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                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

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

                                 Form 10-K/A-2

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

                    For fiscal year ended December 31, 2001
                                      or

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

                 For the transition period from       to     .

                          Commission File No. 1-3071

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

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


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

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

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

Title of each class: Common Stock, $.001 par value

Name of each exchange in which registered: New York Stock Exchange, Inc.

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

Title of class: None

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

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

   The aggregate market value of the Common Stock of the registrant held by
nonaffiliates as of April 5, 2002: $1,122,422,000. This calculation does not
reflect a determination that such persons are affiliates for any other purpose.

   Number of shares of the Common Stock of the registrant outstanding as of
April 5, 2002: 79,220,366 shares.

                      Documents Incorporated by Reference

   Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders held on May 14, 2002 (filed on April 22, 2002) are incorporated by
reference into Part III, as indicated herein.

   The Index to Exhibits is on page 42.
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                               EXPLANATORY NOTE

   Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 2001 in order to
restate the Consolidated Financial Statements and make appropriate conforming
revisions to "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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

   Subsequent to the April 2002 restatement, a special committee of the Board
of Directors together with the Audit Committee of the Board and company
management, aided by outside legal counsel, recently completed an extensive
investigation of certain transactions recorded during 2001, 2000 and 1999,
including those transactions restated by the Company in April 2002. As a result
of this investigation, the Company determined, with the concurrence of its
independent auditors, to restate its 2001, 2000 and 1999 financial statements
for several transactions, including one that was the subject of the April 2002
restatement. The net effect of this restatement for the year ended December 31,
2001 was as follows: (i) a decrease in revenues of $7.5 million, from $1,078.2
million to $1,070.7 million; (ii) a decrease in income before income taxes of
$0.4 million, from $117.4 million to $117.0 million; (iii) a decrease in net
income of $0.2 million, from $72.6 million to $72.4 million; and (iv) a
decrease in diluted earnings per common share of $0.01. The net effect of this
restatement for the year ended December 31, 2000 was as follows: (i) a decrease
in revenues of $3.3 million, from $566.1 million to $562.8 million; (ii) a
decrease in income before income taxes of $2.5 million, from $81.5 million to
$79.0 million; (iii) a decrease in net income of $1.6 million, from $51.2
million to $49.6 million; and (iv) a decrease in earnings per common share of
$0.03 basic and $0.02 diluted. The net effect of this restatement for the year
ended December 31, 1999 was as follows: (i) a decrease in revenues of $5.1
million, from $323.2 million to $318.1 million; (ii) a decrease in income
before income taxes of $3.1 million, from $63.6 million to $60.5 million; (iii)
a decrease in net income of $1.9 million, from $40.4 million to $38.5 million;
and (iv) a decrease in earnings per common share of $0.04 basic and $0.03
diluted. For additional detail concerning the transactions involved in the
restatements and their impact on the Consolidated Financial Statements, see
Notes 20 and 21 of the Notes to Consolidated Financial Statements.

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

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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.
These forward-looking statements can generally be identified as such because
the context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those anticipated as of the date of this report. The risks and
uncertainties include:

  .   the loss of market share through competition;

  .   the introduction of competing technologies by other companies;

  .   a prolonged substantial reduction in oil and gas prices which would cause
      a decline in the demand for our compression and oil and gas production
      equipment;

  .   new governmental safety, health and environmental regulations which could
      require us to make significant capital expenditures;

  .   our inability to successfully integrate acquired businesses;

  .   currency fluctuations;

  .   changes in economic or political conditions in the countries in which the
      Company operates;

  .   legislative changes in the various countries in which Hanover does
      business; and

  .   adverse results in shareholder or other litigation or regulator
      proceedings.

   The forward-looking statements included herein are only made as of the date
of this report and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.

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Item 1.  Business

General

   Hanover Compressor Company is a global market leader in full service natural
gas compression and a leading provider of service, fabrication and equipment
for contract natural gas handling applications. We provide this equipment on a
rental, contract compression, maintenance and acquisition leaseback basis to
natural gas production, processing and transportation companies that are
increasingly seeking outsourcing solutions. Founded in 1990 and a public
company since 1997, our customers include premier independent and major
producers and distributors. In conjunction with our maintenance business, we
have developed our parts and service business to provide solutions to customers
that own their own compression equipment, but want to outsource their
operations. Our compression services are complemented by our compressor and oil
and gas production equipment fabrication operations and gas processing and
treating, gas measurement and power generation services, which broaden our
customer relationships both domestically and internationally.

   As of December 31, 2001, we operated a fleet of 7,066 compression rental
units with an aggregate capacity of approximately 3,477,000 horsepower
(excluding 89,000 in noncompression horsepower). We believe that we are
currently the largest natural gas compression company in the United States on
the basis of aggregate rental horsepower with 6,332 rental units having an
aggregate capacity of approximately 2,696,000 horsepower at December 31, 2001.
Internationally, we estimate that we are one of the largest providers of
compression services in the rapidly growing Latin American and Canadian
markets, operating 734 units with approximately 781,000 horsepower at December
31, 2001.

   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 natural gas. Our decentralized operating
structure, technically experienced personnel and high quality compressor fleet
allow us to successfully provide reliable and timely customer service. As a
result, we have experienced substantial growth over the past five years and
have developed and maintained a number of long-term customer relationships.
This has enabled us to maintain an average horsepower utilization rate of
approximately 93% from 1997 to 2001, compared to industry rates which we
believe to have been 80% to 85% for this period.

   We compete primarily in the market for transportable natural gas compression
units of up to 4,450 horsepower. This market for rental compression has
experienced significant growth over the past decade, with a compound annual
growth rate of approximately 15%. We believe that the growth in the domestic
gas compression market will continue due to the increased consumption of
natural gas, the continued aging of the natural gas reserve base and the
attendant decline of wellhead pressures, and the discovery of new reserves.

   The rental portion of the domestic gas compression market is estimated to be
at least 5.2 million horsepower and account for approximately 34% of the
aggregate U.S. horsepower, up from 20% in 1992. Growth of rental compression
capacity in the U.S. market is primarily driven by the increasing 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 compression units to meet the changing reservoir conditions.
In addition, we also believe that outsourcing typically provides the customer
with more timely and technically proficient service and necessary maintenance,
which often reduces operating costs. Internationally, we believe similar growth
opportunities for compressor rental and sales exist due to (i) increased
worldwide energy consumption, (ii) implementation of international
environmental and conservation laws preventing the flaring of natural gas, and
(iii) increased outsourcing by energy producers and processors.

   Substantially all of our assets and operations are owned or conducted by our
wholly-owned subsidiary, Hanover Compression Limited Partnership ("HCLP"). In
December 2001, HCLP and its subsidiaries completed

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various internal restructuring transactions pursuant to which certain of the
domestic subsidiaries of HCLP were merged, directly or indirectly, with and
into HCLP.

Recent Events--Acquisitions

Year Ended December 31, 2001

   In August 2001, we acquired 100% of the issued and outstanding shares of the
Production Operators Corporation natural gas compression business, ownership
interests in certain joint venture projects in South America, and related
assets ("POI") from Schlumberger for $761 million in cash, Hanover common stock
and indebtedness, subject to certain post-closing adjustments which have
resulted in an increase in the purchase price to approximately $771 million due
to an increase in net assets acquired. Under the terms of the definitive
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 and approximately 8,708,000 Hanover common shares, or
approximately 11% of the outstanding shares of Hanover common stock, which are
required to be held by Schlumberger for at least three years following the
closing date.

   In April 2001, we acquired certain assets of Power Machinery, Inc. for
approximately $2.6 million in cash and 108,625 shares of Hanover common stock
valued at approximately $3.8 million.

   In June 2001, we acquired the assets of J&R International for approximately
$3.7 million in cash and 17,598 shares of Hanover common stock valued at
$654,000.

   In March 2001, we purchased OEC Compression Corporation ("OEC") in an
all-stock transaction for approximately $101.8 million, including the
assumption and subsequent payment of approximately $64.6 million of OEC
indebtedness. We issued an aggregate of approximately 1,146,000 shares of
Hanover common stock to stockholders of OEC.

Year Ended December 31, 2000

   In November 2000, we purchased the common stock of Servicios TIPSA S.A. for
approximately $7.8 million in cash and a $7.8 million note payable. The note
payable was repaid in January 2001.

   In September 2000, we purchased the Dresser-Rand Company's compression
services ("DR") division for $177.0 million, including approximately $1.2
million of acquisition costs. Under the terms of the agreement, $95.0 million
of the purchase price was paid in cash with the balance paid through the
issuance to Ingersoll-Rand of 2,919,681 shares of Hanover common stock. The
estimated value of the stock issued was approximately $80.5 million, based upon
quoted market price for our common stock reduced by a discount due to the
restriction on the stock's marketability. The purchase price was subject to
certain post-closing adjustments pursuant to the acquisition agreement which
have resulted in a $21.4 million increase in the purchase price due to
increases in the net assets acquired.

   In September 2000, we acquired the common stock of Gulf Coast Dismantling,
Inc. for approximately $2.9 million in cash and 9,512 shares of the Company's
treasury stock valued at $300,000.

   In July 2000, we completed our acquisition of PAMCO Services International's
natural gas compressor assets for approximately $45.2 million in cash and a
$12.9 million note payable which was repaid. In connection with the
acquisition, we agreed to purchase under normal business terms specified levels
of equipment over a three-year period beginning October 2000.

   In June 2000, we purchased common stock of Applied Process Solutions, Inc.
("APSI") for 2,303,294 shares of Hanover common stock and assumed $16.0 million
of APSI's outstanding debt. The estimated value of the

                                      5

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stock issued was approximately $54.8 million, based upon quoted market price
for our common stock reduced by a discount due to the restriction on the
stock's marketability.

   In July 2000, we purchased the assets of Rino Equipment, Inc. and K&K
Compression, Ltd. for approximately $15.7 million in cash and 54,810 shares of
Hanover common stock valued at $2.0 million.

   In July 2000, we purchased the common stock of Compression Components
Corporation for approximately $8.0 million in cash and 27,405 shares of Hanover
common stock valued at $1.0 million.

   In March 2000, we purchased the common stock of Southern Maintenance
Services, Inc. for approximately $1.5 million in cash, 46,512 shares of Hanover
common stock valued at $1.0 million and $1.0 million in notes payable that
mature on March 1, 2003.

  Year Ended December 31, 1999

   In August 1999, we purchased the stock of Victoria Compression Services,
Inc., Contract Engineering and Operating, Inc. and Unit Partners, Inc. for
approximately $16.8 million in cash, 183,700 shares of Hanover common stock
valued at $3.3 million and notes payable of approximately $452,000.

   In July 1999, we purchased preferred stock and a purchase option for the
common stock of CDI Holdings, Inc. and its subsidiary Compressor Dynamics, Inc.
("CDI"). In August 1999, we exercised our option to purchase CDI. The total
cost for CDI was approximately $18.5 million in cash.

Industry Overview

  Gas Compression

   Typically, compression is required several times during 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 intrastate
and interstate pipelines.

   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
naturally flows 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 utilized in a number of other applications, all 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 utilized to
re-inject associated gas to lift liquid hydrocarbons artificially which
increases 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 utilized in combination with oil and gas production equipment to process
and refine oil and gas into higher value added and more marketable energy
sources.

   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 such firms, as well as natural gas processors

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and transporters, to increasingly outsource their non-core compression
activities to specialists such as the Company.

   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. 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 rental of
compressor 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: (i) engineering,
fabrication and assembly of the compressor unit; (ii) installation and testing
of the unit; (iii) ongoing performance review to assess the need for a change
in compression; and (iv) periodic maintenance and replacement parts supply.

  Production Equipment

   Oil and gas reserves are generally not commercially marketable as produced
at the wellhead. Typically, such reserves must be refined before they can be
transported to market. Oil and gas production equipment is utilized to separate
and treat such oil and gas immediately after it is produced in order to
facilitate further processing, transportation and sale of such fuels and
derivative energy sources. Oil and gas production equipment is typically
installed at the wellhead immediately prior to commencing the large scale
production phase of a well and remains at the site through the life of the well.

  Market Conditions

   We believe that the most fundamental force driving the demand for gas
compression and production equipment is the growing consumption of natural gas.
As more gas is consumed, the demand for compression and production equipment
increases.

   Additionally, 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 (excluding the former Soviet
Union) has recently grown. Despite significant growth in energy demand, most
non-U.S. energy markets, until recently, have typically 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.

   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 power generation are the
principal reasons for this growth.

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   While gas compression and production equipment typically must be highly
engineered 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 (comprising
four operating divisions): (a)domestic compression rentals; (b)international
compression rentals; (c)parts, service and used equipment; (d)compressor
fabrication; and (e)production and processing equipment fabrication. The
domestic and international compression rentals segments have operations
primarily in the United States, Canada and South America. For financial data
relating to the Company's segments, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 23 to the Notes to
the Consolidated Financial Statements.

  Compression Services and Fabrication

   We provide our customers with a full range of compressor rental, maintenance
and contract compression services. As of December 31, 2001, our gas compressor
fleet consisted of 7,066 units, ranging from 24 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 its fleet of equipment.

   The size and horsepower of our compressor rental fleet owned or operated
under lease on December 31, 2001 is summarized in the following table.

<TABLE>
<CAPTION>
                                      Number   Aggregate
                                        of     Horsepower      % of
         Range of Horsepower per Unit Units  (in thousands) Horsepower
         ---------------------------- ------ -------------- ----------
         <S>                          <C>    <C>            <C>
                 0-100............... 2,103        151          4.3%
                 101-200............. 1,405        216          6.2%
                 201-500............. 1,209        299          8.6%
                 501-800.............   656        419         12.1%
                 801-1,100...........   504        498         14.3%
                 1,101-1,500.........   920      1,326         38.1%
                 1,501-2,500.........   196        336          9.7%
                 2,501-4,450.........    73        232          6.7%
                                      -----      -----        -----
                    Total............ 7,066      3,477        100.0%
                                      =====      =====        =====
</TABLE>

   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
services desired, such as installation, transportation and the degree of daily
operation. Substantially all of our units are operated pursuant to "contract
compression" or "rental with full maintenance" contracts under which we perform
all maintenance and repairs on such units while under contract. In the United
States 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 utilized 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

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meet run-time commitments (the penalty for which is paid in credits to the
customers account) has been insignificant, due largely to our rigorous
preventive maintenance program and extensive field service network which
permits us to promptly address maintenance requirements. Our rental compressor
maintenance activities are conducted by approximately 2,300 experienced and
factory-trained maintenance personnel both at these 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 individual job and the actual operating experience of each compressor
unit. Prior to the conclusion of any rental job, our field management evaluate
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 which indicate a change in the condition of the
equipment. In addition, oil and wear-particle analysis is performed on all
units 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. These field personnel receive regular
mechanical and safety training both from our staff and our vendors. Each of our
field mechanics is responsible for specific compressor unit installations and
has at his or her disposal a dedicated local parts inventory. Additionally,
each field mechanic operates from a fully-equipped service vehicle. Each
mechanic's field service vehicle is radio or cellular telephone equipped 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 benefitted from the fact that our
sales and field service organizations enjoy managerial parity 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 over 2,300 member
compressor rental field service and shop staff of factory-trained and
field-tested compressor mechanics. Our field service mechanics are coordinated
and supported by regional operations managers who have supervisory
responsibility for specific geographic areas.

   Our compressor fabrication operations, doing business as Hanover Maintech,
Hanover-Davis, Hanover Dresser-Rand, and Production Operators Corporation
design, engineer and assemble compression units for sale to third parties as
well as for placement in our compressor rental fleet. As of December 31, 2001,
we had a compressor unit fabrication backlog for sale to third parties of $25.3
million compared to $44.9 million as of December 31, 2000. We believe the
decrease in backlog is primarily attributable to weaker market conditions
related to the decrease in average wellhead natural gas prices in late 2001 and
a contraction of capital spending/investing in the wake of the September 11,
2001 terrorist attacks and the Enron bankruptcy. The average wellhead natural
gas price decreased to $2.51 per mcf in the fourth quarter of 2001 from $4.92
per mcf in the fourth quarter of 2000. The wellhead natural gas price averaged
$4.12 per mcf in 2001 and $3.69 per mcf in 2000. Substantially all backlog is
expected to be produced within a 90 to 180 day period. In general, units to be
sold to third parties are assembled according to each customer's specifications
and sold on a turnkey basis. We acquire major components for these compressor
units from third party suppliers.


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  Oil and Gas Production Equipment

   Through our divisions doing business as Hanover Smith and Hanover Applied
Process Solutions, Inc., we design, engineer, fabricate and either sell or
occasionally 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 generally maintain standard product inventories in
excess of $5 million and are therefore able to meet most customers' rapid
response requirements and minimize customer downtime. As of December 31, 2001,
we had a production equipment fabrication backlog of $38.9 million compared to
$47.1 million as of December 31, 2000. We believe that the decrease in backlog
is attributable to weaker market conditions, which have been impacted by the
price of natural gas and a contraction of capital spending/investing in the in
the wake of the September 11, 2001 terrorist attacks and the Enron bankruptcy.
In addition, backlog has decreased due to our decision to focus on standardized
products that historically deliver higher margins and are usually sold out of
production stock. Substantially all backlog is expected to be produced within a
90 to 180 day period. We also purchase and recondition used production
equipment which is then sold or rented.

  Parts and Service

   We purchase and recondition used gas compression units, power generation and
treating facilities and production equipment which 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, 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 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 power
generation sales and services.

  Market and Customers

   Our customer base consists of over 1,500 U.S. and international companies
engaged in all aspects of the oil and gas industry, including major integrated
oil and gas companies, large and small independent producers, 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 2001 or 2000. POI, which we acquired in
2001 and was previously part of the gas compression business of Schlumberger,
generated 49% of its revenues in 2001 from its three largest customers. On a
pro forma basis these three customers would have accounted for a total of
approximately 10% of our revenues in 2001.

   Our compressor leasing activities are located throughout the continental
United States, internationally and in offshore operations. International
locations include: Tunisia, Nigeria, Argentina, Barbados, Egypt, Equatorial
Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Mexico,
Indonesia, Spain, Nigeria, United Kingdom and Canada. In addition, we have
representative offices in the Netherlands, China and the Cayman Islands. As of
December 31, 2001, equipment representing approximately 6.7% and 22.5% of our
compression horsepower was being used in offshore and international
applications, respectively.

                                      10

<PAGE>

  Sales and Marketing

   Our more than 120 salespeople report to three sales vice presidents. The
sales vice presidents report to our Chief Operating Officer. Our salespeople
aggressively pursue the rental and sale market for compressors and production
equipment in their respective territories. Each salesperson is assigned a
customer list on the basis of the experience and personal relationships of the
salesperson and the individual service requirements of the customer. This
customer and relationship-focused strategy is communicated through frequent
direct contact, technical presentations, print literature, print advertising
and direct mail. Our advertising and promotion strategy is a "concentrated"
approach, tailoring specific messages into a very focused presentation
methodology.

   Additionally, our salespeople coordinate with each other to effectively
pursue customers who operate in multiple regions. The salespeople maintain
intensive contact with our operations personnel in order to promptly respond to
and satisfy customer needs. Our sales efforts concentrate on demonstrating our
record of and 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 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
which 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
acquisition and other opportunities and adopt more aggressive pricing policies.

   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. As a result,
due to economies of scale, companies such as ours with larger rental fleets
typically have relatively lower operating costs and higher margins than smaller
companies.

   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 stay competitive. As the size of the
rental fleet increases, the required amount of inventory does not increase in
the same proportion. The larger rental fleet companies can often generate cost
savings through improved purchasing power and vendor support.

   We believe that we compete effectively on the basis of price, customer
service, including the availability of personnel in remote locations,
flexibility in meeting customer needs and the quality and reliability of our
compressors and related services. The compressor fabrication business is
dominated by a few major competitors, some of which also compete with us in the
compressor rental business. We believe that we are the largest compressor
fabrication company in the United States.

   The production equipment business is a highly fragmented business with
approximately eight substantial U.S. competitors. Although sufficient
information is not available to definitively estimate our relative position in
this market, we believe that we are among the top three oil and gas production
equipment fabricators in the United States.


                                      11

<PAGE>

  Fabrication and 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
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.

  Government Regulation

   We are subject to various federal, state, local and foreign laws and
regulations relating to the environment, health and safety, including
regulations regarding air emissions, wastewater and stormwater discharges, as
well as waste handling and disposal. 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
obligations. 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. As with any
owner of property, we are also subject to clean-up costs and liability for
hazardous materials or any other toxic or hazardous substance that may exist on
or under any of our properties.

   We believe that we are in substantial compliance with environmental laws and
regulations and that the phasing in of recent non-road engine air emission
controls and other known regulatory requirements at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on our financial condition, results of operations or cash flows.

   Notwithstanding the foregoing, we may not be in compliance with certain
environmental requirements for recently acquired facilities, in part because of
our rapid growth through acquisitions. With respect to newly-acquired
facilities, it is our practice to investigate environmental compliance issues
and address any issues promptly. We cannot be certain, however, that all such
issues are completely resolved in accordance with applicable environmental
regulations prior to our taking over operations, although it is our goal to
correct any deficiencies as quickly as possible.

   The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as 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. We are not currently under any order requiring
that we undertake or pay for any cleanup activities, nor are we aware of any
current environmental claims by the government or private parties against us
demanding remedial costs or alleging that the Company is liable for such costs.
However, we cannot assure you that we will not receive any such claims in the
future.

   The Resource Conservation and Recovery Act ("RCRA"), and regulations
promulgated thereunder, 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

                                      12

<PAGE>

RCRA and are not aware of any current claims against us alleging RCRA
violations. However, we cannot be certain that we will not receive such notices
of potential liability in the future.

   Stricter standards in environmental legislation that may affect us may be
imposed in the future, such as more stringent air emission requirements or
proposals to make 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, results of operations, cash flows and financial
condition.

Foreign Operations

   We operate in many different geographic markets, some of which are outside
the United States. Changes in local economic or political conditions,
particularly in Venezuela, Argentina, other parts of Latin America or Canada,
could have a material adverse effect on our business, results of operations and
financial condition. Additional risks inherent in our international business
activities include the following: (a) difficulties in managing international
operations; (b) unexpected changes in regulatory requirements; (c) tariffs and
other trade barriers which may restrict our ability to enter into new markets;
(d) potentially adverse tax consequences; (e) restrictions on repatriation of
earnings or expropriation of property; (f) the burden of complying with foreign
laws; and (g) fluctuations in currency exchange rates and the value of the U.S.
dollar.

   As part of our acquisition of the gas compression business of Schlumberger,
we acquired minority interests in three joint ventures in South America. 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. For financial data relating to
the Company's geographic concentrations, see Note 23 to the Notes to the
Consolidated Financial Statements.

Executive Officers

   The following sets forth, as of March 30, 2002, the name, age and business
experience for the last five years of each of our executive officers.

<TABLE>
<CAPTION>
       Name               Age                    Position
       ----               ---                    --------
  <S>                     <C> <C>
  Victor E. Grijalva..... 63  Chairman of the Board; Director
  Michael J. McGhan...... 47  President and Chief Executive Officer; Director
  Charles D. Erwin....... 41  Chief Operating Officer
  Joe C. Bradford........ 44  Senior Vice President--Worldwide Operations
                              Development
  John E. Jackson........ 43  Senior Vice President--Chief Financial Officer
  Robert O. Pierce....... 42  Senior Vice President--Operations--Fabrication
</TABLE>

   Victor E. Grijalva has served as a director of the Company since February
2002 and Chairman of the Board since March 2002. Mr. Grijalva is the Chairman
of Transocean Sedco Forex and the former Vice Chairman of Schlumberger Ltd. Mr.
Grijalva began his career with Schlumberger in 1964 as a senior development
engineer. Mr. Grijalva served as President of Wireline and Testing in North
America and Executive Vice President of Oilfield Services before being
appointed Vice Chairman of Schlumberger in 1998. Mr. Grijalva retired from
Schlumberger on December 31, 2001 and is a member of the board of the American
Petroleum Institute.

   Michael J. McGhan has served as President and Chief Executive Officer since
October 1991 and has served as a director since March 1992. Mr. McGhan also
serves as an officer and a director of our subsidiaries.


                                      13

<PAGE>

   Charles D. Erwin has served as Chief Operating Officer since April 2001.
Prior to being named Chief Operating Officer, Mr. Erwin served as Senior Vice
President--Sales and Marketing from May 2000 to April 2001 and served as a Vice
President since October 1990.

   Joe C. Bradford has served as Senior Vice President--Worldwide Operations
Development since May 2000. Prior to being named Senior Vice President, Mr.
Bradford had served as a Vice President since March 1993.

   John E. Jackson has served as Senior Vice President--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 ("DEFS" ),
a $10 billion 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 DEFS as Vice President and Controller in April 1999 and was
named Chief Financial Officer in February 2001. Prior to joining DEFS, Mr.
Jackson served in a variety of treasury, controller and accounting positions at
Union Pacific Resources between June 1981 and April 1999, including Chief
Financial Officer--Gathering, Processing & Marketing Division.

   Robert O. Pierce has served as Senior Vice
President--Operations--Fabrication since prior to being named Senior Vice
President, Mr. Pierce had served as a Vice President since April 1995.

Employees

   As of December 31, 2001, we had approximately 4,800 employees, approximately
100 of whom are represented by a labor union. We believe that our relations
with our employees are satisfactory.

Item 2.  Properties

   The following table describes the material facilities owned or leased by
Hanover and our subsidiaries as of December 31, 2001:
<TABLE>
<CAPTION>
                       Square
Location                Feet   Status                       Uses
--------               ------- ------                       ----
<C>                    <C>     <C>    <S>
Houston, Texas........ 192,000  Owned Corporate headquarters and compressor fabrication
Yukon, Oklahoma.......  11,700  Owned Office and compressor maintenance
Pocola, Oklahoma......   8,000  Owned Office and compressor maintenance
Midland, Texas........  12,000  Owned Office and compressor maintenance
Davis, Oklahoma....... 345,000  Owned Compressor fabrication
Kilgore, Texas........  16,750  Owned Office and compressor maintenance
Columbus, Texas....... 210,000  Owned Production equipment manufacturing
Broussard, Louisiana..  35,000  Owned Office and compressor maintenance
Farmington, New Mexico  19,000  Owned Office and compressor maintenance
Broken Arrow, Oklahoma 134,570  Owned Office and compressor fabrication
Tulsa, Oklahoma.......  40,000  Owned Production equipment manufacturing
Aldridge, Walsall UK..  33,700  Owned Office and compressor maintenance
Alberta, Canada.......  78,000  Owned Office and compressor maintenance
Houston, Texas........ 137,000  Owned Office and compressor fabrication
Houston, Texas........ 190,000  Owned Compressor fabrication
Victoria, Texas.......  19,000 Leased Office and compressor maintenance
Farmington, New Mexico  18,500 Leased Office and compressor maintenance
Neuquen, Argentina....  32,900 Leased Office and compressor maintenance
El Tigre, Venezuela...  14,300 Leased Office and compressor maintenance
Patio Ocana, Venezuela  26,700 Leased Office and compressor maintenance
</TABLE>

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

                                      14

<PAGE>

Item 3.  Legal Proceedings

   Commencing in February 2002, approximately 15 putative securities class
action lawsuits were filed against us and certain of our officers and directors
in the United States District Court of the Southern District of Texas. These
class actions have been 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-CV-0410, naming as defendants Hanover
Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr.
Michael A. O'Connor. The plaintiffs in the securities actions purport to
represent purchasers of our common stock during various periods ranging from
May 15, 2000 through January 28, 2002. The complaints assert various claims
under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek
unspecified amounts of compensatory damages, interest and costs, including
legal fees. Motions are pending for appointment of lead plaintiff(s). A
consolidated complaint is due 30 days after the Court appoints lead
plaintiff(s).

   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. The derivative actions in the United States District Court for the
Southern District of Texas were consolidated on August 19 and August 26, 2002.
Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas. The pending
derivative lawsuits are:

<TABLE>
<CAPTION>
        Plaintiff               Defendants          Civil Action No.             Court          Date Instituted
------------------------- ---------------------- ----------------------- ---------------------- ---------------
<S>                       <C>                    <C>                     <C>                    <C>
Harbor Finance Partners,  Michael J. McGhan,            H-02-0761        United States District    03/01/02
derivatively on behalf of William S. Goldberg,                           Court for the Southern
Hanover Compressor        Ted Collins, Jr.,                              District of Texas
Company                   Robert R. Furgason,
                          Melvyn N. Klein,
                          Michael A. O'Connor,
                          Alvin V. Shoemaker,
                          Defendants and Hanover
                          Compressor Company,
                          Nominal Defendant

Roger Koch,               Michael A. O'Connor,          H-02-1332        United States District    4/10/02
derivatively on Behalf of William S. Goldberg,                           Court for the Southern
Hanover Compressor        Melvyn N. Klein,       Consolidated with H-02- District of Texas
Company                   Michael J. McGhan,         0761 on 8/19/02
                          Ted Collins, Jr.,
                          Robert R. Furgason,
                          Rene J. Huck,
                          Alvin V. Shoemaker,
                          Victor E. Grijalva,
                          Gordon T. Hall,
                          I. Jon Brumley,
                          Defendants and Hanover
                          Compressor Company,
                          Nominal Defendant

Henry Carranza,           Michael A. O'Connor,          H-02-1430        United States District    4/18/02
derivatively on           William S. Goldberg,                           Court for the Southern
behalf of Hanover         Melvyn N. Klein,       Consolidated with H-02- District of Texas
Compressor Company        Michael J. McGhan,         0761 on 8/19/02
                          Ted Collins, Jr.,
                          Robert R. Furgason,
                          Rene J. Huck,
                          Alvin V. Shoemaker,
                          Victor E. Grijalva,
                          Gordon T. Hall,
                          I. Jon Brumley,
                          Defendants and Hanover
                          Compressor Company,
                          Nominal Defendant
</TABLE>

                                      15

<PAGE>

<TABLE>
<CAPTION>
    Plaintiff            Defendants           Civil Action No.               Court           Date Instituted
------------------ ----------------------- ----------------------- ------------------------- ---------------
<S>                <C>                     <C>                     <C>                       <C>
William Steves,    Michael A. O'Connor,           H-02-1527        United States District       4/27/02
derivatively on    William S. Goldberg,                            Court for the Southern
behalf of Hanover  Melvyn N. Klein,        Consolidated with H-02- District of Texas
Compressor Company Michael J. McGhan,          0761 on 8/19/02
                   Ted Collins, Jr.,
                   Robert R. Furgason,
                   Rene J. Huck,
                   Alvin V. Shoemaker,
                   Victor E. Grijalva,
                   Gordon T. Hall,
                   I. Jon Brumley,
                   Defendants and Hanover
                   Compressor Company,
                   Nominal Defendant

John B. Hensley,   Michael J. McGhan,             H-02-2994        270th Judicial District,     6/20/02
Jr., derivatively  William S. Goldberg,                            Harris County, Texas;
on behalf of       Michael A. O'Connor,    Consolidated with H-02- removed to the United
Hanover Compressor Ted Collins, Jr.,           0761 on 8/26/02     States District Court
Company            Alvin Shoemaker,                                for the Southern
                   Robert R. Furgason,                             District of Texas on
                   Melvyn N. Klein,                                August 9, 2002
                   Charles D. Erwin, and
                   PricewaterhouseCoopers
                   LLP, Defendants and
                   Hanover Compressor
                   Company, Nominal
                   Defendant

Coffelt Family,    Michael A. O'Conner,           19410-NC         Court of Chancery for the    02/15/02
LLC, derivatively  Michael J. McGhan,                              State of Delaware in and
on behalf of       William S. Goldberg,                            for New Castle County
Hanover Compressor Ted Collins, Jr.,
Company            Melvyn N. Klein,
                   Alvin V. Shoemaker,
                   and Robert R. Furgason,
                   Defendants and Hanover
                   Compressor Company,
                   Nominal Defendant
</TABLE>

   These derivative lawsuits, which were filed by certain of our shareholders
against our Board of Directors purportedly on behalf of the Company, allege,
among other things, that our directors breached their fiduciary duties to
shareholders and seek unspecified amounts of damages, interest and costs,
including legal fees. The Board of Directors has formed a Special Litigation
Committee to address the issues raised by the derivative suits. Subject to the
work of that Committee and the Board's instructions, we intend to defend these
cases vigorously.

   The putative class action securities lawsuit and the derivative lawsuits are
at an early stage. Consequently, it is premature at this time to predict
whether we will incur any liability or to estimate the damages, or the range of
damages, if any, that we might incur in connection with such actions, or
whether an adverse outcome could have a material adverse effect on our
business, consolidated financial condition, results of operations or cash flows.

   On November 14, 2002, the Securities and Exchange Commission issued a Formal
Order of Private Investigation relating to the matters involved in the
restatements of our financial results. We are cooperating fully with the Fort
Worth District Office staff of the Securities and Exchange Commission. It is
too soon to determine whether the outcome of this inquiry will have a material
adverse effect on our business, financial condition, results of operations or
cash flows.

   We are involved in various other legal proceedings that are considered to be
in the normal course of business. We believe that these proceedings will not
have a material adverse effect on our business, consolidated financial
condition, results of operations or cash flows.

                                      16

<PAGE>

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, 2001.

                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

   Our common stock trades on the New York Stock Exchange under the symbol
"HC." The following table sets forth the high and low intraday sales price for
our common stock for the periods indicated.

<TABLE>
<CAPTION>
                                          High   Low
                                         ------ ------
                          <S>            <C>    <C>
                          2000
                          First Quarter. $28.44 $16.91
                          Second Quarter $38.00 $22.72
                          Third Quarter. $40.69 $25.25
                          Fourth Quarter $46.06 $28.94
                          2001
                          First Quarter. $44.38 $29.25
                          Second Quarter $40.45 $29.00
                          Third Quarter. $34.00 $19.00
                          Fourth Quarter $30.40 $19.90
</TABLE>

   As of April 5, 2002, there were 79,220,366 shares of our common stock
outstanding, held by approximately 632 stockholders of record.

   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 develop and expand our
business. Our $350 million credit facility with the JPMorgan Chase Bank, as
agent (the "Bank Credit Agreement") limits the amount of dividends payable by
us (without the lender's prior approval) on our common stock to no more than
25% of our net income for the period from December 3, 2001 until November 30,
2004. Any future determinations to pay cash dividends on the 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.

   Set forth below is certain information with respect to securities sold by us
in 2001 which were not registered under the Securities Act of 1933, as amended,
in reliance upon the exemption under Section 4(2) of the Securities Act. No
underwriting discounts or commissions were paid in any of the transactions
below.

<TABLE>
<CAPTION>
 Date of Sale           Title and Amount                      Aggregate Offering Price
--------------- -------------------------------- --------------------------------------------------
<C>             <C>                              <S>
April 18, 2001  108,625 shares of common stock   Issued to Power Machinery, Inc. in connection with
                                                   the Company's acquisition of Power Machinery,
                                                   Inc. assets
June 14, 2001   17,598 shares of common stock    Issued to Joe D. Jackson in connection with the
                                                   Company's acquisition of J&R International, Inc.
August 31, 2001 8,707,693 shares of common stock Issued to Schlumberger Technology Corporation in
                                                   connection with the Company's acquisition of POI
</TABLE>


                                      17

<PAGE>

Item 6.  Selected Financial Data

                     SELECTED FINANCIAL DATA (HISTORICAL)

           (Dollars and shares in thousands, except per share data)

   In the table below we have presented certain selected financial data for
Hanover for each of the five years in the period ended December 31, 2001. 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" and the Consolidated Financial Statements of the Company.

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                         ---------------------------------------------------
                                                                          2001(2)    2000(1)(2)  1999(2)     1998     1997
                                                                         ----------  ---------- ---------- -------- --------
                                                                         (Restated)  (Restated) (Restated)
<S>                                                                      <C>         <C>        <C>        <C>      <C>
Income Statement Data:
   Revenues:
      Rentals........................................................... $  400,776   $253,837   $192,655  $147,609 $100,685
      Parts, service and used equipment.................................    244,040    129,366     39,130    29,538   10,808
      Compressor fabrication............................................    223,519     90,270     52,531    67,453   49,764
      Production and processing equipment fabrication...................    184,040     79,121     27,255    37,466   37,052
      Equity in income of non-consolidated affiliates...................      9,350      3,518      1,188     1,369
      Gain on change in interest in non-consolidated affiliate..........                   864
      Other.............................................................      8,972      5,810      5,371     2,916    1,084
                                                                         ----------   --------   --------  -------- --------
         Total revenues (3).............................................  1,070,697    562,786    318,130   286,351  199,393
                                                                         ----------   --------   --------  -------- --------
   Expenses:
      Rentals...........................................................    140,998     87,992     64,949    49,386   35,113
      Parts, service and used equipment.................................    166,837     88,294     26,504    21,735    6,955
      Compressor fabrication............................................    188,122     76,754     43,663    58,144   41,584
      Production and processing equipment fabrication...................    147,824     62,684     20,278    25,781   26,375
      Selling, general and administrative...............................    100,980     54,632     33,782    26,626   21,514
      Depreciation and amortization.....................................     90,560     52,882     37,337    37,154   28,439
      Leasing expense...................................................     70,435     45,484     22,090     6,173
      Interest expense..................................................     17,540      8,685      8,786    11,716   10,728
      Foreign currency translation......................................      6,658
      Distributions on mandatorily redeemable convertible preferred
       securities.......................................................      6,373      6,369        278
      Other ............................................................     17,323
                                                                         ----------   --------   --------  -------- --------
         Total expenses.................................................    953,650    483,776    257,667   236,715  170,708
                                                                         ----------   --------   --------  -------- --------
Income before income taxes..............................................    117,047     79,010     60,463    49,636   28,685
Provision for income taxes..............................................     44,470     29,371     22,008    19,259   11,043
                                                                         ----------   --------   --------  -------- --------
Net income before cumulative effect of accounting change................     72,577     49,639     38,455    30,377   17,642
   Cumulative effect of accounting change for derivative instruments,
    net of tax..........................................................       (164)
                                                                         ----------   --------   --------  -------- --------
Net income..............................................................     72,413     49,639     38,455    30,377   17,642
Other comprehensive (loss) income, net of tax:
   Change in fair value of derivative financial instruments.............     (6,073)
   Foreign currency translation adjustment..............................        (27)      (146)      (463)      152
                                                                         ----------   --------   --------  -------- --------
Comprehensive income.................................................... $   66,313   $ 49,493   $ 37,992  $ 30,529 $ 17,642
                                                                         ==========   ========   ========  ======== ========
Diluted net income available to common stockholders:
   Net income before cumulative effect of accounting change............. $   72,577   $ 49,639   $ 38,455  $ 30,377 $ 17,642
   Distributions on mandatorily redeemable convertible preferred
    securities, net of income tax.......................................      4,142
   Cumulative effect of accounting change for derivative instruments,
    net of tax..........................................................       (164)
                                                                         ----------   --------   --------  -------- --------
Diluted net income available to common stockholders..................... $   76,555   $ 49,639   $ 38,455  $ 30,377 $ 17,642
                                                                         ==========   ========   ========  ======== ========
Earnings per common share:
   Basic(4)............................................................. $     1.00   $   0.80   $   0.67  $   0.53 $   0.34
                                                                         ==========   ========   ========  ======== ========
   Diluted(4)........................................................... $     0.94   $   0.75   $   0.63  $   0.50 $   0.32
                                                                         ==========   ========   ========  ======== ========
Weighted average common and common equivalent shares:
   Basic(4).............................................................     72,355     61,831     57,048    56,936   51,246
                                                                         ----------   --------   --------  -------- --------
   Diluted(4)...........................................................     81,175     66,366     61,054    60,182   54,690
                                                                         ----------   --------   --------  -------- --------
</TABLE>

                                      18

<PAGE>

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                             -----------------------------------------------------
                                                              Restated    Restated   Restated
                                                              2001(2)    2000(1)(2)  1999(2)     1998       1997
                                                             ----------  ----------  --------  --------  ---------
<S>                                                          <C>         <C>         <C>       <C>       <C>
Other Data:
   EBITDAR(5)............................................... $  301,955  $  192,430  $128,954  $104,679  $  67,852
Cashflows provided by (used in):
   Operating activities..................................... $  152,774  $   29,746  $ 71,610  $ 31,147  $  32,219
   Investing activities.....................................   (482,277)    (67,481)  (95,502)  (14,699)  (164,490)
   Financing activities.....................................    307,259      77,589    18,218    (9,328)   129,510
Balance Sheet Data (end of period):
   Working capital.......................................... $  275,074  $  282,730  $103,431  $113,264  $  58,027
   Net property, plant and equipment........................  1,151,513     574,703   498,877   392,498    394,070
   Total assets.............................................  2,265,776   1,246,172   753,387   614,590    506,452
   Long-term debt...........................................    504,260     110,935    69,681   156,943    158,838
   Mandatorily redeemable convertible preferred securities..     86,250      86,250    86,250
   Common stockholders' equity..............................  1,039,468     628,947   365,928   315,470    287,028
</TABLE>
--------
(1) April 2002 Restatement--In conjunction with a review of our joint ventures
    and other transactions conducted by counsel under the direction of the
    Audit Committee, we restated our financial statements for the year ended
    December 31, 2000. The net effect of the restatement made in April 2002 for
    the year ended December 31, 2000 was as follows: (i) a decrease in revenues
    of $37.7 million, from $603.8 million to $566.1 million; (ii) a decrease in
    income before taxes of $12.0 million, from $93.5 million to $81.5 million;
    (iii) a decrease in net income of $7.5 million, from $58.7 million to $51.2
    million; and (iv) a decrease in earnings per common share of $0.12 basic
    and $0.11 diluted. See Note 20 of the Notes to Consolidated Financial
    Statements. See Note 21 of the Notes to Consolidated Financial Statements
    for information regarding the further restatement of the 2000 Financial
    Statements.
(2) November 2002 Restatement--Subsequent to the April 2002 restatement, a
    special committee of the Board of Directors together with the Audit
    Committee and company management, aided by outside legal counsel, recently
    completed an extensive investigation of certain transactions recorded
    during 2001, 2000 and 1999, including those transactions restated by the
    Company in April 2002. As a result of this investigation, the Company
    determined, with the concurrence its independent accountants, to restate
    its financial statements for several transactions, including one that was
    the subject of the April 2002 restatement. The net effect of this
    restatement for the year ended December 31, 2001 was as follows: (i) a
    decrease in revenues of $7.5 million, from $1,078.2 million to $1,070.7
    million; (ii) a decrease in income before income taxes of $0.4 million,
    from $117.4 million to $117.0 million; (iii) a decrease in net income of
    $0.2 million, from $72.6 million to $72.4 million; and (iv) a decrease in
    diluted earnings per common share of $0.01. The net effect of this
    restatement for the year ended December 31, 2000 was as follows: (i) a
    decrease in revenues of $3.3 million, from $566.1 million to $562.8
    million; (ii) a decrease in income before taxes of $2.5 million from $81.5
    million to $79.0 million; (iii) a decrease in net income of $1.6 million,
    from $51.2 million to $49.6 million; and (iv) a decrease in earnings per
    common share of $0.03 basic and $0.02 diluted. The net effect of this
    restatement for the year ended December 31, 1999 was as follows: (i) a
    decrease in revenues of $5.1 million, from $323.2 million to $318.1
    million; (ii) a decrease in income before income taxes of $3.1 million,
    from $63.6 million to $60.5 million; (iii) a decrease in net income of $1.9
    million, from $40.4 million to $38.5 million; and (iv) a decrease in
    earnings per common share of $0.04 basic and $0.03 diluted. See Notes 20
    and 21 of the Notes to Consolidated Financial Statements.
(3) We have grown as a result of internal growth and business combinations. For
    a description of significant business acquisitions, see Note 2 to the Notes
    to the Consolidated Financial Statements.
(4) In June 2000, we completed a 2-for-1 stock split effected in the form of a
    100% stock dividend. All weighted average and common equivalent shares and
    earnings per common share information have been restated for all periods
    presented to reflect this stock split.
(5) EBITDAR consists of the sum of consolidated net income, interest expense,
    leasing expense, distributions on mandatorily redeemable convertible
    preferred securities, income tax, and depreciation and amortization. We
    believe that EBITDAR is a commonly used measure of financial performance
    for valuing companies in the compression industry. Additionally, since
    EBITDAR is a basic source of funds not only for growth but to service
    indebtedness, lenders in the private and public debt markets use EBITDAR as
    a primary determinant of borrowing capacity. EBITDAR should not be
    considered as an alternative performance measure prescribed by generally
    accepted accounting principles.

                                      19

<PAGE>

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.

GENERAL

   Hanover Compressor Company is a leading provider of a broad array of natural
gas compression, gas handling and related services in the United States and
select international markets. Founded in 1990 and publicly held since 1997, we
operate the largest compressor rental fleet in the United States, in terms of
horsepower, in the gas compression industry and provide services on a rental,
contract compression, maintenance and acquisition leaseback basis. In
conjunction with our maintenance business, we have developed our parts and
service business to provide solutions to customers that own their own
compression equipment but want to outsource their operations. Our compression
services are complemented by our compressor and oil and gas production
equipment fabrication operations and gas processing and treating, gas
measurement and power generation services, which broaden our customer
relationships both domestically and internationally. Our products and services
are essential to the production, gathering, processing, transportation and
storage of natural gas and are provided primarily to independent and major
producers and distributors of natural gas.

   The Company has grown through organic growth and through acquisitions. For
2002, the Company plans to reduce its capital spending and focus on completing
the integration of recent acquisitions.

   In August 2001, we acquired 100% of the issued and outstanding shares of POI
from Schlumberger for $761 million in cash, and Hanover common stock and
indebtedness, subject to certain post-closing adjustments pursuant to the
purchase agreement (the "POI Acquisition") that to date have resulted in an
increase in the purchase price to approximately $771 million due to an increase
in net assets acquired. Under the terms of the acquisition 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 and approximately 8,708,000 Hanover common shares, or approximately 11% of
the outstanding shares of Hanover common stock, which are required to be held
by Schlumberger for at least three years following the closing date. The
ultimate number of shares issued under the purchase agreement was determined
based on the nominal value of $283 million divided by 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 POI Acquisition was accounted for as a purchase and is included in our
financial statements commencing on September 1, 2001.

   As of December 31, 2001, we recorded approximately $67 million in goodwill
related to the acquisition of POI which, in accordance with the transition
provisions of SFAS 142 will not be amortized. In addition, as of December 31,
2001, we recorded $8.2 million in estimated value of identifiable intangible
assets. The purchase price was subject to certain post-closing adjustments, a
contingent payment of up to $58 million by us to Schlumberger and additional
contingent payments by us based on the realization of certain tax benefits by
us over the next 15 years.

   In March 2001, we purchased 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 1,146,000 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.
   In September 2000, we acquired the compression services division of
Dresser-Rand Company for $177 million in cash and common stock, subject to
certain post-closing adjustments pursuant to the acquisition agreement which to
date have resulted in an increase in the purchase price to approximately $199
million due to increases in net assets acquired. In July 2000, we acquired
PAMCO Services International for approximately $58 million in cash and notes.
In June 2000, the we acquired Applied Process Solutions, Inc. for approximately

                                      20

<PAGE>

2,303,000 newly issued shares of our common stock. These acquisitions were
included in the results of operations from their respective acquisition dates.

   We completed a two-for-one stock split effected in the form of a 100% stock
dividend in June 2000. Accordingly, common stock, additional paid-in capital
and all earnings per share information have been restated for all periods
presented.

   In addition, in 2002, we determined to restate our financials for the years
ended December 31, 2001, 2000 and 1999. Accordingly, revenues, expenses income
before taxes, net income and earnings per share have been restated for the
years ended December 31, 2001, 2000 and 1999. See Notes 20 and 21 in the Notes
to the Consolidated Financial Statements.

   The following table summarizes revenues, expenses and gross profit
percentages for each of the our business segments (dollars in millions):

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                              --------------------------
                                                              Restated Restated Restated
                                                                2001     2000     1999
                                                              -------- -------- --------
<S>                                                           <C>      <C>      <C>
Revenues:
   Rentals--Domestic......................................... $  269.9  $172.5   $136.5
   Rentals--International....................................    130.9    81.3     56.2
   Parts, service and used equipment.........................    244.0   129.4     39.1
   Compressor fabrication....................................    223.5    90.3     52.5
   Production and processing equipment fabrication...........    184.0    79.1     27.3
   Equity in income of non-consolidated affiliates and other.     18.4    10.2      6.5
                                                              --------  ------   ------
       Total................................................. $1,070.7  $562.8   $318.1
                                                              ========  ======   ======
Expenses:
   Rentals--Domestic......................................... $   95.2  $ 60.3   $ 46.2
   Rentals--International....................................     45.8    27.7     18.8
   Parts, service and used equipment.........................    166.8    88.3     26.5
   Compressor fabrication....................................    188.1    76.8     43.7
   Production and processing equipment fabrication...........    147.8    62.7     20.3
                                                              --------  ------   ------
       Total................................................. $  643.7  $315.8   $155.5
                                                              ========  ======   ======
Gross profit percentage:
   Rentals--Domestic.........................................    64.7%   65.0%    66.1%
   Rentals--International....................................    65.0%   66.0%    66.6%
   Parts, service and used equipment.........................    31.6%   31.7%    32.3%
   Compressor fabrication....................................    15.8%   15.0%    16.9%
   Production and processing equipment fabrication...........    19.7%   20.8%    25.6%
</TABLE>

CRITICAL ACCOUNTING POLICIES AND 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 and
leaseback transactions, revenue recognition and contingencies and litigation.

   We base our estimates on historical experience and on other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making 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.

                                      21

<PAGE>

  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 deteriorated, resulting in an impairment of its ability
to make payments, additional allowances may be required.

   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.

  Long Lived Assets and Investments

   We review for the impairment of long-lived assets, including property, plant
and equipment, and goodwill whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss exists when estimated undiscounted cash flows expected to
result from the use of the asset and its eventual disposition are less than its
carrying amount. The impairment loss recognized represents the excess of the
asset's carrying value as compared to its estimated fair market value and would
be charged to the period in which the impairment occurred. In addition, we
capitalize major improvements that we believe extend the useful life of an
asset. Repairs and maintenance are expensed as incurred. Interest is
capitalized during the fabrication period of compression equipment and
facilities that are for use in our rental operations. The capitalized interest
is recorded as part of the basis of the asset to which it relates and is
amortized over the asset's estimated useful life.

   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 in the future.

  Tax Assets

   We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, should we determine that we
would not be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax asset may need to be charged to
income in the period such determination is made.

  Sale and Leaseback Transactions

   Since 1998, we have entered into five sale and leaseback transactions of
compression equipment with special purpose entities. Sale and leaseback
transactions of compression equipment are evaluated for lease classification in
accordance with Statement of Financial Accounting Standards No. 13 "Accounting
for Leases." In accordance with generally accepted accounting principles, these
special purpose entities are not included in our consolidated financial
statements when the owners of the special purpose entities have made a
substantial residual equity investment of at least three percent of the total
capital of the entity that is at risk during the entire term of the lease.
Generally accepted accounting principles requires us to:

  .   estimate the remaining life of the asset at lease inception;

  .   estimate the fair market value of the asset at lease inception;

  .   estimate the leased equipment's residual value at the end of the lease;

  .   estimate certain costs to be incurred by us in connection with the lease;

  .   estimate the present value of the lease payments under the lease; and

                                      22

<PAGE>

  .   confirm that the substantial residual equity investment, of at least
      three percent of the total capital of the entity continues to be at risk
      during the entire term of the lease.

   If these estimates were materially incorrect, we could be required to
include the special purpose entities and the related compression equipment and
debt in our financial statements. We believe that our estimates were correct;
however, if we were required to consolidate the special purpose entities as of
December 31, 2001, we would add approximately $1,031 million in compressor
equipment and approximately $1,140 million in debt to our balance sheet and we
would reverse $109 million of the deferred gains which were recorded on our
balance sheet as a result of the transactions.

   In addition, because we sold the compressors to the lessors, our
depreciation expense was reduced by approximately $43 million, $31 million, and
$20 million for the years ended December 31, 2001, 2000 and 1999, respectively.
We also believe that these transactions had the effect of decreasing interest
expense. However, we believe the decreased interest expense and the increased
leasing expense are not directly comparable because the duration of our
operating leases are longer than the maturity of our revolving line of credit.

   See " Leasing Transactions" in our Management's Discussion and Analysis of
Financial Condition and Results of Operations for more information on these
sale and leaseback transactions.

  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 since reasonably dependable
estimates of the revenue and costs applicable to various stages of a contract
can be made and since the 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 six months. As of December 31, 2001, we
had recognized $155.6 million of revenue, $103.7 million in billings and $25.6
million of gross profit based on percentage-of-completion accounting for
projects which were not yet complete.

   We estimate percentage-of-completion for compressor and processing equipment
fabrication on a direct labor hour-to-total labor hour basis. This requires
management to estimate the number of total labor hours required for each
project and to estimate the profit expected on the project. Production
equipment fabrication percentage-of-completion is estimated using the
cost-to-total cost basis. This requires us to estimate the number 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 on any single project.

  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, we are required to record a loss during the period in which
we, based on our experience, believe a contingency is likely to result in a
financial loss to us.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenues

   Our total revenues increased by $507.9 million, or 90%, to $1,070.7 million
during the year ended December 31, 2001 from $562.8 million during 2000. The
increase in revenues resulted from growth in horsepower of our natural gas
compressor rental fleet, organic growth in our fabrication business and
outsourcing businesses, which includes compression, gas treating, process
measurement and power generation, as well as growth due to business
acquisitions completed in 2001 and 2000.

                                      23

<PAGE>

   Revenues from rentals increased by $147.0 million, or 58%, to $400.8 million
during 2001 from $253.8 million during 2000. Domestic revenues from rentals
increased by $97.4 million, or 56%, to $269.9 million during 2001 from $172.5
million during 2000. International rental revenues increased by $49.6 million,
or 61%, to $130.9 million during 2001 from $81.3 million during 2000. The
increase in both domestic and international rental revenue resulted from
expansion of our rental fleet and business acquisitions completed in 2001 and
2000. At December 31, 2001, the compressor rental fleet consisted of
approximately 3,477,000 horsepower, a 62% increase over the 2,151,000
horsepower in the rental fleet at December 31, 2000. Domestically, the rental
fleet increased by 955,000 horsepower, or 55%, during 2001 and internationally
by 371,000 horsepower, or 90%.

   Revenue from parts, service and used equipment increased by $114.6 million,
or 89% to $244.0 million during 2001 from $129.4 million during 2000. This
increase is due in part to an increase in our marketing focus for this business
segment, as well as expansion of business activities through acquisitions.
Approximately 48% of the increase in parts, service and used equipment revenues
resulted from business acquisitions. Revenues from compressor fabrication
increased by $133.2 million, or 148%, to $223.5 million during 2001 from $90.3
million during 2000. Approximately 47% of this increase is due to the
acquisition of Dresser-Rand Company's compression service division in September
2000 and POI Acquisition in August 2001. During 2001, an aggregate of
approximately 366,000 horsepower of compression equipment was fabricated and
sold compared to approximately 166,000 horsepower fabricated and sold during
2000. In addition, 220,000 horsepower was fabricated and placed in the rental
fleet during 2001 compared to 168,000 horsepower in 2000.

   Revenues from production and processing equipment fabrication increased by
$104.9 million, or 133%, to $184.0 million during 2001 from $79.1 million
during 2000. Of this increase 48% is due to the acquisition of APSI during June
2000 and the balance due to an improvement in market conditions in the process
equipment business compared to conditions which existed in 2000.

   Equity in earnings in subsidiaries increased $5.8 million, or 166%, to $9.3
million during 2001, from $3.5 million during 2000. This increase is primarily
due to our acquisition of POI, which included interests in three joint venture
projects in South America. These joint ventures contributed $8.1 million in
equity earnings for 2001 which was partially offset by a decrease in equity
earnings from Collicutt Hanover Mechanical Services which decreased to a loss
of $257,000 in 2001 from $786,000 in income in 2000.

Expenses

   Operating expenses of the rental segments increased by $53.0 million, or
60%, to $141.0 million during 2001 from $88.0 million during 2000. The increase
resulted primarily from the corresponding 58% increase in revenues from rentals
over the corresponding period in 2000. The gross profit percentage from rentals
was approximately 65% during 2001 and 2000.

   Operating expenses of our parts, service and used equipment segment
increased by $78.5 million, or 89% to $166.8 million, during 2001, compared to
$88.3 million in 2000, which relates to the 89% increase in parts, service and
used equipment revenue. The gross profit margin from parts, service and used
equipment was 32% during 2001 and 2000. Operating expenses of compressor
fabrication increased by $111.3 million, or 145%, to $188.1 million during 2001
from $76.8 million during 2000, commensurate with the increase in compressor
fabrication revenue. The gross profit margin on compression fabrication was 16%
during 2001 and 15% during 2000. The operating expenses attributable to
production equipment fabrication increased by $85.1 million, or 136%, to $147.8
million during 2001 from $62.7 million during 2000. The gross profit margin
attributable to production and processing equipment fabrication was 20% during
2001 and 21% during 2000.

   Selling, general and administrative expenses increased $46.4 million, or
85%, to $101.0 million during 2001 from $54.6 million during 2000. The increase
is attributable to increased personnel and other administrative and selling
expenses associated with business acquisitions completed during 2001 and 2000
as well as increased activity in the our business segments.

                                      24

<PAGE>

   We believe that earnings before interest, leasing expense, distributions on
mandatorily redeemable convertible preferred securities, income taxes,
depreciation and amortization (EBITDAR) is a commonly used measure of financial
performance and for valuing companies in the compression industry. EBITDAR is a
useful yardstick as it measures the capacity of companies to generate cash
without reference to how they are capitalized, how they account for significant
non-cash charges for depreciation and amortization associated with assets used
in the business (the bulk of which are long-lived assets in the compression
industry), or what their tax attributes may be. Additionally, since EBITDAR is
a basic source of funds not only for growth but to service indebtedness,
lenders in both the private and public debt markets use EBITDAR as a primary
determinant of borrowing capacity. EBITDAR for the year ended December 31, 2001
increased 57% to $302.0 million from $192.4 million for the year ended December
31, 2000 primarily due to the increase in our revenue for reasons previously
discussed. EBITDAR should not be considered in isolation from, or a substitute
for, net income, cash flows from operating activities or other consolidated
income or cash flow data prepared in accordance with generally accepted
accounting principles.

   Depreciation and amortization increased by $37.7 million, or 71%, to $90.6
million during 2001 compared to $52.9 million during 2000. The increase in
depreciation was due to the additions to the rental fleet which were partially
offset by an approximately $12 million decrease in depreciation as a result of
the sale of compression equipment into the equipment leases in March, August
and October 2000 and in August 2001. The increase in amortization of
approximately $6.5 million was due to additional goodwill recorded from
business acquisitions completed during 2001 and 2000.

   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 15 year depreciable life.
Our new estimated lives are based upon the different types of compressors
presently in our rental fleet rather than a blanket life applied to all
compressors, and more accurately reflects the economic lives of the
compressors. The effect of this change in estimate on the year ended December
31, 2001 was a decrease in depreciation expense of approximately $5 million and
an increase in net income of approximately $3.1 million ($0.04 per share). We
anticipate this change in estimated useful life will reduce future depreciation
expense, based on our current depreciable assets, by approximately $14 million
per year.

   We incurred leasing expense of $70.4 million during 2001 compared to $45.5
million during 2000. The increase of $24.9 million resulted from the additional
equipment leases entered into in 2001 and 2000.

   Interest expense increased by $8.8 million to $17.5 million during 2001 from
$8.7 million for the 2000. The increase in interest expense is due to higher
levels of outstanding debt partially offset by lower effective interest rates.

   Translation expense for the year ended December 31, 2001 was $6.7 million,
primarily due to the Company's operations in Argentina and Venezuela. Due to
the currency exposure in Argentina and Venezuela, the Company recorded an
exchange loss during 2001 of approximately $5.2 million and $1.2 million for
assets exposed to currency translation risk in these countries, respectively.

   Other expenses during 2001 was $17.3 million, which included a $2.7 million
bridge loan commitment fee associated with Hanover's recent acquisition of POI,
a $5.0 million write down of an investment in Aurion Technologies, Inc., a $1.0
million litigation settlement, $7.6 million from the recognition of an
unrealized loss related to the change in fair value of the interest rate swaps
as required under SFAS 133 (see Note 18 in Notes to the Consolidated Financial
Statements) and $1.0 million in other non-operating expenses.

Income Taxes

   The provision for income taxes increased by $15.1 million, or 51%, to $44.5
million during 2001 from $29.4 million during 2000. The increase resulted
primarily from the corresponding increase in income before income taxes. The
average effective income tax rates during 2001 and 2000 were 38.0% and 37.2%,
respectively.

                                      25

<PAGE>

Net Income

   Net income increased $22.8 million, or 46%, to $72.4 million during 2001
from $49.6 million during 2000 due to the increase in revenues and gross
profits discussed above.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Revenues

   Our total revenues increased by $244.7 million, or 77%, to $562.8 million
during 2000 from $318.1 million during 1999. The increase resulted from growth
of our natural gas compressor rental fleet and business acquisitions completed
during 2000.

   Revenues from rentals increased by $61.1 million, or 32%, to $253.8 million
during 2000 from $192.7 million during 1999. Domestic revenues from rentals
increased by $36.0 million, or 26%, to $172.5 million during 2000 from $136.5
million during 1999. International revenues from rentals increased by $25.1
million, or 45%, to $81.3 million during 2000 from $56.2 million during 1999.
At December 31, 2000, the compressor rental fleet consisted of approximately
2,151,000 horsepower, a 48% increase over the 1,458,000 horsepower in the
rental fleet at December 31, 1999. Domestically, the rental fleet increased by
560,000 horsepower, or 47%, during 2000 and internationally by 133,000
horsepower, or 48%. The increase in both domestic and international rental
revenues resulted primarily from expansion of our rental fleet.

   Revenues from parts, service and used equipment increased by $90.3 million,
or 231%, to $129.4 million during 2000 from $39.1 million during 1999. This
increase is due primarily to increased marketing focus and partially from
expansion of business activities through recent acquisitions. Approximately 28%
of the increase in parts, service and used equipment revenues resulted from
business acquisitions. Revenues from compressor fabrication increased by $37.8
million, or 72%, to $90.3 million during 2000 from $52.5 million during 1999.
An aggregate of 166,000 horsepower was sold during 2000. In addition, 168,000
horsepower was fabricated and placed in the rental fleet during 2000. The
increase in horsepower produced during 2000 resulted from an increased demand
for compression equipment due to higher natural gas prices. The average
wellhead natural gas price increased from $2.19 per mcf in 1999 to $3.69 per
mcf for 2000.

   Revenues from production and processing equipment fabrication increased by
$51.8 million, or 190%, to $79.1 million during 2000 from $27.3 million during
1999. The increase in revenues from production equipment fabrication is due
primarily to the acquisition of Applied Process Solutions Inc. in June 2000.

   Equity in earnings in subsidiaries increased by $2.3 million during 2000 to
$3.5 million from $1.2 million during 1999. This increase was primarily due to
our investment in Hanover Measurement Services Company, LP which was formed in
September 1999. In addition, during 2000 we recorded a change in interest gain
of $0.9 million resulting from a decrease in our interest due to an
unconsolidated subsidiary's stock offering to third parties.

Expenses

   Operating expenses of the rentals segments increased by $23.0 million, or
35%, to $88.0 million during 2000 from $65.0 million during 1999. The increase
resulted primarily from the corresponding 32% increase in revenues from rentals
over the corresponding period in 1999. The gross profit percentage from rentals
was 65% during 2000 and 66% during 1999.

   Operating expenses of our parts, service and used equipment segment
increased $61.8 million, or 233%, to $88.3 million during 2000 from $26.5
million during 1999, which relates to the 231% increase in parts and service
revenue. The gross profit percentage from parts, service and used equipment was
32% during 2000 and 1999. Operating expenses of compressor fabrication
increased by $33.1 million, or 76%, to $76.8 million from $43.7 million during
1999. The gross profit margin on compression fabrication was 15% during 2000
and 17%

                                      26

<PAGE>

during 1999. The decrease in gross profit margin for compression fabrication
was attributable to the acquisition of the compression services division of
Dresser-Rand Company. Production and processing equipment fabrication operating
expenses increased by $42.4 million, or 209%, during 2000 to $62.7 million from
$20.3 million during 1999. The gross profit margin attributable to production
and processing equipment fabrication decreased to 21% during 2000, from 26%
during 1999. The decrease in gross profit margin for production and processing
equipment fabrication was attributable to the acquisition of Applied Process
Solutions, Inc. in June 2000, which has lower gross margins than we had
historically experienced.

   Selling, general and administrative expenses increased by $20.9 million, or
62% to $54.6 million during 2000. The increase is attributable to increased
personnel and other administrative and selling expenses associated with
business acquisitions completed in 2000 and the increase in operating activity
in our rental business segments as described above.

   Depreciation and amortization expense increased by $15.5 million, or 42%
during 2000 to $52.9 million. The increase in depreciation from the additions
to the rental fleet and additional goodwill amortization of approximately $3.0
million from acquisitions was offset by an approximately $11.0 million decrease
in depreciation as a result of the equipment leases entered into in June 1999
and during 2000.

   Interest expense decreased by $.1 million, or 1% during 2000 to $8.7
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment leases which was used to reduce indebtedness under
our credit facility and the capitalization of interest expense on assets that
are under construction.

   We incurred compression equipment lease expense of $45.5 million during 2000
and $22.1 million during 1999. The increase is due to having a full year of
lease expense on the equipment lease entered into in June 1999 and the new
equipment leases entered into during 2000.

Income Taxes

   The provision for income taxes increased by $7.4 million, or 34%, to $29.4
million during 2000 from $22.0 million during 1999. The increase resulted
primarily from the corresponding increase in income before taxes. Our effective
income tax rate was approximately 37.2% during 2000 and 36.4% during 1999.

Net Income and Earnings Per Share

   Net income increased $11.1 million, or 29%, to $49.6 million for 2000 from
$38.5 million in 1999 for the reasons discussed above.

LEASING TRANSACTIONS

   The sale of equipment by Hanover and its subsidiaries to special purpose
entities, which leaseback the equipment to us, has a number of advantages over
other sources of capital presently available to us. Specifically, we believe
sale and leaseback transactions (1) enable Hanover to affordably extend the
duration of its financing arrangements, (2) reduce Hanover's cost of capital
and (3) provide access to a source of capital other than traditional bank
financing.

   Prior to our first sale and leaseback transaction in 1998, we financed
growth in compression assets by drawing down on our revolving line of credit
with a commercial bank. While highly flexible and well priced, the line of
credit represented a short term funding strategy to finance long-term assets.
Sale and leaseback transactions can reduce refinancing risk by extending the
duration of our capital commitments.

   Sale and leaseback transactions also provide capital to us at a lower cost
compared to other sources presently available to us. Lenders to the special
purpose entities do not require as high a rate of interest because their
capital risk is mitigated by a perfected, first priority security interest in
the compression equipment, as well as a residual value guarantee provided by
us. This factor has the corresponding effect of reducing our lease rate

                                      27

<PAGE>

relative to an unsecured borrowing rate. Based on our periodic review of
capital alternatives, we believe that the cost of our rent payments in the sale
and lease-back transactions historically has been 0.50% to 2.00% per annum less
than the cost of debt financing alternatives available to us at the time we
entered into these sale and leaseback transactions. We will continue to
evaluate sale leaseback transactions as well as consider other forms of
financing for cost effectiveness as future capital needs arise.

   We also believe that the sale and lease-back transactions represent a source
of capital in addition to the commercial bank financing traditionally utilized
by us. This diversification of our capital sources has broadened our access to
capital to allow us to expand operations.

   In August 2001 and in connection with the POI Acquisition, we completed two
sale and leaseback transactions involving certain compression equipment.
Concurrent with these transactions, we exercised our purchase option under our
July 1998 operating lease for $200 million. Under one transaction, we received
$309.3 million proceeds from the sale of compression equipment. Under the
second transaction, we received $257.8 million from the sale of additional
compression equipment. Both transactions are recorded as a sale and leaseback
of the equipment and are recorded as operating leases. 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 under our normal operating
procedures. The agreement calls for semi-annual rental payments of
approximately $12.8 million in addition to quarterly rental payments of
approximately $245,000. 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 under our normal operating procedures. The agreement calls for semi-annual
rental payments of approximately $10.9 million in addition to quarterly rental
payments of approximately $213,000. We have options to repurchase the equipment
under certain conditions as defined by the lease agreement. Through December
31, 2001, we incurred transaction costs of approximately $17.9 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 and leaseback of
compression equipment. In March 2000, we entered into a separate $200 million
sale and leaseback of compression equipment. Under the March agreement, 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. In June 1999 and in July 1998, we completed
two other separate $200 million sale and leaseback transactions of compression
equipment. Under the lease agreements, the equipment was sold and leased back
by us for a five year term and will be utilized by us in our business. We have
options to repurchase the equipment under the 2000 and 1999 leases as defined
under certain conditions by the lease agreement. The lease agreements call for
variable quarterly payments that fluctuate with the London Interbank Offering
Rate. We incurred an aggregate of approximately $8.1 million in transactions
costs for the leases entered into in 2000, 1999 and 1998, 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 the proceeds, net book value of equipment
sold, deferred gain on equipment sale, the residual guarantee and the lease
termination date for equipment leases (in thousands of dollars):

<TABLE>
<CAPTION>
                                                   Residual
                          Sale   Net Book Deferred   Value        Lease
  Lease                 Proceeds  Value     Gain   Guarantee Termination Date
  -----                 -------- -------- -------- --------- ----------------
  <S>                   <C>      <C>      <C>      <C>       <C>
  June 1999............ $200,000 $166,356 $33,644  $166,000   June 2004
  March and August 2000  200,000  166,922  33,078   166,000   March 2005
  October 2000.........  172,589  155,692  16,897   142,299   October 2005
  August 2001..........  309,300  306,034   3,266   232,000   September 2008
  August 2001..........  257,750  235,877  21,873   175,000   September 2011
</TABLE>

                                      28

<PAGE>

   These transactions are recorded as a sale and leaseback of the equipment and
the leases are treated as operating leases. We made guarantees under the lease
agreements that are due upon termination of the leases and which may be
satisfied by a cash payment or the exercise of our equipment purchase options
under the terms of the lease agreements. The residual value guarantees and
other lease terms which are based on negotiation between Hanover and third
party lessors, were supported by equipment appraisals and analysis. We believe
that the market value of the equipment at the end of the lease will exceed the
guaranteed residual values due to our predictive and preventive maintenance
programs, routine overhaul practices and the expected demand for compression
equipment in the future. We review the value of the equipment whenever events
or circumstances indicate that a decrease in market value may have occurred as
a result of foreseeable obsolescence or a decrease in market demand. If the
fair value of the equipment was less than the guaranteed residual value, we
would accrue additional lease expense for the amount that would be payable upon
termination of the lease. All gains on
the sale of the equipment are deferred until the end of the respective lease
terms. Should we not exercise our purchase options under the lease agreements,
the deferred gains will be recognized to the extent they exceed any final rent
payments and any other payments required under the lease agreements.

   As a result of the lease transactions, we incurred approximately $70.4
million, $45.5 million, and $22.1 million in lease expense for the years ended
December 31, 2001, 2000 and 1999, respectively. The following future minimum
lease payments are due under the leasing arrangements exclusive of any final
rent payments or purchase option payments (in thousands): 2002--$88,111;
2003--$84,941; 2004--$77,536; 2005--$62,780; 2006--$49,072; and $149,779
thereafter.

   In connection with the leases entered into in August 2001, we are obligated
to prepare registration statements and complete an exchange offering to enable
the holders of the notes issued by the lessors to exchange their notes with
notes which are registered under the Securities Act. Because the exchange
offering has not been completed, we are required to pay additional lease
expense in the amount equal to $105,600 per week until the exchange offering is
completed. The additional lease expense began accruing on January 28, 2002.

LIQUIDITY AND CAPITAL RESOURCES

   Our cash balance amounted to $23.2 million at December 31, 2001 compared to
$45.5 million at December 31, 2000. Primary sources of cash during the year
ended December 31, 2001 were net proceeds of $185.5 million from the issuance
of 4.75% convertible senior notes due 2008, $83.9 million through our public
offering of 2,500,000 shares of common stock, $550 million from two
sale-leaseback transactions, $54.5 million from borrowings under our bank
credit facility and operating cash flows of $152.8 million. Principal uses of
cash during the year ended December 31, 2001 were capital expenditures of
$660.1 million (including $200 million used to exercise our purchase option
under our 1998 operating lease) and business acquisitions of $386.1 million.

   Working capital decreased to $275.1 million at December 31, 2001 from $282.7
million at December 31, 2000, primarily as a result of the $58 million
liability to Schlumberger which is expected to be paid in 2002 and is included
in accrued liabilities. Excluding the $58 million accrued business acquisition
payment liability, working capital would have increased by $50.4 million. This
increase was due to increases in accounts receivables, inventories and costs in
excess of billings, which resulted from increased levels of activity in our
lines of business compared to 2000 as well as from acquisitions. The increases
were partially offset by an increase in current liabilities.

   We invested $1,066.4 million in property, plant and equipment in 2001
(before the impact of sale and leaseback transactions). During 2001, we added
approximately 1,326,000 horsepower to the rental fleet. At December 31, 2001,
the compressor rental fleet consisted of 2,696,000 horsepower domestically and
781,000 horsepower in the international rental fleet.

   Given its consistently high compressor rental fleet utilization, we carry
out new customer projects through fleet additions and other related capital
expenditures. We invest funds necessary to make these rental fleet

                                      29

<PAGE>

additions only when our idle equipment cannot economically fulfill a project's
requirements and the new equipment expenditure is matched with long-term
contracts whose economic terms exceed our return on capital targets. During
2002, we plan to spend approximately $250 million on rental equipment fleet
additions, including $60 million on equipment overhauls and other maintenance
capital. Historically, we have funded capital expenditures with a combination
of internally generated cash flow, borrowing under the revolving credit
facility, sale lease-back transactions and raising additional equity and
issuing long term debt.

   In August 2001, we acquired the natural gas compression business of
Schlumberger in exchange for total consideration of $771 million in cash,
common stock and indebtedness. To finance the acquisition, we used $270 million
of the proceeds from the sale-leaseback transactions in combination with the
$150 million subordinated acquisition note and $283 million of common stock.

   We believe that cash flow from operations and borrowing under our existing
$350 million bank credit facility will provide us with adequate capital
resources to fund our estimated level of capital expenditures for the near
term. Since capital expenditures for 2002 are largely discretionary, we believe
we would be able to significantly reduce them, after a short period, if
expected cash flows from operations were not realized. As of December 31, 2001,
we had approximately $157 million in borrowings and approximately $44 million
in letters of credit outstanding on our $350 million revolving bank credit
facility (3.89% weighted average effective rate at December 31, 2001). The
letters of credit expire between 2002 and 2003.

   We are in compliance with all covenants or other requirements set forth in
our bank credit facility and indentures. Further, we do not have any rating
downgrade provisions that would accelerate the maturity dates of our debt.
However, a downgrade in our credit rating could 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. As of December 31, 2001, our debt to
capitalization ratio, including the residual value guarantees under our
operating leases, was 1.34 to 1 and our book debt to capitalization ratio,
excluding operating leases, was .49 to 1.

   Our bank credit facility permits us to incur indebtedness up to the $350
million credit limit under our bank credit agreement, plus an additional $125
million in unsecured indebtedness. In addition, our bank credit facility
permits us to enter into future sale and leaseback transactions with respect to
equipment having a value not in excess of $300 million. In addition, the
indenture and the participation agreements, which are part of our compression
equipment leases, 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, Hanover's ratio of EBITDAR, as adjusted, to total
fixed charges is greater than 2.25 to 1.0. These agreements define indebtedness
to include the present value of the total rental obligations under sale and
leaseback transactions and under facilities similar to our compression
equipment lease facilities.

   Based upon our total debt of approximately $510 million at December 31,
2001, we expect total debt service payments for the year ending December 31,
2002 will be approximately $38 million based upon interest rates in effect as
of December 31, 2001. In addition, based upon our current operating lease
commitments and rates, we expect that total compressor lease rent payments for
the year ending December 31, 2002 will be approximately $88 million. We also
expect that total distributions on our 7 1/4% mandatorily redeemable
convertible preferred securities for the year ended December 31, 2002 (assuming
no deferrals as permitted by the terms of such securities) to be approximately
$6.4 million.

                                      30

<PAGE>

   The following summarizes our contractual obligations at December 31, 2001,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.


<TABLE>
<CAPTION>
                                                  TOTAL      2002    2003       2004   Thereafter
                                                ---------- -------- -------   -------- ----------
               December 31, 2001
               -----------------                                (In thousands)
<S>                                             <C>        <C>      <C>       <C>      <C>
CONTRACTUAL OBLIGATIONS:
4.75% convertible senior notes due 2008........ $  192,000 $        $         $         $192,000
Bank credit facility...........................    157,000                     157,000
Other long-term debt(1)........................    160,813    5,553   1,382      1,037   152,841
Other contractual obligations(2)...............     58,000   58,000
Mandatorily redeemable convertible
 preferred securities..........................     86,250                                86,250
Compression equipment operating leases(3)......    512,219   88,111  84,941     77,536   261,631
Facilities and other equipment operating leases     13,586    4,238   3,536      2,903     2,909
                                                ---------- -------- -------   --------  --------
Total contractual cash obligations............. $1,179,868 $155,902 $89,859   $238,476  $695,631
                                                ========== ======== =======   ========  ========
</TABLE>
--------
   (1) In connection with the POI Acquisition on August 31, 2001, the Company
       issued a $150 million subordinated acquisition note to Schlumberger,
       which matures December 15, 2005. Interest on the subordinated
       acquisition note accrues and is payable-in-kind at the rate of 8.5%
       annually for the first six months after issuance and periodically
       increases in increments of 1% to 2% per annum to a maximum interest rate
       42 months after issuance of 15.5%. In the event of an event of default
       under the subordinated acquisition note, interest will accrue at a rate
       of 2% above the then applicable rate. The subordinated acquisition note
       is subordinated to all of the Company's indebtedness other than
       indebtedness to fund future acquisitions. In the event that the Company
       completes an offering of equity securities, the Company is required to
       apply the proceeds of the offering to repay amounts outstanding under
       the subordinated acquisition note as long as no default exists or would
       exist under our other indebtedness as a result of such payment.
   (2) We are required to pay $58 million to Schlumberger with proceeds of a
       financing of a South American joint venture, a minority interest of
       which was acquired by Hanover in the acquisition of POI. If the joint
       venture fails to execute the financing or such financing fails to be
       non-recourse to us, in either case, on or before December 31, 2002, we
       will have 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. Our right to exercise the put expires on
       January 31, 2003. Since we expect the financing to be completed in 2002,
       this $58 million amount is included in "Accrued liabilities" in our
       balance sheet.
   (3) Excludes residual value guarantees.
--------
   As part of our business, we are a party to various financial guarantees,
performance guarantees and other contractual commitments to extend guarantees
of credit and other assistance to various subsidiaries, investees and other
third parties. To varying degrees, these guarantees involve elements of
performance and credit risk, which are not included on our Consolidated Balance
Sheet. The possibility of us 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 if events occurred that required that one be established.

   Effective January 2001,we agreed to provide certain facilitation services to
Belleli Energy SRL ("Belleli"), a fabrication company based in Italy. In
connection with this arrangement, we agreed to provide Belleli with project
financing including necessary guarantees, bonding capacity and other collateral
on an individual project basis. Under this arrangement, Belleli must present
each project to us which we may approve at our sole discretion. Under a
separate agreement with Belleli, we have issued letters of credit on Belleli's
behalf totaling approximately $11.1 million at December 31, 2001. In July 2001,
the Company acquired a 20% interest in Belleli.

                                      31

<PAGE>

   We are also a guarantor of approximately $881 million of debt associated
with the special purpose entities with which we entered into sale leaseback
transactions, which is equal to the residual value guarantees under the lease
agreements.

   The Company utilizes derivative financial instruments to minimize the risks
and/or costs associated with financial and global operating activities by
managing its exposure to interest rate fluctuation on a portion of its variable
rate debt and leasing obligations. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The 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.

   On January 1, 2001, we adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"), as amended by SFAS 137 and
SFAS 138, 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
which were outstanding at December 31, 2001 with notional amounts of
$75,000,000 and $125,000,000 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 counterparty. The difference paid or
received on the swap transactions is recorded as an accrued lease liability and
is recognized in leasing expense. These swap transactions expire in July 2003.
On January 1, 2001, in accordance with the transition provisions of SFAS 133,
we recorded a loss resulting from the cumulative effect of an accounting change
in the statement of income of approximately $164,000 ($.00 per share), net of
tax benefit of $89,000. During 2001, we recognized an additional unrealized
loss of approximately $7.6 million related to the change in the fair value of
these interest rate swaps in other expense in the statement of income because
these swaps did not meet the specific hedge criteria as a result of the
counterparty's option to extend the interest rate swaps. Further, management
decided not to designate the interest rate swaps as hedges at the time they
were extended by the counterparty. At December 31, 2001, we recorded $5.7
million in accrued liabilities and $2.2 million in other long-term liabilities
related to the fair value adjustment with respect to these interest rate swaps.
The fair value of these interest rate swaps will fluctuate with changes in
interest rates over their remaining terms and the fluctuations will be recorded
in the statement of income. 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:

                                       Maturity Strike    Notional
                      Lease              Date    Rate      Amount
                      -----            -------- ------- ------------
            March 2000................ 3/11/05  5.2550% $100,000,000
            August 2000............... 3/11/05  5.2725% $100,000,000
            October 2000.............. 10/26/05 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 2001, we
recorded a $6.1 million loss, net of tax in other comprehensive income, $2.6
million in accrued current liabilities and $6.8 million in other long-term
liabilities with respect to these three swaps.

   The counterparty to each of the our interest rate swap agreements is a major
international financial institution. 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.

   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,

                                      32

<PAGE>

payment under such contracts can either be made at an exchange rate negotiated
by the parties or, if no such agreement is reached, a preliminary payment may
be made based on a 1 dollar to 1 peso equivalent pending a final agreement. The
Argentine government also requires the parties to such contracts to renegotiate
the price terms within 180 days of the devaluation. As a result, we are
involved in negotiations with our customers in Argentina as to the currency in
which contract amounts are to be paid, as mandated by the Argentine government.
We are currently evaluating the full impact of the measures taken by the
Argentine government. For the year ended December 31, 2001, our Argentine
operations represented approximately 7% of our revenue and 7% of our EBITDAR,
before allocation of corporate sales, general and administrative expense. The
economic situation in Argentina is subject to change, and we cannot predict
whether the peso will continue to lose value against the dollar or the terms
under which we and our customers will be able to renegotiate our contracts. To
the extent that the situation in Argentina continues to deteriorate, exchange
controls continue in place and the value of the peso against the dollar is
reduced further, Hanover's results of operations in Argentina may be adversely
affected which could result in reductions in Hanover's net income.

   In addition, we have exposure to currency risks in Venezuela. To mitigate
that risk, the majority of our existing contracts provide that we receive
payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our
exposure to fluctuations in the bolivar's value. For the year ended December
31, 2001, our Venezuelan operations represented approximately 7% of our revenue
and 11% of our EBITDAR, before allocation of corporate sales, general and
administrative expense.

FACTORS THAT MAY AFFECT OUR FINANCIAL CONDITION AND FUTURE RESULTS

   Short Lease Terms--Many of our compressor leases with customers have short
initial terms, and we cannot be sure that the rental compressors will stay out
on location after the end of the initial lease term.

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

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

   We have made and plan to continue to make substantial capital investments to
expand our compressor rental fleet and our complementary businesses. Our
current plans are to spend approximately $250 million in 2002, exclusive of any
major acquisitions, in continued expansion and maintenance of our rental fleet
and other businesses. The amount of these expenditures may vary depending on
their expected rate of return, 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
and 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
capital expenditures in the short term, we cannot assure you that these sources
will be sufficient. Failure to generate sufficient cash flow, together with the
absence of alternative sources of capital, could have a material adverse effect
on our growth, results of operations and financial condition.

   International Operations--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

                                      33

<PAGE>

effect on our business, results of operations and financial condition.
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 in Venezuela and Argentina;

  .   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,
      particularly in Argentina and 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.

   Acquisition Strategy--We may not be able to find suitable acquisition
candidates or successfully integrate acquired companies into our business.

   As part of our business strategy, we have completed selective acquisitions
of other companies, assets and product lines that either complement or expand
our business and may do so in the future. Each acquisition involves potential
risks, such as the diversion of management's attention away from current
operations, problems in integrating acquired businesses and possible short-term
adverse effects on our operations as a result of that process. We may be unable
to successfully integrate acquired businesses into our business, or may be able
to do so only at significant expense. We actively review acquisition
opportunities on an ongoing basis, and we may make new acquisitions at any
time. Given our selective approach to acquisitions, we are unable to predict
whether or when we will find suitable acquisition candidates or whether we will
be able to complete a material acquisition. Depending on the size of our
potential acquisitions, we may seek to finance acquisitions with cash or
through the issuance of new debt and/or equity securities.

   Industry Conditions--A prolonged, substantial reduction in oil or gas prices
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. As a result, the demand for our
gas compression and oil and gas production equipment was adversely affected.
Any future significant, prolonged decline in oil and gas prices could have a
material adverse effect on our business, results of operations and financial
condition.

   Erosion of the financial condition of customers could adversely affect our
business. We continually monitor and manage the credit we extend to our
customers and attempt to limit credit risks by utilizing risk transfer
arrangements and by obtaining security interests. Our business could be
adversely affected in the event that the financial condition of our customers
erodes. At times during which the natural gas market weakens, the likelihood of
the erosion of the financial condition of these customers increases. Upon the
financial failure of a customer, we could experience a loss associated with the
unsecured portion of any of our outstanding accounts receivable.

                                      34

<PAGE>

   Competition--We operate in a highly competitive industry.

   We experience competition from companies who may be able to more quickly
adapt to changes within our industry and throughout the economy as a whole,
more readily take advantage of acquisition and other opportunities and adopt
more aggressive pricing policies. There can be no assurance that we will be
able to continue to compete successfully in this market or against such
competition. If we do not compete successfully, our business, results of
operations and financial condition could be adversely affected.

   Potential Liability and Insurance--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 assure you that the
insurance will be adequate to cover the liability we may incur. Insurance
premium pricing is highly volatile and we cannot assure you that we will be
able to obtain insurance in the future at a reasonable cost or at all. Our
business, results of operations and financial condition could be adversely
affected if we incur substantial liability and the damages are not covered by
insurance or are in excess of policy limits.

   Terrorist Attacks or Responses Thereto--Terrorist attacks or responses
thereto could adversely affect our business, results of operations and
financial condition.
   On September 11, 2001, terrorists carried out attacks that destroyed the
World Trade Center in New York and badly damaged the Pentagon outside of
Washington, D.C. As a result of these attacks, the United States securities
markets were closed for several days. We believe that these events and the
subsequent military actions have caused a delay in capital spending which has
impacted our business. The impact that these terrorist attacks, or future
events arising as a result of these terrorist attacks, including military or
police activities in the United States or foreign countries, future terrorist
activities or threats of such activities, political unrest and instability,
riots and protests, could have on the United States and the global economy, the
United States and global securities markets and our business, results of
operations and financial condition cannot presently be determined with any
accuracy.

   Governmental Regulation--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 civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements and
issuance of injunctions as to future compliance. As part of the regular overall
evaluation of both our current operations and newly acquired operations, we are
in the process of applying for or updating certain facility permits with
respect to stormwater discharges, waste handling and air emissions relating to
painting and blasting. 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 obligations.

   We are evaluating the impact on our operations of recently promulgated air
emission regulations 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. 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

                                      35

<PAGE>

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, results of operations or financial condition. However, future events,
such as compliance with more stringent laws and regulations, 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 and we are not currently under any orders
or directives to undertake any remedial activity. 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 impacted by soil contamination. Where such contamination was
identified, we have since conducted remedial activities at these
previously-held properties as we believed necessary to meet regulatory
standards, and either sold the owned properties to third parties or returned
the leased properties to the lessors. We are not currently aware of any further
remedial obligations at such previously-held properties. 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, results of operations, or financial
condition. We cannot be certain, however, that cleanup standards will not
become more stringent, or that we will not be required to undertake any
remedial activities involving any substantial 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 may not result in substantial costs.

   Concentrated Ownership--A significant amount of our stock is owned by two
stockholders.

   GKH Investments, L.P. ("GKH") owned approximately 23% of our common stock as
of December 31, 2001. Schlumberger and its affiliates owned approximately 11%
of our common stock as of December 31, 2001. As holders of large blocks of our
stock, GKH and Schlumberger are in a position to exert substantial influence
over the outcome of many corporate actions requiring stockholder approval,
including the election of directors, the additional issuance of our common
stock or other securities and transactions involving a change of control. The
interests of GKH or Schlumberger could conflict with the interests of our other
stockholders.

   GKH has advised us that it is in the process of dissolving and "winding up"
its affairs. Although GKH has not advised us of the precise timeline of its
dissolution and "winding-up," we believe that GKH will complete this process
within the next 24 months. As part of the "wind-up" process, GKH will liquidate
or distribute substantially all of its assets, including the shares of our
common stock owned by GKH, to its partners. In the event the partners of GKH
receive a distribution of shares of our common stock from GKH as a result of
the wind up, we cannot predict whether those partners would continue to hold
those shares or whether the interests of such partners may conflict with the
interests of our other stockholders.

   Customer Concentration--POI, which we acquired as part of the gas
compression business of Schlumberger in August 2001, is subject to a higher
level of customer concentration than we have historically experienced.

   POI generated 49% of its revenues in 2001 from its three largest customers.
On a pro forma basis, these three customers would have accounted for 10% of our
revenues in 2001. While our historic customer base is

                                      36

<PAGE>

more diverse, the loss of any of the three largest customers or a significant
decrease in demand by any of the three largest customers for the services POI
provides could have an adverse effect on our business, results of operations
and financial condition.

   Substantial Debt and Operating Leases--We have a substantial amount of debt
and operating lease commitments. Our current debt level could limit our ability
to fund future growth and operations and increase our exposure during adverse
economic periods.

   As of December 31, 2001, we had approximately $881 million in total residual
value guarantees that are due upon termination of our operating leases and may
be satisfied by a cash payment or the exercise of our purchase options under
the terms of the respective lease agreements, approximately $510 million of
debt outstanding, and unused availability of approximately $149 million under
our $350 million bank credit agreement.

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

  .   make it more difficult for us to satisfy our obligations;

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

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

  .   increase our vulnerability to interest rate fluctuations because the
      interest payments on a portion of our debt are at 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 operating lease commitments; and

  .   limit our ability to borrow additional funds.

   Additionally, agreements governing our compression equipment leases 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.

   We may incur additional debt and increase the amounts under our bank credit
facility and our operating lease commitments in the future which may intensify
the risks described above. Our bank credit facility permits us to incur
indebtedness up to the $350 million credit limit under our bank credit
facility, plus an additional $125 million in unsecured indebtedness. As of
December 31, 2001, we had $149 million of availability under our $350 million
bank credit facility (3.9% rate at December 31, 2001). In addition, our bank
credit facility permits us to enter into sale and leaseback transactions with
respect to equipment having a value not in excess of $300 million. In addition
to purchase money and similar obligations, the indenture and the participation
agreement, which are part of our compression equipment leases, 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,
Hanover's ratio of EBITDA, as adjusted, to total fixed charges is greater than
2.25 to 1.0. These agreements define indebtedness to include the present value
of the total rental obligations under sale and leaseback transactions and under
facilities similar to our compression equipment lease facilities.

   Significant Cash Requirements--We will need to generate a significant amount
of cash to service our indebtedness and operating lease commitments and to fund
working capital, and our ability to generate cash depends on many factors
beyond our control.

                                      37

<PAGE>

   Our ability to make scheduled payments under our operating leases, or to
refinance our indebtedness, will depend on our ability to generate cash in the
future. This is subject to our operational performance, as well as general
economic, financial, competitive, legislative, regulatory and other factors
that are beyond our control.

   Based upon our total debt of approximately $510 million at December 31,
2001, we expect total debt service payments for the year ending December 31,
2002 will be approximately $38 million based upon interest rates in effect as
of December 31, 2001. In addition, based upon our current operating lease
commitments and rates, we expect that total compressor lease rent payments for
the year ending December 31, 2002 will be approximately $88 million. We also
expect that total distributions on our 7 1/4% mandatorily redeemable
convertible preferred securities for the year ended December 31, 2002 (assuming
no deferrals as permitted by the terms of such securities) to be approximately
$6.4 million.

   We cannot be sure that our business will generate sufficient cash flow from
operations or that future borrowings will be available to us under our $350
million bank credit agreement in an amount sufficient to enable us to pay our
indebtedness, operating lease commitments, or to fund our other liquidity
needs. We cannot be sure that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. Our inability to
refinance our debt on commercially reasonable terms could materially adversely
affect our business.

   Characterization of Our Compression Equipment Leases--We treat our
compression equipment leases as operating leases for financial accounting
purposes but as a financing arrangement for income and certain other tax
purposes. Changes in generally accepted accounting principles related to
operating leases or accounting treatment inconsistent with our intent could
adversely affect our other obligations, and tax treatment inconsistent with our
intent could have a material adverse effect on our financial condition, results
of operations and liquidity.

   We intend to continue to treat our compression equipment leases as a secured
financing arrangement for income and certain other tax purposes, which is
consistent with how the leases are intended to be treated for bankruptcy law
and state law purposes, but differs from the treatment of the compression
equipment leases as an operating lease for financial accounting purposes.

   If the Internal Revenue Service or another taxing authority were to
successfully contend that our compression equipment leases or any of our other
operating leases should be treated as a sale and 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 the compression
equipment lease.

   In addition, if our compression equipment leases are treated as indebtedness
rather than as an operating lease for financial accounting purposes, this
additional indebtedness could cause a default with respect to certain of our
other obligations. A default under those other obligations could adversely
affect our ability to make timely payments on our other obligations which in
turn could result in a default on such other obligations.

   Volatility of Our Stock Price--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 recently initiated against our Company. This
type of litigation could result in liability, substantial costs and the
diversion of management time and resources.

                                      38

<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

   In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations. This Statement is effective for all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. Companies may no
longer use the pooling method for future combinations.

   In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets
("SFAS 142"). Under SFAS 142, amortization of goodwill over an estimated useful
life will be discontinued. Instead, goodwill amounts will be subject to a
fair-value-based annual impairment assessment. The standard also requires
acquired intangible assets to be recognized separately and amortized as
appropriate. SFAS 142 is effective for Hanover on January 1, 2002. However,
under the transition provisions of SFAS 142, goodwill acquired in a business
combination for which the acquisition date is after June 30, 2001, shall not be
amortized. Because the acquisition of POI was consummated after June 30, 2001,
the goodwill related to the POI acquisition was not amortized in 2001. The
goodwill related to business combinations completed before June 30, 2001
continued to be amortized in 2001 because Hanover had not adopted SFAS 142. We
expect the adoption of SFAS No. 142 to have an impact on future financial
statements, due to the discontinuation of goodwill amortization expense. For
2001, goodwill amortization expense was $11.6 million based on goodwill of
approximately $196 million related to acquisitions which were completed before
June 30, 2001. The transition provisions of SFAS 142 require us to perform an
initial impairment assessment of goodwill by June 30, 2002. We are currently
performing the initial assessment and evaluating the effect the implementation
of the impairment assessment provisions of SFAS 142 will have on our financial
statements.

   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. This
statement is effective for Hanover effective January 1, 2003. We are currently
assessing the new standard and have not yet determined the impact on our
consolidated results of operations, cash flows or financial position.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The new rules supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The new rules retain many of the fundamental recognition
and measurement provisions of SFAS No. 121, but significantly change the
criteria for classifying an asset as held-for-sale. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. We have evaluated the new
standard and believe that it will have no material effect on our consolidated
results of operations or financial position.

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

   We are exposed to interest rate and foreign currency risk. We periodically
enter into interest rate swaps to manage our exposure to fluctuations in
interest rates. At December 31, 2001, the fair market value of these interest
rate swaps, excluding the portion attributable to and included in accrued
leasing was a liability of approximately $17.2 million of which $8.2 million
was recorded in accrued liabilities and $9.0 million in other long-term
liabilities. We are party to five interest rate swaps to convert variable lease
payments under certain lease arrangements to fixed payments as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                                          Fair Value of the
                                                                                               Swap at
       Maturity Date             Company Pays Fixed Rate        Notional Amount           December 31, 2001
       -------------             -----------------------        ---------------           -----------------
<S>                             <C>                        <C>                        <C>
         7/21/2003                       5.5100%                   $ 75,000                   ($2,907)
         7/21/2003                       5.5600%                   $125,000                   ($4,942)
         3/11/2005                       5.2550%                   $100,000                   ($2,926)
         3/11/2005                       5.2725%                   $100,000                   ($3,011)
         10/26/2005                      5.3975%                   $100,000                   ($3,406)
</TABLE>

                                      39

<PAGE>

   We are exposed to interest rate risk on borrowings under our floating rate
revolving credit facility. At December 31, 2001, $157 million was outstanding
bearing interest at a weighted average effective rate of 3.89% per annum.
Assuming a hypothetical 10% increase in weighted average interest rate from
those in effect at December 31, 2001, the increase in annual interest expense
for advances under this facility would be approximately $0.6 million. At
December 31, 2001, we are exposed to variable rental rates on the equipment
leases it entered into in June 1999, October 2000. Assuming a hypothetical 10%
increase in interest rates from those in effect at quarter end, the increase in
annual leasing expense on these equipment leases would be approximately $1.9
million. We do not currently use derivative financial instruments to mitigate
foreign currency risk, although recent economic events in Argentina may
motivate us to do so,

   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 can either be made at
an exchange rate negotiated by the parties or, if no such agreement is reached,
a preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also requires the parties
to such contracts to renegotiate the price terms within 180 days of the
devaluation. As a result, we are involved in negotiations with our customers in
Argentina as to the currency in which contract amounts are to be paid, as
mandated by the Argentine government. We are currently evaluating the full
impact of the measures taken by the Argentine government. For the year ended
December 31, 2001, our Argentine operations represented approximately 7% of our
revenue and 7% of our EBITDAR, before allocation of corporate sales, general
and administrative expense. The economic situation in Argentina is subject to
change, and we cannot predict whether the peso will continue to lose value
against the dollar or the terms under which we and our customers will be able
to renegotiate our contracts. To the extent that the situation in Argentina
continues to deteriorate, exchange controls continue in place and the value of
the peso against the dollar is reduced further, Hanover's results of operations
in Argentina may be adversely affected which could result in reductions in
Hanover's net income.

   In addition, we have exposure to currency risks in Venezuela. To mitigate
that risk, the majority of our existing contracts provide that we receive
payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our
exposure to fluctuations in the bolivar's value. For the year ended December
31, 2001, our Venezuelan operations represented approximately 7% of our revenue
and 11% of our EBITDAR, before allocation of corporate sales, general and
administrative expense.

Item 8.  Financial Statements and Supplementary Data.

   The financial statements and supplementary information specified by this
Item are presented following Item 14 of this report.

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

   None.

                                      40

<PAGE>

                                   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 2002 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.

Item 11.  Executive Compensation.

   The information included or to be included under the caption "Executive
Compensation" in the Company's definitive proxy statement for its 2002 Annual
Meeting of Stockholders is incorporated by reference herein.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

   The information included or to be included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement for its 2002 Annual Meeting of Stockholders is
incorporated by reference herein.

Item 13.  Certain Relationships and Related Transactions.

   The information included or to be included under the caption "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement for its 2002 Annual Meeting of Stockholders is incorporated by
reference herein.

                                      41

<PAGE>

                                    PART IV

Item 14.  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.

<TABLE>
       <S>                                                       <C>
       Report of Independent Accountants........................ F-1
       Consolidated Balance Sheet............................... F-2
       Consolidated Statement of Income and Comprehensive Income F-3
       Consolidated Statement of Cash Flows..................... F-4, F-5
       Consolidated Statement of Common Stockholders' Equity.... F-6
       Notes to Consolidated Financial Statements............... F-7
       Selected Quarterly Financial Data (unaudited)............ F-44
</TABLE>

       2. Financial Statement Schedule

<TABLE>
               <S>                                            <C>
               Schedule II--Valuation and Qualifying Accounts S-1
</TABLE>

       3. Exhibits.

<TABLE>
<CAPTION>
Exhibit
Number                                            Description
------                                            -----------
<C>     <S>
 3.1    Certificate of Incorporation of the Hanover Compressor Holding Co., as amended (11)[3.1]

 3.2    Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated
        December 8, 1999 (11)[3.2]

 3.3    Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co. dated
        July 11, 2000 (11)[3.3]

 3.4    By-laws of Hanover Compressor Company (7)[3.3]

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

 4.2    Form of Warrant Agreement (1) [4.10]

 4.3    Specimen Stock Certificate (1) [4.11]

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

 10.1   Credit Agreement, dated as of December 15, 1997, as amended and restated as of December 3, 2001,
        among the Company, Hanover Compression Limited Partnership, JPMorgan Chase Bank, as agent,
        and several banks and other financial institutions that are parties thereto (16) [10.79]

 10.2   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 that are parties thereto (16) [10.80]

 10.3   Holdings Guarantee, dated as of December 3, 2001, made by the Company in favor of JPMorgan
        Chase Bank, as agent (16) [10.81]

 10.4   Subsidiaries' Guarantee, dated as of December 3, 2001, made by certain of the Company's
        subsidiaries in favor of JPMorgan Chase Bank, as agent (16) [10.82]

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

                                      42

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>     <S>

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

 10.7   1993 Hanover Compressor Company Management Stock Option Plan (1) [10.5]

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

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

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

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

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

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

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

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

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

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

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

 10.19  1997 Stock Purchase Plan (1) [10.24]

 10.20  1998 Stock Option Plan (2) [10.7]

 10.21  December 10, 1998 Stock Option Plan (3)

 10.22  1999 Stock Option Plan (3)

 10.23  Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 (the "1999 Trust") and the
        Company (5)[10.36]

 10.24  Guarantee dated as of June 15, 1999 and made by the Company, Hanover/Smith, Inc., Hanover
        Maintech, Inc. and Hanover Land Company (5) [10.37]

 10.25  Participation Agreement dated as of June 15, 1999 among the Company, the 1999 Trust, Societe
        Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and
        Wilmington Trust Company. (5) [10.38]

 10.26  Security Agreement dated as of June 15, 1999 made by the 1999 Trust in favor The Chase Manhattan
        Bank, as agent. (5) [10.39]

 10.27  Lease supplement No. 1 dated June 15, 1999 between the 1999 Trust and the Company. (5) [10.40]

 10.28  Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the Company, Hanover/Smith,
        Inc. Hanover Maintech, Inc. and Hanover Land Company. (5) [10.41]

 10.29  Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of
        December 15, 1999, among Hanover Compressor Company, as sponsor, Wilmington Trust
        Company, as property trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as
        administrative trustees. (4)[4.5]
</TABLE>

                                      43

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                            Description
------                                            -----------
<C>     <S>

 10.30  Indenture for the Convertible Junior Subordinated Indentures due 2029, dated as of December 15,
        1999 among Hanover Compressor Company, as issuer, and Wilmington Trust Company, as trustee.
        (4)[4.6]

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

 10.32  Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029.
        (4)[4.9]

 10.33  Preferred Securities Guarantee, dated as of December 15, 1999, between Hanover Compressor
        Company, as guarantor, and Wilmington Trust Company, as guarantee trustee. (4)[4.10]

 10.34  Common Securities Guarantee dated as of December 15, 1999, by Hanover Compressor Company,
        as guarantor (4)[4.11]

 10.35  Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A and the Hanover
        Compression Inc. (6) [10.43]

 10.36  Guarantee dated as of March 13, 2000 and made by the Company, Hanover Compression Inc. and
        certain of their Subsidiaries (6) [10.44]

 10.37  Participation Agreement dated as of March 13, 2000 among the Company, the Hanover Equipment
        Trust 2000A (the "2000A Trust") and various banks (6) [10.45]

 10.38  Security Agreement dated as of March 13, 2000 made by the 2000A Trust in favor The Chase
        Manhattan Bank, as agent. (6) [10.46]

 10.39  Assignment of leases, rents and Guarantee from Hanover Equipment Trust 2000A to The Chase
        Manhattan Bank dated as of March 13, 2000. (7) [10.47]

 10.40  Agreement and Plan of Merger by and among Hanover Compressor Company, APSI Acquisition
        Corporation and Applied Process Solutions, Inc. dated as of May 3, 2000. (7)[10.48]

 10.41  Amendment to Agreement and Plan of Merger by and among Hanover Compressor Company, APSI
        Acquisition Corporation and Applied Process Solutions, Inc. dated as of May 31, 2000. (7)[10.49]

 10.42  Amendment No. 2 dated as of October 24, 2000, to Agreement and Plan of Merger by and among
        Hanover Compressor Company, APSI Acquisition Corporation and Applied Process Solutions, Inc.
        (9)[10.50]

 10.43  Purchase Agreement dated as of July 11, 2000 among Hanover Compressor Company, Hanover
        Compression Inc., Dresser-Rand Company and Ingersoll-Rand Company (8) [99.2]

 10.44  Agreement and Plan of Merger dated as of July 13, 2000 by and among Hanover Compressor
        Company, Caddo Acquisition Corporation and OEC Compression Corporation. (9)[10.51]

 10.45  Voting and Disposition Agreement dated as of July 13, 2000 by and among Hanover Compressor
        Company and the holders of common stock of OEC Compression Corporation named therein.
        (9)[10.52]

 10.46  Amendment No. 1 to Agreement and Plan of Merger dated as of November 14, 2000 and by and
        among Hanover Compressor Company. Caddo Acquisition Corporation and OEC Compression
        Corporation (10)[10.51]

 10.47  Management Agreement (10)[10.52]

 10.48  Asset Purchase Agreement made on July 10, 2000 by and among Hanover Compressor Company and
        Stewart & Stevenson Services, Stewart & Stevenson Power, Inc. and PAMCO Services International,
        Inc. (10)[10.53]
</TABLE>

                                      44

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>     <S>

 10.49  Lease dated as of October 27, 2000 between Hanover Equipment Trust 2000B and Hanover
        Compression Inc. (10)[10.54]

 10.50  Guarantee dated as of October 27, 2000 made by Hanover Compressor Company, Hanover
        Compression Inc. and certain subsidiaries (10)[10.55]

 10.51  Participation Agreement dated as of October 27, 2000 among Hanover Compression Inc., Hanover
        Equipment Trust 2000B, 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 (10)[10.56]

 10.52  Security Agreement dated as of October 27, 2000 made by Hanover Equipment Trust 2000B in favor
        of The Chase Manhattan Bank as agent for the lenders (10)[10.57]

 10.53  Assignment of Leases, Rents and Guarantee dated as of October 27, 2000, made by Hanover
        Equipment Trust 2000B in favor of The Chase Manhattan Bank as agent for the lenders (10)[10.58]

 10.54  Amendment No. 1 to Management Agreement (11) [10.62]

 10.55  Purchase Agreement dated June 28, 2001 among Schlumberger Technology Corporation,
        Schlumberger Oilfield Holdings Limited, Schlumberger Sarevco S.A., Camco International Inc.,
        Hanover Compressor Company and Hanover Compression Limited Partnership (13) [10.63]

 10.56  Lease dated as of August 31, 2001 between Hanover Equipment Trust 2001A and the Hanover
        Compression Limited Partnership (14) [10.64]

 10.57  Guarantee dated as of August 31, 2001 and made by Hanover Compressor Company, Hanover
        Compression Limited Partnership and certain subsidiaries (14) [10.65]

 10.58  Participation Agreement dated as of August 31, 2001 among the Hanover Compression Limited
        Partnership, the Hanover Equipment Trust 2001A and General Electric Capital Corporation (14)
        [10.66]

 10.59  Security Agreement dated as of August 31, 2001 made by the Hanover Equipment Trust 2001A in
        favor Wilmington Trust FSB as agent (14) [10.67]

 10.60  Assignment of Leases, Rents and Guarantee from Hanover Equipment Trust 2001A to Wilmington
        Trust FSB dated as of August 31, 2001 (14) [10.68]

 10.61  Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among
        Hanover Equipment Trust 2001A, as issuer, Hanover Compression Limited Partnership and certain
        subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee (14) [10.69]

 10.62  Lease dated as of August 31, 2001 between Hanover Equipment Trust 2001B and the Hanover
        Compression Limited Partnership (14) [10.70]

 10.63  Guarantee dated as of August 31, 2001 and made by Hanover Compressor Company, Hanover
        Compression Limited Partnership. and certain subsidiaries (14) [10.71]

 10.64  Participation Agreement dated as of August 31, 2001 among the Hanover Compression Limited
        Partnership, the Hanover Equipment Trust 2001B and General Electric Capital Corporation (14)
        [10.72]

 10.65  Security Agreement dated as of August 31, 2001 made by the Hanover Equipment Trust 2001B in
        favor Wilmington Trust FSB as agent (14) [10.73]

 10.66  Assignment of Leases, Rents and Guarantee from Hanover Equipment Trust 2001B to Wilmington
        Trust FSB dated as of August 31, 2001 (14) [10.74]
</TABLE>

                                      45

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number                                             Description
------                                             -----------
<C>     <S>

 10.67  Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among
        Hanover Equipment Trust 2001B, as issuer, Hanover Compression Limited Partnership and certain
        subsidiaries, as guarantors, and Wilmington Trust FSB, as Trustee (14) [10.75]

 10.68  Amendment dated as of August 31, 2001 to Purchase Agreement among Schlumberger Oilfield
        Holdings Limited, Schlumberger Surenco S.A., Camco International Inc., Hanover Compressor
        Company and Hanover Compression Limited Partnership (15) [99.3]

 10.69  Most Favored Supplier and Alliance Agreement dated August 31, 2001 among Schlumberger
        Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression
        Limited Partnership (15) [99.4]

 10.70  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 Hanover Compressor Company (15)
        [99.5]

 10.71  2001 Equity Incentive Plan (17) [4.1]

 10.72  Indenture relating to the 4.75% Convertible Senior Notes due 2008 dated as of March 21, 2001
        between Hanover Compressor Company and Wilmington Trust Company, as trustee (18) [4.4]

 12.1   Computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges
        and preferred dividends*

 21.1   List of Subsidiaries (19) [2.1]

 23.1   Consent of PricewaterhouseCoopers LLP*

 99.1   Letter dated October 15, 2001 to GKH partners regarding wind-up of GKH Investments, L.P. and
        GKH Private Limited (15) [99.1]
</TABLE>
--------
*  Filed herewith.
(1) Such exhibit previously filed as an exhibit to the Company's Registration
    Statement (File No. 333-27953) on Form S-1, as amended, under the exhibit
    number indicated in brackets [  ], and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Third Quarter of 1998, under the exhibit number
    indicated in brackets [  ], and is incorporated by reference.
(3) Compensatory plan or arrangement required to be filed.
(4) Such exhibit previously filed as an exhibit to the Company's Registration
    Statement (File No. 333-30344) on Form S-3 under the exhibit number
    indicated in brackets [  ], and is incorporated by reference.
(5) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
    number indicated in brackets [  ], and is incorporated by reference.
(6) Such exhibit previously filed as an exhibit to the Company's Annual Report
    on Form 10-K for the Year Ended 1999 under the exhibit number indicated in
    brackets [  ], and is incorporated by reference.
(7) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Second Quarter of 2000, under the exhibit
    number indicated in brackets [  ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Current Report
    on Form 8-K dated August 31, 2000, under the exhibit number indicated in
    brackets [  ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Quarterly
    Report on Form 10-Q for the Third Quarter of 2000, under the exhibit number
    indicated in brackets [  ], and is incorporated by reference.
(10) Such exhibit previously filed as an exhibit to the Company's Registration
     Statement (File No. 333-50836) on Form S-4, as amended, under the exhibit
     number indicated in brackets [  ], and is incorporated by reference.

                                      46

<PAGE>

(11) Such exhibit previously filed as an exhibit to the Company's Annual Report
     on Form 10-K for the year ended 2000, under the exhibit number indicated
     in brackets [  ], and is incorporated by reference.
(12) Such exhibit previously filed as an exhibit to the Company's Current
     Report on Form 8-K dated October 18, 2001, under the exhibit number
     indicated in brackets [  ], and is incorporated by reference.
(13) Such exhibit previously filed as an exhibit to the Company's Quarterly
     Report on Form 10-Q for the Second Quarter of 2001, under the exhibit
     number indicated in brackets [  ], and is incorporated by reference.
(14) Such exhibit previously filed as an exhibit to the Company's Quarterly
     Report on Form 10-Q for the Third Quarter of 2001, under the exhibit
     number indicated in brackets [  ], and is incorporated by reference.
(15) Such exhibit previously filed as an exhibit to the Company's Current
     Report on Form 8-K dated September 14, 2001, under the exhibit number
     indicated in brackets [  ], and is incorporated by reference.
(16) Such exhibit previously filed as an exhibit to the Company's Current
     Report on Form 8-K dated December 17, 2001, under the exhibit number
     indicated in brackets [  ], and is incorporated by reference.
(17) Such exhibit previously filed as an exhibit to the Company's Registration
     Statement (File No. 333-73904) on Form S-8, under the exhibit number
     indicated in brackets [      ], and is incorporated by reference.
(18) Such exhibit previously filed as an exhibit to the Company's Registration
     Statement (File No. 333-54942) on Form S-3, as amended, under the exhibit
     number indicated in brackets [    ], and is incorporated herein by
     reference.
(19) Such exhibit previously filed as an exhibit to the Company's Annual Report
     on Form 10-K for the year ended December 31, 2001, under the exhibit
     number indicated in brackets [  ], and is incorporated by reference.

       (b)  Reports submitted on Form 8-K.

   (1) A report on Form 8-K was filed on October 18, 2001, which reported under
the caption "Item 5--Other Events" that the Company's largest stockholder, GKH
Investments, L.P., has extended the date by which it intends to complete the
liquidation or distribution of its shares of the Company's common stock beyond
January 25, 2002.
   (2) A report on Form 8-K was filed on November 5, 2001, which reported under
the caption "Item 5--Other Events" that the Company expected to report earnings
per share results that are within the range of analysts' consensus estimates
for the third quarter of 2001.
   (3) A report on Form 8-K was filed on November 8, 2001, which reported under
the caption "Item 5--Other Events" the Company's revenues, cash flow and
earnings per common share for the third quarter of 2001.
   (4) A report on Form 8-K was filed on November 9, 2001, which filed as an
exhibit under the caption "Item 7--Financial Statements and Exhibits" the
financial statements of the natural gas compression business, Production
Operators Corporation, acquired from Schlumberger Limited, the Pro Forma
combined financial statements of the Company and Production Operators
Corporation, and the consent of independent accountants.
   (5) A report on Form 8-K was filed on December 4, 2001, which reported under
the caption "Item 5--Other Events" that the Company increased its revolving
credit facility to $350 million and extended the term of the facility by three
years to November 20, 2004.
   (6) A report on Form 8-K was filed on December 17, 2001, which filed as an
exhibit under the caption "Item 7--Financial Statements and Exhibits" the
Company's amended and restated revolving credit facility and certain related
guarantee agreements.

Other

   Contemporaneous with the filing of this Form 10-K/A for the year ended
December 31, 2001, we have provided to the Securities and Exchange Commission
the Certifications of the chief executive officer and the chief financial
officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

                                      47

<PAGE>

                                  SIGNATURES

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

                                             HANOVER COMPRESSOR COMPANY

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

Date: November 21, 2002

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

          Signature                        Title                    Date
          ---------                        -----                    ----

     /S/  CHAD C. DEATON       President and Chief Executive  November 21, 2002
-----------------------------    Officer (Principal
       Chad C. Deaton            Executive Officer and
                                 Director)

    /S/  JOHN E. JACKSON       Chief Financial Officer        November 21, 2002
-----------------------------    (Principal Financial and
       John E. Jackson           Accounting Officer)

   /S/  VICTOR E. GRIJALVA     Director                       November 21, 2002
-----------------------------
     Victor E. Grijalva

    /S/  TED COLLINS, JR.      Director                       November 21, 2002
-----------------------------
      Ted Collins, Jr.

   /S/  ROBERT R. FURGASON     Director                       November 21, 2002
-----------------------------
     Robert R. Furgason

    /S/  MELVYN N. KLEIN       Director                       November 21, 2002
-----------------------------
       Melvyn N. Klein

  /s/  MICHAEL A. O'CONNOR     Director                       November 21, 2002
-----------------------------
     Michael A. O'Connor

   /s/  ALVIN V. SHOEMAKER     Director                       November 21, 2002
-----------------------------
     Alvin V. Shoemaker

     /S/  I. JON BRUMLEY       Director                       November 21, 2002
-----------------------------
       I. Jon Brumley

      /S/  GORDON HALL         Director                       November 21, 2002
-----------------------------
         Gordon Hall

       /s/  RENE HUCK          Director                       November 21, 2002
-----------------------------
          Rene Huck

                                      48

<PAGE>

                                Certifications

   I, Chad C. Deaton, certify that:

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

      2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report; and

      3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   the registrant as of, and for, the periods presented in this annual report.

Date: November 21, 2002


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

   I, John E. Jackson, certify that:

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

      2. Based on my knowledge, this annual report does not contain any untrue
   statement of a material fact or omit to state a material fact necessary to
   make the statements made, in light of the circumstances under which such
   statements were made, not misleading with respect to the period covered by
   this annual report; and

      3. Based on my knowledge, the financial statements, and other financial
   information included in this annual report, fairly present in all material
   respects the financial condition, results of operations and cash flows of
   the registrant as of, and for, the periods presented in this annual report.

Date: November 21, 2002


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

                                      49

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Hanover Compressor Company

   In our opinion, the accompanying consolidated financial statements listed on
the index appearing under Item 14(a)(1) on page 42, present fairly, in all
material respects, the financial position of Hanover Compressor Company and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, 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 14(a)(2) on page 42 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 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 Note 18 to the financial statements, the Company changed its
method of accounting for derivatives in 2001. As discussed in Notes 20 and 21,
the December 31, 2001, 2000 and 1999 consolidated financial statements have
been restated for certain revenue recognition matters.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
April 16, 2002, except for Notes 21 and 22
as to which the date is
November 18, 2002.

                                      F-1

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                          CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                 ----------------------
                                                                                    2001         2000
                                                                                 ----------   ----------
                                                                                  Restated     Restated
                                                                                  (See Notes 20 and 21)
                                                                                     (in thousands,
                                                                                 except for par value and
                                                                                     share amounts)
                                                ASSETS
<S>                                                                              <C>          <C>
Current assets:
   Cash and cash equivalents.................................................... $   23,191   $   45,484
   Accounts receivable, net.....................................................    272,450      221,059
   Inventory....................................................................    215,655      144,692
   Costs and estimated earnings in excess of billings on uncompleted contracts..     59,099       24,976
   Prepaid taxes................................................................     19,990       19,948
   Other current assets.........................................................     24,719       12,384
                                                                                 ----------   ----------
       Total current assets.....................................................    615,104      468,543
Property, plant and equipment, net..............................................  1,151,513      574,703
Goodwill, net...................................................................    242,178      138,673
Intangible and other assets.....................................................     78,653       37,801
Investment in non-consolidated affiliates.......................................    178,328       26,452
                                                                                 ----------   ----------
          Total assets.......................................................... $2,265,776   $1,246,172
                                                                                 ==========   ==========

                              LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt......................................... $    5,553   $    2,423
   Short-term notes payable.....................................................                  10,073
   Accounts payable, trade......................................................    119,077       88,651
   Accrued liabilities..........................................................    155,108       46,705
   Advance billings.............................................................     53,140       32,292
   Billings on uncompleted contracts in excess of costs and estimated earnings..      7,152        5,669
                                                                                 ----------   ----------
       Total current liabilities................................................    340,030      185,813
Long-term debt..................................................................    504,260      110,935
Other liabilities...............................................................    130,276      132,895
Deferred income taxes...........................................................    165,492      101,332
                                                                                 ----------   ----------
          Total liabilities.....................................................  1,140,058      530,975
                                                                                 ----------   ----------
Commitments and contingencies (Note 17).........................................
Mandatorily redeemable convertible preferred securities.........................     86,250       86,250
Common stockholders' equity:
   Common stock, $.001 par value; 200,000,000 shares authorized; 79,228,179 and
     66,454,703 shares issued and outstanding...................................         79           66
   Additional paid-in capital...................................................    828,939      483,737
   Notes receivable--employee stockholders......................................     (2,538)      (1,531)
   Accumulated other comprehensive income (loss)................................     (6,557)        (457)
   Retained earnings............................................................    220,262      147,849
   Treasury stock--75,739 common shares, at cost................................       (717)        (717)
                                                                                 ----------   ----------
       Total common stockholders' equity........................................  1,039,468      628,947
                                                                                 ----------   ----------
          Total liabilities and common stockholders' equity..................... $2,265,776   $1,246,172
                                                                                 ==========   ==========
</TABLE>

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

                                      F-2

<PAGE>

                          HANOVER COMPRESSOR COMPANY

           CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                  ---------------------------------------
                                                                                     2001          2000         1999
                                                                                   ----------    --------     --------
                                                                                   Restated      Restated     Restated
                                                                                       (See Notes 20 and 21)
                                                                                  (in thousands, except per share amounts)
<S>                                                                               <C>            <C>          <C>
Revenues and other:
   Rentals....................................................................... $  400,776     $253,837     $192,655
   Parts, service and used equipment.............................................    244,040      129,366       39,130
   Compressor fabrication........................................................    223,519       90,270       52,531
   Production and processing equipment fabrication...............................    184,040       79,121       27,255
   Equity in income of non-consolidated affiliates...............................      9,350        3,518        1,188
   Gain on change in interest in non-consolidated affiliate......................                     864
   Other.........................................................................      8,972        5,810        5,371
                                                                                   ----------     --------     --------
                                                                                   1,070,697      562,786      318,130
                                                                                   ----------     --------     --------
Expenses:
   Rentals.......................................................................    140,998       87,992       64,949
   Parts, service and used equipment.............................................    166,837       88,294       26,504
   Compressor fabrication........................................................    188,122       76,754       43,663
   Production and processing equipment fabrication...............................    147,824       62,684       20,278
   Selling, general and administrative...........................................    100,980       54,632       33,782
   Depreciation and amortization.................................................     90,560       52,882       37,337
   Leasing expense...............................................................     70,435       45,484       22,090
   Interest expense..............................................................     17,540        8,685        8,786
   Foreign currency translation..................................................      6,658
   Distributions on mandatorily redeemable convertible preferred securities......      6,373        6,369          278
   Other.........................................................................     17,323
                                                                                   ----------     --------     --------
                                                                                     953,650      483,776      257,667
                                                                                   ----------     --------     --------
Income before income taxes.......................................................    117,047       79,010       60,463
Provision for income taxes.......................................................     44,470       29,371       22,008
                                                                                   ----------     --------     --------
Net income before cumulative effect of accounting change.........................     72,577       49,639       38,455
   Cumulative effect of accounting change for derivative instruments, net of tax.       (164)
                                                                                   ----------     --------     --------
Net income.......................................................................     72,413       49,639       38,455
Other comprehensive (loss) income, net of tax:
   Change in fair value of derivative financial instruments......................     (6,073)
   Foreign currency translation adjustment.......................................        (27)        (146)        (463)
                                                                                   ----------     --------     --------
Comprehensive income............................................................. $   66,313     $ 49,493     $ 37,992
                                                                                   ==========     ========     ========
Diluted net income per share:
   Net income.................................................................... $   72,413     $ 49,639     $ 38,455
   Distributions on mandatorily redeemable convertible preferred securities, net
     of tax......................................................................      4,142
                                                                                   ----------     --------     --------
Net income for purposes of computing diluted net income per share................ $   76,555     $ 49,639     $ 38,455
                                                                                   ==========     ========     ========
Earnings per common share:
   Basic......................................................................... $     1.00     $   0.80     $   0.67
                                                                                   ==========     ========     ========
   Diluted....................................................................... $     0.94     $   0.75     $   0.63
                                                                                   ==========     ========     ========
Weighted average common and common equivalent shares outstanding:
   Basic.........................................................................     72,355       61,831       57,048
                                                                                   ==========     ========     ========
   Diluted.......................................................................     81,175       66,366       61,054
                                                                                   ==========     ========     ========
</TABLE>
  The accompanying notes are an integral part of these financial statements.

                                      F-3

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                 -------------------------------
                                                                                    2001       2000       1999
                                                                                 ---------  ---------  ---------
                                                                                  Restated   Restated   Restated
                                                                                      (See Notes 20 and 21)
                                                                                          (in thousands)
<S>                                                                              <C>        <C>        <C>
Cash flows from operating activities:
    Net income.................................................................. $  72,413  $  49,639  $  38,455
    Adjustments:
       Depreciation and amortization............................................    90,560     52,882     37,337
       Amortization of debt issuance costs and debt discount....................       831      1,050        884
       Bad debt expense.........................................................     4,860      3,198      1,475
       Gain on sale of property, plant and equipment............................    (4,208)   (10,421)    (3,951)
       Equity in income of nonconsolidated affiliates...........................    (8,634)    (3,518)    (1,188)
       Loss (gain) on non-consolidated affiliates...............................     4,629       (864)
       Loss on derivative instruments...........................................     7,849
       Deferred income taxes....................................................    32,206     27,907     10,259
       Changes in assets and liabilities, excluding business combinations:
          Accounts receivable and notes.........................................   (17,212)   (90,749)   (18,884)
          Inventory.............................................................   (45,633)   (36,869)    (2,473)
          Costs and estimated earnings versus billings on
            uncompleted contracts...............................................   (32,640)    (7,964)     3,293
          Accounts payable and other liabilities................................    21,168     44,259     11,969
          Advance billings......................................................    20,848     (4,031)     3,634
          Other.................................................................     5,737      5,227     (9,200)
                                                                                 ---------  ---------  ---------
             Net cash provided by operating activities..........................   152,774     29,746     71,610
                                                                                 ---------  ---------  ---------
Cash flows from investing activities:
    Capital expenditures........................................................  (660,085)  (274,823)  (282,940)
    Payments for deferred lease transaction costs...............................   (18,177)    (4,547)
    Proceeds from sale of property, plant and equipment.........................   590,763    410,915    219,649
    Proceeds from sale of investment in non-consolidated subsidiary.............     3,143
    Cash used for business acquisitions, net....................................  (386,056)  (194,955)   (35,311)
    Cash returned from unconsolidated subsidiary................................                           8,000
    Cash used to acquire investments in unconsolidated subsidiaries.............   (11,865)    (4,071)    (4,900)
                                                                                 ---------  ---------  ---------
             Net cash used in investing activities..............................  (482,277)   (67,481)   (95,502)
                                                                                 ---------  ---------  ---------
Cash flows from financing activities:
    Net borrowings (repayments) on revolving credit facility....................    54,500     40,400    (64,400)
    Payments for debt issue costs...............................................    (3,390)
    Issuance of common stock, net...............................................    83,850     59,400
    Proceeds from mandatorily redeemable convertible preferred
      securities, net...........................................................                          82,940
    Proceeds from warrant conversions and stock options exercises...............     2,280      3,608        545
    Issuance of convertible senior notes, net...................................   185,537
    Repayment of long-term debt and short-term notes............................   (15,580)   (27,695)    (8,357)
    Repayments of shareholder notes.............................................        62      1,876      7,490
                                                                                 ---------  ---------  ---------
             Net cash provided by financing activities..........................   307,259     77,589     18,218
                                                                                 ---------  ---------  ---------
Effect of exchange rate changes on cash and equivalents.........................       (49)      (126)       (73)
                                                                                 ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents............................   (22,293)    39,728     (5,747)
Cash and cash equivalents at beginning of year..................................    45,484      5,756     11,503
                                                                                 ---------  ---------  ---------
Cash and cash equivalents at end of year........................................ $  23,191  $  45,484  $   5,756
                                                                                 =========  =========  =========
</TABLE>
  The accompanying notes are an integral part of these financial statements.

                                      F-4

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                           -----------------------------
                                                              2001       2000      1999
                                                           ---------  ---------  --------
                                                            Restated   Restated  Restated
                                                               (See Notes 20 and 21)
                                                                   (in thousands)
<S>                                                        <C>        <C>        <C>
Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized amounts.............. $   8,457  $   8,874  $ 7,897
                                                           =========  =========  =======
   Income taxes paid...................................... $   1,723  $   1,639  $12,065
                                                           =========  =========  =======
Supplemental disclosure of noncash transactions:
   Debt issued for property, plant and equipment..........            $  12,922
                                                                      =========
   Assets (received) sold in exchange for note receivable. $  (1,601) $   2,783  $ 3,538
                                                           =========  =========  =======
   Common stock issued in exchange for notes receivable... $   1,069             $   731
                                                           =========             =======
   Conversion of deferred stock option liability.......... $  (1,529)
                                                           =========
Acquisitions of businesses:
   Property, plant and equipment acquired................. $ 606,271  $ 202,893  $39,105
                                                           =========  =========  =======
   Other assets acquired, net of cash acquired............ $  87,865  $  93,116  $ 2,784
                                                           =========  =========  =======
   Investments in non-consolidated affiliates............. $ 140,081
                                                           =========
   Goodwill............................................... $ 115,131  $ 113,962  $ 6,927
                                                           =========  =========  =======
   Liabilities assumed.................................... $(118,388) $ (66,113) $(1,578)
                                                           =========  =========  =======
   Debt issued............................................ $(155,462)
                                                           =========
   Deferred taxes......................................... $ (35,212) $  (9,029) $(8,627)
                                                           =========  =========  =======
   Treasury and common stock issued....................... $(254,230) $(139,874) $(3,300)
                                                           =========  =========  =======
</TABLE>


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

                                      F-5

<PAGE>

                          HANOVER COMPRESSOR COMPANY

             CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                 Years Ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                           Accumulated              Notes
                                               Common stock    Additional     other              receivable-  Restated
                                             -----------------  paid-in   comprehensive Treasury   employee   Retained
                                               Shares   Amount  capital   income (loss)  stock   stockholders earnings
                                             ---------- ------ ---------- ------------- -------- ------------ --------
                                                                 (in thousands, except share data)
<S>                                          <C>        <C>    <C>        <C>           <C>      <C>          <C>
Balance at December 31, 1998................ 57,180,944  $57    $268,977     $   152    $(3,325)   $(10,146)  $ 59,755
Conversion of warrants......................     52,678    1
Exercise of stock options...................    197,352              545
Other comprehensive loss....................                                    (463)
Issuance of common stock to employees.......     74,900              731                               (731)
Issuance of 183,700 treasury shares at
 $17.96 per share...........................                       1,561                  1,739
Repayment of employee stockholder notes.....                                                          7,490
Income tax benefit from stock options
 exercised..................................                       1,176
Other.......................................                         (46)
Net income..................................                                                                    38,455
                                             ----------  ---    --------     -------    -------    --------   --------
Balance at December 31, 1999 (Restated See
 Notes 20 and 21)........................... 57,505,874  $58    $272,944     $  (311)   $(1,586)   $ (3,387)  $ 98,210
Conversion of warrants......................    684,770
Exercise of stock options...................    994,572    1       3,607
Other comprehensive loss....................                                    (146)
Issuance of common stock, net...............  2,000,000    2      59,398
Issuance of common stock for acquisitions...  5,269,487    5     136,569
Issuance of 91,727 treasury shares at $35.98
 per share..................................                       2,431                    869
Repayment of employee stockholder notes.....                                                          1,876
Income tax benefit from stock options
 exercised..................................                       8,813
Other.......................................                         (25)                               (20)
Net income..................................                                                                    49,639
                                             ----------  ---    --------     -------    -------    --------   --------
Balance at December 31, 2000 (Restated See
 Notes 20 and 21)........................... 66,454,703  $66    $483,737     $  (457)   $  (717)   $ (1,531)  $147,849
Exercise of stock options...................    250,161    1       3,807
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.......................................                         640
Net income (Restated see Note 21)...........                                                                    72,413
                                             ----------  ---    --------     -------    -------    --------   --------
Balance at December 31, 2001................ 79,228,179  $79    $828,939     $(6,557)   $  (717)   $ (2,538)  $220,262
                                             ==========  ===    ========     =======    =======    ========   ========
</TABLE>

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

                                      F-6

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2001, 2000 and 1999

1.  The Company, Business and Significant Accounting Policies

   Hanover Compressor Company and its subsidiaries ("Hanover" or the "Company")
is a global market leader in full service natural gas compression and a leading
provider of service, fabrication and equipment for contract natural gas
handling applications. The Company provides this equipment on a rental,
contract compression, maintenance and acquisition leaseback basis to natural
gas production, processing and transportation companies that are increasingly
seeking outsourcing solutions. Hanover was founded in 1990 and is a Delaware
corporation. In December 1999, the Company adopted a holding company structure
and merged into the new holding company that assumed the name of Hanover
Compressor Company. The charter and by-laws of the new holding company are
substantially the same as the old Company.

  Principles of Consolidation

   The accompanying consolidated financial statements include Hanover and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliated
entities in which the Company owns more than a 20% interest and does not have a
controlling interest are accounted for using the equity method.

  Use of Estimates in the Financial Statements

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

  Cash and Cash Equivalents

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

  Revenue Recognition

   Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to five
years. Parts, 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. The Company estimates
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 cost-to-total cost basis. The
average duration of these projects is typically between four to six months.

  Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, accounts receivable,
advances to non-consolidated affiliates and notes receivable. The

                                      F-7

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

Company believes that the credit risk in temporary cash investments that the
Company has with financial institutions is minimal. Trade accounts receivable
are due from companies of varying size engaged principally in oil and gas
activities throughout the world. The Company reviews the financial condition of
customers prior to extending credit and generally does not obtain collateral
for trade receivables. Payment terms are on a short-term basis and in
accordance with industry standards. The Company considers this credit risk to
be limited due to these companies' financial resources, the nature of the
services it provides them and the terms of its rental contracts. Trade accounts
receivable is recorded net of estimated doubtful accounts of approximately
$6,300,000 and $2,659,000 at December 31, 2001 and 2000, 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:


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

   Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost, 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 the Company's use in its 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.

   Prior to July 1, 2001, compression equipment in the rental fleet was
depreciated using the straight-line method over an estimated useful life of 15
years. After a review of the useful lives of its compression fleet, effective
July 1, 2001, the Company changed its estimate of the useful life of certain
compression equipment to range from 15 to 30 years instead of a 15 year life.
The Company's new estimated lives are based on different types of compressors
presently in the Company's rental fleet rather than a blanket life applied to
all compressors and more accurately reflects the economic lives of the
compressors. The effect of this change in estimate on the year ended December
31, 2001 was a decrease in depreciation expense of approximately $5,000,000 and
an increase in net income of approximately $3,100,000 ($0.04 per share). The
Company anticipates this change in estimated useful life will reduce future
depreciation expense, based on the Company's current depreciable assets, by
approximately $16,000,000 per year.

  Long-Lived Assets

   The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, goodwill, intangibles and investments in
non-consolidated affiliates whenever events or changes in

                                      F-8

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.

  Goodwill

   The excess of cost over net assets of acquired businesses is recorded as
goodwill and amortized 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 (see Note 19). Accumulated
amortization was $20,528,000 and $8,902,000 at December 31, 2001 and 2000,
respectively. Amortization of goodwill totaled $11,626,000, $5,080,000 and
$2,048,000 in 2001, 2000 and 1999, respectively.

  Sale and Leaseback Transactions

   The Company from time to time enters into sale and leaseback transactions of
compression equipment with special purpose entities. Sale and leaseback
transactions of compression equipment are evaluated for lease classification in
accordance with Statement of Financial Accounting Standards No. 13 "Accounting
for Leases." The special purpose entities are not consolidated by the Company
when the owners of the special purposes entities have made a substantial
residual equity investment of at least three percent that is at risk during the
entire term of the lease.

  Stock-Based Compensation

   In accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123") "Accounting for Stock-Based Compensation," the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and has provided, in Note 14, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.

  Income Taxes

   The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments
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, translation gains and losses are
included in net income.

                                      F-9

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


  Earnings Per Common Share

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

   Included in diluted shares are common stock equivalents relating to options
of 3,990,000, 4,258,000 and 3,296,000 in 2001, 2000 and 1999, respectively,
warrants of 4,000, 277,000 and 712,000 in 2001, 2000 and 1999, respectively,
and mandatorily redeemable convertible preferred securities of 4,825,000 in
2001. The mandatorily redeemable convertible preferred securities were excluded
from the diluted shares for 2000 and 1999 as their effect would have been
anti-dilutive. In 1999, 212,000 common stock equivalents were excluded from the
computation of diluted earnings per share as the effect would have been
anti-dilutive. The convertible senior notes were excluded from the diluted
shares for all periods presented as their effects would have been anti-dilutive.

  Comprehensive Income

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

  Financial Instruments

   The Company utilizes derivative financial instruments to minimize the risks
and/or costs associated with financial and global operating activities by
managing its exposure to interest rate fluctuation on a portion of its leasing
obligations. The Company does 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 and SFAS 138, 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. The Company adopted SFAS 133 beginning January 1, 2001.

  Reclassifications

   Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2001 financial statement classification. These
reclassifications have no impact on net income.

2. Business Combinations

   Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the date of
acquisition. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies

                                     F-10

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

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, 2001

   In August 2001, we acquired 100% of the issued and outstanding shares of the
Production Operators Corporation's natural gas compression business, ownership
interests in certain joint venture projects in South America, and related
assets ("POI") from Schlumberger for $761,000,000 in cash, Hanover common stock
and indebtedness, subject to certain post-closing adjustments pursuant to the
purchase agreement (the "POI Acquisition") which have resulted in an increase
in the purchase price to approximately $771,000,000 due to an increase in net
assets acquired. Under the terms of the definitive agreement, Schlumberger
received approximately $270,000,000 in cash (excluding the amounts paid for the
increase in net assets), $150,000,000 in a long-term subordinated note and
approximately 8,708,000 Hanover common shares, or approximately 11% of the
outstanding shares, of Hanover common stock which are required to be held by
Schlumberger for at least three years following the closing date. The ultimate
number of shares issued under the purchase agreement was determined based on
the nominal value of $283,000,000 divided by the 30 day average closing price
of Hanover common stock as defined under the agreement and subject to a collar
of $41.50 and $32.50. The estimated fair value of the stock issued was
$212,468,000, 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. Additionally, under the terms of the
agreement, the Company is required to pay up to $58,000,000 upon the occurrence
of certain events (see Note 16) relating to one of the joint ventures a
minority interest of which was acquired by Hanover in the transaction. The
purchase price was a negotiated amount between the Company and Schlumberger and
the Company expects the acquisition to be accretive to earnings in future
periods. The Company believes the purchase price represents the fair market
value of the POI business based on its assets, customer base, reputation,
market position (domestic and international) and potential for long term
growth. The Company incurred approximately $14,975,000 in expenses in
connection with the acquisition. The POI Acquisition was accounted for as a
purchase and is included in our financial statements commencing on September 1,
2001.

   As of December 31, 2001 the Company has recorded approximately $67,476,000
in goodwill, of which none will be deductible for tax purposes, related to the
POI acquisition which will not be amortized in accordance with the transition
provisions of SFAS 142 (See Note 19). In addition, as of December 31, 2001, the
Company recorded $8,210,000 in estimated value of identifiable intangible
assets which will be amortized over a 24 month weighted average life. The
purchase price is subject to a contingent payment by Hanover to Schlumberger
based on the realization of certain tax benefits by the Company over the next
15 years.

   In June 2001, we acquired the assets of J&R International for approximately
$3,700,000 in cash and 17,598 shares of the Company's common stock valued at
$654,000.

   In April 2001, we acquired certain assets of Power Machinery, Inc. for
approximately $2,569,000 in cash and 108,625 shares of the Company's common
stock valued at approximately $3,853,000.

   In March 2001, we purchased OEC Compression Corporation ("OEC") in an
all-stock transaction for approximately $101,849,000, including the assumption
and payment of approximately $64,594,000 of OEC indebtedness. We paid an
aggregate of approximately 1,145,706 shares of Hanover common stock to

                                     F-11

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

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.

   The following table summarizes the estimated values of the assets acquired
and liabilities assumed as of the acquisition dates for the OEC and POI
acquisitions:

<TABLE>
<CAPTION>
                                                     OEC         POI
                                                  March 2001 August 2001
                                                  ---------- -----------
       <S>                                        <C>        <C>
       Current assets............................  $  4,451   $ 80,091
       Property, plant and equipment.............   114,841    487,880
       Intangible assets.........................                8,210
       Goodwill..................................               67,476
       Investments in non-consolidated affiliates              140,081
                                                   --------   --------
       Total assets acquired.....................   119,292    783,738

       Current liabilities.......................    (3,114)   (47,667)
       Other liabilities.........................   (15,531)   (20,978)
       Long term debt............................   (62,057)
                                                   --------   --------
       Total liabilities assumed.................   (80,702)   (68,645)
                                                   --------   --------
       Net assets acquired.......................  $ 38,590   $715,093
                                                   ========   ========
</TABLE>

   During the year ended December 31, 2001, the Company completed other
acquisitions which were not significant either individually or in the aggregate.

Year Ended December 31, 2000

   In October 2000, the Company purchased the common stock of Servicios TIPSA
S.A. for approximately $7,750,000 in cash and a $7,750,000 note payable. The
note payable was repaid in January 2001.

   In September 2000, the Company purchased the Dresser-Rand Company's
compression services division ("DR") for $177,000,000 including approximately
$1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000
of the purchase price was paid in cash with the balance being paid through the
issuance to Ingersoll-Rand of 2,919,681 shares of the Company's newly issued
restricted common stock. The estimated value of the stock issued was
approximately $80,539,000, based upon quoted market price for the Company's
common stock reduced by a discount due to the restriction on the stock's
marketability. The purchase price is subject to certain post-closing
adjustments pursuant to the acquisition agreement which have resulted in
approximately a $21,400,000 increase in the purchase price due to increases in
the net assets acquired. In connection with the acquisition, the Company has
agreed to purchase under normal business terms $25,000,000 worth of products,
goods and services from Dresser-Rand Company over a three-year period beginning
December 2001.

   In September 2000, the Company acquired the common stock of Gulf Coast
Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of the
Company's treasury stock valued at $300,000.

   In July 2000, the Company completed its acquisition of PAMCO Services
International's natural gas compressor assets for approximately $45,210,000 in
cash and a $12,922,000 note payable due on April 10, 2001. The note is payable
periodically as idle horsepower is contracted. Approximately $10,599,000 of the
note payable was repaid in 2000. In connection with the acquisition, the
Company agreed to purchase under normal business terms specified levels of
equipment over a three-year period beginning October 2000.

   In June 2000, the Company purchased common stock of Applied Process
Solutions, Inc. ("APSI") for 2,303,294 shares of the Company's common stock and
assumption of $16,030,000 of APSI's outstanding debt.

                                     F-12

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

The estimated value of the stock issued was approximately $54,816,000, based
upon quoted market price for the Company's common stock reduced by a discount
due to the restriction on the stock's marketability. The assumed debt has been
repaid.

   In July 2000, the Company purchased the assets of Rino Equipment, Inc. and
K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares
of the Company's treasury stock valued at $2,000,000.

   In July 2000, the Company purchased the common stock of Compression
Components Corporation for approximately $7,972,000 in cash and 27,405 shares
of the Company's treasury stock valued at $1,000,000.

   In March 2000, the Company purchased the common stock of Southern
Maintenance Services, Inc. ("SMS") for approximately $1,500,000 in cash, 46,512
shares of the Company's common stock valued at $1,000,000 and $1,000,000 in
notes payable that mature on March 1, 2003.

Year Ended December 31, 1999

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

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

  Pro Forma Information

   The pro forma information set forth below assumes the POI, OEC, APSI and DR
acquisitions are accounted for had the purchases occurred at the beginning of
2000. 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):

<TABLE>
<CAPTION>
                                                       Years Ended
                                                      December 31,
                                                 -----------------------
                                                  Restated    Restated
                                                    2001        2000
                                                 ----------- -----------
                                                 (unaudited) (unaudited)
        <S>                                      <C>         <C>
        Revenue................................. $1,180,090   $828,696
        Net income..............................     71,844     44,941
        Earnings per common share--basic........       0.92       0.60
        Earnings per common share--diluted......       0.87       0.57
</TABLE>

3. Inventory

   Inventory consisted of the following amounts (in thousands):

<TABLE>
<CAPTION>
                                                      December 31,
                                                   -------------------
                                                    Restated  Restated
                                                      2001      2000
                                                   ---------- --------
          <S>                                      <C>        <C>
          Parts and supplies...................... $  146,877 $ 92,558
          Work in progress........................     46,091   47,193
          Finished goods..........................     22,687    4,941
                                                   ---------- --------
                                                   $  215,655 $144,692
                                                   ========== ========
</TABLE>

                                     F-13

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


4. Compressor and Production Equipment Fabrication Contracts

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

<TABLE>
<CAPTION>
                                                     December 31,
                                                 --------------------
                                                    2001       2000
                                                 ----------  --------
         <S>                                     <C>         <C>
         Costs incurred on uncompleted contracts $  129,952  $ 58,302
         Estimated earnings.....................     25,654     8,414
                                                 ----------  --------
                                                    155,606    66,716
         Less--billings to date.................   (103,659)  (47,409)
                                                 ----------  --------
                                                 $   51,947  $ 19,307
                                                 ==========  ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                            --------------------
                                                                               2001       2000
                                                                            ----------  --------
<S>                                                                         <C>         <C>
Costs and estimated earnings in excess of billings on uncompleted contracts $   59,099  $ 24,976
Billings on uncompleted contracts in excess of costs and estimated earnings     (7,152)   (5,669)
                                                                            ----------  --------
                                                                            $   51,947  $ 19,307
                                                                            ==========  ========
</TABLE>

5. Property, plant and equipment

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                          --------------------
                                                           Restated   Restated
                                                             2001       2000
                                                          ----------  --------
<S>                                                       <C>         <C>
Compression equipment, facilities and other rental assets $1,171,282  $577,435
Land and buildings.......................................     55,570    35,233
Transportation and shop equipment........................     61,848    44,202
Other....................................................     23,848    15,279
                                                          ----------  --------
                                                           1,312,548   672,149
Accumulated depreciation.................................   (161,035)  (97,446)
                                                          ----------  --------
                                                          $1,151,513  $574,703
                                                          ==========  ========
</TABLE>

   Depreciation expense was $73,821,000, $46,211,000, and $34,696,000 in 2001,
2000 and 1999, respectively. Assets under construction of $98,538,000 and
$66,203,000 are included in compression equipment, facilities and other rental
assets at December 31, 2001 and 2000, respectively. The Company capitalized
$2,899,000, $1,823,000 and $1,533,000 of interest related to construction in
process during 2001, 2000, and 1999, respectively.

   In August 2001, the Company exercised its purchase option under the 1998
operating lease (see Note 10) for $200,000,000. The depreciable basis of the
compressors purchased has been reduced by the deferred gain of approximately
$41,993,000 which was recorded at inception of the lease and previously
included as an other liability on the Company's balance sheet.

                                     F-14

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


6.  Intangible and Other Assets

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

<TABLE>
<CAPTION>
                                                            December 31,
                                                          ----------------
                                                          Restated Restated
                                                            2001     2000
                                                          -------- --------
    <S>                                                   <C>      <C>
    Deferred debt issuance and leasing transactions costs $42,183  $16,091
    Notes receivable.....................................  25,562   14,975
    Other................................................  20,829   12,150
                                                          -------  -------
                                                           88,574   43,216
    Accumulated amortization.............................  (9,921)  (5,415)
                                                          -------  -------
                                                          $78,653  $37,801
                                                          =======  =======
</TABLE>

   Amortization of intangible and other assets totaled $5,113,000, $1,591,000
and $593,000 in 2001, 2000 and 1999, respectively, exclusive of amortization of
debt issuance costs.

   Certain notes receivable result from an agreement entered into in 2001 to
advance funds to a third party in connection with various power generation
development projects. Under the agreement, the Company agreed to advance
working capital of up to $12,500,000. At December 31, 2001, $7,500,000 was
funded under the agreement. The notes bear interest at the prime lending rate
that ranged from 5.5% to 8%, are secured by equipment and mature on April 30,
2002. The notes may be repaid in cash or by exchanging each note with a
identical promissory note collateralized by equipment and payable from the net
operating revenue of a related power generation project.

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

   See Note 16 for related party notes receivable.

7. Investments in Non-Consolidated Affiliates

   Investments in affiliates that are not controlled by the Company but where
the Company has the ability to exercise significant influence over the
operations are accounted for using the equity method. The Company's share of
net income or losses of these affiliates is reflected in the Consolidated
Statements of Income as Equity in income of non-consolidated affiliates. The
Company's primary equity method investments are comprised of entities that own,
fabricate, operate, service and maintain compression and other related
facilities. These entities maintain independent capital structures and have
financed their operations on a limited or no recourse basis to the Company. The
Company's equity method investments totaled approximately $169,222,000 and
$19,627,000 at December 31, 2001 and 2000, respectively.

   The most significant investments are the joint ventures (Pigap II, El
Furrial and Simco) acquired in connection with the POI acquisition completed in
August 2001. At December 31, 2001, these ventures account for approximately
$152,443,000 of the equity investments and generated equity in earnings for
2001 of approximately $8,053,000. At December 31, 2001, the Company's
investment in these joint ventures exceeded its equity in underlying assets by
approximately $6,700,000.

                                     F-15

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The Company's ownership interest and location of each equity investee is as
follows:

<TABLE>
<CAPTION>
                                        Ownership
                                        Interest    Location          Type of Business
                                        --------- ------------- ----------------------------
<S>                                     <C>       <C>           <C>
Wilpro--Pigap II.......................   30.0%     Venezuela   Gas Compression Plant
Wilpro--El Furrial.....................   33.3%     Venezuela   Gas Compression Plant
Simco Consortium.......................   35.5%     Venezuela   Gas Compression Plant
Hanover Measurement Services Company LP   49.8%   United States Monitoring Services
Servi Compressores, CA.................   50.0%     Venezuela   Compression Service Provider
Collicutt Mechanical Services Ltd......   24.1%      Canada     Compression Service Provider
Belleli Energy Srl.....................   20.2%       Italy     Fabricator
</TABLE>

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

<TABLE>
<CAPTION>
                                            December 31,
                                          ----------------
                                            2001    2000
                                          -------- -------
                      <S>                 <C>      <C>
                      Current assets..... $330,542 $67,785
                      Non-current assets.  620,951  89,798
                      Current liabilities  113,255  44,073
                      Debt payable.......  620,884  48,129
                      Owners equity......  217,354  65,381
</TABLE>

   Summarized earnings information for these entities for the years ended
December 31, 2001, 2000 and 1999 follows (on a 100% basis, in thousands):

<TABLE>
<CAPTION>
                                    Years ended December 31,
                                    ------------------------
                                    2001(1)   2000    1999
                                    -------- ------- -------
                   <S>              <C>      <C>     <C>
                   Revenues........ $201,581 $86,059 $60,364
                   Operating income   46,097  17,290   9,566
                   Pretax income...   25,417  10,500   5,924
</TABLE>
--------
        (1) Amounts for the joint ventures acquired in connection with the POI
            business acquisition are included from September 1, 2001.

   The financial data for 2000 and 1999 includes the Company's 20% interest in
Meter Acquisition Company LP and its 60% interest in Hanover/Enron Venezuela
Ltd. The Company sold Meter Acquisition Company LP in 2001 for cash of
approximately $3,143,000. The Company purchased the remaining 40% interest in
Hanover/Enron Venezuela Ltd. during 2001 for $3,050,000.

   Effective January 2001, the Company agreed to provide certain facilitation
services to Belleli Energy SRL ("Belleli"), a fabrication company based in
Italy. In connection with this arrangement, the Company agreed to provide
Belleli with project financing including necessary guarantees, bonding capacity
and other collateral on an individual project basis. Under the arrangement,
Belleli must present each project to the Company which must be approved at the
Company's sole discretion. The Company received $1,723,000 from Belleli in 2001
for its facilitation services. Under a separate agreement with Belleli, the
Company has issued letters of credit on Belleli's behalf totaling approximately
$11,100,000 at December 31, 2001.

                                     F-16

<PAGE>

                          HANOVER COMPRESSOR COMPANY

      CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY--(Continued)

                 Years Ended December 31, 2001, 2000 and 1999


   During 2000, Collicutt Mechanical Services sold additional shares that
reduced the Company's ownership percentage to approximately 24%, accordingly, a
change in interest gain of $864,000 was recorded in the statement of income.

   In the normal course of business, Hanover engages in purchase and sale
transactions with Collicut Mechanical Services, which is owned 24% by Hanover.
During the period ended December 31, 2001, Hanover had sales to this related
party of $2,579,000; and purchases of $19,197,000. At December 31, 2001,
Hanover had a net payable to this related party of $1,691,000.

   In the normal course of business, Hanover engages in purchase and sale
transactions with Servi- Compressor, which is owned 50% by Hanover. During the
period ended December 31, 2001, Hanover had sales to this related party of
$849,000; and purchases of $1,859,000. At December 31, 2001, Hanover had a net
receivable from this related party of $464,000.

   The Company also holds interests in companies in which it does not exercise
significant influence over the operations. These investments are accounted for
using the cost method. Cost method investments totaled approximately $9,106,000
and $6,825,000 at December 31, 2001 and 2000, respectively.

   In May 2000, the Company 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 $2,511,000 in cash. In
2001, the Company purchased additional shares for approximately $1,250,000,
advanced $2,700,000 to Aurion and had an accounts receivable of $1,103,000.
Aurion filed for bankruptcy protection in March 2002, and accordingly, the
Company recorded other expense of approximately $5,013,000 at December 31, 2001
to impair its investment and the unrecoverable amount of the advances.

8. Accrued Liabilities

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

<TABLE>
<CAPTION>
                                                             December 31,
                                                           ----------------
                                                             2001    2000
                                                           -------- -------
     <S>                                                   <C>      <C>
     Accrued salaries, bonuses and other employee benefits $ 14,843 $ 6,356
     Accrued income and other taxes.......................   15,536   2,812
     Accrued leasing expense..............................   21,990   3,389
     Additional purchase price for DR (Note 2)............    1,798  16,562
     Additional purchase price for POI (Note 2)...........   58,000
     Accrued other........................................   42,941  17,586
                                                           -------- -------
                                                           $155,108 $46,705
                                                           ======== =======
</TABLE>

                                     F-17

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


9. Long-Term Debt

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

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                    ------------------
                                                                                      2001      2000
                                                                                    --------  --------
<S>                                                                                 <C>       <C>
Bank credit facility............................................................... $157,000  $102,500
4.75% convertible senior notes due 2008............................................  192,000
Schlumberger note, interest at 8.5%................................................  150,000
Real estate mortgage, interest at 7.5%, collateralized by certain land and
  buildings, payable through 2002..................................................    3,583     4,000
Other, interest at various rates, collateralized by equipment and other assets, net
  of unamortized discount..........................................................    7,230     6,858
                                                                                    --------  --------
                                                                                     509,813   113,358
Less--current maturities...........................................................   (5,553)   (2,423)
                                                                                    --------  --------
                                                                                    $504,260  $110,935
                                                                                    ========  ========
</TABLE>

   The Company's primary credit facility as amended and restated provides for a
$350,000,000 revolving credit facility that matures on November 30, 2004.
Advances bear interest at the bank's prime or a negotiated rate (3.9% and 7.5%
at December 31, 2001 and 2000, respectively). A commitment fee of 0.35% per
annum on the average available commitment is payable quarterly. The credit
facility contains certain financial covenants and limitations on, among other
things, indebtedness, liens, leases and sales of assets. The credit facility
also limits the payment of cash dividends on the Company's common stock to 25%
of net income for the respective period. The credit facility was amended in
December 2001. The credit facility was increased from $200,000,000 and the term
was extended for three years to mature November 2004. We paid fees of
approximately $3,390,000 related to this amendment.

   As a result of the restatement of its consolidated financial statements, for
the period ended December 31, 2000 and nine months ended September 30, 2001 and
other compliance provisions, the Company was not in compliance with certain
covenants of its bank credit facility and lease agreements. The Company has
obtained waivers and amendments and is now in compliance.

   In March 2001, the Company issued $192,000,000 principal amount of 4.75%
convertible senior notes due 2008 (see Note 13).

   In connection with the POI Acquisition on August 31, 2001, the Company
issued a $150,000,000 subordinated acquisition note to Schlumberger, which
matures December 15, 2005. Interest on the subordinated acquisition note
accrues and is payable-in-kind at the rate of 8.5% annually for the first six
months after issuance and periodically increases in increments of 1% to 2% per
annum to a maximum interest rate 42 months after issuance of 15.5%. In the
event of an event of default under the subordinated acquisition note, interest
will accrue at a rate of 2% above the then applicable rate. The subordinated
acquisition note is subordinated to all of the Company's indebtedness other
than indebtedness to fund future acquisitions. In the event that the Company
completes an offering of equity securities, the Company is required to apply
the proceeds of the offering to repay amounts outstanding under the
subordinated acquisition note as long as no default exists or would exist under
our other indebtedness as a result of such payment.

                                     F-18

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   Approximately $11,191,000 of subordinated promissory notes were owed to
related parties and were repaid on December 31, 2000. The Company incurred
interest to these parties of $784,000 during 2000 and 1999.

   Maturities of long-term debt at December 31, 2001 are (in thousands):
2002--$5,553; 2003--$1,382; 2004 $158,037; 2005--$150,871; 2006--$656; and
$193,314 thereafter.

10. Leasing Transactions

   In August 2001 and in connection with the POI Acquisition, the Company
completed two sale and leaseback transactions involving certain compression
equipment. Concurrent with the transactions, the Company exercised its purchase
option under its 1998 operating lease for $200,000,000. In the first
transaction, the Company received $309,300,000 proceeds from the sale of
compression equipment. In the second transaction, the Company received
$257,750,000 for the sale of additional compression equipment. Both
transactions are recorded as a sale and leaseback of the equipment and are
recorded as operating leases. Under the first transaction, the equipment was
sold and leased back by the Company for a seven year period and will continue
to be deployed by the Company under its normal operating procedures. The
agreement calls for semi-annual rental payments of approximately $12,750,000 in
addition to quarterly rental payments of approximately $245,000. Under the
second transaction, the equipment was sold and leased back by the Company for a
10 year period and will continue to be deployed by the Company under its normal
operating procedures. The agreement calls for semi-annual rental payments of
approximately $10,938,000 in addition to quarterly rental payments of
approximately $213,000. The Company has options to repurchase the equipment
under certain conditions as defined by the lease agreement. The Company
incurred transaction costs of approximately $17,900,000 related to the
transactions. These costs are included in intangible and other assets and are
being amortized over the respective lease terms.

   In October 2000, the Company completed a $172,589,000 sale and leaseback of
certain compression equipment. In March 2000, the Company entered into a
separate $200,000,000 sale and leaseback of certain compression equipment.
Under the March agreement, the Company received $100,000,000 proceeds from the
sale of compression equipment at closing and in August 2000, the Company
completed the second half of the equipment lease and received an additional
$100,000,000 for the sale of additional compression equipment. In June 1999 and
in July 1998 the Company completed two other separate $200,000,000 sale and
leaseback transactions of certain compression equipment. Under the 2000 and
1999 lease agreements, the equipment was sold and leased back by the Company
for a five year period and will be deployed by the Company under its normal
operating procedures. At any time, the Company has options to repurchase the
equipment under the 2000 and 1999 leases under certain conditions as defined by
the lease agreement. The 2000 and 1999 lease agreements call for variable
quarterly payments that fluctuate with the London Interbank Offering Rate. The
Company incurred an aggregate of approximately $8,100,000 in transactions costs
for the leases entered into in 2000 and 1999, 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.

                                     F-19

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The following table summarizes the proceeds, net book value of equipment
sold, deferred gain on equipment sale, the residual guarantee and the lease
termination date for equipment leases (in thousands of dollars):

<TABLE>
<CAPTION>
                                                    Residual      Lease
                           Sale   Net Book Deferred   Value    Termination
   Lease                 Proceeds  Value     Gain   Guarantee     Date
   -----                 -------- -------- -------- --------- --------------
   <S>                   <C>      <C>      <C>      <C>       <C>
   June 1999............ $200,000 $166,356 $33,644  $166,000  June 2004
   March and August 2000  200,000  166,922  33,078   166,000  March 2005
   October 2000.........  172,589  155,692  16,897   142,299  October 2005
   August 2001..........  309,300  306,034   3,266   232,000  September 2008
   August 2001..........  257,750  235,877  21,873   175,000  September 2011
</TABLE>

   All transactions are recorded as a sale and leaseback of the equipment and
the leases are treated as operating leases. We issued guarantees under the
lease agreements that are due upon termination of the leases and which may be
satisfied by a cash payment or the exercise of our equipment purchase options
under the terms of the lease agreements. The residual value guarantees and
other lease terms, which are based on negotiation between Hanover and third
party lessors, were supported by equipment appraisals and analysis. We believe
that the market value of the equipment at the end of the lease will exceed the
guaranteed residual values due to our predictive and preventive maintenance
programs, routine overhaul practices and the expected demand for compression
equipment in the future. We review the value of the equipment whenever events
or circumstances indicate that a decrease in market value may have occurred as
a result of foreseeable obsolescence or a decrease in market demand. If the
fair value of the equipment was less than the guaranteed residual value, we
would accrue additional lease expense for the amount that would be payable upon
termination of the lease. Any gains on the sale of the equipment are deferred
until the end of the respective lease terms. Should we not exercise our
purchase options under the lease agreements, the deferred gains will be
recognized to the extent they exceed any final rent payments and any other
payments required under the lease agreements.

   As a result of the lease transactions, we incurred approximately
$70,435,000, $45,484,000, and $22,090,000 in lease expense for the years ended
December 31, 2001, 2000 and 1999, respectively. The following future minimum
lease payments are due under the leasing arrangements, exclusive of any final
rent payments or purchase option payments (in thousands): 2002--$88,111;
2003--$84,941; 2004--$77,536; 2005--$62,780; 2006--$49,072, and $149,779
thereafter.

   In connection with the leases entered into in August 2001, the Company is
obligated to prepare registration statements and complete an exchange offering
to enable the holders of the notes issued by the lessors to exchange their
notes with notes which are registered under the Exchange Act of 1933. Because
the exchange offering has not been completed, the Company is required to pay
additional lease expense in the amount equal to $105,600 per week, until the
exchange offering is completed. The additional lease expense began accruing on
January 28, 2002.

11. Income Taxes

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

<TABLE>
<CAPTION>
                                                     Years ended December 31,
                                                    --------------------------
                                                    Restated Restated Restated
                                                      2001     2000     1999
                                                    -------- -------- --------
 <S>                                                <C>      <C>      <C>
 Domestic.......................................... $ 67,175 $58,746  $44,618
 Foreign...........................................   49,872  20,264   15,845
                                                    -------- -------  -------
                                                    $117,047 $79,010  $60,463
                                                    ======== =======  =======
</TABLE>

                                     F-20

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


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

<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                                             --------------------------
                                                             Restated Restated Restated
                                                               2001     2000     1999
                                                             -------- -------- --------
<S>                                                          <C>      <C>      <C>
Current tax provision (benefit):
   Federal.................................................. $ 1,136  $ 3,526  $ 6,958
   State....................................................     654      499    1,412
   Foreign..................................................  10,474   (2,561)   3,379
                                                             -------  -------  -------
       Total current........................................  12,264    1,464   11,749
                                                             -------  -------  -------
Deferred tax provision:
   Federal..................................................  27,073   16,309    9,533
   State....................................................                       151
   Foreign..................................................   5,133   11,598      575
                                                             -------  -------  -------
       Total deferred.......................................  32,206   27,907   10,259
                                                             -------  -------  -------
Total provision............................................. $44,470  $29,371  $22,008
                                                             =======  =======  =======
</TABLE>

   The income tax expense for 2001, 2000 and 1999 resulted in effective tax
rates of 38.0%, 37.2% and 36.4%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
<TABLE>
<CAPTION>
                                                              Years ended December 31,
                                                             -------------------------
                                                             Restated Restated Restated
                                                               2001     2000     1999
                                                             -------- -------- --------
<S>                                                          <C>      <C>      <C>
Federal income tax at statutory rates....................... $40,966  $27,653  $21,163
State income taxes, net of federal income tax benefit.......     425      324    1,016
Impact of foreign operations, net of federal tax benefit....     683    1,241      211
Nondeductible goodwill......................................   1,289      964      583
Other, net..................................................   1,107     (811)    (965)
                                                             -------  -------  -------
                                                             $44,470  $29,371  $22,008
                                                             =======  =======  =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 December 31,
                                                             --------------------
                                                              Restated   Restated
                                                                2001       2000
                                                             ---------  ---------
<S>                                                          <C>        <C>
Deferred tax assets:
   Net operating losses..................................... $  64,787  $  32,222
   Investment in joint ventures.............................    11,145
   Inventory................................................     3,039        811
   Alternative minimum tax carryforward.....................    15,152     14,623
   Derivative instruments...................................     6,452
   Accrued liabilities......................................     3,980      1,168
   Other....................................................     9,703      1,405
                                                             ---------  ---------
Gross deferred tax assets...................................   114,258     50,229
   Valuation allowance......................................   (11,145)
                                                             ---------  ---------
                                                               103,113     50,229
                                                             ---------  ---------
Deferred tax liabilities:
   Property, plant and equipment............................  (263,108)  (145,892)
   Other....................................................    (5,497)    (5,669)
                                                             ---------  ---------
Gross deferred tax liabilities..............................  (268,605)  (151,561)
                                                             ---------  ---------
                                                             $(165,492) $(101,332)
                                                             =========  =========
</TABLE>

                                     F-21

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The Company has net operating loss carryforwards at December 31, 2001 of
approximately $185,103,000 expiring in 2006 to 2021. In addition, the Company
has an alternative minimum tax credit carryforward of approximately $15,152,000
that does not expire.

   In 2001, the Company recorded approximately $35,212,000 of additional
deferred income tax liabilities resulting from the 2001 acquisition
transactions. In 2000, the Company recorded approximately $9,029,000 of
additional deferred income tax liability resulting from the 2000 acquisition
transactions. See Note 2 for a description of the transactions.

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

12. Mandatorily Redeemable Convertible Preferred Securities

   In December 1999, the Company issued $86,250,000 of unsecured Mandatorily
Redeemable Convertible Preferred Securities (the "Convertible Preferred
Securities") through Hanover Compressor Capital Trust, a Delaware business
trust and wholly-owned finance subsidiary of the Company. The Convertible
Preferred Securities have a liquidation amount of $50 per unit. The Convertible
Preferred Securities mature in 30 years but the Company may redeem 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. During 2001, 2000 and 1999, the
Company recorded approximately $6,253,000, $6,253,000 and $278,000
respectively, in distributions, related to Convertible Preferred Securities.
Each Convertible Preferred Security is convertible into 2.7972 shares of
Hanover common stock, subject to certain conditions. The Company has fully and
unconditionally guaranteed the Convertible Preferred Securities. The Company
incurred approximately $3,587,000 in transaction costs that are included in
other assets, net of $120,000 and $116,000 of accumulated amortization at
December 31, 2001, and 2000, 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 $130,705,000 at
December 31, 2001.

13. Common Stockholders' Equity

  Convertible Senior Notes Offering

   In March 2001, the Company issued $192,000,000 principal amount of 4.75%
convertible senior notes due 2008. The notes mature on March 15, 2008 and are
subject to call beginning on March 15, 2004. The notes are convertible into
shares of the Company's common stock at a conversion price of approximately
$43.94 per share. In addition, the Company may decrease the conversion price by
any amount for any period of time, subject to approval by the Board of
Directors and within the terms of the indenture. The Company received
approximately $185,537,000 of proceeds from the sale, net of underwriting and
offering costs. The fair value of the convertible senior notes is approximately
$178,539,000 at December 31, 2001.

  Stock Offerings

   In March 2001, the Company completed a public offering of 2,500,000 newly
issued shares of the Company's common stock. The Company realized approximately
$83,850,000 of proceeds from the offering, net of underwriting and offering
costs.

                                     F-22

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   In May 2000, the Company completed a private placement of 2,000,000 newly
issued shares of common stock to an institutional investor for cash of
$59,400,000, net of offering costs.

  Stock Split

   In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All common stock, additional paid-in capital and
earnings per common share information have been restated for all periods
presented to reflect this stock split. In addition, the Board of Directors
approved an increase of authorized shares of common stock to 200,000,000.

  Notes Receivable-Employee Stockholders

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

  Other

   As of December 31, 2001, warrants to purchase approximately 4,000 shares of
common stock at $.005 per share were outstanding. The warrants expire in August
2005.

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

14. Stock Options

   The Company has employee stock option plans that provide for the granting of
options to purchase common shares. The options are generally issued with an
exercise price equal to the fair market value on the date of grant and are
exercisable over a ten-year period. No compensation expense related to stock
options was recorded in 2001, 2000 and 1999.

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

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

   In June 2000, the Company purchased APSI, which had existing stock option
programs in place. The Company converted the outstanding APSI stock options
into the Company's stock options as of the purchase date at a conversion ratio
equal to the exchange ratio under the merger agreement. As a result, 127,813
options were converted at a weighted-average per share exercise price of
approximately $12.88. Approximately 60,307 of the options vested at acquisition
with the remaining options vesting at varying dates through 2003.

                                     F-23

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The following is a summary of stock option activity for the years ended
December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                         Weighted average
                                                Shares   price per share
                                              ---------  ----------------
      <S>                                     <C>        <C>
      Options outstanding, December 31, 1998. 8,790,430       $ 5.95
         Options granted.....................   272,156        13.79
         Options canceled....................   (68,230)        9.72
         Options exercised...................  (197,352)        2.76
                                              ---------
      Options outstanding, December 31, 1999. 8,797,004         6.24
         Options granted.....................
         APSI acquisition....................   127,813        12.88
         Options canceled....................   (11,562)        9.78
         Options exercised...................  (994,572)        3.68
                                              ---------
      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
                                              =========
</TABLE>

   The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2001:

<TABLE>
<CAPTION>
                                 Options outstanding      Options exercisable
                             ---------------------------- ------------------
                                       Weighted
                                        average  Weighted            Weighted
                                       remaining average             average
                                        life in  exercise            exercise
    Range of exercise prices  Shares     years    price    Shares     price
    ------------------------ --------- --------- -------- ---------  --------
    <S>                      <C>       <C>       <C>      <C>        <C>
         $0.01..............    71,686    2.1     $ 0.01     71,686   $ 0.01
         $2.30--$3.48....... 3,371,834    1.5       2.37  3,371,834     2.37
         $4.57--$6.96.......   255,276    4.3       5.36    255,276     5.36
         $9.57--$14.50...... 3,884,395    6.3      10.17  3,316,084     9.93
         $20.09--$25.00.....    81,284    9.2      22.72      2,293    20.09
                             ---------                    ---------
                             7,664,475                    7,017,173
                             =========                    =========
</TABLE>

   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
$25.00 and $6.10 per option during 2001 and 1999, 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 the Company's 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 its employee

                                     F-24

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

stock options. The Company did not grant any stock options in 2000. The fair
value of options at date of grant was estimated using the Black-Scholes model
with the following weighted average assumptions:

<TABLE>
<CAPTION>
                                      2001   2000  1999
                                     ------- ---- -------
                      <S>            <C>     <C>  <C>
                      Expected life. 6 years N/A  6 years
                      Interest rate.    4.0% N/A     6.0%
                      Volatility....   35.4% N/A    29.4%
                      Dividend yield      0% N/A       0%
</TABLE>

   Stock-based compensation costs, computed in accordance with FAS 123, would
have reduced net income by $3,804,000, $4,598,000, and $2,194,000 in 2001, 2000
and 1999, respectively. The pro forma impact on net income would have reduced
basic and diluted earnings per share by $0.05 in 2001, basic and diluted
earnings per share by $0.07 in 2000 and basic and diluted earnings per share by
$0.04 per share in 1999.

15. Benefit Plans

   The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company recorded matching contributions of $1,062,000,
$594,000, and $399,000 during the years ended December 31, 2001, 2000 and 1999,
respectively.

16. Related Party and Certain Other Transactions

Transactions with GKH Entities

   Hanover and GKH Investments ("GKH") are parties to a stockholders agreement
which provides, among other things, for GKH's rights of visitation and
inspection and Hanover's obligation to provide Rule 144A information to
prospective transferees of GKH's Hanover common stock.

   Hanover, GKH and other stockholders (collectively, the "Holders"), who
together currently beneficially own approximately 23% of the outstanding
Hanover common stock are parties to a Registration Rights Agreement (the "GKH
Rights Agreement"). The GKH Rights Agreement generally provides that, if
Hanover proposes to register shares of its capital stock or any other
securities under the Securities Act, then upon the request of those Holders
owning in the aggregate at least 2.5% of Hanover common stock or derivatives
thereof (the "Registrable Securities") then held by all of the Holders, Hanover
will use its 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. Hanover is required to pay all
registration expenses in connection with registrations of Registrable
Securities effected pursuant to the GKH Rights Agreement. In addition, any
single Holder of Hanover common stock that owns 18% or more of the common stock
has the right to demand, on one occasion, the registration of its common stock.

   Hanover and GKH were parties to an agreement whereby, in exchange for
investment banking and financial advisory services rendered, the Company agreed
to pay a fee to GKH. In February 2001, in full satisfaction of its obligations
under this agreement, Hanover paid a one time fee of $2,048,000 to GKH for
services rendered under the agreement and the amount was included in accrued
liabilities as of December 31, 2000.

   In August 2001, Hanover paid a $4,650,000 fee to GKH as payment for services
rendered in connection with Hanover's acquisition of POI and related assets.

                                     F-25

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   Pursuant to an agreement with GKH which provides for compensation to GKH for
services, the Company paid a management fee of $45,000 per month from November
2001 until terminated in early 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 and, for the years ended 2001, 2000 and 1999,
approximately $76,000, $228,540 and $228,540, respectively, was billed under
the leases. In 2000 and 1999, the Company leased compressors to other companies
owned or controlled by or affiliated with related parties. Rental and
maintenance revenues billed to these related parties totaled $708,000 and
$738,000 during 2000 and 1999, respectively.
Transactions with Schlumberger Entities

   Pursuant to the Lock-Up, Standstill and Registration Rights Agreement, dated
as of August 31, 2001 (the "Schlumberger Rights Agreement"), between Hanover
and Schlumberger Technology Company, Camco International Inc., Schlumberger
Surenco, S.A., Schlumberger Oilfield Holdings Limited, Operational Services,
Inc. (collectively, the "Schlumberger Companies"), Hanover granted to each of
the Schlumberger Companies certain registration rights in connection with
shares of Hanover common stock (the "Hanover Stock") received by the
Schlumberger Companies as consideration for Hanover's acquisition of Production
Operators Corporation and related assets. 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 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 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.

   In August 2001, Hanover purchased POI from Schlumberger. As part of the
purchase agreement entered into with respect to the POI Acquisition, the
Company is required to make a payment of up to $58,000,000 due upon the
completion of a financing of a South American joint venture acquired by the
Company. If the joint venture fails to execute the financing or such financing
fails to be non-recourse to Hanover, in either case, on or before December 31,
2002, the Company will have 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
Hanover to the joint venture. The Company's right to exercise the put expires
on January 31, 2003.

   In connection with the POI Acquisition, Hanover issued a $150,000,000
subordinated acquisition note to Schlumberger, which matures December 15, 2005.
Interest on the subordinated acquisition note accrues and is payable-in-kind at
the rate of 8.5% annually for the first six months after issuance and
periodically increases in increments of 1% to 2% per annum to a maximum
interest rate 42 months after issuance of 15.5%. In the event of an event of
default under the subordinated acquisition note, interest will accrue at a rate
of 2% above the then

                                     F-26

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

applicable rate. The subordinated acquisition note is subordinated to all of
Hanover's indebtedness other than indebtedness to fund future acquisitions. In
the event that Hanover completes an offering of equity securities, Hanover is
required to apply the proceeds of the offering to repay amounts outstanding
under the subordinated acquisition note as long as no default exists or would
exist under our other indebtedness as a result of such payment.

   Schlumberger has the right under the POI acquisition agreement, so long as
Schlumberger owns at least 5% of Hanover common stock and subject to certain
restrictions, to designate one representative to sit on our board of directors.

   For each of the years ended December 31, 2001, 2000 and 1999, Hanover
generated revenues of approximately $1,379,000, $918,000 and $1,979,000,
respectively, in business dealings with Schlumberger.

   In August 2001, Hanover 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 our international business by placing our personnel in
Schlumberger's offices in six top international markets and (3) providing us
with access to consulting advice and technical assistance in enhancing our
field automation capabilities.

   During 2001, the Company sold equipment totaling approximately $12,004,000
to an affiliate of Enron Capital and Trade Resources Corp ("Enron").

   In 2000, Hanover advanced cash to certain management employees in return for
notes. At December 31, 2001, the notes receivable totaled approximately
$1,212,000, bear interest at the prime rate, mature in June 2004 and are
collateralized by Hanover common stock owned by the employees with full
recourse. The notes and related interest will be forgiven over a four-year
period should the employee continue his employment with Hanover. The
forgiveness will accelerate upon a change in control of Hanover. Hanover
recognized compensation expense related to the forgiveness of these notes
receivable that totaled $263,000 and $105,000 during 2001 and 2000,
respectively.

   In 2001, Hanover advanced cash of $2,200,000 to Mike McGhan, Chief Executive
Officer and President of Hanover, in return for notes. The notes bear interest
at 4.88%, mature on April 11, 2006 and are collateralized by personal real
estate with full recourse.

   Set forth below is certain information concerning the indebtedness of
executive officers and directors to Hanover:

<TABLE>
<CAPTION>
                                               Largest Aggregate
                          Aggregate Amount     Amount Outstanding  Weighted Average Rate
                  Year Outstanding at Year End  during each Year  of Interest at Year End
                  ---- ----------------------- ------------------ -----------------------
<S>               <C>  <C>                     <C>                <C>
Michael J. McGhan 2001       $2,200,000            $2,200,000              4.88%
Charles D. Erwin. 2001       $  632,000            $  769,000               4.8%
Joe C. Bradford.. 2001       $  580,000            $  706,000               4.8%
</TABLE>

   Management believes that the terms of the foregoing transactions were no
less favorable to Hanover than those that would otherwise be obtainable in an
arms' length transactions with unaffiliated third parties.

                                     F-27

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


17. Commitments and Contingencies

   Rent expense, excluding lease payments for the leasing transactions
described in Note 10, for 2001, 2000 and 1999 was approximately $4,008,000,
$2,159,000, and $1,320,000 respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 10 under noncancelable operating
leases with terms in excess of one year at December 31, 2001 are (in thousands
of dollars): 2002--$4,238; 2003--$3,536; 2004--$2,903; 2005--$2,078; 2006--$830
and none thereafter.

   As part of the POI Acquisition, the Company is required to make a payment of
$58,000,000 due upon the completion of a refinancing of a South American joint
venture acquired by Hanover. If the joint venture fails to execute the
refinancing or such financing fails to be non-recourse to Hanover, in either
case, on or before December 31, 2002, the Company will have the right to put
its interest in such joint venture back to Schlumberger in exchange for the
purchase price allocated to the joint venture, plus the net amount of any
capital contributions by the Company to the joint venture. The Company's right
to exercise the put expires on January 31, 2003. Since the Company expects the
financing to be completed and the $58,000,000 obligation paid in 2002, this
obligation is recorded in accrued liabilities in the accompanying balance
sheet. The purchase price is also subject to a contingent payment by Hanover to
Schlumberger based on the realization of certain tax benefits by Hanover over
the next 15 years.

   In the ordinary course of business the Company is involved in various
pending or threatened legal actions, including environmental matters. While
management is unable to predict the ultimate outcome of these actions, it
believes that any ultimate liability arising from these actions will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. See Note 22.

18. Accounting for Derivatives

   The Company adopted SFAS 133 on 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, the Company entered into two
interest rate swaps which are outstanding at December 31, 2001 with notional
amounts of $75,000,000 and $125,000,000 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 counterparty. The
difference paid or received on the swap transactions is recorded as an accrued
lease liability and recognized in leasing expense. These swap transactions
expire in July 2003. On January 1, 2001, in accordance with the transition
provisions of SFAS 133, we recorded a loss resulting from the cumulative effect
of an accounting change in the statement of income of approximately $164,000
($.00 per share), net of tax benefit of $89,000. During 2001, the Company
recognized an additional unrealized loss of approximately $7,596,000 related to
the change in the fair value of these interest rate swaps in other expense in
the statement of income because these swaps did not meet the specific hedge
criteria as a result of the counterparty's option to extend the interest rate
swaps. Further, management decided not to designate the interest rate swaps as
hedges at the time they were extended by the counterparty. At December 31,
2001, the Company recorded a $5,673,000 in accrued liabilities and $2,176,000
in other long-term liabilities related to the fair value adjustment with
respect to these interest rate swaps. The fair value of these interest rate
swaps will fluctuate with changes in interest rates over their remaining terms
and the fluctuations will be recorded in the statement of income. During the
second quarter of 2001, the Company entered into three

                                     F-28

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

additional interest rate swaps to convert variable lease payments under certain
lease arrangements to fixed payments as follows:

<TABLE>
<CAPTION>
                                         Maturity Strike     Amount
                      Lease                Date    Rate     Notional
          -----------------------------  -------- ------  ------------
          <S>                            <C>      <C>     <C>
          March   2000..................  3/11/05 5.2550% $100,000,000
          August  2000..................  3/11/05 5.2725% $100,000,000
          October  2000................. 10/26/05 5.3975% $100,000,000
</TABLE>

   These three swaps, which the Company has 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 2001, the
Company recorded a $6,073,000 loss, net of tax in other comprehensive income,
$2,569,000 in accrued current liabilities and $6,774,000 in other long-term
liabilities with respect to the fair value adjustment related to these three
swaps.

   The counterparty to all of the Company's interest rate swap agreements are
major international financial institutions. The Company continually monitors
the credit quality of these financial institutions and does not expect
non-performance by any conunterparty.

19. New Accounting Pronouncements

   In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations. This Statement is effective for all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. All business combinations in the scope of this
statement are to be accounted for using one method, the purchase method.
Companies may no longer use the pooling method for future combinations.

   In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets
("SFAS 142"). Under SFAS 142, amortization of goodwill over an estimated useful
life will be discontinued. Instead, goodwill amounts will be subject to a
fair-value-based annual impairment assessment. The standard also requires
acquired intangible assets to be recognized separately and amortized as
appropriate. SFAS 142 is effective for Hanover on January 1, 2002. However,
under the transition provisions of SFAS 142, goodwill acquired in a business
combination for which the acquisition date is after June 30, 2001, shall not be
amortized. Because the acquisition of POI was consummated after June 30, 2001,
the goodwill related to the POI acquisition was not amortized in 2001. The
goodwill related to business combinations completed before June 30, 2001
continued to be amortized in 2001 because Hanover had not adopted SFAS 142. The
Company expects the adoption of SFAS No. 142 to have an impact on future
financial statements, due to the discontinuation of goodwill amortization
expense. For 2001, goodwill amortization expense was $11,626,000 based on
goodwill of approximately $195,991,000 related to acquisitions which were
completed before June 30, 2001. The transition provisions of SFAS 142 require
the Company to perform an initial impairment assesment of goodwill by June 30,
2002. The Company is currently performing the initial assessment and evaluating
the effect the implementation of the impairment assessment provisions of SFAS
142 will have on its financial statements.

   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. This
statement is effective for Hanover effective January 1, 2003. The Company is
currently assessing the new standard and has not yet determined the impact on
its consolidated results of operations, cash flows or financial position.

   In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." The new rules supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." The new rules retain many of the fundamental recognition
and measurement provisions of SFAS No. 121, but significantly change the
criteria for classifying an asset as held-

                                     F-29

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

for-sale. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company has evaluated the new standard and believes that it will
have no material effect on its consolidated results of operations, cash flows
or financial position.

20. April 2002 Restatement

   In conjunction with a review of our joint ventures and other transactions
conducted by counsel under the direction of the Audit Committee in early 2002,
the Company determined to restate its financial statements for the year ended
December 31, 2000. The net effect of the April 2002 restatement was as follows:
(i) a decrease in revenues of $37.7 million, from $603.8 million to $566.1
million; (ii) a decrease in income before taxes of $12.0 million, from $93.5
million to $81.5 million; (iii) a decrease in net income of $7.5 million, from
$58.7 million to $51.2 million; and (iv) a decrease in earnings per common
share of $0.12 basic and $0.11 diluted for the year ended December 31, 2000.
See Note 21 for information regarding the further restatement of the 2000
consolidated financial statements.

   The transactions involved in the April 2002 restatement, which are detailed
further below are: (i) the Cawthorne Channel project in Nigeria initially
conducted through the Hampton Roads Shipping Investors II, L.L.C. joint
venture; (ii) the acquisition of two compressors in a non-monetary exchange
transaction; (iii) a compressor sale transaction; and (iv) the sale of a
turbine engine. The impact of the restatement for the year ended December 31,
2000 is summarized below:

<TABLE>
<CAPTION>
                                                                Cawthorne
                                                                 Channel
                                                                Project in Acquisitions
                                                                 Nigeria/       of
                                                                 Hampton   Compressors
                                                                  Roads      In Non-    Compressor  Sale of
                                                                  Joint      Monetary      Sale     Turbine
                                                       As Filed  Venture     Exchange   Transaction Engine   Restated
                                                       -------- ---------- ------------ ----------- -------  --------
                                                                  (in thousands except per share amounts)
<S>                                                    <C>      <C>        <C>          <C>         <C>      <C>
Revenues:
    Rentals........................................... $254,515                                              $254,515
    Parts, service and used equipment.................  151,707                          $(12,004)   (7,500)  132,203
    Compressor fabrication............................   96,838  $ (6,568)                                     90,270
    Production and processing equipment fabrication...   88,572    (9,451)                                     79,121
    Gain on sale of other assets......................    4,113              $(2,225)                           1,888
    Gain on change in interest in non-consolidated
     affiliate........................................      864                                                   864
    Other.............................................    7,220                                                 7,220

                                                       --------  --------    -------     --------   -------  --------
       Total revenues.................................  603,829   (16,019)    (2,225)     (12,004)   (7,500)  566,081

                                                       --------  --------    -------     --------   -------  --------
Expenses:
    Rentals...........................................   87,992                                                87,992
    Parts, service and used equipment.................  103,276                            (7,954)   (6,194)   89,128
    Compressor fabrication............................   81,996    (5,242)                                     76,754
    Production and processing equipment fabrication...   69,281    (6,597)                                     62,684
    Selling, general and administrative...............   54,606        26                                      54,632
    Depreciation and amortization.....................   52,882                                                52,882
    Lease expense.....................................   45,484                                                45,484
    Interest expense..................................    8,473       212                                       8,685
    Distributions on mandatorily redeemable
     convertible preferred Securities.................    6,369                                                 6,369

                                                       --------  --------    -------     --------   -------  --------
       Total expenses.................................  510,359   (11,601)                 (7,954)   (6,194)  484,610

                                                       --------  --------    -------     --------   -------  --------
Income before income taxes............................   93,470    (4,418)    (2,225)      (4,050)   (1,306)   81,471
Provision for income taxes............................   34,771    (1,644)      (827)      (1,507)     (486)   30,307

                                                       --------  --------    -------     --------   -------  --------
Net income............................................ $ 58,699  $ (2,774)   $(1,398)    $ (2,543)  $  (820) $ 51,164

                                                       ========  ========    =======     ========   =======  ========
Earnings per common share:
    Basic............................................. $   0.95                                              $   0.83
    Diluted .......................................... $   0.88                                              $   0.77
</TABLE>

                                     F-30

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                 Restatement
                                                       As filed     Items     Restated
                                                      ---------- ----------- ----------
                                                               (in thousands)
<S>                                                   <C>        <C>         <C>
Accounts receivable, net............................. $  242,526  $(19,504)  $  223,022
Inventory............................................    139,248     6,194      145,442
Costs and estimated earnings in excess of billings
  on uncompleted contracts...........................     38,665   (13,689)      24,976
Property, plant and equipment, net...................    583,586    (9,990)     573,596
Intangible and other assets, net.....................     65,707      (776)      64,931
Total assets.........................................  1,289,521   (37,765)   1,251,756
Accrued liabilities..................................     49,205    (2,500)      46,705
Other liabilities....................................    158,661   (25,766)     132,895
Deferred income taxes................................    105,369    (1,964)     103,405
Total liabilities....................................    563,278   (30,230)     533,048
Retained earnings....................................    158,895    (7,535)     151,360
Total liabilities and common stockholders' equity....  1,289,521   (37,765)   1,251,756
</TABLE>

Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture

   Cawthorne Channel is a project to build, own 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 Global Energy and
Refining Ltd. ("Global") and Shell Petroleum Development Company of Nigeria
Limited, the Nigerian operating unit of The Royal/Dutch Shell Group ("Shell").
The Company entered into a contract with Global in June 1999 to fabricate and
lease facilities to Global to assist Global in fulfilling its obligations under
its contract with Shell. Subsequently, the Company acquired a 10% interest in
Global in settlement of a $1.1 million debt owed by Global to the Company.

   In September 2000, the Company and an unrelated third party formed a joint
venture known as Hampton Roads Shipping Investors II, L.L.C. ("Hampton Roads")
which was to own the gas processing facilities and lease them to Global. The
Company held a 25% interest in Hampton Roads, and the third party held the
remaining 75% interest. The Company's initial capital contribution to Hampton
Roads was $1,250,000 and the third party's initial capital contribution was
$3,750,000. The Company entered into a turnkey construction contract with
Hampton Roads to fabricate the barges for the Cawthorne Channel project for
$51,000,000. The barges were to be used pursuant to a 10-year contract with
Shell to commence September 30, 2001. During the first quarter of 2001, the
scope of the project was reduced requiring less costly gas processing
facilities of approximately $43,000,000 and the contract term was extended to
15 years with a projected start date of September 2003. Since the lease had not
started yet, the Company recorded no income attributable to its equity
ownership in the venture.

   The Company accounted for the work performed under the turnkey construction
contract using the percentage of completion method of accounting, and recorded
75% of the revenue and net income, based on the third party's ownership share
of Hampton Roads. Based upon the discovery of a commitment by the Company to
loan Hampton Roads up to $43,500,000 for the purpose of paying the balance of
the turnkey construction contract and a guarantee by the Company to refund the
capital contributed by the third party should certain conditions not be met,
the Company concluded that it had retained substantial risk of ownership with
respect to the third party's interest. Accordingly, the Company determined to
treat the project as if the Company had owned 100% of the project from its
inception and reversed the revenue and net income previously recognized.

                                     F-31

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999



   In February 2002, the Company purchased the 75% interest in Hampton Roads
that it did not own. The Company now owns 100% of the venture and will
recognize the rental revenues pursuant to its contract with Global once startup
begins.

Acquisition of Compressors In Non-Monetary Exchange

   In the third quarter of 2000, the Company acquired two compressors in a
non-monetary exchange transaction with an independent oil and gas producer. In
the transaction, the Company acquired the two compressors in exchange for
certain gas reservoir rights that the Company had obtained in settlement of a
payment default by one of its customers. The Company accounted for the
transaction as an exchange of non-monetary assets and recorded $2,225,000 in
revenue and pre-tax income in 2000. In 2002, the Company discovered that it had
made certain guarantees with respect to the performance of the oil and gas
reservoir rights. Therefore, the Company concluded that the earnings process
was not complete in the third quarter of 2000 and that the Company retained an
ongoing risk of not recovering the fair value of the compressors received in
exchange for the oil and gas properties. Based on this analysis, the Company
restated its financial results for the third quarter of 2000 to reverse the
$2,225,000 in revenue it had originally recognized on the transaction.

Compressor Sale Transaction

   The Company sold 33 gas compressors to a gas pipeline system then controlled
by Enron for $12,004,000 pursuant to invoices issued in December 2000. The
Company recorded $4,050,000 of pre-tax income from the transaction in the
fourth quarter of 2000. In January 2001, the Company entered into an agreement
with its customer to provide transition services and settle claims between the
parties arising from the operation of the compressors prior to their sale. The
agreement also provided for the issuance of a bill of sale. Upon further
evaluation of the transaction, the Company determined to recognize revenue and
net income in January 2001 when the bill of sale was issued.

Sale of Turbine Engine

   In the fourth quarter of 2000, the Company entered the non-oil field power
generation market to take advantage of rising electricity demand and purchased
used turbines to carry out this effort. In connection with this effort, the
Company agreed to sell a turbine to a third party on extended credit and
recognized revenues of $7,500,000 and $1,306,000 of pre-tax income in the
fourth quarter of 2000. In early 2001, the third party assigned their interest
in the turbine to another unrelated third party. The Company was ultimately
paid for the turbine in December 2001. Based on the information provided to the
Company at the time of the April 2002 restatement, the Company determined that
revenue should have been recognized for this transaction in the fourth quarter
of 2001 when payment was received and collectability was assured. As a result
of the discovery of new information, the Company determined to restate the sale
of the turbine engine recorded in the fourth quarter of 2001. See "Sale and
Purchase of Turbine Engine" in Note 21.

Reclassification

   The Company determined that the deferred gain related to the 1999 and 2000
leases was calculated in error. A reclassification between property, plant and
equipment and other liabilities has been made to correct this matter. This
reclassification had no impact on net income.


                                     F-32

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999



21. November 2002 Restatement

   In October 2002, a special committee of the Board of Directors together with
the Audit Committee of the Board and company management, aided by outside legal
counsel, completed an extensive investigation of transactions recorded during
2001, 2000 and 1999, including those transactions restated by the Company in
April 2002 (see Note 20). As a result of this investigation, the Company
determined, to restate its financial results further for the years ended 2001,
2000 and 1999. The net effect of the restatement for the year ended December
31, 2001 was as follows: (i) a decrease in revenues of $7.5 million, from
$1,078.2 million to $1,070.7 million; (ii) a decrease in income before income
taxes of $0.4 million, from $117.4 million to $117.0 million; (iii) a decrease
in net income of $0.2 million, from $72.6 million to $72.4 million; and (iv) a
decrease in diluted earnings per common share of $0.01. The net effect of this
restatement for the year ended December 31, 2000 was as follows: (i) a decrease
in revenues of $3.3 million, from $566.1 million to $562.8 million; (ii) a
decrease in income before income taxes of $2.5 million, from $81.5 million to
$79.0 million; (iii) a decrease in net income of $1.6 million, from $51.2
million to $49.6 million; and (iv) a decrease in earnings per common share of
$0.03 basic and $0.02 diluted. The net effect of this restatement for the year
ended December 31, 1999 was as follows: (i) a decrease in revenues of $5.1
million, from $323.2 million to $318.1 million; (ii) a decrease in income
before income taxes of $3.1 million, from $63.6 million to $60.5 million; (iii)
a decrease in net income of $1.9 million, from $40.4 million to $38.5 million;
and (iv) a decrease in earnings per common share of $0.04 basic and $0.03
diluted.

   The transactions involved in the November 2002 restatement, which are
detailed below, are: (i) sale of compression and production equipment; (ii) a
delay penalty; (iii) a turbine sale and purchase; (iv) an agreement to provide
technical assistance to an Indonesian company; (v) a scrap sale transaction;
(vi) the sale of certain used compression equipment; and (vii) the recording of
pre-acquisition revenues associated with a business acquired by Hanover. In
addition, the Company restated the following transactions by reversing their
impact from the quarter originally recorded in 2000 and recording them in a
subsequent quarter of 2000: (i) the sale of an interest in a power plant in
Venezuela; (ii) an agreement to provide services to a company ultimately
acquired by Hanover; and (iii) the sale of four used compressors. These three
transactions are not reflected in the tables below because they had no impact
on the overall financial results for 2001 or 2000.

                                     F-33

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


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

<TABLE>
<CAPTION>
                                                                                  Sale Of
                                                                                Compression
                                                                                    And
                                                                      As Filed  Production   Delay
                                                                     April 2002  Equipment  Penalty Restated
                                                                     ---------- ----------- ------- --------
                                                                     (in thousands except per share amounts)
<S>                                                                  <C>        <C>         <C>     <C>
Revenues:
    Rentals.........................................................  $192,655                      $192,655
    Parts, service and used equipment...............................    42,518    $(3,388)            39,130
    Compressor fabrication..........................................    52,531                        52,531
    Production and processing equipment fabrication.................    28,037       (782)            27,255
    Equity in income of non-consolidated affiliate..................     1,188                         1,188
    Other...........................................................     6,291               $(920)    5,371
                                                                      --------    -------    -----  --------
       Total revenues...............................................   323,220     (4,170)    (920)  318,130
                                                                      --------    -------    -----  --------
Expenses:
    Rentals.........................................................    64,949                        64,949
    Parts, service and used equipment...............................    27,916     (1,412)            26,504
    Compressor fabrication..........................................    43,663                        43,663
    Production and processing equipment fabrication.................    20,833       (555)            20,278
    Selling, general and administrative.............................    33,782                        33,782
    Depreciation and amortization...................................    37,337                        37,337
    Lease expense...................................................    22,090                        22,090
    Interest expense................................................     8,786                         8,786
    Distributions on mandatorily redeemable convertible preferred
     Securities.....................................................       278                           278
                                                                      --------    -------    -----  --------
       Total expenses...............................................   259,634     (1,967)           257,667
                                                                      --------    -------    -----  --------
Income before income taxes..........................................    63,586     (2,203)    (920)   60,463
Provision for income taxes..........................................    23,145       (802)    (335)   22,008
                                                                      --------    -------    -----  --------
Net income..........................................................  $ 40,441    $(1,401)   $(585) $ 38,455
                                                                      ========    =======    =====  ========
Earnings per common share:
    Basic...........................................................  $   0.71                      $   0.67
    Diluted ........................................................  $   0.66                      $   0.63
</TABLE>


                                     F-34

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2000, 1999 and 1998


   The impact of the November 2002 restatement for the year ended December 31,
2000 is summarized below:

<TABLE>
<CAPTION>
                                                                                                  Sale Of
                                                Indonesia                                       Compression
                                                Technical              Sale of Used    Pre-         And
                                      As Filed  Assistance Scrap Sale  Compression  Acquisition Production   Delay
                                     April 2002  Revenue   Transaction  Equipment     Revenue    Equipment  Penalty Restated
                                     ---------- ---------- ----------- ------------ ----------- ----------- ------- --------
                                                            (in thousands, except per share amounts)
<S>                                  <C>        <C>        <C>         <C>          <C>         <C>         <C>     <C>
Revenues:
    Rentals.........................  $254,515    $(678)                                                            $253,837
    Parts, service and used
     equipment......................   132,203                                        $(2,527)     $(310)            129,366
    Compressor fabrication..........    90,270                                                                        90,270
    Production and processing
     equipment fabrication..........    79,121                                                                        79,121
    Equity in income of on-
     consolidated affiliates........     3,518                                                                         3,518
    Gain on change in interest in
     non-consolidated affiliate.....       864                                                                           864
    Other...........................     5,590                $(700)                                         $920      5,810
                                      --------    -----       -----       -----       -------      -----     ----   --------
       Total revenues...............   566,081     (678)       (700)                   (2,527)      (310)     920    562,786
                                      --------    -----       -----       -----       -------      -----     ----   --------
Expenses:
    Rentals.........................    87,992                                                                        87,992
    Parts, service and used
     equipment......................    89,128                            $ 600        (1,434)                        88,294
    Compressor fabrication..........    76,754                                                                        76,754
    Production and processing
     equipment fabrication..........    62,684                                                                        62,684
    Selling, general and
     administrative.................    54,632                                                                        54,632
    Depreciation and amortization...    52,882                                                                        52,882
    Lease expense...................    45,484                                                                        45,484
    Interest expense................     8,685                                                                         8,685
    Distributions on mandatorily
     redeemable convertible
     preferred Securities...........     6,369                                                                         6,369
                                      --------    -----       -----       -----       -------      -----     ----   --------
       Total expenses...............   484,610                              600        (1,434)                       483,776
                                      --------    -----       -----       -----       -------      -----     ----   --------
Income before income taxes..........    81,471     (678)       (700)       (600)       (1,093)      (310)     920     79,010
Provision for income taxes..........    30,307     (258)       (266)       (228)         (415)      (118)     349     29,371
                                      --------    -----       -----       -----       -------      -----     ----   --------
Net income..........................  $ 51,164    $(420)      $(434)      $(372)      $  (678)     $(192)    $571   $ 49,639
                                      ========    =====       =====       =====       =======      =====     ====   ========
Earnings per common share:
    Basic...........................  $   0.83                                                                      $   0.80
    Diluted ........................  $   0.77                                                                      $   0.75
</TABLE>

<TABLE>
<CAPTION>
                                                                 Restatement
                                                       As filed     Items     Restated
                                                      ---------- ----------- ----------
                                                               (in thousands)
<S>                                                   <C>        <C>         <C>
Accounts receivable, net............................. $  223,022   $(1,963)  $  221,059
Inventory............................................    145,442      (750)     144,692
Property, plant and equipment, net...................    573,596     1,107      574,703
Goodwill.............................................    141,973    (3,300)     138,673
Intangible and other assets, net.....................     38,479      (678)      37,801
Total assets.........................................  1,251,756    (5,584)   1,246,172
Deferred income taxes................................    103,405    (2,073)     101,332
Total liabilities....................................    533,048    (2,073)     530,975
Retained earnings....................................    151,360    (3,511)     147,849
Total liabilities and common stockholders' equity....  1,251,756    (5,584)   1,246,172
</TABLE>

                                     F-35

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The impact of the November 2002 restatement for the year ended December 31,
2001 is summarized below:

<TABLE>
<CAPTION>
                                                                                                     Sale Of
                                                              Indonesia  Overstatement             Compression
                                                     Turbine  Technical   of Mark to                   And
                                          As Filed   Sale and Assistance    Market     Scrap Sale  Production
                                         April 2002  Purchase  Revenue      Expense    Transaction  Equipment   Restated
                                         ----------  -------- ---------- ------------- ----------- ----------- ----------
                                                             (in thousands, except per share amounts)
<S>                                      <C>         <C>      <C>        <C>           <C>         <C>         <C>
Revenues:
   Rentals.............................. $  400,776                                                            $  400,776
   Parts, service and used equipment....    251,816  $(7,500)   $(276)                                            244,040
   Compressor fabrication...............    223,519                                                               223,519
   Production and processing
    equipment fabrication...............    184,040                                                               184,040
   Equity in income of non-
    consolidated affiliates.............      9,350                                                                 9,350
   Other................................      8,708                                       $264                      8,972
                                         ----------  -------    -----    -------------    ----        -----    ----------
      Total.............................  1,078,209   (7,500)    (276)                     264                  1,070,697
                                         ----------  -------    -----    -------------    ----        -----    ----------
Expenses:
   Rentals..............................    140,998                                                               140,998
   Parts, service and used equipment....    172,743   (6,194)    (428)                                $ 716       166,837
   Compressor fabrication...............    188,122                                                               188,122
   Production and processing
    equipment fabrication...............    147,824                                                               147,824
   Selling, general and administrative..    100,980                                                               100,980
   Depreciation and amortization........     90,560                                                                90,560
   Lease expense........................     70,435                                                                70,435
   Interest expense.....................     17,540                                                                17,540
   Foreign currency translation.........      6,658                                                                 6,658
   Distributions on mandatorily
    redeemable convertible preferred
    securities..........................      6,373                                                                 6,373
   Other................................     18,566                          (1,243)                               17,323
                                         ----------  -------    -----       -------       ----        -----    ----------
      Total expenses....................    960,799   (6,194)    (428)       (1,243)                    716       953,650
                                         ----------  -------    -----       -------       ----        -----    ----------
Income before income taxes..............    117,410   (1,306)     152         1,243        264         (716)      117,047
Provision for income taxes..............     44,609     (496)      58           472        100         (273)       44,470
                                         ----------  -------    -----       -------       ----        -----    ----------
Net income before cumulative effect of
 accounting change......................     72,801     (810)      94           771        164         (443)       72,577
   Cumulative effect of accounting
    change for derivative instruments,
    net of income tax...................       (164)                                                                 (164)
                                         ----------  -------    -----       -------       ----        -----    ----------
Net income.............................. $   72,637  $  (810)   $  94       $   771       $164        $(443)   $   72,413
                                         ==========  =======    =====       =======       ====        =====    ==========
Earnings per common share:
   Basic................................ $     1.00                                                            $     1.00
   Diluted.............................. $     0.95                                                            $     0.94
</TABLE>

<TABLE>
<CAPTION>
                                                             Restatement
                                                   As filed     Items     Restated
                                                  ---------- ----------- ----------
                                                           (in thousands)
<S>                                               <C>        <C>         <C>
Inventory........................................ $  216,405   $  (750)  $  215,655
Property, plant and equipment, net...............  1,153,691    (2,178)   1,151,513
Goodwill, net....................................    245,478    (3,300)     242,178
Intangible and other assets......................     79,615      (962)      78,653
Total assets.....................................  2,272,966    (7,190)   2,265,776
Other liabilities................................    131,519    (1,243)     130,276
Deferred income taxes............................    167,704    (2,212)     165,492
Total liabilities................................  1,143,513    (3,455)   1,140,058
Retained earnings................................    223,997    (3,735)     220,262
Total liabilities and common stockholders' equity  2,272,966    (7,190)   2,265,776
</TABLE>

                                     F-36

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


Sale of Compression and Production Equipment

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

Delay Penalty

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

Turbine Engine Sale and Purchase

   As described in Note 20 under the heading "Sale of Turbine Engine" above, in
the fourth quarter of 2000, the Company entered into an agreement to sell a
turbine to a third party. In the April 2002 restatement, based on information
provided to the Company at that time, the Company restated the transaction to
recognize the $7,500,000 in revenue in the fourth quarter of 2001, when full
payment was received. Through the Company's subsequent investigation, it
discovered that in the fourth quarter of 2001, the Company purchased an
interest in a turbine engine package from a third party for $8,000,000. The
third party was the same entity that had ultimately purchased the Company's
turbine engine. Based upon an evaluation of this new information, the Company
has determined to account for these transactions as a non-monetary exchange,
rather than a sale and purchase transaction. Accordingly, the revenue and
related expense which was recorded in the fourth quarter of 2001 was reversed.

Indonesian Technical Assistance Revenue

   In the second quarter of 2000, the Company entered into an agreement to
provide technical assistance services to an independent oil and gas producer in
Indonesia. Under the agreement, the Company purchased for $1.1 million an
option to acquire a controlling interest in the Indonesian company as well as
certain inventory. Based on the agreement, the Company recognized revenue of
$378,000 in the first quarter of 2000, $300,000 in the second quarter of 2000,
$138,000 in the second quarter of 2001, and $138,000 in the third quarter of
2001. The Company has determined, following a review of the transaction, that
the payments made to the Company are more properly characterized as a return of
the Company's investment in the option rather than as payments for the
provision of services. Accordingly, the Company determined that the payments
received from the Indonesian company should be recorded as a return of
investment in the option instead of revenue.

                                     F-37

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


Overstatement of Mark to Market Expense

   In the fourth quarter of 2001, the Company overstated by $1,243,000 the mark
to market expense related to its interest rate swaps that are recorded in other
expense.

Scrap Sale Transaction

   In the third quarter of 2000, the Company recorded $700,000 of revenue from
the sale of scrap inventory to an independent salvage metal company, pursuant
to invoices issued in September 2000. Based upon the evaluation of when the
scrap inventory was delivered and paid for in connection with this transaction,
the Company has determined that no revenue should have been recorded in 2000
and that it should have recognized $264,000 in revenue on this transaction in
the fourth quarter of 2001. Accordingly, the $700,000 of revenue was reversed
in 2000.

Sale of Used Compression Equipment

   In the fourth quarter of 2000, the Company recognized $1,500,000 in revenue
and $1,200,000 in pre-tax income from the sale of used compression equipment by
a Company subsidiary. The compression equipment was acquired as a result of the
acquisition of a subsidiary by the Company less than six months prior to the
sale of the equipment. Upon further evaluation of the transaction, the Company
determined that the compression equipment should have been valued at $900,000
(instead of $300,000) in the allocation of the purchase price and the gain on
the sale should be reduced by $600,000 with a corresponding adjustment made to
reduce goodwill.

Pre-Closing Revenue

   In the second quarter of 2000, the Company completed negotiations for the
acquisition of used equipment companies. The Company entered into acquisition
agreements with effective dates of June 1, 2000 which were not completed until
July 2000. The Company recorded $2,085,000 in revenue and $965,000 in pre-tax
income in the second quarter of 2000 and $442,000 in revenue and $128,000 in
pre-tax income in the third quarter of 2000, reflecting the results of the
acquired entities for the period between the effective date of the acquisitions
and the closing of the acquisitions. Upon further evaluation of this matter,
the Company determined that these pre-closing results should not have been
recorded.

Power Plant Sale

   In the second quarter of 2000, the Company sold a 25% interest in a
Venezuelan power plant to Energy Transfer Group, LLC ("ETG") in an exchange of
non similar assets. The Company accounted for the transaction as a sale and
recorded a gain on sale of other assets of $1,250,000 in the second quarter of
2000. In 2000, the Company and ETG also discussed the possible purchase by the
Company of an interest in a power generation facility in Florida with the
Company making a payment toward that purchase in the second quarter of 2000. In
the fourth quarter of 2000, these discussions resulted in the purchase by
Hanover of a 10% interest in ETG. Upon further evaluation of this transaction,
the Company determined that the revenue and pre-tax income from the exchange of
the interest in the Venezuelan power plant should be moved from the second
quarter of 2000 to the fourth quarter of 2000 to align with the completion of
the exchange.

Management Fee Transaction

   In the second quarter of 2000 the Company recorded $450,000 in revenue for
management services provided to Ouachita Energy Corporation, a compression
services company, pursuant to an invoice dated June 30, 2000. In the third
quarter of 2000, the Company reversed the revenue, because the management fee
was not agreed to by both parties until the fourth quarter of 2000. Upon
further evaluation of the transaction, the Company determined that the reversal
of revenue should have occurred in the second quarter of 2000.

                                     F-38

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


Compressor Sale Transaction

   In connection with the sale of four compressors, the Company recorded
revenue of $1,486,000 and pre-tax income of $1,081,000 in the first quarter of
2000, and revenue of $750,000 and pre-tax income of $468,000 in the third
quarter of 2000. Based upon further examination of the transaction, the Company
has determined that it should have recognized the income from this transaction
in the fourth quarter of 2000, when title to the equipment was transferred,
rather than in the first and third quarters of 2000.

22. Subsequent Events

   Commencing in February 2002, approximately 15 putative securities class
action lawsuits were filed against the Company and certain of its officers and
directors in the United States District Court of the Southern District of
Texas. These class actions have been 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-CV-0410, naming as
defendants Hanover Compressor Company, Mr. Michael J. McGhan, Mr. William S.
Goldberg and Mr. Michael A. O'Connor. The plaintiffs in the securities actions
purport to represent purchasers of the Company's common stock during various
periods ranging from May 15, 2000 through January 28, 2002. The complaints
assert various claims under Section 10(b) and 20(a) of the Securities Exchange
Act of 1934 and seek unspecified amounts of compensatory damages, interest and
costs, including legal fees. Motions are pending for appointment of lead
plaintiff(s). A consolidated complaint is due 30 days after the Court appoints
lead plaintiff(s).

   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. The derivative actions in the United States District Court for the
Southern District of Texas were consolidated on August 19 and August 26, 2002.
Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas. The pending
derivative lawsuits are:

<TABLE>
<CAPTION>
        Plaintiff               Defendants       Civil Action No.         Court          Date Instituted
------------------------- ---------------------- ---------------- ---------------------- ---------------
<S>                       <C>                    <C>              <C>                    <C>
Harbor Finance Partners,  Michael J. McGhan,        H-02-0761     United States District    03/01/02
derivatively on behalf of William S. Goldberg,                    Court for the Southern
Hanover Compressor        Ted Collins, Jr.,                       District of Texas
Company                   Robert R. Furgason,
                          Melvyn N. Klein,
                          Michael A. O'Connor,
                          Alvin V. Shoemaker,
                          Defendants and Hanover
                          Compressor Company,
                          Nominal Defendant

Roger Koch,               Michael A. O'Connor,      H-02-1332     United States District    4/10/02
derivatively on behalf of William S. Goldberg,                    Court for the Southern
Hanover Compressor        Melvyn N. Klein,         Consolidated   District of Texas
Company                   Michael J. McGhan,      with H-02-0761
                          Ted Collins, Jr.,         on 8/19/02
                          Robert R. Furgason,
                          Rene J. Huck,
                          Alvin V. Shoemaker,
                          Victor E. Grijalva,
                          Gordon T. Hall,
                          I. Jon Brumley,
                          Defendants and Hanover
                          Compressor Company,
                          Nominal Defendant
</TABLE>

                                     F-39

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
    Plaintiff            Defendants        Civil Action No.           Court           Date Instituted
------------------ ----------------------- ---------------- ------------------------- ---------------
<S>                <C>                     <C>              <C>                       <C>

Henry Carranza,    Michael A. O'Connor,       H-02-1430     United States District       4/18/02
derivatively on    William S. Goldberg,                     Court for the Southern
behalf of Hanover  Melvyn N. Klein,          Consolidated   District of Texas
Compressor Company Michael J. McGhan,       with H-02-0761
                   Ted Collins, Jr.,          on 8/19/02
                   Robert R. Furgason,
                   Rene J. Huck,
                   Alvin V. Shoemaker,
                   Victor E. Grijalva,
                   Gordon T. Hall,
                   I. Jon Brumley,
                   Defendants and Hanover
                   Compressor Company,
                   Nominal Defendant
William Steves,    Michael A. O'Connor,       H-02-1527     United States District       4/27/02
derivatively on    William S. Goldberg,                     Court for the Southern
behalf of Hanover  Melvyn N. Klein,          Consolidated   District of Texas
Compressor Company Michael J. McGhan,       with H-02-0761
                   Ted Collins, Jr.,          on 8/19/02
                   Robert R. Furgason,
                   Rene J. Huck,
                   Alvin V. Shoemaker,
                   Victor E. Grijalva,
                   Gordon T. Hall,
                   I. Jon Brumley,
                   Defendants and Hanover
                   Compressor Company,
                   Nominal Defendant

John B. Hensley,   Michael J. McGhan,         H-02-2994     270th Judicial District,     6/20/02
Jr., derivatively  William S. Goldberg,                     Harris County, Texas;
on behalf of       Michael A. O'Connor,      Consolidated   removed to the United
Hanover Compressor Ted Collins, Jr.,        with H-02-0761  States District Court
Company            Alvin Shoemaker,           on 8/26/02    for the Southern
                   Robert R. Furgason,                      District of Texas on
                   Melvyn N. Klein,                         August 9, 2002
                   Charles D. Erwin, and
                   PricewaterhouseCoopers
                   LLP, Defendants and
                   Hanover Compressor
                   Company, Nominal
                   Defendant

Coffelt Family,    Michael A. O'Conner,        19410-NC     Court of Chancery for the    02/15/02
LLC, derivatively  Michael J. McGhan,                       State of Delaware State
on behalf of       William S. Goldberg,                     Court in New Castle
Hanover Compressor Ted Collins, Jr.,                        County
Company            Melvyn N. Klein,
                   Alvin V. Shoemaker,
                   and Robert R. Furgason,
                   Defendants and Hanover
                   Compressor Company,
                   Nominal Defendant
</TABLE>

   These derivative lawsuits, which were filed by certain of our shareholders
against our Board of Directors purportedly on behalf of the Company, allege,
among other things, that our directors breached their fiduciary duties to
shareholders and seek unspecified amounts of damages, interest and costs,
including legal fees. The Board of Directors has formed a Special Litigation
Committee to address the issues raised by the derivative suits. Subject to the
work of that Committee and the Board's instructions, we intend to defend these
cases vigorously.

   The putative class action securities lawsuit and the derivative lawsuits are
at an early stage. Consequently, it is premature at this time to predict
whether we will incur any liability or to estimate the damages, or the range of
damage, if any, that we might incur in connection with such actions, or whether
an adverse outcome could have a material adverse effect on our business,
consolidated financial condition, results of operations or cash flows.

                                     F-40

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   On November 14, 2002, the Securities and Exchange Commission issued a Formal
Order of Private Investigation relating to the matters involved in the
restatements of our financial results. We are cooperating fully with the Fort
Worth District office staff of the Securities and Exchange Commission. It is
too soon to determine whether the outcome of this inquiry will have a material
adverse effect on our business, financial condition, results of operations or
cash flows.

Management Changes

   On July 30, the Company announced the resignation of William S. Goldberg as
vice chairman and a member of the board of directors, effective August 31,
2002. On August 2, 2002, the Company announced the resignations of Chief
Executive Officer Michael J. McGhan and Chief Operating Officer Charles D.
Erwin, and Chairman Victor E. Grijalva was appointed by the board of directors
to serve as Chief Executive Officer pending completion of a search for a
replacement. On August 20, 2002, the Company announced the election of Chad
Deaton, former executive vice president of Schlumberger Oilfield Services, as
president, chief executive officer and a director.

23. Industry Segments and Geographic Information

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

   The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include equity in income of nonconsolidated
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. Capital
expenditures include fixed asset purchases.

   No single customer accounts for 10% or more of the Company's revenues for
all periods presented. One vendor accounted for approximately $41,200,000 of
the Company's purchases in 2000.

                                     F-41

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

   The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 2001,
2000 and 1999.

  Industry Segments

<TABLE>
<CAPTION>
                                                      Parts,
                                                      service              Production
                            Domestic   International and used  Compressor   equipment
                            rentals       rentals    equipment fabrication fabrication  Other   Eliminations Consolidated
                            --------   ------------- --------- ----------- ----------- -------- ------------ ------------
                                                      (in thousands of dollars)
<S>                         <C>        <C>           <C>       <C>         <C>         <C>      <C>          <C>
2001: (Restated)
   Revenues from external
    customers.............. $269,874     $130,902    $244,040   $223,519    $184,040   $ 18,322               $1,070,697
   Intersegment sales......                 2,858      72,930    112,748       7,110      4,600  $(200,246)
                            --------     --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.......  269,874      133,760     316,970    336,267     191,150     22,922   (200,246)    1,070,697
   Gross profit............  174,671       85,107      77,203     35,397      36,216     18,322                  426,916
   Identifiable assets.....  982,073      557,697     119,411    191,593     192,888    222,114                2,265,776
   Capital expenditures....  470,374      137,805       6,763        399      24,626     20,118                  660,085
   Depreciation and
    amortization...........   45,743       33,685       2,996      4,774       3,362                              90,560
2000: (Restated)
   Revenues from external
    customers.............. $172,517     $ 81,320    $129,366   $ 90,270    $ 79,121   $ 10,192               $  562,786
   Intersegment sales......                 1,200      31,086     89,963       3,653      7,413  $(133,315)
                            --------     --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.......  172,517       82,520     160,452    180,233      82,774     17,605   (133,315)      562,786
   Gross profit............  112,181       53,664      41,072     13,516      16,437     10,192                  247,062
   Identifiable assets.....  428,332      431,362      13,226    202,390     125,377     45,485                1,246,172
   Capital expenditures....  214,425       58,801                    874         723                             274,823
   Depreciation and
    amortization...........   30,102       15,117         160      4,381       3,122                              52,882
1999: (Restated)
   Revenues from external
    customers.............. $136,430     $ 56,225    $ 39,130   $ 52,531    $ 27,255   $  6,559               $  318,130
   Intersegment sales......                 1,200      38,656     75,139       4,821             $(119,816)
                            --------     --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.......  136,430       57,425      77,786    127,670      32,076      6,559   (119,816)      318,130
   Gross profit............   90,246       37,460      12,626      8,868       6,977      6,559                  162,736
   Identifiable assets.....  432,572      249,800                 41,252      24,007      5,756                  753,387
   Capital expenditures....  180,593       99,535                  1,469       1,343                             282,940
   Depreciation and
    amortization...........   24,448       11,158                    702       1,029                              37,337
</TABLE>

  Geographic Data

<TABLE>
<CAPTION>
                                         United States International Consolidated
                                         ------------- ------------- ------------
                                                (in thousands of dollars)
<S>                                      <C>           <C>           <C>
2001: (Restated)
   Revenues from external customers.....  $  760,439     $310,258     $1,070,697
   Identifiable assets(1)...............  $1,319,084     $946,692     $2,265,776

2000: (Restated)
   Revenues from external customers.....  $  440,799     $121,987     $  562,786
   Identifiable assets..................  $  760,105     $486,067     $1,246,172

1999: (Restated)
   Revenues from external customers.....  $  257,992     $ 60,138     $  318,130
   Indentifiable assets.................  $  500,414     $252,973     $  753,387
</TABLE>
--------
(1) Identifiable assets for international operations include approximately
    $264,000,000 related to Venezuela, of which approximately $152,443,000
    relates to the joint ventures acquired in connection with the POI
    acquisition completed in August 2001.

                                     F-42

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


24. Other Expenses

   Other expenses during 2001 were $17,323,000 which included a $2,750,000
bridge loan commitment fee associated with Hanover's acquisition of POI, a
$5,013,000 write down of an investment in Aurion, a $965,000 litigation
settlement, $7,596,000 from the recognition of an unrealized loss related to
the change in fair value of the interest rate swaps as required under SFAS 133
(see Note 18 to Consolidated Financial Statements) and $999,000 in other
non-operating expenses.

                                     F-43

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                  SELECTED QUARTERLY UNAUDITED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                       1st         2nd      3rd       4th
                                                     quarter     quarter  quarter  quarter(1)
                                                     --------    -------- -------- ----------
                                                     (in thousands, except per share amounts)
<S>                                                  <C>         <C>      <C>      <C>
2001: (Restated)
   Revenue(3)....................................... $229,944    $245,429 $282,294  $313,030
   Gross profit(3)..................................   93,368      97,006  113,583   122,959
   Net income(3)....................................   19,809      20,752   19,848    12,004
   Earnings per common and common equivalent share:
       Basic(3)..................................... $   0.30    $   0.30 $   0.27  $   0.15
       Diluted(3)................................... $   0.27    $   0.28 $   0.26  $   0.14

2000: (Restated)
   Revenue(4)....................................... $ 89,611    $112,689 $147,470  $213,016
   Gross profit(4)..................................   47,787      52,656   63,899    82,720
   Net income(4)....................................   10,832      10,743   11,870    16,194
   Earnings per common and common equivalent share:
       Basic(2)(4).................................. $   0.19    $   0.18 $   0.19  $   0.24
       Diluted(2)(4)................................ $   0.17    $   0.17 $   0.17  $   0.23
</TABLE>
--------
(1) The Company incurred other expenses during the fourth quarter of 2001 which
    included a $5,013,000 write down of an investment in Aurion, a $965,000
    litigation settlement, and $999,000 in other non-operating expenses. In
    addition, the Company incurred a $5,511,000 translation loss related to its
    foreign operations, primarily in Argentina and Venezuela.
(2) In June 2000, the Company completed a 2-for-1 stock split effected in the
    form of a 100% stock dividend. All weighted average and common equivalent
    shares and earnings per common share information have been restated for all
    periods presented to reflect this stock split.
(3) The Company restated the 2001 quarters for certain revenue recognition
    matters as disclosed in each quarter's Form 10-Q/A and in Notes 20 and 21.
    The aggregate impact of the April and November restatements was as follows:

<TABLE>
<CAPTION>
                                                   1st        2nd        3rd        4th
                                                 quarter    quarter    quarter    quarter
-                                               ---------- ---------- ---------- ----------
                                                Increase/  Increase/  Increase/  Increase/
                                                (Decrease) (Decrease) (Decrease) (Decrease)
                                                ---------- ---------- ---------- ----------
                                                 (in thousands, except per share amounts)
<S>                                             <C>        <C>        <C>        <C>
Revenue........................................  $10,025    $(17,657)  $17,489    $(7,512)
Gross profit...................................    3,480      (2,964)   (3,366)       353
Net income.....................................    1,180      (2,652)   (2,616)       218
Earnings per common and common equivalent share
   Basic.......................................  $  0.02    $  (0.03)  $ (0.04)   $  0.01
   Diluted.....................................  $  0.01    $  (0.03)  $ (0.03)   $  0.00
</TABLE>


                                     F-44

<PAGE>

(4) The Company restated its 2000 results for certain revenue recognition
    matters as disclosed in Notes 20 and 21. The aggregate impact of the April
    and November restatements was as follows:

<TABLE>
<CAPTION>
                                                   1st        2nd        3rd        4th
                                                 quarter    quarter    quarter    quarter
                                                ---------- ---------- ---------- ----------
                                                Increase/  Increase/  Increase/  Increase/
                                                (Decrease) (Decrease) (Decrease) (Decrease)
                                                ---------- ---------- ---------- ----------
                                                 (in thousands, except per share amounts)
<S>                                             <C>        <C>        <C>        <C>
Revenue........................................   $ (946)   $(4,395)   $(15,111)  $(20,591)
Gross profit...................................     (539)    (3,275)     (5,740)    (4,668)
Net income.....................................     (333)    (2,030)     (3,540)    (3,157)
Earnings per common and common equivalent share
   Basic.......................................   $   --    $ (0.03)   $  (0.05)  $  (0.05)
   Diluted.....................................   $(0.01)   $ (0.03)   $  (0.06)  $  (0.04)
</TABLE>

                                     F-45

<PAGE>

                                  SCHEDULE II

                          HANOVER COMPRESSOR COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                            Additions
                                                 Balance at Charged to               Balance at
                                                 Beginning  Costs and                  End of
                  Description                    of Period   Expenses   Deductions     Period
                  -----------                    ---------- ---------- ----------    ----------
<S>                                              <C>        <C>        <C>           <C>
Allowance for doubtful
  accounts deducted from
  accounts receivable in the
  balance sheet--
   2001......................................... $2,659,000 $4,860,000 $1,219,000(1) $6,300,000
   2000.........................................  1,730,000  3,198,000  2,269,000(1)  2,659,000
   1999.........................................  1,212,000  1,476,000   958,000 (1)  1,730,000
Allowance for obsolete and slow moving inventory
  deducted from inventories in the balance sheet
   2001(3)...................................... $  560,000 $2,336,000 $  795,000(2) $2,101,000
</TABLE>
--------
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory written off at cost, net of value received.
(3) Amounts for 2000 and 1999 were not material.

                                      S-1