling or delaying scheduled maintenance of their existing

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gas compression and oil and gas production
equipment and determining not to purchase new gas compression
and oil and gas production equipment. In addition, upon the
financial failure of a customer, we could experience a loss
associated with the unsecured portion of any of our outstanding
accounts receivable.


Recently, due in part to a deterioration in
market conditions, we have experienced a decline in revenues and
profits. Our business recorded a $208.3 million net loss
for the year ended December 31, 2003 and a
$116.1 million net loss for the year ended
December 31, 2002. Our results for the years ended
December 31, 2003 and 2002 have been affected by an
increase in selling, general and administrative expenses,
depreciation expense, foreign currency translation expense,
interest expense, goodwill impairments, asset impairments,
write-downs of discontinued operations, the provision for the
cost of the litigation settlement and the cumulative effect of
an accounting change. If market conditions were to deteriorate,
there could be a material decline in our business, consolidated
financial condition, results of operations and cash flows.



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

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



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in managing international operations;                                                                                                       
|
| |  | unexpected changes in regulatory requirements;                                                                                                           
|
| |  | tariffs and other trade barriers that may
    restrict our ability to enter into new markets;                                                            
|
| |  | potentially adverse tax consequences;                                                                                                                    
|
| |  | expropriation of property or restrictions on
    repatriation of earnings;                                                                               
|
| |  | difficulties in establishing new international
    offices and risks inherent in establishing new relationships in
    foreign countries;                
|
| |  | the burden of complying with foreign
    laws; and                                                                                                       
|
| |  | fluctuations in currency exchange rates and the
    value of the U.S. dollar, particularly with respect to our
    operations in Argentina and Venezuela.

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

Some of the international markets in which we
operate or plan to operate in the future are politically
unstable and are subject to occasional civil and community
unrest, such as Venezuela and Western Africa. Riots, strikes,
the outbreak of war or terrorist attacks in foreign locations
could also adversely affect our business. We have not obtained
insurance against terrorist attacks and, due to its limited
availability and high cost, do not expect to obtain such
insurance in the future.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Political conditions and fluctuations in
    currency exchange rates in Argentina and Venezuela could
    adversely affect our business.

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

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In January 2002, Argentina devalued its peso
against the U.S. dollar and imposed significant
restrictions on fund transfers internally and outside the
country. In addition, the Argentine government enacted
regulations to temporarily prohibit enforcement of contracts
with exchange rate-based purchase price adjustments. Instead,
payment under such contracts could either be made at an exchange
rate negotiated by the parties or, if no such agreement were
reached, a preliminary payment could be made based on a one
dollar to one peso equivalent pending a final agreement. The
Argentine government also required the parties to such contracts
to renegotiate the price terms within 180 business days of the
devaluation. We have renegotiated all of our agreements in
Argentina. As a result of these negotiations, we received
approximately $11.2 million in reimbursements in 2002 and
$0.7 million in 2003. For the year ended December 31,
2003, our Argentine operations represented approximately 5% of
our revenue and 9% of our gross profit. During the years ended
December 31, 2003 and 2002, we recorded an exchange gain of
approximately $0.5 million and an exchange loss of
approximately $9.9 million, respectively, for assets
exposed to currency translation in Argentina. The economic
situation in Argentina is subject to change. To the extent that
the situation in Argentina deteriorates, exchange controls
continue in place and the value of the peso against the dollar
is reduced further, our results of operations in Argentina could
be materially and adversely affected which could result in
reductions in our net income.

In addition, during the years ended
December 31, 2003 and 2002, we recorded exchange losses of
approximately $2.4 million and $5.8 million,
respectively, for assets exposed to currency translation in
Venezuela and recorded translation losses of approximately
$0.6 million and $1.1 million, respectively, for all
other countries. For the year ended December 31, 2003, our
Venezuelan operations represented approximately 11% of our
revenue and 18% of our gross profit. At December 31, 2003,
we had approximately $23.0 million in accounts receivable
related to our Venezuelan operations.

In December 2002, opponents of Venezuelan
President Hugo Chávez initiated a country-wide strike by
workers of the national oil company in Venezuela. This strike, a
two-month walkout, had a significant negative impact on
Venezuelas economy and temporarily shut down a substantial
portion of Venezuelas oil industry. As a result of the
strike, Venezuelas oil production dropped substantially.
In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency that can be
exchanged for foreign currency by businesses operating inside
Venezuela. In May 2003, after six months of negotiation, the
Organization of the American States brokered an agreement
between the Venezuelan government and its opponents. Although
the accord does offer the prospect of stabilizing
Venezuelas economy, if another national strike is staged,
exchange controls remain in place, or economic and political
conditions in Venezuela continue to deteriorate, our results of
operations in Venezuela could be materially and adversely
affected, which could result in reductions in our net income. As
a result of the disruption in our operations in Venezuela,
during the fourth quarter of 2002, our international rental
revenues decreased by approximately $2.7 million. In the
year ended December 31, 2003, we recognized approximately
$2.7 million of billings to Venezuelan customers that were
not recognized in 2002 due to concerns about the ultimate
receipt of those revenues. In addition, a recent movement to
remove President Chávez has resulted in renewed civil
strife in Venezuela. If such strife continues or escalates, our
results of operations in Venezuela could be further materially
and adversely affected.

In February 2003, the Venezuelan government fixed
the exchange rate to 1,600 bolivars for each U.S. dollar.
In February 2004, the government devalued the currency by
approximately 17%. The impact of the devaluation on our results
of operations will depend upon the amount of our assets
(primarily working capital) exposed to currency fluctuation in
Venezuela in future periods. As of December 31, 2003, we
had approximately $6.0 million in net assets exposed to
currency fluctuation in Venezuela. Based on these assets, a 10%
change in exchange rates would result in a $0.5 million
gain or loss in Venezuela.



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

The length of our compressor leases with
customers varies based on operating conditions and customer
needs. In most cases, under currently prevailing lease rates,
the initial lease terms are not long enough to enable us to
fully recoup the average cost of acquiring or fabricating the
equipment. We cannot be sure that

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a substantial number of our lessees will continue
to renew their leases or that we will be able to re-lease the
equipment to new customers or that any renewals or re-leases
will be at comparable lease rates. The inability to renew or
re-lease a substantial portion of our compressor rental fleet
would have a material adverse effect upon our business,
consolidated financial condition, results of operations and cash
flows.




| |                                                 
| | ------------------------------------------------
| | We operate in a highly competitive
    industry.

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



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

Natural gas operations entail inherent risks,
including equipment defects, malfunctions and failures and
natural disasters, which could result in uncontrollable flows of
gas or well fluids, fires and explosions. These risks may expose
us, as an equipment operator or fabricator, to liability for
personal injury, wrongful death, property damage, pollution and
other environmental damage. We have obtained insurance against
liability for personal injury, wrongful death and property
damage, but we cannot be sure that the insurance will be
adequate to cover the liability we may incur. Insurance premium
pricing is highly volatile and we cannot be sure that we will be
able to obtain insurance in the future at a reasonable cost or
at all. Our business, consolidated financial condition, results
of operations and cash flows could be materially adversely
affected if we incur substantial liability and the damages are
not covered by insurance or are in excess of policy limits.



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

We depend on the continuing efforts of our
executive officers and senior management. The departure of any
of our key personnel could have a material adverse effect on our
business, operating results and financial condition. We do not
maintain key man life insurance coverage with respect to our
executive officers or key management personnel. In addition, we
believe that our success depends on our ability to attract and
retain qualified employees. There is significant demand in our
industry for qualified engineers and mechanics to manufacture
and repair natural gas compression equipment. If we fail to
retain our skilled personnel and to recruit other skilled
personnel, we could be unable to compete effectively.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is a risk that the Internal Revenue
    Service or another taxing authority would not agree with our
    treatment of sale leaseback transactions, which could increase
    our taxes.

We treat our sale leaseback transactions as
financing arrangements for income tax and certain other tax
purposes. A tax treatment inconsistent with our position could
have a material adverse effect on our financial condition,
results of operations and liquidity. We intend to continue to
treat the leases as a secured financing arrangement for income
and certain other tax purposes, which is consistent with the way
the leases are intended to be treated for bankruptcy law and
state law purposes. If the Internal Revenue Service or another
taxing authority were to successfully contend that the leases or
any of our other operating leases should be treated as a sale
leaseback of equipment rather than a secured financing
arrangement, we may owe significant additional taxes. This
result may affect our ability to make payments on our debt or
our compression equipment lease obligations.

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| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to a variety of
    governmental regulations relating to the environment, health and
    safety.

Our business is subject to a variety of federal,
state, local and foreign laws and regulations relating to the
environment, health and safety. These laws and regulations are
complex, change frequently and have tended to become more
stringent over time. Failure to comply with these laws and
regulations may result in a variety of administrative, civil and
criminal enforcement measures, including assessment of monetary
penalties, imposition of remedial requirements and issuance of
injunctions as to future compliance. From time to time as part
of the regular overall evaluation of our operations, including
newly acquired operations, we apply for or amend facility
permits with respect to stormwater or wastewater discharges,
waste handling, or air emissions relating to manufacturing
activities or equipment operations, which subjects us to new or
revised permitting conditions that may be onerous or costly to
comply with. In addition, certain of our customer service
arrangements may require us to operate, on behalf of a specific
customer, petroleum storage units such as underground tanks or
pipelines and other regulated units, all of which may impose
additional compliance and permitting obligations.

As one of the largest natural gas compression
companies in the United States, we conduct operations at
numerous facilities in a wide variety of locations across the
country. Our operations at many of these facilities require
federal, state or local environmental permits or other
authorizations. For example, natural gas compressors at many of
our customer facilities require individual air permits or
general authorizations to operate under various air regulatory
programs established by rule or regulation. These permits and
authorizations frequently contain numerous compliance
requirements, including monitoring and reporting obligations and
operational restrictions, such as emission limits. Given the
large number of facilities in which we operate, and the numerous
environmental permits and other authorizations applicable to our
operations, we occasionally identify or are notified of
technical violations of certain requirements existing in various
permits and other authorizations, and it is likely that similar
technical violations will occur in the future. Occasionally, we
have been assessed penalties for our non-compliance, and we
could be subject to such penalties in the future. While such
penalties generally do not have a material financial impact on
our business or operations, it is possible future violations
could result in substantial penalties.

We are evaluating the impact on our operations of
recently promulgated air emission regulations under the Clean
Air Act relating to non-road engines. We intend to implement any
equipment upgrades or permit modifications required by these air
emission regulations according to the required schedule of
compliance. We do not anticipate, however, that any changes or
updates in response to such regulations, or any other
anticipated permit modifications (for stormwater, other air
emission sources or otherwise) or anticipated ongoing regulatory
compliance obligations will have a material adverse effect on
our operations either as a result of any enforcement measures or
through increased capital costs. Based on our experience to
date, we believe that the future cost of compliance with
existing laws and regulations will not have a material adverse
effect on our business, consolidated financial condition,
results of operations and cash flows. However, future events,
such as compliance with more stringent laws, regulations or
permit conditions, a major expansion of our operations into more
heavily regulated activities, more vigorous enforcement policies
by regulatory agencies, or stricter or different interpretations
of existing laws and regulations could require us to make
material expenditures.

We have conducted preliminary environmental site
assessments with respect to some, but not all, properties
currently owned or leased by us, usually in a pre-acquisition
context. Some of these assessments have revealed that soils
and/or groundwater at some of our facilities are contaminated
with hydrocarbons, heavy metals and various other regulated
substances. With respect to newly acquired properties, we do not
believe that our operations caused or contributed to any such
contamination in any material respect and we are not currently
under any governmental orders or directives requiring us to
undertake any remedial activity at such properties. We typically
will develop a baseline of site conditions so we can establish
conditions at the outset of our operations on such property.
However, the handling of petroleum products and other regulated
substances is a normal part of our operations and we have
experienced occasional minor spills or incidental leakage in
connection with our operations. Certain properties previously
owned or leased by us were determined to be affected by soil
contamination. Where such contamination was

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identified and determined by us to be our
responsibility, we conducted remedial activities at these
previously-held properties to the extent we believed necessary
to meet regulatory standards and either sold the owned
properties to third parties or returned the leased properties to
the lessors. Based on our experience to date and the relatively
minor nature of the types of contamination we have identified to
date, we believe that the future cost of necessary investigation
or remediation on our current properties will not have a
material adverse effect on our business, consolidated financial
condition, results of operations, and cash flows. We cannot be
certain, however, that clean-up standards will not become more
stringent, or that we will not be required to undertake any
remedial activities involving any material costs on any of these
current or previously held properties in the future or that the
discovery of unknown contamination or third-party claims made
with respect to current or previously owned or leased properties
will not result in material costs.




| |                                               
| | ----------------------------------------------
| | Our stock price may experience
    volatility.

Our stock price, like that of other companies,
can be volatile. Some of the factors that could affect our stock
price are quarterly increases or decreases in revenue or
earnings, changes in revenue or earnings estimates by the
investment community, and speculation in the press or investment
community about our financial condition or results of
operations. General market conditions and domestic or
international economic factors unrelated to our performance may
also affect our stock price. For these reasons, investors should
not rely on recent trends to predict future stock prices or
financial results. In addition, following periods of volatility
in a companys securities, securities class action
litigation against a company is sometimes instituted and has
been previously brought against us. This type of litigation
could result in liability, substantial costs and the diversion
of management time and resources.

New Accounting Pronouncements

In June 2001, the FASB issued SFAS 143,
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143).
SFAS 143 establishes the accounting standards for the
recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 became
effective for us on January 1, 2003. The adoption of this
new standard did not have a material effect on our consolidated
results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145
updates, clarifies and simplifies existing accounting
pronouncements. Provisions of SFAS 145 related to the
rescission of Statement 4 became effective for us on
January 1, 2003. The provisions of SFAS 145 related to
SFAS 13 are effective for transactions occurring after
May 15, 2002. We have adopted the provisions of the new
standard, which had no material effect on our consolidated
results of operations, cash flows or financial position.

In June 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS 146
supersedes previous accounting guidance, principally Emerging
Issues Task Force Issue (EITF) No. 94-3. We
adopted the provision of SFAS 146 for restructuring
activities initiated after December 31, 2002, which had no
material effect on our financial statements. SFAS 146
requires that the liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of the commitment to an exit plan.
SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly,
SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform
multiple revenue generating activities. EITF 00-21 became
effective for interim periods beginning after June 15,
2003. We have adopted the

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provisions of EITF 00-21, which did not have
a material effect on our consolidated results of operations,
cash flows or financial position.


In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, which clarifies disclosure and
recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The adoption of the provisions of this
interpretation did not have a material effect on our
consolidated results of operations, cash flows or financial
position.

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

Prior to July 1, 2003, we entered into five
lease transactions that were recorded as a sale and leaseback of
the compression equipment and were treated as operating leases
for financial reporting purposes. On July 1, 2003, we
adopted the provisions of FIN 46 as they relate to the
special purpose entities that lease compression equipment to us.
As a result of the adoption, we added approximately
$1,089 million in compressor equipment assets,
$192.3 million of accumulated depreciation (including
approximately $58.6 million of accumulated depreciation
related to periods before the sale and leaseback of the
equipment), $1,105.0 million in debt and $34.6 million
in minority interest obligations to our balance sheet, and we
reversed $108.8 million of deferred gains that were
recorded on our balance sheet as a result of the sale leaseback
transactions. On July 1, 2003, we recorded a
$133.7 million charge ($86.9 million net of tax) to
record the cumulative effect from the adoption of FIN 46
related to prior period depreciation of the compression
equipment assets. Additionally, we estimate that we will record
approximately $17 million per year in additional
depreciation expense on our leased compression equipment as a
result of the inclusion of the compression equipment on our
balance sheet and will also record the payments made under our
compression equipment leases as interest expense.

In December 2003, we exercised our purchase
option under the 1999 compression equipment operating lease. As
of December 31, 2003, the remaining compression assets
owned by the entities that lease equipment to us but are now
included in property, plant and equipment in our consolidated
financial statements had a net book value of approximately
$804.0 million, including improvements made to these assets
after the sale leaseback transactions.

We have a consolidated subsidiary trust that has
mandatorily redeemable convertible preferred securities
outstanding that have a liquidation value of $86.3 million.
These securities were previously reported on our balance sheet
as mandatorily redeemable convertible preferred securities.
Because we only have a limited ability to make decisions about
its activities and we are not the primary beneficiary of the
trust, the trust is a VIE under FIN 46. As such, the
mandatorily redeemable convertible preferred securities issued
by the trust are no longer reported on our balance sheet.
Instead, we now report our subordinated notes payable to the
trust as a debt. These intercompany notes have previously been

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eliminated in our consolidated financial
statements. The changes related to our mandatorily redeemable
convertible preferred securities for our balance sheet are
reclassifications and had no impact on our consolidated results
of operations or cash flow.


In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is
effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. All provisions of SFAS 149 will
be applied prospectively. We have adopted the provisions
SFAS 149, which did not have a material effect on our
consolidated results of operations, cash flow or financial
position.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS 150 changes
the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity.
SFAS 150 requires that those instruments be classified as
liabilities in statements of financial position. SFAS 150
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for interim
periods beginning after June 15, 2004. On November 7,
the FASB issued Staff Position 150-4 that delayed the effective
date for certain types of financial instruments. We do not
believe the adoption of the guidance currently provided in
SFAS 150 will have a material effect on our consolidated
results of operations or cash flow. However, we may be required
to classify as debt approximately $28.6 million in sale
leaseback obligations that are currently reported as
Minority interest on our condensed consolidated
balance sheet pursuant to FIN 46. See
 Leasing Transactions and Accounting Change for
FIN 46.

These minority interest obligations represent the
equity of the entities that lease compression equipment to us.
In accordance with the provisions of our compression equipment
lease obligations, the equity certificate holders are entitled
to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of December 31, 2003,
the yield rates on the outstanding equity certificates ranged
from 4.4% to 9.5%. Equity certificate holders may receive a
return of capital payment upon lease termination or our purchase
of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression
equipment to us. At December 31, 2003, the carrying value
of the minority interest obligations approximated the fair
market value of assets that would be required to be transferred
to redeem the minority interest obligations.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We are exposed to interest rate and foreign
currency risk. Hanover and its subsidiaries periodically enter
into interest rate swaps to manage our exposure to fluctuations
in interest rates. At December 31, 2003, the fair market
value of our interest rate swaps, excluding the portion
attributable to and included in accrued interest, was a
liability of approximately $15.1 million, of which
$11.7 million was recorded in accrued liabilities and
$3.4 million in other long-term liabilities. At
December 31, 2003 we were party to three interest rate
swaps to convert variable lease payments under certain lease
arrangements to fixed payments as follows (dollars in thousands):

|              |  |              |        |          |  |               |         |  |  |   |        |  
|------------- |  | ------------ | ------ | -------- |  | ------------- | ------- |  |  | - | ------ | -
|              |  |              |        |          |  | Fair Value of
|              |  |              |        |          |  | the          
|              |  |              |        |          |  | Swap at      
|              |  | Company Pays |        | Notional |  | December 31, 
|Maturity Date |  | Fixed Rate   |        | Amount   |  | 2003         
|              |  |              |        |          |  |              
|3/11/2005     |  |              | 5.2550 | %        |  | $             | 100,000 |  |  | $ | (4,435 | )
|3/11/2005     |  |              | 5.2725 | %        |  | $             | 100,000 |  |  | $ | (4,456 | )
|10/26/2005    |  |              | 5.3975 | %        |  | $             | 100,000 |  |  | $ | (6,191 | )

At December 31, 2003, we were exposed to
variable rental rates, which fluctuate with market interest
rate, on a portion of the equipment leases we entered into in
2001 and 2000. Assuming a hypothetical 10%

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increase in the variable rates from those in
effect at year end, the increase in annual interest expense on
the equipment lease notes would be approximately
$0.5 million.


We are also exposed to interest rate risk on
borrowings under our floating rate bank credit facility. At
December 31, 2003, $27.0 million was outstanding
bearing interest at a weighted average effective rate of
4.2% per annum. Assuming a hypothetical 10% increase in the
weighted average interest rate from those in effect at
December 31, 2003, the increase in annual interest expense
for advances under this facility would be approximately
$0.1 million.

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

For the year ended December 31, 2003, our
Argentine operations represented approximately 5% of our revenue
and 9% of our gross profit. During the years ended
December 31, 2003 and 2002, we recorded an exchange gain of
approximately $0.5 million and an exchange loss of
approximately $9.9 million, respectively for assets exposed
to currency translation in Argentina.

In addition, during the years ended
December 31, 2003 and 2002, we recorded exchange losses of
approximately $2.4 million and $5.8 million,
respectively, for assets exposed to currency translation in
Venezuela and recorded translation losses of approximately
$0.6 million and $1.1 million, respectively, for all
other countries. For the year ended December 31, 2003, our
Venezuelan operations represented approximately 11% of our
revenue and 18% of our gross profit. At December 31, 2003,
we had approximately $23.0 million in accounts receivable
related to our Venezuelan operations.

In February 2003, the Venezuelan government fixed
the exchange rate to 1,600 bolivars for each U.S. dollar.
In February 2004, the government devalued the currency by
approximately 17%. The impact of the devaluation on our results
will depend upon the amount of our assets (primarily working
capital) exposed to currency fluctuation in Venezuela in future
periods. As of December 31, 2003, we had approximately
$6.0 million in net assets exposed to currency fluctuation
in Venezuela. Based on these assets, a 10% change in exchange
rates would result in a $0.5 million gain or loss in
Venezuela.

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

During 2003, we entered into forward exchange
contracts with a notional value of $10.0 million to
mitigate the risk of changes in exchange rates between the Euro
and the U.S. dollar. These contracts mature during 2004.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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






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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures. The Companys principal executive officer
and principal financial officer evaluated the effectiveness of
the Companys disclosure controls and procedures as of
December 31, 2003 (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934). Based on the evaluation, the
Companys principal executive officer and principal
financial officer believe that the Companys disclosure
controls and procedures were effective to ensure that material

68



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information was accumulated and communicated to
the Companys management, including the Companys
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.


(b) Changes in Internal Controls.
Under the direction of our President and Chief Executive
Officer, Senior Vice President and Chief Financial Officer, and
Senior Vice President and General Counsel, we continued the
process of reviewing our internal controls and procedures for
financial reporting and have changed or are in the process of
changing some of those controls and procedures, including
changes relating to: information systems (including controls
over access to the systems and segregation of duties), human
resources; internal audit; tax accounting, planning and
analysis, reconciliation of intercompany accounts; approval of
capital expenditures; preparation, approval and closing of
significant agreements and transactions; review and
quantification of compressor substitutions under compression
equipment lease agreements; integration of acquired businesses
and assets (including integration of certain financial and
accounting systems related thereto); standardization of internal
controls and policies across the organization; and the
development, implementation and enhancements of corporate
governance policies and procedures and performance management
systems. As part of our review of our internal controls and
procedures for financial reporting, we have made personnel
changes and hired additional qualified staff in the legal,
accounting/finance and human resource areas and are utilizing
third parties to assist with some of our integration and
internal audit functions. This review is ongoing, and the review
to date constitutes the evaluation required by
Rule 13a-15(d) of the Securities Exchange Act of 1934.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information included or to be included in the
Companys definitive proxy statement for its 2004 Annual
Meeting of Stockholders under the captions Nominees for
Election as Directors, and Section 16(a)
Beneficial Ownership Reporting Compliance is incorporated
by reference herein. Please see Item 1 of this
Form 10-K for identification of our executive officers.

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






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information included or to be included under
the caption Information Regarding Executive
Compensation in the Companys definitive proxy
statement for its 2004 Annual Meeting of Stockholders is
incorporated by reference herein.






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

The information included or to be included under
the captions Security Ownership of Certain Beneficial
Owners and Management and Equity Compensation Plan
Information in the Companys definitive proxy
statement for its 2004 Annual Meeting of Stockholders is
incorporated by reference herein.

69



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EQUITY COMPENSATION PLAN INFORMATION

The equity compensation plans and agreements
discussed in this section are referred to collectively as the
Equity Compensation Plans. The table below provides
information as of December 31, 2003 with respect to shares
of our common Stock that may be issued under the following
Equity Compensation Plans of the Company: 1997 Stock Option
Plan, the 1998 Stock Option Plan, the December 9, 1998
Stock Option Plan, the 1999 Stock Option Plan, the 2001 Equity
Incentive Plan and the 2003 Stock Incentive Plan. The
Compensation Committee has authority to make future grants only
under the 1997 Stock Option Plan, the 2001 Equity Incentive Plan
and the 2003 Stock Incentive Plan.

The table also includes information with respect
to shares of our common stock subject to outstanding options
that were granted under (1) the following Equity
Compensation Plans adopted prior to our initial public offering
in 1997, under which the authority to make additional grants has
been terminated: the 1992 Stock Compensation Plan, the 1993
Management Stock Option Plan, the 1995 Employee Stock Option
Plan, the 1995 Management Stock Option Plan, the 1996 Employee
Stock Option Plan; and (2) Stock Option Agreements entered
into by and between Hanover and the following individuals: Tom
P. McNeil III, Glenn Wind, and Kurt Wind. The plans listed
in (1) above are referred to as the Pre-IPO
Plans. The agreements listed in (2) above are
referred to as the Pre-IPO Agreements.

|                                                                     |  |                            |           |                   |  |                           |       |  |  |  |           |    
|-------------------------------------------------------------------- |  | -------------------------- | --------- | ----------------- |  | ------------------------- | ----- |  |  |  | --------- | ---
|                                                                     |  |                            |           | Weighted-         |  | Number of securities     
|                                                                     |  |                            |           | average exercise  |  | remaining available for  
|                                                                     |  | Number of securities to be |           | price of          |  | future issuance under    
|                                                                     |  | issued upon exercise of    |           | outstanding       |  | equity compensation plans
|                                                                     |  | outstanding options,       |           | options, warrants |  | (excluding securities    
|                                                                     |  | warrants and rights        |           | and rights        |  | reflected in column a)   
|Plan category                                                        |  | (a)                        |           | (b)               |  | (c)                      
|                                                                     |  |                            |           |                   |  |                          
|Equity compensation plans approved by security
    holders(1)        |  |                            | 3,306,592 | (4)               |  | $                         | 11.42 |  |  |  | 2,485,790 |    
|Equity compensation plans not approved by
    security holders(2)(3) |  |                            | 2,589,229 |                   |  | $                         | 5.93  |  |  |  |          | (5)
|                                                                     |  |                            |           |                   |  |                           |       |  |  |  |           |    
|Total                                                                |  |                            | 5,895,821 |                   |  | $                         | 9.01  |  |  |  | 2,485,790 |    
|                                                                     |  |                            |           |                   |  |                           |       |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Composed of the 2003 Stock Incentive Plan, the
    2001 Equity Incentive Plan and the 1997 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | Composed of all of the Equity Compensation Plans
    except the 2003 Stock Incentive Plan, the 2001 Equity Incentive
    Plan and the 1997 Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | The table does not include information for the
    Applied Process Solutions Incorporated (APSI) 1998
    Stock Option Plan assumed by Hanover in connection with its
    acquisition of APSI in May 2000. As of December 31, 2003, a
    total of 35,873 shares of the Common Stock were issuable
    upon exercise of outstanding options under the assumed plan. The
    weighted average exercise price of those outstanding options is
    $16.65 per share. No additional awards may be granted under
    such plan.
|   
|(4) | In addition, as of December 31, 2003, there
    are 512,000 shares of restricted stock outstanding granted
    under the 2003 Stock Incentive Plan and the 2001 Equity
    Incentive Plan.                                                                                                                                                                                                                                                                                                                                  
|   
|(5) | The Board of Directors terminated any existing
    authority to make future grants under these plans on
    May 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                   

The Equity Compensation Plans that have not been
approved by security holders are described below. The Pre-IPO
Plans and the 1997 Stock Option Plan, the 1998 Stock Option
Plan, the December 9, 1998 Stock Option Plan, and the 1999
Stock Option Plan have the following material features:
(1) awards under such plans are limited to stock options
and may be made, depending on the terms of each plan, to the
Companys officers, directors, employees, advisors and
consultants; (2) unless otherwise set forth in any
applicable stock option agreement and depending on the terms of
each plan, the stock options vest over a period of up to five
years; and (3) the term of the stock options granted under
the plans may not exceed 10 years, except for the 1992
Stock Option Plan under which the term of the stock options may
not exceed 15 years. The Pre-IPO Agreements have the
following material features: (1) awards under such
agreements are limited to stock options and were made to the
specific person named in the

70



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agreement; (2) the stock options vest over a
period of five years from the date of the agreement;
(3) the term of the stock options granted under the
agreements is 10 years; and (4) no additional grants
may be made under these agreements.


Additional information as of December 31,
2003, about the Equity Compensation Plans that have not been
approved by stockholders is provided in the following table.

|                                                 |  |             |           |                    |  |                       |  |           |  |            |       |  |  |  |    | 
|------------------------------------------------ |  | ----------- | --------- | ------------------ |  | --------------------- |  | --------- |  | ---------- | ----- |  |  |  | -- | 
|                                                 |  |             |           |                    |  | Number of Shares      |  |           |  |           
|                                                 |  |             |           | Shares Previously  |  | Reserved for Issuance |  | Weighted- |  | Shares    
|                                                 |  | Number of   |           | Issued Pursuant to |  | Upon the Exercise of  |  | Average   |  | Available 
|                                                 |  | Shares      |           | Stock Option       |  | Outstanding Stock     |  | Exercise  |  | for Future
|Plan or Agreement Name                           |  | Issuable(#) |           | Exercises(#)       |  | Options(#)            |  | Price($)  |  | Grants(#) 
|                                                 |  |             |           |                    |  |                       |  |           |  |           
|1992 Stock Compensation Plan                     |  |             | 379,200   |                    |  | 257,856               |  | 113,760   |  | $          | 2.06  |  |  |  | *  | 
|Incentive Option Plan                            |  |             | 2,703,064 |                    |  | 1,283,191             |  | 1,419,872 |  | $          | 2.29  |  |  |  | *  | 
|1995 Employee Stock Option Plan                  |  |             | 199,694   |                    |  | 169,347               |  | 30,031    |  | $          | 4.75  |  |  |  | *  | 
|1995 Management Stock Option Plan                |  |             | 26,332    |                    |  | 19,588                |  | 6,636     |  | $          | 3.48  |  |  |  | *  | 
|1996 Employee Stock Option Plan                  |  |             | 116,920   |                    |  | 43,648                |  | 69,836    |  | $          | 5.70  |  |  |  | *  | 
|Tom P. McNeil III Stock Option Agreement         |  |             | 26,332    |                    |  |                      |  | 26,332    |  | $          | 6.96  |  |  |  | *  | 
|Glenn Wind and Kurt Wind Stock Option Agreements |  |             | 47,400    |                    |  | 24,322                |  | 23,078    |  | $          | 0.003 |  |  |  | *  | 
|1998 Stock Option Plan                           |  |             | 520,000   |                    |  | 14,173                |  | 421,047   |  | $          | 13.29 |  |  |  | ** | 
|December 9, 1998 Stock Option Plan               |  |             | 700,000   |                    |  | 309,828               |  | 298,370   |  | $          | 9.75  |  |  |  | ** | 
|1999 Stock Option Plan                           |  |             | 600,000   |                    |  | 23,866                |  | 180,267   |  | $          | 14.51 |  |  |  | ** | 



---



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



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






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information included or to be included under
the caption Certain Relationships and Transactions
in the Companys definitive proxy statement for its 2004
Annual Meeting of Stockholders is incorporated by reference
herein.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information included or to be included under
the caption Principal Accounting Fees and Services
in the Companys definitive proxy statement for its 2004
Annual Meeting of Stockholders is incorporated by reference
herein.

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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

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



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

|                                                          |  |  |      | 
|--------------------------------------------------------- |  |  | ---- | 
|Report of Independent Auditors                            |  |  | F-1  | 
|Consolidated Balance Sheet                                |  |  | F-2  | 
|Consolidated Statement of Operations                      |  |  | F-3  | 
|Consolidated Statement of Comprehensive Income
    (Loss) |  |  | F-4  | 
|Consolidated Statement of Cash Flows                      |  |  | F-5  | 
|Consolidated Statement of Common
    Stockholders Equity |  |  | F-7  | 
|Notes to Consolidated Financial Statements                |  |  | F-8  | 
|Selected Quarterly Financial Data (unaudited)             |  |  | F-51 | 



| |                                
| | -------------------------------
| | 2. Financial Statement Schedule

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



| |            
| | -----------
| | 3. Exhibits

|        |   |             |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | - | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 3 | .1          |  | Certificate of Incorporation of the Hanover
    Compressor Holding Co., as amended, incorporated by reference to
    Exhibit 3.1 to Hanover Compressor Companys (the
    Company) Current Report on Form 8-K filed with
    the SEC on February 5, 2001.                                                                                                                                     
|        | 3 | .2          |  | Certificate of Amendment of Certificate of
    Incorporation of Hanover Compressor Holding Co., dated
    December 8, 1999, incorporated by reference to
    Exhibit 3.2 to the Companys Current Report on
    Form 8-K filed with the SEC on February 5, 2001.                                                                                                                                
|        | 3 | .3          |  | Certificate of Amendment of Certificate of
    Incorporation of Hanover Compressor Holding Co., dated
    July 11, 2000, incorporated by reference to
    Exhibit 3.3 to the Companys Current Report on
    Form 8-K filed with the SEC on February 5, 2001.                                                                                                                                   
|        | 3 | .4          |  | Amended and Restated Bylaws of the Company, dated
    March 10, 2004.*                                                                                                                                                                                                                                                                                                                          
|        | 4 | .1          |  | Third Amended and Restated Registration Rights
    Agreement, dated as of December 5, 1995, by and between the
    Company, GKH Partners, L.P., GKH Investments, L.P., Astra
    Resources, Inc. and other stockholders of the Company party
    thereto, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-24953)
    on Form S-1, as amended.
|        | 4 | .2          |  | Form of Warrant Agreement, dated as of
    August 7, 1995, incorporated by reference to
    Exhibit 4.10 to the Companys Registration Statement
    (File No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                              
|        | 4 | .3          |  | Specimen Stock Certificate, incorporated by
    reference to Exhibit 4.11 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                                                                                                                                                                                                                         
|        | 4 | .4          |  | Form of Hanover Compressor Capital Trust
    7 1/4% Convertible Preferred Securities, incorporated
    by reference to Exhibit 4.8 to the Companys
    Registration Statement (File No. 333-30344) on
    Form S-3 as filed with the SEC on February 14, 2000.                                                                                                                                 
|        | 4 | .5          |  | Indenture for the Convertible Junior Subordinated
    Debentures due 2029, dated as of December 15, 1999, among
    the Company, as issuer, and Wilmington Trust Company, as
    trustee, incorporated by reference to Exhibit 4.6 to the
    Companys Registration Statement (File No. 333-30344)
    on Form S-3 filed with the SEC on February 14, 2000.                                    
|        | 4 | .6          |  | Form of Hanover Compressor Company Convertible
    Subordinated Junior Debentures due 2029, incorporated by
    reference to Exhibit 4.9 to the Companys Registration
    Statement (File No. 333-30344) on Form S-3 as filed
    with the SEC on February 14, 2000.                                                                                                                           
|        | 4 | .7          |  | Indenture for the 4.75% Convertible Senior
    Notes due 2008, dated as of March 15, 2001, between the
    Company and Wilmington Trust Company, as trustee.*                                                                                                                                                                                                                                   

72



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 4  | .8          |  | Form of 4.75% Convertible Senior Notes due
    2008.*                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4  | .9          |  | Indenture for the 8.50% Senior Secured Notes
    due 2008, dated as of August 30, 2001, among the 2001A
    Trust, as issuer, Hanover Compression Limited Partnership and
    certain subsidiaries, as guarantors, and Wilmington Trust FSB,
    as Trustee, incorporated by reference to Exhibit 10.69 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                
|        | 4  | .10         |  | Form of 8.50% Senior Secured Notes due 2008.*                                                                                                                                                                                                                                                                                                                                                                                           
|        | 4  | .11         |  | Indenture for the 8.75% Senior Secured Notes
    due 2011, dated as of August 30, 2001, among the 2001B
    Trust, as issuer, Hanover Compression Limited Partnership and
    certain subsidiaries, as guarantors, and Wilmington Trust FSB,
    as Trustee, incorporated by reference to Exhibit 10.75 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                
|        | 4  | .12         |  | Form of 8.75% Senior Secured Notes due 2011.*                                                                                                                                                                                                                                                                                                                                                                                           
|        | 4  | .13         |  | Indenture for the Zero Coupon Subordinated Notes
    due March 31, 2007, dated as of May 14, 2003, between
    the Company and Wachovia Bank, National Association, as trustee,
    incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-106384)
    on Form S-3, as filed with the SEC on June 23, 2003.                                                                                 
|        | 4  | .14         |  | Form of Zero Coupon Subordinated Notes due
    March 31, 2007.*                                                                                                                                                                                                                                                                                                                                                                         
|        | 4  | .15         |  | Senior Indenture, dated as of December 15,
    2003, among the Company, Subsidiary Guarantors named therein and
    Wachovia Bank, National Association, as trustee, incorporated by
    reference to Exhibit 4.1 to the Companys Registration
    Statement on Form 8-A, as filed with the SEC on
    December 15, 2003.                                                                                                              
|        | 4  | .16         |  | First Supplemental Indenture to the Senior
    Indenture dated as of December 15, 2003, relating to the
    8.625% Senior Notes due 2010, dated as of December 15,
    2003, between the Company and Wachovia Bank, National
    Association, as trustee, incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form 8-A, as filed with the SEC on December 15, 2003.                             
|        | 4  | .17         |  | Form of 8.625% Senior Notes due 2010.*                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4  | .18         |  | Second Supplemental Indenture to the Senior
    Indenture dated as of December 15, 2003, relating to the
    4.75% Convertible Senior Notes due 2014, dated as of
    December 15, 2003, between the Company and Wachovia Bank,
    National Association, as trustee, incorporated by reference to
    Exhibit 4.4 to the Companys Current Report on
    Form 8-K, as filed with the SEC on December 16, 2003.                         
|        | 4  | .19         |  | Form of 4.75% Convertible Senior Notes due
    2014.*                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4  | .20         |  | Registration Rights Agreement, dated as of
    May 14, 2003, by and between Schlumberger Technology
    Corporation and the Company.*                                                                                                                                                                                                                                                                                                   
|        | 4  | .21         |  | Lock-Up, Standstill and Registration Rights
    Agreement, dated as of August 31, 2001, by and among
    Schlumberger Technology Corporation, Camco
    International, Inc., Schlumberger Oilfield Holdings Ltd.,
    Schlumberger Surenco S.A., Operational Services, Inc. and
    the Company, incorporated by reference to Exhibit 99.5 to
    the Companys Current Report on Form 8-K filed with
    the SEC on September 14, 2001.
|        | 10 | .1          |  | Stipulation and Agreement of Settlement, dated as
    of October 23, 2003, incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003.                                                                                                                                                                                                                   
|        | 10 | .2          |  | PIGAP Settlement Agreement, dated as of
    May 14, 2003, by and among Schlumberger Technology
    Corporation, Schlumberger Oilfield Limited, Schlumberger Surenco
    S.A., the Company and Hanover Compression Limited Partnership.*                                                                                                                                                                                                 
|        | 10 | .3          |  | Offset Rights Agreement, dated as of May 14,
    2003, by and between Schlumberger Technology Corporation and the
    Company.*                                                                                                                                                                                                                                                                                                         
|        | 10 | .4          |  | Credit Agreement, dated as of December 15,
    2003, among the Company, Hanover Compression Limited
    Partnership, Bank One, NA as Syndication Agent, JPMorgan Chase
    Bank, as Administrative Agent, and the several lenders parties
    thereto, incorporated by reference to Exhibit 10.1 to the
    Companys Current Report on Form 8-K, as filed with
    the SEC on December 16, 2003.                                       

73



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .5          |  | Guarantee and Collateral Agreement, dated as of
    December 15, 2003, among the Company, Hanover Compression
    Limited Partnership and certain of their subsidiaries in favor
    of JPMorgan Chase Bank, as Collateral Agent, incorporated by
    reference to Exhibit 10.2 to the Companys Current
    Report on Form 8-K, as filed with the SEC on
    December 16, 2003.                                                                                                                                                                                     
|        | 10 | .6          |  | Hanover Guarantee, dated as of December 15,
    2003, made by the Company in favor of JPMorgan Chase Bank, as
    Administrative Agent for the lenders parties to the Credit
    Agreement dated as of December 15, 2003.*                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .7          |  | Subsidiaries Guarantee, dated as of
    December 15, 2003, in favor of JPMorgan Chase Bank, as
    Administrative Agent for the lenders parties to the Credit
    Agreement dated as of December 15, 2003.*                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .8          |  | Lease, dated as of March 13, 2000, between
    Hanover Equipment Trust 2000A (the 2000A Trust) and
    Hanover Compression Inc., incorporated by reference to
    Exhibit 10.43 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                       
|        | 10 | .9          |  | Guarantee, dated as of March 13, 2000, made
    by the Company, Hanover Compression Inc. and certain of their
    Subsidiaries, incorporated by reference to Exhibit 10.44 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                          
|        | 10 | .10         |  | Participation Agreement, dated as of
    March 13, 2000, among Hanover Compression Inc., Hanover the
    2000A Trust and the several banks parties thereto, incorporated
    by reference to Exhibit 10.45 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 1999.                                                                                                                                                                                                                                                          
|        | 10 | .11         |  | Security Agreement, dated as of March 13,
    2000, made by the 2000A Trust in favor of The Chase Manhattan
    Bank, as agent, incorporated by reference to Exhibit 10.46
    to the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                          
|        | 10 | .12         |  | Assignment of leases, rents and Guarantee from
    the 2000A Trust to The Chase Manhattan Bank, dated as of
    March 13, 2000, incorporated by reference to
    Exhibit 10.47 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                          
|        | 10 | .13         |  | Lease, dated as of October 27, 2000, between
    Hanover Equipment Trust 2000B (the 2000B Trust) and
    Hanover Compression Inc., incorporated by reference to
    Exhibit 10.54 to the Companys Registration Statement
    (File No. 333-50836) on Form S-4, as filed with the
    SEC on December 22, 2000.                                                                                                                                                                                                                                                    
|        | 10 | .14         |  | Guarantee, dated as of October 27, 2000 made
    by the Company, Hanover Compression Inc. and certain
    subsidiaries, incorporated by reference to Exhibit 10.55 to
    the Companys Registration Statement (File
    No. 333-50836) on Form S-4, as filed with the SEC on
    December 22, 2000.                                                                                                                                                                                                                                                                 
|        | 10 | .15         |  | Participation Agreement, dated as of
    October 27, 2000, among Hanover Compression Inc., the 2000B
    Trust, The Chase Manhattan Bank, National Westminster Bank PLC,
    Citibank N.A., Credit Suisse First Boston and the Industrial
    Bank of Japan as co-agents; Bank Hapoalim B.M. and FBTC Leasing
    Corp., as investors, Wilmington Trust Company and various
    lenders, incorporated by reference to Exhibit 10.56 to the
    Companys Registration Statement (File No. 333-50836)
    on Form S-4, as filed with the SEC on December 22,
    2000.
|        | 10 | .16         |  | Security Agreement, dated as of October 27,
    2000, made by the 2000B Trust in favor of The Chase Manhattan
    Bank as agent for the lenders, incorporated by reference to
    Exhibit 10.57 to the Companys Registration Statement
    (File No. 333-50836) on Form S-4, as filed with the
    SEC on December 22, 2000.                                                                                                                                                                                                                                        
|        | 10 | .17         |  | Assignment of Leases, Rents and Guarantee, dated
    as of October 27, 2000, made by the 2000B Trust to The
    Chase Manhattan Bank as agent for the lenders, incorporated by
    reference to Exhibit 10.58 to the Companys
    Registration Statement (File No. 333-50836) on
    Form S-4, as filed with the SEC on December 22, 2000.                                                                                                                                                                                                                          
|        | 10 | .18         |  | Lease, dated as of August 31, 2001, between
    Hanover Equipment Trust 2001A (the 2001A Trust) and
    Hanover Compression Limited Partnership, incorporated by
    reference to Exhibit 10.64 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2001.                                                                                                                                                                                                                                                                   
|        | 10 | .19         |  | Guarantee, dated as of August 31, 2001, made
    by the Company, Hanover Compression Limited Partnership, and
    certain subsidiaries, incorporated by reference to
    Exhibit 10.65 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                  

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .20         |  | Participation Agreement, dated as of
    August 31, 2001, among Hanover Compression Limited
    Partnership, the 2001A Trust, and General Electric Capital
    Corporation, incorporated by reference to Exhibit 10.66 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                   
|        | 10 | .21         |  | Security Agreement, dated as of August 31,
    2001, made by the 2001A Trust in favor Wilmington Trust FSB as
    agent, incorporated by reference to Exhibit 10.67 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                                                      
|        | 10 | .22         |  | Assignment of Leases, Rents and Guarantee from
    the 2001A Trust to Wilmington Trust FSB, dated as of
    August 31, 2001, incorporated by reference to
    Exhibit 10.68 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                  
|        | 10 | .23         |  | Lease, dated as of August 31, 2001, between
    Hanover Equipment Trust 2001B (the 2001B Trust) and
    Hanover Compression Limited Partnership, incorporated by
    reference to Exhibit 10.70 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2001.                                                                                                                                                                                                                        
|        | 10 | .24         |  | Guarantee, dated as of August 31, 2001, made
    by the Company, Hanover Compression Limited Partnership, and
    certain subsidiaries, incorporated by reference to
    Exhibit 10.71 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                       
|        | 10 | .25         |  | Participation Agreement, dated as of
    August 31, 2001, among Hanover Compression Limited
    Partnership, the 2001B Trust, and General Electric Capital
    Corporation, incorporated by reference to Exhibit 10.72 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                   
|        | 10 | .26         |  | Security Agreement, dated as of August 31,
    2001, made by the 2001B Trust in favor of Wilmington Trust FSB
    as agent, incorporated by reference to Exhibit 10.73 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                                                   
|        | 10 | .27         |  | Assignment of Leases, Rents and Guarantee from
    the 2001B Trust to Wilmington Trust FSB, dated as of
    August 31, 2001, incorporated by reference to
    Exhibit 10.74 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                  
|        | 10 | .28         |  | Amendment and Consent, dated as of June 26,
    2000, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.40 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                   
|        | 10 | .29         |  | Second Amendment, dated as of August 30,
    2000, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.41 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                      
|        | 10 | .30         |  | First Amendment, dated as of January 31,
    2001, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.42 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                      
|        | 10 | .31         |  | Second Amendment, dated as of July 27, 2001,
    to (i) the Credit Agreement, dated as of December 15,
    1997, as amended and restated on March 13, 2000, among the
    Company, Hanover Compression Inc., the Chase Manhattan Bank, as
    administrative agent, and the lenders parties thereto and
    (ii) certain Synthetic Guarantees referenced in the
    amendment, incorporated by reference to Exhibit 10.43 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002.
|        | 10 | .32         |  | Third Amendment to certain Guarantees, dated as
    of December 3, 2001, among the Company, certain of the
    Companys subsidiaries, JPMorgan Chase Bank, as agent, and
    several banks and other financial institutions parties thereto,
    incorporated by reference to Exhibit 10.80 to the
    Companys Current Report on Form 8-K filed with the
    SEC on December 17, 2001.                                                                                                                                 

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .33         |  | Waiver and Amendment, dated as of March 15,
    2002, to (i) the Credit Agreement dated as of
    December 15, 1997, as amended and restated on
    December 3, 2002, among the Company, Hanover Compression
    Inc., the Chase Manhattan Bank, and the lenders parties thereto
    and (ii) certain Synthetic Guarantees referenced in the
    amendment, incorporated by reference to Exhibit 10.45 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002.                                             
|        | 10 | .34         |  | Amendment, dated as of June 26, 2002, to
    (i) the Credit Agreement dated as of December 15,
    1997, as amended and restated as of December 3, 2001, among
    the Company, certain of the Companys subsidiaries,
    JPMorgan Chase Bank, as administrative agent, and the lenders
    parties thereto and (ii) certain Synthetic Guarantees and
    Credit Agreements referenced in the amendment, incorporated by
    reference to Exhibit 10.75 to the Companys Current
    Report on Form 8-K filed with the SEC on August 6,
    2002.  
|        | 10 | .35         |  | Amendment, dated as of January 31, 2003, to
    (i) the Credit Agreement dated as of December 15,
    1997, as amended and restated on December 3, 2001, among
    the Company, certain of the Companys subsidiaries,
    JPMorgan Chase Bank, as administrative agent, and the lenders
    parties thereto and (ii) certain Synthetic Guarantees and Credit
    Agreements referenced in the amendment, incorporated by
    reference to Exhibit 10.80 to the Companys Current
    Report on Form 8-K filed with the SEC on February 7,
    2003.
|        | 10 | .36         |  | Amendment, dated as of December 15, 2003, to
    the 2000A and 2000B Synthetic Guarantees, Credit Agreements and
    Participation Agreements.*                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .37         |  | Amended and Restated Declaration of Trust of
    Hanover Compressor Capital Trust, dated as of December 15,
    1999, among the Company, as sponsor, Wilmington Trust Company,
    as property trustee, and Richard S. Meller, William S.
    Goldberg and Curtis A. Bedrich, as administrative trustees,
    incorporated by reference to Exhibit 4.5 to the
    Companys Registration Statement (File No. 333-30344)
    on Form S-3 filed with the SEC on February 14, 2000.                                                                    
|        | 10 | .38         |  | Preferred Securities Guarantee Agreement, dated
    as of December 15, 1999, between the Company, as guarantor,
    and Wilmington Trust Company, as guarantee trustee, incorporated
    by reference to Exhibit 4.10 to the Companys
    Registration Statement (File No. 333-30344) on
    Form S-3 as filed with the SEC on February 14, 2000.                                                                                                                                                                                                  
|        | 10 | .39         |  | Common Securities Guarantee Agreement, dated as
    of December 15, 1999, by the Company, as guarantor, for the
    benefit of the holders of common securities of Hanover
    Compressor Capital Trust, incorporated by reference to
    Exhibit 4.11 to the Companys Registration Statement
    (File No. 333-30344) on Form S-3 as filed with the SEC
    on February 14, 2000.                                                                                                                                                                 
|        | 10 | .40         |  | Amended and Restated Guarantee and Collateral
    Agreement, dated January 31, 2003, made by the Company,
    certain of the Companys subsidiaries, JPMorgan Chase Bank,
    as administrative agent, and the lenders parties thereto,
    incorporated by reference to Exhibit 10.6 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                                                                                                                                              
|        | 10 | .41         |  | Purchase Agreement, dated as of July 11,
    2000, among the Company, Hanover Compression Inc., Dresser-Rand
    Company and Ingersoll-Rand Company, incorporated by reference to
    Exhibit 99.2 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2000.                                                                                                                                                                                                                                                        
|        | 10 | .42         |  | Agreement and Plan of Merger, dated as of
    July 13, 2000, among the Company, Caddo Acquisition
    Corporation, and OEC Compression Corporation, incorporated by
    reference to Exhibit 10.51 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2000.                                                                                                                                                                                                                                                 
|        | 10 | .43         |  | Amendment No. 1 to Agreement and Plan of
    Merger, dated as of November 14, 2000, by and among the
    Company, Caddo Acquisition Corporation and OEC Compression
    Corporation.*                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .44         |  | Amendment No. 2 to Agreement and Plan of
    Merger, dated as of February 2, 2001, by and among the
    Company, Caddo Acquisition Corporation and OEC Compression
    Corporation.*                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .45         |  | Purchase Agreement, dated June 28, 2001,
    among Schlumberger Technology Corporation, Schlumberger Oilfield
    Holdings Ltd., Schlumberger Surenco S.A., Camco International
    Inc., the Company and Hanover Compression Limited Partnership,
    incorporated by reference to Exhibit 10.63 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2001.                                                                                                                                                       

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .46         |  | Schedule 1.2(c) to Purchase Agreement, dated
    June 28, 2001, among Schlumberger Technology Corporation,
    Schlumberger Oilfield Holdings Limited, Schlumberger Surenco
    S.A., Camco International Inc., the Company and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on February 6, 2003.       
|        | 10 | .47         |  | Amendment No. 1, dated as of August 31,
    2001, to Purchase Agreement among Schlumberger Technology
    Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger
    Surenco S.A., Camco International Inc., the Company and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.3 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2001.
|        | 10 | .48         |  | Most Favored Supplier and Alliance Agreement,
    dated August 31, 2001, among Schlumberger Oilfield Holdings
    Limited, Schlumberger Technology Corporation and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.4 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2001.                                                                  
|        | 10 | .49         |  | Agreement by and among SJMB, L.P., Charles
    Underbrink, John L. Thompson, Belleli Energy S.r.l. and
    Hanover Compressor Company and certain of its subsidiaries dated
    September 20, 2002, incorporated by reference to
    Exhibit 10.62 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002.                                                                          
|        | 10 | .50         |  | Hanover Compressor Company 1992 Stock
    Compensation Plan, incorporated by reference to
    Exhibit 10.63 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31,
    2002.                                                                                                                                                                                                           
|        | 10 | .51         |  | Hanover Compressor Company Senior Executive Stock
    Option Plan, incorporated by reference to Exhibit 10.4 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                             
|        | 10 | .52         |  | Hanover Compressor Company 1993 Management Stock
    Option Plan, incorporated by reference to Exhibit 10.5 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                              
|        | 10 | .53         |  | Hanover Compressor Company Incentive Option Plan,
    incorporated by reference to Exhibit 10.6 to the
    Companys Registration Statement (File No. 333-24953)
    on Form S-1, as amended.                                                                                                                                                                                                                            
|        | 10 | .54         |  | Amendment and Restatement of the Hanover
    Compressor Company Incentive Option Plan, incorporated by
    reference to Exhibit 10.7 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                                                                                                                                                                                     
|        | 10 | .55         |  | Hanover Compressor Company 1995 Employee Stock
    Option Plan, incorporated by reference to Exhibit 10.8 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                                
|        | 10 | .56         |  | Hanover Compressor Company 1995 Management Stock
    Option Plan, incorporated by reference to Exhibit 10.9 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                              
|        | 10 | .57         |  | Form of Stock Option Agreement for DeVille and
    McNeil, incorporated by reference to Exhibit 10.70 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                                                                                                                                                                                                   
|        | 10 | .58         |  | Form of Stock Option Agreements for Wind Bros,
    incorporated by reference to Exhibit 10.71 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                                                                                                                                                                                                           
|        | 10 | .59         |  | Hanover Compressor Company 1996 Employee Stock
    Option Plan, incorporated by reference to Exhibit 10.10 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                               
|        | 10 | .60         |  | Hanover Compressor Company 1997 Stock Option
    Plan, as amended, incorporated by reference to
    Exhibit 10.23 to the Companys Registration Statement
    (File No. 333-24953) on Form S-1, as
    amended.                                                                                                                                                                                                        
|        | 10 | .61         |  | 1997 Stock Purchase Plan, incorporated by
    reference to Exhibit 10.24 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                                                                                                                                                                                                                                                 

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|        |    |             |  |                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .62         |  | Hanover Compressor Company 1998 Stock Option
    Plan, incorporated by reference to Exhibit 10.7 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1998.                                                                 
|        | 10 | .63         |  | Hanover Compressor Company December 9, 1998
    Stock Option Plan, incorporated by reference to
    Exhibit 10.33 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31,
    1998.                                              
|        | 10 | .64         |  | Hanover Compressor Company 1999 Stock Option
    Plan, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-32096)
    on Form S-8 filed with the SEC on March 10,
    2000.                                      
|        | 10 | .65         |  | Hanover Compressor Company 2001 Equity Incentive
    Plan, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-73904)
    on Form S-8 filed with the SEC on November 21,
    2001.                               
|        | 10 | .66         |  | Hanover Compressor Company 2003 Stock Incentive
    Plan, incorporated by reference to the Companys Definitive
    Proxy Statement on Schedule 14A, as filed with the SEC on
    April 15, 2003.                                                                 
|        | 10 | .67         |  | Management Fee Letter, dated November 14,
    1995 between GKH Partners, L.P. and the Company, incorporated by
    reference to Exhibit 10.3 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                        
|        | 10 | .68         |  | Employment Letter with John E. Jackson, dated
    February 1, 2002, incorporated by reference to
    Exhibit 10.73 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2002.                                                 
|        | 10 | .69         |  | Employment Letter with Mark S. Berg, dated
    April 17, 2002, incorporated by reference to
    Exhibit 10.74 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2002.                                                      
|        | 10 | .70         |  | Employment Letter with Chad C. Deaton, dated
    August 19, 2002, incorporated by reference to
    Exhibit 10.79 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30,
    2002.                                               
|        | 10 | .71         |  | Letter Agreement by and between Robert O. Pierce
    and Hanover Compressor Company dated September 18, 2002,
    incorporated by reference to Exhibit 10.92 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.   
|        | 10 | .72         |  | Employment Letter with Peter Schreck, dated
    August 22, 2000, incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2003.                                                     
|        | 10 | .73         |  | Employment Letter with Stephen York, dated
    March 6, 2002, incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2003.                                                        
|        | 10 | .74         |  | Separation Agreement with Mark Berg, dated
    February 27, 2004.*                                                                                                                                                                                              
|        | 12 | .1          |  | Computation of ratio of earnings to fixed
    charges.*                                                                                                                                                                                                           
|        | 14 | .1          |  | P.R.I.D.E. in Performance 
    Hanovers Guide to Ethical Business Conduct.*                                                                                                                                                                                     
|        | 21 | .1          |  | List of Subsidiaries.*                                                                                                                                                                                                                                            
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                                                                                                                           
|        | 31 | .1          |  | Certification of the Chief Executive Officer
    pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
    Exchange Act of 1934.*                                                                                                                                
|        | 31 | .2          |  | Certification of the Chief Financial Officer
    pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
    Exchange Act of 1934.*                                                                                                                                
|        | 32 | .1          |  | Certification of the Chief Executive Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                   
|        | 32 | .2          |  | Certification of the Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                   
|        | 99 | .1          |  | Letter from GKH partners regarding wind-up of GKH
    Investments, L.P. and GKH Private Limited, dated
    October 15, 2001, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on October 18, 2001.

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|        |    |             |  |                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 99 | .2          |  | Letter from GKH Partners, L.P. to Mark S. Berg,
    Senior Vice President and General Counsel of the Company, dated
    November 12, 2002, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on November 15, 2002.
|        | 99 | .3          |  | Letter from GKH Partners, L.P. to Mark S.
    Berg, Senior Vice President and General Counsel of the Company,
    dated March 11, 2004, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on March 12, 2004.      



---

* Filed herewith

 Management contract or
compensatory plan or arrangement

(b) Reports on Form 8-K.

During the quarter ended December 31, 2003,
Hanover filed or furnished the following information in current
reports on Form 8-K:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On December 19, 2003, we filed a current
    report on Form 8-K, reporting under Item 5 that we
    issued a press release announcing a settlement with the
    Securities and Exchange Commission. The date of such report (the
    date of the earliest event reported) was December 18, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | On December 16, 2003, we filed a current
    report on Form 8-K, reporting under Item 5 that we
    entered into an underwriting agreement with J.P. Morgan
    Securities Inc., as representative of the several underwriters,
    and Citigroup Global Markets Inc., as independent underwriter,
    in connection with the issuance and sale of $200,000,000
    aggregate principal amount of our 8.625% Senior Notes due
    2010. We also reported that we entered into an underwriting
    agreement with J.P. Morgan Securities Inc., as
    representative of the several underwriters, and
    Simmons & Company International, as independent
    underwriter, in connection with the issuance and sale of
    $143,750,000 aggregate principal amount of our
    4.75% Convertible Senior Notes due 2014. We also reported
    that we closed our new $350,000,000 bank credit facility. In
    addition, we filed the underwriting agreements, senior
    indenture, supplement indentures, forms of notes, opinion of
    Vinson & Elkins L.L.P., credit agreement and guarantee
    and collateral agreement under Item 7. The date of such
    report (the date of the earliest event reported) was
    December 9, 2003.
|
| |  | On December 9, 2003, we filed a current
    report on Form 8-K, reporting under Item 5 that we
    filed a prospectus supplement with the Securities and Exchange
    Commission in connection with the offer and sale for the account
    of Schlumberger Technology Corporation of $262,621,810 aggregate
    principal amount at maturity of our Zero Coupon Subordinated
    Notes due March 31, 2007. We also reported that we had bank
    commitments totaling $345 million for a proposed bank
    credit facility, and we reported the preliminary approval by the
    court of the proposed settlement to resolve all of the
    securities class actions, ERISA class actions and shareholder
    derivative actions previously filed against us and certain other
    individuals. In addition, we filed the prospectus supplement and
    form of proposed credit agreement under Item 7. The date of
    such report (the date of the earliest event reported) was
    December 2, 2003.                                                                                                                                                                                                                                   
|
| |  | On November 18, 2003, we filed a current
    report on Form 8-K, filing under Item 7 our Audited
    Consolidated Financial Statements for the fiscal years ended
    December 31, 2002, 2001 and 2000. The financial statements
    were filed to conform to the 2003 presentation for the
    distributions on our mandatorily redeemable preferred
    securities, now included in interest expense, and the change in
    value of derivative financial instruments, now included in
    leasing expense, as discussed under Item 5. The date of
    such report (the date of the earliest event reported) was
    November 18, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On November 5, 2003, we filed a current
    report on Form 8-K, furnishing under Item 12 a press
    release announcing our financial results for the quarter ended
    September 30, 2003. The date of such report (the date of
    the earliest event reported) was November 5, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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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: March 26, 2004

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. DEATONChad C. Deaton         |  | President and Chief Executive Officer (Principal
    Executive Officer and Director) |  | March 26, 2004
|                                        
|/s/ JOHN E. JACKSONJohn E. Jackson       |  | Chief Financial Officer (Principal Financial and
    Accounting Officer)             |  | March 26, 2004
|                                        
|/s/ VICTOR E. GRIJALVAVictor E. Grijalva |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ TED COLLINS, JR.Ted Collins, Jr.     |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ ROBERT R. FURGASONRobert R. Furgason |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ ALVIN V. SHOEMAKERAlvin V. Shoemaker |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ I. JON BRUMLEYI. Jon Brumley         |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ GORDON HALLGordon Hall               |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ STEPHEN M. PAZUKStephen M. Pazuk     |  | Director                                                                             |  | March 26, 2004
|                                        
|/s/ MARGARET K. DORMANMargaret K. Dorman |  | Director                                                                             |  | March 26, 2004

80



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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

Hanover Compressor Company


In our opinion, the consolidated financial
statements listed in the index appearing under Item 15 (a)
(1) on page 72, present fairly, in all material
respects, the financial position of Hanover Compressor Company
and its subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15 (a) (2) on page 72, presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with 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 discussed in Notes 12 and 9 to the
financial statements, the Company changed its method of
accounting for variable interest entities in 2003 and goodwill
and other intangibles in 2002, respectively.

PricewaterhouseCoopers LLP

Houston, Texas

March 25, 2004


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##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED BALANCE SHEET

|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |         |         |           | 
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------- | -------- | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                            |                                                                                                                             |                                                                                
|                                                            |                                                                                                                             | December 31,                                                                   
|                                                            |                                                                                                                             |                                                                                
|                                                            |                                                                                                                             | 2003                                                                            |                                                       | 2002    
|                                                            |                                                                                                                             |                                                                                 |                                                       |         
|                                                            |                                                                                                                             |                                                                                
|                                                            |                                                                                                                             | (in thousands, except par                                                      
|                                                            |                                                                                                                             | value and share amounts)                                                       
|ASSETS                                                      |                                                                                                                             |                                                                                 |                                                       |         
|Current assets:                                             |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             | Cash and cash equivalents                                                       |                                                       | $        | 56,619  |           |           | $       | 19,011  |          
|                                                            |                                                                                                                             | Restricted cashsecurities settlement escrow                                    |                                                       |          | 29,649  |           |           |         |        |          
|                                                            |                                                                                                                             | Accounts receivable, net of allowance of $5,460
    and $5,162                  |                                                       |          | 195,183 |           |           |         | 211,722 |          
|                                                            |                                                                                                                             | Inventory, net                                                                  |                                                       |          | 155,297 |           |           |         | 166,004 |          
|                                                            |                                                                                                                             | Costs and estimated earnings in excess of
    billings on uncompleted contracts |                                                       |          | 50,128  |           |           |         | 57,346  |          
|                                                            |                                                                                                                             | Prepaid taxes                                                                   |                                                       |          | 4,677   |           |           |         | 7,664   |          
|                                                            |                                                                                                                             | Assets held for sale                                                            |                                                       |          | 17,344  |           |           |         | 33,765  |          
|                                                            |                                                                                                                             | Other current assets                                                            |                                                       |          | 35,105  |           |           |         | 49,933  |          
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             |                                                                                 | Total current assets                                  |          |         | 544,002   |           |         |         | 545,445   | 
|Property, plant and equipment, net                          |                                                                                                                             |                                                                                 | 2,027,654                                             |          |         |           | 1,167,675 |        
|Goodwill, net                                               |                                                                                                                             |                                                                                 | 176,629                                               |          |         |           | 180,519   |        
|Intangible and other assets                                 |                                                                                                                             |                                                                                 | 67,482                                                |          |         |           | 74,058    |        
|Investments in non-consolidated affiliates                  |                                                                                                                             |                                                                                 | 88,718                                                |          |         |           | 150,689   |        
|Assets held for sale, non-current                           |                                                                                                                             |                                                                                 | 13,981                                                |          |         |           | 35,643    |        
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             |                                                                                 | Total assets                                          |          | $       | 2,918,466 |           |         | $       | 2,154,029 | 
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|LIABILITIES AND COMMON STOCKHOLDERS
    EQUITY             |                                                                                                                             |                                                                                 |                                                       |         
|Current liabilities:                                        |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             | Short-term debt                                                                 |                                                       | $        | 32,519  |           |           | $       | 31,997  |          
|                                                            |                                                                                                                             | Current maturities of long-term debt                                            |                                                       |          | 3,511   |           |           |         | 1,744   |          
|                                                            |                                                                                                                             | Accounts payable, trade                                                         |                                                       |          | 53,354  |           |           |         | 72,637  |          
|                                                            |                                                                                                                             | Accrued liabilities                                                             |                                                       |          | 155,441 |           |           |         | 189,639 |          
|                                                            |                                                                                                                             | Advance billings                                                                |                                                       |          | 34,380  |           |           |         | 36,156  |          
|                                                            |                                                                                                                             | Liabilities held for sale                                                       |                                                       |          | 1,128   |           |           |         | 3,257   |          
|                                                            |                                                                                                                             | Billings on uncompleted contracts in excess of
    costs and estimated earnings |                                                       |          | 8,427   |           |           |         | 14,571  |          
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             |                                                                                 | Total current liabilities                             |          |         | 288,760   |           |         |         | 350,001   | 
|Long-term debt                                              |                                                                                                                             |                                                                                 | 1,746,793                                             |          |         |           | 521,203   |        
|Other liabilities                                           |                                                                                                                             |                                                                                 | 72,464                                                |          |         |           | 156,191   |        
|Deferred income taxes                                       |                                                                                                                             |                                                                                 | 28,333                                                |          |         |           | 93,613    |        
|Liabilities held for sale, non-current                      |                                                                                                                             |                                                                                 |                                                      |          |         |           | 19,002    |        
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             |                                                                                 | Total liabilities                                     |          |         | 2,136,350 |           |         |         | 1,140,010 | 
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|Commitments and contingencies
    (Note 19)                 |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|Minority interest                                           |                                                                                                                             |                                                                                 | 28,628                                                |          |         |           | 143       |        
|Mandatorily redeemable convertible preferred
    securities |                                                                                                                             |                                                                                 |                                                      |          |         |           | 86,250    |        
|Common stockholders equity:                                |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            | Common stock, $.001 par value;
    200,000,000 shares authorized; 82,649,629 and
    80,815,209 shares issued, respectively |                                                                                 |                                                       | 83       |         |           |           | 81      |        
|                                                            | Additional paid-in capital                                                                                                  |                                                                                 |                                                       | 856,020  |         |           |           | 841,657 |        
|                                                            | Deferred employee compensationrestricted
    stock grants                                                                  |                                                                                 |                                                       | (5,452   | )       |           |           | (2,285  | )      
|                                                            | Accumulated other comprehensive income (loss)                                                                               |                                                                                 |                                                       | 9,227    |         |           |           | (13,696 | )      
|                                                            | Retained earnings (deficit)                                                                                                 |                                                                                 |                                                       | (104,065 | )       |           |           | 104,194 |        
|                                                            | Treasury stock252,815 and 253,115 common
    shares, at cost, respectively                                                 |                                                                                 |                                                       | (2,325   | )       |           |           | (2,325  | )      
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            | Total common stockholders equity                                                                                           |                                                                                 |                                                       | 753,488  |         |           |           | 927,626 |        
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        
|                                                            |                                                                                                                             |                                                                                 | Total liabilities and common stockholders
    equity |          | $       | 2,918,466 |           |         | $       | 2,154,029 | 
|                                                            |                                                                                                                             |                                                                                 |                                                       |          |         |           |           |        

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

F-2



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##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |         | 
|------------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------- | --------- | ------- | - | ---- | --------- | ------- | - | - | --------- | ------- | 
|                                                                    |                                                            |                                         
|                                                                    |                                                            | Years Ended December 31,                
|                                                                    |                                                            |                                         
|                                                                    |                                                            | 2003                                     |           | 2002    |   | 2001
|                                                                    |                                                            |                                          |           |         |   |     
|                                                                    |                                                            |                                         
|                                                                    |                                                            | (In thousands, except per share amounts)
|Revenues and other income:                                          |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Domestic rentals                                           |                                          | $         | 324,186 |   |      | $         | 328,600 |   |   | $         | 269,679 | 
|                                                                    | International rentals                                      |                                          |           | 206,404 |   |      |           | 189,700 |   |   |           | 131,097 | 
|                                                                    | Parts, service and used equipment                          |                                          |           | 169,023 |   |      |           | 223,845 |   |   |           | 214,872 | 
|                                                                    | Compressor and accessory fabrication                       |                                          |           | 106,896 |   |      |           | 114,009 |   |   |           | 223,519 | 
|                                                                    | Production and processing equipment fabrication            |                                          |           | 260,660 |   |      |           | 149,656 |   |   |           | 184,040 | 
|                                                                    | Equity in income of non-consolidated affiliates            |                                          |           | 23,088  |   |      |           | 18,811  |   |   |           | 9,350   | 
|                                                                    | Other                                                      |                                          |           | 5,093   |   |      |           | 4,189   |   |   |           | 8,403   | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    |                                                            |                                          | 1,095,350 |         |   |      | 1,028,810 |         |   |   | 1,040,960 |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Expenses:                                                           |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Domestic rentals                                           |                                          |           | 127,425 |   |      |           | 122,172 |   |   |           | 95,203  | 
|                                                                    | International rentals                                      |                                          |           | 67,465  |   |      |           | 57,579  |   |   |           | 45,795  | 
|                                                                    | Parts, service and used equipment                          |                                          |           | 126,619 |   |      |           | 179,844 |   |   |           | 152,701 | 
|                                                                    | Compressor and accessory fabrication                       |                                          |           | 96,922  |   |      |           | 99,446  |   |   |           | 188,122 | 
|                                                                    | Production and processing equipment fabrication            |                                          |           | 234,203 |   |      |           | 127,442 |   |   |           | 147,824 | 
|                                                                    | Selling, general and administrative                        |                                          |           | 161,655 |   |      |           | 153,676 |   |   |           | 92,172  | 
|                                                                    | Foreign currency translation                               |                                          |           | 2,548   |   |      |           | 16,753  |   |   |           | 6,658   | 
|                                                                    | Provision for cost of litigation settlement                |                                          |           | 42,991  |   |      |           |        |   |   |           |        | 
|                                                                    | Other                                                      |                                          |           | 2,906   |   |      |           | 27,607  |   |   |           | 9,727   | 
|                                                                    | Depreciation and amortization                              |                                          |           | 172,602 |   |      |           | 151,181 |   |   |           | 88,823  | 
|                                                                    | Goodwill impairment                                        |                                          |           | 35,466  |   |      |           | 52,103  |   |   |           |        | 
|                                                                    | Leasing expense                                            |                                          |           | 43,139  |   |      |           | 90,074  |   |   |           | 78,031  | 
|                                                                    | Interest expense                                           |                                          |           | 89,175  |   |      |           | 43,352  |   |   |           | 23,904  | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    |                                                            |                                          | 1,203,116 |         |   |      | 1,121,229 |         |   |   | 928,960   |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Income (loss) from continuing operations before
    income taxes    |                                                            |                                          | (107,766  | )       |   |      | (92,419   | )       |   |   | 112,000   |        
|Provision for (benefit from) income taxes                           |                                                            |                                          | 784       |         |   |      | (17,576   | )       |   |   | 42,388    |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Income (loss) from continuing operations                            |                                                            |                                          | (108,550  | )       |   |      | (74,843   | )       |   |   | 69,612    |        
|Income (loss) from discontinued operations, net
    of tax          |                                                            |                                          | 1,252     |         |   |      | (875      | )       |   |   | 2,965     |        
|Loss on sale/write-downs of discontinued
    operations, net of tax |                                                            |                                          | (14,051   | )       |   |      | (40,350   | )       |   |   |          |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Income (loss) before cumulative effect of
    accounting changes    |                                                            |                                          | (121,349  | )       |   |      | (116,068  | )       |   |   | 72,577    |        
|Cumulative effect of accounting changes, net of
    tax             |                                                            |                                          | (86,910   | )       |   |      |          |         |   |   | (164      | )      
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Net income (loss)                                                   |                                                            | $                                        | (208,259  | )       |   | $    | (116,068  | )       |   | $ | 72,413    |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Basic earnings (loss) per common share:                             |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Income (loss) from continuing operations                   |                                          | $         | (1.34   | ) |      | $         | (0.94   | ) |   | $         | 0.96    | 
|                                                                    | Income (loss) from discontinued operations, net
    of tax |                                          |           | (0.16   | ) |      |           | (0.52   | ) |   |           | 0.04    | 
|                                                                    | Cumulative effect of accounting changes, net of
    tax    |                                          |           | (1.07   | ) |      |           |        |   |   |           |        | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Net income (loss)                                                   |                                                            | $                                        | (2.57     | )       |   | $    | (1.46     | )       |   | $ | 1.00      |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Diluted earnings (loss) per common share:                           |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Income (loss) from continuing operations                   |                                          | $         | (1.34   | ) |      | $         | (0.94   | ) |   | $         | 0.91    | 
|                                                                    | Income (loss) from discontinued operations, net
    of tax |                                          |           | (0.16   | ) |      |           | (0.52   | ) |   |           | 0.03    | 
|                                                                    | Cumulative effect of accounting changes, net of
    tax    |                                          |           | (1.07   | ) |      |           |        |   |   |           |        | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Net income (loss)                                                   |                                                            | $                                        | (2.57     | )       |   | $    | (1.46     | )       |   | $ | 0.94      |        
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|Weighted average common and equivalent shares
    outstanding:      |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Basic                                                      |                                          |           | 81,123  |   |      |           | 79,500  |   |   |           | 72,355  | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        
|                                                                    | Diluted                                                    |                                          |           | 81,123  |   |      |           | 79,500  |   |   |           | 81,175  | 
|                                                                    |                                                            |                                          |           |         |   |      |           |         |   |   |           |        

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

F-3



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##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(LOSS)

|                                   |                                                                          |                          |          |        |  |      |          |        |   |   |        |        |  
|---------------------------------- | ------------------------------------------------------------------------ | ------------------------ | -------- | ------ |  | ---- | -------- | ------ | - | - | ------ | ------ | -
|                                   |                                                                          |                         
|                                   |                                                                          | Years Ended December 31,
|                                   |                                                                          |                         
|                                   |                                                                          | 2003                     |          | 2002   |  | 2001
|                                   |                                                                          |                          |          |        |  |     
|                                   |                                                                          |                         
|                                   |                                                                          | (in thousands)          
|Net income (loss)                  |                                                                          | $                        | (208,259 | )      |  | $    | (116,068 | )      |   | $ | 72,413 |       
|Other comprehensive income (loss): |                                                                          |                          |          |        |  |      |          |        |   |   |        |       
|                                   | Change in fair value of derivative financial
    instruments, net of tax |                          |          | 5,693  |  |      |          | (8,866 | ) |   |        | (6,073 | )
|                                   | Foreign currency translation adjustment                                  |                          |          | 17,230 |  |      |          | 1,727  |   |   |        | (27    | )
|                                   |                                                                          |                          |          |        |  |      |          |        |   |   |        |       
|Comprehensive income (loss)        |                                                                          | $                        | (185,336 | )      |  | $    | (123,207 | )      |   | $ | 66,313 |       
|                                   |                                                                          |                          |          |        |  |      |          |        |   |   |        |       

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

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##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |          |        |         |          |  
|----------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ---------------------------------------------------------- | ------- | ------- | ------- | -------- | ------- | ------- | -------- | -------- | ------ | ------- | -------- | -
|                                                            |                                                                                     |                                                                               
|                                                            |                                                                                     | Years Ended December 31,                                                      
|                                                            |                                                                                     |                                                                               
|                                                            |                                                                                     | 2003                                                                           |                                                                           | 2002                                                       |         | 2001   
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |        
|                                                            |                                                                                     |                                                                               
|                                                            |                                                                                     | (In thousands)                                                                
|Cash flows from operating activities:                       |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            | Net income (loss)                                                                   |                                                                                | $                                                                         | (208,259                                                   | )       |         | $       | (116,068 | )       |         | $        | 72,413   |       
|                                                            | Adjustments:                                                                        |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |          |       
|                                                            |                                                                                     | Depreciation and amortization                                                  |                                                                           |                                                            | 172,602 |         |         |          | 151,181 |         |          |          | 88,823 |        
|                                                            |                                                                                     | Amortization of debt issuance costs and debt
    discount                      |                                                                           |                                                            | 120     |         |         |          | 121     |         |          |          | 831    |        
|                                                            |                                                                                     | Loss (income) from discontinued operations, net
    of tax                     |                                                                           |                                                            | 12,799  |         |         |          | 41,225  |         |          |          | (2,965 | )      
|                                                            |                                                                                     | Cumulative effect of accounting changes, net of
    tax                        |                                                                           |                                                            | 86,910  |         |         |          |        |         |          |          | 164    |        
|                                                            |                                                                                     | Bad debt expense                                                               |                                                                           |                                                            | 4,028   |         |         |          | 7,091   |         |          |          | 4,860  |        
|                                                            |                                                                                     | Gain on sale of property, plant and equipment                                  |                                                                           |                                                            | (6,347  | )       |         |          | (7,769  | )       |          |          | (3,492 | )      
|                                                            |                                                                                     | Equity in income of non-consolidated affiliates,
    net of dividends received |                                                                           |                                                            | (4,637  | )       |         |          | (2,223  | )       |          |          | (9,350 | )      
|                                                            |                                                                                     | Loss on investments and charges for
    non-consolidated affiliates            |                                                                           |                                                            |        |         |         |          | 15,950  |         |          |          | 4,629  |        
|                                                            |                                                                                     | (Gain) loss on derivative instruments                                          |                                                                           |                                                            | (4,606  | )       |         |          | (3,245  | )       |          |          | 7,849  |        
|                                                            |                                                                                     | Provision for inventory impairment and reserves                                |                                                                           |                                                            | 3,049   |         |         |          | 13,853  |         |          |          | 2,336  |        
|                                                            |                                                                                     | Provision for cost of litigation settlement, in
    excess of cash paid        |                                                                           |                                                            | 39,494  |         |         |          |        |         |          |          |       |        
|                                                            |                                                                                     | Write-down of notes receivable                                                 |                                                                           |                                                            |        |         |         |          | 8,454   |         |          |          |       |        
|                                                            |                                                                                     | Goodwill impairment                                                            |                                                                           |                                                            | 35,466  |         |         |          | 52,103  |         |          |          |       |        
|                                                            |                                                                                     | Restricted stock compensation expense                                          |                                                                           |                                                            | 1,178   |         |         |          | 423     |         |          |          |       |        
|                                                            |                                                                                     | Pay-in-kind interest on long-term notes payable                                |                                                                           |                                                            | 21,048  |         |         |          | 17,163  |         |          |          | 4,285  |        
|                                                            |                                                                                     | Deferred income taxes                                                          |                                                                           |                                                            | (12,407 | )       |         |          | (19,041 | )       |          |          | 30,218 |        
|                                                            |                                                                                     | Changes in assets and liabilities, excluding
    business combinations:        |                                                                           |                                                            |         |         |         |          |         |         |          |          |        |        
|                                                            |                                                                                     |                                                                                | Accounts receivable and notes                                             |                                                            |         | 19,444  |         |          |         | 89,457  |          |          |        | (20,671 | )       
|                                                            |                                                                                     |                                                                                | Inventory                                                                 |                                                            |         | 4,026   |         |          |         | 4,699   |          |          |        | (41,186 | )       
|                                                            |                                                                                     |                                                                                | Costs and estimated earnings versus billings on
    uncompleted contracts |                                                            |         | 16,455  |         |          |         | 33,129  |          |          |        | (32,640 | )       
|                                                            |                                                                                     |                                                                                | Accounts payable and other liabilities                                    |                                                            |         | (33,931 | )       |          |         | (67,132 | )        |          |        | 14,745  |         
|                                                            |                                                                                     |                                                                                | Advance billings                                                          |                                                            |         | (4,213  | )       |          |         | (8,394  | )        |          |        | 20,647  |         
|                                                            |                                                                                     |                                                                                | Other                                                                     |                                                            |         | 19,310  |         |          |         | (16,101 | )        |          |        | 4,401   |         
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by continuing operations                 |         |         | 161,529 |          |         |         | 194,876  |          |        |         | 145,897  |  
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by discontinued operations               |         |         | 3,206   |          |         |         | 841      |          |        |         | 6,877    |  
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by operating activities                  |         |         | 164,735 |          |         |         | 195,717  |          |        |         | 152,774  |  
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|Cash flows from investing activities:                       |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            | Capital expenditures                                                                |                                                                                |                                                                           | (142,466                                                   | )       |         |         | (250,170 | )       |         |          | (639,883 | )     
|                                                            | Payments for deferred lease transaction costs                                       |                                                                                |                                                                           | (1,246                                                     | )       |         |         | (1,568   | )       |         |          | (18,177  | )     
|                                                            | Proceeds from sale of property, plant and
    equipment                             |                                                                                |                                                                           | 26,698                                                     |         |         |         | 69,685   |         |         |          | 590,763  |       
|                                                            | Proceeds from sale of investment in
    non-consolidated affiliates                 |                                                                                |                                                                           |                                                           |         |         |         |         |         |         |          | 3,143    |       
|                                                            | Cash used for business acquisitions, net                                            |                                                                                |                                                                           | (15,000                                                    | )       |         |         | (10,440  | )       |         |          | (386,056 | )     
|                                                            | Proceeds from business divestitures                                                 |                                                                                |                                                                           | 500                                                        |         |         |         |         |         |         |          |         |       
|                                                            | Cash returned from non-consolidated affiliates                                      |                                                                                |                                                                           | 64,837                                                     |         |         |         | 17,429   |         |         |          |         |       
|                                                            | Cash used to acquire investments in and advances
    to non-consolidated affiliates |                                                                                |                                                                           | (500                                                       | )       |         |         |         |         |         |          | (11,865  | )     
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash used in continuing operations                     |         |         | (67,177 | )        |         |         | (175,064 | )        |        |         | (462,075 | )
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by (used in) discontinued
    operations |         |         | 23,707  |          |         |         | (18,639  | )        |        |         | (20,202  | )
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash used in investing activities                      |         |         | (43,470 | )        |         |         | (193,703 | )        |        |         | (482,277 | )
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|Cash flows from financing activities:                       |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            | Borrowings on revolving credit facilities                                           |                                                                                |                                                                           | 145,000                                                    |         |         |         | 141,750  |         |         |          |         |       
|                                                            | Repayments on revolving credit facilities                                           |                                                                                |                                                                           | (274,500                                                   | )       |         |         | (142,250 | )       |         |          | 54,500   |       
|                                                            | Payments for debt issue costs                                                       |                                                                                |                                                                           | (7,464                                                     | )       |         |         | (644     | )       |         |          | (3,390   | )     
|                                                            | Issuance of common stock, net                                                       |                                                                                |                                                                           |                                                           |         |         |         |         |         |         |          | 83,850   |       
|                                                            | Purchase of treasury stock                                                          |                                                                                |                                                                           |                                                           |         |         |         | (1,608   | )       |         |          |         |       
|                                                            | Proceeds from stock options exercised                                               |                                                                                |                                                                           | 6,699                                                      |         |         |         | 6,661    |         |         |          | 2,280    |       
|                                                            | Proceeds from employee stock purchase                                               |                                                                                |                                                                           |                                                           |         |         |         | 277      |         |         |          |         |       
|                                                            | Issuance of convertible senior notes, net                                           |                                                                                |                                                                           | 138,941                                                    |         |         |         |         |         |         |          | 185,537  |       
|                                                            | Issuance of senior notes, net                                                       |                                                                                |                                                                           | 193,698                                                    |         |         |         |         |         |         |          |         |       
|                                                            | Payments of 1999 equipment lease obligations                                        |                                                                                |                                                                           | (200,000                                                   | )       |         |         |         |         |         |          |         |       
|                                                            | Repayment of other debt                                                             |                                                                                |                                                                           | (68,293                                                    | )       |         |         | (7,654   | )       |         |          | (15,571  | )     
|                                                            | Proceeds from employee stockholder notes                                            |                                                                                |                                                                           |                                                           |         |         |         | 120      |         |         |          | 62       |       
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by (used in) continuing
    operations   |         |         | (65,919 | )        |         |         | (3,348   | )        |        |         | 307,268  |  
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash used in discontinued operations                   |         |         | (18,538 | )        |         |         | (884     | )        |        |         | (9       | )
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|                                                            |                                                                                     |                                                                                |                                                                           | Net cash provided by (used in) financing
    activities    |         |         | (84,457 | )        |         |         | (4,232   | )        |        |         | 307,259  |  
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|Effect of exchange rate changes on cash and
    equivalents |                                                                                     |                                                                                | 800                                                                       |                                                            |         |         | (1,962  | )        |         |         | (49      | )       
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|Net increase (decrease) in cash and cash
    equivalents    |                                                                                     |                                                                                | 37,608                                                                    |                                                            |         |         | (4,180  | )        |         |         | (22,293  | )       
|Cash and cash equivalents at beginning of year              |                                                                                     |                                                                                | 19,011                                                                    |                                                            |         |         | 23,191  |          |         |         | 45,484   |         
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         
|Cash and cash equivalents at end of year                    |                                                                                     | $                                                                              | 56,619                                                                    |                                                            |         | $       | 19,011  |          |         | $       | 23,191   |         
|                                                            |                                                                                     |                                                                                |                                                                           |                                                            |         |         |         |          |         |         |          |         

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

F-5



---



##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |          |  
|------------------------------------------------- | -------------------------------------------------------------- | ------------------------ | - | ------ | - | ---- | - | ------- | - |  | - | -------- | -
|                                                  |                                                                |                         
|                                                  |                                                                | Years Ended December 31,
|                                                  |                                                                |                         
|                                                  |                                                                | 2003                     |   | 2002   |   | 2001
|                                                  |                                                                |                          |   |        |   |     
|                                                  |                                                                |                         
|                                                  |                                                                | (in thousands)          
|Supplemental disclosure of cash flow information: |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Interest paid, net of capitalized amounts                      |                          | $ | 49,011 |   |      | $ | 23,263  |   |  | $ | 12,154   |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Income taxes paid (refunded), net                              |                          | $ | 1,129  |   |      | $ | (4,212  | ) |  | $ | 1,723    |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|Supplemental disclosure of noncash transactions:  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Debt paid for property, plant and equipment                    |                          |   |       |   |      | $ | (4,352  | ) |  |   |         |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Assets (received) sold in exchange for note
    receivable     |                          | $ | 3,300  |   |      | $ | 258     |   |  | $ | (1,601   | )
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Common stock issued in exchange for notes
    receivable       |                          | $ | 35     |   |      | $ | 274     |   |  | $ | 1,069    |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Conversion of deferred stock option liability                  |                          | $ | 289    |   |      | $ | 253     |   |  | $ | 1,529    |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|Acquisitions of businesses:                       |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Cash                                                           |                          | $ | 209    |   |      |   |        |   |  |   |         |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Property, plant and equipment acquired                         |                          | $ | 267    |   |      | $ | 11,716  |   |  | $ | 606,271  |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Other assets acquired, net of cash acquired                    |                          | $ | 3,918  |   |      | $ | 102,204 |   |  | $ | 87,865   |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Investments in and advances to non-consolidated
    affiliates |                          | $ | (4,673 | ) |      |   |        |   |  | $ | 140,081  |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Goodwill                                                       |                          | $ | 15,558 |   |      | $ | 5,162   |   |  | $ | 115,131  |  
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Liabilities assumed                                            |                          | $ | (279   | ) |      | $ | (72,209 | ) |  | $ | (118,388 | )
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Debt issued or assumed                                         |                          |   |       |   |      | $ | (36,433 | ) |  | $ | (155,462 | )
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Deferred taxes                                                 |                          |   |       |   |      |   |        |   |  | $ | (35,212  | )
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         
|                                                  | Treasury and common stock issued                               |                          |   |       |   |      |   |        |   |  | $ | (254,230 | )
|                                                  |                                                                |                          |   |        |   |      |   |         |   |  |   |         

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

F-6



---



##### Table of Contents



HANOVER COMPRESSOR COMPANY

CONSOLIDATED STATEMENT OF COMMON
STOCKHOLDERS EQUITY

|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |          |  
|---------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | ---------- |  | ------------- | -- | ------------- |  | ----------- | ------- | ------------- |  | ------------ | ------- | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | -------- | -
|                                                                                         |  |                                   |            |            |  | Accumulated   |    |               |  | Notes       |         | Deferred      |  |             
|                                                                                         |  | Common stock                      |            | Additional |  | other         |    |               |  | receivable- |         | compensation- |  | Retained    
|                                                                                         |  |                                   |            | paid-in    |  | comprehensive |    | Treasury      |  | employee    |         | restricted    |  | earnings    
|                                                                                         |  | Shares                            |            | Amount     |  | capital       |    | income (loss) |  | stock       |         | stockholders  |  | stock grants |         | (deficit)
|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |          
|                                                                                         |  |                                  
|                                                                                         |  | (in thousands, except share data)
|Balance at December 31, 2000                                                             |  |                                   | 66,454,703 |            |  | $             | 66 |               |  | $           | 483,737 |               |  | $            | (457    | )         |  | $ | (717   | ) |  | $ | (1,531 | ) |  | $ |       |   |  | $ | 147,849  |  
|Exercise of stock options                                                                |  |                                   | 250,161    |            |  |               | 1  |               |  |             | 3,808   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Cumulative translation adjustment                                                        |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | (27     | )         |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Change in fair value of derivative financial
    instrument, net of tax                  |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | (6,073  | )         |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Issuance of common stock, net                                                            |  |                                   | 2,500,000  |            |  |               | 2  |               |  |             | 83,848  |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Issuance of common stock for acquisitions                                                |  |                                   | 9,980,540  |            |  |               | 10 |               |  |             | 254,220 |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Issuance of common stock to employees                                                    |  |                                   | 42,775     |            |  |               |   |               |  |             | 1,069   |               |  |              |        |           |  |   |       |   |  |   | (1,069 | ) |  |   |       |   |  |   |         |  
|Repayment of employee stockholder notes                                                  |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   | 62     |   |  |   |       |   |  |   |         |  
|Income tax benefit from stock options exercised                                          |  |                                   |           |            |  |               |   |               |  |             | 1,618   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Other                                                                                    |  |                                   |           |            |  |               |   |               |  |             | 639     |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Net income                                                                               |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   | 72,413   |  
|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2001                                                             |  |                                   | 79,228,179 |            |  | $             | 79 |               |  | $           | 828,939 |               |  | $            | (6,557  | )         |  | $ | (717   | ) |  | $ | (2,538 | ) |  | $ |       |   |  | $ | 220,262  |  
|Exercise of stock options                                                                |  |                                   | 1,422,850  |            |  |               | 2  |               |  |             | 6,912   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Cumulative translation adjustment                                                        |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | 1,727   |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Change in fair value of derivative financial
    instrument, net of tax                  |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | (8,866  | )         |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Issuance of restricted stock grants, net of
    amortization expense                     |  |                                   | 142,630    |            |  |               |   |               |  |             | 2,708   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   | (2,285 | ) |  |   |         |  
|Issuance of common stock to employees                                                    |  |                                   | 21,550     |            |  |               |   |               |  |             | 551     |               |  |              |        |           |  |   |       |   |  |   | (274   | ) |  |   |       |   |  |   |         |  
|Purchase of 147,322 treasury shares at
    $8.96 per share                               |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   | (1,320 | ) |  |   |       |   |  |   |       |   |  |   |         |  
|Purchase of 30,054 treasury shares at
    $9.60 per share                                |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   | (288   | ) |  |   |       |   |  |   |       |   |  |   |         |  
|Repayment of employee stockholder notes                                                  |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   | 120    |   |  |   |       |   |  |   |         |  
|Income tax benefit from stock options exercised                                          |  |                                   |           |            |  |               |   |               |  |             | 2,547   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Reserve for collectibility                                                               |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   | 2,692  |   |  |   |       |   |  |   |         |  
|Net loss                                                                                 |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   | (116,068 | )
|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2002                                                             |  |                                   | 80,815,209 |            |  | $             | 81 |               |  | $           | 841,657 |               |  | $            | (13,696 | )         |  | $ | (2,325 | ) |  | $ |       |   |  | $ | (2,285 | ) |  | $ | 104,194  |  
|Exercise of stock options                                                                |  |                                   | 1,432,636  |            |  |               | 1  |               |  |             | 6,987   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Cumulative translation adjustment                                                        |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | 17,230  |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Change in fair value of derivative financial
    instrument, net of tax                  |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              | 5,693   |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Issuance of restricted stock grants, net of
    forfeitures, net of amortization expense |  |                                   | 400,384    |            |  |               | 1  |               |  |             | 4,345   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   | (3,167 | ) |  |   |         |  
|Issuance of common stock to employees                                                    |  |                                   | 1,400      |            |  |               |   |               |  |             | 35      |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Income tax benefit from stock options exercised                                          |  |                                   |           |            |  |               |   |               |  |             | 2,996   |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   |         |  
|Net loss                                                                                 |  |                                   |           |            |  |               |   |               |  |             |        |               |  |              |        |           |  |   |       |   |  |   |       |   |  |   |       |   |  |   | (208,259 | )
|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2003                                                             |  |                                   | 82,649,629 |            |  | $             | 83 |               |  | $           | 856,020 |               |  | $            | 9,227   |           |  | $ | (2,325 | ) |  | $ |       |   |  | $ | (5,452 | ) |  | $ | (104,065 | )
|                                                                                         |  |                                   |            |            |  |               |    |               |  |             |         |               |  |              |         |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |          |  

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

F-7



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##### Table of Contents



HANOVER COMPRESSOR COMPANY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001




|   |                                                              
|-- | -------------------------------------------------------------
|1. | The Company, Business and Significant
    Accounting Policies

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

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



| |                            
| | ---------------------------
| | Principles of Consolidation

The accompanying consolidated financial
statements include Hanover and its wholly-owned and majority
owned subsidiaries and certain variable interest entities, for
which we are the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Investments in affiliated entities in which we
own more than a 20% interest and do not have a controlling
interest are accounted for using the equity method. Investments
in entities in which we own less than 20% are held at cost.
Prior year amounts have been reclassified to present certain of
our businesses as discontinued operations. (See Note 3.)



| |                                                 
| | ------------------------------------------------
| | Use of Estimates in the Financial
    Statements

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

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



| |                          
| | -------------------------
| | Cash and Cash Equivalents

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

F-8



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                
| | ---------------
| | Restricted Cash

Our restricted cash represents funds held in
escrow for the payment related to the settlement of our
securities-related litigation. (See Note 19.)



| |                    
| | -------------------
| | Revenue Recognition

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

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



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject us
to concentrations of credit risk consist of cash and cash
equivalents, accounts receivable, advances to non-consolidated
affiliates and notes receivable. We believe that the credit risk
in temporary cash investments that we have with financial
institutions is minimal. Trade accounts and notes receivable are
due from companies of varying size engaged principally in oil
and gas activities throughout the world. We review the financial
condition of customers prior to extending credit and generally
do not obtain collateral for trade receivables. Payment terms
are on a short-term basis and in accordance with industry
practice. We consider this credit risk to be limited due to
these companies financial resources, the nature of
products and the services we provide them and the terms of our
rental contracts. Trade accounts receivable is recorded net of
estimated doubtful accounts of approximately $5.5 million
and $5.2 million at December 31, 2003 and 2002,
respectively.



| |          
| | ---------
| | Inventory

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



| |                              
| | -----------------------------
| | Property, Plant and Equipment

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

|                                         |  |  |                | 
|---------------------------------------- |  |  | -------------- | 
|Compression equipment and facilities     |  |  | 4 to 30  years | 
|Buildings                                |  |  | 30 years       | 
|Transportation, shop equipment and other |  |  | 3 to 12  years | 

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

F-9



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

After a review of the estimated economic lives of
our compression fleet, on July 1, 2001 we changed our
estimate of the useful life of certain compression equipment to
range from 15 to 30 years instead of a uniform 15-year
depreciable life. Our new estimated lives are based upon our
experience, maintenance program and the different types of
compressors presently in our rental fleet. We believe our new
estimate reflects the economic useful lives of the compressors
more accurately than a uniform useful life applied to all
compressors regardless of their age or performance
characteristics. We estimate that the effect of this change in
estimate on 2001 was a decrease in depreciation expense of
approximately $5.0 million and an increase in net income of
approximately $3.1 million ($0.04 per share).



| |                  
| | -----------------
| | Computer software

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



| |                                              
| | ---------------------------------------------
| | Long-Lived Assets, other than
    Intangibles

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



| |                                   
| | ----------------------------------
| | Goodwill and Other
    Intangibles

The excess of cost over net assets of acquired
businesses is recorded as goodwill. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 142,
Goodwill and Other Intangible Assets
(SFAS 142). Under SFAS 142, amortization
of goodwill over an estimated useful life is discontinued.
Instead, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. Prior to
adoption of SFAS 142 on January 1, 2002, we amortized
goodwill on a straight-line basis over 15 or 20 years
commencing on the dates of the respective acquisitions except
for goodwill related to business acquisitions after
June 30, 2001. Accumulated amortization was
$13.7 million and $14.3 million at December 31,
2003 and 2002, respectively. Amortization of goodwill totaled
$10.1 million in 2001. (See Note 9.) Identifiable
intangibles are amortized over the assets estimated useful
lives.



| |                            
| | ---------------------------
| | Sale Leaseback Transactions

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



| |             
| | ------------
| | Income Taxes

We account for income taxes using an asset and
liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been

F-10



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

recognized in our financial statements or tax
returns. In estimating future tax consequences, all expected
future events are considered other than enactments that would
change the tax law or rates. A valuation allowance is recognized
for deferred tax assets if it is more likely than not that some
or all of the deferred tax asset will not be realized.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The financial statements of subsidiaries outside
the U.S., except those located in Latin America and highly
inflationary economies, are measured using the local currency as
the functional currency. Assets 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 Latin America and highly inflationary economies, financial
statements are measured using U.S. dollar functional
currency and translation gains and losses are included in net
income (loss).



| |                          
| | -------------------------
| | Earnings Per Common Share

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

The table below indicates the net income for
purposes of computing diluted net income per share from
continuing operations (in thousands):

|                                                                                                 |                                                                 |              |        |        |  
|------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ------------ | ------ | ------ | -
|                                                                                                 |                                                                 | Year Ended  
|                                                                                                 |                                                                 | December 31,
|                                                                                                 |                                                                 |             
|                                                                                                 |                                                                 | 2001        
|                                                                                                 |                                                                 |             
|Diluted net income per share:                                                                    |                                                                 |              |        |       
|                                                                                                 | Net income                                                      |              | $      | 72,413 |  
|                                                                                                 | Income from discontinued operations, net of tax                 |              |        | (2,965 | )
|                                                                                                 | Distributions on convertible subordinated notes,
    net of tax |              |        | 4,142  |  
|                                                                                                 |                                                                 |              |        |       
|Net income for purposes of computing diluted net
    income per share from continuing operations |                                                                 | $            | 73,590 |       
|                                                                                                 |                                                                 |              |        |       

The table below indicates the potential common
shares issuable which were included in computing the dilutive
potential common shares used in diluted earnings (loss) per
common share (in thousands):

|                                                                                                                                |                                                              |              |        |      |  |      |        |    |  |  |        |       | 
|------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------ | ------ | ---- |  | ---- | ------ | -- |  |  | ------ | ----- | 
|                                                                                                                                |                                                              |             
|                                                                                                                                |                                                              | Years Ended 
|                                                                                                                                |                                                              | December 31,
|                                                                                                                                |                                                              |             
|                                                                                                                                |                                                              | 2003         |        | 2002 |  | 2001
|                                                                                                                                |                                                              |              |        |      |  |     
|Weighted average common shares
    outstanding  used in basic earnings (loss) per common
    share                             |                                                              |              | 81,123 |      |  |      | 79,500 |    |  |  | 72,355 |      
|Net dilutive potential common shares issuable:                                                                                  |                                                              |              |        |      |  |      |        |    |  |  |        |      
|                                                                                                                                | On exercise of options and vesting of restricted
    stock   |              |        | **   |  |      |        | ** |  |  |        | 3,991 | 
|                                                                                                                                | On exercise of warrants                                      |              |        | **   |  |      |        | ** |  |  |        | 4     | 
|                                                                                                                                | On conversion of convertible subordinated notes
    due 2029 |              |        | **   |  |      |        | ** |  |  |        | 4,825 | 
|                                                                                                                                | On conversion of convertible senior notes due 2008           |              |        | **   |  |      |        | ** |  |  |        | **    | 
|                                                                                                                                | On conversion of convertible senior notes due 2014           |              |        | **   |  |      |        | ** |  |  |        | **    | 
|                                                                                                                                |                                                              |              |        |      |  |      |        |    |  |  |        |      
|Weighted average common shares and dilutive
    potential common shares  used in dilutive earnings
    (loss) per common share |                                                              |              | 81,123 |      |  |      | 79,500 |    |  |  | 81,175 |      
|                                                                                                                                |                                                              |              |        |      |  |      |        |    |  |  |        |      



---



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

F-11



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below indicates the potential common
shares issuable which were excluded from net dilutive potential
common shares issuable as their effect would be anti-dilutive
(in thousands):

|                                               |                                                                                              |              |        |       |  |      |        |       |  |  |       |       | 
|---------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------ | ------ | ----- |  | ---- | ------ | ----- |  |  | ----- | ----- | 
|                                               |                                                                                              |             
|                                               |                                                                                              | Years Ended 
|                                               |                                                                                              | December 31,
|                                               |                                                                                              |             
|                                               |                                                                                              | 2003         |        | 2002  |  | 2001
|                                               |                                                                                              |              |        |       |  |     
|Net dilutive potential common shares issuable: |                                                                                              |              |        |       |  |      |        |       |  |  |       |      
|                                               | On exercise of options and vesting of restricted
    stock                                   |              |        | 1,264 |  |      |        | 2,442 |  |  |       |      | 
|                                               | On exercise of options-exercise price greater
    than average market value at end of period |              |        | 3,929 |  |      |        | 931   |  |  |       |      | 
|                                               | On exercise of warrants                                                                      |              |        | 4     |  |      |        | 4     |  |  |       |      | 
|                                               | On conversion of convertible subordinated notes
    due 2029                                 |              |        | 4,825 |  |      |        | 4,825 |  |  |       |      | 
|                                               | On conversion of convertible senior notes due 2008                                           |              |        | 4,370 |  |      |        | 4,370 |  |  |       | 3,399 | 
|                                               | On conversion of convertible senior notes due 2014                                           |              |        | 420   |  |      |        |      |  |  |       |      | 
|                                               |                                                                                              |              |        |       |  |      |        |       |  |  |       |      
|                                               |                                                                                              |              | 14,812 |       |  |      | 12,572 |       |  |  | 3,399 |      
|                                               |                                                                                              |              |        |       |  |      |        |       |  |  |       |      



| |                         
| | ------------------------
| | Stock-Based Compensation

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

|                              |                                                                                                          |              |          |        |   |      |          |        |   |   |        |        |  
|----------------------------- | -------------------------------------------------------------------------------------------------------- | ------------ | -------- | ------ | - | ---- | -------- | ------ | - | - | ------ | ------ | -
|                              |                                                                                                          |             
|                              |                                                                                                          | Years Ended 
|                              |                                                                                                          | December 31,
|                              |                                                                                                          |             
|                              |                                                                                                          | 2003         |          | 2002   |   | 2001
|                              |                                                                                                          |              |          |        |   |     
|Net income (loss) as reported |                                                                                                          | $            | (208,259 | )      |   | $    | (116,068 | )      |   | $ | 72,413 |       
|                              | Add back: Restricted stock grant expense, net of
    tax                                                 |              |          | 766    |   |      |          | 275    |   |   |        |       |  
|                              | Deduct: Stock-based employee compensation expense
    determined under the fair value method, net of tax |              |          | (2,628 | ) |      |          | (2,753 | ) |   |        | (3,804 | )
|                              |                                                                                                          |              |          |        |   |      |          |        |   |   |        |       
|Proforma net income (loss)    |                                                                                                          | $            | (210,121 | )      |   | $    | (118,546 | )      |   | $ | 68,609 |       
|                              |                                                                                                          |              |          |        |   |      |          |        |   |   |        |       
|Earnings (loss) per share:    |                                                                                                          |              |          |        |   |      |          |        |   |   |        |       
|                              | Basic as reported                                                                                        |              | $        | (2.57  | ) |      | $        | (1.46  | ) |   | $      | 1.00   |  
|                              | Basic proforma                                                                                           |              | $        | (2.59  | ) |      | $        | (1.49  | ) |   | $      | 0.95   |  
|                              | Diluted as reported                                                                                      |              | $        | (2.57  | ) |      | $        | (1.46  | ) |   | $      | 0.94   |  
|                              | Diluted proforma                                                                                         |              | $        | (2.59  | ) |      | $        | (1.49  | ) |   | $      | 0.90   |  

In 2003 and 2002, we granted 435,000 and
151,000 restricted shares, respectively, of Hanover common
stock to certain employees as part of an incentive compensation
plan. The restricted stock grants vest equally over four years.
As of December 31, 2003, 512,000 restricted shares
were outstanding under our incentive compensation plans. We will
recognize compensation expense equal to the fair value of the
stock at the date of grant over the vesting period related to
these grants. During 2003 and 2002, we recognized
$1.2 million and $0.4 million, respectively, in
compensation expense related to these grants.



| |                     
| | --------------------
| | Comprehensive Income

Components of comprehensive income (loss) are net
income and all changes in equity during a period except those
resulting from transactions with owners. Accumulated other
comprehensive income (loss)

F-12



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

consists of the foreign currency translation
adjustment and changes in the fair value of derivative financial
instruments, net of tax. The following table summarizes our
accumulated other comprehensive income (loss) (in thousands):

|                                                                         |  |              |        |      |  |   |         |  
|------------------------------------------------------------------------ |  | ------------ | ------ | ---- |  | - | ------- | -
|                                                                         |  |             
|                                                                         |  | December 31,
|                                                                         |  |             
|                                                                         |  | 2003         |        | 2002
|                                                                         |  |              |        |     
|Change in fair value of derivative financial
    instruments, net of tax |  | $            | (9,246 | )    |  | $ | (14,939 | )
|Foreign currency translation adjustment                                  |  |              | 18,473 |      |  |   | 1,243   |  
|                                                                         |  |              |        |      |  |   |         |  
|                                                                         |  | $            | 9,227  |      |  | $ | (13,696 | )
|                                                                         |  |              |        |      |  |   |         |  



| |                      
| | ---------------------
| | Financial Instruments

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

In June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). SFAS 133, as amended by
SFAS 137, SFAS 138, and SFAS 149, 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. We adopted SFAS 133 beginning January 1,
2001. (See Note 14.)



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the prior periods
financial statements have been reclassified to conform to the
2003 financial statement classification as more fully discussed
in Notes 3 and 14. These reclassifications have no
impact on net income. See Note 3 for a discussion of
discontinued operations.



|   |                      
|-- | ---------------------
|2. | Business Acquisitions

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



| |                                 
| | --------------------------------
| | Year Ended December 31,
    2003

Belleli Acquisition.In 2002, we increased our ownership of
Belleli to 51% from 20.3% by converting $13.4 million in
loans, together with approximately $3.2 million in accrued
interest thereon, into additional equity ownership and in
November 2002 began consolidating the results of Bellelis
operations. Belleli has three manufacturing facilities, one in
Mantova, Italy and two in the United Arab Emirates (Jebel Ali
and Hamriyah). During 2002, we also purchased certain operating
assets used by Belleli for approximately

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

$22.4 million from a bankruptcy estate of
Bellelis former parent and leased these assets to Belleli
for approximately $1.2 million per year, for a term of
seven years.

In connection with our increase in ownership in
2002, we entered into an agreement with the minority owner of
Belleli that provided the minority owner the right, until
June 30, 2003, to purchase our interest for an amount that
approximated our investment in Belleli. The agreement also
provided us with the right, beginning in July 2003, to purchase
the minority owners interest in Belleli. In addition, the
minority owner historically had been unwilling to provide its
proportionate share of capital to Belleli. We believed that our
ability to maximize value would be enhanced if we were able to
exert greater control through the exercise of our purchase
right. Thus, in August 2003, we exercised our option to acquire
the remaining 49% interest in Belleli for approximately
$15.0 million in order to gain complete control of Belleli.
As a result of these transactions and intervening foreign
exchange rate changes, we recorded $4.8 million in
identifiable intangible assets, with a weighted average life of
approximately 17 years, and $35.5 million in goodwill.

As a result of the war in Iraq, the strengthening
of the Euro and generally unfavorable economic conditions, we
believe that the estimated fair value of Belleli declined
significantly during 2003. Upon gaining complete control of
Belleli and assessing our long-term growth strategy, we
determined that these general factors in combination with the
specific economic factors impacting Belleli had significantly
and adversely impacted the timing and amount of the future cash
flows that we expected Belleli to generate. We currently do not
expect to realize our original growth expectations for Belleli
in the timeframe that we originally forecasted.

During the performance of our annual goodwill
impairment review in the fourth quarter of 2003, we determined
the present value of Bellelis expected future cash flows
was less than our carrying value of Belleli. This resulted in a
full impairment charge for the $35.5 million in goodwill
associated with Belleli. Upon further analysis, it was
determined that the factors resulting in the goodwill impairment
charge were also present during the third quarter of 2003 and
that the exercise of our purchase option in the third quarter of
2003 and the presence of such factors should have resulted in an
interim goodwill impairment test under SFAS 142 and an
impairment charge at that time. We have adjusted our third
quarter results accordingly. (See Note 9.)

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



| |                                 
| | --------------------------------
| | Year Ended December 31,
    2002

In July 2002, we acquired a 92.5% interest in
Wellhead Power Gates, LLC (Gates) for approximately
$14.4 million and had loaned approximately $6 million
to Gates prior to our acquisition. Gates is a developer and
owner of a forty-six megawatt cycle power facility in Fresno
County, California. This investment was accounted for as a
consolidated subsidiary and was classified as an asset held for
sale and its operating results were reported in income (loss)
from discontinued operations, until sold in September 2003. See
Note 3 for a discussion of discontinued operations.

In July 2002, we acquired a 49.0% interest in
Wellhead Power Panoche, LLC (Panoche) for
approximately $6.8 million and had loaned approximately
$5.0 million to Panoche prior to the acquisition of our
interest. Panoche is a developer and owner of a forty-nine
megawatt cycle power facility in Fresno County, California,
which is under contract with the California Department of Water
Resources. This investment was classified as an asset held for
sale and the equity income (loss) from this non-consolidated
subsidiary was reported in income (loss) from discontinued
operations, until sold in June 2003. See Note 3 for a
discussion of discontinued operations.

In July 2002, we acquired certain assets of
Voyager Compression Services, LLC a natural gas compression
services company located in Gaylord, Michigan, for approximately
$2.5 million in cash.

F-14



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

See discussion of 2002 acquisition of Belleli
above.



| |                                 
| | --------------------------------
| | Year Ended December 31,
    2001

In August 2001, we acquired 100% of the issued
and outstanding shares of Production Operators Corporation
(POC) from Schlumberger for $761 million in
cash, our common stock and debt, subject to certain post-closing
adjustments pursuant to the purchase agreement that to date have
resulted in an increase in the purchase price to approximately
$778 million due to an increase in net assets acquired.
Under the terms of the purchase agreement, Schlumberger received
approximately $270 million in cash (excluding the amounts
paid for the increase in net assets), $150 million in a
long-term subordinated note, which in May, 2003 was restructured
as our Zero Coupon Subordinated Notes due March 31, 2007,
and 8,707,693 shares of our common stock, or approximately
11% of our then outstanding shares, which are required to be
held by Schlumberger for at least three years following the
closing date (see Note 11). The ultimate number of shares
issued under the purchase agreement was determined based on the
nominal value of $283 million divided by $32.50 per
share, the 30-day average closing price of Hanover common stock
as defined under the acquisition agreement and subject to a
collar of $41.50 and $32.50. The estimated fair value of the
stock issued was $212.5 million, based on the market value
of the shares at the time the number of shares issued was
determined, reduced by an estimated 20% discount due to the
restrictions on the stocks marketability. The POC
acquisition was accounted for as a purchase and was included in
our financial statements commencing on September 1, 2001.

Additionally, as part of the purchase agreement,
we are required to make a payment of up to $58.0 million
due upon the completion of a financing of the PIGAP II
South American joint venture (PIGAP ) acquired by
Hanover. Because the joint venture failed to execute the
financing on or before December 31, 2002, we had the right
to put our interest in the joint venture back to Schlumberger in
exchange for a return of the purchase price allocated to the
joint venture, plus the net amount of any capital contributions
by Hanover to the joint venture. (See Note 11.)

The purchase price was a negotiated amount
between Hanover and Schlumberger. We believe the purchase price
represented the fair market value of the POC business based on
its assets, customer base, reputation, market position (domestic
and international) and potential for long-term growth. We
incurred approximately $15.0 million in expenses in
connection with the acquisition.

As of December 31, 2003 we had recorded
approximately $68.2 million in goodwill, that will not be
deductible for tax purposes, related to the POC acquisition
which was not amortized in accordance with the transition
provisions of SFAS 142 (See Note 9). In addition, we
recorded $9.8 million in identifiable intangible assets of
which $8.2 million was amortized over a 24 month
weighted average life and $1.6 million is included in our
basis of the PIGAP joint venture and relates to the option to
put the joint venture back to Schlumberger. The purchase price
is subject to a contingent payment by Hanover to Schlumberger
based on the realization of certain tax benefits by Hanover over
the next 15 years. No payments on this contingent
obligation have been made to date.

In June 2001, we acquired the assets of J&R
International for approximately $3.7 million in cash and
17,598 shares of Hanovers common stock valued at
approximately $0.7 million.

In April 2001, we acquired certain assets of
Power Machinery, Inc. for approximately $2.6 million
in cash and 108,625 shares of Hanovers common stock
valued at approximately $3.9 million.

In March 2001, we purchased OEC Compression
Corporation (OEC) in an all-stock transaction for
approximately $101.8 million, including the assumption and
payment of approximately $64.6 million of OEC indebtedness.
We paid an aggregate of approximately 1,145,706 shares of
Hanover common stock to stockholders of OEC. The acquisition was
accounted for under the purchase method of accounting and is
included in our financial statements commencing in April 2001.

F-15



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During 2002 and 2001, we completed other
acquisitions which were not significant either individually or
in the aggregate.



| |                      
| | ---------------------
| | Pro Forma Information

The pro forma information set forth below assumes
the Belleli acquisition is accounted for had the purchase
occurred at the beginning of 2002. The remaining acquisitions
were not considered material for pro forma purposes. 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):

|                                          |  |              |           |  
|----------------------------------------- |  | ------------ | --------- | -
|                                          |  | Years Ended 
|                                          |  | December 31,
|                                          |  | 2002        
|                                          |  |             
|                                          |  | (unaudited) 
|Revenue                                   |  | $            | 1,108,990 |  
|Net income (loss)                         |  |              | (116,262  | )
|Earnings (loss) per common share basic   |  |              | (1.46     | )
|Earnings (loss) per common share diluted |  |              | (1.46     | )



|   |                                                           
|-- | ----------------------------------------------------------
|3. | Discontinued Operations and Other Assets Held
    for Sale

During the fourth quarter of 2002, Hanovers
Board of Directors approved managements plan to dispose of
our non-oilfield power generation projects, which were part of
our domestic rental business, and certain used equipment
businesses, which were part of our parts and service business.
These disposals meet the criteria established for recognition as
discontinued operations under SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
(SFAS 144). SFAS 144 specifically requires
that such amounts must represent a component of a business
comprised of operations and cash flows that can be clearly
distinguished, operationally and for financial reporting
purposes, from the rest of the entity. These businesses are
reflected as discontinued operations in our Consolidated
Statement of Operations. Due to changes in market conditions,
the disposal plan was not completed in 2003. We are continuing
to actively market these assets and have made valuation
adjustments as a result of the change in market conditions. As a
result of our consolidation efforts during 2003, we reclassified
certain closed facilities to assets held for sale. These assets
are expected to be sold within the next 12 months and the
assets and liabilities are reflected as held-for-sale on our
Consolidated Balance Sheet.

In 2003, we recorded a $21.6 million
($14.1 million after tax) charge to write-down our
investment in discontinued operations to their current estimated
market value. During the fourth quarter of 2002, Hanover
recognized a pre-tax charge to discontinued operations of
approximately $52.3 million ($36.5 million after tax)
for the estimated loss in fair-value from carrying value
expected to be realized at the time of disposal. This amount
includes a $19.0 million pre-tax impairment of goodwill.
During the second quarter of 2002, Hanover recognized a pre-tax
write-down of $6.0 million ($3.9 million after tax)
for certain turbines related to the non-oilfield power
generation business which has also been reflected as
discontinued operations.

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

F-16



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the time of the Gates closing. In addition, we
were released from a $12 million letter of credit from us
to GE Capital that was provided as additional credit support for
the Gates capital lease.

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

|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |        | 
|------------------------------------------------------------------ | ----------------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |                                                 |                         
|                                                                   |                                                 | Years Ended December 31,
|                                                                   |                                                 | 2003                     |        | 2002   |   | 2001
|                                                                   |                                                 |                          |        |        |   |     
|Revenues and other:                                                |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|                                                                   | Domestic rentals                                |                          | $      | 4,490  |   |      | $      | 2,870  |  |   | $      |       | 
|                                                                   | Parts, service and used equipment               |                          |        | 17,223 |   |      |        | 20,197 |  |   |        | 29,168 | 
|                                                                   | Equity in income of non-consolidated affiliates |                          |        | 550    |   |      |        | 405    |  |   |        |       | 
|                                                                   | Other                                           |                          |        | (77    | ) |      |        | 52     |  |   |        | 569    | 
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|                                                                   |                                                 |                          | 22,186 |        |   |      | 23,524 |        |  |   | 29,737 |       
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|Expenses:                                                          |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|                                                                   | Domestic rentals                                |                          |        | 1,176  |   |      |        | 363    |  |   |        |       | 
|                                                                   | Parts, service and used equipment               |                          |        | 11,334 |   |      |        | 13,485 |  |   |        | 14,136 | 
|                                                                   | Selling, general and administrative             |                          |        | 6,512  |   |      |        | 8,346  |  |   |        | 8,808  | 
|                                                                   | Depreciation and amortization                   |                          |        |       |   |      |        | 1,672  |  |   |        | 1,737  | 
|                                                                   | Interest expense                                |                          |        | 796    |   |      |        | 481    |  |   |        | 9      | 
|                                                                   | Other                                           |                          |        | 433    |   |      |        | 1,309  |  |   |        |       | 
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|                                                                   |                                                 |                          | 20,251 |        |   |      | 25,656 |        |  |   | 24,690 |       
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|Income (loss) from discontinued operations before
    income taxes |                                                 |                          | 1,935  |        |   |      | (2,132 | )      |  |   | 5,047  |       
|Provision for (benefit from) income taxes                          |                                                 |                          | 683    |        |   |      | (1,257 | )      |  |   | 2,082  |       
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       
|Income (loss) from discontinued operations                         |                                                 | $                        | 1,252  |        |   | $    | (875   | )      |  | $ | 2,965  |       
|                                                                   |                                                 |                          |        |        |   |      |        |        |  |   |        |       

Summary balance sheet data for assets held for
sale as of December 31, 2003 (in thousands):

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

F-17



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Summary balance sheet data for discontinued
operations as of December 31, 2002 (in thousands):

|                             |                                 |                          |        |              |        |       |        |        |        |   |        |        |        | 
|---------------------------- | ------------------------------- | ------------------------ | ------ | ------------ | ------ | ----- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                             |                                 |                          |        | Non-Oilfield |        |      
|                             |                                 | Used                     |        | Power        |        |      
|                             |                                 | Equipment                |        | Generation   |        | Total
|                             |                                 |                          |        |              |        |      
|Current assets               |                                 | $                        | 20,099 |              |        | $     | 13,666 |        |        | $ | 33,765 |       
|Property plant and equipment |                                 |                          | 858    |              |        |       | 28,103 |        |        |   | 28,961 |       
|Non-current assets           |                                 |                          |       |              |        |       | 6,682  |        |        |   | 6,682  |       
|                             |                                 |                          |        |              |        |       |        |        |        |   |        |       
|                             | Total assets held for sale      |                          |        | 20,957       |        |       |        | 48,451 |        |   |        | 69,408 |       
|                             |                                 |                          |        |              |        |       |        |        |        |   |        |       
|Current liabilities          |                                 |                          |       |              |        |       | 3,257  |        |        |   | 3,257  |       
|Non-current liabilities      |                                 |                          |       |              |        |       | 19,002 |        |        |   | 19,002 |       
|                             |                                 |                          |        |              |        |       |        |        |        |   |        |       
|                             | Total liabilities held for sale |                          |        |             |        |       |        | 22,259 |        |   |        | 22,259 |       
|                             |                                 |                          |        |              |        |       |        |        |        |   |        |       
|                             |                                 | Net assets held for sale |        | $            | 20,957 |       |        | $      | 26,192 |   |        | $      | 47,149 | 
|                             |                                 |                          |        |              |        |       |        |        |        |   |        |       



|   |          
|-- | ---------
|4. | Inventory

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

|                   |  |              |         |      |  |   |         | 
|------------------ |  | ------------ | ------- | ---- |  | - | ------- | 
|                   |  |             
|                   |  | December 31,
|                   |  |             
|                   |  | 2003         |         | 2002
|                   |  |              |         |     
|Parts and supplies |  | $            | 114,063 |      |  | $ | 114,833 | 
|Work in progress   |  |              | 29,412  |      |  |   | 37,790  | 
|Finished goods     |  |              | 11,822  |      |  |   | 13,381  | 
|                   |  |              |         |      |  |   |         | 
|                   |  | $            | 155,297 |      |  | $ | 166,004 | 
|                   |  |              |         |      |  |   |         | 



|                                                                                                                                                                                                                                                                                                                                                                                                                             | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|During the year ended December 31, 2003,
    2002 and 2001 we recorded approximately $3.0 million,
    $13.9 million and $2.3 million, respectively, in
    inventory write-downs and reserves for parts inventory which was
    either obsolete, excess or carried at a price above market
    value. As of December 31, 2003 and 2002, we had inventory
    reserves of $12.7 million and $14.2 million,
    respectively. | 



|   |                                                              
|-- | -------------------------------------------------------------
|5. | Compressor and Production Equipment
    Fabrication Contracts

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

|                                        |  |              |          |      |  |   |          |  
|--------------------------------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                                        |  |             
|                                        |  | December 31.
|                                        |  |             
|                                        |  | 2003         |          | 2002
|                                        |  |              |          |     
|Costs incurred on uncompleted contracts |  | $            | 366,626  |      |  | $ | 234,670  |  
|Estimated earnings                      |  |              | 47,782   |      |  |   | 21,073   |  
|                                        |  |              |          |      |  |   |          |  
|                                        |  |              | 414,408  |      |  |   | 255,743  |  
|Less  billings to date                 |  |              | (372,707 | )    |  |   | (212,968 | )
|                                        |  |              |          |      |  |   |          |  
|                                        |  | $            | 41,701   |      |  | $ | 42,775   |  
|                                        |  |              |          |      |  |   |          |  

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

|                                                                                |  |              |        |      |  |   |         |  
|------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------- | -
|                                                                                |  |             
|                                                                                |  | December 31,
|                                                                                |  |             
|                                                                                |  | 2003         |        | 2002
|                                                                                |  |              |        |     
|Costs and estimated earnings in excess of
    billings on uncompleted contracts |  | $            | 50,128 |      |  | $ | 57,346  |  
|Billings on uncompleted contracts in excess of
    costs and estimated earnings |  |              | (8,427 | )    |  |   | (14,571 | )
|                                                                                |  |              |        |      |  |   |         |  
|                                                                                |  | $            | 41,701 |      |  | $ | 42,775  |  
|                                                                                |  |              |        |      |  |   |         |  

F-18



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|6. | Property, plant and equipment

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

|                                                              |  |              |           |      |  |   |           |  
|------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                                                              |  |             
|                                                              |  | December 31,
|                                                              |  |             
|                                                              |  | 2003         |           | 2002
|                                                              |  |              |           |     
|Compression equipment, facilities and other
    rental assets |  | $            | 2,407,873 |      |  | $ | 1,261,241 |  
|Land and buildings                                            |  |              | 80,142    |      |  |   | 86,732    |  
|Transportation and shop equipment                             |  |              | 77,912    |      |  |   | 75,443    |  
|Other                                                         |  |              | 41,741    |      |  |   | 31,888    |  
|                                                              |  |              |           |      |  |   |           |  
|                                                              |  |              | 2,607,668 |      |  |   | 1,455,304 |  
|Accumulated depreciation                                      |  |              | (580,014  | )    |  |   | (287,629  | )
|                                                              |  |              |           |      |  |   |           |  
|                                                              |  | $            | 2,027,654 |      |  | $ | 1,167,675 |  
|                                                              |  |              |           |      |  |   |           |  

Depreciation expense was $160.6 million,
$139.4 million and $73.6 million in 2003, 2002 and
2001, respectively. Depreciation expense for 2003 and 2002
includes $14.3 million and $34.5 million, respectively
for the impairment of certain idle units of our compression
fleet that are being retired and the acceleration of
depreciation of certain plants and facilities expected to be
sold or abandoned. Assets under construction of
$81.3 million and $116.4 million are included in
compression equipment, facilities and other rental assets at
December 31, 2003 and 2002, respectively. We capitalized
$1.0 million, $2.5 million and $2.8 million of
interest related to construction in process during 2003, 2002,
and 2001, respectively.

On July 1, 2003, we adopted the provisions
of FIN 46 as they relate to the special purpose entities
that lease compression equipment to us. As a result, we added
approximately $1,089.4 million in compressor equipment
assets, $192.3 million of accumulated depreciation
(including approximately $58.6 million of accumulated
depreciation related to periods before the sale and leaseback of
the equipment), $1,105.0 million in debt and
$34.6 million in minority interest obligations to our
balance sheet, and we reversed $108.8 million of deferred
gains that were recorded on our balance sheet in Other
liabilities as a result of the sale leaseback transactions. See
Note 12 and 22 for a discussion of the impact of our
partial adoption of FIN 46.

In December 2003, we exercised our purchase
option under the 1999 compression equipment operating lease. As
of December 31, 2003, the remaining compression assets
owned by the entities that lease equipment to us but are now
included in property, plant and equipment in our consolidated
financial statements had a net book value of approximately
$804.0 million, including improvements made to these assets
after the sale leaseback transactions.



|   |                            
|-- | ---------------------------
|7. | Intangible and Other Assets

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

|                                                          |  |              |         |      |  |   |         |  
|--------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                          |  |             
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2003         |         | 2002
|                                                          |  |              |         |     
|Deferred debt issuance and leasing transactions
    costs |  | $            | 52,633  |      |  | $ | 44,396  |  
|Notes receivable                                          |  |              | 7,319   |      |  |   | 12,769  |  
|Intangibles                                               |  |              | 9,922   |      |  |   | 27,602  |  
|Other                                                     |  |              | 12,770  |      |  |   | 10,983  |  
|                                                          |  |              |         |      |  |   |         |  
|                                                          |  |              | 82,644  |      |  |   | 95,750  |  
|Accumulated amortization                                  |  |              | (15,162 | )    |  |   | (21,692 | )
|                                                          |  |              |         |      |  |   |         |  
|                                                          |  | $            | 67,482  |      |  | $ | 74,058  |  
|                                                          |  |              |         |      |  |   |         |  

F-19



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Notes receivable result primarily from customers
for sales of equipment or advances to other parties in the
ordinary course of business. During 2003, we sold our ownership
positions in two non-oilfield power generation projects and
received a portion of the proceeds in notes. (See Note 3.)
During 2002, we recorded a charge in other expense to reserve
for certain employee notes. (See Note 20.)

See Note 18 for a discussion of related
party notes receivable.

Intangible assets consisted of the following:

|                                                         |  |                         |        |                         |  |          |         |              |  |   |        |  |  |   |         |  
|-------------------------------------------------------- |  | ----------------------- | ------ | ----------------------- |  | -------- | ------- | ------------ |  | - | ------ |  |  | - | ------- | -
|                                                         |  |                         |        |                        
|                                                         |  | As of December 31, 2003 |        | As of December 31, 2002
|                                                         |  |                         |        |                        
|                                                         |  | Gross                   |        |                         |  | Gross    |         |             
|                                                         |  | carrying                |        | Accumulated             |  | carrying |         | Accumulated 
|                                                         |  | amount                  |        | amortization            |  | amount   |         | amortization
|                                                         |  |                         |        |                         |  |          |         |             
|                                                         |  |                        
|                                                         |  | (in thousands)         
|Deferred debt issuance and leasing transaction
    costs |  | $                       | 52,633 |                         |  | $        | (12,538 | )            |  | $ | 44,396 |  |  | $ | (14,179 | )
|Marketing related                                        |  |                         | 4,419  |                         |  |          | (1,482  | )            |  |   | 4,465  |  |  |   | (618    | )
|Customer related                                         |  |                         | 3,390  |                         |  |          | (490    | )            |  |   | 1,881  |  |  |   | (20     | )
|Technology based                                         |  |                         | 1,463  |                         |  |          | (206    | )            |  |   |       |  |  |   |        |  
|Contract based                                           |  |                         | 650    |                         |  |          | (446    | )            |  |   | 21,256 |  |  |   | (6,875  | )
|                                                         |  |                         |        |                         |  |          |         |              |  |   |        |  |  |   |         |  
|                                                         |  | $                       | 62,555 |                         |  | $        | (15,162 | )            |  | $ | 71,998 |  |  | $ | (21,692 | )
|                                                         |  |                         |        |                         |  |          |         |              |  |   |        |  |  |   |         |  

In 2003, upon the acquisition of the remaining
49% interest of Belleli, certain contract based intangibles were
reclassified to goodwill.

Amortization of intangible and other assets
totaled $12.0 million, $11.8 million and
$5.1 million in 2003, 2002 and 2001, respectively.
Estimated future intangible amortization expense is (in
thousands):

|           |      |   |        |        | 
|---------- | ---- | - | ------ | ------ | 
|           | 2004 |   | $      | 10,306 | 
|           | 2005 |   |        | 8,413  | 
|           | 2006 |   |        | 7,170  | 
|           | 2007 |   |        | 5,277  | 
|           | 2008 |   |        | 3,795  | 
|Thereafter |      |   | 12,432 |       
|           |      |   |        |       
|           |      | $ | 47,393 |       
|           |      |   |        |       



|   |                                               
|-- | ----------------------------------------------
|8. | Investments in Non-Consolidated
    Affiliates

Investments in affiliates that are not controlled
by Hanover but where we have the ability to exercise significant
influence over the operations are accounted for using the equity
method. Our share of net income or losses of these affiliates is
reflected in the Consolidated Statement of Operations as Equity
in income of non-consolidated affiliates. Our primary equity
method investments are comprised of entities that own,
fabricate, operate, service and maintain compression and other
related facilities. Our equity method investments totaled
approximately $87.6 million and $148.8 million at
December 31, 2003 and 2002, respectively.

F-20



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Our ownership interest and location of each
equity method investee at December 31, 2003 is as follows:

|                                        |  |           |       |          |  |                  |               |  |  |  |                              | 
|--------------------------------------- |  | --------- | ----- | -------- |  | ---------------- | ------------- |  |  |  | ---------------------------- | 
|                                        |  | Ownership |       |          |  |                 
|                                        |  | Interest  |       | Location |  | Type of Business
|                                        |  |           |       |          |  |                 
|Pigap II                                |  |           | 30.0% |          |  |                  | Venezuela     |  |  |  | Gas Compression Plant        | 
|El Furrial                              |  |           | 33.3% |          |  |                  | Venezuela     |  |  |  | Gas Compression Plant        | 
|Simco/ Harwat Consortium                |  |           | 35.5% |          |  |                  | Venezuela     |  |  |  | Gas Compression Plant        | 
|Hanover Measurement Services Company LP |  |           | 50.4% |          |  |                  | United States |  |  |  | Monitoring Services          | 
|Collicutt Energy Services Ltd.          |  |           | 24.1% |          |  |                  | Canada        |  |  |  | Compression Service Provider | 
|CrystaTech, Inc.                        |  |           | 35.0% |          |  |                  | United States |  |  |  | Process Technology Company   | 

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

|                                    |  |              |         |      |  |   |         | 
|----------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                    |  |             
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2003         |         | 2002
|                                    |  |              |         |     
|Current assets                      |  | $            | 176,925 |      |  | $ | 140,314 | 
|Non-current assets                  |  |              | 585,335 |      |  |   | 575,985 | 
|Current liabilities, excluding debt |  |              | 43,753  |      |  |   | 53,474  | 
|Debt payable                        |  |              | 409,157 |      |  |   | 182,288 | 
|Other non-current liabilities       |  |              | 36,114  |      |  |   | 14,193  | 
|Owners equity                      |  |              | 273,236 |      |  |   | 466,344 | 

Summarized earnings information for these
entities for the years ended December 31, 2003, 2002 and
2001 follows (on a 100% basis, in thousands):

|                 |  |                          |         |      |  |         |         |  |  |   |         | 
|---------------- |  | ------------------------ | ------- | ---- |  | ------- | ------- |  |  | - | ------- | 
|                 |  |                         
|                 |  | Years Ended December 31,
|                 |  |                         
|                 |  | 2003                     |         | 2002 |  | 2001(1)
|                 |  |                          |         |      |  |        
|Revenues         |  | $                        | 277,575 |      |  | $       | 288,268 |  |  | $ | 201,581 | 
|Operating income |  |                          | 136,998 |      |  |         | 85,907  |  |  |   | 46,097  | 
|Pretax income    |  |                          | 72,054  |      |  |         | 76,519  |  |  |   | 25,417  | 



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts for the joint ventures acquired in
    connection with the POC business acquisition are included from
    September 1, 2001.

The most significant investments are the joint
ventures (Pigap II, El Furrial and Simco/ Harwat
Consortium) acquired in connection with the POC acquisition
completed in August 2001. At December 31, 2003 and 2002,
these ventures account for approximately $79.4 and
$141.0 million of our equity investments, respectively, and
generated equity in earnings for 2003, 2002 and 2001 of
approximately $21.7 million, $21.7 million and
$8.1 million. During 2003 and 2002, we received
approximately $18.5 million and $16.6 million in
dividends from these joint ventures. In connection with our
investment in El Furrial and Simco/ Harwat Consortium, we
guaranteed our portion of the debt in the joint venture related
to these projects. At December 31, 2003 and 2002 we have
guaranteed approximately $52.3 million and
$56.7 million, respectively, of the debt which is on these
joint venture books. These amounts are not recorded on
Hanovers books.

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

F-21



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During 2003, we acquired a 35% interest in
CrystaTech, Inc. a process technology company, for approximately
$0.5 million.

The financial data for 2001 includes Belleli.
Effective January 2001, we agreed to provide certain
facilitation services to Belleli and provide Belleli with
project financing including necessary guarantees, bonding
capacity and other collateral on an individual project basis. We
received $1.7 million from Belleli in 2001 for our
facilitation services. In November 2002 and August 2003, Hanover
acquired additional interest in Belleli bringing the total
ownership to 100%. The increase in ownership in November 2002,
required that we record our investment in Belleli using the
consolidation method of accounting rather than equity method
accounting. The results of Bellelis operations subsequent
to the acquisition of the controlling interest in November 2002,
and the assets and liabilities of Belleli have been consolidated
in our financial statements. (See Note 2.)

In the normal course of business, we engage in
purchase and sale transactions with Collicutt Energy Services
Ltd. During the years ended December 31, 2003, 2002 and
2001, we had sales to this related party of $0.3 million,
$0.9 million and $2.6 million respectively; and
purchases of $6.1 million, $19.6 million and
$19.2 million, respectively. At December 31, 2003 and
2002, we had a net payable to this related party of
$0.8 million and $0.1 million, respectively. In 2002,
due to permanent decline in the market value of our investment
in Collicutt Energy Services Ltd., we recorded to Other expense
an impairment of $5.0 million.

We also hold interests in companies in which we
do not exercise significant influence over the operations. These
investments are accounted for using the cost method. Cost method
investments totaled approximately $1.1 million and
$1.9 million at December 31, 2003 and 2002,
respectively. During 2002, we determined that certain of our
cost method investments were permanently impaired and therefore
recorded in Other expense impairment charges amounting to
$7.1 million.

In May 2000, we acquired common stock of Aurion
Technologies, Inc. (Aurion), a technology
company formed to develop remote monitoring and data collection
services for the compression industry, for $2.5 million in
cash. In 2001, we purchased additional shares for approximately
$1.3 million, advanced $2.7 million to Aurion and had
an accounts receivable of $1.1 million. Aurion filed for
bankruptcy protection in March 2002, and accordingly, we
recorded in Other expense approximately $5.0 million during
the year ended December 31, 2001 to impair our investment
and the unrecoverable amount of the advances. During 2002, we
recorded an additional charge related to Aurion of
$3.9 million.



|   |         
|-- | --------
|9. | Goodwill

In January 2002,we adopted SFAS 142. Under
SFAS 142, amortization of goodwill over an estimated useful
life was discontinued. Instead, goodwill will be reviewed for
impairment annually or whenever events indicate impairment may
have occurred. The standard also requires acquired intangible
assets to be recognized separately and amortized as appropriate.
The adoption of SFAS 142 has had an impact on
Hanovers financial statements, due to the discontinuation
of goodwill amortization expense.

The provisions of SFAS 142 require us to
identify our reporting units and perform an annual impairment
assessment of the goodwill attributable to each reporting units.
We determined that our reporting units are the same as our
business segments, except for our production and processing
equipment business that we evaluated at one level below our
business segments. We perform our annual impairment assessment
in the fourth quarter of the year and determine the fair value
of reporting units using a combination of the expected present
value of future cash flows and the market approach.

Due to a downturn in our business and changes in
the business environment in which we operate, we completed an
additional impairment analysis as of June 30, 2002. As a
result of the test performed as of June 30, 2002, we
recorded a $47.5 million impairment of goodwill
attributable to our production and

F-22



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

processing equipment fabrication business unit.
In the fourth quarter of 2002, we recorded a $4.6 million
goodwill impairment related to our pump division.

During 2003, we performed an impairment review of
goodwill and because the present value of Bellelis
expected cash flows was less than the book value of our
investment in Belleli, we determined that a $35.5 million
impairment charge should be recorded on the goodwill associated
with Belleli. (See Note 2.)

The table below presents the change in the net
carrying amount of goodwill for the years ended
December 31, 2003 and 2002 (in thousands):

|                                     |       |              |        |              |  |             |        |            |  |              |        |        |  |   |         |         |   |   |        |         | 
|------------------------------------ | ----- | ------------ | ------ | ------------ |  | ----------- | ------ | ---------- |  | ------------ | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------- | 
|                                     |       |              |        |              |  | Purchase    |        |            |  |             
|                                     |       |              |        |              |  | Adjustment  |        |            |  |             
|                                     |       | December 31, |        |              |  | and Other   |        | Goodwill   |  | December 31,
|                                     |       | 2002         |        | Acquisitions |  | Adjustments |        | Impairment |  | 2003        
|                                     |       |              |        |              |  |             |        |            |  |             
|Domestic rentals                     |       | $            | 94,655 |              |  | $           |       |            |  | $            | 249    |        |  | $ |        |         |   | $ | 94,904 |        
|International rentals                |       |              | 34,659 |              |  |             |       |            |  |              | (377   | )      |  |   |        |         |   |   | 34,282 |        
|Parts, service and used equipment    |       |              | 32,691 |              |  |             | 558    |            |  |              | (379   | )      |  |   |        |         |   |   | 32,870 |        
|Compressor and accessory fabrication |       |              | 14,573 |              |  |             |       |            |  |              |       |        |  |   |        |         |   |   | 14,573 |        
|Production and processing equipment  |       |              | 3,941  |              |  |             | 15,000 |            |  |              | 16,525 |        |  |   | (35,466 | )       |   |   |       |        
|                                     |       |              |        |              |  |             |        |            |  |              |        |        |  |   |         |         |   |   |        |        
|                                     | Total |              | $      | 180,519      |  |             | $      | 15,558     |  |              | $      | 16,018 |  |   | $       | (35,466 | ) |   | $      | 176,629 | 
|                                     |       |              |        |              |  |             |        |            |  |              |        |        |  |   |         |         |   |   |        |        

|                                     |       |              |        |              |  |             |       |              |  |            |       |              |  |   |         |         |   |   |         |         |   |   |        |         | 
|------------------------------------ | ----- | ------------ | ------ | ------------ |  | ----------- | ----- | ------------ |  | ---------- | ----- | ------------ |  | - | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------- | 
|                                     |       |              |        |              |  |             |       | Goodwill     |  |            |       |             
|                                     |       |              |        |              |  | Purchase    |       | Written Off  |  |            |       |             
|                                     |       |              |        |              |  | Adjustment  |       | Related to   |  |            |       |             
|                                     |       | December 31, |        |              |  | and Other   |       | Discontinued |  | Goodwill   |       | December 31,
|                                     |       | 2001         |        | Acquisitions |  | Adjustments |       | Operations   |  | Impairment |       | 2002        
|                                     |       |              |        |              |  |             |       |              |  |            |       |             
|Domestic rentals                     |       | $            | 89,696 |              |  | $           |      |              |  | $          | 4,959 |              |  | $ |        |         |   | $ |        |         |   | $ | 94,655 |        
|International rentals                |       |              | 33,984 |              |  |             |      |              |  |            | 675   |              |  |   |        |         |   |   |        |         |   |   | 34,659 |        
|Parts, service and used equipment    |       |              | 51,822 |              |  |             |      |              |  |            | (121  | )            |  |   | (19,010 | )       |   |   |        |         |   |   | 32,691 |        
|Compressor and accessory fabrication |       |              | 19,176 |              |  |             |      |              |  |            |      |              |  |   |        |         |   |   | (4,603  | )       |   |   | 14,573 |        
|Production and processing equipment  |       |              | 47,500 |              |  |             | 3,941 |              |  |            |      |              |  |   |        |         |   |   | (47,500 | )       |   |   | 3,941  |        
|                                     |       |              |        |              |  |             |       |              |  |            |       |              |  |   |         |         |   |   |         |         |   |   |        |        
|                                     | Total |              | $      | 242,178      |  |             | $     | 3,941        |  |            | $     | 5,513        |  |   | $       | (19,010 | ) |   | $       | (52,103 | ) |   | $      | 180,519 | 
|                                     |       |              |        |              |  |             |       |              |  |            |       |              |  |   |         |         |   |   |         |         |   |   |        |        



---

Additions to goodwill for our production and
processing segment for 2003 and 2002 relate to our acquisition
of Belleli. (See Note 2).

Hanovers adjusted net income and earnings
per share, adjusted to exclude goodwill amortization expense,
for the twelve months ended December 31, 2001 is as follows
(in thousands, except per share data):

|                                        |  |      |        | 
|--------------------------------------- |  | ---- | ------ | 
|                                        |  | 2001
|                                        |  |     
|Net income                              |  | $    | 72,413 | 
|Goodwill amortization, net of tax       |  |      | 8,846  | 
|                                        |  |      |        | 
|Adjusted net income                     |  | $    | 81,259 | 
|                                        |  |      |        | 
|Basic earnings per share, as reported   |  | $    | 1.00   | 
|Goodwill amortization, net of tax       |  |      | 0.12   | 
|                                        |  |      |        | 
|Adjusted basic earnings per share       |  | $    | 1.12   | 
|                                        |  |      |        | 
|Diluted earnings per share, as reported |  | $    | 0.94   | 
|Goodwill amortization, net of tax       |  |      | 0.11   | 
|                                        |  |      |        | 
|Adjusted diluted earnings per share     |  | $    | 1.05   | 
|                                        |  |      |        | 

F-23



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                    
|--- | -------------------
|10. | Accrued Liabilities

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

|                                                          |  |              |         |      |  |   |         | 
|--------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                                          |  |             
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2003         |         | 2002
|                                                          |  |              |         |     
|Accrued salaries, bonuses and other employee
    benefits |  | $            | 20,533  |      |  | $ | 21,024  | 
|Accrued income and other taxes                            |  |              | 15,948  |      |  |   | 24,095  | 
|Accrued leasing expense                                   |  |              |        |      |  |   | 23,465  | 
|Additional purchase price for POC                         |  |              |        |      |  |   | 60,740  | 
|Current portion of hedge instruments                      |  |              | 11,703  |      |  |   | 16,082  | 
|Litigation settlement accrual                             |  |              | 32,692  |      |  |   |        | 
|Accrued interest                                          |  |              | 23,228  |      |  |   | 2,939   | 
|Accrued other                                             |  |              | 51,337  |      |  |   | 41,294  | 
|                                                          |  |              |         |      |  |   |         | 
|                                                          |  | $            | 155,441 |      |  | $ | 189,639 | 
|                                                          |  |              |         |      |  |   |         | 

The decrease of $60.7 million for the
additional purchase price for POC is due to the reclassification
and repayment of a $58 million contingent liability and
accrued interest associated with the PIGAP II joint venture
that was restructured into the PIGAP Note. (See Note 2
and 11.)

Beginning in July 2003, payments accrued under
our sale leaseback transactions which were previously included
in accrued leasing are included in accrued interest as a result
of adopting the provisions of FIN 46 and consolidating the
special purpose entities that lease compression equipment to us.
(See Note 12.)

In December 2002, we announced a plan to
consolidate certain of our manufacturing facilities and to
terminate approximately 500 employees worldwide during 2003. In
connection with the planned severance, we recorded an expense to
selling, general and administrative expenses for
$2.7 million for estimated termination benefits and the
amount is included in accrued other liabilities. As of
December 31, 2003, $2.0 million had been paid out for
the planned severance and we reversed the remaining balance.
During the fourth quarter of 2003, we identified additional
headcount reductions and implemented a plan to close two
additional facilities and recorded a $0.7 million expense.



|    |     
|--- | ----
|11. | Debt

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

|                                   |  |              |        |      |  |   |        | 
|---------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                   |  |             
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2003         |        | 2002
|                                   |  |              |        |     
|Belleli factored receivables      |  | $            | 13,261 |      |  | $ | 15,970 | 
|Belleli revolving credit facility |  |              | 16,141 |      |  |   | 11,964 | 
|Other, interest at 5.0%, due 2004  |  |              | 3,117  |      |  |   | 4,063  | 
|                                   |  |              |        |      |  |   |        | 
|Short-term debt                    |  | $            | 32,519 |      |  | $ | 31,997 | 
|                                   |  |              |        |      |  |   |        | 

In November 2002, we increased our ownership in
Belleli to 51%. (See Note 2.) Belleli has financed its
operations through the factoring of its receivables. Such
factoring is typically short term in nature and at
December 31, 2003 bore interest at a weighted average rate
of 4.0%. In addition, Bellelis revolving credit facilities
bore interest at a weighted average rate of 3.2% and 3.0% at
December 31, 2003 and 2002, respectively. These revolving
credit facilities expire in 2004 and are partially secured by
letters of credit issued and outstanding under Hanovers
bank credit facility of $10.2 million as of
December 31, 2003.

F-24



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                                                                                                |  |              |           |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | ------- | -
|                                                                                                                |  |             
|                                                                                                                |  | December 31,
|                                                                                                                |  |             
|                                                                                                                |  | 2003         |           | 2002
|                                                                                                                |  |              |           |     
|Bank credit facility due November 2004                                                                          |  | $            |          |      |  | $ | 156,500 |  
|Bank credit facility due December 2006                                                                          |  |              | 27,000    |      |  |   |        |  
|4.75% convertible senior notes due 2008                                                                         |  |              | 192,000   |      |  |   | 192,000 |  
|4.75% convertible senior notes due 2014                                                                         |  |              | 143,750   |      |  |   |        |  
|8.625% senior notes due 2010                                                                                    |  |              | 200,000   |      |  |   |        |  
|2000A equipment lease notes, interest at 4.2%,
    due March 2005*                                              |  |              | 193,600   |      |  |   |        |  
|2000B equipment lease notes, interest at 4.1%,
    due October 2005*                                            |  |              | 167,411   |      |  |   |        |  
|2001A equipment lease notes, interest at 8.5%,
    due September 2008*                                          |  |              | 300,000   |      |  |   |        |  
|2001B equipment lease notes, interest at 8.8%,
    due September 2011*                                          |  |              | 250,000   |      |  |   |        |  
|Schlumberger note, interest at 12.5% at
    December 31, 2002                                                   |  |              |          |      |  |   | 167,096 |  
|Zero coupon subordinated notes, interest at 11%,
    due March 2007                                             |  |              | 185,501   |      |  |   |        |  
|7.25% convertible subordinated notes due
    2029*                                                              |  |              | 86,250    |      |  |   |        |  
|Real estate mortgage, collateralized by certain
    land and buildings, payable through September 2004          |  |              | 2,917     |      |  |   | 3,250   |  
|Other, interest at various rates, collateralized
    by equipment and other assets, net of unamortized discount |  |              | 1,875     |      |  |   | 4,101   |  
|                                                                                                                |  |              |           |      |  |   |         |  
|                                                                                                                |  |              | 1,750,304 |      |  |   | 522,947 |  
|Less current maturities                                                                                        |  |              | (3,511    | )    |  |   | (1,744  | )
|                                                                                                                |  |              |           |      |  |   |         |  
|Long-term debt                                                                                                  |  | $            | 1,746,793 |      |  | $ | 521,203 |  
|                                                                                                                |  |              |           |      |  |   |         |  



---



|  |                                                                      
|- | ---------------------------------------------------------------------
|* | See Note 22 for a discussion of the impact
    of adoption of FIN 46.

Maturities of long-term debt (excluding interest
to be accrued thereon) at December 31, 2003 are (in
thousands):

|           |  |              |           | 
|---------- |  | ------------ | --------- | 
|           |  | December 31,
|           |  | 2003        
|           |  |             
|2004       |  | $            | 3,511     | 
|2005       |  |              | 361,512   | 
|2006       |  |              | 27,517    | 
|2007       |  |              | 185,542   | 
|2008       |  |              | 492,045   | 
|Thereafter |  |              | 680,177   | 
|           |  |              |           | 
|           |  | $            | 1,750,304 | 
|           |  |              |           | 



| |             
| | ------------
| | Senior Notes

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



| |                     
| | --------------------
| | Bank Credit Facility

In December 2003, we entered into a new
$350 million bank credit facility having a maturity date of
December 29, 2006 and made conforming amendments related to
the compression equipment lease obligations that we entered into
in 2000. Our prior $350 million bank credit facility that
was scheduled to mature in November 2004, was terminated upon
closing of the new facility. The new bank credit facility
modified certain covenants that were contained in the prior
facility and eliminated certain covenants entirely. The new
agreement prohibits us (without the lenders prior
approval) from declaring or paying

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

any dividend (other than dividends payable solely
in our common stock or in options, warrants or rights to
purchase such common stock) on, or making similar payments with
respect to, our capital stock. The new agreement clarifies and
provides certain thresholds with respect to our ability to make
investments in our foreign subsidiaries. In addition, under the
new agreement, we granted the lenders a security interest in the
inventory, equipment and certain other property of Hanover and
its domestic subsidiaries (with certain exceptions), and pledged
66% of the equity interest in certain of our foreign
subsidiaries.

Our new bank credit facility provides for a
$350 million revolving credit in which advances bear
interest at (a) the greater of the administrative
agents prime rate, the federal funds effective rate, or
the base CD rate, or (b) a eurodollar rate, plus, in each
case, a specified margin (4.2% weighted average interest rate at
December 31, 2003). A commitment fee equal to 0.625% times
of the average daily amount of the available commitment under
the bank credit facility is payable quarterly to the lenders
participating in the bank credit facility. Our bank credit
facility contains certain financial covenants and limitations
on, among other things, indebtedness, liens, leases and sales of
assets.

As of December 31, 2003, we had
approximately $27 million in borrowings and approximately
$77.1 million in letters of credit outstanding on our bank
credit facility (4.2% weighted average effective rate at
December 31, 2003). Our bank credit facility permits us to
incur indebtedness, subject to covenant limitations described
above, up to a $350 million credit limit, plus, in addition
to certain other indebtedness, an additional
(i) $40 million in unsecured indebtedness,
(ii) $50 million of nonrecourse indebtedness of
unqualified subsidiaries and (iii) $25 million of
secured purchase money indebtedness.

As of December 31, 2003, we were in
compliance with all material covenants and other requirements
set forth in our bank credit facility, agreements related to our
compression equipment lease obligations and indentures. Giving
effect to the covenant limitations in our bank credit facility,
the liquidity available under that facility as of
December 31, 2003 was approximately $223 million. A
default under our bank credit facility or these agreements would
trigger cross-default provisions under the agreements relating
to certain of our other debt obligations. Such defaults would
have a material adverse effect on our liquidity, financial
position and operations.

In addition to purchase money and similar
obligations, the indentures and the agreements related to our
compression equipment lease obligations for our 2001A and 2001B
sale leaseback transactions and our 8.625% Senior Notes due 2010
permit us to incur indebtedness up to the $350 million
credit limit under our bank credit facility, plus (1) an
additional $75 million in unsecured indebtedness and
(2) any additional indebtedness so long as, after incurring
such indebtedness, our ratio of the sum of consolidated net
income before interest expense, income taxes, depreciation
expense, amortization of intangibles, certain other non-cash
charges and rental expense to total fixed charges (all as
defined and adjusted by the agreements), or our coverage
ratio, is greater than 2.25 to 1.0 and no default or event
of default has occurred or would occur as a consequence of
incurring such additional indebtedness and the application of
the proceeds thereon. The indentures and agreements for our
2001A and 2001B sale leaseback transactions define indebtedness
to include the present value of our rental obligations under
sale leaseback transactions and under facilities similar to our
compression equipment operating leases. As of December 31,
2003, Hanovers coverage ratio was less than 2.25 to 1.0
and therefore as of such date we could not incur indebtedness
other than under our bank credit facility and up to an
additional $75 million in unsecured indebtedness and
certain other permitted indebtedness, including certain
refinancing indebtedness.



| |                                   
| | ----------------------------------
| | Zero Coupon Subordinated
    Notes

In January 2003, we gave notice of our intent to
exercise our right to put our interest in the PIGAP II
joint venture back to Schlumberger. If not exercised, the put
right would have expired as of February 1, 2003. Hanover
acquired its interest in PIGAP II as part of its purchase
of POC from Schlumberger in August 2001. On May 14, 2003,
we entered into an agreement with Schlumberger to

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

terminate our right to put our interest in the
PIGAP II joint venture to Schlumberger. As a result, we
retained our ownership interest in PIGAP II. We also agreed
with Schlumberger to restructure the $150 million
subordinated note that Schlumberger received from us in August
2001 as part of the purchase price for the acquisition of POC.

A comparison of the primary financial terms of
the original $150 million subordinated note and the
restructured note are shown in the table below.

|                                                               |  |                                                  |  |                                                                        
|-------------------------------------------------------------- |  | ------------------------------------------------ |  | -----------------------------------------------------------------------
|Primary Financial Term                                         |  | Restructured Note                                |  | Original Note                                                          
|                                                               |  |                                                  |  |                                                                        
|Principal Outstanding at March 31, 2003:                       |  | $171 million                                     |  | $171 million                                                           
|                                                              
|Maturity:                                                      |  | March 31, 2007                                   |  | December 31, 2005                                                      
|                                                              
|Interest Rate:                                                 |  | Zero coupon accreting at 11.0% fixed             |  | 13.5%, 14.5% beginning March 1, 2004, 15.5%
    beginning March 1, 2005
|                                                              
|Schlumberger First Call Rights on Hanover Equity
    Issuance: |  | None                                             |  | Schlumberger had first call on any Hanover equity
    offering proceeds
|                                                              
|Call Provision:                                                |  | Hanover cannot call the Note prior to March 2006 |  | Callable at any time                                                   

As of March 31, 2003, the date from which
the interest rate was adjusted, the $150 million
subordinated note had an outstanding principal balance of
approximately $171 million, including accrued interest.
Under the restructured terms, the maturity of the restructured
notes have been extended to March 31, 2007, from the
original maturity of December 31, 2005. The notes are zero
coupon notes with original issue discount accreting at 11.0% for
its remaining life, up to a total principal amount of
$262.6 million payable at maturity. The notes will accrue
additional interest at a rate of 2.0% per annum upon the
occurrence and during the continuance of an event of default
under the notes. The notes will also accrue additional interest
at a rate of 3.0% per annum if our consolidated leverage ratio,
as defined in the indenture governing the notes, exceeds 5.18 to
1.0 as of the end of two consecutive fiscal quarters. As of
December 31, 2003, we estimate that our debt balance could
have increased by approximately $53 million in additional
indebtedness and not exceeded the 5.18 to 1.0 ratio.
Notwithstanding the foregoing, the notes will accrue additional
interest at a rate of 3.0% per annum if both of the previously
mentioned circumstances occur. The notes also contain a covenant
that limits our ability to incur additional indebtedness if
Hanovers consolidated leverage ratio exceeds 5.6 to 1.0,
subject to certain exceptions. Schlumberger will no longer have
a first call on any proceeds from the issuance of any shares of
capital stock or other equity interests by Hanover and the notes
are not callable by Hanover until March 31, 2006. As agreed
upon with Schlumberger, Hanover has agreed to bear the cost of
and has registered these notes with the Securities and Exchange
Commission (SEC) covering the resale of the
restructured notes by Schlumberger. The registration process was
completed in December 2003 and the notes were sold by
Schlumberger and we incurred $0.8 million in registration
expenses.

Also on May 14, 2003, we agreed with
Schlumberger Surenco, an affiliate of Schlumberger, to the
modification of the repayment terms of a $58.0 million
obligation that was accrued as a contingent liability on our
balance sheet since the acquisition of POC and was associated
with the PIGAP II joint venture. The obligation was
converted into a non-recourse promissory note (PIGAP
Note) payable by Hanover Cayman Limited, our indirect
wholly-owned consolidated subsidiary, with a 6% interest rate
compounding semi-annually until maturity in December 2053. In
October 2003, the PIGAP II joint venture closed on the
projects financing and distributed approximately
$78.5 million to Hanover, of which approximately
$59.9 million was used to repay the PIGAP Note.

F-27



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

For financial accounting purposes, the above
described changes to the restructured subordinated note and
PIGAP Note were not considered an extinguishment of debt, but
have been accounted for as debt modifications which resulted in
no income or expense recognition related to the transaction.



| |                         
| | ------------------------
| | Convertible Senior Notes

In December 2003, we issued under our shelf
registration statement $143.8 million aggregate principal
amount of our 4.75% convertible senior notes due 2014. We
may redeem these convertible notes beginning in 2011, subject to
certain conditions. The convertible notes are convertible into
shares of our common stock at an initial conversion rate of
66.6667 shares of our common stock per $1,000 principal
amount of the convertible notes (subject to adjustment in
certain events, some of which may result in the triggering of a
beneficial conversion feature) at any time prior to the stated
maturity of the convertible notes or the redemption or
repurchase of the convertible notes by us. The proceeds from
this offering were used to repay a portion of the outstanding
indebtedness under our bank credit facility. The fair value of
the 2014 convertible senior notes is approximately
$160.5 million at December 31, 2003.

In March 2001, we issued $192.0 million
principal amount of 4.75% convertible senior notes due
2008. The notes mature on March 2008 and are subject to
call beginning on March 2004. The notes are convertible
into shares of our common stock at a conversion price of
approximately $43.94 per share (subject to adjustment in
certain events, some of which may result in the triggering of a
beneficial conversion feature) at any time prior to the stated
maturity of the convertible notes or the redemption or
repurchase of the convertible notes by us. We received
approximately $185.5 million of proceeds from the sale, net
of underwriting and offering costs. The fair value of the 2008
convertible senior notes is approximately $178.6 million at
December 31, 2003.



| |                                   
| | ----------------------------------
| | Convertible Subordinated
    Notes

In December 1999, we issued $86.3 million of
unsecured mandatorily redeemable convertible preferred
securities through Hanover Compressor Capital Trust, a Delaware
business trust and wholly-owned finance subsidiary of Hanover.
The convertible preferred securities have a liquidation amount
of $50 per unit. The convertible preferred securities
mature in 30 years but we may redeem them 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. We recorded approximately
$6.3 million, during 2003, 2002 and 2001, for distributions
related to convertible preferred securities. Each convertible
preferred security is convertible into 2.7972 shares of
Hanover common stock, subject to certain conditions. We have
fully and unconditionally guaranteed the convertible preferred
securities. We incurred approximately $3.6 million in
transaction costs that are included in other assets, and
recorded $0.1 million, $0.1 million and
$0.1 million of amortization for December 31, 2003,
2002 and 2001, respectively. The transaction costs are being
amortized over the term of the convertible preferred securities.
The fair value of the convertible preferred securities is
approximately $85.2 million at December 31, 2003.

These securities were previously reported on our
balance sheet as mandatorily redeemable convertible preferred
securities. Because we only have a limited ability to make
decisions about its activities and we are not the primary
beneficiary of the trust, the trust is a VIE under FIN 46.
As such, the mandatorily redeemable preferred securities issued
by the trust are no longer reported on our balance sheet.
Instead, we now report our subordinated notes payable to the
trust as a debt. These intercompany notes have previously been
eliminated in our consolidated financial statements. The changes
related to our mandatorily redeemable preferred securities are
reclassifications and have no impact on our consolidated results
of operations or cash flow. (See Note 22.)

F-28



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                          
|--- | ---------------------------------------------------------
|12. | Leasing Transactions and Accounting Change for
    FIN 46

As of December 31, 2003, we are the lessee
in four transactions involving the sale of compression equipment
by us to special purpose entities, which in turn lease the
equipment back to us. At the time we entered into the leases,
these transactions had a number of advantages over other sources
of capital then available to us. The sale leaseback transactions
(1) enabled us to affordably extend the duration of our
financing arrangements and (2) reduced our cost of capital.

In August 2001 and in connection with the
acquisition of POC, we completed two sale leaseback transactions
involving certain compression equipment. Under one sale
leaseback transaction, we received $309.3 million in
proceeds from the sale of certain compression equipment. Under
the second sale leaseback transaction, we received
$257.8 million in proceeds from the sale of additional
compression equipment. Under the first transaction, the
equipment was sold and leased back by us for a seven-year period
and will continue to be deployed by us in the normal course of
our business. The agreement calls for semi-annual rental
payments of approximately $12.8 million in addition to
quarterly rental payments of approximately $0.2 million.
Under the second transaction, the equipment was sold and leased
back by us for a ten-year period and will continue to be
deployed by us in the normal course of our business. The
agreement calls for semi-annual rental payments of approximately
$10.9 million in addition to quarterly rental payments of
approximately $0.2 million. We have options to repurchase
the equipment under certain conditions as defined by the lease
agreements. Through December 31, 2003, we incurred
transaction costs of approximately $18.6 million related to
these transactions. These costs are included in intangible and
other assets and are being amortized over the respective lease
terms.

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

The following table summarizes as of
December 31, 2003 the proceeds, residual guarantee, lease
termination date and minority interest obligations for equipment
leases (in thousands):

|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 
|--------------------- |  | -------- | ------- | --------- |  | ---------------- | ------- | ---------- |  |  | -------------- |  |  | - | ------ | 
|                      |  |          |         | Residual  |  |                  |         | Minority  
|                      |  | Sale     |         | Value     |  | Lease            |         | Interest  
|                      |  | Proceeds |         | Guarantee |  | Termination Date |         | Obligation
|Lease                 |  |          |         |           |  |                  |         |           
|March and August 2000 |  | $        | 200,000 |           |  | $                | 166,000 |            |  |  | March 2005     |  |  | $ | 6,400  | 
|October 2000          |  |          | 172,589 |           |  |                  | 142,299 |            |  |  | October 2005   |  |  |   | 5,178  | 
|August 2001           |  |          | 309,300 |           |  |                  | 232,000 |            |  |  | September 2008 |  |  |   | 9,300  | 
|August 2001           |  |          | 257,750 |           |  |                  | 175,000 |            |  |  | September 2011 |  |  |   | 7,750  | 
|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 
|                      |  | $        | 939,639 |           |  | $                | 715,299 |            |  |  |                |  |  | $ | 28,628 | 
|                      |  |          |         |           |  |                  |         |            |  |  |                |  |  |   |        | 

The lease facilities contain certain financial
covenants and limitations which restrict us with respect to,
among other things, indebtedness, liens, leases and sale of
assets. We are entitled under the compression equipment
operating lease agreements to substitute equipment that we own
for equipment owned by the special purpose entities, provided
that the value of the equipment that we are substituting is

F-29



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

equal to or greater than the value of the
equipment that is being substituted. Each lease agreement limits
the aggregate amount of replacement equipment that may be
substituted to under each lease.

Prior to July 1, 2003, these lease
transactions were recorded as a sale and leaseback of the
compression equipment and were treated as operating leases for
financial reporting purposes. On July 1, 2003, we adopted
the provisions of FIN 46 as they relate to the special
purpose entities that lease compression equipment to us. As a
result of the adoption, we added approximately
$1,089 million in compressor equipment assets,
$192.3 million of accumulated depreciation (including
approximately $58.6 million of accumulated depreciation
related to periods before the sale and leaseback of the
equipment), $1,105.0 million in debt and $34.6 million
in minority interest obligations to our balance sheet, and we
reversed $108.8 million of deferred gains that were
recorded on our balance sheet as a result of the sale leaseback
transactions. On July 1, 2003, we recorded a
$133.7 million charge ($86.9 million net of tax) to
record the cumulative effect from the adoption of FIN 46
related to prior period depreciation of the compression
equipment assets. Additionally, we estimate that we will record
approximately $17 million per year in additional
depreciation expense on our leased compression equipment as a
result of the inclusion of the compression equipment on our
balance sheet and will also record the payments made under our
compression equipment leases as interest expense.

In December 2003, we exercised our purchase
option under the 1999 compression equipment operating lease. As
of December 31, 2003, the remaining compression assets
owned by the entities that lease equipment to us but are now
included in property, plant and equipment in our consolidated
financial statements had a net book value of approximately
$804.0 million, including improvements made to these assets
after the sale leaseback transactions.

The minority interest obligations represent the
equity of the entities that lease compression equipment to us.
In accordance with the provisions of our compression equipment
lease obligations, the equity certificate holders are entitled
to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of December 31, 2003,
the yield rates on the outstanding equity certificates ranged
from 4.4% to 9.5%. Equity certificate holders may receive a
return of capital payment upon lease termination or our purchase
of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression
equipment to us. At December 31, 2003, the carrying value
of the minority interest obligations approximated the fair
market value of assets that would be required to be transferred
to redeem the minority interest obligations.

In connection with the compression equipment
leases entered into in August 2001, we were obligated to prepare
registration statements and complete an exchange offer to enable
the holders of the notes issued by the lessors to exchange their
notes with notes registered under the Securities Act of 1933.
Because of the restatement of our financial statements, the
exchange offer was not completed within the timeframe required
by the agreements related to the compression equipment lease
obligations and we were required to pay additional lease expense
in an amount equal to $105,600 per week until the exchange
offering was completed. The additional lease expense began
accruing on January 28, 2002 and increased our lease
expense by $1.1 million and $5.1 million during 2003
and 2002, respectively. The registration statements became
effective in February 2003. The exchange offer was completed and
the requirement to pay the additional lease expense ended on
March 13, 2003.

In February 2003, in connection with an amendment
to our bank credit facility and, in December 2003, in connection
with the closing on our new bank credit facility we executed
conforming amendments to the compression equipment leases
entered into in 2000 (see Note 11).

F-30



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |             
|--- | ------------
|13. | Income Taxes

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

|         |  |                          |          |      |  |      |          |   |  |   |         | 
|-------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2003                     |          | 2002 |  | 2001
|         |  |                          |          |      |  |     
|Domestic |  | $                        | (115,937 | )    |  | $    | (115,733 | ) |  | $ | 62,128  | 
|Foreign  |  |                          | 8,171    |      |  |      | 23,314   |   |  |   | 49,872  | 
|         |  |                          |          |      |  |      |          |   |  |   |         | 
|         |  | $                        | (107,766 | )    |  | $    | (92,419  | ) |  | $ | 112,000 | 
|         |  |                          |          |      |  |      |          |   |  |   |         | 

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

|                                                |         |                          |     |         |         |      |         |         |         |   |        |        |        | 
|----------------------------------------------- | ------- | ------------------------ | --- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                                |         |                         
|                                                |         | Years Ended December 31,
|                                                |         |                         
|                                                |         | 2003                     |     | 2002    |         | 2001
|                                                |         |                          |     |         |         |     
|Current tax provision (benefit):                |         |                          |     |         |         |      |         |         |         |   |        |       
|                                                | Federal |                          | $   |        |         |      | $       | (9,551  | )       |   | $      | 1,136  |       
|                                                | State   |                          |     | 245     |         |      |         | (227    | )       |   |        | 560    |       
|                                                | Foreign |                          |     | 12,946  |         |      |         | 11,243  |         |   |        | 10,474 |       
|                                                |         |                          |     |         |         |      |         |         |         |   |        |       
|                                                |         | Total current            |     |         | 13,191  |      |         |         | 1,465   |   |        |        | 12,170 | 
|                                                |         |                          |     |         |         |      |         |         |         |   |        |       
|Deferred tax provision (benefit):               |         |                          |     |         |         |      |         |         |         |   |        |       
|                                                | Federal |                          |     | (18,334 | )       |      |         | (10,738 | )       |   |        | 25,085 |       
|                                                | Foreign |                          |     | 5,927   |         |      |         | (8,303  | )       |   |        | 5,133  |       
|                                                |         |                          |     |         |         |      |         |         |         |   |        |       
|                                                |         | Total deferred           |     |         | (12,407 | )    |         |         | (19,041 | ) |        |        | 30,218 | 
|                                                |         |                          |     |         |         |      |         |         |         |   |        |       
|Total provision for (benefit from) income taxes |         | $                        | 784 |         |         | $    | (17,576 | )       |         | $ | 42,388 |       
|                                                |         |                          |     |         |         |      |         |         |         |   |        |       

The provision for (benefit from) income taxes for
2003, 2002 and 2001 resulted in effective tax rates on
continuing operations of (0.7)%, 19.0% and 37.8%, respectively.
The reasons for the differences between these effective tax
rates and the U.S. statutory rate of 35% are as follows (in
thousands):

|                                                                                            |  |                          |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                            |  |                         
|                                                                                            |  | Years Ended December 31,
|                                                                                            |  |                         
|                                                                                            |  | 2003                     |         | 2002 |  | 2001
|                                                                                            |  |                          |         |      |  |     
|Federal income tax at statutory rate                                                        |  | $                        | (37,718 | )    |  | $    | (32,347 | ) |  | $ | 39,200 |  
|State income taxes, net of federal benefit                                                  |  |                          | 159     |      |  |      | (148    | ) |  |   | 364    |  
|Foreign effective rate/ U.S. rate
    differential (including foreign valuation allowances) |  |                          | 8,997   |      |  |      | (8,020  | ) |  |   | (2,775 | )
|U.S. impact of foreign operations, net of
    federal benefit                               |  |                          | 4,561   |      |  |      | 7,894   |   |  |   | 3,458  |  
|Nondeductible goodwill                                                                      |  |                          |        |      |  |      | 10,117  |   |  |   | 1,118  |  
|U.S. valuation allowances                                                                   |  |                          | 25,746  |      |  |      | 2,609   |   |  |   |       |  
|Other, net                                                                                  |  |                          | (961    | )    |  |      | 2,319   |   |  |   | 1,023  |  
|                                                                                            |  |                          |         |      |  |      |         |   |  |   |        |  
|                                                                                            |  | $                        | 784     |      |  | $    | (17,576 | ) |  | $ | 42,388 |  
|                                                                                            |  |                          |         |      |  |      |         |   |  |   |        |  

The foreign effective rate/U.S. rate
differential includes the impact of approximately
$35.5 million non-deductible goodwill impairment.

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                               |                                             |              |          |          |   |   |          |          |  
|------------------------------ | ------------------------------------------- | ------------ | -------- | -------- | - | - | -------- | -------- | -
|                               |                                             |             
|                               |                                             | December 31,
|                               |                                             |             
|                               |                                             | 2003         |          | 2002    
|                               |                                             |              |          |         
|Deferred tax assets:           |                                             |              |          |          |   |   |          |         
|                               | Net operating losses carryforward           |              | $        | 245,406  |   |   | $        | 157,928  |  
|                               | Investment in joint ventures                |              |          | 8,955    |   |   |          | 11,208   |  
|                               | Inventory                                   |              |          | 16,623   |   |   |          | 7,097    |  
|                               | Alternative minimum tax credit carryforward |              |          | 5,407    |   |   |          | 5,351    |  
|                               | Derivative instruments                      |              |          | 5,279    |   |   |          | 9,656    |  
|                               | Accrued liabilities                         |              |          | 10,858   |   |   |          | 13,478   |  
|                               | Intangibles                                 |              |          | 14,274   |   |   |          | 15,297   |  
|                               | Capital loss carryforward                   |              |          | 5,852    |   |   |          |         |  
|                               | Other                                       |              |          | 7,364    |   |   |          | 9,003    |  
|                               |                                             |              |          |          |   |   |          |         
|Gross deferred tax assets      |                                             |              | 320,018  |          |   |   | 229,018  |         
|                               | Valuation allowance                         |              |          | (55,015  | ) |   |          | (23,371  | )
|                               |                                             |              |          |          |   |   |          |         
|                               |                                             |              | 265,003  |          |   |   | 205,647  |         
|                               |                                             |              |          |          |   |   |          |         
|Deferred tax liabilities:      |                                             |              |          |          |   |   |          |         
|                               | Property, plant and equipment               |              |          | (291,249 | ) |   |          | (297,896 | )
|                               | Other                                       |              |          | (2,087   | ) |   |          | (1,364   | )
|                               |                                             |              |          |          |   |   |          |         
|Gross deferred tax liabilities |                                             |              | (293,336 | )        |   |   | (299,260 | )       
|                               |                                             |              |          |          |   |   |          |         
|                               |                                             | $            | (28,333  | )        |   | $ | (93,613  | )       
|                               |                                             |              |          |          |   |   |          |         

We had U.S. net operating loss carryforwards
at December 31, 2003 of approximately $613.0 million
expiring in 2004 to 2023. At December 2003, we had an
alternative minimum tax credit carryforward of approximately
$5.4 million that does not expire. At December 31,
2003, we had approximately $88.0 million of net operating
loss carryforwards in certain non-U.S. jurisdictions. Of
these, approximately $17.7 million have no expiration date,
and the remaining $70.3 million will expire in future years
through 2012.

The valuation allowance increased by
$31.6 million primarily due to: (1) a
$25.7 million valuation allowance recorded for our
U.S. deferred tax assets related to our net operating loss
carryforward and (2) additional valuation allowances
recorded, net, for losses in non-U.S. tax jurisdictions.
Realization of deferred tax assets associated with net operating
loss carryforwards is dependent upon generating sufficient
taxable income in the appropriate jurisdiction prior to their
expiration. Management believes it is more likely than not that
the remaining deferred tax asset, not subject to valuation
allowance, will be realized through future taxable income.

We plan to reinvest the undistributed earnings of
our foreign subsidiaries of approximately $174 million.
Accordingly, U.S. deferred taxes have not been provided on
these earnings.



|    |                           
|--- | --------------------------
|14. | Accounting for Derivatives

We adopted SFAS 133, effective
January 1, 2001. SFAS 133 requires that all derivative
instruments (including certain derivative instruments embedded
in other contracts) be recognized in the balance sheet at fair
value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in
the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged item
pending recognition in earnings. Prior to 2001, we entered into
two interest rate swaps with notional amounts of
$75 million and $125 million and strike rates of 5.51%
and 5.56%, respectively. These swaps were to expire in July
2001; however, they were extended for an additional two years at
the option of the swap counterparty and expired in July 2003.
The difference paid or received on the swap transactions was
recorded as an accrued liability and recognized in leasing
expense in all periods before July 1, 2003, and in interest
expense thereafter. Because management decided not to

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

designate the interest rate swaps as hedges at
the time they were extended by the counterparty, we recognized
unrealized gains of approximately $4.1 million and
approximately $3.2 million related to the change in the
fair value of these interest rate swaps in lease expense in our
statement of operations during the years ended December 31,
2003 and 2002, respectively and recognized an unrealized gain of
approximately $0.5 million in interest expense in 2003.
Prior to July 1, 2003, these amounts were reported as
Change in fair value of derivative financial
instruments in our consolidated statement of operations.
We have reclassified these amounts as interest and lease expense
to conform to the 2003 financial statement classification. At
December 31, 2002, we had approximately $4.6 million
in accrued liabilities with respect to the fair value adjustment
related to these interest rate swaps. The fair value of these
interest rate swaps fluctuated with changes in interest rates
over their terms and the fluctuations were recorded in our
statement of operations.

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

|      |              |               |  |             |                  |                 |  |  |         |  |  |  |              | 
|----- | ------------ | ------------- |  | ----------- | ---------------- | --------------- |  |  | ------- |  |  |  | ------------ | 
|Lease |              | Maturity Date |  | Strike Rate |                  | Notional Amount
|      |              |               |  |             |                  |                
|      | March 2000   |               |  |             | March 11, 2005   |                 |  |  | 5.2550% |  |  |  | $100,000,000 | 
|      | August 2000  |               |  |             | March 11, 2005   |                 |  |  | 5.2725% |  |  |  | $100,000,000 | 
|      | October 2000 |               |  |             | October 26, 2005 |                 |  |  | 5.3975% |  |  |  | $100,000,000 | 

These three swaps, which we have designated as
cash flow hedging instruments, meet the specific hedge criteria
and any changes in their fair values have been recognized in
other comprehensive income. During the years ended
December 31, 2003, 2002 and 2001, we recorded income of
approximately $7.9 million and a loss of $13.6 million
and $9.3 million, respectively, related to these three
swaps ($5.1 million, $8.9 million, and
$6.1 million net of tax) in other comprehensive income. As
of December 31, 2003 and December 31, 2002, a total of
approximately $11.7 million and $11.5 million,
respectively, was recorded in current liabilities and
approximately $3.4 million and $11.5 million,
respectively, in long-term liabilities with respect to the fair
value adjustment related to these three swaps.

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

During 2003, we entered into forward exchange
contracts with a notional value of $10.0 million to
mitigate the risk of changes in exchange rates between Euro and
the U.S. dollar. These contracts mature during 2004. As of
December 31, 2003, a total of approximately
$0.6 million was recorded in other current assets and other
comprehensive income with respect to the fair value adjustment
related to these three contracts.



|    |                            
|--- | ---------------------------
|15. | Common Stockholders Equity



| |                
| | ---------------
| | Stock Offerings

In March 2001, we completed a public offering of
2.5 million newly issued shares of Hanovers common
stock. We realized approximately $83.9 million of proceeds
from the offering, net of underwriting and offering costs.



| |                                             
| | --------------------------------------------
| | Notes Receivable  Employee
    Stockholders

Under various stock purchase plans, our employees
were eligible to purchase shares of Hanover stock at fair market
value in exchange for cash and/or notes receivable. The notes
were collateralized by the common stock and the general credit
of the employee, bear interest at a prime rate, and were
generally payable on demand or at the end of a four-year period.
The notes were recorded as a reduction of common
stockholders equity. Due to the decline in the price of
Hanovers stock which secured a portion of the

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

notes, during 2002, we recorded a reserve for
these notes receivable. During 2003, the notes receivable for
loans to employees who were not executive officers were forgiven.



| |      
| | -----
| | Other

As of December 31, 2003, warrants to
purchase approximately 4,000 shares of common stock at
$.005 per share were outstanding. The warrants expire in
August 2005.

See Note 1 and 2 for a description of other
common stock transactions.



|    |              
|--- | -------------
|16. | Stock Options

Hanover has employee stock option plans that
provide for the granting of options to purchase common shares.
The options are generally issued with an exercise price equal to
the fair market value on the date of grant and are exercisable
over a ten-year period. Options granted typically vest over a
three to four year period. No compensation expense related to
stock options was recorded in 2003, 2002 and 2001.

In 2003 and 2002, we granted 435,000 and
151,000 restricted shares, respectively, of Hanover common
stock to certain employees as part of an incentive compensation
plan. The restricted stock grants vest equally over four years.
As of December 31, 2003, 512,000 restricted shares were
outstanding under our plans. We will recognize compensation
expense equal to the fair value of the stock at the date of
grant over the vesting period related to these grants. During
2003 and 2002, we recognized $1.2 million and
$0.4 million respectively, in compensation expense related
to these grants.

The following is a summary of stock option
activity for the years ended December 31, 2003, 2002 and
2001:

|                                       |                   |        |           |                  |   |   |      |       | 
|-------------------------------------- | ----------------- | ------ | --------- | ---------------- | - | - | ---- | ----- | 
|                                       |                   |        |           | Weighted average
|                                       |                   | Shares |           | price per share 
|                                       |                   |        |           |                 
|Options outstanding, December 31, 2000 |                   |        | 7,918,683 |                  |   | $ | 6.63 |      
|                                       | Options granted   |        |           | 43,575           |   |   |      | 25.00 | 
|                                       | Options canceled  |        |           | (47,622          | ) |   |      | 12.48 | 
|                                       | Options exercised |        |           | (250,161         | ) |   |      | 9.12  | 
|                                       |                   |        |           |                  |   |   |      |      
|Options outstanding, December 31, 2001 |                   |        | 7,664,475 |                  |   |   | 6.62 |      
|                                       | Options granted   |        |           | 1,497,706        |   |   |      | 13.35 | 
|                                       | Options canceled  |        |           | (261,323         | ) |   |      | 10.29 | 
|                                       | Options exercised |        |           | (1,422,850       | ) |   |      | 4.69  | 
|                                       |                   |        |           |                  |   |   |      |      
|Options outstanding, December 31, 2002 |                   |        | 7,478,008 |                  |   |   | 8.21 |      
|                                       | Options granted   |        |           | 539,285          |   |   |      | 11.41 | 
|                                       | Options canceled  |        |           | (652,963         | ) |   |      | 11.06 | 
|                                       | Options exercised |        |           | (1,432,636       | ) |   |      | 4.68  | 
|                                       |                   |        |           |                  |   |   |      |      
|Options outstanding, December 31, 2003 |                   |        | 5,931,694 |                  |   |   | 9.07 |      
|                                       |                   |        |           |                  |   |   |      |      

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes significant ranges
of outstanding and exercisable options at December 31, 2003:

|                         |  |                     |           |                     |  |          |     |        |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | --- | ------ |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                     |  |         
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted            |  |          |     |       
|                         |  |                     |           | Average             |  | Weighted |     |        |  | Weighted
|                         |  |                     |           | Remaining           |  | Average  |     |        |  | Average 
|                         |  |                     |           | Life in             |  | Exercise |     |        |  | Exercise
|Range of exercise prices |  | Shares              |           | Years               |  | Price    |     | Shares |  | Price   
|                         |  |                     |           |                     |  |          |     |        |  |         
|$0.00-2.50               |  |                     | 1,556,710 |                     |  |          | 1.5 |        |  | $        | 2.24  |  |  |  | 1,556,710 |  |  | $ | 2.24  | 
|$2.51-5.00               |  |                     | 37,240    |                     |  |          | 1.5 |        |  |          | 4.52  |  |  |  | 37,240    |  |  |   | 4.52  | 
|$5.01-7.50               |  |                     | 96,168    |                     |  |          | 1.9 |        |  |          | 6.04  |  |  |  | 96,168    |  |  |   | 6.04  | 
|$7.51-10.00              |  |                     | 2,322,567 |                     |  |          | 4.5 |        |  |          | 9.77  |  |  |  | 1,986,522 |  |  |   | 9.76  | 
|$10.01-12.50             |  |                     | 805,332   |                     |  |          | 8.0 |        |  |          | 11.68 |  |  |  | 246,778   |  |  |   | 12.40 | 
|$12.51-15.00             |  |                     | 843,455   |                     |  |          | 7.5 |        |  |          | 14.50 |  |  |  | 258,828   |  |  |   | 14.48 | 
|$15.01-17.50             |  |                     | 175,000   |                     |  |          | 8.3 |        |  |          | 17.29 |  |  |  | 58,334    |  |  |   | 17.29 | 
|$17.51-20.00             |  |                     | 14,000    |                     |  |          | 8.3 |        |  |          | 18.43 |  |  |  | 3,734     |  |  |   | 18.29 | 
|$20.01-22.50             |  |                     | 24,413    |                     |  |          | 1.2 |        |  |          | 20.09 |  |  |  | 24,413    |  |  |   | 20.09 | 
|$22.51-25.00             |  |                     | 56,809    |                     |  |          | 7.8 |        |  |          | 25.00 |  |  |  | 17,077    |  |  |   | 25.00 | 
|                         |  |                     |           |                     |  |          |     |        |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 5,931,694 |                     |  |          |     |        |  |          |       |  |  |  | 4,285,804 |  |  |   |       | 
|                         |  |                     |           |                     |  |          |     |        |  |          |       |  |  |  |           |  |  |   |       | 

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 $11.41, $13.35 and
$25.00 per option during 2003, 2002 and 2001, respectively.

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

|               |  |      |          |      |  |      |          |  |  |  |          | 
|-------------- |  | ---- | -------- | ---- |  | ---- | -------- |  |  |  | -------- | 
|               |  | 2003 |          | 2002 |  | 2001
|               |  |      |          |      |  |     
|Expected life  |  |      | 6  years |      |  |      | 6  years |  |  |  | 6  years | 
|Interest rate  |  |      | 3.16%    |      |  |      | 4.4%     |  |  |  | 4.0%     | 
|Volatility     |  |      | 40.3%    |      |  |      | 39.3%    |  |  |  | 35.4%    | 
|Dividend yield |  |      | 0%       |      |  |      | 0%       |  |  |  | 0%       | 

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



|    |              
|--- | -------------
|17. | Benefit Plans

Our 401(k) retirement plan provides for optional
employee contributions up to the IRS limitation and
discretionary employer matching contributions. We recorded
matching contributions of $2.6 million, $1.5 million,
and $1.1 million during the years ended December 31,
2003, 2002 and 2001, respectively.



|    |                                                 
|--- | ------------------------------------------------
|18. | Related Party and Certain Other
    Transactions



| |                                   
| | ----------------------------------
| | Transactions with GKH
    Entities

Hanover and GKH Investments, L.P. and GKH Private
Limited (collectively GKH), are parties to a
stockholders agreement that provides, among other things, for
GKHs rights of visitation and inspection and our
obligation to provide Rule 144A information to prospective
transferees of the Common Stock.

F-35



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

GKH and other stockholders (collectively, the
Holders) who, as of December 31, 2003, together
beneficially owned approximately 10% of the outstanding Common
Stock, are, together with Hanover, parties to a Third Amended
Registration Rights Agreement dated December 5, 1995 (the
GKH Rights Agreement). The GKH Rights Agreement
generally provides that if we propose to register shares of our
capital stock or any other securities under the Securities Act
of 1933, then upon the request of those Holders owning in the
aggregate at least 2.5% of the Common Stock (the
Registrable Securities) then held by all of the
Holders, we will use our reasonable best efforts to cause the
Registrable Securities so requested by the Holders to be
included in the applicable registration statement, subject to
underwriters cutbacks. We are required to pay all
registration expenses in connection with registrations of
Registrable Securities effected pursuant to the GKH Rights
Agreement.

William S. Goldberg, who was at the time a
Managing Director of GKH Partners, acted as Chief Financial
Officer of Hanover during 2001 and into 2002 and served as Vice
Chairman of the Board beginning in February 2002.
Mr. Goldberg resigned as Chief Financial Officer in
February 2002 and resigned as Vice Chairman of the Board and as
a member of the Board in August 2002. Mr. Goldberg did not
receive cash remuneration from Hanover. We did reimburse GKH
Partners for certain travel and related expenses incurred by
Mr. Goldberg in connection with his efforts on
Hanovers behalf.

GKH has advised Hanover that it is in the process
of dissolving and winding up its affairs. On
November 12, 2002, GKH informed us that GKH advised its
limited partners that it was extending the wind-up process of
the partnership for an additional twelve months from
January 25, 2003 until January 25, 2004. On
December 3, 2002, GKH, as nominee for GKH Private Limited,
and GKH Investments, L.P. made a partial distribution of
10.0 million shares out of a total of 18.3 million
shares held by GKH to its limited and general partners. As part
of the wind-up process, GKH may liquidate or distribute
substantially all of its assets, including the remaining shares
of the Common Stock owned by GKH, to its partners. (See
Note 24.)

In August 2001, Hanover paid a $4.7 million
fee to GKH as payment for services rendered in connection with
Hanovers acquisition of POC and related assets. Pursuant
to an agreement with GKH which provides for compensation to GKH
for services, Hanover paid a management fee of $45,000 per
month from November 2001 until the agreement was terminated in
February 2002.

Hanover leases certain compression equipment to
an affiliate of Cockrell Oil and Gas, LP, which was
owned 50% by GKH until January 2001. The lease is on a
month-to-month basis. For the year ended 2001, approximately
$0.1 million was billed under the lease.



| |                                            
| | -------------------------------------------
| | Transactions with Schlumberger
    Entities

In August 2001, we purchased POC from the
Schlumberger Companies (as defined below). Schlumberger Limited
(Schlumberger Limited and the Schlumberger Companies,
collectively are referred to as Schlumberger) owns,
directly or indirectly, all of the equity of the Schlumberger
Companies. Pursuant to the Lock-Up, Standstill and Registration
Rights Agreement, dated as of August 31, 2001 (the
Schlumberger Rights Agreement), between Schlumberger
Technology Company, Camco International Inc., Schlumberger
Surenco, S.A., Schlumberger Oilfield Holdings Limited,
Operational Services, Inc. (collectively, the
Schlumberger Companies) and Hanover, Hanover granted
to each of the Schlumberger Companies certain registration
rights in connection with shares of the Common Stock received by
the Schlumberger Companies as consideration in the POC
acquisition (the Hanover Stock). The registration
rights granted to the Schlumberger Companies include
(i) the right, subject to certain restrictions, to register
the Hanover Stock in any registration of securities initiated by
Hanover within the period of time beginning on the third
anniversary of the date of the Schlumberger Rights Agreement and
ending on the tenth anniversary of the date of the Schlumberger
Rights Agreement (such period of time, the Registration
Period), and (ii) the right, subject to certain
restrictions, to demand up to five

F-36



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

registrations of the Hanover Stock within the
Registration Period. Hanover is required to pay all registration
expenses in connection with registrations of Hanover Stock
pursuant to the Schlumberger Rights Agreement. For a period of
three years from the date of the Schlumberger Rights Agreement,
the Schlumberger Companies are prohibited from, directly or
indirectly, selling or contracting to sell any of the Hanover
Stock. The Schlumberger Rights Agreement also provides that none
of the Schlumberger Companies shall, without Hanovers
written consent, (i) acquire or propose to acquire,
directly or indirectly, greater than twenty-five percent (25%)
of the shares of Hanover common stock, (ii) make any public
announcement with respect to, or submit a proposal for, any
extraordinary transaction involving Hanover, (iii) form or
join in any group with respect to the matters set forth in (i)
above, or (iv) enter into discussions or arrangements with
any third party with respect to the matters set forth in (i)
above.

Schlumberger has the right under the POC purchase
agreement, so long as Schlumberger owns at least 5% of the
Common Stock and subject to certain restrictions, to nominate
one representative to sit on our Board of Directors.
Schlumberger currently has no representative who sits on the
Companys board of directors. For the years ended
December 31, 2003, 2002 and 2001, Hanover generated
revenues of approximately $0.5 million, $6.0 million,
and $1.4 million in business dealings with Schlumberger. In
addition, Hanover made purchases of equipment and services of
approximately $7.6 million from Schlumberger during 2002.

As part of the purchase agreement entered into
with respect to the POC Acquisition, we were required to make a
payment of up to $58.0 million plus interest from the
proceeds of and due upon the completion of a financing of
PIGAP II, a South American joint venture acquired by
Hanover from Schlumberger. (See Note 8.) Because the joint
venture failed to execute the financing on or before
December 31, 2002, Hanover had the right to put its
interest in the joint venture back to Schlumberger in exchange
for a return of the purchase price allocated to the joint
venture, plus the net amount of any capital contributions by us
to the joint venture. In January 2003, we gave notice of our
intent to exercise our right to put our interest in the joint
venture back to Schlumberger. If not exercised, the put right
would have expired as of February 1, 2003. (See
Note 11.) In May 2003, we agreed with Schlumberger Surenco,
an affiliate of Schlumberger, to the modification of the
repayment terms of the $58.0 million obligation. The
obligation was converted into a non-recourse promissory note
with a 6% interest rate compounding semi-annually until maturity
in December 2053. In October 2003, the PIGAP II joint
venture closed on the projects financing and distributed
approximately $78.5 million to Hanover, of which
approximately $59.9 million was used to pay off the PIGAP
Note.

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

In August 2001, we entered into a five-year
strategic alliance with Schlumberger intended to result in the
active support of Schlumberger in fulfilling certain of our
business objectives. The principal components of the strategic
alliance include (1) establishing Hanover as
Schlumbergers most favored supplier of compression,
natural gas treatment and gas processing equipment worldwide,
(2) Schlumbergers coordination and cooperation in
further developing Hanovers international business by
placing Hanover personnel in Schlumbergers offices in six
top international markets and (3) providing Hanover with
access to consulting advice and technical assistance in
enhancing its field automation capabilities. During 2003, we
received approximately $0.5 million in payments from
Schlumberger to reimburse us for our efforts in connection with
the alliance.



| |                                     
| | ------------------------------------
| | Other Related Party
    Transactions

In January 2002, Hanover advanced cash of
$0.1 million to Robert O. Pierce, a former Senior Vice
President  Manufacturing and Procurement, in return
for a promissory note. The note bore interest at

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4.0%, matured on September 30, 2002, and was
unsecured. On September 18, 2002, the Board of Directors
approved the purchase of 30,054 shares of Hanover common
stock from Mr. Pierce at $9.60 per share for a total
of $0.3 million. The price per share was determined by
reference to the closing price quoted on the New York Stock
Exchange on September 18, 2002. The Board of Directors
determined to purchase the shares from Mr. Pierce because
it was necessary for him to sell shares to repay his loan with
Hanover as well as another outstanding loan. The loans matured
during a blackout period under our insider trading policy and
therefore Mr. Pierce could not sell shares of Hanover stock
in the open market to repay the loans. Mr. Pierces
loan from Hanover was repaid in full in September 2002.

During 2001, we sold equipment totaling
approximately $12.0 million to an affiliate of Enron
Capital and Trade Resources Corp. During 2001, we learned that
Enron had sold its investment in Hanovers stock and thus
is no longer a related party to us.

In exchange for notes, Hanover has loaned
approximately $8.9 million to employees, some of who were
subject to margin calls, which together with accrued interest
were outstanding as of December 31, 2002. In December 2002,
Hanovers Board of Directors eliminated the practice of
extending loans to employees and executive officers and there
are no loans outstanding with any current executive officer of
Hanover. Due to the decline in Hanovers stock price and
other collectibility concerns, we have recorded a charge in
other expense to reserve $6.0 million for these employee
loans. During 2003, the notes receivable for loans to employees
who were not executive officers were forgiven.

In connection with the restatements announced by
Hanover in 2002, certain present and former officers and
directors have been named as defendants in putative stockholder
class actions, stockholder derivative actions and have been
involved with the investigation that was conducted by the Staff
of the SEC. Pursuant to the indemnification provisions of our
certificate of incorporation and bylaws, we paid legal fees on
behalf of certain employees, officers and directors involved in
these proceedings. In connection with these proceedings, we
advanced, on behalf of indemnified officers and directors,
during 2003 and 2002, $1.2 million and $1.1 million,
respectively, in the aggregate.

During 2002, $0.4 million was advanced on
behalf of former director and officer William S. Goldberg;
$0.3 million was advanced on behalf of former director and
officer Michael J. McGhan; $0.1 million was advanced on
behalf of former officer Charles D. Erwin; $0.1 million was
advanced on behalf of former officer Joe S. Bradford;
$0.1 million was advanced on behalf of directors Ted
Collins, Jr., Robert R. Furgason, Rene Huck (former
director), Melvyn N. Klein, Michael A. OConnor (former
director), and Alvin V. Shoemaker, who were elected prior to
2002; and $0.1 million was advanced on behalf of
directors I. Jon Brumley, Victor E. Grijalva, and Gordon T.
Hall who were elected during 2002.

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

On July 30, 2003, HCLP entered into a
Membership Interest Redemption Agreement pursuant to which its
10% interest in Energy Transfer Group, LLC (ETG) was
redeemed, and as a result HCLP withdrew as a member of ETG. In
consideration for the surrender of HCLPs 10% membership
interest in ETG, pursuant to a Partnership Interest
Purchase Agreement dated as of July 30, 2003, subsidiaries
of ETG sold to subsidiaries of the Company their entire 1%
interest in Energy Transfer Hanover Ventures, L.P. (Energy
Ventures). As a result of the transaction, the Company now
owns, indirectly, 100% of Energy Ventures. The Companys
10% interest in ETG was carried on the Companys books for
no value. Ted Collins, Jr., a Director of the Company,
owned 100% of Azalea Partners, which at the time of the
transaction, owned 13% of ETG. We advanced working capital to
ETG, for certain costs incurred by ETG for the performance of
services relating to Energy Ventures power generation
business. During the fiscal

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

year ended December 31, 2003 and 2002, the
largest aggregate amount advanced under this arrangement was
$0.4 million and $0.4 million, respectively. The
advances did not bear interest. At December 31, 2002, we
had $0.4 million in advances outstanding to ETG. In 2003
and 2002, ETG billed Hanover $0.5 million and
$1.9 million for services rendered to reimburse ETG for
expenses incurred on behalf of Energy Ventures during the year.
In 2003 and 2002, we recorded sales of approximately
$2.8 million and $0.5 million, respectively related to
equipment leases and parts sales to ETG.



| |                                                
| | -----------------------------------------------
| | Transactions with Former Executive
    Officers

Michael J. McGhan.Mr. McGhan served as Chief Executive Officer and President
of Hanover since October 1991 and served as a director of
Hanover since March 1992. Mr. McGhan also served as an
officer and director of certain Hanover subsidiaries during his
tenure. Mr. McGhan resigned from all positions held with
Hanover on August 1, 2002. In 2001, we advanced cash of
$2.2 million to Mr. McGhan, in return for promissory
notes. The notes bore interest at 4.88%, matured on
April 11, 2006, and are collateralized by personal real
estate and Hanover common stock with full recourse.
411,914 shares of Hanover Common Stock owned by
Mr. McGhan were held secured as collateral for this
$2.2 million loan. In May, 2003, Mr. McGhan paid in
full the $2.2 million loan together with the applicable
accrued interest.

In January 2002, we advanced additional cash of
$0.4 million to Mr. McGhan in return for a promissory
note. The note bore interest at 4.0% and was repaid in full in
September 2002. Set forth below is information concerning the
indebtedness of Mr. McGhan to Hanover as of
December 31, 2003, 2002 and 2001.

|     |  |                |           |                |  |           |           |  |  |  |       | 
|---- |  | -------------- | --------- | -------------- |  | --------- | --------- |  |  |  | ----- | 
|     |  |                |           | Largest        |  | Weighted 
|     |  | Aggregate      |           | Note Principal |  | Average  
|     |  | Note Principal |           | Amount         |  | Rate of  
|     |  | Amount         |           | Outstanding    |  | Interest 
|     |  | Outstanding    |           | during each    |  | at Period
|Year |  | at Period End  |           | Period         |  | End      
|     |  |                |           |                |  |          
|2003 |  | $              |          |                |  | $         | 2,200,000 |  |  |  | 4.88% | 
|2002 |  | $              | 2,200,000 |                |  | $         | 2,600,000 |  |  |  | 4.88% | 
|2001 |  | $              | 2,200,000 |                |  | $         | 2,200,000 |  |  |  | 4.88% | 

On July 29, 2002, we purchased
147,322 shares of the Common Stock from Mr. McGhan for
$8.96 per share for a total of $1.3 million. The price
per share was determined by reference to the closing price
quoted on the New York Stock Exchange on July 29,
2002. The Board of Directors determined to purchase the shares
from Mr. McGhan because he was subject to a margin call
during a blackout period under the Hanover insider trading
policy, and therefore, could not sell such shares to the public
to cover the margin call without being in violation of the
policy.

On August 1, 2002, we entered into a
Separation Agreement with Mr. McGhan. The agreement sets
forth a mutual agreement to sever the relationships between
Mr. McGhan and Hanover, including the employment
relationships of Mr. McGhan with Hanover and its
affiliates. In the agreement, the parties also documented their
understandings with respect to: (i) the posting of
additional collateral by Mr. McGhan to secure repayment of
loans owed by Mr. McGhan to Hanover; and (ii) certain
waivers and releases by Mr. McGhan. In the agreement,
Mr. McGhan made certain representations as to the status of
the outstanding loans payable by Mr. McGhan to Hanover, the
documentation for the loans and the enforceability of his
obligations under the loan documents. The loans were not
modified and must be repaid in accordance with their original
terms. In addition, the agreement provided that Mr. McGhan
may exercise his vested stock options pursuant to the
post-termination exercise periods set forth in the applicable
plan. Since the date of the agreement, Mr. McGhan has
exercised all such vested stock options and the net shares from
such exercise were used as collateral for his outstanding
indebtedness to Hanover.

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In addition, Mr. McGhan agreed, among other
things, not to compete with Hanover and not to solicit Hanover
employees or customers under terms described in the agreement
for a period of twenty-four months after the effective date of
the agreement. In consideration for this
non-compete/non-solicitation agreement, Hanover agreed to pay
Mr. McGhan $33,333 per month for a period of eighteen
months after the effective date of the agreement.

Charles D. Erwin.Mr. Erwin served as Chief Operating Officer of Hanover
since April 2001 and served as Senior Vice President 
Sales and Marketing since May 2000. Mr. Erwin resigned from
these positions on August 2, 2002. In 2000, we advanced
$824,087 to Mr. Erwin in return for a promissory note. In
2002 and 2001, according to the terms of the original note, we
recorded compensation expense and forgave $207,382 and $145,118
of such indebtedness (which included $42,565 and $62,709 of
accrued interest), respectively. The balance of the loan was
repaid in full by Mr. Erwin in December 2002. Set forth
below is information concerning the indebtedness of
Mr. Erwin to Hanover as of December 31, 2002
and 2001:

|     |  |             |         |             |  |           |         |  |  |  |      | 
|---- |  | ----------- | ------- | ----------- |  | --------- | ------- |  |  |  | ---- | 
|     |  | Aggregate   |         | Largest     |  |          
|     |  | Note        |         | Note        |  | Weighted 
|     |  | Principal   |         | Principal   |  | Average  
|     |  | Amount      |         | Amount      |  | Rate of  
|     |  | Outstanding |         | Outstanding |  | Interest 
|     |  | at Period   |         | during each |  | at Period
|Year |  | End         |         | Period      |  | End      
|     |  |             |         |             |  |          
|2002 |  | $           |        |             |  | $         | 631,800 |  |  |  | 4.3% | 
|2001 |  | $           | 631,800 |             |  | $         | 769,148 |  |  |  | 4.8% | 

On August 2, 2002, we entered into a
Separation Agreement with Mr. Erwin. The agreement sets
forth a mutual agreement to sever the relationships between
Mr. Erwin and Hanover, including the employment
relationships of Mr. Erwin with Hanover and its affiliates.
In the agreement, the parties also documented their
understandings with respect to: (i) the posting of
additional collateral by Mr. Erwin to secure repayment of
an outstanding loan owed by Mr. Erwin to Hanover;
(ii) certain waivers and releases by Mr. Erwin; and
(iii) the payment of a reasonable and customary finders fee
for certain proposals brought to Hanovers attention by
Mr. Erwin during the twenty-four month period after the
effective date of the agreement. In the agreement,
Mr. Erwin has made certain representations as to the status
of an outstanding loan payable by Mr. Erwin to Hanover, the
documentation for the loan and the enforceability of his
obligations under the loan documents. The loan was not modified
and as noted above this note was repaid in full in December
2002. In addition, the agreement provides that Mr. Erwin
may exercise his vested stock options pursuant to the
post-termination exercise periods set forth in the applicable
plan. Since the date of the agreement, Mr. Erwin has
exercised all such vested stock options. Mr. Erwins
non-vested stock options were forfeited as of August 2,
2002. In addition, Mr. Erwin agreed, among other things,
not to compete with Hanover and not to solicit Hanover employees
or customers under terms described in the agreement for a period
of twenty-four months after the effective date of the agreement.
In consideration for this non-compete/non-solicitation
agreement, Hanover agreed to pay Mr. Erwin $20,611 per
month for a period of eighteen months after the effective date
of the agreement.

Joe C. Bradford.In
August 2002, our Board of Directors did not reappoint
Mr. Bradford to the position of Senior Vice
President  Worldwide Operations Development, which he
held since May 2000. On September 27, 2002,
Mr. Bradford resigned his employment with Hanover. In 2000,
we advanced $764,961 to Mr. Bradford in return for a
promissory note that matures in June 2004. In 2002 and 2001,
according to the terms of the note, we recorded compensation
expense and forgave $192,504 and $134,706 of such indebtedness
(which included $39,512 and $58,210 of accrued interest),
respectively. Set forth

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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

below is information concerning the indebtedness
of Mr. Bradford to Hanover as of December 31, 2003,
2002 and 2001:

|     |  |             |         |             |  |           |         |  |  |  |      | 
|---- |  | ----------- | ------- | ----------- |  | --------- | ------- |  |  |  | ---- | 
|     |  | Aggregate   |         | Largest     |  |          
|     |  | Note        |         | Note        |  | Weighted 
|     |  | Principal   |         | Principal   |  | Average  
|     |  | Amount      |         | Amount      |  | Rate of  
|     |  | Outstanding |         | Outstanding |  | Interest 
|     |  | at Period   |         | during each |  | at Period
|Year |  | End         |         | Period      |  | End      
|     |  |             |         |             |  |          
|2003 |  | $           | 535,473 |             |  | $         | 535,473 |  |  |  | 4.0% | 
|2002 |  | $           | 535,473 |             |  | $         | 579,845 |  |  |  | 4.3% | 
|2001 |  | $           | 579,845 |             |  | $         | 706,022 |  |  |  | 4.8% | 



|    |                              
|--- | -----------------------------
|19. | Commitments and Contingencies

Rent expense, excluding lease payments for the
leasing transactions described in Note 12, for 2003, 2002
and 2001 was approximately $5.1 million, $4.1 million,
and $4.0 million respectively. Commitments for future
minimum rental payments with terms in excess of one year at
December 31, 2003 are: 2004  $4.4 million;
2005  $2.8 million; 2006 
$2.1 million; 2007  $1.5 million;
2008  $1.2 million and $0.6 million
thereafter.

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

|                                             |                                                         |      |  |                   |  |   |         |         | 
|-------------------------------------------- | ------------------------------------------------------- | ---- |  | ----------------- |  | - | ------- | ------- | 
|                                             |                                                         |      |  | Maximum Potential
|                                             |                                                         |      |  | Undiscounted     
|                                             |                                                         |      |  | Payments as of   
|                                             |                                                         | Term |  | December 31, 2003
|                                             |                                                         |      |  |                  
|Indebtedness of non-consolidated affiliates: |                                                         |      |  |                   |  |   |         |        
|                                             | Simco/ Harwat Consortium(1)                             |      |  | 2005              |  |   | $       | 12,285  | 
|                                             | El Furrial(1)                                           |      |  | 2013              |  |   |         | 40,021  | 
|Other:                                       |                                                         |      |  |                   |  |   |         |        
|                                             | Performance guarantees through letters of
    credit(2) |      |  | 2004-2007         |  |   |         | 67,130  | 
|                                             | Standby letters of credit                               |      |  | 2004              |  |   |         | 23,018  | 
|                                             | Bid bonds and performance bonds(2)                      |      |  | 2004-2007         |  |   |         | 105,393 | 
|                                             |                                                         |      |  |                   |  |   |         |        
|                                             |                                                         |      |  |                   |  | $ | 247,847 |        
|                                             |                                                         |      |  |                   |  |   |         |        



---



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

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



| |                                                                    
| | -------------------------------------------------------------------
| | Litigation and Securities and Exchange
    Commission Investigation

Commencing in February 2002, approximately 15
putative securities class action lawsuits were filed against us
and certain of our current and former officers and directors in
the United States District Court for the Southern District of
Texas. These class actions (together with subsequently filed
actions) were consolidated into one case, Pirelli Armstrong
Tire Corporation Retiree Medical Benefits Trust, On Behalf of
Itself and All Others Similarly Situated, Civil Action
No. H-02-0410, naming as defendants Hanover,
Mr. Michael J. McGhan, Mr. William S. Goldberg and
Mr. Michael A. OConnor. The complaints

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

asserted various claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and sought
unspecified amounts of compensatory damages, interest and costs,
including legal fees. The court entered an order appointing
Pirelli Armstrong Tire Corporation Retiree Medical Benefits
Trust and others as lead plaintiffs on January 7, 2003 and
appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP
as lead counsel. On September 5, 2003, lead plaintiffs
filed an amended complaint in which they sought relief under
Sections 10(b) of the Securities Exchange Act and
Section 11 of the Securities Act against Hanover, certain
former officers and directors and our auditor,
PricewaterhouseCoopers LLP, on behalf of themselves and the
class of persons who purchased Hanover securities between
May 4, 1999 and December 23, 2002.

In the securities action, the plaintiffs allege
generally that the defendants violated the federal securities
laws by making misstatements and omissions in our periodic
filings with the SEC as well as in other public statements in
connection with the transactions that were restated in 2002.

Commencing in February 2002, four derivative
lawsuits were filed in the United States District Court for the
Southern District of Texas, two derivative lawsuits were filed
in state district court for Harris County, Texas (one of which
was nonsuited and the second of which was removed to Federal
District Court for the Southern District of Texas) and one
derivative lawsuit was filed in the Court of Chancery for the
State of Delaware in and for New Castle County. These derivative
lawsuits, which were filed by certain of our shareholders
purportedly on behalf of Hanover, alleged, among other things,
that our directors breached their fiduciary duties to
shareholders in connection with certain of the transactions that
were restated in 2002, and sought unspecified amounts of
damages, interest and costs, including legal fees. The
derivative lawsuits in the United States District Court for the
Southern District of Texas were consolidated on August 19
and August 26, 2002 into the Harbor Finance Partners
derivative lawsuit. With that consolidation, the pending
derivative lawsuits were:

|                                                                                  |  |                                                                                                                                                                                                                      |  |                  |           |       |  |                                                                                  |  |  |          | 
|--------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ----- |  | -------------------------------------------------------------------------------- |  |  | -------- | 
|                                                                                  |  |                                                                                                                                                                                                                      |  |                  |           |       |  | Date                                                                            
|Plaintiff                                                                         |  | Defendants                                                                                                                                                                                                           |  | Civil Action No. |           | Court |  | Instituted                                                                      
|                                                                                  |  |                                                                                                                                                                                                                      |  |                  |           |       |  |                                                                                 
|Harbor Finance Partners, derivatively on behalf
    of Hanover Compressor Company |  | Michael J. McGhan, William S. Goldberg, Ted
    Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael
    A. OConnor, and Alvin V. Shoemaker, Defendants and Hanover
    Compressor Company, Nominal Defendant |  |                  | H-02-0761 |       |  | United States District Court for the Southern
    District of Texas              |  |  | 03/01/02 | 
|Coffelt Family, LLC, derivatively on behalf of
    Hanover Compressor Company     |  | Michael A. OConnor, Michael J. McGhan,
    William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein,
    Alvin V. Shoemaker and Robert R. Furgason, Defendants and
    Hanover Compressor Company, Nominal Defendant  |  |                  | 19410-NC  |       |  | Court of Chancery for the State of Delaware State
    Court in New Castle County |  |  | 02/15/02 | 

On October 2, 2003, the Harbor Finance
Partners derivative lawsuit was consolidated into the Pirelli
Armstrong Tire Corporation Retiree Medical Benefits Trustsecurities class action.

On and after March 26, 2003, three
plaintiffs filed separate putative class actions against
Hanover, certain named individuals and other purportedly unknown
defendants, in the United States District Court for the Southern
District of Texas. The alleged class was composed of persons who
participated in or were beneficiaries of The Hanover Companies
Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal
Revenue Code of 1986, as amended. The purported class action
sought relief under ERISA based upon Hanovers and the
individual defendants alleged mishandling of
Hanovers 401(k) Plan. The three ERISA putative class
actions are entitled:

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Kirkley v.
Hanover,Case No. H-03-1155;
Angleopoulos v. Hanover, Case No. H-03-1064;
and Freeman v. Hanover, Case No. H-03-1095. On
August 1, 2003, the three ERISA class actions were
consolidated into the Pirelli Armstrong Tire Corporation
Retiree Medical Benefits Trustfederal securities class
action. On October 9, 2003, a consolidated amended
complaint was filed by the plaintiffs in the ERISA class action
against Hanover, Michael McGhan, Michael OConnor and
William Goldberg, which included the same allegations as
indicated above, and was filed on behalf of themselves and a
class of persons who purchased or held Hanover securities in
their 401(k) Plan between May 4, 1999 and December 23,
2002.

These actions alleged generally that, in
connection with the transactions that were restated in 2002, we
and certain individuals acting as fiduciaries of Hanovers
401(k) Plan breached our fiduciary duties to the plan
participants by offering Hanover common stock as an investment
option, failing to provide material information to plan
participants regarding the suitability of Hanover common stock
as an investment alternative, failing to monitor the performance
of plan fiduciaries, and failing to provide material information
to other fiduciaries.

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

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

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

On February 9, 2004, the United States
District Court for the Southern District of Texas entered three
Orders and Final Judgments, approving the settlement on the
terms agreed upon in the Stipulation of Settlement with respect
to all of the claims described above including the dismissal of
each of the

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

actions other than the Coffelt Family derivative
action filed in the Delaware Chancery Court. The court also
entered an Order and Final Judgment approving the plans of
allocation with respect to each action, as well as an Order and
Final Judgment approving the schedule of attorneys fees
for counsel for the settling plaintiffs. The time in which these
Orders and Final Judgments may be appealed expired on
March 10, 2004 without any appeal being lodged. In
addition, on March 16, 2004, the Delaware Chancery Court
dismissed the Coffelt Family derivative action. The settlement
has therefore become final and will be implemented according to
its terms. In March 2004, we issued and delivered to the escrow
agent for the settlement fund 2.5 million shares of Hanover
common stock, as required by the settlement. Our independent
auditor, PricewaterhouseCoopers, is not a party to the
settlement and remains a party to the securities class action.

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

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

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

As of December 31, 2003, our accompanying
balance sheet includes a $33.4 million long-term liability
and $32.7 million in accrued liabilities related to amounts
that are expected to be paid in the next twelve months. During
the second quarter of 2003, the $26.7 million receivable
from the insurance carriers and $2.8 million of our portion
of the cash settlement was paid into an escrow fund and is
included in the accompanying balance sheet as restricted cash.
In the first quarter of 2004, we will reclassify
$29.8 million, the value accrued for the stock to be paid,
from other liabilities to stockholders equity and will
include the shares in our outstanding shares used for earnings
per share calculations.

On November 14, 2002, the SEC issued a
Formal Order of Private Investigation relating to the
transactions underlying and other matters relating to the
restatements of our financial statements. In December 2003, we
entered into a settlement with the SEC. Without admitting or
denying any of the SECs findings, we consented to the
entry of a cease and desist order requiring future compliance
with certain periodic reporting, record keeping and internal
control provisions of the securities laws. The settlement did
not impose any monetary penalty on us, and required no
additional restatements of our historical financial statements.

F-44



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of December 31, 2003, we had incurred
approximately $15.1 million in legal related expenses in
connection with the internal investigations, the putative class
action securities and ERISA lawsuits, the derivative lawsuits
and the SEC investigation. Of this amount, we advanced
approximately $2.3 million on behalf of certain current and
former officers and directors in connection with the above-named
proceedings. We intend to advance any litigation costs of our
current and former officers and directors, subject to the
limitations imposed by Delaware and other applicable law and
Hanovers certificate of incorporation and bylaws. We do
not expect additional legal fees and administrative costs in
connection with the settlement of the litigation, advances on
behalf of current and former officers and directors for legal
fees and other related costs to exceed $2.5 million, the
remaining balance of the accrual.

On June 25, 1999, we notified the Air
Quality Bureau of the Environmental Protection Division, New
Mexico Environment Department, of potential violations of
regulatory and permitting requirements. The potential violations
included failure to conduct required performance tests, failure
to file required notices and failure to pay fees for compressor
units located on sites for more than one year. We promptly paid
the required fees and corrected the potential violations. On
June 12, 2001, after the potential violations had been
corrected, the Director of the Division issued a compliance
order to us in connection with the potential violations. The
compliance order assessed a civil penalty of $15,000 per
day per alleged regulatory violation and permit; no total
penalty amount was proposed in the compliance order. On
October 3, 2003, the Division notified us that the total
proposed penalty would be $759,072. However, since the alleged
violations had been self-disclosed, that amount was reduced to
$189,768. We have responded to the penalty assessment,
challenging some of the calculations, and have proposed an
alternative settlement amount. We are currently negotiating with
the New Mexico Environment Department on the method of
calculation and proposed settlement amounts, and the issue is
not yet resolved. A Stipulated Motion for Extension of Time to
File Answer has been filed which extends the deadline for filing
our response to March 22, 2004.

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



|    |              
|--- | -------------
|20. | Other Expense

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

For the year ended December 31, 2002, other
expenses included $15.9 million of write-downs and charges
related to investments in four non-consolidated affiliates that
had experienced a decline in value that we believed to be other
than temporary, a $0.5 million write-off of a purchase
option for an acquisition that we had abandoned,
$2.7 million in other non-operating costs and a
$8.5 million write-down of notes receivable including a
$6.0 million reserve established for loans to employees who
were not executive officers. During 2003, the notes receivable
for loans to employees who were not executive officers were
forgiven.

For the year ended December 31, 2001, other
expenses were $9.7 million which included a
$2.8 million bridge loan commitment fee associated with
Hanovers acquisition of POC, a $5.0 million
write-down of an investment in Aurion, a $1.0 million
litigation settlement and $1.0 million in other
non-operating expenses.

F-45



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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                
|--- | -----------------------------------------------
|21. | Restructuring, Impairment and Other
    Charges

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

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

Included in the net loss for 2002 were the
following pre-tax charges (in thousands):

|                                                                                                      |       |   |        |         | 
|----------------------------------------------------------------------------------------------------- | ----- | - | ------ | ------- | 
|Inventory reserves  (in Parts and
    service and used equipment expense)                            |       | $ | 6,800  |        
|Severance and other charges (in Selling, general
    and administrative)                              |       |   | 6,160  |        
|Write off of idle equipment and assets to be sold
    or abandoned (in Depreciation and amortization) |       |   | 34,485 |        
|Goodwill impairments                                                                                  |       |   | 52,103 |        
|Non-consolidated affiliate write-downs/charges
    (in Other expense)                                 |       |   | 15,950 |        
|Write-down of discontinued operations                                                                 |       |   | 58,282 |        
|Note receivable reserves (in Other expense)                                                           |       |   | 8,454  |        
|Write-off of abandoned purchase option (in Other
    expense)                                         |       |   | 500    |        
|                                                                                                      |       |   |        |        
|                                                                                                      | Total |   | $      | 182,734 | 
|                                                                                                      |       |   |        |        

For a further description of these charges see
Notes 3, 4, 6, 7, 8, 9 and 20.



|    |                              
|--- | -----------------------------
|22. | New Accounting Pronouncements

In June 2001, the FASB issued SFAS 143,
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143).
SFAS 143 establishes the accounting standards for the
recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. SFAS 143 became
effective for Hanover on January 1, 2003. The adoption of
this new standard did not have a material effect on our
consolidated results of operations, cash flows or financial
position.

In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145
updates, clarifies and simplifies existing accounting
pronouncements. Provisions of SFAS 145 related to the
rescission of Statement 4 became effective for us on
January 1, 2003. The provisions of SFAS 145 related to
SFAS 13 are effective for transactions occurring after
May 15, 2002. We have adopted the provisions of the new
standard, which had no material effect on our consolidated
results of operations, cash flows or financial position.

In June 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146), which addresses
accounting for restructuring and similar costs. SFAS 146
supersedes previous accounting guidance, principally Emerging
Issues Task Force Issue (EITF) No. 94-3. We
adopted the provision of SFAS 146 for restructuring
activities initiated after December 31, 2002, which had no
material effect on our financial statements. SFAS 146
requires that the liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of the commitment to an exit plan.
SFAS 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly,
SFAS 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.

F-46



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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21).
EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform
multiple revenue generating activities. EITF 00-21 became
effective for interim periods beginning after June 15,
2003. We have adopted the provisions of EITF 00-21, which
did not have a material effect on our consolidated results of
operations, cash flow or financial position.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, which clarifies disclosure and
recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for
financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The adoption of the provisions of this
interpretation did not have a material effect on our
consolidated results of operations, cash flow or financial
position.

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

Prior to July 1, 2003, we entered into five
lease transactions that were recorded as a sale and leaseback of
the compression equipment and were treated as operating leases
for financial reporting purposes. On July 1, 2003, we
adopted the provisions of FIN 46 as they relate to the
special purpose entities that lease compression equipment to us.
As a result of the adoption, we added approximately
$1,089 million in compressor equipment assets,
$192.3 million of accumulated depreciation (including
approximately $58.6 million of accumulated depreciation
related to periods before the sale and leaseback of the
equipment), $1,105.0 million in debt and $34.6 million
in minority interest obligations to our balance sheet, and we
reversed $108.8 million of deferred gains that were
recorded on our balance sheet as a result of the sale leaseback
transactions. On July 1, 2003, we recorded a
$133.7 million charge ($86.9 million net of tax) to
record the cumulative effect from the adoption of FIN 46
related to prior period depreciation of the compression
equipment assets. Additionally, we estimate that we will record
approximately $17 million per year in additional
depreciation expense on our leased compression equipment as a
result of the inclusion of the compression equipment on our
balance sheet and will also record the payments made under our
compression equipment leases as interest expense.

We have a consolidated subsidiary trust that has
mandatorily redeemable preferred securities outstanding which
have a liquidation value of $86.3 million. These securities
were previously reported on our balance sheet as mandatorily
redeemable convertible preferred securities. Because we only
have a limited ability to make decisions about its activities
and we are not the primary beneficiary of the trust, the trust
is a VIE under FIN 46. As such, the mandatorily redeemable
preferred securities issued by the trust

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HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

are no longer reported on our balance sheet.
Instead, we now report our subordinated notes payable to the
trust as a debt. These intercompany notes have previously been
eliminated in our consolidated financial statements. The changes
related to our mandatorily redeemable preferred securities for
our balance sheet are reclassifications and no impact on our
consolidated results of operations or cash flow.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is
effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. All provisions of SFAS 149 will
be applied prospectively. We have adopted the provisions
SFAS 149, which did not have a material effect on our
consolidated results of operations, cash flow or financial
position.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS 150 changes
the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity.
SFAS 150 requires that those instruments be classified as
liabilities in statements of financial position. SFAS 150
is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for interim
periods beginning after June 15, 2004. On November 7,
the FASB issued Staff Position 150-4 that delayed the effective
date for certain types of financial instruments. We do not
believe the adoption of the guidance currently provided in
SFAS 150 will have a material effect on our consolidated
results of operations or cash flow. However, we may be required
to classify as debt approximately $28.6 million in sale
leaseback obligations that are currently reported as
Minority interest on our condensed consolidated
balance sheet pursuant to FIN 46. (See Note 12.)

These minority interest obligations represent the
equity of the entities that lease compression equipment to us.
In accordance with the provisions of our compression equipment
lease obligations, the equity certificate holders are entitled
to quarterly or semi-annual yield payments on the aggregate
outstanding equity certificates. As of December 31, 2003,
the yield rates on the outstanding equity certificates ranged
from 4.4% to 9.5%. Equity certificate holders may receive a
return of capital payment upon lease termination or our purchase
of the leased compression equipment after full payment of all
debt obligations of the entities that lease compression
equipment to us. At December 31, 2003, the carrying value
of the minority interest obligations approximated the fair
market value of assets that would be required to be transferred
to redeem the minority interest obligations.



|    |                                                 
|--- | ------------------------------------------------
|23. | Industry Segments and Geographic
    Information

We manage our business segments primarily based
upon the type of product or service provided. We have five
principal industry segments: Domestic Rentals; International
Rentals; Parts, Service and Used Equipment; Compressor and
Accessory Fabrication; and Production and Processing Equipment
Fabrication. The Domestic and International Rentals segments
primarily provide natural gas compression and production and
processing equipment rental and maintenance services to meet
specific customer requirements on Hanover-owned assets. The
Parts, Service and Used Equipment segment provides a full range
of services to support the surface production needs of customers
from installation and normal maintenance and services to full
operation of a customers owned assets and surface
equipment as well as sales of used equipment. The Compressor and
Accessory Fabrication Segment involves the design, fabrication
and sale of natural gas compression units and accessories to
meet unique customer specifications. The Production and
Processing Equipment Fabrication Segment designs, fabricates and
sells equipment used in the production and treating of crude oil
and natural gas and engineering, procurement and construction of
heavy wall reactors for refineries and desalination plants.

F-48



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We evaluate the performance of our 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, foreign
currency translation, provision for cost of litigation
settlement, goodwill impairment, other expenses and income
taxes. Amounts defined as Other include equity in
income of non-consolidated affiliates, results of other
insignificant operations and corporate related items primarily
related to cash management activities. Revenues include sales to
external customers and intersegment sales. Intersegment sales
are accounted for at cost, except for compressor fabrication
sales which are accounted for on an arms length basis.
Intersegment sales and any resulting profits 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.

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

The following tables present sales and other
financial information by industry segment and geographic region
for the years ended December 31, 2003, 2002 and 2001.



| |                  
| | -----------------
| | Industry Segments

|      |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |           |           | 
|----- | -------------------------------- | -------------- | - | ------------- | ------- | -------------- | - | ----------- | ------- | ----------- | - | ------- | ------- | ------------ | - | ------------ | ------- |  | - | ------- | ------- |  | - | ------- | ------ |  | - | -------- | -------- | - | - | --------- | --------- | 
|      |                                  |                |   |               |         |                |   |             |         | Production  |   |         |         |              |   |             
|      |                                  |                |   |               |         |                |   | Compressor  |         | and         |   |         |         |              |   |             
|      |                                  |                |   |               |         | Parts, service |   | and         |         | processing  |   |         |         |              |   |             
|      |                                  | Domestic       |   | International |         | and used       |   | accessory   |         | equipment   |   |         |         |              |   |             
|      |                                  | rentals        |   | rentals       |         | equipment      |   | fabrication |         | fabrication |   | Other   |         | Eliminations |   | Consolidated
|      |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |             
|      |                                  |               
|      |                                  | (in thousands)
|2003: |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      | Revenues from external customers |                | $ | 324,186       |         |                | $ | 206,404     |         |             | $ | 169,023 |         |              | $ | 106,896      |         |  | $ | 260,660 |         |  | $ | 28,181  |        |  | $ |         |          |   | $ | 1,095,350 |          
|      | Intersegment sales               |                |   |              |         |                |   | 1,679       |         |             |   | 69,527  |         |              |   | 10,736       |         |  |   | 24,676  |         |  |   |        |        |  |   | (106,618 | )        |   |   |          |          
|      |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      |                                  | Total revenues |   |               | 324,186 |                |   |             | 208,083 |             |   |         | 238,550 |              |   |              | 117,632 |  |   |         | 285,336 |  |   |         | 28,181 |  |   |          | (106,618 | ) |   |           | 1,095,350 | 
|      | Gross profit                     |                |   | 196,761       |         |                |   | 138,939     |         |             |   | 42,404  |         |              |   | 9,974        |         |  |   | 26,457  |         |  |   | 28,181  |        |  |   |         |          |   |   | 442,716   |          
|      | Identifiable assets              |                |   | 1,639,554     |         |                |   | 751,914     |         |             |   | 64,496  |         |              |   | 95,506       |         |  |   | 191,999 |         |  |   | 174,997 |        |  |   |         |          |   |   | 2,918,466 |          
|      | Capital expenditures             |                |   | 73,007        |         |                |   | 59,200      |         |             |   | 24      |         |              |   | 2,735        |         |  |   | 7,500   |         |  |   |        |        |  |   |         |          |   |   | 142,466   |          
|      | Depreciation and amortization    |                |   | 109,214       |         |                |   | 55,684      |         |             |   | 916     |         |              |   | 1,290        |         |  |   | 5,498   |         |  |   |        |        |  |   |         |          |   |   | 172,602   |          
|2002: |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      | Revenues from external customers |                | $ | 328,600       |         |                | $ | 189,700     |         |             | $ | 223,845 |         |              | $ | 114,009      |         |  | $ | 149,656 |         |  | $ | 23,000  |        |  | $ |         |          |   | $ | 1,028,810 |          
|      | Intersegment sales               |                |   |              |         |                |   | 6,718       |         |             |   | 54,249  |         |              |   | 60,790       |         |  |   | 12,848  |         |  |   | 5,057   |        |  |   | (139,662 | )        |   |   |          |          
|      |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      |                                  | Total revenues |   |               | 328,600 |                |   |             | 196,418 |             |   |         | 278,094 |              |   |              | 174,799 |  |   |         | 162,504 |  |   |         | 28,057 |  |   |          | (139,662 | ) |   |           | 1,028,810 | 
|      | Gross profit                     |                |   | 206,428       |         |                |   | 132,121     |         |             |   | 44,001  |         |              |   | 14,563       |         |  |   | 22,214  |         |  |   | 23,000  |        |  |   |         |          |   |   | 442,327   |          
|      | Identifiable assets              |                |   | 763,161       |         |                |   | 792,554     |         |             |   | 92,609  |         |              |   | 90,639       |         |  |   | 245,366 |         |  |   | 169,700 |        |  |   |         |          |   |   | 2,154,029 |          
|      | Capital expenditures             |                |   | 120,581       |         |                |   | 101,349     |         |             |   | 1,093   |         |              |   | 441          |         |  |   | 26,706  |         |  |   |        |        |  |   |         |          |   |   | 250,170   |          
|      | Depreciation and amortization    |                |   | 90,160        |         |                |   | 54,249      |         |             |   | 1,233   |         |              |   | 1,282        |         |  |   | 4,257   |         |  |   |        |        |  |   |         |          |   |   | 151,181   |          
|2001: |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      | Revenues from external customers |                | $ | 269,679       |         |                | $ | 131,097     |         |             | $ | 214,872 |         |              | $ | 223,519      |         |  | $ | 184,040 |         |  | $ | 17,753  |        |  | $ |         |          |   | $ | 1,040,960 |          
|      | Intersegment sales               |                |   |              |         |                |   | 2,858       |         |             |   | 72,930  |         |              |   | 112,748      |         |  |   | 7,110   |         |  |   | 4,600   |        |  |   | (200,246 | )        |   |   |          |          
|      |                                  |                |   |               |         |                |   |             |         |             |   |         |         |              |   |              |         |  |   |         |         |  |   |         |        |  |   |          |          |   |   |          
|      |                                  | Total revenues |   |               | 269,679 |                |   |             | 133,955 |             |   |         | 287,802 |              |   |              | 336,267 |  |   |         | 191,150 |  |   |         | 22,353 |  |   |          | (200,246 | ) |   |           | 1,040,960 | 
|      | Gross profit                     |                |   | 174,476       |         |                |   | 85,302      |         |             |   | 62,171  |         |              |   | 35,397       |         |  |   | 36,216  |         |  |   | 17,753  |        |  |   |         |          |   |   | 411,315   |          
|      | Identifiable assets              |                |   | 867,544       |         |                |   | 683,829     |         |             |   | 145,010 |         |              |   | 153,198      |         |  |   | 194,081 |         |  |   | 222,114 |        |  |   |         |          |   |   | 2,265,776 |          
|      | Capital expenditures             |                |   | 450,172       |         |                |   | 137,805     |         |             |   | 6,763   |         |              |   | 399          |         |  |   | 24,626  |         |  |   | 20,118  |        |  |   |         |          |   |   | 639,883   |          
|      | Depreciation and amortization    |                |   | 45,743        |         |                |   | 33,685      |         |             |   | 1,259   |         |              |   | 4,774        |         |  |   | 3,362   |         |  |   |        |        |  |   |         |          |   |   | 88,823    |          

F-49



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##### Table of Contents



HANOVER COMPRESSOR COMPANY


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                
| | ---------------
| | Geographic Data

|      |                                  |                           |   |                  |  |              |   |           |  |  |   |           | 
|----- | -------------------------------- | ------------------------- | - | ---------------- |  | ------------ | - | --------- |  |  | - | --------- | 
|      |                                  | United                    |   |                  |  |             
|      |                                  | States                    |   | International(1) |  | Consolidated
|      |                                  |                           |   |                  |  |             
|      |                                  |                          
|      |                                  | (in thousands of dollars)
|2003: |                                  |                           |   |                  |  |              |   |           |  |  |   |          
|      | Revenues from external customers |                           | $ | 647,176          |  |              | $ | 448,174   |  |  | $ | 1,095,350 | 
|      | Identifiable assets              |                           | $ | 1,950,944        |  |              | $ | 967,522   |  |  | $ | 2,918,466 | 
|2002: |                                  |                           |   |                  |  |              |   |           |  |  |   |          
|      | Revenues from external customers |                           | $ | 692,823          |  |              | $ | 335,987   |  |  | $ | 1,028,810 | 
|      | Identifiable assets              |                           | $ | 1,068,003        |  |              | $ | 1,086,026 |  |  | $ | 2,154,029 | 
|2001: |                                  |                           |   |                  |  |              |   |           |  |  |   |          
|      | Revenues from external customers |                           | $ | 730,702          |  |              | $ | 310,258   |  |  | $ | 1,040,960 | 
|      | Identifiable assets              |                           | $ | 1,319,084        |  |              | $ | 946,692   |  |  | $ | 2,265,776 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | International operations include approximately
    $122.8 million, $104.0 million and $77.2 million
    of revenues and $348.2 million, $431.0 million and
    $467.8 million of identifiable assets for 2003, 2002 and
    2001, respectively, related to operations and investments in
    Venezuela. Approximately $79.4 million, $141.0 million
    and $152.4 million of the identifiable assets in 2003, 2002
    and 2001, respectively, relates to the joint ventures acquired
    in connection with the POC acquisition completed in August 2001.
    (See Note 8).



|    |                  
|--- | -----------------
|24. | Subsequent Events

On February 9, 2004, the United States
District Court for the Southern District of Texas entered three
Orders and Final Judgments, approving the securities related
settlement on the terms agreed upon in the Stipulation of
Settlement with respect to all of the claims described in
Note 19. The court also entered an Order and Final Judgment
approving the plans of allocation with respect to each action,
as well as an Order and Final Judgment approving the schedule of
attorneys fees for counsel for the settling plaintiffs.
The time in which these Orders and Final Judgments may be
appealed expired on March 10, 2004 without any appeal being
lodged. The settlement has therefore become final and will be
implemented according to its terms. In March 2004, we issued and
delivered to the escrow agent for the settlement fund
2.5 million shares of Hanover common stock, as required by
the settlement. See Note 19 for further information related
to the settlement.

We received a letter on March 11, 2004 from
the administrative trustee of the GKH Liquidating Trust
indicating it and one of its affiliates had decided to
distribute 5.8 million shares of the 8.3 million
shares of Hanover common stock owned by the GKH Liquidating
Trust (formerly held by GKH) and its affiliate to the relevant
beneficiaries. The remaining 2.5 million shares held by GKH
will be paid as part of the global shareholder litigation
settlement. (See Note 19.)

On March 5, 2004, we sold our 50.384%
limited partnership interest and 0.001% general partnership
interest in Hanover Measurement Services Company, L.P. to
EMS Pipeline Services, L.L.C. for $4.9 million, of
which $0.2 million has been put in escrow subject to the
outcome of post closing working capital adjustments. We have no
obligation to the purchaser with respect to any post-closing
adjustment in excess of the escrowed amount. We accounted for
our interest in Hanover Measurement under the equity method.

F-50



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##### Table of Contents



HANOVER COMPRESSOR COMPANY

SELECTED QUARTERLY UNAUDITED FINANCIAL
DATA

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

|         |                                                                     |                                          |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |         |       |       |  
|-------- | ------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------------------------- | ------- | ---- | ------- | - | ------- | ----- | - | - | -------- | ---- | ----- | - | ------- | ----- | ----- | -
|         |                                                                     | 1st                                      |                                                                  | 2nd     |      | 3rd     |   | 4th    
|         |                                                                     | Quarter                                  |                                                                  | Quarter |      | Quarter |   | Quarter
|         |                                                                     |                                          |                                                                  |         |      |         |   |        
|         |                                                                     |                                         
|         |                                                                     | (In thousands, except per share amounts)
|2003(1): |                                                                     |                                          |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |        
|         | Revenue                                                             |                                          | $                                                                | 273,687 |      |         | $ | 276,364 |       |   | $ | 275,197  |      |       | $ | 270,102 |      
|         | Gross profit                                                        |                                          |                                                                  | 114,800 |      |         |   | 111,332 |       |   |   | 108,858  |      |       |   | 107,726 |      
|         | Income (loss) before cumulative effect of
    accounting changes(3) |                                          |                                                                  | (26,599 | )    |         |   | 207     |       |   |   | (58,509  | )    |       |   | (36,448 | )    
|         | Net income (loss)(3)                                                |                                          |                                                                  | (26,599 | )    |         |   | 207     |       |   |   | (145,419 | )    |       |   | (36,448 | )    
|         | Earnings (loss) per common and common equivalent
    share:         |                                          |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |         |      
|         |                                                                     | Basic:                                   |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |         |       |      
|         |                                                                     |                                          | Income (loss) before cumulative effect of
    accounting changes |         | $    | (0.33   | ) |         | $     |  |   |          | $    | (0.72 | ) |         | $     | (0.45 | )
|         |                                                                     |                                          | Net income (loss)                                                |         | $    | (0.33   | ) |         | $     |  |   |          | $    | (1.79 | ) |         | $     | (0.45 | )
|         |                                                                     | Diluted:                                 |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |         |       |      
|         |                                                                     |                                          | Income (loss) before cumulative effect of
    accounting changes |         | $    | (0.33   | ) |         | $     |  |   |          | $    | (0.72 | ) |         | $     | (0.45 | )
|         |                                                                     |                                          | Net income (loss)                                                |         | $    | (0.33   | ) |         | $     |  |   |          | $    | (1.79 | ) |         | $     | (0.45 | )
|2002(2): |                                                                     |                                          |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |        
|         | Revenue                                                             |                                          | $                                                                | 255,526 |      |         | $ | 262,220 |       |   | $ | 249,367  |      |       | $ | 261,697 |      
|         | Gross profit                                                        |                                          |                                                                  | 108,398 |      |         |   | 109,750 |       |   |   | 117,635  |      |       |   | 106,544 |      
|         | Net income (loss)                                                   |                                          |                                                                  | 5,034   |      |         |   | (55,241 | )     |   |   | 9,059    |      |       |   | (74,920 | )    
|         | Earnings (loss) per common and common equivalent
    share:         |                                          |                                                                  |         |      |         |   |         |       |   |   |          |      |       |   |         |      
|         |                                                                     | Basic                                    |                                                                  | $       | 0.06 |         |   | $       | (0.70 | ) |   | $        | 0.11 |       |   | $       | (0.93 | )    
|         |                                                                     | Diluted                                  |                                                                  | $       | 0.06 |         |   | $       | (0.70 | ) |   | $        | 0.11 |       |   | $       | (0.93 | )    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During, the first quarter of 2003, we recorded a
    $42.1 million estimated provision for the estimated
    settlement of securities litigation that was subsequently
    adjusted to $43.0 million. During the third quarter of
    2003, we recorded a $35.5 million goodwill impairment,
    $14.3 million rental fleet impairment, $16.8 million
    write-down of discontinued operations and $133.7 million
    cumulative effect of accounting change for the adoption of
    FIN 46. During the fourth quarter of 2003, we recorded a
    $2.5 million write-off of deferred financing costs and
    $2.3 million write-down of discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | During the second quarter of 2002, we recorded a
    $47.5 million goodwill impairment, $6.0 million
    write-down of assets held for sale, a $6.1 million
    inventory reserve, a $0.5 million write off of a purchase
    option for an acquisition which was abandoned and
    $14.1 million write-down related to investments in certain
    non-consolidated affiliates. We incurred other expenses during
    the fourth quarter of 2002 which included a $8.5 million
    write-down of notes receivable and a $1.9 million write off
    related to Aurion. In addition, during the fourth quarter of
    2002, we recorded i) $52.3 million pre-tax charge for
    the estimated loss in fair-value from the carrying value
    expected to be realized at the time of disposal of our
    discontinued operations; ii) $34.5 million in
    additional impairment to reduce the carrying value of certain
    idle compression equipment that are being retired and the
    acceleration of depreciation related to certain plants and
    facilities expected to be sold or abandoned;
    iii) $4.6 million goodwill impairment related to our
    pump division which is expected to be sold; and
    iv) $2.7 million in employee separation costs.

F-51



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | During the performance of our annual goodwill
    impairment review in the fourth quarter of 2003, we determined
    the present value of Bellelis expected future cash flows
    was less than our carrying value of Belleli. This resulted in a
    full impairment charge for the $35.5 million in goodwill
    associated with Belleli. Upon further analysis, it was
    determined that the factors resulting in the goodwill impairment
    charge were also present during the third quarter of 2003 and
    that the exercise of our purchase option in the third quarter of
    2003 and the presence of such factors should have resulted in an
    interim goodwill impairment test under SFAS 142 and an
    impairment charge at that time. Our financial results previously
    reported for the third quarter of 2003 did not include the
    impairment charge. (See Note 2). The results included in
    the above table have been adjusted to reflect the
    $35.5 million impairment charge in our third quarter
    results. The table below indicates the impact of this adjustment
    (in thousands):

|                                                                 |                                                                  |             |          |             |   |   |          |       |  
|---------------------------------------------------------------- | ---------------------------------------------------------------- | ----------- | -------- | ----------- | - | - | -------- | ----- | -
|                                                                 |                                                                  | 3rd Quarter |          | 3rd Quarter
|                                                                 |                                                                  | as reported |          | as restated
|                                                                 |                                                                  |             |          |            
|Revenue                                                          |                                                                  | $           | 275,197  |             |   | $ | 275,197  |      
|Gross profit                                                     |                                                                  |             | 108,858  |             |   |   | 108,858  |      
|Income (loss) before cumulative effect of
    accounting changes |                                                                  |             | (23,043  | )           |   |   | (58,509  | )    
|Net income (loss)                                                |                                                                  |             | (109,953 | )           |   |   | (145,419 | )    
|Earnings (loss) per common and common
    equivalent share:      |                                                                  |             |          |             |   |   |          |      
|                                                                 | Basic:                                                           |             |          |             |   |   |          |       |  
|                                                                 | Income (loss) before cumulative effect of
    accounting changes |             | $        | (0.28       | ) |   | $        | (0.72 | )
|                                                                 | Net income (loss)                                                |             | $        | (1.35       | ) |   | $        | (1.79 | )
|                                                                 | Diluted:                                                         |             |          |             |   |   |          |       |  
|                                                                 | Income (loss) before cumulative effect of
    accounting changes |             | $        | (0.28       | ) |   | $        | (0.72 | )
|                                                                 | Net income (loss)                                                |             | $        | (1.35       | ) |   | $        | (1.79 | )

F-52



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##### Table of Contents



SCHEDULE II

HANOVER COMPRESSOR COMPANY

VALUATION AND QUALIFYING ACCOUNTS


|                                                                                                    |      |                |   |            |  |            |   |           |  |  |   |        |     |  |   |        | 
|--------------------------------------------------------------------------------------------------- | ---- | -------------- | - | ---------- |  | ---------- | - | --------- |  |  | - | ------ | --- |  | - | ------ | 
|                                                                                                    |      | Balance        |   | Additions  |  |            |   |          
|                                                                                                    |      | at             |   | Charged to |  |            |   | Balance  
|                                                                                                    |      | Beginning      |   | Costs and  |  |            |   | at End of
|Description                                                                                         |      | of Period      |   | Expenses   |  | Deductions |   | Period   
|                                                                                                    |      |                |   |            |  |            |   |          
|                                                                                                    |      |               
|                                                                                                    |      | (In thousands)
|Allowance for doubtful accounts deducted from
    accounts receivable in the balance sheet          |      |                |   |            |  |            |   |           |  |  |   |        |     |  |   |       
|                                                                                                    | 2003 |                | $ | 5,162      |  |            | $ | 4,028     |  |  | $ | 3,730  | (1) |  | $ | 5,460  | 
|                                                                                                    | 2002 |                |   | 6,300      |  |            |   | 7,091     |  |  |   | 8,229  | (1) |  |   | 5,162  | 
|                                                                                                    | 2001 |                |   | 2,659      |  |            |   | 4,860     |  |  |   | 1,219  | (1) |  |   | 6,300  | 
|Allowance for obsolete and slow moving inventory
    deducted from inventories in the balance sheet |      |                |   |            |  |            |   |           |  |  |   |        |     |  |   |       
|                                                                                                    | 2003 |                | $ | 14,211     |  |            | $ | 3,049     |  |  | $ | 4,531  | (2) |  | $ | 12,729 | 
|                                                                                                    | 2002 |                |   | 2,101      |  |            |   | 13,853    |  |  |   | 1,743  | (2) |  |   | 14,211 | 
|                                                                                                    | 2001 |                |   | 560        |  |            |   | 2,336     |  |  |   | 795    | (2) |  |   | 2,101  | 
|Allowance for deferred tax assets not expected to
    be realized                                   |      |                |   |            |  |            |   |           |  |  |   |        |     |  |   |       
|                                                                                                    | 2003 |                | $ | 23,371     |  |            | $ | 46,824    |  |  | $ | 15,180 | (3) |  | $ | 55,015 | 
|                                                                                                    | 2002 |                |   |           |  |            |   | 23,371    |  |  |   |       |     |  |   | 23,371 | 
|Allowance for employee loans                                                                        |      |                |   |            |  |            |   |           |  |  |   |        |     |  |   |       
|                                                                                                    | 2003 |                | $ | 6,021      |  |            | $ |          |  |  | $ | 6,021  | (4) |  | $ |       | 
|                                                                                                    | 2002 |                |   |           |  |            |   | 6,021     |  |  |   |       |     |  |   | 6,021  | 



---



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | Uncollectible accounts written off, net of
    recoveries.                                                 
|   
|(2) | Obsolete inventory written off at cost, net of
    value received.                                         
|   
|(3) | Reflects utilization of prior year valuation
    allowance in the current year.                            
|   
|(4) | During 2003, the notes receivable for loans to
    employees who were not executive officers were forgiven.

S-1



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##### Table of Contents



EXHIBIT INDEX

|        |   |             |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | - | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 3 | .1          |  | Certificate of Incorporation of the Hanover
    Compressor Holding Co., as amended, incorporated by reference to
    Exhibit 3.1 to Hanover Compressor Companys (the
    Company) Current Report on Form 8-K filed with
    the SEC on February 5, 2001.                                                                                                                                             
|        | 3 | .2          |  | Certificate of Amendment of Certificate of
    Incorporation of Hanover Compressor Holding Co., dated
    December 8, 1999, incorporated by reference to
    Exhibit 3.2 to the Companys Current Report on
    Form 8-K filed with the SEC on February 5, 2001.                                                                                                                                        
|        | 3 | .3          |  | Certificate of Amendment of Certificate of
    Incorporation of Hanover Compressor Holding Co., dated
    July 11, 2000, incorporated by reference to
    Exhibit 3.3 to the Companys Current Report on
    Form 8-K filed with the SEC on February 5, 2001.                                                                                                                                           
|        | 3 | .4          |  | Amended and Restated Bylaws of the Company, dated
    March 10, 2004.*                                                                                                                                                                                                                                                                                                                                  
|        | 4 | .1          |  | Third Amended and Restated Registration Rights
    Agreement, dated as of December 5, 1995, by and between the
    Company, GKH Partners, L.P., GKH Investments, L.P., Astra
    Resources, Inc. and other stockholders of the Company party
    thereto, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-24953)
    on Form S-1, as amended.        
|        | 4 | .2          |  | Form of Warrant Agreement, dated as of
    August 7, 1995, incorporated by reference to
    Exhibit 4.10 to the Companys Registration Statement
    (File No. 333-24953) on Form S-1, as amended.                                                                                                                                                                                                      
|        | 4 | .3          |  | Specimen Stock Certificate, incorporated by
    reference to Exhibit 4.11 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                                                                                                                                                                                                                                 
|        | 4 | .4          |  | Form of Hanover Compressor Capital Trust
    7 1/4% Convertible Preferred Securities, incorporated
    by reference to Exhibit 4.8 to the Companys
    Registration Statement (File No. 333-30344) on
    Form S-3 as filed with the SEC on February 14, 2000.                                                                                                                                         
|        | 4 | .5          |  | Indenture for the Convertible Junior Subordinated
    Debentures due 2029, dated as of December 15, 1999, among
    the Company, as issuer, and Wilmington Trust Company, as
    trustee, incorporated by reference to Exhibit 4.6 to the
    Companys Registration Statement (File No. 333-30344)
    on Form S-3 filed with the SEC on February 14, 2000.                                            
|        | 4 | .6          |  | Form of Hanover Compressor Company Convertible
    Subordinated Junior Debentures due 2029, incorporated by
    reference to Exhibit 4.9 to the Companys Registration
    Statement (File No. 333-30344) on Form S-3 as filed
    with the SEC on February 14, 2000.                                                                                                                                   
|        | 4 | .7          |  | Indenture for the 4.75% Convertible Senior
    Notes due 2008, dated as of March 15, 2001, between the
    Company and Wilmington Trust Company, as trustee.*                                                                                                                                                                                                                                           
|        | 4 | .8          |  | Form of 4.75% Convertible Senior Notes due
    2008.*                                                                                                                                                                                                                                                                                                                                                   
|        | 4 | .9          |  | Indenture for the 8.50% Senior Secured Notes
    due 2008, dated as of August 30, 2001, among the 2001A
    Trust, as issuer, Hanover Compression Limited Partnership and
    certain subsidiaries, as guarantors, and Wilmington Trust FSB,
    as Trustee, incorporated by reference to Exhibit 10.69 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.
|        | 4 | .10         |  | Form of 8.50% Senior Secured Notes due 2008.*                                                                                                                                                                                                                                                                                                                                                           
|        | 4 | .11         |  | Indenture for the 8.75% Senior Secured Notes
    due 2011, dated as of August 30, 2001, among the 2001B
    Trust, as issuer, Hanover Compression Limited Partnership and
    certain subsidiaries, as guarantors, and Wilmington Trust FSB,
    as Trustee, incorporated by reference to Exhibit 10.75 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.
|        | 4 | .12         |  | Form of 8.75% Senior Secured Notes due 2011.*                                                                                                                                                                                                                                                                                                                                                           
|        | 4 | .13         |  | Indenture for the Zero Coupon Subordinated Notes
    due March 31, 2007, dated as of May 14, 2003, between
    the Company and Wachovia Bank, National Association, as trustee,
    incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-106384)
    on Form S-3, as filed with the SEC on June 23, 2003.                                                 
|        | 4 | .14         |  | Form of Zero Coupon Subordinated Notes due
    March 31, 2007.*                                                                                                                                                                                                                                                                                                                                         



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 4  | .15         |  | Senior Indenture, dated as of December 15,
    2003, among the Company, Subsidiary Guarantors named therein and
    Wachovia Bank, National Association, as trustee, incorporated by
    reference to Exhibit 4.1 to the Companys Registration
    Statement on Form 8-A, as filed with the SEC on
    December 15, 2003.                                                                                                              
|        | 4  | .16         |  | First Supplemental Indenture to the Senior
    Indenture dated as of December 15, 2003, relating to the
    8.625% Senior Notes due 2010, dated as of December 15,
    2003, between the Company and Wachovia Bank, National
    Association, as trustee, incorporated by reference to
    Exhibit 4.2 to the Companys Registration Statement on
    Form 8-A, as filed with the SEC on December 15, 2003.                             
|        | 4  | .17         |  | Form of 8.625% Senior Notes due 2010.*                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4  | .18         |  | Second Supplemental Indenture to the Senior
    Indenture dated as of December 15, 2003, relating to the
    4.75% Convertible Senior Notes due 2014, dated as of
    December 15, 2003, between the Company and Wachovia Bank,
    National Association, as trustee, incorporated by reference to
    Exhibit 4.4 to the Companys Current Report on
    Form 8-K, as filed with the SEC on December 16, 2003.                         
|        | 4  | .19         |  | Form of 4.75% Convertible Senior Notes due
    2014.*                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4  | .20         |  | Registration Rights Agreement, dated as of
    May 14, 2003, by and between Schlumberger Technology
    Corporation and the Company.*                                                                                                                                                                                                                                                                                                   
|        | 4  | .21         |  | Lock-Up, Standstill and Registration Rights
    Agreement, dated as of August 31, 2001, by and among
    Schlumberger Technology Corporation, Camco
    International, Inc., Schlumberger Oilfield Holdings Ltd.,
    Schlumberger Surenco S.A., Operational Services, Inc. and
    the Company, incorporated by reference to Exhibit 99.5 to
    the Companys Current Report on Form 8-K filed with
    the SEC on September 14, 2001.
|        | 10 | .1          |  | Stipulation and Agreement of Settlement, dated as
    of October 23, 2003, incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003.                                                                                                                                                                                                                   
|        | 10 | .2          |  | PIGAP Settlement Agreement, dated as of
    May 14, 2003, by and among Schlumberger Technology
    Corporation, Schlumberger Oilfield Limited, Schlumberger Surenco
    S.A., the Company and Hanover Compression Limited Partnership.*                                                                                                                                                                                                 
|        | 10 | .3          |  | Offset Rights Agreement, dated as of May 14,
    2003, by and between Schlumberger Technology Corporation and the
    Company.*                                                                                                                                                                                                                                                                                                         
|        | 10 | .4          |  | Credit Agreement, dated as of December 15,
    2003, among the Company, Hanover Compression Limited
    Partnership, Bank One, NA as Syndication Agent, JPMorgan Chase
    Bank, as Administrative Agent, and the several lenders parties
    thereto, incorporated by reference to Exhibit 10.1 to the
    Companys Current Report on Form 8-K, as filed with
    the SEC on December 16, 2003.                                       
|        | 10 | .5          |  | Guarantee and Collateral Agreement, dated as of
    December 15, 2003, among the Company, Hanover Compression
    Limited Partnership and certain of their subsidiaries in favor
    of JPMorgan Chase Bank, as Collateral Agent, incorporated by
    reference to Exhibit 10.2 to the Companys Current
    Report on Form 8-K, as filed with the SEC on
    December 16, 2003.                                                        
|        | 10 | .6          |  | Hanover Guarantee, dated as of December 15,
    2003, made by the Company in favor of JPMorgan Chase Bank, as
    Administrative Agent for the lenders parties to the Credit
    Agreement dated as of December 15, 2003.*                                                                                                                                                                                                              
|        | 10 | .7          |  | Subsidiaries Guarantee, dated as of
    December 15, 2003, in favor of JPMorgan Chase Bank, as
    Administrative Agent for the lenders parties to the Credit
    Agreement dated as of December 15, 2003.*                                                                                                                                                                                                                            
|        | 10 | .8          |  | Lease, dated as of March 13, 2000, between
    Hanover Equipment Trust 2000A (the 2000A Trust) and
    Hanover Compression Inc., incorporated by reference to
    Exhibit 10.43 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.                                                                                                                                                          
|        | 10 | .9          |  | Guarantee, dated as of March 13, 2000, made
    by the Company, Hanover Compression Inc. and certain of their
    Subsidiaries, incorporated by reference to Exhibit 10.44 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 1999.                                                                                                                                                             



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .10         |  | Participation Agreement, dated as of
    March 13, 2000, among Hanover Compression Inc., Hanover the
    2000A Trust and the several banks parties thereto, incorporated
    by reference to Exhibit 10.45 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 1999.                                                                                                                                                                                                                                                          
|        | 10 | .11         |  | Security Agreement, dated as of March 13,
    2000, made by the 2000A Trust in favor of The Chase Manhattan
    Bank, as agent, incorporated by reference to Exhibit 10.46
    to the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                          
|        | 10 | .12         |  | Assignment of leases, rents and Guarantee from
    the 2000A Trust to The Chase Manhattan Bank, dated as of
    March 13, 2000, incorporated by reference to
    Exhibit 10.47 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.                                                                                                                                                                                                                                                                                          
|        | 10 | .13         |  | Lease, dated as of October 27, 2000, between
    Hanover Equipment Trust 2000B (the 2000B Trust) and
    Hanover Compression Inc., incorporated by reference to
    Exhibit 10.54 to the Companys Registration Statement
    (File No. 333-50836) on Form S-4, as filed with the
    SEC on December 22, 2000.                                                                                                                                                                                                                                                    
|        | 10 | .14         |  | Guarantee, dated as of October 27, 2000 made
    by the Company, Hanover Compression Inc. and certain
    subsidiaries, incorporated by reference to Exhibit 10.55 to
    the Companys Registration Statement (File
    No. 333-50836) on Form S-4, as filed with the SEC on
    December 22, 2000.                                                                                                                                                                                                                                                                 
|        | 10 | .15         |  | Participation Agreement, dated as of
    October 27, 2000, among Hanover Compression Inc., the 2000B
    Trust, The Chase Manhattan Bank, National Westminster Bank PLC,
    Citibank N.A., Credit Suisse First Boston and the Industrial
    Bank of Japan as co-agents; Bank Hapoalim B.M. and FBTC Leasing
    Corp., as investors, Wilmington Trust Company and various
    lenders, incorporated by reference to Exhibit 10.56 to the
    Companys Registration Statement (File No. 333-50836)
    on Form S-4, as filed with the SEC on December 22,
    2000.
|        | 10 | .16         |  | Security Agreement, dated as of October 27,
    2000, made by the 2000B Trust in favor of The Chase Manhattan
    Bank as agent for the lenders, incorporated by reference to
    Exhibit 10.57 to the Companys Registration Statement
    (File No. 333-50836) on Form S-4, as filed with the
    SEC on December 22, 2000.                                                                                                                                                                                                                                        
|        | 10 | .17         |  | Assignment of Leases, Rents and Guarantee, dated
    as of October 27, 2000, made by the 2000B Trust to The
    Chase Manhattan Bank as agent for the lenders, incorporated by
    reference to Exhibit 10.58 to the Companys
    Registration Statement (File No. 333-50836) on
    Form S-4, as filed with the SEC on December 22, 2000.                                                                                                                                                                                                                          
|        | 10 | .18         |  | Lease, dated as of August 31, 2001, between
    Hanover Equipment Trust 2001A (the 2001A Trust) and
    Hanover Compression Limited Partnership, incorporated by
    reference to Exhibit 10.64 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2001.                                                                                                                                                                                                                                                                   
|        | 10 | .19         |  | Guarantee, dated as of August 31, 2001, made
    by the Company, Hanover Compression Limited Partnership, and
    certain subsidiaries, incorporated by reference to
    Exhibit 10.65 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                  
|        | 10 | .20         |  | Participation Agreement, dated as of
    August 31, 2001, among Hanover Compression Limited
    Partnership, the 2001A Trust, and General Electric Capital
    Corporation, incorporated by reference to Exhibit 10.66 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                                              
|        | 10 | .21         |  | Security Agreement, dated as of August 31,
    2001, made by the 2001A Trust in favor Wilmington Trust FSB as
    agent, incorporated by reference to Exhibit 10.67 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                                 
|        | 10 | .22         |  | Assignment of Leases, Rents and Guarantee from
    the 2001A Trust to Wilmington Trust FSB, dated as of
    August 31, 2001, incorporated by reference to
    Exhibit 10.68 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                             
|        | 10 | .23         |  | Lease, dated as of August 31, 2001, between
    Hanover Equipment Trust 2001B (the 2001B Trust) and
    Hanover Compression Limited Partnership, incorporated by
    reference to Exhibit 10.70 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2001.                                                                                                                                                                                                                                                                   
|        | 10 | .24         |  | Guarantee, dated as of August 31, 2001, made
    by the Company, Hanover Compression Limited Partnership, and
    certain subsidiaries, incorporated by reference to
    Exhibit 10.71 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                                  



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .25         |  | Participation Agreement, dated as of
    August 31, 2001, among Hanover Compression Limited
    Partnership, the 2001B Trust, and General Electric Capital
    Corporation, incorporated by reference to Exhibit 10.72 to
    the Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                             
|        | 10 | .26         |  | Security Agreement, dated as of August 31,
    2001, made by the 2001B Trust in favor of Wilmington Trust FSB
    as agent, incorporated by reference to Exhibit 10.73 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2001.                                                                                                                                                                                                                                                                             
|        | 10 | .27         |  | Assignment of Leases, Rents and Guarantee from
    the 2001B Trust to Wilmington Trust FSB, dated as of
    August 31, 2001, incorporated by reference to
    Exhibit 10.74 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2001.                                                                                                                                                                                                                                                                            
|        | 10 | .28         |  | Amendment and Consent, dated as of June 26,
    2000, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.40 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                                             
|        | 10 | .29         |  | Second Amendment, dated as of August 30,
    2000, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.41 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                                                
|        | 10 | .30         |  | First Amendment, dated as of January 31,
    2001, to (i) the Amended and Restated Senior Credit
    Agreement dated March 13, 2000, among the Company, Hanover
    Compression Inc., the Chase Manhattan Bank, as agent, and the
    lenders parties thereto and (ii) certain Synthetic
    Guarantees referenced in the amendment, incorporated by
    reference to Exhibit 10.42 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002.                                                                
|        | 10 | .31         |  | Second Amendment, dated as of July 27, 2001,
    to (i) the Credit Agreement, dated as of December 15,
    1997, as amended and restated on March 13, 2000, among the
    Company, Hanover Compression Inc., the Chase Manhattan Bank, as
    administrative agent, and the lenders parties thereto and
    (ii) certain Synthetic Guarantees referenced in the
    amendment, incorporated by reference to Exhibit 10.43 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002.                          
|        | 10 | .32         |  | Third Amendment to certain Guarantees, dated as
    of December 3, 2001, among the Company, certain of the
    Companys subsidiaries, JPMorgan Chase Bank, as agent, and
    several banks and other financial institutions parties thereto,
    incorporated by reference to Exhibit 10.80 to the
    Companys Current Report on Form 8-K filed with the
    SEC on December 17, 2001.                                                                                                                                                           
|        | 10 | .33         |  | Waiver and Amendment, dated as of March 15,
    2002, to (i) the Credit Agreement dated as of
    December 15, 1997, as amended and restated on
    December 3, 2002, among the Company, Hanover Compression
    Inc., the Chase Manhattan Bank, and the lenders parties thereto
    and (ii) certain Synthetic Guarantees referenced in the
    amendment, incorporated by reference to Exhibit 10.45 to
    the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002.                                             
|        | 10 | .34         |  | Amendment, dated as of June 26, 2002, to
    (i) the Credit Agreement dated as of December 15,
    1997, as amended and restated as of December 3, 2001, among
    the Company, certain of the Companys subsidiaries,
    JPMorgan Chase Bank, as administrative agent, and the lenders
    parties thereto and (ii) certain Synthetic Guarantees and
    Credit Agreements referenced in the amendment, incorporated by
    reference to Exhibit 10.75 to the Companys Current
    Report on Form 8-K filed with the SEC on August 6,
    2002.  
|        | 10 | .35         |  | Amendment, dated as of January 31, 2003, to
    (i) the Credit Agreement dated as of December 15,
    1997, as amended and restated on December 3, 2001, among
    the Company, certain of the Companys subsidiaries,
    JPMorgan Chase Bank, as administrative agent, and the lenders
    parties thereto and (ii) certain Synthetic Guarantees and Credit
    Agreements referenced in the amendment, incorporated by
    reference to Exhibit 10.80 to the Companys Current
    Report on Form 8-K filed with the SEC on February 7,
    2003.



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .36         |  | Amendment, dated as of December 15, 2003, to
    the 2000A and 2000B Synthetic Guarantees, Credit Agreements and
    Participation Agreements.*                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .37         |  | Amended and Restated Declaration of Trust of
    Hanover Compressor Capital Trust, dated as of December 15,
    1999, among the Company, as sponsor, Wilmington Trust Company,
    as property trustee, and Richard S. Meller, William S.
    Goldberg and Curtis A. Bedrich, as administrative trustees,
    incorporated by reference to Exhibit 4.5 to the
    Companys Registration Statement (File No. 333-30344)
    on Form S-3 filed with the SEC on February 14, 2000.
|        | 10 | .38         |  | Preferred Securities Guarantee Agreement, dated
    as of December 15, 1999, between the Company, as guarantor,
    and Wilmington Trust Company, as guarantee trustee, incorporated
    by reference to Exhibit 4.10 to the Companys
    Registration Statement (File No. 333-30344) on
    Form S-3 as filed with the SEC on February 14, 2000.                                                                                                                              
|        | 10 | .39         |  | Common Securities Guarantee Agreement, dated as
    of December 15, 1999, by the Company, as guarantor, for the
    benefit of the holders of common securities of Hanover
    Compressor Capital Trust, incorporated by reference to
    Exhibit 4.11 to the Companys Registration Statement
    (File No. 333-30344) on Form S-3 as filed with the SEC
    on February 14, 2000.                                                                                             
|        | 10 | .40         |  | Amended and Restated Guarantee and Collateral
    Agreement, dated January 31, 2003, made by the Company,
    certain of the Companys subsidiaries, JPMorgan Chase Bank,
    as administrative agent, and the lenders parties thereto,
    incorporated by reference to Exhibit 10.6 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                                                                          
|        | 10 | .41         |  | Purchase Agreement, dated as of July 11,
    2000, among the Company, Hanover Compression Inc., Dresser-Rand
    Company and Ingersoll-Rand Company, incorporated by reference to
    Exhibit 99.2 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2000.                                                                                                                                                                                    
|        | 10 | .42         |  | Agreement and Plan of Merger, dated as of
    July 13, 2000, among the Company, Caddo Acquisition
    Corporation, and OEC Compression Corporation, incorporated by
    reference to Exhibit 10.51 to the Companys Quarterly
    Report on Form 10-Q for the quarter ended
    September 30, 2000.                                                                                                                                                                             
|        | 10 | .43         |  | Amendment No. 1 to Agreement and Plan of
    Merger, dated as of November 14, 2000, by and among the
    Company, Caddo Acquisition Corporation and OEC Compression
    Corporation.*                                                                                                                                                                                                                                                                                           
|        | 10 | .44         |  | Amendment No. 2 to Agreement and Plan of
    Merger, dated as of February 2, 2001, by and among the
    Company, Caddo Acquisition Corporation and OEC Compression
    Corporation.*                                                                                                                                                                                                                                                                                            
|        | 10 | .45         |  | Purchase Agreement, dated June 28, 2001,
    among Schlumberger Technology Corporation, Schlumberger Oilfield
    Holdings Ltd., Schlumberger Surenco S.A., Camco International
    Inc., the Company and Hanover Compression Limited Partnership,
    incorporated by reference to Exhibit 10.63 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2001.                                                                                   
|        | 10 | .46         |  | Schedule 1.2(c) to Purchase Agreement, dated
    June 28, 2001, among Schlumberger Technology Corporation,
    Schlumberger Oilfield Holdings Limited, Schlumberger Surenco
    S.A., Camco International Inc., the Company and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on February 6, 2003.                                                              
|        | 10 | .47         |  | Amendment No. 1, dated as of August 31,
    2001, to Purchase Agreement among Schlumberger Technology
    Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger
    Surenco S.A., Camco International Inc., the Company and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.3 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2001.                                                       
|        | 10 | .48         |  | Most Favored Supplier and Alliance Agreement,
    dated August 31, 2001, among Schlumberger Oilfield Holdings
    Limited, Schlumberger Technology Corporation and Hanover
    Compression Limited Partnership, incorporated by reference to
    Exhibit 99.4 to the Companys Current Report on
    Form 8-K filed with the SEC on September 14, 2001.                                                                                                                         
|        | 10 | .49         |  | Agreement by and among SJMB, L.P., Charles
    Underbrink, John L. Thompson, Belleli Energy S.r.l. and
    Hanover Compressor Company and certain of its subsidiaries dated
    September 20, 2002, incorporated by reference to
    Exhibit 10.62 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002.                                                                                                                                 



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .50         |  | Hanover Compressor Company 1992 Stock
    Compensation Plan, incorporated by reference to
    Exhibit 10.63 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31,
    2002.                            
|        | 10 | .51         |  | Hanover Compressor Company Senior Executive Stock
    Option Plan, incorporated by reference to Exhibit 10.4 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                              
|        | 10 | .52         |  | Hanover Compressor Company 1993 Management Stock
    Option Plan, incorporated by reference to Exhibit 10.5 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                               
|        | 10 | .53         |  | Hanover Compressor Company Incentive Option Plan,
    incorporated by reference to Exhibit 10.6 to the
    Companys Registration Statement (File No. 333-24953)
    on Form S-1, as amended.                                             
|        | 10 | .54         |  | Amendment and Restatement of the Hanover
    Compressor Company Incentive Option Plan, incorporated by
    reference to Exhibit 10.7 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.      
|        | 10 | .55         |  | Hanover Compressor Company 1995 Employee Stock
    Option Plan, incorporated by reference to Exhibit 10.8 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                 
|        | 10 | .56         |  | Hanover Compressor Company 1995 Management Stock
    Option Plan, incorporated by reference to Exhibit 10.9 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                               
|        | 10 | .57         |  | Form of Stock Option Agreement for DeVille and
    McNeil, incorporated by reference to Exhibit 10.70 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                    
|        | 10 | .58         |  | Form of Stock Option Agreements for Wind Bros,
    incorporated by reference to Exhibit 10.71 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                                            
|        | 10 | .59         |  | Hanover Compressor Company 1996 Employee Stock
    Option Plan, incorporated by reference to Exhibit 10.10 to
    the Companys Registration Statement (File
    No. 333-24953) on Form S-1, as amended.                                
|        | 10 | .60         |  | Hanover Compressor Company 1997 Stock Option
    Plan, as amended, incorporated by reference to
    Exhibit 10.23 to the Companys Registration Statement
    (File No. 333-24953) on Form S-1, as
    amended.                         
|        | 10 | .61         |  | 1997 Stock Purchase Plan, incorporated by
    reference to Exhibit 10.24 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.                                                                  
|        | 10 | .62         |  | Hanover Compressor Company 1998 Stock Option
    Plan, incorporated by reference to Exhibit 10.7 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1998.                                         
|        | 10 | .63         |  | Hanover Compressor Company December 9, 1998
    Stock Option Plan, incorporated by reference to
    Exhibit 10.33 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31,
    1998.                      
|        | 10 | .64         |  | Hanover Compressor Company 1999 Stock Option
    Plan, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-32096)
    on Form S-8 filed with the SEC on March 10,
    2000.              
|        | 10 | .65         |  | Hanover Compressor Company 2001 Equity Incentive
    Plan, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement (File No. 333-73904)
    on Form S-8 filed with the SEC on November 21,
    2001.       
|        | 10 | .66         |  | Hanover Compressor Company 2003 Stock Incentive
    Plan, incorporated by reference to the Companys Definitive
    Proxy Statement on Schedule 14A, as filed with the SEC on
    April 15, 2003.                                         
|        | 10 | .67         |  | Management Fee Letter, dated November 14,
    1995 between GKH Partners, L.P. and the Company, incorporated by
    reference to Exhibit 10.3 to the Companys
    Registration Statement (File No. 333-24953) on
    Form S-1, as amended.



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .68         |  | Employment Letter with John E. Jackson, dated
    February 1, 2002, incorporated by reference to
    Exhibit 10.73 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2002.                                                                
|        | 10 | .69         |  | Employment Letter with Mark S. Berg, dated
    April 17, 2002, incorporated by reference to
    Exhibit 10.74 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2002.                                                                     
|        | 10 | .70         |  | Employment Letter with Chad C. Deaton, dated
    August 19, 2002, incorporated by reference to
    Exhibit 10.79 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended September 30,
    2002.                                                              
|        | 10 | .71         |  | Letter Agreement by and between Robert O. Pierce
    and Hanover Compressor Company dated September 18, 2002,
    incorporated by reference to Exhibit 10.92 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002.                  
|        | 10 | .72         |  | Employment Letter with Peter Schreck, dated
    August 22, 2000, incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2003.                                                                    
|        | 10 | .73         |  | Employment Letter with Stephen York, dated
    March 6, 2002, incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q for the quarter ended March 31,
    2003.                                                                       
|        | 10 | .74         |  | Separation Agreement with Mark Berg, dated
    February 27, 2004.*                                                                                                                                                                                                             
|        | 12 | .1          |  | Computation of ratio of earnings to fixed
    charges.*                                                                                                                                                                                                                          
|        | 14 | .1          |  | P.R.I.D.E. in Performance 
    Hanovers Guide to Ethical Business Conduct.*                                                                                                                                                                                                    
|        | 21 | .1          |  | List of Subsidiaries.*                                                                                                                                                                                                                                                           
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP.*                                                                                                                                                                                                                                          
|        | 31 | .1          |  | Certification of the Chief Executive Officer
    pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
    Exchange Act of 1934.*                                                                                                                                               
|        | 31 | .2          |  | Certification of the Chief Financial Officer
    pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
    Exchange Act of 1934.*                                                                                                                                               
|        | 32 | .1          |  | Certification of the Chief Executive Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                  
|        | 32 | .2          |  | Certification of the Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                  
|        | 99 | .1          |  | Letter from GKH partners regarding wind-up of GKH
    Investments, L.P. and GKH Private Limited, dated
    October 15, 2001, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on October 18, 2001.               
|        | 99 | .2          |  | Letter from GKH Partners, L.P. to Mark S. Berg,
    Senior Vice President and General Counsel of the Company, dated
    November 12, 2002, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on November 15, 2002.
|        | 99 | .3          |  | Letter from GKH Partners, L.P. to Mark S.
    Berg, Senior Vice President and General Counsel of the Company,
    dated March 11, 2004, incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on March 12, 2004.      



---

* Filed herewith

 Management contract or
compensatory plan or arrangement