<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                Form 10-K/A

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

(MARK ONE)

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

                    For fiscal year ended December 31, 1999

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

            For the transition period from            to           .

                           Commission File No. 1-3071

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

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

              Delaware                                 76-0625124
   (State or Other Jurisdiction of        (I.R.S. Employer 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:

<TABLE>
<CAPTION>
            Title of each class             Name of each exchange in which registered
            -------------------             -----------------------------------------
<S>                                         <C>
       Common Stock, $.001 par value              New York Stock Exchange, Inc.
</TABLE>

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

                                 Title of class
                                      None

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

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

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

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

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000 (to be filed on or before April 30,
2000) are incorporated by reference into Part II, as indicated herein.

   The Index to Exhibits is on page E-1.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>


                             EXPLANATORY NOTE

   Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 1999 in order to
restate the Financial Statements and revise the Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company
determined that its obligation to GKH Partners, L.P. for services performed
should have been accrued as a liability over the life of the agreement. The net
effect, after adjusting for income tax of $271,000, is a $461,000 decrease in
net income from $18,103,000 to $17,642,000 for the year ended December 31,
1997, a $782,000 reduction in retained earnings at January 1, 1997 and a
corresponding $1,243,000 reduction in retained earnings at December 31, 1999
and 1998. See Note 18 of the Notes to Consolidated Financial Statements.

                                       2
<PAGE>


                        HANOVER COMPRESSOR COMPANY

                             TABLE OF CONTENTS

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

ITEM 7
  Management's Discussion and Analysis of Financial Condition and Results
   of Operations..........................................................   5

ITEM 8
  Financial Statements and Supplementary Data.............................  10

                                 PART IV
ITEM 14
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K........  10
</TABLE>

                                       3
<PAGE>


Item 6. Selected Financial Data

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

   The following table presents certain selected financial data for the Company
for each of the five years in the period ended December 31, 1999. Certain
financial data for the years presented have been restated as described in Note
18 to the Consolidated Financial Statements. The selected financial data have
been derived from the audited consolidated financial statements of the Company.
The following information should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
                                         Year Ended December 31,
                              -------------------------------------------------
                                1999      1998   1997(6)  1996(6)    1995(1)(6)
                              --------  -------- -------- -------    ----------
<S>                           <C>       <C>      <C>      <C>        <C>
Income Statement Data:
Revenues:
 Rentals....................  $192,655  $147,609 $100,685 $72,897     $43,859
 Parts and service..........    34,461    23,870   10,254   6,458       4,495
 Compressor fabrication.....    52,531    67,453   49,764  28,764      29,593
 Production equipment
  fabrication...............    28,037    37,466   37,052  26,903      16,960
 Gain on sale of property,
  plant & equipment.........     5,927     2,552      148     352         412
 Other......................     3,417     3,007      895     637         645
                              --------  -------- -------- -------     -------
   Total revenues...........   317,028   281,957  198,798 136,011      95,964
                              ========  ======== ======== =======     =======
Expenses:
 Rentals....................    64,949    49,386   35,113  26,012      13,691
 Parts and service..........    21,724    17,341    6,360   4,788       4,122
 Compressor fabrication.....    43,663    58,144   41,584  24,657      25,265
 Production equipment
  fabrication...............    20,833    25,781   26,375  19,574      13,178
 Selling, general and
  administrative............    33,782    26,626   21,514  16,711      13,555
 Depreciation and
  amortization(2)...........    37,337    37,154   28,439  20,722      13,494
 Leasing expense............    22,090     6,173
 Interest expense...........     8,786    11,716   10,728   6,594       4,560
 Distributions on
  mandatorily redeemable
  convertible preferred
  securities................       278
                              --------  -------- -------- -------     -------
   Total expenses...........   253,442   232,321  170,113 119,058      87,865
                              --------  -------- -------- -------     -------
Income before income taxes..    63,586    49,636   28,685  16,953       8,099
Provision for income taxes..    23,145    19,259   11,043   6,730       3,109
                              --------  -------- -------- -------     -------
Net income..................  $ 40,441  $ 30,377 $ 17,642 $10,223     $ 4,990
                              --------  -------- -------- -------     -------
Other comprehensive income
 (loss), net of tax:
 Foreign currency
  translation adjustment....      (463)      152
                              --------  -------- -------- -------     -------
Comprehensive income........  $ 39,978  $ 30,529 $ 17,642 $10,223     $ 4,990
                              ========  ======== ======== =======     =======
Net income available to
 common stockholders:
 Net Income.................  $ 40,441  $ 30,377 $ 17,642 $10,223     $ 4,990
 Dividends on Series A and
  Series B preferred
  stock.....................                               (1,773)       (832)
 Series A preferred stock
  exchange..................                               (3,794)
 Series B preferred stock
  conversion................                               (1,400)
                              --------  -------- -------- -------     -------
Net income available to
 common stockholders........  $ 40,441  $ 30,377 $ 17,642 $ 3,256     $ 4,158
                              ========  ======== ======== =======     =======
Weighted average common and
 common equivalent shares
 outstanding:
 Basic(5)...................    57,048    56,936   51,246  40,996      28,746
                              --------  -------- -------- -------     -------
 Diluted(5).................    61,054    60,182   54,690  44,046      30,716
                              --------  -------- -------- -------     -------
Earnings per common share:
 Basic(5)...................  $   0.71  $   0.53 $   0.34 $  0.08     $  0.14
                              ========  ======== ======== =======     =======
 Diluted(5).................  $   0.66  $   0.50 $   0.32 $  0.07(3)  $  0.14
                              ========  ======== ======== =======     =======
</TABLE>

                                       4
<PAGE>

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                             --------------------------------------------------
                               1999      1998    1997(6)   1996(6)   1995(1)(6)
                             --------  --------  --------  --------  ----------
<S>                          <C>       <C>       <C>       <C>       <C>
Other Data:
 EBITDA (4)................  $132,077  $104,679  $ 67,852  $ 44,269   $ 26,153
                             ========  ========  ========  ========   ========
Cashflows provided by (used
 in):
 Operating activities......  $ 68,222  $ 31,147  $ 32,219  $ 20,276   $  9,088
 Investing activities......   (92,114)  (14,699) (164,490)  (87,683)   (68,474)
 Financing activities......    18,218    (9,328)  129,510    71,740     62,206
Balance Sheet Data (end of
 period):
 Working capital...........  $107,966  $113,264  $ 58,027  $ 41,513   $ 23,270
 Net property, plant and
  equipment................   497,465   392,498   394,070   266,406    198,074
 Total assets..............   756,510   614,590   506,452   341,387    252,313
 Long-term debt............    69,681   156,943   158,838   122,756     50,451
 Mandatorily redeemable
  convertible preferred
  securities...............    86,250
 Preferred stockholders'
  equity...................                                             26,894
 Common stockholders'
  equity...................   367,914   315,470   287,028   176,113    138,678
</TABLE>
--------
(1) The selected historical financial information includes the results of
    operations of the Company and its wholly-owned subsidiaries. During 1995,
    the Company acquired Astra Resources Compression, Inc., a significant
    subsidiary.

(2) In order to more accurately reflect the estimated useful lives of natural
    gas compressor units in the rental fleet; effective January 1, 1996 the
    Company changed the lives over which these units are depreciated from 12
    to 15 years. The effect of this change was a decrease in depreciation
    expense of $2.6 million and an increase in net income of $1.5 million
    ($.03 per diluted common share) for the year ended December 31, 1996.

(3) Diluted earnings per share in 1996 was $.23 per share before the effects
    of charging retained earnings for $1.8 million relating to dividends on
    redeemable preferred stock and one time charges to retained earnings for
    (i) $3.8 million related to the exchange of all Series A preferred stock
    for subordinated notes and (ii) $1.4 million related to the conversion of
    all Series B preferred stock to Common Stock.
(4) EBITDA consists of the sum of consolidated net income before interest
    expense, lease expense, distributions on mandatorily redeemable
    convertible preferred securities, income tax, and depreciation and
    amortization. The Company believes that EBITDA is a meaningful measure of
    its operating performance and is also used to measure the Company's
    ability to meet debt service requirements. EBITDA should not be considered
    as an alternative performance measure prescribed by generally accepted
    accounting principles.

(5) In June 2000, 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.

(6) Restated as discussed in Note 18 to the Consolidated Financial Statements.
    The net effect of the restatement on the periods presented was an increase
    in selling, general and administrative expenses of $732,000, $272,000, and
    $1,013,000; a decrease in net income of $461,000, $158,000, and $624,000;
    and a decrease in earnings per common share of basic: $.01, $.00 and $.03
    and diluted: $.01, $.01, and $.02 for the years ended December 31, 1997,
    1996 and 1995, respectively.

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 the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.

GENERAL

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

                                       5
<PAGE>

   The following table summarizes revenues, expenses and gross profit
percentages for each of the Company's business segments (Dollars in millions):
<TABLE>
<CAPTION>
                                                         Year ended December
                                                                 31,
                                                         ----------------------
                                                          1999    1998    1997
                                                         ------  ------  ------
<S>                                                      <C>     <C>     <C>
Revenues:
  Rentals--Domestic..................................... $136.5  $107.4  $ 78.7
  Rentals--International................................   56.2    40.2    22.0
  Compressor fabrication................................   52.5    67.5    49.8
  Production equipment fabrication......................   28.0    37.5    37.1
  Other.................................................   43.8    29.4    11.2
                                                         ------  ------  ------
    Total............................................... $317.0  $282.0  $198.8
                                                         ======  ======  ======
Expenses:
  Rentals--Domestic..................................... $ 46.2  $ 36.6  $ 27.5
  Rentals--International................................   18.8    12.8     7.6
  Compressor fabrication................................   43.7    58.1    41.6
  Production equipment fabrication......................   20.8    25.8    26.4
  Other.................................................   21.7    17.4     6.3
                                                         ------  ------  ------
    Total............................................... $151.2  $150.7  $109.4
                                                         ======  ======  ======
Gross profit percentage:
  Rentals--Domestic.....................................   66.1%   65.9%   65.1%
  Rentals--International................................   66.6%   68.2%   65.5%
  Compressor fabrication................................   16.8%   13.8%   16.5%
  Production equipment fabrication......................   25.7%   31.2%   28.8%
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.

Revenues

   The Company's total revenues increased by $35.0 million, or 12%, to $317.0
million during 1999 from $282.0 million during 1998. The increase resulted from
growth of the Company's natural gas compressor rental fleet but was offset by
decreases in compressor fabrication and production equipment fabrication
revenues.

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

   Revenue from parts and service increased by $10.6 million, or 44% to $34.5
million during 1999 from $23.9 million during 1998. Revenues from the
fabrication and sale of compressor equipment to third parties decreased by
$15.0 million, or 22%, to $52.5 million during 1999 from $67.5 million during
1998. An aggregate of 147,000 horsepower was sold during 1999. In addition,
130,000 horsepower was fabricated and placed in the rental fleet during 1999.
The Company believes the revenue decrease during 1999 was due in part to a
project where a customer supplied its own engines, which are typically provided
by the Company, and in part to lower energy prices earlier in 1999, which
reduced the demand for compressors thereby adversely impacting sales prices.

   Revenues from the fabrication and sale of production equipment decreased by
$9.5 million, or 25%, to $28.0 million during 1999 from $37.5 million during
1998 primarily due to the decline in well completions resulting from lower
energy prices during the first half of 1999.

                                       6
<PAGE>

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

Expenses

   Operating expenses of the rentals segments increased by $15.6 million, or
32% to $65.0 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts and
service increased $4.4 million, or 25% to $21.7 million during 1999 from $17.3
million during 1998, which relates to the 44% increase in parts and service
revenue. The gross profit percentage from parts and service increased to 37%
during 1999 from 27% in 1998. Operating expenses of compressor fabrication
decreased by $14.4 million, or 25% to $43.7 million from $58.1 million during
1998. The gross profit margin on compression fabrication increased to 17%
during 1999, from 14% during 1998. Production equipment fabrication operating
expenses decreased by $5.0 million, or 19%, during 1999 to $20.8 million from
$25.8 million during 1998. The decrease in operating expenses is reflective of
the corresponding change in production equipment fabrication revenues during
1999. The gross profit margin attributable to production equipment fabrication
decreased to 26% during 1999, from 31% during 1998.

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

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

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

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

Income Taxes

   The provision for income taxes increased by $3.8 million, or 20%, to $23.1
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 36.4% during 1999 and 38.8% during
1998. The decrease in average effective income rates is due to expected
benefits from a foreign sales corporation established in 1998.

Net Income and Earnings Per Share

   Net income increased $10.1 million, or 33%, to $40.4 million for 1999 from
$30.4 million in 1998 for the reasons discussed above.

                                       7
<PAGE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Revenues

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

Expenses

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

   Selling, general and administrative expenses increased by $5.1 million, or
24% to $26.6 million during 1998. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals and compression
fabrication operating segments as well as increased administrative costs
relating to being a public reporting entity. Depreciation and amortization
expense increased by $8.7 million, or 31% during 1998 to $37.1 million as the
Company continued to expand its rental fleet with capital expenditures and net
business acquisitions that amounted to approximately $212.0 million. In
addition, the company sold certain compression equipment with a book value of
approximately $158.0 million in July, 1998 under a sale and lease back
arrangement. See "LIQUIDITY AND CAPITAL RESOURCES" for a description of the
Equipment Lease. Consequently, the Company incurred compression equipment lease
expense of $6.2 million during 1998. As a result of the Equipment Lease, the
Company expects to incur annual operating lease expense of approximately $14
million. Interest expense increased by $1.0 million, or 9% during 1998 to $11.7
million.

Income Taxes

   The Company's effective income tax rate was approximately 39% during 1998
and during 1997. Accordingly, the provision for income taxes increased by $8.2
million, or 74%, during 1998 to $19.3 million as a result of income before
income taxes increasing by 73% during 1998 over 1997.

Net Income and Earnings Per Share

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

                                       8
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

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

   The Company's cash balance amounted to $5.8 million at December 31, 1999
compared to $11.5 million at December 31, 1998. Primary sources of cash during
1999 were cash provided by internal operations of $68.2 million, net proceeds
of $200 million from the sale of compression equipment under the Equipment
Lease and net proceeds of $82.9 million from the private offering of the
Convertible Preferred Securities. Principal uses of cash during the year ended
December 31, 1999 were capital expenditures of $282.9 million, business
combinations and investments in unconsolidated entities of $40.2 million and
$72.8 million repayment of long-term debt.

   Total current assets increased from $165.1 million at December 31, 1998 to
$192.5 million at December 31, 1999 primarily as a result of increases in
accounts receivable and inventories. Accounts receivable at December 31, 1999
increased by $23.5 million to $93.7 million. The increase corresponds with 18%
increase in total revenue of $94.3 million realized by the Company during the
three months ended December 31, 1999 compared to $79.8 million during the three
months ended December 31, 1998. In addition, inventories increased by $3.5
million to $66.5 million at December 31, 1999. The increase in inventories
reflects increases in parts and supplies, work in progress and finished goods
as the level of activity in the Company's domestic and international rentals
increased over 1998. Working capital at December 31, 1999 was also affected by
an $32.8 million increase in total current liabilities at December 31, 1999 to
$84.6 million. The 63% increase in total current liabilities results largely
from the increase in vendor accounts payable caused by the expansion of the
Company's operating activities and also due to the Subordinated Notes in the
aggregate principal amount of $15.4 million becoming due on December 31, 2000.

   The amounts invested in property, plant and equipment and business
combinations during 1999 was $318.3 million which resulted in the addition of
approximately 391,000 horsepower to the rental fleet. At December 31, 1999, the
rental fleet consisted of 1,181,000 horsepower domestically and 277,000 in the
international rental fleet. Current plans are to spend in excess of $250
million during 2000, exclusive of any major acquisition, in continued expansion
of the rental fleet. Historically, the Company has funded capital expenditures
with a combination of internally generated cash flow, borrowings under the
revolving credit facility, lease transactions and raising additional equity. As
of December 31, 1999 the Company had approximately $138 million of credit
capacity remaining on its $200 million Bank Credit Agreement (7.7% rate at
December 31, 1999). In March 2000, the Company finalized a third sale and lease
back transaction. Under the agreement, the Company received $100 million
proceeds from the sale of the compression equipment at closing and may sell an
additional $100 million of equipment to the Trust during the next twelve
months. The equipment sold will be leased back by the Company for a five-year
period and will continue to be deployed by

                                       9
<PAGE>

the Company under its normal operating procedures. Hanover has the option to
repurchase the equipment from the Trust at any time. The Company feels it has
adequate capital resources to fund its estimated level of capital expenditures
for the year 2000.

Impact of Year 2000

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

New Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that, upon
adoption, all derivative instruments (including certain derivative instruments
embedded in other contracts) be recognized in the balance sheet at fair value,
and that changes in such fair values be recognized in earnings unless specific
hedging criteria are met. Changes in the values of derivatives that meet these
hedging criteria will ultimately offset related earnings effects of the hedged
item pending recognition in earnings. SFAS 133 is effective for the Company
beginning in 2001. The impact of SFAS 133 on the Company's financial
statements will depend on a variety of factors, including future interpretive
guidance from the FASB, the future level of actual foreign currency
transactions, the extent of our hedging activities, the type of hedging
instruments used and the effectiveness of such instruments. However management
does not believe the effect of adoption will have a material effect on the
Company's results of operations, cash flows or financial position.

Item 8. Financial Statements and Supplementary Data

   In this report, the consolidated financial statements and supplementary
data appearing on pages F-1 through F-22 are incorporated in this item 8 by
reference. See Index to the Financial Statements at 19.

                                    PART IV

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

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

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

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

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

                                      10
<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

                                                 /s/ Michael J. McGhan
                                          By: _________________________________
                                                     Michael J. McGhan
                                               President and Chief Executive
                                                          Officer

   Date: February 2, 2001

   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.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
      /s/ Michael J. McGhan            President and Chief         February 2, 2001
______________________________________  Executive Officer
          Michael J. McGhan             (Principal Executive
                                        Officer and Director)

     /s/ William S. Goldberg           Chief Financial Officer     February 2, 2001
______________________________________  and Treasurer (Principal
         William S. Goldberg            Financial and Accounting
                                        Officer)

       /s/ Ted Collins, Jr.            Director                    February 2, 2001
______________________________________
           Ted Collins, Jr.

      /s/ Robert R. Furgason           Director                    February 2, 2001
______________________________________
          Robert R. Furgason

       /s/ Melvyn N. Klein             Director                    February 2, 2001
______________________________________
           Melvyn N. Klein

     /s/ Michael A. O'Connor           Director                    February 2, 2001
______________________________________
         Michael A. O'Connor

        /s/ Alvin V. Shoemaker         Director                    February 2, 2001
______________________________________
            Alvin V. Shoemaker
</TABLE>


                                       11
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
   3.1   Certificate of Incorporation of the Hanover Compressor Holding Co.(9)

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

   3.3   By-laws of Hanover Compressor Company(9)

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

   4.10  Form of Warrant Agreement (1) [4.10]

   4.11  Specimen Stock Certificate (1) [4.11]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      E-1
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  10.14  Lease Agreement, dated December 4, 1990, between Hanover Compressor
         Company and Ricardo J. Guerra and Luis J. Guerra as amended (1)
         [10.15]

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

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

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

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

  10.19  1997 Stock Purchase Plan (1) [10.24]

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

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

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

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

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

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

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

  10.27  1998 Stock Option Plan (4) [10.7]

  10.28  December 10, 1998 Stock Option Plan (5)

  10.29  1999 Stock Option Plan (5)
  10.30  1998 Amendments to Credit Agreement, dated as of December 15, 1997,
         with the Chase Manhattan Bank, a New York banking corporation as
         Administrative Agent and several banks and other financial
         institutions that are parties thereto (7)[10.35]

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

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

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

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

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

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


                                      E-2
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

  12.1   Computation of ratio of earnings to fixed charges*

  21.1   List of Subsidiaries(9)

  23.1   Consent of PricewaterhouseCoopers LLP*

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

(9)  Such exhibit previously filed as an exhibit to the Company's Annual Report
     on Form 10-K for the Year Ended 1999 and is incorporated by reference.

*Filed herewith.

                                      E-3
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                         Page
                                                                         ----
   <S>                                                                   <C>
   Report of Independent Accountants.................................... F-1
   Consolidated Balance Sheet........................................... F-2
   Consolidated Statement of Income and Comprehensive Income............ F-3
   Consolidated Statement of Cash Flows................................. F-4,F-5
   Consolidated Statement of Common Stockholders' Equity................ F-6
   Notes to Consolidated Financial Statements........................... F-7
   Selected Quarterly Financial Data (unaudited)........................ F-22
</TABLE>
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Hanover Compressor Company

   In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income, of cash flows and
of common stockholders' equity present fairly, in all material respects, the
financial position of Hanover Compressor Company and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   As described in Note 18, the December 31, 1997 consolidated financial
statements have been restated to record a liability to a stockholder.

PricewaterhouseCoopers LLP

Houston, Texas

March 8, 2000, except as to
the stock split described in
Note 16 which is as of
June 14, 2000, and except for
Note 18 as to which the date
is February 1, 2001

                                      F-1
<PAGE>

                           HANOVER COMPRESSOR COMPANY

                           Consolidated Balance Sheet

                           December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                Restated
                                                              (See Note 18)
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
                                                            (in thousands of
                                                             dollars, except
                                                            for par value and
                                                             share amounts)
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $  5,756  $ 11,503
  Accounts receivable, net.................................   93,715    70,205
  Inventory................................................   66,562    63,044
  Costs and estimated earnings in excess of billings on
   uncompleted contracts...................................    4,782     7,871
  Prepaid taxes............................................   16,430     9,466
  Other current assets.....................................    5,287     2,967
                                                            --------  --------
    Total current assets...................................  192,532   165,056
                                                            --------  --------
Property, plant and equipment:
  Compression equipment and facilities.....................  520,403   422,896
  Land and buildings.......................................   19,000    15,044
  Transportation and shop equipment........................   27,616    21,667
  Other....................................................   10,029    11,119
                                                            --------  --------
                                                             577,048   470,726
  Accumulated depreciation.................................  (79,583)  (78,228)
                                                            --------  --------
    Net property, plant and equipment......................  497,465   392,498
                                                            --------  --------
Intangible and other assets................................   66,513    57,036
                                                            --------  --------
                                                            $756,510  $614,590
                                                            ========  ========
        LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt..................... $ 15,967  $    444
  Accounts payable, trade..................................   32,308    23,361
  Accrued liabilities......................................   22,065    17,599
  Advance billings.........................................   13,328     9,694
  Billings on uncompleted contracts in excess of costs and
   estimated earnings......................................      898       694
                                                            --------  --------
    Total current liabilities..............................   84,566    51,792
Long-term debt.............................................   69,681   156,943
Other liabilities..........................................   82,566    44,875
Deferred income taxes......................................   65,533    45,510
                                                            --------  --------
    Total liabilities......................................  302,346   299,120
                                                            --------  --------
Mandatorily redeemable convertible preferred securities....   86,250
Commitments and contingencies (Note 15)
Common stockholders' equity:
  Common stock, $.001 par value; 200 million shares
   authorized; 57,505,874 and 57,180,944 shares issued and
   outstanding, respectively...............................       58        57
  Additional paid-in capital...............................  272,944   268,977
  Notes receivable--employee stockholders..................   (3,387)  (10,146)
  Accumulated other comprehensive income...................     (311)      152
  Retained earnings........................................  100,196    59,755
  Treasury stock--167,394 and 351,094 common shares,
   respectively, at cost...................................   (1,586)   (3,325)
                                                            --------  --------
    Total common stockholders' equity......................  367,914   315,470
                                                            --------  --------
                                                            $756,510  $614,590
                                                            ========  ========
</TABLE>

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

                                      F-2
<PAGE>

                           HANOVER COMPRESSOR COMPANY

           Consolidated Statement of Income and Comprehensive Income

                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                  1999      1998       1997
                                                --------  -------- -------------
                                                                     Restated
                                                                   (See Note 18)
                                                     (in thousands, except
                                                      per share amounts)
<S>                                             <C>       <C>      <C>
Revenues:
  Rentals.....................................  $192,655  $147,609   $100,685
  Parts and service...........................    34,461    23,870     10,254
  Compressor fabrication......................    52,531    67,453     49,764
  Production equipment fabrication............    28,037    37,466     37,052
  Gain on sale of property, plant and
   equipment..................................     5,927     2,552        148
  Other.......................................     3,417     3,007        895
                                                --------  --------   --------
                                                 317,028   281,957    198,798
                                                --------  --------   --------
Expenses:
  Rentals.....................................    64,949    49,386     35,113
  Parts and service...........................    21,724    17,341      6,360
  Compressor fabrication......................    43,663    58,144     41,584
  Production equipment fabrication............    20,833    25,781     26,375
  Selling, general and administrative.........    33,782    26,626     21,514
  Depreciation and amortization...............    37,337    37,154     28,439
  Leasing expense.............................    22,090     6,173
  Interest expense............................     8,786    11,716     10,728
  Distributions on mandatorily redeemable
   convertible preferred securities...........       278
                                                --------  --------   --------
                                                 253,442   232,321    170,113
                                                --------  --------   --------
Income before income taxes....................    63,586    49,636     28,685
Provision for income taxes....................    23,145    19,259     11,043
                                                --------  --------   --------
Net income....................................    40,441    30,377     17,642
                                                --------  --------   --------
Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustment.....      (463)      152
                                                --------  --------   --------
Comprehensive income..........................  $ 39,978  $ 30,529   $ 17,642
                                                ========  ========   ========
Net income available to common stockholders...  $ 40,441  $ 30,377   $ 17,642
                                                ========  ========   ========
Weighted average common and common equivalent
 shares outstanding
  Basic.......................................    57,048    56,936     51,246
                                                ========  ========   ========
  Diluted.....................................    61,054    60,182     54,690
                                                ========  ========   ========
Earnings per common share
  Basic.......................................  $   0.71  $   0.53   $   0.34
                                                ========  ========   ========
  Diluted.....................................  $   0.66  $   0.50   $   0.32
                                                ========  ========   ========
</TABLE>

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

                                      F-3
<PAGE>

                           HANOVER COMPRESSOR COMPANY

                      Consolidated Statement of Cash Flows

                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                1999      1998        1997
                                              --------  --------  -------------
                                                                    Restated
                                                                  (See Note 18)
                                                 (in thousands of dollars)
<S>                                           <C>       <C>       <C>
Cash flows from operating activities:
 Net income.................................. $ 40,441  $ 30,377    $ 17,642
 Adjustments:
  Depreciation and amortization..............   37,337    37,154      28,439
  Amortization of debt issuance costs and
   debt discount.............................      884       852         892
  Bad debt expense...........................    1,475       349         594
  Gain on sale of property, plant and
   equipment.................................   (5,927)   (2,552)       (148)
  Equity in income of nonconsolidated
   affiliates................................   (1,188)   (1,369)        206
  Deferred income taxes......................   11,396    12,358       5,962
  Changes in assets and liabilities, net of
   effects of business combinations:
   Accounts receivable.......................  (23,974)  (28,337)    (13,604)
   Inventory.................................   (1,918)  (24,169)    (14,726)
   Costs and estimated earnings versus
    billings on uncompleted contracts........    3,293    (3,000)      2,929
   Accounts payable and other liabilities....   11,969    14,358       7,728
   Advance billings..........................    3,634     2,942          51
   Other.....................................   (9,200)   (7,816)     (3,746)
                                              --------  --------    --------
    Net cash provided by operating
     activities..............................   68,222    31,147      32,219
                                              --------  --------    --------
Cash flows from investing activities:
 Capital expenditures........................ (282,940) (169,498)   (150,995)
 Proceeds from sale of property, plant and
  equipment..................................  223,037   208,644       2,887
 Cash used for business acquisitions, net....  (35,311)  (42,581)     (6,287)
 Cash returned from unconsolidated
  subsidiary.................................    8,000
 Cash used to acquire investments in
  unconsolidated subsidiaries................   (4,900)  (11,264)    (10,095)
                                              --------  --------    --------
    Net cash used in investing activities....  (92,114)  (14,699)   (164,490)
                                              --------  --------    --------
Cash flows from financing activities:
 Net borrowings (repayments) on revolving
  credit facility............................  (64,400)   (4,700)     63,681
 Proceeds from issuance of long-term debt....              2,825       5,000
 Issuance of common stock, net...............                         92,088
 Equity issuance costs.......................                           (687)
 Proceeds from mandatorily redeemable
  convertible preferred securities, net......   82,940
 Proceeds from warrant conversions and stock
  option exercises...........................      545       121
 Repayment of long-term debt.................   (8,357)   (2,226)    (31,757)
 Purchase of treasury stock..................             (5,950)
 Repayments of shareholder notes.............    7,490       602       1,185
                                              --------  --------    --------
    Net cash provided by (used in) financing
     activities..............................   18,218    (9,328)    129,510
                                              --------  --------    --------
Effect of exchange rate changes on cash and
 equivalents.................................      (73)     (178)
                                              --------  --------    --------
Net increase (decrease) in cash and cash
 equivalents.................................   (5,747)    6,942      (2,761)
Cash and cash equivalents at beginning of
 year........................................   11,503     4,561       7,322
                                              --------  --------    --------
Cash and cash equivalents at end of year..... $  5,756  $ 11,503    $  4,561
                                              ========  ========    ========
</TABLE>

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

                                      F-4
<PAGE>

                           HANOVER COMPRESSOR COMPANY

                      Consolidated Statement of Cash Flows

                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                      1999      1998     1997
                                                     -------  --------  -------
                                                         (in thousands of
                                                             dollars)
<S>                                                  <C>      <C>       <C>
Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized amounts......... $ 7,897  $ 10,992  $10,069
                                                     =======  ========  =======
  Income taxes paid................................. $12,065  $  2,249  $ 5,857
                                                     =======  ========  =======
Supplemental disclosure of noncash transactions:
  Debt issued for property, plant and equipment.....                    $   379
                                                                        =======
  Property sold in exchange for note receivable..... $ 3,538  $  1,500
                                                     =======  ========
  Common stock issued in exchange for notes
   receivable....................................... $   731            $ 5,163
                                                     =======            =======
Acquisitions of businesses:
  Property, plant and equipment acquired............ $39,105  $ 31,015
                                                     =======  ========
  Other noncash assets acquired..................... $ 9,711  $ 25,000
                                                     =======  ========
  Liabilities assumed............................... $(1,578) $ (1,261)
                                                     =======  ========
  Deferred taxes.................................... $(8,627) $(12,174)
                                                     =======  ========
  Common stock issued............................... $(3,300) $ (3,300)
                                                     =======  ========
</TABLE>


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

                                      F-5
<PAGE>

                           HANOVER COMPRESSOR COMPANY

             Consolidated Statement of Common Stockholders' Equity

                  Years Ended December 31, 1999, 1998 and 1997

                  (in thousands of dollars, except share data)

<TABLE>
<CAPTION>
                                                        Accumulated               Notes
                            Common Stock    Additional     Other               Receivable--
                          -----------------  Paid-in   Comprehensive Treasury    Employee     Retained
                            Shares   Amount  Capital      Income      Stock    Stockholders   Earnings
                          ---------- ------ ---------- ------------- --------  ------------ -------------
                                                                                              Restated
                                                                                            (See Note 18)
<S>                       <C>        <C>    <C>        <C>           <C>       <C>          <C>
Balance at January 1,
 1997...................  45,877,082  $46    $171,319                $  (218)    $(6,770)     $ 11,736
Issuance of common
 stock..................  10,327,686   10      92,078
Issuance of common stock
 to employees...........     529,570    1       5,162                             (5,163)
Repayment of employee
 shareholder notes......                                                           1,185
Net income..............                                                                        17,642
                          ----------  ---    --------                -------     -------      --------
Balance at December 31,
 1997...................  56,734,338   57     268,559                   (218)    (10,748)       29,378
Conversion of warrants..     396,960
Exercise of stock
 options................      49,646              120
Other comprehensive
 income.................                                   $ 152
Purchase of 588,400
 treasury shares, at
 cost...................                                              (5,950)
Issuance of 300,000
 treasury shares at
 $11.00 per share.......                          457                  2,843
Repayment of employee
 shareholder notes......                                                             602
Other...................                         (159)
Net income..............                                                                        30,377
                          ----------  ---    --------      -----     -------     -------      --------
Balance at December 31,
 1998...................  57,180,944   57     268,977        152      (3,325)    (10,146)       59,755
Conversion of warrants..      52,678    1
Exercise of stock
 options................     197,352              545
Other comprehensive
 loss...................                                    (463)
Issuance of common stock
 to employees...........      74,900              731                               (731)
Issuance of 183,700
 treasury shares at
 $17.96 per share.......                        1,561                  1,739
Repayment of employee
 shareholder notes......                                                           7,490
Income tax benefit from
 stock options
 exercised..............                        1,176
Other...................                          (46)
Net income..............                                                                        40,441
                          ----------  ---    --------      -----     -------     -------      --------
Balance at December 31,
 1999...................  57,505,874  $58    $272,944      $(311)    $(1,586)    $(3,387)     $100,196
                          ==========  ===    ========      =====     =======     =======      ========
</TABLE>

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

                                      F-6
<PAGE>

                           HANOVER COMPRESSOR COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1999, 1998 and 1997

1. The Company, Business and Significant Accounting Policies

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

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

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

Principles of Consolidation

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

Use of Estimates in the Financial Statements

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

Cash and Cash Equivalents

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

Revenue Recognition

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

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


                                      F-7
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


Concentrations of Credit Risk

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

Inventory

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

Property, Plant and Equipment

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

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

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

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

Long-Lived Assets

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

Intangible and Other Assets

   Investments in affiliated corporations in which the Company does not have a
controlling interest are accounted for using the equity method. The excess of
cost over net assets of acquired businesses is recorded as

                                      F-8
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997

goodwill and amortized on a straight-line basis over 15 years commencing on the
dates of the respective acquisitions. Accumulated amortization was $3,822,000
and $1,810,000 at December 31, 1999 and 1998, respectively.

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

Stock-Based Compensation

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

Income Taxes

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

Foreign Currency Translation

   The financial statements of subsidiaries outside the U.S., except those
located in highly inflationary economies, are measured using the local currency
as the functional currency. Assets, including goodwill, and liabilities of
these subsidiaries are translated at the rates of exchange at the balance sheet
date. Income and expense items are translated at average monthly rates of
exchange. The resulting gains and losses from the translation of accounts are
included in accumulated other comprehensive income. For subsidiaries located in
highly inflationary economies, translation gains and losses are included in net
income. The resulting translation adjustment for the year ended December 31,
1997 was not significant.

Earnings Per Common Share

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

   Included in diluted shares are common stock equivalents relating to options
of 3,296,000, 2,460,000 and 2,306,000 in 1999, 1998 and 1997, respectively, and
warrants of 712,000, 786,000 and 1,138,000 in 1999, 1998 and 1997,
respectively. The common stock equivalents excluded from the computation of
diluted earnings per share as the effect would be anti-dilutive were
approximately 212,000 and 292,000 in 1999 and 1998. No common stock equivalents
were anti-dilutive in 1997.

                                      F-9
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


Comprehensive Income

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

Financial Instruments

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

Reclassifications

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

2. Business Combinations

   Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included
in the revised purchase price allocation. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods the adjustments are determined. The Company's management does not
believe potential deviations between its fair value estimates and actual fair
values to be material.

Year Ended December 31, 1999

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

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

Year Ended December 31, 1998

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

                                      F-10
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


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

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                   ---------------------------
                                                       1999           1998
                                                   ------------   ------------
                                                   (unaudited)    (unaudited)
      <S>                                          <C>            <C>
      Revenue.....................................  $    323,002   $    308,870
      Net income..................................        40,412         31,391
      Earnings per common share--basic............  $       0.71   $       0.55
      Earnings per common share--diluted..........  $       0.66   $       0.52
</TABLE>

Year Ended December 31, 1997

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

3. Inventory

   Inventory consisted of the following amounts (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                ----------------
                                                                  1999    1998
                                                                -------- -------
      <S>                                                       <C>      <C>
      Parts and supplies....................................... $ 44,058 $32,808
      Work in progress.........................................   18,677  19,962
      Finished goods...........................................    3,827  10,274
                                                                -------- -------
                                                                $ 66,562 $63,044
                                                                ======== =======
</TABLE>

4. Compressor and Production Equipment Fabrication Contracts

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

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

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

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

                                      F-11
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


5. Intangible and Other Assets

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

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

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

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

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

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

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

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

                                      F-12
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


6. Accrued Liabilities

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

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

7. Long-Term Debt

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

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

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

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

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

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

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

                                      F-13
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


8. Leasing Transactions

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

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

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

9. Income Taxes

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

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                        ------------------------
                                                          1999    1998    1997
                                                        -------- ------- -------
      <S>                                               <C>      <C>     <C>
      Domestic......................................... $ 47,741 $39,160 $22,864
      Foreign..........................................   15,845  10,476   5,821
                                                        -------- ------- -------
                                                        $ 63,586 $49,636 $28,685
                                                        ======== ======= =======
</TABLE>

                                      F-14
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


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

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                         1999    1998    1997
                                                        ------- ------- -------
      <S>                                               <C>     <C>     <C>
      Current tax expense:
        Federal........................................ $ 6,958 $ 3,421 $ 3,308
        State..........................................   1,412   1,741   1,281
        Foreign........................................   3,379   1,739     492
                                                        ------- ------- -------
          Total current................................  11,749   6,901   5,081
                                                        ------- ------- -------
      Deferred tax expense:
        Federal........................................  10,670  10,312   4,272
        State..........................................     151      85     (23)
        Foreign........................................     575   1,961   1,713
                                                        ------- ------- -------
          Total deferred...............................  11,396  12,358   5,962
                                                        ------- ------- -------
      Total provision.................................. $23,145 $19,259 $11,043
                                                        ======= ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     ------------------------
                                                      1999     1998    1997
                                                     -------  ------- -------
      <S>                                            <C>      <C>     <C>
      Federal income tax at statutory rates......... $22,255  $17,373 $10,040
      State income taxes, net of federal income tax
       benefit......................................   1,016    1,187     817
      Foreign income taxes..........................     211       33     226
      Other, net....................................    (337)     666     (40)
                                                     -------  ------- -------
                                                     $23,145  $19,259 $11,043
                                                     =======  ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                              December 31,
                                                           -------------------
                                                             1999       1998
                                                           ---------  --------
      <S>                                                  <C>        <C>
      Deferred tax assets:
        Net operating losses.............................. $   7,490  $  3,345
        Alternative minimum tax carryforward..............    19,005    13,276
        Other.............................................     2,346     4,457
                                                           ---------  --------
      Gross deferred tax assets...........................    28,841    21,078
                                                           ---------  --------
      Deferred tax liabilities:
        Property, plant and equipment.....................   (82,764)  (58,249)
        Other.............................................   (11,610)   (8,339)
                                                           ---------  --------
      Gross deferred tax liabilities......................   (94,374)  (66,588)
                                                           ---------  --------
                                                           $(65,533)  $(45,510)
                                                           =========  ========
</TABLE>

   The Company has net operating loss carryforwards at December 31, 1999 of
$21,400,000 expiring in 2006 to 2018. In addition, the Company has an
alternative minimum tax credit carryforward of $19,005,000 that does not
expire.


                                      F-15
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997

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

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

10. Mandatorily Redeemable Convertible Preferred Securities

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

11. Common Stockholders' Equity

Notes Receivable-Employee Stockholders

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

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

Other

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

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

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

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

                                      F-16
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


12. Stock Options

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

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

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

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

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

Options Outstanding December 31, 1999

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

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

                                      F-17
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


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

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

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

13. Benefit Plans

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

14. Related Party Transactions

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

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

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

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

                                      F-18
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


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

15. Commitments and Contingencies

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

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

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

16. Subsequent Events

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

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

17. Industry Segments and Geographic Information

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

   The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" include sales of property, plant and equipment,
results of other insignificant operations, corporate related items primarily
related

                                      F-19
<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 1999, 1998 and 1997

to cash management activities and parts and service operations which are not
separately managed. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost and are
eliminated in consolidation. Identifiable assets are tangible and intangible
assets that are identified with the operations of a particular segment or
geographic region, or which are allocated when used jointly. Capital
expenditures include fixed asset purchases.

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

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

Industry Segments

<TABLE>
<CAPTION>
                                                            Production
                         Domestic International Compressor   Equipment
                         Rentals     Rentals    Fabrication Fabrication  Other  Eliminations Consolidated
                         -------- ------------- ----------- ----------- ------- ------------ ------------
                                                    (in thousands of dollars)
<S>                      <C>      <C>           <C>         <C>         <C>     <C>          <C>
1999:
  Revenues from external
   customers............ $136,430    $56,225      $52,531     $28,037   $43,805                $317,028
  Intersegment sales....               1,200       75,139       4,821    38,656  $(119,816)          --
                         --------    -------      -------     -------   -------  ---------     --------
  Total revenues........  136,430     57,425      127,670      32,858    82,461   (119,816)     317,028
  Gross profit..........   90,246     37,460        8,868       7,204    22,081                 165,859
  Identifiable assets...  529,667    149,968       47,608      23,511     5,756                 756,510
  Capital expenditures..  180,593     99,535        1,469       1,343                           282,940
  Depreciation and
   amortization.........   24,448     11,158          702       1,029                            37,337
1998:
  Revenues from external
   customers............ $107,420    $40,189      $67,453     $37,466   $29,429                $281,957
  Intersegment sales....               1,200       54,369       2,902    10,735  $ (69,206)          --
                         --------    -------      -------     -------   -------  ---------     --------
  Total revenues........  107,420     41,389      121,822      40,368    40,164    (69,206)     281,957
  Gross profit..........   70,850     27,374        9,309      11,685    12,087                 131,305
  Identifiable assets...  422,026    129,628       33,578      17,855    11,503                 614,590
  Capital expenditures..  111,289     54,830        2,524         855                           169,498
  Depreciation and
   amortization.........   28,383      7,128          701         942                            37,154
1997:
  Revenues from external
   customers............ $ 78,656    $22,029      $49,764     $37,052   $11,297                $198,798
  Intersegment sales....               1,200       48,072         462     7,775  $ (57,509)          --
                         --------    -------      -------     -------   -------  ---------     --------
  Total revenues........   78,656     23,229       97,836      37,514    19,072    (57,509)     198,798
  Gross profit..........   51,149     14,423        8,180      10,677     4,937                  89,366
  Identifiable assets...  360,362     98,421       30,088      13,020     4,561                 506,452
  Capital expenditures..  109,540     36,545          993       3,917                           150,995
  Depreciation and
   amortization.........   23,261      3,912          554         712                            28,439
</TABLE>

                                     F-20
<PAGE>

                           HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                        December 31, 1999, 1998 and 1997


Geographic Data

<TABLE>
<CAPTION>
                                              United
                                              States  International Consolidated
                                             -------- ------------- ------------
                                                  (in thousands of dollars)
<S>                                          <C>      <C>           <C>
1999:
  Revenues from external customers.......... $256,890   $ 60,138      $317,028
  Identifiable assets....................... $603,368   $153,142      $756,510
1998:
  Revenues from external customers.......... $230,605   $ 51,352      $281,957
  Identifiable assets....................... $484,269   $130,321      $614,590
1997:
  Revenues from external customers.......... $176,045   $ 22,753      $198,798
  Identifiable assets....................... $406,602   $ 99,850      $506,452
</TABLE>

18. Restatement

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

                                      F-21
<PAGE>

                           HANOVER COMPRESSOR COMPANY

                 Selected Quarterly Financial Data (unaudited)

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

<TABLE>
<CAPTION>
                                                  1st     2nd     3rd     4th
                                                Quarter Quarter Quarter Quarter
                                                ------- ------- ------- -------
                                                (in thousands, except per share
                                                           amounts)
<S>                                             <C>     <C>     <C>     <C>
1999
  Revenue...................................... $64,444 $73,799 $84,462 $94,323
  Gross profit.................................  36,947  38,681  43,373  46,858
  Net income...................................   8,639   8,482  10,388  12,932
  Earnings per common and common equivalent
   share:
    Basic...................................... $  0.15 $  0.15 $  0.18 $  0.23
    Diluted.................................... $  0.14 $  0.14 $  0.17 $  0.21
1998
  Revenue...................................... $61,449 $68,933 $71,796 $79,779
  Gross profit.................................  28,411  31,963  34,841  36,090
  Net income...................................   6,251   6,972   8,048   9,106
  Earnings per common and common equivalent
   share:
    Basic...................................... $  0.11 $  0.12 $  0.14 $  0.16
    Diluted.................................... $  0.10 $  0.12 $  0.13 $  0.15
</TABLE>

                                      F-22