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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   Form 10-K

(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, 2002

                                      or

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

              For the transition period from         to         .

                          Commission File No. 1-13071

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

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

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

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

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

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

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

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.  [_]

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

   The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of June 28, 2002: $642,210,000. For purposes of this
disclosure, common stock held by persons who hold more than 5% of the
outstanding voting shares and common stock held by executive officers and
directors of the registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

   Number of shares of the Common Stock of the registrant outstanding as of
March 21, 2003: 80,581,181 shares.

                      Documents Incorporated by Reference

   Portions of the Registrant's definitive proxy statement for the 2003 Annual
Meeting of Stockholders to be held in 2003, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2002, are
incorporated by reference into Part II and Part III.

   The Index to Exhibits begins on page 57.

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                          HANOVER COMPRESSOR COMPANY

                               TABLE OF CONTENTS

<TABLE>
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<S>          <C>                                                                        <C>
PART I
    Item 1.  Business..................................................................   3
    Item 2.  Properties................................................................  18
    Item 3.  Legal Proceedings.........................................................  19
    Item 4.  Submission of Matters to a Vote of Security Holders.......................  20

PART II
    Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.....  21
    Item 6.  Selected Financial Data...................................................  22
    Item 7.  Management's Discussion and Analysis of Financial Condition and Results of
               Operations..............................................................  24
    Item 7A. Quantitative and Qualitative Disclosures About Market Risk................  54
    Item 8.  Financial Statements and Supplementary Data...............................  55
    Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial
               Disclosure..............................................................  55

PART III
    Item 10. Directors and Executive Officers of Hanover...............................  56
    Item 11. Executive Compensation....................................................  56
    Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
               Stockholder Matters.....................................................  56
    Item 13. Certain Relationships and Related Transactions............................  56
    Item 14. Controls and Procedures...................................................  56

PART IV
    Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........  57
SIGNATURES.............................................................................  66
CERTIFICATIONS.........................................................................  67
</TABLE>

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                                    PART I

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

  .   our inability to renew our short-term leases so as to fully recoup the
      cost of acquiring or fabricating leased equipment;

  .   our inability to generate sufficient cash, access capital markets or to
      incur indebtedness to fund our business;

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

  .   changes in economic or political conditions in the countries in which we
      do business;

  .   legislative changes in the countries in which we do business;

  .   the loss of market share through competition;

  .   the introduction of competing technologies by other companies;

  .   losses due to the inherent risks associated with our operations,
      including equipment defects; malfunctions and failures and natural
      disasters;

  .   war, terrorists attacks and/or the responses thereto;

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

  .   our high level of customer concentration which intensifies the negative
      effect of the loss of one or more of our customers;

  .   our inability to comply with loan and lease covenants;

  .   the decreased financial flexibility associated with our significant cash
      requirements and substantial debt and compression equipment lease
      commitments;

  .   reduced profit margins resulting from increased pricing pressure in our
      business;

  .   our inability to successfully integrate acquired businesses;

  .   currency fluctuation;

  .   our inability to execute our exit and sale strategy with respect to
      assets classified as discontinued operations and held for sale;

  .   adverse results in shareholder or other litigation or regulatory
      proceedings; and

  .   our inability to properly implement new enterprise resource planning
      systems used for integration of our businesses.

   Other factors besides those described in this Form 10-K could also affect
our actual results. You should carefully consider the risks and uncertainties
described above and those discussed in Item 1 "Business" and in

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Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Factors That May Affect Our Financial Condition and Future
Results," of this Form 10-K in evaluating our forward-looking statements.

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

Item 1.  Business

General

   Hanover Compressor Company, ("we", "Hanover" or "the Company") Delaware
corporation, together with its subsidiaries, is a global market leader in full
service natural gas compression and a leading provider of service, fabrication
and equipment for natural gas processing and transportation applications. We
sell this equipment and provide it on a rental, contract compression,
maintenance and acquisition leaseback basis to natural gas production,
processing and transportation companies. Founded in 1990, and a public company
since 1997, our customers include both major and premier independent oil and
gas producers and distributors as well as national oil and gas companies. Our
maintenance business, together with our parts and service business, can provide
solutions to customers that own their own compression equipment, but want to
outsource their operations. We also have compressor and oil and gas production
equipment fabrication operations and provide gas processing and treating, gas
measurement and oilfield power generation services, primarily to our domestic
and international customers as a complement to our compression services.

   We believe that we are currently the largest natural gas compression company
in the United States on the basis of aggregate rental horsepower, with 6,988
rental units having an aggregate capacity of approximately 3,514,000 horsepower
at December 31, 2002. We estimate that we are one of the largest providers of
compression services in the rapidly growing Latin American and Canadian
markets, operating 787 units internationally with approximately 860,000
horsepower at December 31, 2002.

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

   We compete primarily in the market for transportable natural gas compression
units of up to 4,450 horsepower. This market for rental compression has
experienced significant growth over the past decade. Although our revenues were
impacted in 2002 by a slowdown in capital spending by oil and gas producers and
general weakness in the overall market caused by lower drilling and new well
completion activity, we believe that the gas compression market will continue
to grow due to the increased consumption of natural gas, the continued aging of
the natural gas reserve base and the attendant decline of wellhead pressures,
the discovery of new reserves and the continuing interest in outsourcing
compression by major producers. We believe that international market
opportunities will drive Hanover's growth in the years to come.

   Our total compression horsepower at December 31, 2002 was approximately
3,514,000, including certain units from acquired companies that we have
traditionally excluded from our rental utilization because these units required
maintenance and upgrade to meet our standards ("unavailable units").
Historically, we have reported our horsepower utilization rate excluding
unavailable units, but going forward we will report on a total horsepower
basis. Hanover's compression horsepower utilization rate as of December 31,
2002, on a total horsepower basis, was 78%, compared to 84% at December 31,
2001.

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   As of June 2002, the rental portion of the domestic gas compression market
was estimated by industry analysts to be at least 5.0 million horsepower, which
now accounts for approximately 31% of aggregate U.S. horsepower, having doubled
since 1996. Growth of the rental compression capacity in the U.S. market is
primarily driven by the increasing trend toward outsourcing by energy producers
and processors. We believe that outsourcing provides the customer greater
financial and operating flexibility by minimizing the customer's investment in
equipment and enabling the customer to more efficiently resize compression
units to meet changing reservoir conditions. In addition, we also believe that
outsourcing typically provides the customer with more timely and technically
proficient service and maintenance, which often reduces operating costs. We
believe growth opportunities for compressor rental and sales exist due to (i)
increased worldwide energy consumption, (ii) implementation of international
environmental and conservation laws prohibiting the flaring of natural gas,
which increases the need for gathering systems, (iii) increased outsourcing by
energy producers and processors, and (iv) the environmental soundness, economy
and availability of natural gas as an alternative energy source. The rental
compression business is capital intensive and our ability to take advantage of
these growth opportunities may be limited by our ability to raise capital to
fund our expansion. See Management's Discussion and Analysis for Results of
Operations--Liquidity and Capital Resources in Item 7 of this Form 10-K.

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

Recent Events

   During the fourth quarter of 2002, we reviewed our business lines and the
board of directors approved management's recommendation to exit and sell our
non-oilfield power generation facilities and certain used equipment business
lines. The results from these businesses are reflected as discontinued
operations in our Consolidated Financial Statements and prior periods have been
adjusted to reflect this presentation. Additionally, in the second and fourth
quarter of 2002, we recorded certain write-downs, asset impairments and
restructuring costs. A summary of these changes and the related impact to the
Company's financial results is discussed below. See Management's Discussion and
Analysis of Results of Operations in Item 7 of this Form 10-K.

   In January 2003, we exercised our right to put our interest in the PIGAP II
joint venture back to Schlumberger. If not exercised, the put right would have
expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as
part of its purchase of Production Operators Corporation from Schlumberger in
August 2001. PIGAP II is a joint venture, currently owned 70% by a subsidiary
of Williams Companies Inc. and 30% by Hanover, which operates a natural gas
compression facility in Venezuela that processes 1.2 billion standard cubic
feet per day of natural gas. The natural gas processed by PIGAP II is
re-injected into oil reservoirs for enhanced oil recovery.

   The consummation of the transfer of Hanover's interest in the PIGAP II joint
venture back to Schlumberger is subject to certain consents. We are currently
in discussions with Schlumberger to explore the possibility of entering into a
new agreement under which Hanover would retain the 30% ownership interest in
the joint venture. In light of the ongoing discussions between Hanover and
Schlumberger relating to the put, the parties have agreed to postpone the
closing date to no later than May 31, 2003.

   In February 2003, we executed an amendment to our bank credit facility and
certain compression equipment leases that we entered into in 1999 and 2000. The
amendment, which was effective as of December 31, 2002, modifies certain
financial covenants to allow us greater flexibility in accessing the capacity
under the bank credit facility to support our short-term liquidity needs. In
addition, at the higher end of our permitted consolidated leverage ratio, the
amendment would increase the commitment fee under the bank credit facility by
0.125% and increase the interest rate margins used to calculate the applicable
interest rates under all of the agreements by up to 0.75%. Any increase in our
interest cost as a result of the amendment will depend on our consolidated
leverage ratio at the end of each quarter, the amount of indebtedness
outstanding and the interest rate quoted for the

                                      4

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benchmark selected by us. As part of the amendment, we granted the lenders
under these agreements a security interest in the inventory, equipment and
certain other property of Hanover and its domestic subsidiaries, and pledged
66% of the equity interest in certain of Hanover's foreign subsidiaries. In
consideration for obtaining the amendment, we agreed to pay approximately $1.8
million in fees to the lenders under these agreements. We also agreed to a
restriction on our capital expenditures during 2003, which under the agreement
cannot exceed $200 million.

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

2002 Acquisitions

Year Ended December 31, 2002

   In July 2002, we increased our ownership of Belleli Energy S.r.l.
("Belleli"), an Italian-based engineering, procurement and construction company
that primarily engineers and manufactures desalinatization plants for use in
Europe and the Middle East, to 40.3% from 20.3% by converting a $4.0 million
loan to Belleli into additional equity ownership. In November 2002, we
increased our ownership to 51% by exchanging a $9.4 million loan to the other
principal owner of Belleli for additional equity ownership and began
consolidating the results of Belleli's operations.

   In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC
("Gates") for approximately $14.4 million and had loaned approximately $6
million to Gates prior to our acquisition. Gates is a developer and owner of a
forty-six megawatt cycle peaking power facility in Fresno County, California.
This investment is accounted for as a consolidated subsidiary and is included
in discontinued operations. See Note 3 to the Notes to the Consolidated
Financial Statements in Item 15 of this Form 10-K.

   In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC
("Panoche") for approximately $6.8 million and had loaned approximately $5
million to Panoche prior to the acquisition of our interest. Panoche is a
developer and owner of a forty-nine megawatt cycle peaking power facility in
Fresno County, California, which is under contract with California Department
of Water Resources. This investment is accounted under the equity method of
accounting and is included in discontinued operations. See Note 3 to the Notes
to the Consolidated Financial Statements in Item 15 of this Form 10-K.

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

Business Strategy

   Historically, we have generated growth in excess of industry averages fueled
by acquisitions and management focus on revenue growth. This has resulted in
Hanover becoming a market leader in outsourced compression and has allowed us
to establish sufficient critical mass to offer broad-based global solutions to
our customers' surface production and processing needs and to expand our
business lines. However, this dramatic growth has not been without its costs.
Our growth exceeded the Company's infrastructure capabilities, strained our
internal control environment, increased our leverage and hampered our ability
to integrate the operations of acquired companies into our business. Further,
in 2002, management's attention was diverted by the 2002 restatements of our
financial statements, an investigation by the Securities and Exchange
Commission and various related shareholder lawsuits. We will continue to work
on the latter two items in 2003.

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   Nevertheless, Hanover's new management team is focused on the future. Our
growth strategy includes the following key elements:

  .   Core Business Focus:  Our new management team has conducted a review of
      our business lines and has decided to exit and sell certain business
      lines. As a result, in the forth quarter of 2002, the board of directors
      approved management's recommendation to exit and sell the Company's
      non-oilfield power generation and certain used equipment business lines.
      The results from these businesses are now reflected as discontinued
      operations in our financial statements and prior periods have been
      adjusted to reflect this presentation. We anticipate completing the sale
      of these assets in 2003.

  .   Improve Operating Performance:  In conjunction with our core business
      focus, we intend to work to improve the Company's operating performance.
      We have begun to selectively introduce price increases for our domestic
      compression rental business and anticipate being able to achieve an
      average of a 1-2% increase in prices in 2003. We will also work to
      increase our domestic fleet utilization by retiring obsolete units and
      curtailing the addition of new units. Finally, we will be working to
      increase activity in our fabrication sales and parts and service
      divisions.

  .   Offer Broad-Based Solutions:  We believe that we are the only company in
      our industry that offers outsourced rental compression as well as the
      sale of compressors, oil and gas production and processing equipment and
      related services. By offering a broad range of services that complement
      our historic strengths, we believe that we can offer global solutions to
      our customers which we expect to drive growth in each of our businesses.
      With this focus, our employees can leverage our following strengths to
      pursue bottom-line growth opportunities:

      . Our leading position in the design and fabrication of compressors helps
        us meet our rental fleet growth requirements as well as the needs of
        our customers who resize or replace units on existing projects or
        obtain compression products and services for new projects.

      . Our compressor services business supplies parts and services and
        manages compression units for customers who own their units, thereby
        helping us develop relationships for future business.

      . We design and fabricate oil and gas production equipment and provide
        related services essential to the operation of recently completed oil
        and gas wells, all of which enhance our opportunity to deliver
        compression services and equipment to customers as the need develops
        over the useful life of a well.

      . As our customers look to us to provide an ever-widening array of
        outsourced services, we continue to build our core business from
        emerging business opportunities, such as turnkey gas treatment, gas
        measurement and oilfield power generation sales and services. As with
        compression, these emerging businesses are increasingly being
        outsourced by industry participants and represent an additional
        opportunity to gain incremental revenue from current and potential
        customers.

  .   Facility Consolidation and Headcount Reductions:  With our dramatic
      growth came certain redundancies in our operations. During 2003, we plan
      to reduce headcount by approximately 500 employees worldwide and
      consolidate our fabrication operations into 9 fabrication centers down
      from the 13 fabrication centers we had as of December 31, 2002. The
      estimated annualized savings from these actions are expected to be
      approximately $20 million.

  .   Capital Discipline and Leverage Reduction:  In 2003, our focus will be on
      the total return from our investments as opposed to revenue growth. We
      will work to reduce working capital and to limit our capital expenditures
      to less than our cash flow, while reducing debt with excess cash flow and
      proceeds from asset sales. In addition, we agreed in our recent amendment
      to our bank credit facility to limit our capital expenditures for 2003 to
      no more than $200 million. In 2002, capital expenditures were
      approximately $250.2 million.

  .   Integrate Systems and Operations:  In order to enable us to move quickly
      to react to our customer's needs, both domestically and internationally,
      much of 2003 will be devoted to integrating our systems

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      and operations. For example, we are currently implementing the Oracle
      Enterprise Resource Planning systems consolidating approximately 80
      different accounting and reporting systems. We estimate that
      implementation of these systems will take 18 to 24 months and will cost
      approximately $24 million. We expect that our domestic and major
      international systems will be integrated by year-end 2003.

  .   Exploit International Opportunities:  We believe international markets
      represent one of the greatest growth opportunities for our business.
      Although our international horsepower has grown significantly over the
      last six years, we continue to believe that the market is drastically
      underserved. Of total proven worldwide reserves as of December 31, 2002,
      97% are located outside the United States. We believe that the continuing
      worldwide development and implementation of oil and gas environmental and
      conservation laws prohibiting the flaring of natural gas and encouraging
      the use of gas-fired electric oilfield power generation, coupled with
      increased worldwide energy consumption, will continue to drive use of
      compression by international energy companies. In addition, we typically
      see higher pricing relative to the domestic market in international
      markets. At December 31, 2002, we had 860,000 horsepower in service
      internationally, or 24% of our total horsepower. International horsepower
      provided approximately 37% of the rental revenue for the year ended
      December 31, 2002 and approximately 33% of the rental revenue for the
      year ended December 31, 2001. Moreover, international oil and gas
      companies have traditionally purchased compression equipment, but over
      the past decade, the international energy producers have increasingly
      chosen to fulfill their compression requirements through outsourcing. We
      believe we are well positioned to exploit the opportunity created by
      these international trends.

  .   Increase Horsepower Utilization and Continue to Expand in our Existing
      Domestic Markets:  Since 1992, the percentage of aggregate compression
      horsepower outsourced by the industry has increased from nearly 20% to
      approximately 31% in 2002. This move to outsourcing has been driven by,
      among other things, the desire of producers and distributors of natural
      gas to: (1) maximize production revenue by improving mechanical run-time
      and reducing equipment maintenance and personnel costs; (2) increase
      capital available for other uses; and (3) improve operating flexibility
      by exploiting the rental company's greater asset base and extensive field
      service organization to efficiently resize compressor units to meet
      changing reservoir conditions. We believe the breadth and quality of our
      services and rental fleet, the depth of our customer relationships and
      our presence throughout the gas producing regions of the United States
      position us to capture additional outsourced business.

  .   Focus on High Horsepower Units:  The high horsepower compression segment,
      comprised of units of greater than 500 horsepower, is the fastest growing
      segment of the rental compression market. These units are typically
      installed on larger wells, gathering systems and processing and treating
      facilities whose size and generally more attractive unit economics
      largely insulate them from declining commodity prices. As a result,
      compressors in this segment tend to realize higher utilization rates. The
      greater technical requirements of these larger systems enable us to
      differentiate our compression products and services and to offer related
      products and services. Most compressors that we install internationally
      are high horsepower units. As of December 31, 2002, approximately 79% of
      our aggregate horsepower consists of high horsepower compression units.
      We believe the breadth of our experience, the quality of our service and
      of our compressor production and treatment equipment fabrication
      operations and our international experience will enable us to continue to
      capture business in this segment of the market.

  .   Capitalize on our Decentralized Management and Operating Structure:  To
      facilitate our broad-based approach we have adopted a geographical
      business unit concept and utilize a decentralized management and
      operating structure to provide superior customer service in a
      relationship-driven, service-intensive industry. We believe that our
      regionally based network, local presence, experience and in-depth
      knowledge of customers' operating needs and growth plans provide us with
      significant competitive advantages and drive internal growth. As our new
      systems are put in place, each of our geographic business unit managers
      will have primary profit and loss accountability for the unit which will
      provide greater focus on our bottom line.

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                               Industry Overview

Gas Compression

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

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

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

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

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

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

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   In order to meet customers' needs, gas compressor fabricators typically
offer a variety of services to their customers, including: (1) engineering,
fabrication and assembly of the compressor unit; (2) installation and testing
of the unit; (3) ongoing performance review to assess the need for a change in
compression; and (4) periodic maintenance and replacement parts supply.

  Production Equipment

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

  Market Conditions

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

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

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

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

                               Business Segments

   Our revenues and income are derived from five business segments (comprising
four operating divisions): (a) domestic rentals; (b) international rentals; (c)
compressor and accessory fabrication; (d) production and processing equipment
fabrication; and (e) parts and service. The domestic and international
compression rentals segments have operations primarily in the United States,
Canada and South America. For financial data relating to our business segments
and financial data relating to the amount or percentage of revenue contributed
by any class of similar products or services which accounted for 10 percent or
more of consolidated revenue in any of the last three fiscal years, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Form 10-K and Note 25 to the Notes to
Consolidated Financial Statements in Item 15 of this Form 10-K.

                                      9

<PAGE>

    Compression Rentals, Maintenance Services and Compressor and Accessory
                                  Fabrication

   We provide our customers with a full range of compressor and associated
equipment sales, rental, maintenance and contract compression services. As of
December 31, 2002, our compressor fleet consisted of 6,988 units, ranging from
8 to 4,450 horsepower per unit. The size, type and geographic diversity of this
rental fleet enable us to provide our customers with a range of compression
units that can serve a wide variety of applications and to select the correct
equipment for the job, rather than trying to "fit" the job to our fleet of
equipment.

   We base our gas compressor rental rates on several factors, including the
cost and size of the equipment, the type and complexity of service desired by
the customer, the length of the contract, and the inclusion of any other
desired services, such as installation, transportation and the degree of daily
operation. Recently, we began to selectively introduce price increases for our
domestic compression rental business, and we anticipate being able to achieve
an average 1-2% increase in prices in 2003. Substantially all of our units are
operated pursuant to "contract compression" or "rental with full maintenance"
contracts under which we perform all maintenance and repairs on such units
while under contract. In the U.S. onshore market, compression rental fleet
units are generally leased under contract with minimum terms of six months to
two years, which convert to month-to-month at the end of the stipulated minimum
period. Historically, the majority of our customers have extended the length of
their contracts, on a month-to-month basis, well beyond the initial term.
Typically, our compression rental units utilized in offshore and international
applications carry substantially longer lease terms than those for onshore
domestic applications.

   An essential element to our success is our ability to provide compression
services to customers with contractually committed compressor run-times of
between 95% and 98%. Historically, our incidence of failing to meet run-time
commitments (the penalty for which is paid in credits to the customer's
account) has been insignificant, due largely to our rigorous preventive
maintenance program and extensive field service network that permits us to
promptly address maintenance requirements. Our team of over 2300 experienced
maintenance personnel performs our rental compression maintenance services both
at our facilities and in the field. Such maintenance facilities are situated in
close proximity to actual rental fleet deployment to permit superior service
response times.

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

   Our field service mechanics provide all operating and maintenance services
for our compression units leased on a contract compression or full maintenance
basis and are on-call 24 hours a day. Those field personnel receive regular
mechanical and safety training both from our staff and our vendors. Each of our
field mechanics is responsible for specific compressor unit installations and
has at his or her disposal a dedicated local parts inventory. Additionally,
each field mechanic operates from a fully equipped service vehicle. Each
mechanic's field service vehicle is radio or cellular telephone equipped which
allows that individual to be our primary

                                      10

<PAGE>

contact with the customer's field operations staff and to be contacted at
either his or her residence or mobile phone 24 hours a day. Accordingly, our
field service mechanics are given the responsibility to promptly respond to
customer service needs as they arise based on the mechanic's trained judgment
and field expertise.

   We believe our competitive position has benefited from the managerial parity
that our sales and field service organizations enjoy within the company,
enabling these two vital organizations to work together in a highly coordinated
fashion in order to deliver maximum customer service, responsiveness and
reliability. The foundation for our successful field operations effort is the
experience and responsiveness of our over 2300 member compressor rental field
service and shop staff of compressor mechanics. Our field service mechanics are
coordinated and supported by regional operations managers who have supervisory
responsibility for specific geographic areas.

   Our compressor and accessory fabrication operations, design, engineer and
assemble compression units and accessories for sale to third parties as well as
for placement in our compressor rental fleet. As of December 31, 2002, we had a
compressor unit fabrication backlog for sale to third parties of $29.8 million
compared to $25.3 million as of December 31, 2001. Substantially all backlog is
expected to be produced within a 90 to 180 day period. In general, units to be
sold to third parties are assembled according to each customer's specifications
and sold on a turnkey basis. We acquire major components for these compressor
units from third party suppliers. We maintain parts inventories for our own use
and to meet our customers needs. As of December 31, 2002, we had approximately
$115 million in parts inventories.

                            Compressor Rental Fleet

   The size and horsepower of our compressor rental fleet owned or operated
under lease on December 31, 2002 is summarized in the following table.

<TABLE>
<CAPTION>
                                                Aggregate
                                      Number    Horsepower      % of
        Range of Horsepower per Unit of Units (in thousands) Horsepower
        ---------------------------- -------- -------------- ----------
        <S>                          <C>      <C>            <C>
                0-100...............  2,073         130          3.7%
                101-200.............  1,390         210          6.0%
                201-500.............  1,215         412         11.7%
                501-800.............    765         511         14.5%
                801-1,100...........    374         374         10.6%
                1,101-1,500.........    900       1,268         36.1%
                1,501-2,500.........    197         364         10.4%
                2,501-4,450.........     74         245          7.0%
                                      -----       -----        -----
                   Total............  6,988       3,514        100.0%
                                      =====       =====        =====
</TABLE>

  Oil and Gas Production and Processing Equipment Fabrication

   Through our production and processing equipment fabrication division, we
design, engineer, fabricate and either sell or occasionally rent a broad range
of oil and gas production equipment designed to heat, separate, dehydrate and
measure crude oil and natural gas. Our product line includes line heaters, oil
and gas separators, glycol dehydration units and skid-mounted production
packages designed for both onshore and offshore production facilities. We
generally maintain standard product inventories in excess of $5 million and are
therefore able to meet most customers' rapid response requirements and minimize
customer downtime. As of December 31, 2002, we had a production and processing
equipment fabrication backlog of $56.0 million compared to $38.9 million as of
December 31, 2001. Substantially all backlog is expected to be produced within
a 90 to 180 day period. We also purchase and recondition used production and
processing equipment which is then sold or rented.

                                      11

<PAGE>

  Parts, Service and Used Equipment

   We purchase and recondition used gas compression units, oilfield power
generation and treating facilities and production equipment that is then sold
or rented to customers. In addition, we often provide contract operations and
related services for customers that prefer to own their production, gas
treating, and oilfield power generation or compression equipment. We believe
that we are particularly well qualified to provide these services because our
highly experienced operating personnel have access to the full range of our
compression rental, production processing equipment and oilfield power
generation equipment and facilities. As customers look to us to provide an
ever-widening array of outsourced services, we will continue to build our core
business with emerging business opportunities, such as turnkey gas treatment,
gas measurement and oilfield power generation sales and services. We maintain
parts inventories for our own use and to meet our customers needs. As of
December 31, 2002, we had approximately $115 million in parts inventories.

  Sources and Availability of Raw Materials

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

  Market and Customers

   Our customer base consists of over 1,800 U.S. and international companies
engaged in all aspects of the oil and gas industry, including major integrated
oil and gas companies, national oil and gas companies, large and small
independent producers and natural gas processors, gatherers and pipelines.
Additionally, we have negotiated strategic alliances or preferred vendor
relationships with key customers pursuant to which we receive preferential
consideration in customer compressor and oil and gas production equipment
procurement decisions in exchange for providing enhanced product availability,
product support, automated procurement practices and limited pricing
concessions. No individual customer accounted for more than 10% of our
consolidated revenues during 2002, 2001 or 2000.

   Our compressor leasing activities are located throughout the continental
United States, internationally and in offshore operations. International
locations include Argentina, Barbados, Egypt, United Arab Emirates, Equatorial
Guinea, India, Venezuela, Colombia, Trinidad, Bolivia, Brazil, Mexico, Peru,
Pakistan, Indonesia, Nigeria, United Kingdom and Canada. In addition, we have
representative offices in the Netherlands and the Cayman Islands and have plans
to open representative offices in Nigeria and Russia. As of December 31, 2002,
equipment representing approximately 24% of our compressor horsepower was being
used in international applications.

  Sales and Marketing

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

                                      12

<PAGE>

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

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

  Competition

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

   Because the business is capital intensive, our ability to take advantage of
growth opportunities may be limited by our ability to raise capital. As part of
the recent amendment to our bank credit facility, we agreed to limit our
capital expenditures for 2003 to no more than $200 million. To the extent that
any of our competitors have a lower cost of capital or have greater access to
capital than we do they may be able to compete more effectively, which may
allow them to more readily take advantage of available opportunities.

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

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

   We believe that we compete effectively on the basis of price, customer
service, including the availability of personnel in remote locations,
flexibility in meeting customer needs and quality and reliability of our
compressors and related services. A few major fabricators, some of whom also
compete with us in the compressor rental business, dominate the compressor
fabrication business. We believe that we are one of the largest compressor
fabrication companies in the United States.

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

                                      13

<PAGE>

  Government Regulation

   We are subject to various federal, state, local and foreign laws and
regulations relating to the environment, health and safety, including
regulations regarding air emissions, wastewater and storm water discharges, as
well as waste handling and disposal. In addition, certain of our customer
service arrangements may require us to operate, on behalf of a specific
customer, petroleum storage units such as underground tanks, or pipelines and
other regulated units, all of which may impose additional compliance
obligations. Certain states have or are considering, and the federal government
has recently passed, more stringent air emission controls on off-road engines.
These laws and regulations may affect the costs of our operations. As with any
owner of real property, we are subject to clean-up costs and liability for
hazardous materials or any other toxic or hazardous substance that may exist on
or under any of our properties.

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

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

   The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on persons who are
considered to be responsible for the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the facility or
disposal site or sites where the release occurred and companies that disposed
or arranged for the disposal of the hazardous substances. Under CERCLA, and
similar state laws, such persons may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment, for damages to natural resources, and for the costs of
certain health studies. Furthermore, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by hazardous substances or other pollutants
released into the environment. We are not currently under any order requiring
that we undertake or pay for any cleanup activities, nor are we aware of any
current environmental claims by the government or private parties against us
demanding remedial costs or alleging that we are liable for such costs.
However, we cannot be certain that we will not receive any such claims in the
future.

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

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

                                      14

<PAGE>

Foreign Operations

   We operate in many different geographic markets, some of which are outside
the United States. Changes in local economic or political conditions,
particularly in Venezuela, Argentina, other parts of Latin America or Canada,
could have a material adverse effect on our business, consolidated financial
condition, results of operations or cash flows. Additional risks inherent in
our international business activities include the following: (a) difficulties
in managing international operations; (b) unexpected changes in regulatory
requirements; (c) tariffs and other trade barriers which may restrict our
ability to enter into new markets; (d) changes in political conditions; (e)
potentially adverse tax consequences; (f) restrictions on repatriation of
earnings or expropriation of property; (g) the burden of complying with foreign
laws; and (h) fluctuations in currency exchange rates and the value of the U.S.
dollar. See the discussion of our Argentine and Venezuelan operations included
in Management Discussion and Analysis of Financial Condition in Item 7 of this
Form 10-K. Our future plans involve expanding our business in foreign markets
where were currently do not conduct business. Our decentralized management
structure and the risks inherent in new business ventures, especially in
foreign markets where local customs, laws and business procedures present
special challenges, may affect our ability to be successful in these ventures
or avoid losses which could have a material adverse effect on our business,
financial condition, results of operations or cash flows.

   In December 2002, certain opposition groups in Venezuela initiated an
unofficial national strike. This has caused economic conditions in Venezuela to
deteriorate, including a substantial reduction in the production of oil in
Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency which can be exchanged for
foreign currency by businesses operating in Venezuela.

   As of December 31, 2002, we had approximately $21.5 million in receivables
from customers in Venezuela, a significant portion of which were due from
Petroleos de Venezuela, S.A., Venezuela's state-owned oil company. If the
national strike continues, exchange controls remain in place, our receivables
continue to increase and ultimately are not paid or economic conditions in
Venezuela continue to deteriorate, our results of operations in Venezuela could
be materially and adversely affected, which could result in reductions in
Hanover's net income.

   As part of our acquisition of the gas compression business of Schlumberger,
we acquired minority interests in three joint ventures in Venezuela. As a
minority investor in these joint ventures, we will not be able to control their
operations and activities, including without limitation, whether and when they
distribute cash or property to their holders. In January 2003, we exercised our
right to put our interest in one of these joint ventures, the PIGAP II joint
venture, back to Schlumberger. If not exercised, the put right would have
expired as of February 1, 2003. The consummation of the transfer of the
Company's interest in the joint venture back to Schlumberger is subject to
certain consents. We are currently in discussions with Schlumberger to explore
the possibility of entering into a new agreement under which we would retain
the 30% ownership interest in the joint venture. In light of the ongoing
discussions between Hanover and Schlumberger relating to the put, the parties
have agreed to postpone the closing date to no later than May 31, 2003.

   For financial data relating to the Company's geographic concentrations, see
Note 25 to the Notes to Consolidated Financial Statements included in Item 15
of this Form 10-K.

                                      15

<PAGE>

                     Executive Officers of the Registrant

   The following sets forth, as of March 14, 2002, the name, age and business
experience for the last five years of each of our executive officers:

<TABLE>
<CAPTION>
         Name       Age                       Position
         ----       ---                       --------
   <S>              <C> <C>
   Chad C. Deaton.. 50  President and Chief Executive Officer; Director
   John E. Jackson. 44  Senior Vice President--Chief Financial Officer
   Mark S. Berg.... 44  Senior Vice President--General Counsel and Secretary
   Robert O. Pierce 43  Senior Vice President--Operations--Fabrication
   Peter G. Schreck 39  Vice President--Treasury and Planning
   Stephen P. York. 46  Vice President and Corporate Controller
</TABLE>

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

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

   John E. Jackson has served as Senior Vice President and Chief Financial
Officer since February 2002. Prior to joining the Company, Mr. Jackson served
as Vice President and Chief Financial Officer of Duke Energy Field Services, a
$10 billion joint venture of Duke Energy and Phillips Petroleum that is one of
the nation's largest producers and marketers of natural gas liquids. Mr.
Jackson joined Duke Energy Field Services as Vice President and Controller in
April 1999 and was named Chief Financial Officer in February 2001. Prior to
joining Duke Energy Field Services, Mr. Jackson served in a variety of
treasury, controller and accounting positions at Union Pacific Resources
between June 1981 and April 1999.

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

   Robert O. Pierce has served as Senior Vice President--Manufacturing &
Procurement since May 2000. Prior to being named Senior Vice President, Mr.
Pierce was Vice President, serving the Company in that position since April
1995.

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

   Stephen P. York has served as Vice President and Corporate Controller since
April 2002. Prior to joining Hanover, Mr. York served as Director, Payroll
Production of Exult, Inc., a provider of web-enabled Human Resources management
services in Charlotte, NC, since 2001. From 1981 to 2000, Mr. York held various
management positions with Bank of America Corporation, Charlotte, NC, including
Senior Vice President--Personnel Operations, Senior Vice
President--Controller/General Accounting, Senior Vice President--Corporate

                                      16

<PAGE>

Accounts Payable/Fixed Assets, and Vice President--Audit Director. Mr. York was
an accountant with KPMG Peat Marwick in Waco, TX, from 1979 to 1981.

                                   Employees

   As of December 31, 2002 we had approximately 4,700 employees, approximately
85 of whom are represented by a labor union and approximately 600 contract
personnel. We believe that our relations with our employees and contract
personnel are satisfactory.

                            Electronic Information

   We maintain a website which can be found at http://www.hanover-co.com. At
this time we do not make our Form 10-Ks, quarterly reports on Form 10-Q,
current reports on Form 8-K, or the amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, available on our website. We are currently working to improve
our website to make available such materials and other information useful to
investors and expect such information to be available on our website soon.
However, due to resource constraints, this work has not been completed. Such
information is readily available at the website of the Securities and Exchange
Commission, which can be found at http://www.sec.gov.

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

                                      17

<PAGE>

Item 2.  Properties

   The following table describes the material facilities owned or leased by
Hanover and our subsidiaries as of December 31, 2002:

<TABLE>
<CAPTION>
                                     Square
          Location            Status  Feet                        Uses
          --------            ------ -------                      ----
<S>                           <C>    <C>     <C>
Broken Arrow, Oklahoma.......  Owned 127,505 Compressor and accessory fabrication
Davis, Oklahoma..............  Owned 393,870 Compressor and accessory fabrication
Houston, Texas...............  Owned 256,505 Compressor and accessory fabrication
Houston, Texas...............  Owned 155,822 Compressor and accessory fabrication
Houston, Texas...............  Owned 148,925 Compressor and accessory fabrication
Anaco, Venezuela............. Leased  10,000 Compressor rental and service
Casper, Wyoming..............  Owned  28,390 Compressor rental and service
Comodoro Rivadavia, Argentina Leased  21,000 Compressor rental and service
Comodoro Rivadavia, Argentina  Owned  26,000 Compressor rental and service
Farmington, New Mexico.......  Owned  20,361 Compressor rental and service
Gillette, Wyoming............ Leased  10,200 Compressor rental and service
Houston, Texas............... Leased  13,200 Compressor rental and service
Kilgore, Texas...............  Owned  33,039 Compressor rental and service
Maturin, Venezuela...........  Owned  20,000 Compressor rental and service
Midland, Texas...............  Owned  53,300 Compressor rental and service
Neuquen, Argentina...........  Owned  30,000 Compressor rental and service
Pampa, Texas................. Leased  24,000 Compressor rental and service
Pocola, Oklahoma.............  Owned  18,705 Compressor rental and service
Santa Cruz, Bolivia.......... Leased  21,500 Compressor rental and service
Tulsa, Oklahoma.............. Leased  16,456 Compressor rental and service
Tulsa, Oklahoma.............. Leased  13,100 Compressor rental and service
Tulsa, Oklahoma.............. Leased  19,200 Compressor rental and service
Victoria, Texas..............  Owned  21,840 Compressor rental and service
Victoria, Texas.............. Leased  18,083 Compressor rental and service
Walsall, UK-Redhouse.........  Owned  15,300 Compressor rental and service
Walsall, UK-Westgate.........  Owned  44,700 Compressor rental and service
West Monroe, Louisiana.......  Owned  26,100 Compressor rental and service
Yukon, Oklahoma..............  Owned  22,453 Compressor rental and service
Odessa,Texas.................  Owned  15,751 Parts, service and used equipment
Houston, Texas............... Leased  28,750 Parts, service and used equipment
Houston, Texas............... Leased  73,450 Parts, service and used equipment
Odessa, Texas................  Owned  30,281 Parts, service and used equipment
Broussard, Louisiana.........  Owned  74,402 Production and processing equipment fabrication
Calgary, Alberta, Canada.....  Owned  89,000 Production and processing equipment fabrication
Columbus, Texas..............  Owned 219,552 Production and processing equipment fabrication
Corpus Christi, Texas........  Owned  11,000 Production and processing equipment fabrication
Corpus Christi, Texas........  Owned  54,000 Production and processing equipment fabrication
Dubai, UAE...................  Owned  19,680 Production and processing equipment fabrication
Edmonton, Alberta, Canada....  Owned  40,000 Production and processing equipment fabrication
Hamriyah Free Zone, UAE......  Owned  20,664 Production and processing equipment fabrication
Houston, Texas............... Leased 103,000 Production and processing equipment fabrication
Mantova, Italy...............  Owned 200,263 Production and processing equipment fabrication
Midland, Texas...............  Owned  11,500 Production and processing equipment fabrication
Tulsa, Oklahoma..............  Owned  40,100 Production and processing equipment fabrication
Victoria, Texas..............  Owned  50,506 Production and processing equipment fabrication
</TABLE>

                                      18

<PAGE>

   The Company's corporate headquarters and compressor fabrication facility in
Houston, Texas and its production equipment manufacturing facility in Columbus,
Texas are mortgaged to secure the repayment of approximately $3.2 million (as
of December 31, 2002) in indebtedness to a commercial bank.

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

Item 3.  Legal Proceedings

   Commencing in February 2002, approximately 15 putative securities class
action lawsuits were filed against us and certain of our officers and directors
in the United States District Court for the Southern District of Texas. These
class actions have been consolidated into one case, Pirelli Armstrong Tire
Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others
Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover
Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr.
Michael A. O'Connor. The plaintiffs in these securities actions purport to
represent purchasers of our common stock during various periods ranging from
May 15, 2000 through January 28, 2002. The complaints assert various claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek
unspecified amounts of compensatory damages, interest and costs, including
legal fees. The court entered an order appointing Pirelli Armstrong Tire
Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on
January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as
lead counsel. A consolidated amended complaint is currently due to be filed on
or before April 7, 2003.

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

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

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

   Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas. Currently,
the Company will be required to file an answer or otherwise move with respect
to the derivative action filed in Delaware by May 3, 2003. The Board of
Directors has formed a Special Litigation Committee to address the issues
raised by the derivative suits. Subject to the work of that Committee and its
instructions, we intend to defend these cases vigorously.

                                      19

<PAGE>

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

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

   In January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and
John Petti filed a putative securities class action against
PricewaterhouseCoopers LLP, which is Hanover's auditor. The alleged class is
all persons who purchased the equity or debt securities of Hanover Compressor
Company or its affiliates from March 8, 2000 through and including October 23,
2002. On February 13, 2003, the court consolidated this action with Civil
Action No. H-02-0410 described above.

   On March 26, 2003, Ann Angleopoulos filed a putative class action against
Hanover, Michael McGhan, Michael O'Conner, Chad Deaton and other purportedly
unknown defendants. The alleged class is comprised of persons who between
November 8, 2000 and the present participated in or were beneficiaries of The
Hanover Companies Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal Revenue Code of 1986,
as amended. The purported class action seeks relief under the Employee
Retirement Income Security Act based upon Hanover's and the individual
defendants' alleged mishandling of the Company's 401(k) Plan. The Company has
not yet been served with the complaint in this action.

   As of December 31, 2002, the Company has paid approximately $7.7 million in
legal related expenses in connection with the internal investigations, the
putative class action securities lawsuits, the derivative lawsuits and the
Securities and Exchange Commission investigation. Of this amount, the Company
has paid approximately $1.0 million on behalf of officers and directors in
connection with the above-named proceedings. The Company intends to pay the
litigation costs of its officers and directors, subject to the limitations
imposed by Delaware law and the Company's certificate of incorporation and
bylaws. The Company expects to be reimbursed for all or a portion of these
litigation expenses from the Company's directors' and officers' insurance
policies.

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

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

   No matters were submitted to a vote of our shareholders during the fourth
quarter of our fiscal year ended December 31, 2002.

                                      20

<PAGE>

                                    PART II

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

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

<TABLE>
<CAPTION>
                                          High   Low
                                         ------ ------
                          <S>            <C>    <C>
                          2001
                          First Quarter. $44.38 $29.25
                          Second Quarter $40.45 $29.00
                          Third Quarter. $34.00 $19.00
                          Fourth Quarter $30.40 $19.90

                          2002
                          First Quarter. $25.52 $10.50
                          Second Quarter $20.33 $11.56
                          Third Quarter. $13.50 $ 6.80
                          Fourth Quarter $11.98 $ 6.20
</TABLE>

   As of March 21, 2003, there were 80,581,181 shares of our common stock
outstanding, held by approximately 726 stockholders of record.

   We have not paid any cash dividends on our common stock since our formation
and do not anticipate paying such dividends in the foreseeable future. The
Board of Directors anticipates that all cash flow generated from operations in
the foreseeable future will be retained and used to pay down debt, develop and
expand our business. Our $350 million credit facility with the JPMorgan Chase
Bank, as agent (the "Bank Credit Agreement") limits the amount of dividends
payable by us (without the lender's prior approval) on our common stock to no
more than 25% of our net income for the period from December 3, 2001 until
November 30, 2004. Any future determinations to pay cash dividends on the
common stock will be at the discretion of the our Board of Directors and will
be dependent upon our results of operations and financial condition, credit and
loan agreements in effect at that time and other factors deemed relevant by the
Board of Directors.

   The information included or to be included in the Company's definitive proxy
statement for its 2003 Annual Meeting of Stockholders under the caption "Equity
Compensation Plan Information" is incorporated by reference herein.

                                      21

<PAGE>

Item 6.  Selected Financial Data

                     SELECTED FINANCIAL DATA (HISTORICAL)

   In the table below we have presented certain selected financial data for
Hanover for each of the five years in the period ended December 31, 2002. The
historical consolidated financial data has been derived from Hanover's audited
consolidated financial statements. The following information should be read
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 of this Form 10-K and the Consolidated
Financial Statements of the Company in Item 15 of this Form 10-K.

   During the fourth quarter of 2002, we reviewed our business lines and the
board of directors approved management's recommendation to exit and sell our
non-oilfield power generation and certain used equipment business lines. The
results from these businesses are reflected as discontinued operations and
prior periods have been adjusted to reflect this presentation. Additionally, in
the second and fourth quarter of 2002, we recorded certain write-downs, asset
impairments and restructuring costs. A summary of these changes and charges to
the Company's financial results is discussed below.

<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,
                                                                         ------------------------------------------------------
                                                                            2002      2001(2)    2000(1)(2)  1999(2)     1998
                                                                         ----------  ----------  ---------- ---------- --------
                                                                                     (Restated)  (Restated) (Restated)
                                                                                 (in thousands, except per share data)
<S>                                                                      <C>         <C>         <C>        <C>        <C>
Income Statement Data:
   Revenues:
      Domestic rentals.................................................. $  328,600  $  269,679   $172,517   $136,430  $107,420
      International rentals.............................................    189,700     131,097     81,320     56,225    40,189
      Parts, service and used equipment.................................    223,845     214,872    113,526     39,130    29,538
      Compressor and accessory fabrication..............................    114,009     223,519     90,270     52,531    67,453
      Production and processing equipment fabrication...................    149,656     184,040     79,121     27,255    37,466
      Equity in income of non-consolidated affiliates...................     18,811       9,350      3,518      1,188     1,369
      Gain on change in interest in non-consolidated affiliate..........         --          --        864         --        --
      Other.............................................................      4,189       8,403      5,688      5,371     2,916
                                                                         ----------  ----------   --------   --------  --------
         Total revenues (3).............................................  1,028,810   1,040,960    546,824    318,130   286,351
                                                                         ----------  ----------   --------   --------  --------
   Expenses:
      Domestic rentals..................................................    120,740      95,203     60,336     46,184    36,570
      International rentals.............................................     57,579      45,795     27,656     18,765    12,816
      Parts, service and used equipment.................................    179,844     152,701     79,958     26,504    21,735
      Compressor and accessory fabrication..............................     99,446     188,122     76,754     43,663    58,144
      Production and processing equipment fabrication...................    127,442     147,824     62,684     20,278    25,781
      Selling, general and administrative...............................    153,676      92,172     51,768     33,782    26,626
      Foreign currency translation......................................     16,753       6,658         --         --        --
      Change in fair value of derivative financial instruments..........     (3,245)      7,596         --         --        --
      Other.............................................................     27,607       9,727         --         --        --
      Depreciation and amortization (4).................................    151,181      88,823     52,188     37,337    37,154
      Goodwill impairment...............................................     52,103          --         --         --        --
      Leasing expense...................................................     94,751      70,435     45,484     22,090     6,173
      Interest expense..................................................     36,978      17,531      8,679      8,786    11,716
      Distributions on mandatorily redeemable convertible preferred
       securities.......................................................      6,374       6,373      6,369        278        --
                                                                         ----------  ----------   --------   --------  --------
                                                                          1,121,229     928,960    471,876    257,667   236,715
                                                                         ----------  ----------   --------   --------  --------
Income (loss) from continuing operations before income taxes............    (92,419)    112,000     74,948     60,463    49,636
Provision for (benefit from) income taxes...............................    (17,576)     42,388     27,818     22,008    19,259
                                                                         ----------  ----------   --------   --------  --------
Income (loss) from continuing operations................................    (74,843)     69,612     47,130     38,455    30,377
Discontinued operations, net of tax.....................................    (41,225)      2,965      2,509         --        --
                                                                         ----------  ----------   --------   --------  --------
Income (loss) before cumulative effect of accounting change.............   (116,068)     72,577     49,639     38,455    30,377
   Cumulative effect of accounting change for derivative instruments,
    net of tax..........................................................         --        (164)        --         --        --
                                                                         ----------  ----------   --------   --------  --------
Net income (loss)....................................................... $ (116,068) $   72,413   $ 49,639   $ 38,455  $ 30,377
                                                                         ==========  ==========   ========   ========  ========
</TABLE>

                                      22

<PAGE>

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                              -------------------------------------------------------
                                                                 2002      2001(2)    2000(1)(2)   1999(2)     1998
                                                              ----------  ----------  ----------  ---------- --------
                                                                          (Restated)  (Restated)  (Restated)
                                                              (Dollars and shares in thousands, except per share data)
<S>                                                           <C>         <C>         <C>         <C>        <C>
Diluted net income available to common stockholders:
Net income (loss)............................................ $ (116,068) $   72,413  $   49,639   $ 38,455  $ 30,377
(Income) loss from discontinued operations...................     41,225      (2,965)     (2,509)        --        --
Distributions on mandatorily redeemable convertible preferred
 securities, net of income tax...............................         --       4,142          --         --        --
                                                              ----------  ----------  ----------   --------  --------
Diluted net income (loss) available to common stockholders... $  (74,843) $   73,590  $   47,130   $ 38,455  $ 30,377
                                                              ==========  ==========  ==========   ========  ========
Earnings (loss) per common share:
Basic earnings (loss) per common share from continuing
 operations (5).............................................. $    (1.46) $     1.00  $     0.80   $   0.67  $   0.53
                                                              ==========  ==========  ==========   ========  ========
Diluted earnings (loss) per common share from continuing
 operations (5).............................................. $    (1.46) $     0.94  $     0.75   $   0.63  $   0.50
                                                              ==========  ==========  ==========   ========  ========
Weighted average common and common equivalent shares:
Basic (5)....................................................     79,500      72,355      61,831     57,048    56,936
                                                              ==========  ==========  ==========   ========  ========
Diluted (5)..................................................     79,500      81,175      66,366     61,054    60,182
                                                              ==========  ==========  ==========   ========  ========

                                                                              Years Ended December 31,
                                                              -------------------------------------------------------
                                                                           Restated    Restated    Restated
                                                                 2002      2001(2)    2000(1)(2)   1999(2)     1998
                                                              ----------  ----------  ----------  ---------- --------
                                                                                   (in thousands)
Cashflows provided by (used in):
   Operating activities...................................... $  195,717  $  152,774  $   29,746   $ 71,610  $ 31,147
   Investing activities......................................   (193,703)   (482,277)    (67,481)   (95,502)  (14,699)
   Financing activities......................................     (4,232)    307,259      77,589     18,218    (9,328)
Balance Sheet Data (end of period):
   Working capital........................................... $  212,085  $  275,074  $  282,730   $103,431  $113,264
   Net property, plant and equipment.........................  1,167,675   1,151,513     574,703    498,877   392,498
   Total assets..............................................  2,154,029   2,265,776   1,246,172    753,387   614,590
   Long-term debt............................................    521,203     504,260     110,935     69,681   156,943
   Mandatorily redeemable convertible preferred securities...     86,250      86,250      86,250     86,250        --
   Common stockholders' equity...............................    927,626   1,039,468     628,947    365,928   315,470
</TABLE>
--------
(1) April 2002 Restatement--In conjunction with a review of our joint ventures
    and other transactions conducted by the Audit Committee, the Company
    determined to restate its financial statements for the year ended December
    31, 2000 and each of the quarters in the nine months ended September 30,
    2001. See Note 22 in Notes to the Consolidated Financial Statements in Item
    15 of this Form 10-K.
(2) November 2002 Restatement--A special committee of Hanover's Board of
    Directors, together with the Audit Committee of the Board and our
    management, completed an extensive investigation of certain transactions
    recorded during 2001, 2000 and 1999, including those transactions restated
    by Hanover in April 2002. As a result of this investigation, the Company
    determined to restate its financial results for the years ended December
    31, 2001, 2000 and 1999. See Note 23 in Notes to Consolidated Financial
    Statements in Item 15 of this Form 10-K.
(3) We have grown as a result of internal growth and business combinations. For
    a description of significant business acquisitions, see Note 2 to the Notes
    to Consolidated Financial Statements in Item 15 of this Form 10-K. In the
    fourth quarter of 2002, we decided to discontinue certain businesses. For a
    description of the discontinued operations, see Note 3 to the Notes to
    Consolidated Financial Statements in Item 15 of this Form 10-K.
(4) In June 2001, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards 142, Goodwill and Other Intangible Assets
    ("SFAS 142"). Under SFAS 142, amortization of goodwill to earnings is
    discontinued. Instead, goodwill will be reviewed for impairment annually or
    whenever events indicate impairment may have occurred. SFAS 142 was
    effective for Hanover on January 1, 2002. Under the transition provisions
    of SFAS 142, goodwill acquired in a business combination for which the
    acquisition date is after June 30, 2001 shall not be amortized. For
    financial data relating to our goodwill and other intangible assets, see
    Management's Discussion and Analysis of Financial Condition and Results of
    Operations in Item 7 of this Form 10-K and Note 9 to the Notes to
    Consolidated Financial Statements in Item 15 of this Form 10-K.

                                      23

<PAGE>

(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.

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

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

GENERAL

   Hanover Compressor Company, through its subsidiaries, is a global market
leader in full service natural gas compression and a leading provider of
service, fabrication and equipment for natural gas processing and
transportation. We sell this equipment and provide it on a rental, contract
compression, maintenance and acquisition leaseback basis to natural gas
production, processing and transportation companies that are seeking
outsourcing solutions. Founded in 1990 and a public company since 1997, our
customers include both major and premier independent oil and gas producers and
distributors as well as national oil and gas companies. Our maintenance
business, together with our parts and service business, can provide solutions
to customers that own their own compression equipment, but want to outsource
their operations. We also have compressor and oil and gas production equipment
fabrication operations and provide gas processing and treating, gas measurement
and oilfield power generation services, which broaden our customer
relationships both domestically and internationally.

   The Company has grown through internal growth and through acquisitions. For
2003, the Company plans to reduce its capital spending and focus on completing
the integration of recent acquisitions. In addition, we plan to reduce our
headcount by approximately 500 employees worldwide and consolidate our
fabrication operations into 9 fabrication centers down from the 13 fabrication
centers we had as of December 31, 2002. The estimated annualized savings from
these actions are expected to be approximately $20 million.

Recent Events

   During the fourth quarter of 2002, we reviewed our business lines and the
board of directors approved management's recommendation to exit and sell our
non-oilfield power generation facilities and certain used equipment business
lines. The results from these businesses are reflected as discontinued
operations in our Consolidated Financial Statements and prior periods have been
adjusted to reflect this presentation. Additionally, in the second and fourth
quarter of 2002, we recorded certain write-downs, asset impairments and
restructuring costs. A summary of these changes and the related impact to the
Company's financial results is discussed below.

   In January 2003, we exercised our right to put our interest in the PIGAP II
joint venture back to Schlumberger. If not exercised, the put right would have
expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as
part of its purchase of Production Operators Corporation from Schlumberger in
August 2001. PIGAP II is a joint venture, currently owned 70% by a subsidiary
of Williams Companies Inc. and 30% by Hanover, which operates a natural gas
compression facility in Venezuela that processes 1.2 billion standard cubic
feet per day of natural gas. The natural gas processed by PIGAP II is
re-injected into oil reservoirs for enhanced oil recovery.

   The consummation of the transfer of Hanover's interest in the joint venture
back to Schlumberger is subject to certain consents. We are currently in
discussions with Schlumberger to explore the possibility of entering into a new
agreement under which Hanover would retain the 30% ownership interest in the
joint venture. In light of the ongoing discussions between Hanover and
Schlumberger relating to the put, the parties have agreed to postpone the
closing date to no later than May 31, 2003.

   In February 2003, we executed an amendment to our bank credit facility and
certain compression equipment leases that we entered into in 1999 and 2000. The
amendment, effective as of December 31, 2002, modifies

                                      24

<PAGE>

certain financial covenants to allow us greater flexibility in accessing the
capacity under the bank credit facility to support our short-term liquidity
needs. In addition, at the higher end of our permitted consolidated leverage
ratio, the amendment would increase the commitment fee under the bank credit
facility by 0.125% and increase the interest rate margins used to calculate the
applicable interest rates under all of the agreements by up to 0.75%. Any
increase in our interest cost as a result of the amendment will depend on our
consolidated leverage ratio at the end of each quarter, the amount of
indebtedness outstanding and the interest rate quoted for the benchmark
selected by us. As part of the amendment, we granted the lenders under these
agreements a security interest in the inventory, equipment and certain other
property of Hanover and its domestic subsidiaries, and pledged 66% of the
equity interest in certain of Hanover's foreign subsidiaries. In consideration
for obtaining the amendment, we agreed to pay approximately $1.8 million in
fees to the lenders under these agreements. We also agreed to a restriction on
our capital expenditures during 2003, which under the agreement cannot exceed
$200 million.

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

Recent Material Acquisitions

   In August 2001, we acquired 100% of the issued and outstanding shares of
Production Operators Corporation ("POI") from Schlumberger (the "POI
Acquisition") for $761 million in cash, and Hanover common stock and
indebtedness, subject to certain post-closing adjustments pursuant to the
purchase agreement that to date have resulted in an increase in the purchase
price to approximately $778 million due to an increase in net assets acquired.
Under the terms of the acquisition agreement, Schlumberger received
approximately $270 million in cash (excluding the amounts paid for the increase
in net assets), $150 million in a long-term subordinated note and approximately
8,708,000 shares of Hanover common stock, or approximately 11% of the
outstanding shares, which are required to be held by Schlumberger for at least
three years following the closing date. The ultimate number of shares issued
under the purchase agreement was determined based on the nominal value of $283
million divided by $32.50 per share, the 30-day average closing price of
Hanover common stock as defined under the acquisition agreement and subject to
a collar of $41.50 and $32.50. The estimated fair value of the stock issued was
$212.5 million, based on the market value of the shares at the time the number
of shares issued was determined reduced by an estimated 20% discount due to the
restrictions on the stock's marketability. The POI Acquisition was accounted
for as a purchase and is included in our financial statements commencing on
September 1, 2001.

   We recorded approximately $70 million in goodwill related to the acquisition
of POI which, in accordance with the transition provisions of Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets ("SFAS 142") will not be amortized. In addition, we recorded $9.8
million in estimated value of identifiable intangible assets. The purchase
price was subject to certain post-closing adjustments, a contingent payment of
up to $58 million by us to Schlumberger and additional contingent payments by
us based on the realization of certain tax benefits by us over the next 15
years.

   In March 2001, we purchased OEC Compression Corporation ("OEC") in an
all-stock transaction for approximately $101.8 million, including the
assumption and payment of approximately $64.6 million of OEC indebtedness. We
paid an aggregate of approximately 1,146,000 shares of Hanover common stock to
stockholders of OEC. The acquisition was accounted for under the purchase
method of accounting and is included in our financial statements commencing in
April 2001.

   In September 2000, we acquired the compression services division of
Dresser-Rand Company for $177 million in cash and common stock, subject to
certain post-closing adjustments pursuant to the acquisition

                                      25

<PAGE>

agreement which to date have resulted in an increase in the purchase price to
approximately $199 million due to increases in net assets acquired. In July
2000, we acquired PAMCO Services International for approximately $58 million in
cash and notes. In June 2000, the we acquired Applied Process Solutions, Inc.
for approximately 2,303,000 shares of our common stock. These acquisitions were
included in the results of operations from their respective acquisition dates.

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

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                                    ------------------------------
                                                       2002       2001      2000
                                                    ---------- ---------- --------
<S>                                                 <C>        <C>        <C>
Revenues:
   Domestic rentals................................ $  328,600 $  269,679 $172,517
   International rentals...........................    189,700    131,097   81,320
   Parts, service and used equipment...............    223,845    214,872  113,526
   Compressor and accessory fabrication............    114,009    223,519   90,270
   Production and processing equipment fabrication.    149,656    184,040   79,121
   Equity in income of non-consolidated affiliate..     18,811      9,350    3,518
   Other...........................................      4,189      8,403    6,552
                                                    ---------- ---------- --------
                                                    $1,028,810 $1,040,960 $546,824
                                                    ========== ========== ========
Expenses:
   Domestic rentals................................ $  120,740 $   95,203 $ 60,336
   International rentals...........................     57,579     45,795   27,656
   Parts, service and used equipment...............    179,844    152,701   79,958
   Compressor and accessory fabrication............     99,446    188,122   76,754
   Production and processing equipment fabrication.    127,442    147,824   62,684
                                                    ---------- ---------- --------
                                                    $  585,051 $  629,645 $307,388
                                                    ========== ========== ========
Gross profit percentage:
   Domestic rentals................................    63%        65%       65%
   International rentals...........................    70%        65%       66%
   Parts, service and used equipment...............    20%        29%       30%
   Compressor and accessory fabrication............    13%        16%       15%
   Production and processing equipment fabrication.    15%        20%       21%
</TABLE>

   In addition, in 2002, we determined to restate our financials for the years
ended December 31, 2001, 2000 and 1999. Accordingly, revenues, expenses income
before taxes, net income and earnings per share have been restated for the
years ended December 31, 2001, 2000 and 1999. See Notes 22 and 23 in the Notes
to Consolidated Financial Statements in Item 15 of this Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

                                      26

<PAGE>

  Allowances and Reserves

   We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of a customer deteriorates, resulting in an impairment of its ability
to make payments, additional allowances may be required. During 2002, 2001 and
2000, we recorded approximately $7.1 million, $4.9 million and $3.2 million in
additional allowances for doubtful accounts, respectively.

   We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those expected
by management, additional inventory write-downs may be required.

  Long Lived Assets and Investments

   We review for the impairment of long-lived assets, including property, plant
and equipment, goodwill, intangibles and investments in non-consolidated
affiliates whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss exists
when estimated undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. The
impairment loss recognized represents the excess of the asset's carrying value
as compared to its estimated fair market value and is charged to the period in
which the impairment occurred. In addition, goodwill is evaluated at least
annually pursuant to the requirements of SFAS 142, to determine if the
estimated fair value of the reporting unit exceeds the net carrying value of
the reporting unit, including the applicable goodwill. The estimates of fair
market value is based upon management's estimates of the present value of
future cash flows. Management makes assumptions regarding the estimated cash
flows and if these estimates or their related assumptions change, an impairment
charge may be incurred.

   We capitalize major improvements that we believe extend the useful life of
an asset. Repairs and maintenance are expensed as incurred. Interest is
capitalized during the fabrication period of compression equipment and
facilities that are fabricated for use in our rental operations. The
capitalized interest is recorded as part of the basis of the asset to which it
relates and is amortized over the asset's estimated useful life.

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

  Tax Assets

   Hanover must estimate its expected future taxable income in order to assess
the realizability of its deferred income tax assets. As of December 31, 2002,
Hanover reported a net deferred tax liability of $112.5 million, which included
gross deferred tax assets of $205.6 million, net of a valuation allowance of
$23.4 million. Numerous assumptions are inherent in the estimation of future
taxable income, including assumptions about matters that are dependent on
future events, such as future operating conditions and future financial
conditions.

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

                                      27

<PAGE>

  Sale and Leaseback Transactions

   Since 1998, we have entered into five sale and leaseback transactions of
compression equipment with special purpose entities. These sale and leaseback
transactions are evaluated for lease classification in accordance with SFAS 13,
Accounting for Leases, "SFAS 13". In accordance with generally accepted
accounting principles, the special purpose entities are not included in our
consolidated financial statements when the owners of the special purpose
entities have made a substantial residual equity investment of at least three
percent of the total capital of the entity that is at risk during the entire
term of the lease. Generally accepted accounting principles requires us to:

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

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

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

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

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

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

   If these estimates were materially incorrect, we could be required to
include the special purpose entities and the related compression equipment and
debt in our financial statements. We treat the leases as operating leases for
financial accounting purposes, but as financing arrangements for federal income
tax and certain other tax purposes.

   In addition, because we sold the compressors to the special purpose
entities, our depreciation expense was reduced by approximately $36 million,
$43 million, and $31 million for the years ended December 31, 2002, 2001 and
2000, respectively. We also believe that these transactions had the effect of
decreasing interest expense. However, we believe the decreased interest expense
and the increased leasing expense are not directly comparable because the
duration of our compression equipment leases are longer than the maturity of
our revolving line of credit.

   In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities, an interpretation of ARB 51. FIN 46 will require us to include in our
consolidated financial statements the special purpose entities that lease
compression equipment to us beginning in July 2003. If we were required to
consolidate the special purpose entities as of December 31, 2002, we would add
approximately $1,031 million in compressor equipment and approximately $1,140
million in debt to our balance sheet and we would reverse $109 million of the
deferred gains which were recorded on our balance sheet as a result of the sale
and leaseback transactions. In addition, Hanover would record depreciation
expense on the compression equipment for prior periods (net of tax) as part of
the cumulative effect of the adoption of FIN 46. We are currently in the
process of evaluating the impact of recording depreciation for prior periods.
After we adopt FIN 46, we estimate that we will record approximately $20
million per year in additional depreciation expense on our leased compression
equipment.

   See "--Leasing Transactions" for more information on these sale and
leaseback transactions.

  Revenue Recognition--Percentage of Completion Accounting

   We recognize revenue and profit for our fabrication operations as work
progresses on long-term, fixed-price contracts using the
percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. We follow this method since reasonably dependable
estimates of the revenue and costs applicable to various stages of a contract
can be made and since the fabrication projects usually last several months.
Recognized revenues and profit are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income
in the period in which the facts that give rise to the revision become known.
Examples of factors that would give rise to revisions include variances in the
actual or revisions to the estimated costs of components, labor or other
fabrication costs. The average duration of these projects is four to six
months. As of December 31, 2002, we had recognized approximately $42.8 million
in costs and estimated earnings on uncompleted contracts.

                                      28

<PAGE>

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

   Since we have many fabrication projects in process at any given time, we do
not believe that materially different results would be achieved if different
estimates, assumptions, or conditions were used for each project.

  Contingencies and Litigation

   Due to the restatement of our financial statements and in the ordinary
course of business, we are involved in various pending or threatened legal
actions. While we are unable to predict the ultimate outcome of these actions,
we are required to record a loss during the period in which we, based on our
experience, believe a contingency is likely to result in a financial loss to us.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenues

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

   Revenues from rentals increased by $117.5 million, or 29%, to $518.3 million
during 2002 from $400.8 million during 2001. Domestic revenues from rentals
increased by $58.9 million, or 22%, to $328.6 million during 2002 from $269.7
million during 2001. International rental revenues increased by $58.6 million,
or 45%, to $189.7 million during 2002 from $131.1 million during 2001. The
increase in both domestic and international rental revenues resulted from
expansion of our rental fleet and business acquisitions completed in 2001.
During 2001, we completed two significant acquisitions: (1) in March 2001, we
acquired OEC Compression Corporation which increased our rental fleet by
approximately 175,000 horsepower, and (2) in August 2001, we acquired
Production Operators Corporation which increased our rental fleet by
approximately 860,000 horsepower.

   The increase in international rental revenues was offset in part by
decreased revenues from our Venezuelan operations. In December 2002, certain
opposition groups in Venezuela initiated an unofficial national strike. This
has caused economic conditions in Venezuela to deteriorate, including a
substantial reduction in the production of oil in Venezuela. As a result,
during the fourth quarter of 2002, our international rental revenues were
decreased by approximately $2.7 million as a result of the disruption in our
operations in Venezuela. At December 31, 2002, we had approximately $21.5
million in outstanding receivables related to our Venezuelan operations.

   At December 31, 2002, the compressor rental fleet consisted of approximately
3,514,000 horsepower, a 1% increase over the 3,477,000 horsepower in the rental
fleet at December 31, 2001. Domestic horsepower in the rental fleet decreased
by 1% to 2,654,000 horsepower at December 31, 2002 from approximately 2,696,000
horsepower at December 31, 2001 and international horsepower increased by 10%
to 860,000 horsepower at December 31, 2002 from approximately 781,000
horsepower at December 31, 2001.

   Revenues from parts, service and used equipment increased by $8.9 million,
or 4% to $223.8 million during 2002 from $214.9 million during 2001. This
increase was due to a $26.5 million gas plant sale transaction and a $20.1
million compression equipment sale transaction offset by lower revenues as a
result of weaker market conditions.


                                      29

<PAGE>

   Revenues from compressor and accessory fabrication decreased by $109.5
million, or 49%, to $114.0 million during 2002 from $223.5 million during 2001.
During 2002, an aggregate of approximately 150,900 horsepower of compression
equipment was fabricated and sold compared to approximately 366,000 horsepower
fabricated and sold during 2001. In addition, 97,900 horsepower was fabricated
and placed in the rental fleet during 2002 compared to 220,000 horsepower in
2001.

   Revenues from production and processing equipment fabrication decreased by
$34.3 million, or 19%, to $149.7 million during 2002 from $184.0 million during
2001. In July 2002, we increased our ownership of Belleli Energy S.r.l. to
40.3% from 20.3% by converting a $4.0 million loan to Belleli into additional
equity ownership. In November 2002, we increased our ownership to 51% by
exchanging a $9.4 million loan to the other principal owner of Belleli for
additional equity ownership and began consolidating the results of Belleli's
operations. Production and processing equipment revenues include $15.4 million
in revenues from the consolidation of Belleli since November 21, 2002.
Excluding Belleli, revenues from our fabrication businesses declined by 27% due
to decreased capital spending by our customers in 2002 caused by weak economic
market conditions and recent political and economic events in South America
resulting in lower drilling and new well completion activity by oil and gas
producers. The average North and South American rig count decreased by 27% in
2002 to 1,097 from 1,497 in 2001 and the twelve month rolling average Henry Hub
natural gas price decreased to $3.22 per Mcf in December 2002 from $4.26 per
Mcf in December 2001.

   Equity in earnings in subsidiaries increased $9.4 million, or 101%, to $18.8
million during 2002, from $9.4 million during 2001. This increase is primarily
due to our acquisition of POI, which included interests in three joint venture
projects in South America. These joint ventures contributed $21.2 million in
equity earnings for 2002 compared to $8.1 million in 2001 and was partially
offset by a decrease in equity earnings from Hanover Measurement Services
Company LP which decreased to a loss of $2.2 million in 2002 from $0.8 million
in income in 2001.

Expenses

   Operating expenses from domestic rentals increased by $25.6 million or 27%
to $120.8 million during 2002 from $95.2 million during 2001. Operating
expenses from international rentals increased by $11.8 million, or 26%, to
$57.6 million during 2002 from $45.8 million during 2001. The increase in
rental expenses resulted primarily from the increased rental business and the
corresponding 22% and 45% increase in domestic and international rental
revenues, respectively, over revenues for the corresponding period in 2001. The
gross profit percentage from domestic and international rentals was
approximately 63% and 70%, respectively during 2002 and 65% and 65%,
respectively in 2001. The decrease in domestic rentals gross profit percentage
was primarily due to weaker domestic market conditions. The increase in
international rentals gross profit percentage was due to the increase in
revenues for the year without a corresponding increase in expenses.

   Operating expenses of our parts, service and used equipment segment
increased by $27.1 million, or 18% to $179.8 million, during 2002, compared to
$152.7 million in 2001, which partially relates to the 4% increase in parts,
service and used equipment revenue. The gross profit margin from parts, service
and used equipment was 20% during 2002 down from 29% in 2001. In 2002, parts
and service revenue included $62.4 million in used equipment sales at a 13%
gross margin, compared to $28.0 million in 2001, with a 31% gross margin.
Approximately 4% of the decrease in gross profit margin for parts, service and
used equipment was due to a low margin gas plant sale transaction and a low
margin compressor sale transaction. In addition, approximately 3% of the
decrease in gross margin was due to $6.8 million in inventory write downs and
reserves for parts which were either obsolete, excess or carried at a price
above market value. The remainder of the decrease was primarily due to the
impact of weaker market conditions on sales volume and margins. Excluding the
write downs and the gas plant and compression equipment transaction, the gross
profit margin from parts, service and used equipment would have been 26% during
2002.

   Operating expenses of compressor fabrication decreased by $88.7 million, or
47%, to $99.4 million during 2002 from $188.1 million during 2001, commensurate
with the decrease in compressor fabrication business and

                                      30

<PAGE>

revenue. The gross profit margin on compression fabrication was 13% during 2002
down from 16% in 2001. The operating expenses attributable to production
equipment fabrication decreased by $20.4 million, or 14%, to $127.4 million
during 2002 from $147.8 million during 2001. The gross profit margin
attributable to production and processing equipment fabrication was 15% during
2002 down from 20% in 2001. The decrease in gross profit margin for compression
and accessory fabrication and production and processing equipment fabrication
was attributable to lower sales levels without a corresponding decrease in
overhead and the impact of weaker market conditions on sales margins.

   Selling, general and administrative expenses increased $61.5 million, or
67%, to $153.7 million in 2002 from $92.2 million in 2001. The increase is
attributable to increased personnel and other selling and administrative
activity in our business segments resulting from the acquisitions completed
during 2001. In addition, we recorded $3.8 million in employee separation costs
relating to a reduction in our work force and management changes and
approximately $11.6 million in additional legal and accounting costs, a
significant portion of which was associated with our Board of Directors and
Special Litigation Committee review of certain transactions, the restatement of
our financial results and the Securities and Exchange Commission investigation.

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

   In addition, because we sold compressors in sale-leaseback transactions,
depreciation expense was reduced by approximately $36 million in 2002 compared
to approximately $43 million in 2001. The decrease in depreciation in 2002 from
2001 was due to the Company's change in estimate of useful lives of its
compressors on July 1, 2001, which is discussed above.

   The increase in depreciation was also offset by the decrease in goodwill
amortization due to our adoption of SFAS 142. Under SFAS 142, amortization of
goodwill over an estimated useful life is discontinued. Instead, goodwill
amounts will be subject to a fair-value-based annual impairment assessment.
During 2001, approximately $11.6 million in goodwill amortization was recorded.

   We incurred leasing expense of $94.8 million during 2002 compared to $70.4
million during 2001. The increase of $24.4 million was attributable to the
compression equipment leases we entered into in August 2001. In connection with
these leases, we were obligated to prepare registration statements and complete
an exchange offer to enable the holders of the notes issued by the lessors to
exchange their notes for notes which are registered under the Securities Act of
1933, as amended. Because the exchange offer was not completed until March 13,
2003, we were required to pay additional leasing expense in the amount of
approximately $105,600 per week until March 13, 2003. The additional leasing
expense began accruing on January 28, 2002. In 2002, we recorded additional
leasing expense of approximately $5.1 million related to the registration and
exchange offering obligations.

                                      31

<PAGE>

   Interest expense increased by $19.5 million to $37.0 million during 2002
from $17.5 million during 2001. The increase in interest expense is due to
higher levels of outstanding debt partially offset by lower effective interest
rates.

   Foreign currency translation expense increased by $10.1 million, or 152%, to
$16.8 million during 2002 compared to $6.7 million during 2001. The increase
was primarily due to our operations in Argentina and Venezuela. In January
2002, Argentina devalued its peso against the U.S. dollar and imposed
significant restrictions on funds transfers internally and outside the country.
In addition, the Argentine government enacted regulations to temporarily
prohibit enforcement of contracts with exchange rate-based purchase price
adjustments. Instead, payment under such contracts can either be made at an
exchange rate negotiated by the parties or, if no such agreement is reached, a
preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also required the parties
to such contracts to renegotiate the price terms within 180 days of the
devaluation. We have renegotiated ten of eleven of our agreements in Argentina
and expect to renegotiate the remaining agreement in the near future. We do not
expect that the outcome of the renegotiation of the remaining agreement will
have a material impact on our financial statements. As a result of these
negotiations, we received approximately $11.2 million in partial reimbursements
and expect to receive approximately $0.5 million in early 2003. We recorded
$1.5 million of these partial reimbursements in translation expense and $9.7
million in revenues from international rentals. During 2002, we recorded an
exchange loss of approximately $9.9 million and $5.8 million for assets exposed
to currency translation in Argentina and Venezuela, respectively, and recorded
a translation loss of approximately $1.1 million for all other countries.

   The fair value of our derivative instruments (interest rate swaps) increased
by $3.2 million during 2002 while the fair value decreased by $7.6 million in
2001. This was due to the recognition of an unrealized change in the fair value
of our interest rate swaps which we have not designated as cash flow hedges
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133").

   Due to a downturn in our business and changes in the business environment in
which we operate, we completed a goodwill impairment analysis as of June 30,
2002. As a result of the test performed as of June 30, 2002, we recorded an
estimated $47.5 million impairment of goodwill attributable to our production
and processing equipment fabrication business in the second quarter of 2002.
The second step of the impairment test required us to allocate the fair value
of the production and processing equipment business to its assets. We performed
the second step of the goodwill impairment test in the third quarter of 2002
and determined that no adjustment to the impairment, recorded in the second
quarter, was required. We estimated the fair value of our reporting units using
a combination of the expected present value of future cash flows and the market
approach, which uses actual market sales. In the fourth quarter of 2002, we
also recorded a $4.6 million goodwill impairment related to our pump division
which is expected to be sold in 2003.

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

Income Taxes

   The provision for income taxes decreased by $60.0 million, or 141%, to a tax
benefit of $17.6 million during 2002 from $42.4 million of tax expense during
2001. The decrease resulted primarily from the corresponding decrease in income
before income taxes. The average effective income tax rates during 2002 and
2001 were 19.0% and 37.8%, respectively. The decrease in the effective tax rate
was due primarily to a

                                      32

<PAGE>

nondeductible goodwill impairment charge, U.S. impact of foreign operations,
and valuation allowances against certain net operating losses. The effective
tax rate benefited from non-U.S. foreign exchange losses deductible for tax in
excess of book losses.

Discontinued operations

   During the fourth quarter of 2002, the Company reviewed its business lines
and the board of directors approved management's recommendation to exit and
sell the Company's non-oilfield power generation and certain used equipment
business lines. In the fourth quarter 2002, Hanover recorded a pre-tax charge
of $52.3 million ($36.4 million, net of tax) to write down its investment in
discontinued operations to current estimated fair market values. In addition,
these operations recorded approximately $6.0 million ($3.9 million, net of tax)
in write-downs which were recorded in the second quarter of 2002. Discontinued
operations include three non-oilfield power generation projects in California
and related inventory, and certain of the Company's used equipment divisions.
Hanover anticipates selling these assets in 2003.

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

Net Income (loss)

   Net income (loss) decreased $188.5 million, or 260%, to a net loss of $116.1
million during 2002 from net income of $72.4 million during 2001 primarily due
to (i) the decline in market conditions which impacted our compressor and
accessory fabrication and production and processing equipment sales and gross
profits, (ii) a $6.7 million pre-tax inventory write down, (iii) a $34.5
million charge included in depreciation and amortization expense for reductions
in the carrying value of certain idle units of the Company's compression fleet
that are being retired and the acceleration of depreciation related to certain
plants and facilities expected to be sold or abandoned, (iv) an increase in
selling, general and administrative expenses, depreciation expense, leasing
expense, foreign currency translation expense and interest expense and (v) a
$52.1 million goodwill impairment and (vi) a $40.3 million charge to write down
investments in discontinued operations to their estimated fair market values.

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

Revenues

   Our total revenues increased by $494.2 million, or 90%, to $1,041.0 million
during the year ended December 31, 2001 from $546.8 million during 2000. The
increase in revenues resulted from growth in horsepower of our natural gas
compressor rental fleet, internal growth in our fabrication business and
outsourcing businesses, which includes compression, gas treating, process
measurement and oilfield power generation, as well as growth due to business
acquisitions completed in 2001 and 2000.

   Revenues from rentals increased by $147.0 million, or 58%, to $400.8 million
during 2001 from $253.8 million during 2000. Domestic revenues from rentals
increased by $97.2 million, or 56%, to $269.7 million during 2001 from $172.5
million during 2000. International rental revenues increased by $49.8 million,
or 61%, to $131.1 million during 2001 from $81.3 million during 2000. The
increase in both domestic and international rental revenue resulted from
expansion of our rental fleet and business acquisitions completed in 2001 and
2000. At December 31, 2001, the compressor rental fleet consisted of
approximately 3,477,000 horsepower, a 62% increase over the 2,151,000
horsepower in the rental fleet at December 31, 2000. Domestically, the rental
fleet increased by 955,000 horsepower, or 55%, during 2001 and internationally
by 371,000 horsepower, or 90%.

   Revenue from parts, service and used equipment increased by $101.4 million,
or 89% to $214.9 million during 2001 from $113.5 million during 2000. This
increase is due in part to an increase in our marketing focus

                                      33

<PAGE>

for this business segment, as well as expansion of business activities through
acquisitions. Approximately 40% of the increase in parts, service and used
equipment revenues resulted from business acquisitions. Revenues from
compressor fabrication increased by $133.2 million, or 148%, to $223.5 million
during 2001 from $90.3 million during 2000. Approximately 47% of this increase
is due to the acquisition of Dresser-Rand Company's compression service
division in September 2000 and POI Acquisition in August 2001. During 2001, an
aggregate of approximately 366,000 horsepower of compression equipment was
fabricated and sold compared to approximately 166,000 horsepower fabricated and
sold during 2000. In addition, 220,000 horsepower was fabricated and placed in
the rental fleet during 2001 compared to 168,000 horsepower in 2000.

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

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

Expenses

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

   Operating expenses of our parts, service and used equipment segment
increased by $72.7 million, or 91% to $152.7 million, during 2001, compared to
$80.0 million in 2000, which relates to the 89% increase in parts, service and
used equipment revenue. The gross profit margin from parts, service and used
equipment was 29% during 2001 and 30% during 2000. Operating expenses of
compressor fabrication increased by $111.3 million, or 145%, to $188.1 million
during 2001 from $76.8 million during 2000, commensurate with the increase in
compressor fabrication business and revenue. The gross profit margin on
compression fabrication was 16% during 2001 and 15% during 2000. The operating
expenses attributable to production equipment fabrication increased by $85.1
million, or 136%, to $147.8 million during 2001 from $62.7 million during 2000.
The gross profit margin attributable to production and processing equipment
fabrication was 20% during 2001 and 21% during 2000.

   Selling, general and administrative expenses increased $40.4 million, or
78%, to $92.2 million during 2001 from $51.8 million during 2000. The increase
is attributable to increased personnel and other administrative and selling
expenses associated with business acquisitions completed during 2001 and 2000
as well as increased activity in the our business segments.

   Depreciation and amortization increased by $36.6 million, or 70%, to $88.8
million during 2001 compared to $52.2 million during 2000. The increase in
depreciation was due to the additions to the rental fleet which were partially
offset by an approximately $12 million decrease in depreciation as a result of
the sale of compression equipment into the equipment leases in March, August
and October 2000 and in August 2001. The increase in amortization of
approximately $6.5 million was due to additional goodwill recorded from
business acquisitions completed during 2001 and 2000.

   After a review of the estimated economic lives of our compression fleet, on
July 1, 2001 we changed our estimate of the useful life of certain compression
equipment to range from 15 to 30 years instead of a 15-year depreciable life.
Our new estimated lives are based upon the different types of compressors
presently in our rental fleet rather than a blanket life applied to all
compressors, and more accurately reflects the economic lives

                                      34

<PAGE>

of the compressors. The effect of this change in estimate on the year ended
December 31, 2001 was a decrease in depreciation expense of approximately $5
million and an increase in net income of approximately $3.1 million ($0.04 per
share).

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

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

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

   Other expenses during 2001 was $9.7 million, which included a $2.7 million
bridge loan commitment fee associated with Hanover's recent acquisition of POI,
a $5.0 million write down of an investment in Aurion Technologies, Inc., a $1.0
million litigation settlement, and $1.0 million in other non-operating
expenses. The Company incurred a $7.6 million loss from the recognition of an
unrealized loss related to the change in fair value of the interest rate swaps
as required under SFAS 133 (see Note 20 in the Notes to Consolidated Financial
Statements in Item 15 of this Form 10-K).

Income Taxes

   The provision for income taxes increased by $14.6 million, or 53%, to $42.4
million during 2001 from $27.8 million during 2000. The increase resulted
primarily from the corresponding increase in income before income taxes. The
average effective income tax rates during 2001 and 2000 were 37.8% and 37.1%,
respectively.

Net Income

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

LEASING TRANSACTIONS (Off-Balance Sheet)

   The Company has entered into five transactions involving the sale of
equipment by Hanover and its subsidiaries to special purpose entities, which in
turn lease the equipment back to us. At the time, these transactions had a
number of advantages over other sources of capital then available to us. The
sale and leaseback transactions (1) enabled Hanover to affordably extend the
duration of its financing arrangements, (2) reduce Hanover's cost of capital
and (3) provided access to a source of capital other than traditional bank
financing.

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

   Sale and leaseback transactions also provided capital to us at a lower cost
compared to other sources then available to us. Lenders to the special purpose
entities did not require as high a rate of interest because their capital risk
is mitigated by a perfected, first priority security interest in the
compression equipment, as well as a residual value guarantee provided by us.
This had the effect of reducing our leasing expense relative to an

                                      35

<PAGE>

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

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

   In August 2001 and in connection with the POI Acquisition, we completed two
sale and leaseback transactions involving certain compression equipment.
Concurrent with these transactions, we exercised our purchase option under our
July 1998 operating lease (described below) for $200 million. Under one
transaction, we received $309.3 million proceeds from the sale of compression
equipment. Under the second transaction, we received $257.8 million from the
sale of additional compression equipment. Both transactions are recorded as a
sale and leaseback of the equipment and are recorded as operating leases. Under
the first transaction, the equipment was sold and leased back by us for a
seven-year period and will continue to be deployed by us in the normal course
of our business. The agreement calls for semi-annual rental payments of
approximately $12.8 million in addition to quarterly rental payments of
approximately $215,000. Under the second transaction, the equipment was sold
and leased back by us for a ten-year period and will continue to be deployed by
us in the normal course of our business. The agreement calls for semi-annual
rental payments of approximately $10.9 million in addition to quarterly rental
payments of approximately $188,000. We have options to repurchase the equipment
under certain conditions as defined by the lease agreements. Through December
31, 2002, we incurred transaction costs of approximately $18.6 million related
to these transactions. These costs are included in intangible and other assets
and are being amortized over the respective lease terms.

   In October 2000, we completed a $172.6 million sale and leaseback of
compression equipment. In March 2000, we entered into a separate $200 million
sale and leaseback of compression equipment. Under the March agreement, we
received proceeds of $100 million from the sale of compression equipment at the
first closing in March 2000 and in August 2000, we completed the second half of
the equipment lease and received an additional $100 million for the sale of
additional compression equipment. In June 1999 and in July 1998, we completed
two other separate $200 million sale and leaseback transactions of compression
equipment. Under the lease agreements, the equipment was sold and leased back
by us for a five year term and will be utilized by us in our business. We have
options to repurchase the equipment under the 2000 and 1999 leases as defined
under certain conditions by the lease agreement. The lease agreements call for
variable quarterly payments that fluctuate with the London Interbank Offering
Rate and have covenant restrictions similar to our bank credit facility. We
incurred an aggregate of approximately $7.5 million in transactions costs for
the leases entered into in 2000 and 1999, which are included in intangible and
other assets on the balance sheet and are being amortized over the respective
lease terms of the respective transactions.

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

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

                                      36

<PAGE>

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

   As a result of the lease transactions, we incurred approximately $94.8
million, $70.4 million, and $45.5 million in lease expense for the years ended
December 31, 2002, 2001 and 2000, respectively. The following future minimum
lease payments are due under our compressor leasing arrangements exclusive of
any final rent payments or purchase option payments (in thousands):
2003--$83,703; 2004--$76,418; 2005--$62,332; 2006--$48,987; 2007--$48,987; and
$100,537 thereafter.

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


LIQUIDITY AND CAPITAL RESOURCES

   Our cash balance amounted to $19.0 million at December 31, 2002 compared to
$23.2 million at December 31, 2001. Primary sources of cash during the year
ended December 31, 2002 were cash flow from operations. Principal uses of cash
during the year ended December 31, 2002 were capital expenditures of $250.2
million and business acquisitions of $10.4 million. Working capital decreased
to $212.1 million at December 31, 2002 from $275.1 million at December 31,
2001, primarily as a result of a reduction in account receivables related to
lower operating levels in the fourth quarter of 2002 compared to the fourth
quarter of 2001.

   We invested $250.2 million in property, plant and equipment in 2002 and
added approximately 37,000 net horsepower to our rental fleet. At December 31,
2002, the compressor rental fleet consisted of 2,654,000 horsepower
domestically and 860,000 horsepower in the international rental fleet.

   Given our consistently high compressor rental fleet utilization, we carry
out new customer projects through fleet additions and other related capital
expenditures. We generally invest funds necessary to make these rental fleet
additions when our idle equipment cannot economically fulfill a project's
requirements and the new equipment expenditure is matched with long-term
contracts whose expected economic terms exceed our return on capital targets.
During 2003, we plan to spend approximately $175 to $200 million on rental
equipment fleet additions, including $55 million on equipment overhauls and
other maintenance capital. A recent amendment to our Revolving Credit Agreement
restricts our capital spending to $200 million in 2003. We expect that our 2003
capital spending will be within operating cash flows. Historically, we have
funded capital expenditures with a

                                      37

<PAGE>

combination of internally generated cash flow, borrowing under the revolving
credit facility, sale and leaseback transactions, raising additional equity and
issuing long-term debt.

   We believe that cash flow from operations and borrowing under our existing
$350 million bank credit facility will provide us with adequate capital
resources to fund our estimated level of capital expenditures for the short
term. Since capital expenditures are largely discretionary, we believe we would
be able to significantly reduce them, in a reasonably short time frame, if
expected cash flows from operations are not realized. As of December 31, 2002,
we had approximately $157 million in borrowings and approximately $53 million
in letters of credit outstanding on our $350 million revolving bank credit
facility (3.2% weighted average effective rate at December 31, 2002). The
letters of credit expire between 2003 and 2004. In addition, we had
approximately $4 million in letters of credit outstanding under other letters
of credit facilities which expire during 2003.

   Our bank credit facility permits us to incur indebtedness, subject to
covenant limitations, up to a $350 million credit limit, plus, in addition to
certain other indebtedness, an additional $300 million in subordinated
unsecured indebtedness and $125 million of other unsecured indebtedness. In
addition, our bank credit facility permits us to enter into future sale and
leaseback transactions with respect to equipment having a value not in excess
of $300 million.

   In addition to purchase money and similar obligations, the indentures and
the participation agreements, which are part of our compression equipment
leases, permit us to incur indebtedness up to the $350 million credit limit
under our bank credit facility, plus (1) an additional $75 million in unsecured
indebtedness and (2) any additional indebtedness so long as, after incurring
such indebtedness, our ratio of the sum of consolidated net income before
interest expense, income taxes, depreciation expense, amortization of
intangibles, certain other non-cash charges and rental expense to total fixed
charges (all as defined and adjusted by the agreements), or Hanover's "coverage
ratio," is greater than 2.25 to 1.0. The indentures and participation
agreements define indebtedness to include the present value of our rental
obligations under sale and leaseback transactions and under facilities similar
to our compression equipment leases.

   In February 2003, we executed an amendment to our bank credit facility and
certain compression equipment leases that we entered into in 1999 and 2000. The
amendment, which was effective as of December 31, 2002, modified certain
financial covenants to allow us greater flexibility in accessing the capacity
under the bank credit facility to support our short-term liquidity needs. In
addition, at the higher end of our permitted consolidated leverage ratio, the
amendment would increase the commitment fee under the bank credit facility by
0.125% and increase the interest rate margins used to calculate the applicable
interest rates under all of the agreements by up to 0.75%. Any increase in our
interest costs as a result of the amendment will depend on our consolidated
leverage ratio at the end of each quarter, the amount of indebtedness
outstanding and the interest rate quoted for the benchmark selected by us. As
part of the amendment, we granted the lenders under these agreements a security
interest in the inventory, equipment and certain other property of Hanover and
its domestic subsidiaries, and pledged 66% of the equity interest in certain of
Hanover's foreign subsidiaries. In consideration for obtaining the amendment,
we agreed to pay approximately $1.8 million in fees to the lenders under these
agreements.

   During 2002, we obtained waivers and amendments to our bank credit facility
and certain compression equipment leases to cure non-compliance with covenants
in those agreements largely resulting from the April 2002 restatement of our
consolidated financial statements. These waivers and amendments did not result
in any material adverse consequences to our business.

   In February 2003, Moody's Investor Service announced that it had downgraded
by one grade our senior implied credit rating, our 4.75% Convertible Senior
Notes and our 7.25% Mandatorily Redeemable Convertible Preferred Securities to
Ba3, B2 and B3, respectively, and Standard & Poor's rating service announced
that it had lowered our corporate credit rating to BB-. We do not have any
credit rating downgrade provisions in our debt or equipment lease agreements
that would accelerate the maturity dates of our debt or rental obligations.
However, a downgrade in our credit rating could materially and adversely affect
our ability to renew existing, or obtain access to new, credit facilities in
the future and could increase the cost of such facilities. Should this occur,
we might seek alternative sources of funding.

                                      38

<PAGE>

   As of December 31, 2002, after giving effect to the amendment made in
February 2003, which was effective as of December 31, 2002, we were in
compliance with all covenants and other requirements set forth in our bank
credit facility, compression equipment leases and indentures. Giving effect to
the covenant limitations in our bank credit agreement, as amended to date, the
liquidity available under our revolver at December 31, 2002 was approximately
$120 million. As of December 31, 2002, our debt to capitalization ratio,
including the residual value guarantees under our compression equipment leases,
was 1.55 to 1 and our book debt to capitalization ratio, excluding compression
equipment leases, was .60 to 1.

   Based upon our total debt of approximately $555 million at December 31,
2002, we expect total debt service payments for the year ending December 31,
2003 will be approximately $50 million based upon interest rates in effect as
of December 31, 2002. In addition, based upon our current operating lease
commitments and rates in effect at December 31, 2002, we expect that total
compressor lease rent payments for the year ending December 31, 2003 will be
approximately $84 million. We also expect that total distributions on our 7
1/4% mandatorily redeemable convertible preferred securities for the year ended
December 31, 2003 (assuming no deferrals as permitted by the terms of such
securities) to be approximately $6.4 million.

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

   The following summarizes our contractual obligations at December 31, 2002,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods.

<TABLE>
<CAPTION>
                                                  TOTAL      2003     2004     2005    Thereafter
                                                ---------- -------- -------- --------- ----------
               December 31, 2002
               -----------------                                 (in thousands)
<S>                                             <C>        <C>      <C>      <C>       <C>
CONTRACTUAL OBLIGATIONS:
4.75% convertible senior notes due 2008........ $  192,000 $     -- $     --  $     --  $192,000
Bank credit facility...........................    156,500       --  156,500        --        --
Other debt(1)..................................    206,444   33,741    3,694   167,734     1,275
Other contractual obligations(2)...............     60,740   60,740       --        --        --
Mandatorily redeemable convertible preferred
  securities...................................     86,250       --       --        --    86,250
Compression equipment operating leases.........    420,964   83,703   76,418    62,332   198,511
Residual guarantees under compression equipment
  operating leases (3).........................    881,299       --  166,000   308,299   407,000
Facilities and other equipment operating leases     12,379    4,947    4,000     2,617       815
                                                ---------- -------- -------- ---------  --------
   Total contractual cash obligations.......... $2,016,576 $183,131 $406,612  $540,982  $885,851
                                                ========== ======== ======== =========  ========
</TABLE>
--------
(1) In connection with the POI Acquisition on August 31, 2001, the Company
    issued a $150 million subordinated acquisition note to Schlumberger, which
    matures December 15, 2005. Interest on the note accrues and is
    payable-in-kind at the rate of 8.5% annually for the first six months after
    issuance and periodically increases in increments of 1% to 2% per annum to
    a maximum interest rate 42 months after issuance of 15.5%. In the event of
    an event of default under note, interest will accrue at a rate of 2% above
    the then applicable rate. The note is subordinated to all of the Company's
    indebtedness other than indebtedness to fund future acquisitions. In the
    event that the Company completes an offering of equity securities, the
    Company is required to apply the proceeds of the offering to repay amounts
    outstanding under the note as long as no default exists or would exist
    under our other indebtedness as a result of such payment.

                                      39

<PAGE>

(2) As of December 31, 2002, we were required to pay $58.0 million plus accrued
    interest to Schlumberger upon obtaining financing of a South American joint
    venture, a minority interest of which was acquired by Hanover in the
    acquisition of POI. The $58.0 million obligation is included in "Accrued
    liabilities" in our balance sheet. Because the joint venture failed to
    obtain the financing on or before December 31, 2002, we had the right to
    put our interest in the joint venture back to Schlumberger in exchange for
    a return of the purchase price allocated to the joint venture, plus the net
    amount of any capital contributions by Hanover to the joint venture. In
    January 2003, we exercised our right to put our interest in the joint
    venture back to Schlumberger. If not exercised, the put right would have
    expired as of February 1, 2003. The consummation of the transfer of
    Hanover's interest in the joint venture back to Schlumberger is subject to
    certain consents. Hanover is currently in discussions with Schlumberger to
    explore the possibility of entering into a new agreement under which
    Hanover would retain the 30% ownership interest in the joint venture. In
    light of the ongoing discussions between Hanover and Schlumberger relating
    to the put, the parties have agreed to postpone the closing date to no
    later than May 31, 2003.
(3) We are a guarantor of approximately $881 million of debt associated with
    the special purpose entities with which we entered into sale leaseback
    transactions. The amount of these guarantees are equal to the residual
    value guarantees under the compression equipment lease agreements.

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

   We adopted SFAS 133, as amended by SFAS 137 and SFAS 138, effective January
1, 2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the
balance sheet at fair value, and that changes in such fair values be recognized
in earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, we entered into two interest rate swaps which were outstanding at
September 30, 2002 with notional amounts of $75 million and $125 million and
strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in
July 2001; however, they were extended for an additional two years at the
option of the counterparty and now expire in July 2003. The difference paid or
received on the swap transactions is recorded as an accrued lease liability and
is recognized in leasing expense. On January 1, 2001, in accordance with the
transition provisions of SFAS 133, we recorded a loss resulting from the
cumulative effect of an accounting change in the statement of operations of
approximately $164,000, net of tax benefit of $89,000. During the year ended
December 31, 2002 and 2001, we recognized an unrealized gain of approximately
$3.2 million and an additional unrealized loss of approximately $7.6 million,
respectively, related to the change in the fair value of these interest rate
swaps in the statement of operations because these swaps did not meet the
specific hedge criteria as a result of the counterparty's option to extend the
interest rate swaps. Further, management decided not to designate the interest
rate swaps as hedges at the time they were extended by the counterparty. At
December 31, 2002, we recorded approximately $4.6 million in accrued
liabilities with respect to the fair value adjustment related to these interest
rate swaps. The fair value of these interest rate swaps will fluctuate with
changes in interest rates over their remaining terms and the fluctuations will
be recorded in the statement of operations.

                                      40

<PAGE>

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

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

   These three swaps, which we have designated as cash flow hedging
instruments, meet the specific hedge criteria and any changes in their fair
values have been recognized in other comprehensive income. During the year
ended December 31, 2002 and 2001, we recorded a loss of approximately $13.6
million and $9.3 million, respectively, related to these three swaps, ($8.9
million and $6.1 million, net of tax) in other comprehensive income. As of
December 31, 2002, a total of approximately $16.1 million was recorded in
accrued current liabilities and approximately $11.5 million in other long-term
liabilities with respect to the fair value adjustment related to these three
swaps.

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

   In January 2002, Argentina devalued its peso against the U.S. dollar and
imposed significant restrictions on funds transfers internally and outside the
country. In addition, the Argentine government enacted regulations to
temporarily prohibit enforcement of contracts with exchange rate-based purchase
price adjustments. Instead, payment under such contracts can either be made at
an exchange rate negotiated by the parties or, if no such agreement is reached,
a preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also requires that the
parties to such contracts renegotiate the price terms within 180 days of the
devaluation. As a result of these negotiations, we received approximately $11.2
million in partial reimbursements of which $9.7 million are recorded in
revenue, and expect to receive approximately $0.5 million during 2003. We have
renegotiated ten of eleven of our agreements in Argentina and expect to
renegotiate the remaining agreement in the near future. We do not expect that
the outcome of the renegotiation of the remaining agreement will have a
material impact on our financial statements. During the year ended December 31,
2002, we recorded an exchange loss of approximately $9.9 million for assets
exposed to currency translation in Argentina. For the year ended December 31,
2002, our Argentine operations represented approximately 5% of our revenue and
7% of our gross margin. The economic situation in Argentina is subject to
change. To the extent that the situation in Argentina continues to deteriorate,
exchange controls continue in place and the value of the peso against the
dollar is reduced further, our results of operations in Argentina could be
materially and adversely affected which could result in reductions in our net
income.

   In addition, we have exposure to currency risks in Venezuela. To mitigate
that risk, the majority of our existing contracts provide that we receive
payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our
exposure to fluctuations in the bolivar's value. During the year ended December
31, 2002, we recorded an exchange loss of approximately $5.8 million for assets
exposed to currency translation in Venezuela. For the year ended December 31,
2002, our Venezuelan operations represented approximately 10% of our revenue
and 17% of our gross margin.

   In December 2002, certain opposition groups in Venezuela initiated an
unofficial national strike. This has caused economic conditions in Venezuela to
deteriorate, including a substantial reduction in the production of oil in
Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency which can be exchanged for
foreign currency by businesses operating inside Venezuela. If the national
strike continues, exchange controls remain in place, or economic conditions in
Venezuela continue to deteriorate, Hanover's results of operations in Venezuela
could be materially and adversely affected, which could result in reductions in
Hanover's net income. As a result, during the fourth quarter of 2002, our
international rental revenues were decreased by approximately $2.7 million a
result of the disruption in our operations in Venezuela.

                                      41

<PAGE>

FACTORS THAT MAY AFFECT OUR FINANCIAL CONDITION AND FUTURE RESULTS

Risks Related to Our Business

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

   During 2003 we plan to spend approximately $175 to $200 million, in
continued expansion and maintenance of our rental fleet and other businesses,
including $55 million on equipment overhauls and other maintenance capital. We
expect that our 2003 capital spending will be within our operating cash flows.
The amount of these expenditures may vary depending on conditions in the
natural gas industry and the timing and extent of any significant acquisitions
we may make. Historically, we have funded our capital expenditures through
internally generated funds, sale and leaseback transactions and debt and equity
financing. While we believe that cash flow from our operations and borrowings
under our existing $350 million bank credit agreement will provide us with
sufficient cash to fund our planned 2003 capital expenditures in the short
term, we cannot assure you that these sources will be sufficient. As of
December 31, 2002, we had approximately $120 million of credit capacity
remaining (after giving effect to the covenant limitations in the agreement) on
our $350 million bank credit agreement (3.2% weighted average effective
interest rate at December 31, 2002). Failure to generate sufficient cash flow,
together with the absence of alternative sources of capital, could have a
material adverse effect on our business, consolidated financial condition,
results of operations or cash flows.

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

   As of December 31, 2002, we had approximately $881 million in total residual
value guarantees that are due upon termination of our compression equipment
leases and may be satisfied by a cash payment or the exercise of our purchase
options under the terms of the respective lease agreements and approximately
$555 million of debt outstanding.

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

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

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

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

  .   increase our vulnerability to interest rate fluctuations because the
      interest payments on a portion of our debt are at variable rates;

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

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

  .   limit our ability to borrow additional funds.

   Additionally, the indenture, the participation agreement and other documents
governing our compression equipment leases contain financial and other
restrictive covenants. Failing to comply with those covenants could result in
an event of default which, if not cured or waived, could have a material
adverse effect on us.

   Our bank credit facility and other debt facilities and the operative
documents governing our compression equipment leases contain, among other
things, covenants that may restrict our ability to finance future operations or
capital needs or to engage in other business activities. These covenants
include provisions that restrict our ability to:

  .   incur additional indebtedness or issue guarantees;

  .   create liens on our assets;

                                      42

<PAGE>

  .   engage in mergers, consolidations and certain dispositions of assets;

  .   enter into additional operating leases;

  .   pay dividends on or redeem capital stock;

  .   enter into derivative transactions;

  .   make certain investments or restricted payments;

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

  .   prepay or modify our debt facilities;

  .   enter into transactions with affiliates; or

  .   enter into sale and leaseback transactions.

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

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

   We have approximately $194 million of indebtedness which will mature within
two years from December 31, 2002. Our ability to refinance this indebtedness
will be affected by the factors discussed above and those discussed under the
heading "Significant Leverage" below and by the general market at the time we
refinance. The factors discussed above and those discussed under the heading
"Significant Leverage" below could adversely affect our ability to refinance
this indebtedness at a reasonable cost.

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

   As of December 31, 2002, our debt to capitalization ratio, including
residual value guarantees under our compression equipment leases, was 1.55 to 1
and our book debt to capitalization ratio, excluding our compression equipment
leases, was 0.60 to 1. We have been advised by Moody's Investor Service that
our credit rating may suffer further if we are unable to materially reduce our
leverage during the first half of 2003. In February 2003, Moody's Investor
Service announced that it had downgraded by one grade our senior implied credit
rating, our 4.75% Convertible Senior Notes and our 7.25% Mandatorily Redeemable
Convertible Preferred Securities to Ba3, B2 and B3, respectively, and Standard
& Poor's rating service announced that it had lowered our corporate credit
rating to BB-.

   We do not have any rating downgrade provisions that would accelerate the
maturity dates of our debt if our credit rating was downgraded. However, a
downgrade in our credit rating could adversely affect our ability to renew
existing, or obtain access to new, credit facilities and could increase the
cost of such facilities. Our ability to reduce our leverage depends upon market
and economic conditions, as well as our ability to execute liquidity enhancing
transactions such as sales of non-core assets or our equity securities.

   Significant Cash Requirements--We will need to generate a significant amount
of cash to service our indebtedness and operating lease commitments and to fund
working capital.

                                      43

<PAGE>

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

   Based upon our total debt of $555 million at December 31, 2002, we expect
total debt service payments for the year ended December 31, 2003 will be
approximately $50 million based upon interest rates in effect as of December
31, 2002. In addition, based upon our current operating lease commitments and
rates in effect at December 31, 2002, we expect that total compressor lease
rent payments for the year ended December 31, 2003 will be approximately $84
million. We also expect that total distributions on our 7 1/4% Mandatorily
Redeemable Convertible Preferred Securities for the year ended December 31,
2003 (assuming no deferrals as permitted by the terms of such securities) will
be approximately $6.4 million.

   We are exposed to interest rate risk on borrowings under our floating rate
revolving credit facility. At December 31, 2002, $157 million was outstanding
under this facility bearing interest at a weighted average effective rate of
3.2% per annum. Assuming a hypothetical 10% percent increase or decrease in
this rate and that the amount outstanding under this facility remains constant,
annual interest expense for advances under this facility would increase or
decrease by $0.5 million. In addition, we are exposed to variable rental rates
on the equipment leases we entered into in June 1999 and October 2000. Assuming
a hypothetical 10% percent increase or decrease in rates from those in effect
at December 31, 2002, the increase or decrease in leasing expense for the next
twelve months on these equipment leases would be approximately $1.3 million.

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

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

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

   Characterization of Sale Leaseback Transactions--There is a risk that the
Internal Revenue Service or other taxing authority would not agree with our
treatment of sale leaseback transactions which could increase our taxes.

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


                                      44

<PAGE>

   See discussion of FIN 46 under "New Accounting Pronouncements".

   See Management's Discussion and Analysis of Financial Condition and Results
of Operations--Critical Accounting Policies and Estimates--Sale and Leaseback
Transactions.

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

   The Company has entered into five transactions involving the sale of
equipment by Hanover and its subsidiaries to special purpose entities, which in
turn lease the equipment back to us. We are entitled under the lease agreements
to substitute equipment that we own for equipment owned by the special purpose
entities, provided that the value of the equipment involved in the
substitutions is equal. We generally substitute equipment when a lease customer
of ours exercises a contractual right or otherwise desires to buy the leased
equipment or when fleet equipment owned by the special purposes entities is
selected by the Company for transfer to international projects. Each lease
agreement limits the aggregate amount of replacement equipment that may be
substituted to a percentage of the termination value under each lease. The
termination value is equal to (i) the aggregate amount of outstanding principal
of the corresponding notes issued by the special purpose entity, plus accrued
and unpaid interest and (ii) the aggregate amount of equity investor
contributions to the special purpose entity, plus all accrued amounts due on
account of the investor yield and any other amounts owed to such investors in
the special purpose entity. In the table below termination value does not
include amounts in excess of the aggregate outstanding principal amount of
notes and the aggregate outstanding amount of the equity investor
contributions, as such amounts are periodically paid as supplemental rent as
required by the compression equipment leases. The aggregate amount of
replacement equipment substituted to date (in dollars and percentage of
termination value), the termination value, the substitution percentage
limitation relating to each of our compression equipment leases to date as of
February 28, 2003 is as follows:

<TABLE>
<CAPTION>
                                                             Substitution
                                                             Limitation as
                       Value of     Percentage               Percentage of
                      Substituted of Termination Termination  Termination  Lease Termination
        Lease          Equipment     Value(1)     Value(1)       Value           Date
        -----         ----------- -------------- ----------- ------------- -----------------
                                              (Dollars in Millions)
<S>                   <C>         <C>            <C>         <C>           <C>
June 1999............    $28.1         14.1%      $  200.0        25%       June 2004
March and August 2000     19.1          9.6%         200.0        25%       March 2005
October 2000.........     16.2          9.4%         172.6        25%       October 2005
August 2001..........     16.9          5.5%         309.3        25%       September 2008
August 2001..........     18.0          7.0%         257.7        25%       September 2011
                         -----                    --------
   Total.............    $98.3                    $1,139.6
                         =====                    ========
</TABLE>
--------
(1) Termination value assumes all accrued rents paid before termination.

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

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

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

  .   difficulties in managing international operations;

  .   unexpected changes in regulatory requirements;

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

  .   potentially adverse tax consequences;

  .   restrictions on repatriation of earnings or expropriation of property;

                                      45

<PAGE>

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

  .   the burden of complying with foreign laws; and

  .   fluctuations in currency exchange rates and the value of the U.S. dollar,
      particularly in Argentina and Venezuela.

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

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

   In December 2002, certain opposition groups in Venezuela initiated an
unofficial national strike. This has caused economic conditions in Venezuela to
deteriorate, including a substantial reduction in the production of oil in
Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency that can be exchanged for
foreign currency by businesses operating inside Venezuela. As of December 31,
2002, we had approximately $21.5 million in receivables from customers in
Venezuela, a significant portion of which were due from Petroleos de Venezuela,
S.A., Venezuela's state-owned oil company. If the national strike continues,
exchange controls remain in place, our receivables continue to increase and
ultimately are not paid or economic conditions in Venezuela continue to
deteriorate, our results of operations in Venezuela could be materially and
adversely affected, which could result in reductions in Hanover's net income.

   In January 2002, Argentina devalued its peso against the U.S. dollar and
imposed significant restrictions on funds transfers internally and outside the
country. In addition, the Argentine government enacted regulations to
temporarily prohibit enforcement of contracts with exchange rate-based purchase
price adjustments. Instead, payment under such contracts can either be made at
an exchange rate negotiated by the parties or, if no such agreement is reached,
a preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also requires the parties
to such contracts to renegotiate the price terms within 180 days of the
devaluation. We have renegotiated ten of eleven of our agreements in Argentina
and expect to renegotiate the remaining agreement in the near future. We do not
expect that the outcome of the renegotiation of the remaining agreement will
have a material impact on our financial statements. The economic situation in
Argentina is subject to change. If the situation in Argentina continues to
deteriorate, exchange controls continue in place and the value of the peso
against the dollar is reduced further, Hanover's results of operations in
Argentina could be materially and adversely affected, which could result in
reductions in Hanover's net income.

   As part of our acquisition of the gas compression business of Schlumberger,
we acquired minority interests in three joint ventures in Venezuela. As a
minority investor in these joint ventures, we will not be able to control their
operations and activities, including without limitation, whether and when they
distribute cash or property to their holders.

   Integration of Acquisitions--Integration of acquired assets into our
business involves potential risks which could affect our business.

   Historically, we have completed selective acquisitions of other companies,
assets and product lines that either complement or expand our business. Each
acquisition involves potential risks, such as the diversion of management's
attention away from current operations, problems in integrating acquired
businesses and possible short-term adverse effects on our operations as a
result of that process. We may be unable to successfully

                                      46

<PAGE>

integrate acquired businesses into our business, or may be able to do so only
at significant expense. Our ability to make acquisitions in 2003 will be
impacted by the recent amendment to our bank credit agreement which restricts
our capital spending to $200 million in 2003.

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

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

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

   Recently, due to a deterioration in market conditions, we have experienced a
decline in revenues and profits. For the year ended December 31, 2002, our
business recorded a $116 million net loss. Our results for the year ended
December 31, 2002 have been impacted by (i) the decline in market conditions
which impacted our compressor and accessory fabrication and production and
processing equipment sales and gross profits; (ii) a $6.8 million pre-tax
inventory write down; (iii) a $34.5 million charge included in depreciation and
amortization expense for reductions in the carrying value of certain idle units
of the Company's compression fleet that are being retired and the acceleration
of depreciation related to certain plants and facilities expected to be sold or
abandoned; (iv) an increase in selling, general and administrative expenses,
depreciation expense, leasing expense, foreign currency translation expense,
interest expense; (v) a $52.1 million pre-tax goodwill impairment, primarily
attributable to our production and processing equipment business and (vi) a
$40.4 million charge to write down investments in discontinued operations to
their estimated fair market values.

   Discontinued Operations--Our exit and sale strategy with respect to certain
assets classified as discontinued operations is subject to market and execution
risks.

   During the fourth quarter of 2002, we reviewed our business lines and the
board of directors approved management's recommendation to exit and sell our
non-oilfield power generation and certain used equipment business lines. In the
fourth quarter 2002, Hanover recorded a pre-tax charge of $52.3 million ($36.4
million, net of tax) to write down its investment in discontinued operations to
current estimated fair market values. In addition, these operations recorded
approximately $6.0 million ($3.9 million, net of tax) in write-downs which were
recorded in the second quarter of 2002. Discontinued operations include three
non-oilfield power generation projects and related inventory, and certain of
our used equipment divisions. We anticipate selling these assets in 2003.
However, our ability to sell these assets for an amount equal to their
respective estimated fair market values which they are carried on our books is
subject to the availability and interest of purchasers for those assets and our
ability to find potential purchasers and to take advantage of any opportunities
to sell these assets that may arise.

                                      47

<PAGE>

   Competition--We operate in a highly competitive industry.

   We experience competition from companies who may be able to more quickly
adapt to technological and other changes within our industry and throughout the
economy as a whole, more readily take advantage of acquisition and other
opportunities and adopt more aggressive pricing policies. In times of weak
market conditions, we may experience reduced profit margins from increased
pricing pressure. We may not be able to continue to compete successfully in
this market or against such competition. If we do not compete successfully, we
may lose market share and our business, consolidated financial condition,
results of operations or cash flows could be materially adversely affected.

   Potential Liability and Insurance--Natural gas operations entail inherent
risks that may result in substantial liability to us.

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

   War, Terrorist Attacks or Responses Thereto--The outbreak of war, terrorist
attacks or responses thereto could adversely affect our business, consolidated
financial condition, results of operations or cash flows.

   The war in Iraq, unrest in the Middle East and other parts of the world may
result in instability in the world energy markets, affecting both supply and
demand. Our business, consolidated financial condition, results of operations
or cash flows could be materially adversely affected if we incur substantial
damages as a result of such instability.

   On September 11, 2001, terrorists carried out attacks that destroyed the
World Trade Center in New York and badly damaged the Pentagon outside of
Washington, D.C. As a result of these attacks, the United States securities
markets were closed for several days. We believe that these events and the
subsequent military actions have caused a delay in capital spending which has
impacted our business. The impact that these terrorist attacks, or future
events arising as a result of these terrorist attacks, including military or
police activities in the United States or the outbreak of war in foreign
countries, future terrorist activities or threats of such activities, political
unrest and instability, riots and protests, could have on the United States and
the global economy, the United States and global securities markets and our
business, consolidated financial condition, results of operations or cash flows
cannot be determined with any accuracy. We have not obtained insurance against
terrorist attacks or responses thereto and, due to its limited availability and
high cost, do not expect to obtain such insurance in the future. Our business,
consolidated financial condition, results of operations or cash flows could be
materially adversely affected if we incur substantial damages as a result of
terrorist attacks or responses thereto.

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

   Our business is subject to a variety of federal, state, local and foreign
laws and regulations relating to the environment, health and safety. These laws
and regulations are complex, change frequently and have tended to become more
stringent over time. Failure to comply with these laws and regulations may
result in a variety of civil and criminal enforcement measures, including
assessment of monetary penalties, imposition of remedial requirements and
issuance of injunctions as to future compliance. As part of the regular overall
evaluation of

                                      48

<PAGE>

both our current operations and newly acquired operations, we are in the
process of applying for or updating certain facility permits with respect to
stormwater discharges, waste handling and air emissions relating to painting
and blasting. In addition, certain of our customer service arrangements may
require us to operate, on behalf of a specific customer, petroleum storage
units such as underground tanks or pipelines and other regulated units, all of
which may impose additional compliance obligations.

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

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

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

   GKH Investments, L.P. and GKH Partners L.P., as nominee for GKH Private
Limited (collectively "GKH"), owned approximately 10% of our common stock as of
December 31, 2002. Schlumberger and its affiliates owned approximately 11% of
our common stock as of December 31, 2002. As holders of large blocks of our
stock, GKH and Schlumberger are in a position to exert substantial influence
over the outcome of many corporate actions requiring stockholder approval,
including the election of directors, the additional issuance of our common
stock or other securities and transactions involving a change of control. The
interests of GKH or Schlumberger could conflict with the interests of our other
stockholders.

   GKH has advised us that it is in the process of dissolving and "winding up"
its affairs. On November 12, 2002, GKH informed us that it had advised its
limited partners that it is extending the wind-up process of the

                                      49

<PAGE>

partnership for an additional twelve months from January 25, 2003 until January
25, 2004. On December 3, 2002, GKH made a partial distribution of 10,000,000
shares out of a total of 18,274,795 shares held by GKH to its limited and
general partners. As part of the wind-up process, GKH may liquidate or
distribute substantially all of its assets, including the remaining shares of
our common stock owned by GKH, to its partners. In the event the partners of
GKH receive further distributions of shares of our common stock from GKH as a
result of the wind-up, we cannot predict whether those partners would continue
to hold those shares or whether the interests of such partners may conflict
with the interests of our other stockholders and the holders of the notes.

   Hanover acquired its interest in PIGAP II as part of its purchase of
Production Operators Corporation from Schlumberger in August 2001. PIGAP II is
a joint venture, currently owned 70% by a subsidiary of Williams Companies Inc.
and 30% by Hanover, which operates a natural gas compression facility in
Venezuela that processes 1.2 billion standard cubic feet per day of natural
gas. The natural gas processed by PIGAP II is re-injected into oil reservoirs
for enhanced oil recovery.

   In January 2003, we exercised our right to put our interest in one of these
joint ventures, the PIGAP II joint venture, back to Schlumberger. If not
exercised, the put right would have expired as of February 1, 2003. The
consummation of the transfer of the Company's interest in the joint venture
back to Schlumberger is subject to certain consents. We are currently in
discussions with Schlumberger to explore the possibility of entering into a new
agreement under which we would retain the 30% ownership interest in the joint
venture. In light of the ongoing discussions between Hanover and Schlumberger
relating to the put, the parties have agreed to postpone the closing date to no
later than May 31, 2003.

   Shareholder Litigation--We and certain of our officers and directors are
named as defendants in a putative class action lawsuit and in various
derivative lawsuits.

   The putative class action securities lawsuits and the derivative lawsuits
that we are currently defending are at a very early stage. Consequently, it is
premature at this time to predict liability or to estimate the damages, or the
range of damages, if any, that we might incur in connection with such actions.
As of December 31, 2002, the Company has paid approximately $7.7 million in
legal related expenses in connection with the internal investigations, the
putative class action securities lawsuits, the derivative lawsuits and the
Securities and Exchange Commission investigation. Of this amount, the Company
has paid approximately $1.0 on behalf of officers and directors in connection
with the above-named proceedings. The Company intends to pay the litigation
expenses of its officers and directors, subject to the limitations imposed by
Delaware law and the Company's certificate of incorporation and bylaws. The
Company expects to be reimbursed for some or all of these expenses from the
Company's directors' and officers' insurance policies An adverse outcome in
these actions could have a material adverse effect on our business, financial
condition, results of operations or cash flows. See Item 3. Legal Proceedings.

   Securities and Exchange Commission Investigation--We are currently the
subject of an SEC investigation.

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

   Volatility of Our Stock Price--Our stock price may experience volatility.

   Our stock price, like that of other companies, can be volatile. Some of the
factors that could affect our stock price are quarterly increases or decreases
in revenue or earnings, changes in revenue or earnings estimates by the
investment community, and speculation in the press or investment community
about our financial condition or

                                      50

<PAGE>

results of operations. General market conditions and domestic or international
economic factors unrelated to our performance may also affect our stock price.
For these reasons, investors should not rely on recent trends to predict future
stock prices or financial results. In addition, following periods of volatility
in a company's securities, securities class action litigation against a company
is sometimes instituted and has been recently initiated against our Company.
This type of litigation could result in liability, substantial costs and the
diversion of management time and resources.

NEW ACCOUNTING PRONOUNCEMENTS

   In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible Assets
("SFAS 142"). Under SFAS 142, amortization of goodwill over an estimated useful
life is discontinued. Instead, goodwill will be reviewed for impairment
annually or whenever events indicate impairment may have occurred. The standard
also requires acquired intangible assets to be recognized separately and
amortized as appropriate. SFAS 142 was effective for Hanover on January 1,
2002. The adoption of SFAS No. 142 has had an impact on future financial
statements, due to the discontinuation of goodwill amortization expense. For
the year ended December 31, 2001, goodwill amortization expense was
approximately $11.6 million.

   The transition provisions of SFAS 142 required us to identify our reporting
units and perform an initial impairment assessment of the goodwill attributable
to each reporting unit as of January 1, 2002. We performed our initial
impairment assessment and determined that our reporting units are the same as
our business segments and that no impairment existed as of January 1, 2002.
However, due to a downturn in our business and changes in the business
environment in which we operate, we completed an additional impairment analysis
as of June 30, 2002. As a result of the test performed as of June 30, 2002, we
recorded an estimated $47.5 million impairment of goodwill attributable to our
production and processing equipment fabrication business unit. The second step
of goodwill impairment test required us allocate the fair value of the
reporting unit to the production and processing equipment businesses' assets.
We performed the second step of the goodwill impairment test in the third
quarter of 2002 and determined that no adjustment to the impairment, recorded
in the second quarter, was required. The fair value of reporting units was
estimated using a combination of the expected present value of future cash
flows and the market approach, which uses actual market sales. In the fourth
quarter of 2002, we recorded a $4.6 million goodwill impairment related to our
pump division which we expect to sell in 2003.

   The table below presents the carrying amount of goodwill (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                              2002
                                                          ------------
          <S>                                             <C>
          Domestic rentals...............................   $ 94,655
          International rentals..........................     34,659
          Parts, service and used equipment..............     32,691
          Compressor and accessory fabrication...........     14,573
          Production and processing equipment fabrication      3,941
                                                            --------
             Total.......................................   $180,519
                                                            ========
</TABLE>

                                      51

<PAGE>

   Hanover's net income and earnings per share, adjusted to exclude goodwill
amortization expense, for the twelve months ended December 31, 2001 and 2000
are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     2001     2000
                                                   Restated Restated
                                                   -------- --------
           <S>                                     <C>      <C>
           Net income............................. $72,413  $49,639
           Goodwill amortization, net of tax......   8,846    4,280
                                                   -------  -------
           Adjusted net income.................... $81,259  $53,919
                                                   =======  =======
           Basic earnings per share, as reported.. $  1.00  $  0.80
           Goodwill amortization, net of tax......    0.12     0.07
                                                   -------  -------
           Adjusted basic earnings per share...... $  1.12  $  0.87
                                                   =======  =======
           Diluted earnings per share, as reported $  0.94  $  0.75
           Goodwill amortization, net of tax......    0.11     0.06
                                                   -------  -------
           Adjusted diluted earnings per share.... $  1.05  $  0.81
                                                   =======  =======
</TABLE>

   In June 2001, the FASB issued SFAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets ("SFAS 143"). SFAS 143
establishes the accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. This
statement is effective for Hanover on January 1, 2003. We are currently
assessing the new standard and do not believe it will have a material impact on
our consolidated results of operations, cash flows or financial position.

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

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

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

   In November 2002, the EITF reached a consensus on Issue No. 00-21 ("EITF
00-21"), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 will be
effective for interim periods beginning after June 15, 2003. We are currently
evaluating the impact of adoption of EITF 00-21 on our financial position and
results of operations.


                                      52

<PAGE>

   In November 2002, the FASB issued Interpretation No. 45 ( "FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
We have adopted the disclosure provisions and are currently evaluating the
impact of adoption of the recognition and measurement provisions of FIN 45 on
our financial position and results of operations.

   In December 2002, the FASB issued Statement of SFAS 148, Accounting for
Stock-Based Compensation--Transition and Disclosure ("SFAS 148"). SFAS 148
amends SFAS 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December
15, 2002. We have adopted the disclosure provisions and are currently
evaluating the impact of adoption of SFAS 148 on our financial position and
results of operations.

   In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46" ),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51". The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights ("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity in which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 will require us to include in our
consolidated financial statements the special purpose entities that lease
compression equipment to us beginning in July 2003. If these special purpose
entities had been consolidated in Hanover's financial statements as of December
31, 2002, Hanover would add approximately $1,031 million in compressor
equipment and approximately $1,140 million in debt to its balance sheet and
reverse $109 million of deferred gains that were recorded on its balance sheet
as a result of the sale and leaseback transactions. In addition, Hanover would
record depreciation expense on the compression equipment for prior periods (net
of tax) as part of the cumulative effect of the adoption of FIN 46 and would
record depreciation expense in future periods. We are currently evaluating the
impact of recording depreciation for prior periods. After we adopt FIN 46, we
estimate that we will record approximately $20 million per year in additional
depreciation expense on our leased compression equipment.

                                      53

<PAGE>

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

   We are exposed to interest rate and foreign currency risk. Hanover and its
subsidiaries periodically enter into interest rate swaps to manage its exposure
to fluctuations in interest rates. At December 31, 2002, the fair market value
of these interest rate swaps, excluding the portion attributable to and
included in accrued leasing, was a liability of approximately $27.6 million, of
which $16.1 million was recorded in accrued liabilities and $11.5 million in
other long-term liabilities. We are party to five interest rate swaps to
convert variable lease payments under certain lease arrangements to fixed
payments as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                     Fair Value of the
                                                                                          Swap at
      Maturity Date         Company Pays Fixed Rate        Notional Amount           December 31, 2002
      -------------        -------------------------  -------------------------  -------------------------
<S>                        <C>                        <C>                        <C>
        7/21/2003                   5.5100%                   $ 75,000                   $(1,714)
        7/21/2003                   5.5600%                   $125,000                   $(2,892)
        3/11/2005                   5.2550%                   $100,000                   $(7,163)
        3/11/2005                   5.2725%                   $100,000                   $(7,243)
       10/26/2005                   5.3975%                   $100,000                   $(8,577)
</TABLE>

   At December 31, 2002, we are exposed to variable rental rates, which
fluctuate with market interest rate, on a portion of the equipment leases we
entered into in September 1999 and October 2000. Assuming a hypothetical 10%
increase in the variable rates from those in effect at year end, the increase
in annual leasing expense on these equipment leases would be approximately $1.3
million. We do not currently use derivative financial instruments to mitigate
foreign currency risk; however, we may consider the use of such instruments
because of recent events in Argentina and Venezuela.

   We are also exposed to interest rate risk on borrowings under our floating
rate revolving credit facility. At December 31, 2002, $156.5 million was
outstanding bearing interest at a weighted average effective rate of 3.2% per
annum. Assuming a hypothetical 10% increase in the weighted average interest
rate from those in effect at December 31, 2002, the increase in annual interest
expense for advances under this facility would be approximately $0.5 million.

   In January 2002, Argentina devalued its peso against the U.S. dollar and
imposed significant restrictions on funds transfers internally and outside the
country. In addition, the Argentine government enacted regulations to
temporarily prohibit enforcement of contracts with exchange rate-based purchase
price adjustments. Instead, payment under such contracts can either be made at
an exchange rate negotiated by the parties or, if no such agreement is reached,
a preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also requires that the
parties to such contracts renegotiate the price terms within 180 days of the
devaluation. As a result of these negotiations, we received approximately $11.2
million in partial reimbursements of which $9.7 million are recorded in
revenue, and expect to receive approximately $0.5 million during 2003. We have
renegotiated ten of eleven of our agreements in Argentina and expect to
renegotiate the remaining agreement in the near future. We do not expect that
the outcome of the renegotiation of the remaining agreement will have a
material impact on our financial statements. During the year ended December 31,
2002, we recorded an exchange loss of approximately $9.9 million for assets
exposed to currency translation in Argentina. For the year ended December 31,
2002, our Argentine operations represented approximately 5% of our revenue and
7% of our gross margin. The economic situation in Argentina is subject to
change. To the extent that the situation in Argentina continues to deteriorate,
exchange controls continue in place and the value of the peso against the
dollar is reduced further, our results of operations in Argentina could be
materially and adversely affected which could result in reductions in our net
income.

   In addition, we have exposure to currency risks in Venezuela. To mitigate
that risk, the majority of our existing contracts provide that we receive
payment in U.S. dollars rather than Venezuelan bolivars, thus reducing our
exposure to fluctuations in the bolivar's value. During the year ended December
31, 2002, we recorded an

                                      54

<PAGE>

exchange loss of approximately $5.8 million for assets exposed to currency
translation in Venezuela. For the year ended December 31, 2002, our Venezuelan
operations represented approximately 10% of our revenue and 17% of our gross
margin.

   In December 2002, certain opposition groups in Venezuela initiated an
unofficial national strike. This has caused economic conditions in Venezuela to
deteriorate, including a substantial reduction in the production of oil in
Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency which can be exchanged for
foreign currency by businesses operating inside Venezuela. If the national
strike continues, exchange controls remain in place, or economic conditions in
Venezuela continue to deteriorate, Hanover's results of operations in Venezuela
could be materially and adversely affected, which could result in reductions in
Hanover's net income. As a result, during the fourth quarter of 2002, our
international rental revenues were decreased by approximately $2.7 million as a
result of the disruption in our operations in Venezuela.

Item 8.  Financial Statements and Supplementary Data

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

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

   None.

                                      55

<PAGE>

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

   The information included or to be included in the Company's definitive proxy
statement for its 2003 Annual Meeting of Stockholders under the captions
"Nominees for Election as Directors," and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference herein. Please see Item 1 of
this Form 10-K for identification of our executive officers.

Item 11.  Executive Compensation

   The information included or to be included under the caption "Information
Regarding Executive Compensation" in the Company's definitive proxy statement
for its 2003 Annual Meeting of Stockholders is incorporated by reference herein.

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

   The information included or to be included under the captions "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Company's definitive proxy statement for its 2003
Annual Meeting of Stockholders is incorporated by reference herein.

Item 13.  Certain Relationships and Related Transactions

   The information included or to be included under the caption "Certain
Relationships and Transactions" in the Company's definitive proxy statement for
its 2003 Annual Meeting of Stockholders is incorporated by reference herein.

Item 14.  Controls and Procedures

   (a)  Evaluation of Disclosure Controls and Procedures.  Within 90 days
before the filing of this Report, the Company's principal executive officer and
principal financial officer evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) of the
Securities Exchange Act of 1934). Based on the evaluation, the Company's
principal executive officer and principal financial officer believe that the
Company's disclosure controls and procedures were effective to ensure that
material information was accumulated and communicated to the Company's
management, including the Company's principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.

   (b)  Changes in Internal Controls.  Under the direction of our new President
and Chief Executive Officer, Senior Vice President and Chief Financial Officer,
and Senior Vice President and General Counsel, we continued the process of
reviewing our internal controls and procedures for financial reporting and have
changed or are in the process of changing some of those controls and
procedures, including changes relating to: human resources; internal audit;
reconciliation of intercompany accounts; approval of capital expenditures;
preparation, approval and closing of significant agreements and transactions;
review and quantification of compressor substitutions under compression
equipment lease agreements; integration of acquired businesses and assets
(including integration of certain financial and accounting systems related
thereto); standardization of internal controls and policies across the
organization; and the development, implementation and enhancements of corporate
governance policies and procedures and performance management systems. As part
of our review of our internal controls and procedures for financial reporting,
we have made personnel changes and hired additional qualified staff in the
legal, accounting/finance and human resource areas and are utilizing third
parties to assist with some

                                      56

<PAGE>

of our integration and internal audit functions. This review is ongoing, and
the review to date constitutes the evaluation referenced in paragraphs 5 and 6
of the Certifications of our President and Chief Executive Officer and our
Senior Vice President and Chief Financial Officer which appear immediately
following the signature page of this report.

                                    PART IV

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

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

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

<TABLE>
         <S>                                                   <C>
         Report of Independent Accountants....................      F-1
         Consolidated Balance Sheet...........................      F-2
         Consolidated Statement of Operations.................      F-3
         Consolidated Statement of Comprehensive Income (Loss)      F-4
         Consolidated Statement of Cash Flows................. F-5, F-6
         Consolidated Statement of Common Stockholders' Equity      F-7
         Notes to Consolidated Financial Statements...........      F-8
         Selected Quarterly Financial Data (unaudited)........     F-59
</TABLE>

      2.  Financial Statement Schedule

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

      3.  Exhibits

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

  3.1   Certificate of Incorporation of the Hanover Compressor Holding Co., as amended, incorporated by
        reference to Exhibit 3.1 to Hanover Compressor Company's (the "Company") Current Report on
        Form 8-K filed with the SEC on February 5, 2001.

  3.2   Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated
        December 8, 1999, incorporated by reference to Exhibit 3.2 to the Company's Current Report on
        Form 8-K filed with the SEC on February 5, 2001.

  3.3   Certificate of Amendment of Certificate of Incorporation of Hanover Compressor Holding Co., dated
        July 11, 2000, incorporated by reference to Exhibit 3.3 to the Company's Current Report on Form
        8-K filed with the SEC on February 5, 2001.

  3.4   By-laws of the Company, incorporated by reference to Exhibit 3.3 to the Company's Annual Report
        on Form 10-K for the fiscal year ended December 31, 1999.

  3.5   Amended and Restated Bylaws of the Company, dated December 10, 2002.*

  4.1   Third Amended and Restated Registration Rights Agreement, dated as of December 5, 1995, by and
        between the Company, GKH Partners, L.P., GKH Investments, L.P., Astra Resources, Inc. and other
        stockholders of the Company party thereto, incorporated by reference to Exhibit 4.1 to the
        Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.

  4.2   Form of Warrant Agreement, dated as of August 7, 1995, incorporated by reference to Exhibit 4.10
        to the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.

  4.3   Specimen Stock Certificate, incorporated by reference to Exhibit 4.11 to the Company's Registration
        Statement (File No. 333-24953) on Form S-1, as amended.

  4.4   Form of Second Amended and Restated Stockholders Agreement of the Company, dated as of
        June 1997, incorporated by reference to Exhibit 4.12 to the Company's Registration Statement (File
        No. 333-24953) on Form S-1, as amended.
</TABLE>

                                      57

<PAGE>

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

  10.1  Credit Agreement, dated as of December 15, 1997, as amended and restated as of December 3, 2001,
        among the Company, Hanover Compression Limited Partnership, JPMorgan Chase Bank, as agent,
        and the several lenders parties thereto, incorporated by reference to Exhibit 10.79 to the Company's
        Current Report on Form 8-K filed with the SEC on December 17, 2001.

  10.2  Amendment, dated as of June 26, 2002, to (i) the Credit Agreement dated as of December 15, 1997,
        as amended and restated as of December 3, 2001, among the Company, certain of the Company's
        subsidiaries, JPMorgan Chase Bank, as administrative agent, and the lenders parties thereto and (ii)
        certain Synthetic Guarantees and Credit Agreements referenced in the amendment, incorporated by
        reference to Exhibit 10.75 to the Company's Current Report on Form 8-K filed with the SEC on
        August 6, 2002.

  10.3  Amendment, dated as of January 31, 2003, to the (i) the Credit Agreement dated as of December 15,
        1997, as amended and restated on December 3, 2001, among the Company, certain of the Company's
        subsidiaries, JPMorgan Chase Bank, as administrative agent, and the lenders parties thereto and (ii)
        certain Synthetic Guarantees and Credit Agreements referenced in the amendment, incorporated by
        reference to Exhibit 10.80 to the Company's Current Report on Form 8-K filed with the SEC on
        February 7, 2003.

  10.4  Holdings Guarantee, dated as of December 3, 2001, made by the Company in favor of JPMorgan
        Chase Bank, as agent, incorporated by reference to Exhibit 10.81 to the Company's Current Report
        on Form 8-K filed with the SEC on December 17, 2001.

  10.5  Subsidiaries' Guarantee, dated as of December 3, 2001, made by certain of the Company's
        subsidiaries in favor of JPMorgan Chase Bank, as agent, incorporated by reference to Exhibit 10.82
        to the Company's Current Report on Form 8-K filed with the SEC on December 17, 2001.

  10.6  Amended and Restated Guarantee and Collateral Agreement, dated January 31, 2003, made by the
        Company, certain of the Company's subsidiaries, JPMorgan Chase Bank, as administrative agent,
        and the lenders parties thereto.*

  10.7  Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999 (the "1999 Trust") and the
        Company, incorporated by reference to Exhibit 10.36 to the Company's Quarterly Report on Form
        10-Q for the quarter ended June 30, 1999.

  10.8  Guarantee, dated as of June 15, 1999, made by the Company, Hanover/Smith, Inc., Hanover
        Maintech, Inc. and Hanover Land Company, incorporated by reference to Exhibit 10.37 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.

  10.9  Amended and Restated Guarantee, dated as of March 13, 2000, made by Hanover Compressor
        Company, Hanover Compression Inc., and certain subsidiaries.*

 10.10  Participation Agreement, dated as of June 15, 1999, among the Company, the 1999 Trust, Societe
        Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and
        Wilmington Trust Company, incorporated by reference to Exhibit 10.38 to the Company's Quarterly
        Report on Form 10-Q for the quarter ended June 30, 1999.

 10.11  First Amendment and Waiver, dated as of September 30, 1999, to the Participation Agreement dated
        as of June 15, 1999, among Hanover Compressor Company, Hanover Equipment Trust 1999A (the
        "1999A Trust"), the lender parties thereto and The Chase Manhattan Bank, as agent.*

 10.12  TIDES Amendment, Consent and Joinder, dated as of December 9, 1999, to (i) the Participation
        Agreement, dated as of June 15, 1999, among Hanover Compressor Inc., the 1999A Trust, Societe
        Generale Financial Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and
        Wilmington Trust Company, (ii) the Participation Agreement, dated as of July 22, 1998, among
        Hanover Compression Inc., Hanover Equipment Trust 1998A, Societe Generale Financial
        Corporation, and The Chase Manhattan Bank, as agent, and (iii) other Operative Documents and
        Guarantees referenced in the amendment.*
</TABLE>

                                      58

<PAGE>

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

 10.13  Third Amendment, dated as of March 13, 2000, to (i) the Participation Agreement dated as of
        June 15, 1999, among Hanover Compressor, Inc., the 1999A Trust, Societe Generale Financial
        Corporation and FTBC Leasing Corp., The Chase Manhattan Bank, as agent, and (ii) the Credit
        Agreement referenced in the amendment.*

 10.14  Security Agreement, dated as of June 15, 1999, made by the 1999 Trust in favor The Chase
        Manhattan Bank, as agent, incorporated by reference to Exhibit 10.39 to the Company's Quarterly
        Report on Form 10-Q for the quarter ended June 30, 1999.

 10.15  Lease Supplement No. 1 dated June 15, 1999 between the 1999 Trust and the Company, incorporated
        by reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended
        June 30, 1999.

 10.16  Lease, dated as of March 13, 2000, between Hanover Equipment Trust 2000A (the "2000A Trust")
        and Hanover Compression Inc., incorporated by reference to Exhibit 10.43 to the Company's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1999.

 10.17  Guarantee, dated as of March 13, 2000, made by the Company, Hanover Compression Inc. and
        certain of their Subsidiaries, incorporated by reference to Exhibit 10.44 to the Company's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1999.

 10.18  Participation Agreement, dated as of March 13, 2000, among Hanover Compression Inc., Hanover
        the 2000A Trust and the several banks parties thereto, incorporated by reference to Exhibit 10.45 to
        the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

 10.19  Security Agreement, dated as of March 13, 2000, made by the 2000A Trust in favor of The Chase
        Manhattan Bank, as agent, incorporated by reference to Exhibit 10.46 to the Company's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1999.

 10.20  Assignment of leases, rents and Guarantee from the 2000A Trust to The Chase Manhattan Bank,
        dated as of March 13, 2000, incorporated by reference to Exhibit 10.47 to the Company's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1999.

 10.21  Lease, dated as of October 27, 2000, between Hanover Equipment Trust 2000B (the "2000B Trust")
        and Hanover Compression Inc., incorporated by reference to Exhibit 10.54 to the Company's
        Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22,
        2000.

 10.22  Guarantee, dated as of October 27, 2000 made by the Company, Hanover Compression Inc. and
        certain subsidiaries, incorporated by reference to Exhibit 10.55 to the Company's Registration
        Statement (File No. 333-50836) on Form S-4, as filed with the SEC on December 22, 2000.

 10.23  Participation Agreement, dated as of October 27, 2000, among Hanover Compression Inc., the
        2000B Trust, The Chase Manhattan Bank, National Westminster Bank PLC, Citibank N.A., Credit
        Suisse First Boston and the Industrial Bank of Japan as co-agents; Bank Hapoalim B.M. and FBTC
        Leasing Corp., as investors, Wilmington Trust Company and various lenders, incorporated by
        reference to Exhibit 10.56 to the Company's Registration Statement (File No. 333-50836) on Form
        S-4, as filed with the SEC on December 22, 2000.

 10.24  Security Agreement, dated as of October 27, 2000, made by the 2000B Trust in favor of The Chase
        Manhattan Bank as agent for the lenders, incorporated by reference to Exhibit 10.57 to the
        Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on
        December 22, 2000.

 10.25  Assignment of Leases, Rents and Guarantee, dated as of October 27, 2000, made by the 2000B Trust
        to The Chase Manhattan Bank as agent for the lenders, incorporated by reference to Exhibit 10.58 to
        the Company's Registration Statement (File No. 333-50836) on Form S-4, as filed with the SEC on
        December 22, 2000.
</TABLE>

                                      59

<PAGE>

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

 10.26  Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001A (the "2001A Trust")
        and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.64 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

 10.27  Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited
        Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.65 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

 10.28  Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited
        Partnership, the 2001A Trust, and General Electric Capital Corporation, incorporated by reference to
        Exhibit 10.66 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
        2001.

 10.29  Security Agreement, dated as of August 31, 2001, made by the 2001A Trust in favor Wilmington
        Trust FSB as agent, incorporated by reference to Exhibit 10.67 to the Company's Quarterly Report
        on Form 10-Q for the quarter ended September 30, 2001.

 10.30  Assignment of Leases, Rents and Guarantee from the 2001A Trust to Wilmington Trust FSB, dated
        as of August 31, 2001, incorporated by reference to Exhibit 10.68 to the Company's Quarterly
        Report on Form 10-Q for the quarter ended September 30, 2001.

 10.31  Indenture for the 8.50% Senior Secured Notes due 2008, dated as of August 30, 2001, among the
        2001A Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as
        guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.69 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

 10.32  Hanover Equipment Trust 2001A Exchange and Registration Rights Agreement, dated August 30,
        2001, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement (File No.
        333-75814) on Form S-4 filed with the SEC on December 21, 2001.

 10.33  Lease, dated as of August 31, 2001, between Hanover Equipment Trust 2001B (the "2001B Trust")
        and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.70 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

 10.34  Guarantee, dated as of August 31, 2001, made by the Company, Hanover Compression Limited
        Partnership, and certain subsidiaries, incorporated by reference to Exhibit 10.71 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

 10.35  Participation Agreement, dated as of August 31, 2001, among Hanover Compression Limited
        Partnership, the 2001B Trust, and General Electric Capital Corporation, incorporated by reference to
        Exhibit 10.72 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
        2001.

 10.36  Security Agreement, dated as of August 31, 2001, made by the 2001B Trust in favor of Wilmington
        Trust FSB as agent, incorporated by reference to Exhibit 10.73 to the Company's Quarterly Report
        on Form 10-Q for the quarter ended September 30, 2001.

 10.37  Assignment of Leases, Rents and Guarantee from the 2001B Trust to Wilmington Trust FSB, dated
        as of August 31, 2001, incorporated by reference to Exhibit 10.74 to the Company's Quarterly
        Report on Form 10-Q for the quarter ended September 30, 2001.

 10.38  Indenture for the 8.75% Senior Secured Notes due 2011, dated as of August 30, 2001, among the
        2001B Trust, as issuer, Hanover Compression Limited Partnership and certain subsidiaries, as
        guarantors, and Wilmington Trust FSB, as Trustee, incorporated by reference to Exhibit 10.75 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
</TABLE>

                                      60

<PAGE>

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

 10.39  The 2001B Trust Exchange and Registration Rights Agreement, dated August 30, 2001, incorporated
        by reference to Exhibit 4.2 to the Company's Registration Statement (File No. 333-75818) on Form
        S-4 filed with the SEC on December 21, 2001.

 10.40  Amendment and Consent, dated as of June 26, 2000, to (i) the Amended and Restated Senior Credit
        Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase
        Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees
        referenced in the amendment.*

 10.41  Second Amendment, dated as of August 30, 2000, to (i) the Amended and Restated Senior Credit
        Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase
        Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees
        referenced in the amendment.*

 10.42  First Amendment, dated as of January 31, 2001, to (i) the Amended and Restated Senior Credit
        Agreement dated March 13, 2000, among the Company, Hanover Compression Inc., the Chase
        Manhattan Bank, as agent, and the lenders parties thereto and (ii) certain Synthetic Guarantees
        referenced in the amendment.*

 10.43  Second Amendment, dated as of July 27, 2001, to (i) the Credit Agreement, dated as of December
        15, 1997, as amended and restated on March 13, 2000, among the Company, Hanover Compression
        Inc., the Chase Manhattan Bank, as administrative agent, and the lenders parties thereto and (ii)
        certain Synthetic Guarantees referenced in the amendment.*

 10.44  Third Amendment to certain Guarantees, dated as of December 3, 2001, among the Company, certain
        of the Company's subsidiaries, JPMorgan Chase Bank, as agent, and several banks and other
        financial institutions parties thereto, incorporated by reference to Exhibit 10.80 to the Company's
        Current Report on Form 8-K filed with the SEC on December 17, 2001.

 10.45  Waiver and Amendment, dated as of March 15, 2002, to (i) the Credit Agreement dated as of
        December 15, 1997, as amended and restated on December 3, 2002, among the Company, Hanover
        Compression Inc., the Chase Manhattan Bank, and the lenders parties thereto and (ii) certain
        Synthetic Guarantees referenced in the amendment.*

 10.46  Indenture for the Convertible Junior Subordinated Debentures due 2029, dated as of December 15,
        1999, among the Company, as issuer, and Wilmington Trust Company, as trustee, incorporated by
        reference to Exhibit 4.6 to the Company's Registration Statement (File No. 333-30344) on Form S-3
        filed with the SEC on February 14, 2000.

 10.47  Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred Securities, incorporated by
        reference to Exhibit 4.8 to the Company's Registration Statement (File No. 333-30344) on Form S-3
        as filed with the SEC on February 14, 2000.

 10.48  Form of Hanover Compressor Company Convertible Subordinated Junior Debentures due 2029,
        incorporated by reference to Exhibit 4.9 to the Company's Registration Statement (File No. 333-
        30344) on Form S-3 as filed with the SEC on February 14, 2000.

 10.49  Preferred Securities Guarantee Agreement, dated as of December 15, 1999, between the Company, as
        guarantor, and Wilmington Trust Company, as guarantee trustee, incorporated by reference to
        Exhibit 4.10 to the Company's Registration Statement (File No. 333-30344) on Form S-3 as filed
        with the SEC on February 14, 2000.

 10.50  Common Securities Guarantee Agreement, dated as of December 15, 1999, by the Company, as
        guarantor, for the benefit of the holders of common securities of Hanover Compressor Capital Trust,
        incorporated by reference to Exhibit 4.11 to the Company's Registration Statement (File No. 333-
        30344) on Form S-3 as filed with the SEC on February 14, 2000.
</TABLE>

                                      61

<PAGE>

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

 10.51  Amended and Restated Declaration of Trust of Hanover Compressor Capital Trust, dated as of
        December 15, 1999, among the Company, as sponsor, Wilmington Trust Company, as property
        trustee, and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as administrative
        trustees, incorporated by reference to Exhibit 4.5 to the Company's Registration Statement (File No.
        333-30344) on Form S-3 filed with the SEC on February 14, 2000.

 10.52  Form of Indenture for the 4.75% Convertible Senior Notes due 2008, dated as of       , 2001
        between the Company and Wilmington Trust Company, as trustee, incorporated by reference to
        Exhibit 4.4 to the Company's Registration Statement (File No. 333-54942) on Form S-3, as filed
        with the SEC on February 27, 2001.

 10.53  Purchase Agreement, dated as of July 11, 2000, among the Company, Hanover Compression Inc.,
        Dresser-Rand Company and Ingersoll-Rand Company, incorporated by reference to Exhibit 99.2 to
        the Company's Current Report on Form 8-K filed with the SEC on September 14, 2000.

 10.54  Agreement and Plan of Merger, dated as of July 13, 2000, among the Company, Caddo Acquisition
        Corporation, and OEC Compression Corporation, incorporated by reference to Exhibit 10.51 to the
        Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

 10.55  Amendment No. 1 to Agreement and Plan of Merger, dated as of November 14, 2000, by and among
        the Company, Caddo Acquisition Corporation and OEC Compression Corporation, incorporated by
        reference to Exhibit 10.51 to the Company's Registration Statement (File No. 333-50836) on Form
        S-4, as filed with the SEC on November 28, 2000.

 10.56  Purchase Agreement, dated June 28, 2001, among Schlumberger Technology Corporation,
        Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco International Inc., the
        Company and Hanover Compression Limited Partnership, incorporated by reference to Exhibit 10.63
        to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

 10.57  Schedule 1.2(c) to Purchase Agreement, dated June 28, 2001, among Schlumberger Technology
        Corporation, Schlumberger Oilfield Holdings Limited, Schlumberger Sarevco S.A., Camco
        International Inc., the Company and Hanover Compression Limited Partnership, incorporated by
        reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on
        February 6, 2003.

 10.58  Amendment No. 1, dated as of August 31, 2001, to Purchase Agreement among Schlumberger
        Technology Corporation, Schlumberger Oilfield Holdings Ltd., Schlumberger Surenco S.A., Camco
        International Inc., the Company and Hanover Compression Limited Partnership, incorporated by
        reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed with the SEC on
        September 14, 2001.

 10.59  Most Favored Supplier and Alliance Agreement, dated August 31, 2001, among Schlumberger
        Oilfield Holdings Limited, Schlumberger Technology Corporation and Hanover Compression
        Limited Partnership, incorporated by reference to Exhibit 99.4 to the Company's Current Report on
        Form 8-K filed with the SEC on September 14, 2001.

 10.60  Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31, 2001, by and among
        Schlumberger Technology Corporation, Camco International, Inc., Schlumberger Oilfield Holdings
        Ltd., Schlumberger Surenco S.A., Operational Services, Inc. and the Company, incorporated by
        reference to Exhibit 99.5 to the Company's Current Report on Form 8-K filed with the SEC on
        September 14, 2001.

 10.61  Hanover Compressor Company Subordinated Promissory Note, dated August 31, 2001, in favor of
        Camco International, Inc.*

 10.62  Agreement by and among SJMB, L.P., Charles Underbrink, John L. Thompson, Belleli Energy S.r.l.
        and Hanover Compressor Company and certain of its subsidiaries dated September 20, 2002.*

 10.63  Hanover Compressor Company 1992 Stock Compensation Plan.*++
</TABLE>

                                      62

<PAGE>

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

 10.64  Hanover Compressor Company Senior Executive Stock Option Plan, incorporated by reference to
        Exhibit 10.4 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.65  Hanover Compressor Company 1993 Management Stock Option Plan, incorporated by reference to
        Exhibit 10.5 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.66  Hanover Compressor Company Incentive Option Plan, incorporated by reference to Exhibit 10.6 to
        the Company's Registration Statement (File No. 333-24953) on Form S-1, as amended.

 10.67  Amendment and Restatement of the Hanover Compressor Company Incentive Option Plan,
        incorporated by reference to Exhibit 10.7 to the Company's Registration Statement (File No. 333-
        24953) on Form S-1, as amended.++

 10.68  Hanover Compressor Company 1995 Employee Stock Option Plan, incorporated by reference to
        Exhibit 10.8 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.69  Hanover Compressor Company 1995 Management Stock Option Plan, incorporated by reference to
        Exhibit 10.9 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.70  Form of Stock Option Agreement for DeVille and McNeil.*

 10.71  Form of Stock Option Agreements for Wind Bros.*

 10.72  Hanover Compressor Company 1996 Employee Stock Option Plan, incorporated by reference to
        Exhibit 10.10 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.73  Hanover Compressor Company 1997 Stock Option Plan, as amended, incorporated by reference to
        Exhibit 10.23 to the Company's Registration Statement (File No. 333-24953) on Form S-1, as
        amended.++

 10.74  1997 Stock Purchase Plan, incorporated by reference to Exhibit 10.24 to the Company's Registration
        Statement (File No. 333-24953) on Form S-1, as amended.++

 10.75  Hanover Compressor Company 1998 Stock Option Plan, incorporated by reference to Exhibit 10.7 to
        the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.

 10.76  Hanover Compressor Company December 9, 1998 Stock Option Plan, incorporated by reference to
        Exhibit 10.33 to the Company's Annual Report on Form 10-K for the fiscal year ended December
        31, 1998.++

 10.77  Applied Process Solutions Incorporated Amended 1998 Stock Option Plan, incorporated by reference
        to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on January
        9, 2001.

 10.78  Amendment to Stock Option Agreement Under the Applied Process Solutions Incorporated
        Amended 1998 Stock Option Plan, incorporated by reference to Exhibit 4.2 to the Company's
        Registration Statement on Form S-8 filed with the SEC on January 9, 2001.

 10.79  Hanover Compressor Company 1999 Stock Option Plan, incorporated by reference to Exhibit 4.1 to
        the Company's Registration Statement (File No. 333-32096) on Form S-8 filed with the SEC on
        March 10, 2000.++

 10.80  Hanover Compressor Company 2001 Equity Incentive Plan, incorporated by reference to Exhibit 4.1
        to the Company's Registration Statement (File No. 333-73904) on Form S-8 filed with the SEC on
        November 21, 2001.++
</TABLE>

                                      63

<PAGE>

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

 10.81  Management Fee Letter, dated November 14, 1995 between GKH Partners, L.P. and the Company,
        incorporated by reference to Exhibit 10.3 to the Company's Registration Statement (File No.
        333-24953) on Form S-1, as amended.

 10.82  Employment Letter with John E. Jackson, dated February 1, 2002, incorporated by reference to
        Exhibit 10.73 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
        2002.++

 10.83  Letter Agreement by and among Michael J. McGhan, Hanover Compressor Company and Herndon
        Plant Oakley Ltd., dated July 30, 2002, incorporated by reference to Exhibit 10.76 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++

 10.84  Separation Agreement among Michael J. McGhan, the Company and Hanover Compression Limited
        Partnership, dated August 1, 2002, incorporated by reference to Exhibit 10.77 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++

 10.85  Separation Agreement among Charles D. Erwin, the Company and Hanover Compression Limited
        Partnership, dated August 2, 2002, incorporated by reference to Exhibit 10.78 to the Company's
        Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.++

 10.86  Employment Letter with Mark S. Berg, dated April 17, 2002, incorporated by reference to Exhibit
        10.74 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.++

 10.87  Employment Letter with Chad C. Deaton, dated August 19, 2002, incorporated by reference to
        Exhibit 10.79 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
        2002.++

 10.88  Stock Option Agreement for Mr. Berg dated May 6, 2002.*++

 10.89  Stock Option Agreement for Mr. Deaton dated August 19, 2002.*++

 10.90  Stock Option Agreement for Mr. Grijalva dated March 19, 2002.*++

 10.91  Stock Option Agreement for Mr. Jackson dated January 22, 2002.*++

 10.92  Letter Agreement by and between Robert O. Pierce and Hanover Compressor Company dated
        September 18, 2002.*++

  12.1  Computation of ratio of earnings to fixed charges*

  21.1  List of Subsidiaries*

  23.1  Consent of PricewaterhouseCoopers LLP*

  99.1  Letter from GKH partners regarding wind-up of GKH Investments, L.P. and GKH Private Limited,
        dated October 15, 2001, incorporated by reference to Exhibit 99.1 to the Company's Current Report
        on Form 8-K filed with the SEC on October 18, 2001.

  99.2  Letter from GKH Partners, L.P. to Mark S. Berg, Senior Vice President and General Counsel of the
        Company, dated November 12, 2002, incorporated by reference to Exhibit 99.1 to the Company's
        Current Report on Form 8-K filed with the SEC on November 15, 2002.

  99.3  Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002.*

  99.4  Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1359, as adopted pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002.*
</TABLE>
--------
*  Filed herewith.
++ Management contract or compensatory plan or arrangement

                                      64

<PAGE>

   (b)  Reports submitted on Form 8-K.

   1.  A report on Form 8-K was filed on December 31, 2002, which reported
under the caption "Item 5--Other Events" the completion by the Company of a
review of business operations to address staffing needs. The date of such
report (the date of the earliest event reported) was December 30, 2002.

   2.  A report on Form 8-K was filed on December 4, 2002, which reported the
notification from GKH Investments L.P. and affiliated entities of their
decision to distribute shares of Hanover common stock to partners. The date of
such report (the date of the earliest event reported) was December 3, 2002.

   3.  A report on Form 8-K was filed on November 15, 2002, which reported the
Company's update on the status of the SEC inquiry. The date of such report (the
date of the earliest event reported) was November 14, 2002.

   4.  A report on Form 8-K was filed on November 15, 2002, which reported a
notification from GKH Investments L.P. relating to the extension of the
winding-up process of the partnership. The date of such report (the date of the
earliest event reported) was November 12, 2002.

   5.  A report on Form 8-K was filed on November 1, 2002, which reported under
the caption "Item 5--Other Events" the Company's financial results for the
third quarter ended September 30, 2002. This report also included a
Consolidated Statement of Income (Loss) for the quarter ended September 30,
2002. The date of such report (the date of the earliest event reported) was
October 31, 2002.

   6.  A report on Form 8-K was filed on October 24, 2002, which reported the
restatement of 1999 financial results. The date of such report (the date of the
earliest event reported) was October 23, 2002.

                                      65

<PAGE>

                                  SIGNATURES

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

                                              HANOVER COMPRESSOR COMPANY

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

Date: March 31, 2003

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

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

     /s/  CHAD C. DEATON       President and Chief Executive  March 31, 2003
-----------------------------    Officer (Principal
       Chad C. Deaton            Executive Officer and
                                 Director)

    /s/  JOHN E. JACKSON       Chief Financial Officer        March 31, 2003
-----------------------------    (Principal Financial and
       John E. Jackson           Accounting Officer)

   /s/  VICTOR E. GRIJALVA     Director                       March 31, 2003
-----------------------------
     Victor E. Grijalva

    /s/  TED COLLINS, JR.      Director                       March 31, 2003
-----------------------------
      Ted Collins, Jr.

   /s/  ROBERT R. FURGASON     Director                       March 31, 2003
-----------------------------
     Robert R. Furgason

    /s/  MELVYN N. KLEIN       Director                       March 31, 2003
-----------------------------
       Melvyn N. Klein

  /s/  MICHAEL A. O'CONNOR     Director                       March 31, 2003
-----------------------------
     Michael A. O'Connor

   /s/  ALVIN V. SHOEMAKER     Director                       March 31, 2003
-----------------------------
     Alvin V. Shoemaker

     /s/  I. JON BRUMLEY       Director                       March 31, 2003
-----------------------------
       I. Jon Brumley

      /s/  GORDON HALL         Director                       March 31, 2003
-----------------------------
         Gordon Hall

       /s/  RENE HUCK          Director                       March 31, 2003
-----------------------------
          Rene Huck

                                      66

<PAGE>

                                Certifications

   I, Chad C. Deaton, certify that:

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

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

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

   4.  The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      (a)  designed such disclosure controls and procedures to ensure that
   material information relating to the registrant, including its consolidated
   subsidiaries, is made known to us by others within those entities,
   particularly during the period in which this annual report is being prepared;

      (b)  evaluated the effectiveness of the registrant's disclosure controls
   and procedures as of a date within 90 days prior to the filing date of this
   annual report (the "Evaluation Date"); and

      (c)  presented in this annual report our conclusions about the
   effectiveness of the disclosure controls and procedures based on our
   evaluation as of the Evaluation Date;

   5.  The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

      (a)  all significant deficiencies in the design or operation of internal
   controls which could adversely affect the registrant's ability to record,
   process, summarize and report financial data and have identified for the
   registrant's auditors any material weaknesses in internal controls; and

      (b)  any fraud, whether or not material, that involves management or
   other employees who have a significant role in the registrant's internal
   controls; and

   6.  The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003


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

                                      67

<PAGE>

   I, John E. Jackson, certify that:

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

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

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

   4.  The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      (a)  designed such disclosure controls and procedures to ensure that
   material information relating to the registrant, including its consolidated
   subsidiaries, is made known to us by others within those entities,
   particularly during the period in which this annual report is being prepared;

      (b)  evaluated the effectiveness of the registrant's disclosure controls
   and procedures as of a date within 90 days prior to the filing date of this
   annual report (the "Evaluation Date"); and

      (c)  presented in this annual report our conclusions about the
   effectiveness of the disclosure controls and procedures based on our
   evaluation as of the Evaluation Date;

   5.  The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

      (a)  all significant deficiencies in the design or operation of internal
   controls which could adversely affect the registrant's ability to record,
   process, summarize and report financial data and have identified for the
   registrant's auditors any material weaknesses in internal controls; and

      (b)  any fraud, whether or not material, that involves management or
   other employees who have a significant role in the registrant's internal
   controls; and

   6.  The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003


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

                                      68

<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Hanover Compressor Company

   In our opinion, the accompanying consolidated financial statements listed on
the index appearing under Item15(a)(1) on page 57, present fairly, in all
material respects, the financial position of Hanover Compressor Company and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) on page 57 presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

   As discussed in Notes 9 and 20 to the financial statements, the Company
changed its method of accounting for goodwill and other intangibles in 2002 and
derivatives in 2001, respectively. As discussed in Notes 22 and 23, the
December 31, 2001 and 2000 consolidated financial statements have been restated
for certain revenue recognition matters.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 26, 2003

                                      F-1

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                          CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                 ------------------------
                                                                                    2002         2001
                                                                                 ----------   ----------
                                                                                               Restated
                                                                                              (See Notes
                                                                                              22 and 23)
                                                                                 (in thousands, except par
                                    ASSETS                                       value and share amounts)
<S>                                                                              <C>          <C>
Current assets:
   Cash and cash equivalents.................................................... $   19,011   $   23,191
   Accounts receivable, net.....................................................    211,722      272,450
   Inventory, net...............................................................    166,004      215,655
   Costs and estimated earnings in excess of billings on uncompleted contracts..     57,346       59,099
   Prepaid taxes................................................................      7,664       19,990
   Assets held for sale.........................................................     69,408           --
   Other current assets.........................................................     49,933       24,719
                                                                                 ----------   ----------
       Total current assets.....................................................    581,088      615,104
Property, plant and equipment, net..............................................  1,167,675    1,151,513
Goodwill, net...................................................................    180,519      242,178
Intangible and other assets.....................................................     74,058       78,653
Investments in non-consolidated affiliates......................................    150,689      178,328
                                                                                 ----------   ----------
       Total assets............................................................. $2,154,029   $2,265,776
                                                                                 ==========   ==========
                  LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt......................................... $   33,741   $    5,553
   Accounts payable, trade......................................................     72,637      119,077
   Accrued liabilities..........................................................    189,639      155,108
   Advance billings.............................................................     36,156       53,140
   Liabilities held for sale....................................................     22,259           --
   Billings on uncompleted contracts in excess of costs and estimated earnings..     14,571        7,152
                                                                                 ----------   ----------
       Total current liabilities................................................    369,003      340,030
Long-term debt..................................................................    521,203      504,260
Other liabilities...............................................................    137,332      130,276
Deferred income taxes...........................................................    112,472      165,492
                                                                                 ----------   ----------
       Total liabilities........................................................  1,140,010    1,140,058
                                                                                 ----------   ----------
Commitments and contingencies (Note 19)
Minority interest...............................................................        143           --
Mandatorily redeemable convertible preferred securities.........................     86,250       86,250
Common stockholders' equity:
   Common stock, $.001 par value; 200,000,000 shares authorized; 80,815,209 and
     79,228,179 shares issued, respectively.....................................         81           79
   Additional paid-in capital...................................................    841,657      828,939
   Notes receivable--employee stockholders......................................         --       (2,538)
   Deferred employee compensation - restricted stock grants.....................     (2,285)          --
   Accumulated other comprehensive loss.........................................    (13,696)      (6,557)
   Retained earnings............................................................    104,194      220,262
   Treasury stock--253,115 and 75,739 common shares, at cost, respectively......     (2,325)        (717)
                                                                                 ----------   ----------
   Total common stockholders' equity............................................    927,626    1,039,468
                                                                                 ----------   ----------
       Total liabilities and common stockholders' equity........................ $2,154,029   $2,265,776
                                                                                 ==========   ==========
</TABLE>

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

                                      F-2

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                     ---------------------------------------
                                                                                        2002          2001          2000
                                                                                      ----------    ----------   ----------
                                                                                                    Restated      Restated
                                                                                                    (See Notes 22 and 23)
                                                                                     (in thousands, except per share amounts)
<S>                                                                                  <C>           <C>           <C>
Revenues:
    Domestic rentals................................................................ $  328,600    $  269,679    $  172,517
    International rentals...........................................................    189,700       131,097        81,320
    Parts, service and used equipment...............................................    223,845       214,872       113,526
    Compressor and accessory fabrication............................................    114,009       223,519        90,270
    Production and processing equipment fabrication.................................    149,656       184,040        79,121
    Equity in income of non-consolidated affiliates.................................     18,811         9,350         3,518
    Gain on change in interest in non-consolidated affiliate........................         --            --           864
    Other...........................................................................      4,189         8,403         5,688
                                                                                      ----------    ----------   ----------
                                                                                      1,028,810     1,040,960       546,824
                                                                                      ----------    ----------   ----------
Expenses:
    Domestic rentals................................................................    120,740        95,203        60,336
    International rentals...........................................................     57,579        45,795        27,656
    Parts, service and used equipment...............................................    179,844       152,701        79,958
    Compressor and accessory fabrication............................................     99,446       188,122        76,754
    Production and processing equipment fabrication.................................    127,442       147,824        62,684
    Selling, general and administrative.............................................    153,676        92,172        51,768
    Foreign currency translation....................................................     16,753         6,658            --
    Change in fair value of derivative financial instruments........................     (3,245)        7,596            --
    Other...........................................................................     27,607         9,727            --
    Depreciation and amortization...................................................    151,181        88,823        52,188
    Goodwill impairment.............................................................     52,103            --            --
    Leasing expense.................................................................     94,751        70,435        45,484
    Interest expense................................................................     36,978        17,531         8,679
    Distributions on mandatorily redeemable convertible preferred securities........      6,374         6,373         6,369
                                                                                      ----------    ----------   ----------
                                                                                      1,121,229       928,960       471,876
                                                                                      ----------    ----------   ----------
Income (loss) from continuing operations before income taxes........................    (92,419)      112,000        74,948
Provision for (benefit from) income taxes...........................................    (17,576)       42,388        27,818
                                                                                      ----------    ----------   ----------
Income (loss) from continuing operations............................................    (74,843)       69,612        47,130
Income (loss) from discontinued operations, net of tax..............................       (875)        2,965         2,509
Loss from write down of discontinued operations, net of tax.........................    (40,350)           --            --
                                                                                      ----------    ----------   ----------
Income (loss) before cumulative effect of accounting change.........................   (116,068)       72,577        49,639
Cumulative effect of accounting change for derivative instruments, net of tax.......         --          (164)           --
                                                                                      ----------    ----------   ----------
Net income (loss)................................................................... $ (116,068)   $   72,413    $   49,639
                                                                                      ==========    ==========   ==========
Diluted net income (loss) per share:
    Net income (loss)............................................................... $ (116,068)   $   72,413    $   49,639
    (Income) loss from discontinued operations, net of tax..........................     41,225        (2,965)       (2,509)
    Distributions on mandatorily redeemable convertible preferred securities, net
     of tax.........................................................................         --         4,142            --
                                                                                      ----------    ----------   ----------
Net income (loss) for purposes of computing diluted net income (loss) per share
 from continuing operations......................................................... $  (74,843)   $   73,590    $   47,130
                                                                                      ==========    ==========   ==========
Basic earnings (loss) per common share:
    Income (loss) from continuing operations........................................ $    (0.94)   $     0.96    $     0.76
    Income (loss) from discontinued operations......................................      (0.52)         0.04          0.04
                                                                                      ----------    ----------   ----------
Net income (loss)................................................................... $    (1.46)   $     1.00    $     0.80
                                                                                      ==========    ==========   ==========
Diluted earnings (loss) per common share:
    Income (loss) from continuing operations........................................ $    (0.94)   $     0.91    $     0.71
    Income (loss) from discontinued operations......................................      (0.52)         0.03          0.04
                                                                                      ==========    ==========   ==========
Net income (loss)................................................................... $    (1.46)   $     0.94    $     0.75
                                                                                      ==========    ==========   ==========
Weighted average common and equivalent shares outstanding:
    Basic...........................................................................     79,500        72,355        61,831
                                                                                      ==========    ==========   ==========
    Diluted.........................................................................     79,500        81,175        66,366
                                                                                      ==========    ==========   ==========
</TABLE>

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

                                      F-3

<PAGE>

                          HANOVER COMPRESSOR COMPANY

             CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                         --------------------------------
                                                                            2002       2001       2000
                                                                         ----------  --------   --------
                                                                                     Restated   Restated
                                                                                     (See Notes 22 and 23)
                                                                                 (in thousands)
<S>                                                                      <C>         <C>        <C>
Net income (loss)....................................................... $ (116,068) $ 72,413   $ 49,639
Other comprehensive income (loss):
   Change in fair value of derivative financial instruments, net of tax.     (8,866)   (6,073)        --
   Foreign currency translation adjustment..............................      1,727       (27)      (146)
                                                                         ----------  --------   --------
Comprehensive income (loss)............................................. $ (123,207) $ 66,313   $ 49,493
                                                                         ==========  ========   ========
</TABLE>



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

                                      F-4

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                     --------------------------------
                                                                                        2002        2001       2000
                                                                                     ----------  ---------  ---------
                                                                                                  Restated   Restated
                                                                                                 (See Notes 22 and 23)
                                                                                                    (in thousands)
<S>                                                                                  <C>         <C>        <C>
Cash flows from operating activities:
    Net income (loss)............................................................... $ (116,068) $  72,413  $  49,639
    Adjustments:
       Depreciation and amortization................................................    151,181     88,823     52,188
       Amortization of debt issuance costs and debt discount........................        121        831      1,050
       (Income) loss from discontinued operations, net of tax.......................     41,225     (2,965)    (2,509)
       Bad debt expense.............................................................      7,091      4,860      3,198
       Gain on sale of property, plant and equipment................................     (7,769)    (3,492)   (10,421)
       Equity in income of non-consolidated affiliates, net of dividends
        received....................................................................     (2,223)    (9,350)    (3,518)
       Loss (gain) on investments and charges for non-consolidated affiliates.......     15,950      4,629       (864)
       (Gain) loss on derivative instruments........................................     (3,245)     7,849         --
       Provision for inventory impairment and reserves..............................     13,853      2,336         --
       Write down of notes receivable...............................................      8,454         --         --
       Goodwill impairment..........................................................     52,103         --         --
       Restricted stock compensation expense........................................        423         --         --
       Pay-in-kind interest on Schlumberger note....................................     17,163      4,285         --
       Deferred income taxes........................................................    (19,041)    30,218     27,882
       Changes in assets and liabilities, excluding business combinations:
          Accounts receivable and notes.............................................     89,457    (20,671)   (82,767)
          Inventory.................................................................      4,699    (41,186)   (36,376)
          Costs and estimated earnings versus billings on uncompleted
           contracts................................................................     33,129    (32,640)    (7,964)
          Accounts payable and other liabilities....................................    (67,132)    14,745     42,657
          Advance billings..........................................................     (8,394)    20,647     (4,156)
          Other.....................................................................    (16,101)     4,565     13,420
                                                                                     ----------  ---------  ---------
             Net cash provided by continuing operations.............................    194,876    145,897     41,459
             Net cash provided by (used in) discontinued operations.................        841      6,877    (11,713)
                                                                                     ----------  ---------  ---------
             Net cash provided by operating activities..............................    195,717    152,774     29,746
                                                                                     ----------  ---------  ---------
Cash flows from investing activities:
    Capital expenditures............................................................   (250,170)  (639,883)  (274,858)
    Payments for deferred lease transaction costs...................................     (1,568)   (18,177)    (4,547)
    Proceeds from sale of property, plant and equipment.............................     69,685    590,763    410,915
    Proceeds from sale of investment in non-consolidated affiliates.................         --      3,143         --
    Cash used for business acquisitions, net........................................    (10,440)  (386,056)  (162,355)
    Cash returned from non-consolidated affiliates..................................     17,429         --         --
    Cash used to acquire investments in and advances to unconsolidated affiliates...         --    (11,865)    (4,071)
                                                                                     ----------  ---------  ---------
             Net cash used in continuing operations.................................   (175,064)  (462,075)   (34,916)
             Net cash used in discontinued operations...............................    (18,639)   (20,202)   (32,565)
                                                                                     ----------  ---------  ---------
             Net cash used in investing activities..................................   (193,703)  (482,277)   (67,481)
                                                                                     ----------  ---------  ---------
Cash flows from financing activities:
    Net borrowings (repayments) on revolving credit facility........................       (500)    54,500     40,400
    Payments for debt issue costs...................................................       (644)    (3,390)        --
    Issuance of common stock, net...................................................         --     83,850     59,400
    Purchase of treasury stock......................................................     (1,608)        --         --
    Proceeds from warrant conversions and stock options exercised...................      6,661      2,280      3,608
    Proceeds from employee stock purchase...........................................        277         --         --
    Issuance of convertible senior notes, net.......................................         --    185,537         --
    Repayment of other debt.........................................................     (7,654)   (15,571)   (27,641)
    Proceeds from employee stockholder notes........................................        120         62      1,876
                                                                                     ----------  ---------  ---------
             Net cash provided by (used in) continuing operations...................     (3,348)   307,268     77,643
             Net cash used in discontinued operations...............................       (884)        (9)       (54)
                                                                                     ----------  ---------  ---------
             Net cash provided by (used in) financing activities....................     (4,232)   307,259     77,589
                                                                                     ----------  ---------  ---------
Effect of exchange rate changes on cash and equivalents.............................     (1,962)       (49)      (126)
                                                                                     ----------  ---------  ---------
Net increase (decrease) in cash and cash equivalents................................     (4,180)   (22,293)    39,728
Cash and cash equivalents at beginning of year......................................     23,191     45,484      5,756
                                                                                     ----------  ---------  ---------
Cash and cash equivalents at end of year............................................ $   19,011  $  23,191  $  45,484
                                                                                     ==========  =========  =========
</TABLE>

                                      F-5

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                     CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                           ------------------------------
                                                             2002       2001       2000
                                                           --------  ---------  ---------
                                                                      Restated   Restated
                                                                     (See Notes 22 and 23)
                                                                   (in thousands)
<S>                                                        <C>       <C>        <C>
Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized amounts.............. $ 16,817  $   5,707  $   7,051
                                                           ========  =========  =========
   Income taxes paid (refunded), net...................... $ (4,212) $   1,723  $   1,639
                                                           ========  =========  =========
Supplemental disclosure of noncash transactions:
   Debt (paid) issued for property, plant and equipment... $ (4,352)        --  $  12,922
                                                           ========             =========
   Assets (received) sold in exchange for note receivable. $    258  $  (1,601) $   2,783
                                                           ========  =========  =========
   Common stock issued in exchange for notes receivable... $    274  $   1,069         --
                                                           ========  =========
   Conversion of deferred stock option liability.......... $    253  $   1,529         --
                                                           ========  =========
Acquisitions of businesses:
   Property, plant and equipment acquired................. $ 11,716  $ 606,271  $ 202,358
                                                           ========  =========  =========
   Other assets acquired, net of cash acquired............ $102,204  $  87,865  $  77,097
                                                           ========  =========  =========
   Investments in non-consolidated affiliates.............       --  $ 140,081         --
                                                                     =========
   Goodwill............................................... $  5,162  $ 115,131  $  91,560
                                                           ========  =========  =========
   Liabilities assumed.................................... $(72,209) $(118,388) $ (63,057)
                                                           ========  =========  =========
   Debt issued or assumed................................. $(36,433) $(155,462)        --
                                                           ========  =========
   Deferred taxes.........................................       --  $ (35,212) $  (9,029)
                                                                     =========  =========
   Treasury and common stock issued.......................       --  $(254,230) $(136,574)
                                                                     =========  =========
</TABLE>


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

                                      F-6

<PAGE>

                          HANOVER COMPRESSOR COMPANY

             CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY

                 Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                     Accumulated              Notes         Deferred
                                         Common stock    Additional     other              receivable-   compensation-
                                       -----------------  paid-in   comprehensive Treasury   employee   restricted stock
                                         Shares   Amount  capital   income (loss)  stock   stockholders      grants
                                       ---------- ------ ---------- ------------- -------- ------------ ----------------
                                                                    (in thousands, except share data)
<S>                                    <C>        <C>    <C>        <C>           <C>      <C>          <C>
Balance at December 31, 1999
 (Restated See Notes 22 and 23)....... 57,505,874  $58    $272,944    $   (311)   $(1,586)   $(3,387)       $    --
Conversion of warrants................    684,770
Exercise of stock options.............    994,572    1       3,607          --         --         --             --
Cumulative translation adjustment.....         --   --          --        (146)        --         --             --
Issuance of common stock, net.........  2,000,000    2      59,398          --         --         --             --
Issuance of common stock for
 acquisitions.........................  5,269,487    5     136,569          --         --         --             --
Issuance of 91,727 treasury shares at
 $35.98 per share.....................         --   --       2,431          --        869         --             --
Repayment of employee stockholder
 notes................................         --   --          --          --         --      1,876             --
Income tax benefit from stock options
 exercised............................         --   --       8,813          --         --         --             --
Other.................................         --   --         (25)         --         --        (20)            --
Net income............................         --   --          --          --         --         --             --
                                       ----------  ---    --------    --------    -------    -------        -------
Balance at December 31, 2000
 (Restated See Notes 22 and 23)....... 66,454,703  $66    $483,737    $   (457)   $  (717)   $(1,531)       $    --
Exercise of stock options.............    250,161    1       3,808          --         --         --             --
Cumulative translation adjustment.....         --   --          --         (27)        --         --             --
Change in fair value of derivative
 financial instrument, net of tax.....         --   --          --      (6,073)        --         --             --
Issuance of common stock, net.........  2,500,000    2      83,848          --         --         --             --
Issuance of common stock for
 acquisitions.........................  9,980,540   10     254,220          --         --         --             --
Issuance of common stock to
 employees............................     42,775   --       1,069          --         --     (1,069)            --
Repayment of employee stockholder
 notes................................         --   --          --          --         --         62             --
Income tax benefit from stock options
 exercised............................         --   --       1,618          --         --         --             --
Other.................................         --   --         639          --         --         --             --
Net income............................         --   --          --          --         --         --             --
                                       ----------  ---    --------    --------    -------    -------        -------
Balance at December 31, 2001
 (Restated see Note 23)............... 79,228,179  $79    $828,939    $ (6,557)   $  (717)   $(2,538)       $    --
Exercise of stock options.............  1,422,850    2       6,912          --         --         --             --
Cumulative translation adjustment.....         --   --          --       1,727         --         --             --
Change in fair value of derivative
 financial instrument, net of tax.....         --   --          --      (8,866)        --         --             --
Issuance of restricted stock grants...    142,630   --       2,708          --         --         --         (2,285)
Issuance of common stock to
 employees............................     21,550   --         551          --         --       (274)            --
Purchase of 147,322 treasury shares at
 $8.96 per share......................         --   --          --          --     (1,320)        --             --
Purchase of 30,054 treasury shares at
 $9.60 per share......................         --   --          --          --       (288)        --             --
Repayment of employee stockholder
 notes................................         --   --          --          --         --        120             --
Income tax benefit from stock options
 exercised............................         --   --       2,547          --         --         --             --
Reserve for collectibility............         --   --          --          --         --      2,692             --
Net loss..............................         --   --          --          --         --         --             --
                                       ----------  ---    --------    --------    -------    -------        -------
Balance at December 31, 2002.......... 80,815,209  $81    $841,657    $(13,696)   $(2,325)   $    --        $(2,285)
                                       ==========  ===    ========    ========    =======    =======        =======
</TABLE>
<TABLE>
<CAPTION>


                                        Retained
                                        earnings
                                       ---------

<S>                                    <C>
Balance at December 31, 1999
 (Restated See Notes 22 and 23)....... $  98,210
Conversion of warrants................
Exercise of stock options.............        --
Cumulative translation adjustment.....        --
Issuance of common stock, net.........        --
Issuance of common stock for
 acquisitions.........................        --
Issuance of 91,727 treasury shares at
 $35.98 per share.....................        --
Repayment of employee stockholder
 notes................................        --
Income tax benefit from stock options
 exercised............................        --
Other.................................        --
Net income............................    49,639
                                       ---------
Balance at December 31, 2000
 (Restated See Notes 22 and 23)....... $ 147,849
Exercise of stock options.............        --
Cumulative translation adjustment.....        --
Change in fair value of derivative
 financial instrument, net of tax.....        --
Issuance of common stock, net.........        --
Issuance of common stock for
 acquisitions.........................        --
Issuance of common stock to
 employees............................        --
Repayment of employee stockholder
 notes................................        --
Income tax benefit from stock options
 exercised............................        --
Other.................................        --
Net income............................    72,413
                                       ---------
Balance at December 31, 2001
 (Restated see Note 23)............... $ 220,262
Exercise of stock options.............        --
Cumulative translation adjustment.....        --
Change in fair value of derivative
 financial instrument, net of tax.....        --
Issuance of restricted stock grants...        --
Issuance of common stock to
 employees............................        --
Purchase of 147,322 treasury shares at
 $8.96 per share......................        --
Purchase of 30,054 treasury shares at
 $9.60 per share......................        --
Repayment of employee stockholder
 notes................................        --
Income tax benefit from stock options
 exercised............................        --
Reserve for collectibility............        --
Net loss..............................  (116,068)
                                       ---------
Balance at December 31, 2002.......... $ 104,194
                                       =========
</TABLE>

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

                                      F-7

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2002, 2001 and 2000

1.  The Company, Business and Significant Accounting Policies

   Hanover Compressor Company, through its indirect wholly owned subsidiary
Hanover Compression Limited Partnership and its subsidiaries, ("Hanover", "the
Company", or "We") is a global market leader in full service natural gas
compression and a leading provider of service, fabrication and equipment for
contract natural gas handling applications. We sell this equipment, and provide
it on a rental, contract compression, maintenance and acquisition leaseback
basis to natural gas production, processing and transportation companies. In
conjunction with our maintenance business, we have developed a parts and
service business that together can provide solutions to customers that own
their own compression equipment, but want to outsource their operations. We
also have compressor and oil and gas production equipment fabrication and
provide gas processing and treating, gas measurement and oilfield power
generation services, primarily to our domestic and international customers as a
complement to our compression services. Founded in 1990, and a public company
since 1997, our customers include both major and premier independent oil and
gas producers and distributors, as well as national oil and gas companies.

  Principles of Consolidation

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

  Use of Estimates in the Financial Statements

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

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

  Cash and Cash Equivalents

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

  Revenue Recognition

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

                                      F-8

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

  Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, accounts receivable,
advances to non-consolidated affiliates and notes receivable. The Company
believes that the credit risk in temporary cash investments that the Company
has with financial institutions is minimal. Trade accounts and notes receivable
are due from companies of varying size engaged principally in oil and gas
activities throughout the world. The Company reviews the financial condition of
customers prior to extending credit and generally does not obtain collateral
for trade receivables. Payment terms are on a short-term basis and in
accordance with industry standards. The Company considers this credit risk to
be limited due to these companies' financial resources, the nature of products
and the services it provides them and the terms of its rental contracts. Trade
accounts receivable is recorded net of estimated doubtful accounts of
approximately $5,162,000 and $6,300,000 at December 31, 2002 and 2001,
respectively.

  Inventory

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

  Property, Plant and Equipment

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

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

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

   After a review of the estimated economic lives of our compression fleet, on
July 1, 2001 we changed our estimate of the useful life of certain compression
equipment to range from 15 to 30 years instead of a uniform 15-year depreciable
life. Our new estimated lives are based upon our experience, maintenance
program and the different types of compressors presently in our rental fleet.
The Company believes its new estimate reflects the economic useful lives of the
compressors more accurately than a uniform useful life applied to all
compressors regardless of their age or performance characteristics. The effect
of this change in estimate on 2002 and 2001

                                      F-9

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

was a decrease in depreciation expense of approximately $14,387,000 and
$5,000,000 and an increase in net income of approximately $8,632,000 ($0.11 per
share) and $3,100,000 ($0.04 per share), respectively.

  Computer software

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

  Long-Lived Assets

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

  Goodwill and Intangibles

   The excess of cost over net assets of acquired businesses is recorded as
goodwill. In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 142, Goodwill and
Other Intangible Assets ("SFAS 142"). Under SFAS 142, amortization of goodwill
over an estimated useful life is discontinued. Instead, goodwill will be
reviewed for impairment annually or whenever events indicate impairment may
have occurred. Prior to adoption of SFAS 142 on January 1, 2002, the Company
amortized goodwill on a straight-line basis over 15 or 20 years commencing on
the dates of the respective acquisitions except for goodwill related to
business acquisitions after June 30, 2001. Accumulated amortization was
$14,312,000 and $18,365,000 at December 31, 2002 and 2001, respectively.
Amortization of goodwill totaled $ -0-, $10,101,000 and $4,442,000 in 2002,
2001 and 2000, respectively. (See Note 9.) Identifiable intangibles are
amortized over the assets' estimated useful lives.

  Sale and Leaseback Transactions

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

  Income Taxes

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

                                     F-10

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Foreign Currency Translation

   The financial statements of subsidiaries outside the U.S., except those
located in Latin America and highly inflationary economies, are measured using
the local currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the rates of exchange at the balance sheet date.
Income and expense items are translated at average monthly rates of exchange.
The resulting gains and losses from the translation of accounts are included in
accumulated other comprehensive income. For subsidiaries located in Latin
America and highly inflationary economies, translation gains and losses are
included in net income (loss).

  Earnings Per Common Share

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

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

<TABLE>
<CAPTION>
                                                                          Years Ended
                                                                          December 31,
                                                                      --------------------
                                                                       2002   2001   2000
                                                                      ------ ------ ------
                                                                         (in thousands)
<S>                                                                   <C>    <C>    <C>
Weighted average common shares outstanding--used in basic earnings
  (loss) per common share............................................ 79,500 72,355 61,831
Net dilutive potential common shares issuable:
   On exercise of options............................................     **  3,991  4,258
   On exercise of warrants...........................................     **      4    277
   On conversion of mandatorily redeemable preferred securities......     **  4,825     **
   On conversion of convertible senior notes.........................     **     **     **
                                                                      ------ ------ ------
Weighted average common shares and dilutive potential common shares--
  used in dilutive earnings (loss) per common share.................. 79,500 81,175 66,366
                                                                      ====== ====== ======
</TABLE>
--------
** Excluded from diluted earnings per common share as the effect would have
   been antidilutive.

   The table below indicates the potential common shares issuable which were
excluded from diluted potential common shares as their effect would be
anti-dilutive.

<TABLE>
<CAPTION>
                                                                     Years Ended
                                                                    December 31,
                                                                  -----------------
                                                                  2002  2001  2000
                                                                  ----- ----- -----
                                                                   (in thousands)
<S>                                                               <C>   <C>   <C>
Net dilutive potential common shares issuable:
   On exercise of options and restricted stock................... 2,442    --    --
   On exercise of warrants.......................................     4    --    --
   On conversion of mandatorily redeemable convertible preferred
     securities.................................................. 4,825    -- 4,825
   On conversion of convertible senior notes..................... 4,370 3,399    --
</TABLE>

                                     F-11

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Stock-Based Compensation

   In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") 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." The
following proforma net income and earnings (loss) per share data illustrates
the effect on net income (loss) and net income per share if the fair value
method had been applied to all outstanding and unvested stock options in each
period.

<TABLE>
<CAPTION>
                                                           Years ended December 31,
                                                         ---------------------------
                                                            2002      2001     2000
                                                         ---------  -------  -------
                                                                (in thousands)
<S>                                                      <C>        <C>      <C>
Net income (loss) as reported........................... $(116,068) $72,413  $49,639
   Add back: Restricted stock grant expense, net of tax.       275       --       --
   Deduct: Stock-based employee compensation expense
     determined under the fair value method, net of tax.    (2,753)  (3,804)  (4,598)
                                                         ---------  -------  -------
Proforma net income (loss).............................. $(118,546) $68,609  $45,041
                                                         =========  =======  =======
Earnings (loss) per share:
   Basic as reported.................................... $   (1.46) $  1.00  $  0.80
   Basic proforma....................................... $   (1.49) $  0.95  $  0.73
   Diluted as reported.................................. $   (1.46) $  0.94  $  0.75
   Diluted proforma..................................... $   (1.49) $  0.90  $  0.68
</TABLE>

  Comprehensive Income

   Components of comprehensive income (loss) are net income and all changes in
equity during a period except those resulting from transactions with owners.
Accumulated other comprehensive income consists of the foreign currency
translation adjustment and changes in the fair value of derivative financial
instruments, net of tax. At December 31, 2002, the Company's accumulated other
comprehensive loss included $1,243,000 foreign currency translation gain and
$14,939,000 loss on fair value of derivative instruments, net of tax. At
December 31, 2001, the Company's accumulated other comprehensive loss included
$484,000 foreign currency translation loss and $6,073,000 loss on fair value of
derivative instruments, net of tax.

  Financial Instruments

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

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, requires that, upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged item pending
recognition in earnings. The Company adopted SFAS 133 beginning January 1,
2001. (See Note 20.)

                                     F-12

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Reclassifications

   Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2002 financial statement classification. These
reclassifications have no impact on net income.

2.  Business Combinations

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

  Year Ended December 31, 2002

   In July 2002, we increased our ownership of Belleli Energy S.r.l.
("Belleli") to 40.3% from 20.3% by converting a $4,000,000 loan, together with
the accrued interest thereon, to Belleli into additional equity ownership. In
November 2002, we increased our ownership to 51% by exchanging a $9,410,000
loan, together with the accrued interest thereon, to the other principal owner
for additional equity ownership and began consolidating the results of
Belleli's operations.

   The following table summarizes the estimated values of the assets acquired
and liabilities assumed as of the acquisition date for the Belleli acquisition
(in thousands):

<TABLE>
<CAPTION>
                                                   Belleli
                                                November 2002
                                                -------------
                  <S>                           <C>
                  Current assets...............   $  86,799
                  Property, plant and equipment      11,836
                  Intangible assets............      22,930
                  Goodwill.....................       3,641
                                                  ---------
                  Total assets acquired........     125,206
                                                  ---------
                  Short-term debt..............     (36,433)
                  Current liabilities..........     (58,367)
                  Other liabilities............     (11,428)
                                                  ---------
                  Total liabilities assumed....    (106,228)
                                                  ---------
                  Net assets acquired..........   $  18,978
                                                  =========
</TABLE>

   The Company is in the process of completing its valuation of Belleli's
intangible assets. In connection with its increase in ownership in November
2002, the Company agreed to give the other principal owner the right to buy the
Company's interest in Belleli. This right to buy the Company's interest expires
on June 30, 2003. On July 1, 2003, the Company will have the right to purchase
the other principal owner's interest. During 2002, the Company also purchased
certain operating assets of Belleli for approximately $22,400,000 from a
bankruptcy estate and leased these assets to Belleli for approximately
$1,200,000 per year, for seven years, for use in its operations.

                                     F-13

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC
("Gates") for approximately $14,400,000 and had loaned approximately $6,000,000
to Gates prior to our acquisition. Gates is a developer and owner of a
forty-six megawatt cycle peaking power facility in Fresno County, California.
This investment is accounted for as a consolidated subsidiary. This investment
has been classified as an asset held for sale and its operating results are
reported in income (loss) from discontinued operations. (See Note 3.)

   In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC
("Panoche") for approximately $6,800,000 and had loaned approximately
$5,000,000 to Panoche prior to the acquisition of our interest. Panoche is a
developer and owner of a forty-nine megawatt cycle peaking power facility in
Fresno County, California which is under contract with California Department of
Water Resources. This investment is accounted under the equity method of
accounting. This investment has been classified as an asset held for sale and
the equity income from this non-consolidated subsidiary is reported in income
(loss) from discontinued operations. (See Note 3.)

   In July 2002, we acquired certain assets of Voyager Compression Services,
LLC for approximately $2,500,000 in cash.

  Year Ended December 31, 2001

   In August 2001, we acquired 100% of the issued and outstanding shares of the
Production Operators Corporation's natural gas compression business, ownership
interests in certain joint venture projects in South America, and related
assets ("POI") from Schlumberger for $761,000,000 in cash, Hanover common stock
and indebtedness, subject to certain post-closing adjustments pursuant to the
purchase agreement (the "POI Acquisition") which have resulted in an increase
in the purchase price to approximately $778,000,000 due to an increase in net
assets acquired. Under the terms of the definitive agreement, Schlumberger
received approximately $270,000,000 in cash (excluding the amounts paid for the
increase in net assets), $150,000,000 in a long-term subordinated note and
approximately 8,708,000 Hanover common shares, or approximately 11% of the
outstanding shares of Hanover common stock, which are required to be held by
Schlumberger for at least three years following the closing date. The ultimate
number of shares issued under the purchase agreement was determined based on
the nominal value of $283,000,000 divided by the 30-day average closing price
of Hanover common stock as defined under the agreement and subject to a collar
of $41.50 and $32.50. The estimated fair value of the stock issued was
$212,468,000, based on the market value of the shares at the time the number of
shares issued was determined reduced by an estimated 20% discount due to the
restrictions on the stock's marketability.

   Additionally, as part of the purchase agreement, the Company is required to
make a payment of up to $58,000,000 due upon the completion of a financing of
the PIGAP II South American joint venture ("PIGAP", see Note 19) acquired by
the Company. Because the joint venture failed to execute the financing on or
before December 31, 2002, Hanover had the right to put our interest in the
joint venture back to Schlumberger in exchange for a return of the purchase
price allocated to the joint venture, plus the net amount of any capital
contributions by Hanover to the joint venture. In January 2003, we exercised
our right to put our interest in the joint venture back to Schlumberger. If not
exercised, the put right would have expired as of February 1, 2003. The
consummation of the transfer of Hanover's interest in the PIGAP II joint
venture is subject to certain consents. We are currently in discussions with
Schlumberger to explore the possibility of entering into a new agreement under
which Hanover would retain the 30% ownership interest in the joint venture. In
light of the ongoing discussions between Hanover and Schlumberger relating to
the put, the parties have agreed to postpone the closing date to no later than
May 31, 2003.

                                     F-14

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   The purchase price was a negotiated amount between the Company and
Schlumberger and the Company expects the acquisition to be accretive to
earnings in future periods. The Company believes the purchase price represents
the fair market value of the POI business based on its assets, customer base,
reputation, market position (domestic and international) and potential for
long-term growth. The Company incurred approximately $14,975,000 in expenses in
connection with the acquisition. The POI Acquisition was accounted for as a
purchase and is included in our financial statements commencing on September 1,
2001.

   As of December 31, 2002 the Company has recorded approximately $70,592,000
in goodwill, of which none will be deductible for tax purposes, related to the
POI acquisition which will not be amortized in accordance with the transition
provisions of SFAS 142 (See Note 9). In addition, as of December 31, 2002, the
Company recorded $9,810,000 in estimated value of identifiable intangible
assets which $8,200,000 will be amortized over a 24 month weighted average life
and $1,600,000 is included in our basis of the PIGAP joint venture and relates
to the option to put the joint venture back to Schlumberger. The purchase price
is subject to a contingent payment by Hanover to Schlumberger based on the
realization of certain tax benefits by the Company over the next 15 years.

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

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

   In March 2001, we purchased OEC Compression Corporation ("OEC") in an
all-stock transaction for approximately $101,849,000, including the assumption
and payment of approximately $64,594,000 of OEC indebtedness. We paid an
aggregate of approximately 1,145,706 shares of Hanover common stock to
stockholders of OEC. The acquisition was accounted for under the purchase
method of accounting and is included in our financial statements commencing in
April 2001.

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

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

<TABLE>
<CAPTION>
                                                      POI        OEC
                                                  August 2001 March 2001
                                                  ----------- ----------
       <S>                                        <C>         <C>
       Current assets............................  $ 80,091    $  4,451
       Property, plant and equipment.............   487,880     114,841
       Intangible assets.........................     8,210          --
       Goodwill..................................    67,476          --
       Investments in non-consolidated affiliates   140,081          --
                                                   --------    --------
       Total assets acquired.....................   783,738     119,292
       Current liabilities.......................   (47,667)     (3,114)
       Other liabilities.........................   (20,978)    (15,531)
       Long-term debt............................        --     (62,057)
                                                   --------    --------
       Total liabilities assumed.................   (68,645)    (80,702)
                                                   --------    --------
       Net assets acquired.......................  $715,093    $ 38,590
                                                   ========    ========
</TABLE>

                                     F-15

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Year Ended December 31, 2000

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

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

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

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

   In June 2000, the Company purchased common stock of Applied Process
Solutions, Inc. ("APSI") for 2,303,294 shares of the Company's common stock and
assumption of $16,030,000 of APSI's outstanding debt. The estimated value of
the stock issued was approximately $54,816,000, based upon quoted market price
for the Company's common stock reduced by a discount due to the restriction on
the stock's marketability. The assumed debt has been repaid.

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

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

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

                                     F-16

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Pro Forma Information

   The pro forma information set forth below assumes the Belleli, POI, and OEC
acquisitions are accounted for had the purchases occurred at the beginning of
2001. The remaining acquisitions were not considered material for pro forma
purposes. The pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisitions been consummated at that
time (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                 -----------------------
                                                    2002         2001
                                                 -----------  -----------
                                                 (unaudited)  (unaudited)
       <S>                                       <C>          <C>
       Revenue.................................. $1,108,990   $1,242,216
       Net income (loss)........................   (116,262)      69,260
       Earnings (loss) per common share--basic..      (1.46)        0.88
       Earnings (loss) per common share--diluted      (1.46)        0.84
</TABLE>

3.  Discontinued Operations

   During the fourth quarter of 2002, Hanover's Board of Directors approved
management's plan to dispose of the Company's non-oilfield power generation
projects, which were part of its domestic rental business, and certain used
equipment businesses, which were part of the Company's parts and service
business. These disposals meet the criteria established for recognition as
discontinued operations under SFAS 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144 specifically requires
that such amounts must represent a component of a business comprised of
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. These businesses
have been reflected as discontinued operations in the Company's Consolidated
Statement of Operations for the year ended December 31, 2002 and prior period
financial statements have been adjusted to reflect the impact of these
discontinued operations. These assets are expected to be sold within one year
of December 31, 2002 and the assets and liabilities are reflected as
held-for-sale on the Company's Consolidated Balance Sheet.

   During the fourth quarter of 2002, Hanover recognized a pre-tax charge to
discontinued operations of approximately $52,282,000 ($36,467,000 after tax)
for the estimated loss in fair-value from carrying value expected to be
realized at the time of disposal. This amount includes a $19,010,000 pre-tax
impairment of goodwill. During the second quarter of 2002, Hanover recognized a
pre-tax write-down of $6,000,000 ($3,883,000 after tax) for certain turbines
related to the non-oilfield power generation business which has also been
reflected as discontinued operations.

                                     F-17

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                               ------------------------------
                                                                 2002     2001       2000
                                                               -------  --------   --------
                                                                        Restated   Restated
                                                                        (See Notes 22 and 23)
<S>                                                            <C>      <C>        <C>
Revenues and other:
   Domestic rentals........................................... $ 2,870  $    --    $    --
   Parts, service and used equipment..........................  20,197   29,168     15,840
   Equity in income of non-consolidated affiliates............     405       --         --
   Other......................................................      52      569        122
                                                               -------  -------    -------
                                                                23,524   29,737     15,962
                                                               -------  -------    -------
Expenses:
   Domestic rentals...........................................     363       --         --
   Parts, service and used equipment..........................  13,485   14,136      8,336
   Selling, general and administrative........................   8,346    8,808      2,864
   Depreciation and amortization..............................   1,672    1,737        694
   Interest expense...........................................     481        9          6
   Other......................................................   1,309       --         --
                                                               -------  -------    -------
                                                                25,656   24,690     11,900
                                                               -------  -------    -------
Income (loss) from discontinued operations before income taxes  (2,132)   5,047      4,062
Provision for (benefit from) income taxes.....................  (1,257)   2,082      1,553
                                                               -------  -------    -------
Income (loss) from discontinued operations.................... $  (875) $ 2,965    $ 2,509
                                                               =======  =======    =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                     Non-Oilfield
                                             Used       Power
                                           Equipment  Generation   Total
                                           --------- ------------ -------
      <S>                                  <C>       <C>          <C>
      Current assets......................  $20,099    $13,666    $33,765
      Property plant and equipment........      858     28,103     28,961
      Non-current assets..................       --      6,682      6,682
                                            -------    -------    -------
         Assets held for sale.............   20,957     48,451     69,408
                                            -------    -------    -------
      Current liabilities.................       --      3,257      3,257
      Non-current liabilities.............       --     19,002     19,002
                                            -------    -------    -------
         Liabilities held for sale........       --     22,259     22,259
                                            -------    -------    -------
             Net assets held for sale.....  $20,957    $26,192    $47,149
                                            =======    =======    =======
</TABLE>

   Goodwill associated with discontinued operations was $21,173,000 at December
31, 2001 net of accumulated amortization of $2,163,000. The goodwill was
written off in connection with the write down of these operations to market
value during the fourth quarter of 2002. (See Note 9.)

                                     F-18

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


4.  Inventory

   Inventory consisted of the following amounts (in thousands):

<TABLE>
<CAPTION>
                                           December 31,
                                         -----------------
                                           2002     2001
                                         -------- --------
                                                  Restated
                      <S>                <C>      <C>
                      Parts and supplies $114,833 $146,877
                      Work in progress..   37,790   46,091
                      Finished goods....   13,381   22,687
                                         -------- --------
                                         $166,004 $215,655
                                         ======== ========
</TABLE>

   During the year ended December 31, 2002, we recorded approximately
$13,853,000 in inventory write downs and reserves for parts inventory which was
either obsolete, excess or carried at a price above market value. As of
December 31, 2002 and 2001, we had inventory reserves of $14,211,000 and
$2,101,000, respectively.

5.  Compressor and Production Equipment Fabrication Contracts


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

<TABLE>
<CAPTION>
                                                     December 31,
                                                 --------------------
                                                    2002       2001
                                                 ---------  ---------
         <S>                                     <C>        <C>
         Costs incurred on uncompleted contracts $ 234,670  $ 129,952
         Estimated earnings.....................    21,073     25,654
                                                 ---------  ---------
                                                   255,743    155,606
         Less--billings to date.................  (212,968)  (103,659)
                                                 ---------  ---------
                                                 $  42,775  $  51,947
                                                 =========  =========
</TABLE>

   The increase in the costs and billings on uncompleted contracts was due to
the consolidation of Belleli, when the Company increased its ownership to 51%.
(See Note 2.)

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                   ---------------------
                                                                      2002       2001
                                                                   ---------  ----------
<S>                                                                <C>        <C>
Costs and estimated earnings in excess of billings on uncompleted
  contracts....................................................... $  57,346  $   59,099
Billings on uncompleted contracts in excess of costs and estimated
  earnings........................................................   (14,571)     (7,152)
                                                                   ---------  ----------
                                                                   $  42,775  $   51,947
                                                                   =========  ==========
</TABLE>

                                     F-19

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


6.  Property, plant and equipment

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

<TABLE>
<CAPTION>
                                                               December 31,
                                                          ----------------------
                                                             2002        2001
                                                          ----------  ----------
                                                                       Restated
<S>                                                       <C>         <C>
Compression equipment, facilities and other rental assets $1,261,241  $1,171,282
Land and buildings.......................................     86,732      55,570
Transportation and shop equipment........................     75,443      61,848
Other....................................................     31,888      23,848
                                                          ----------  ----------
                                                           1,455,304   1,312,548
Accumulated depreciation.................................   (287,629)   (161,035)
                                                          ----------  ----------
                                                          $1,167,675  $1,151,513
                                                          ==========  ==========
</TABLE>

   Depreciation expense was $139,427,000, $73,609,000 and $46,155,000 in 2002,
2001 and 2000, respectively. Depreciation expense for 2002 includes $34,485,000
for the impairment of certain idle units of the Company's compression fleet
that are being retired and the acceleration of depreciation of certain plants
and facilities expected to be sold or abandoned. Assets under construction of
$116,427,000 and $98,538,000 are included in compression equipment, facilities
and other rental assets at December 31, 2002 and 2001, respectively. The
Company capitalized $2,470,000, $2,750,000 and $1,823,000 of interest related
to construction in process during 2002, 2001, and 2000, respectively.

   In August 2001, the Company exercised its purchase option under the 1998
operating lease (see Note 12) for $200,000,000. The depreciable basis of the
compressors purchased has been reduced by the deferred gain of approximately
$41,993,000 which was recorded at inception of the lease and previously
included as an other liability on the Company's Consolidated Balance Sheet.

7.  Intangible and Other Assets

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

<TABLE>
<CAPTION>
                                                             December 31,
                                                          -----------------
                                                            2002      2001
                                                          --------  --------
                                                                    Restated
    <S>                                                   <C>       <C>
    Deferred debt issuance and leasing transactions costs $ 44,396  $42,183
    Notes receivable.....................................   12,769   25,562
    Intangibles..........................................   25,642    7,210
    Other................................................   12,943   13,619
                                                          --------  -------
                                                            95,750   88,574
    Accumulated amortization.............................  (21,692)  (9,921)
                                                          --------  -------
                                                          $ 74,058  $78,653
                                                          ========  =======
</TABLE>

   Amortization of intangible and other assets totaled $11,754,000, $5,113,000
and $1,591,000 in 2002, 2001 and 2000, respectively.

                                     F-20

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   Certain notes receivable result from an agreement entered into in 2001 to
advance funds to a third party in connection with various power generation
development projects. Under the agreement, the Company agreed to advance
working capital of up to $12,500,000. At December 31, 2001, $7,500,000 was
funded under the agreement. The notes bear interest at the prime lending rate
that ranged from 5.5% to 8%, are secured by equipment and mature on April 30,
2002. The remaining notes receivable result primarily from customers for sales
of equipment or advances to other parties in the ordinary course of business.
During 2002, the Company converted certain of the notes into equity ownership
positions in the non-oilfield power generation projects and reclassified
certain of these notes to assets held for sale (See Notes 2 and 3) and also
recorded a charge in other expense to reserve for certain employee notes. (See
Note 26.)

   See Note 18 for related party notes receivable.

8.  Investments in Non-Consolidated Affiliates

   Investments in affiliates that are not controlled by the Company but where
the Company has the ability to exercise significant influence over the
operations are accounted for using the equity method. The Company's share of
net income or losses of these affiliates is reflected in the Consolidated
Statement of Operations as Equity in income of non-consolidated affiliates. The
Company's primary equity method investments are comprised of entities that own,
fabricate, operate, service and maintain compression and other related
facilities. The Company's equity method investments totaled approximately
$148,824,000 and $169,222,000 at December 31, 2002 and 2001, respectively.

   The Company's ownership interest and location of each equity investee at
December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                     Ownership
                                     Interest    Location          Type of Business
                                     --------- ------------- ----------------------------
<S>                                  <C>       <C>           <C>
Pigap II............................   30.0%     Venezuela   Gas Compression Plant
El Furrial..........................   33.3%     Venezuela   Gas Compression Plant
Simco/Harwat Consortium.............   35.5%     Venezuela   Gas Compression Plant
Hanover Measurement Services Company
  LP................................   50.2%   United States Monitoring Services
Servi Compressores, CA..............   50.0%     Venezuela   Compression Service Provider
Collicutt Mechanical Services Ltd...   24.1%      Canada     Compression Service Provider
</TABLE>

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

<TABLE>
<CAPTION>
                                           December 31,
                                         -----------------
                                           2002     2001
                                         -------- --------
                     <S>                 <C>      <C>
                     Current assets..... $165,193 $330,542
                     Non-current assets.  591,283  620,951
                     Current liabilities   98,697  113,255
                     Debt payable.......  173,108  620,884
                     Owners' equity.....  484,671  217,354
</TABLE>

                                     F-21

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   Summarized earnings information for these entities for the years ended
December 31, 2002, 2001 and 2000 follows (on a 100% basis, in thousands):

<TABLE>
<CAPTION>
                                    Years ended December 31,
                                    -------------------------
                                      2002   2001(1)   2000
                                    -------- -------- -------
                   <S>              <C>      <C>      <C>
                   Revenues........ $333,150 $201,581 $86,059
                   Operating income   87,231   46,097  17,290
                   Pretax income...   77,121   25,417  10,500
</TABLE>
--------
(1) Amounts for the joint ventures acquired in connection with the POI business
    acquisition are included from September 1, 2001.

   The most significant investments are the joint ventures (Pigap II, El
Furrial and Simco/Harwat) acquired in connection with the POI acquisition
completed in August 2001. At December 31, 2002 and 2001, these ventures account
for approximately $141,008,000 and $152,443,000 of the equity investments,
respectively, and generated equity in earnings for 2002 and 2001 of
approximately $21,680,000 and $8,053,000. See Note 24 for subsequent event
regarding the Company's interest in the PIGAP II joint venture. In connection
with its investment in El Furrial and Simco/Harwat, the Company guaranteed its
portion of the debt in the joint venture related to these projects. At December
31, 2002 the Company has guaranteed approximately $43,512,000 and $13,188,000,
respectively, of the debt which is on these joint venture books. These amounts
are not recorded on the Company's books.

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

   The financial data for 2001 includes Belleli, a fabrication company based in
Italy. Effective January 2001, the Company agreed to provide certain
facilitation services to Belleli and provide Belleli with project financing
including necessary guarantees, bonding capacity and other collateral on an
individual project basis. Under the arrangement, Belleli was required to
present each project to the Company which could be approved at the Company's
sole discretion. The Company received $1,723,000 from Belleli in 2001 for its
facilitation services. Under a separate agreement with Belleli, the Company has
issued letters of credit on Belleli's behalf totaling approximately $16,736,000
at December 31, 2002. In November 2002, the Company acquired an additional
interest in Belleli bringing the total ownership to 51%. The increase in
ownership requires that the Company record its investment in Belleli using the
consolidation method of accounting rather than equity method accounting. The
results of Belleli's operations subsequent to the acquisition of the
controlling interest, and the assets and liabilities of Belleli as of December
31, 2002, have been consolidated in the financial statements of the Company.
(See Note 2.)

   During 2000, Collicutt Hanover Services Ltd. ("Collicutt") sold additional
shares that reduced the Company's ownership percentage to approximately 24%,
accordingly, a change in interest gain of $864,000 was recorded in the
Consolidated Statement of Operations. In 2002, due to permanent decline in the
market value of its investment in Collicut, the Company recorded to Other
expense an impairment of $5,000,000.

   In the normal course of business, Hanover engages in purchase and sale
transactions with Collicut Hanover Services Ltd., which is owned 24% by
Hanover. During the period ended December 31, 2002 and 2001, Hanover

                                     F-22

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

had sales to this related party of $943,000 and $2,579,000, respectively; and
purchases of $19,633,000 and $19,197,000, respectively. At December 31, 2002,
Hanover had a net payable to this related party of $111,700.

   In the normal course of business, Hanover engages in purchase and sale
transactions with Servi-Compressores, which is owned 50% by Hanover. During the
period ended December 31, 2002 and 2001, Hanover had sales to this related
party of $406,000 and $849,000, respectively and made purchases of $1,859,000
during 2001. At December 31, 2001, Hanover had a net receivable from this
related party of $464,000.

   The Company also holds interests in companies in which it does not exercise
significant influence over the operations. These investments are accounted for
using the cost method. Cost method investments totaled approximately $1,865,000
and $9,106,000 at December 31, 2002 and 2001, respectively. During 2002, the
Company determined that certain of its cost method investments were permanently
impaired and therefore recorded in Other expense impairment charges amounting
to $7,100,000.

   In May 2000, the Company acquired common stock of Aurion Technologies, Inc.
("Aurion"), a technology company formed to develop remote monitoring and data
collection services for the compression industry, for $2,511,000 in cash. In
2001, the Company purchased additional shares for approximately $1,250,000,
advanced $2,700,000 to Aurion and had an accounts receivable of $1,103,000.
Aurion filed for bankruptcy protection in March 2002, and accordingly, the
Company recorded in Other expense approximately $5,013,000 during the year
ended December 31, 2001 to impair its investment and the unrecoverable amount
of the advances. During 2002, the Company recorded an additional charge related
to Aurion of $3,850,000.

9.  Goodwill

   In June 2001, the FASB issued SFAS 142, Goodwill and Other Intangible
Assets. Under SFAS 142, amortization of goodwill over an estimated useful life
is discontinued. Instead, goodwill will be reviewed for impairment annually or
whenever events indicate impairment may have occurred. The standard also
requires acquired intangible assets to be recognized separately and amortized
as appropriate. SFAS 142 was effective for Hanover on January 1, 2002. The
adoption of SFAS 142 has had an impact on future financial statements, due to
the discontinuation of goodwill amortization expense.

   The transition provisions of SFAS 142 required the Company to identify its
reporting units and perform an initial impairment assessment of the goodwill
attributable to each reporting unit as of January 1, 2002. The Company
performed its initial impairment assessment and determined that the Company's
reporting units are the same as its business segments and that no impairment
existed as of January 1, 2002. However, due to a downturn in its business and
changes in the business environment in which the Company operates, the Company
completed an additional impairment analysis as of June 30, 2002. As a result of
the test performed as of June 30, 2002, the Company recorded an estimated
$47,500,000 impairment of goodwill attributable to our production and
processing equipment fabrication business unit. The second step of goodwill
impairment test required the Company allocate the fair value of the reporting
unit to the production and processing equipment businesses' assets. The Company
performed the second step of the goodwill impairment test in the third quarter
of 2002 and determined that no adjustment to the impairment, recorded in the
second quarter, was required. The fair value of reporting units was estimated
using a combination of the expected present value of future cash flows and the
market approach. In the fourth quarter of 2002, the Company recorded a
$4,603,000 goodwill impairment related to our pump division which we expect to
sell in 2003.

                                     F-23

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

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

   Hanover's adjusted net income and earnings per share, adjusted to exclude
goodwill amortization expense, for the twelve months ended December 31, 2001
and 2000 are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                     2001     2000
                                                   -------- --------
                                                   Restated Restated
           <S>                                     <C>      <C>
           Net income............................. $72,413  $49,639
           Goodwill amortization, net of tax......   8,846    4,280
                                                   -------  -------
           Adjusted net income.................... $81,259  $53,919
                                                   =======  =======
           Basic earnings per share, as reported.. $  1.00  $  0.80
           Goodwill amortization, net of tax......    0.12     0.07
                                                   -------  -------
           Adjusted basic earnings per share...... $  1.12  $  0.87
                                                   =======  =======
           Diluted earnings per share, as reported $  0.94  $  0.75
           Goodwill amortization, net of tax......    0.11     0.06
                                                   -------  -------
           Adjusted diluted earnings per share.... $  1.05  $  0.81
                                                   =======  =======
</TABLE>


10.  Accrued Liabilities

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

<TABLE>
<CAPTION>
                                                            December 31,
                                                          -----------------
                                                            2002     2001
                                                          -------- --------
    <S>                                                   <C>      <C>
    Accrued salaries, bonuses and other employee benefits $ 21,024 $ 14,843
    Accrued income and other taxes.......................   24,095   15,536
    Accrued leasing expense..............................   23,465   21,990
    Additional purchase price for DR (Note 2)............       --    1,798
    Additional purchase price for POI (Note 2)...........   60,740   58,000
    Accrued other........................................   60,315   42,941
                                                          -------- --------
                                                          $189,639 $155,108
                                                          ======== ========
</TABLE>

                                     F-24

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   In December 2002, the Company announced a plan to consolidate certain of its
manufacturing facilities and to terminate approximately 500 employees worldwide
during 2003. In connection with the planned severance, the Company recorded an
expense to selling, general and administrative expenses for $2,720,000 for
estimated termination benefits and the amount is included in accrued other
liabilities. As of December 31, 2002, no amounts had been paid out for the
planned severance.

11.  Debt

   Debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                    ------------------
                                                                                      2002      2001
                                                                                    --------  --------
<S>                                                                                 <C>       <C>
Bank credit facility............................................................... $156,500  $157,000
4.75% convertible senior notes due 2008............................................  192,000   192,000
Schlumberger note, interest at 12.5%...............................................  167,096   150,000
Real estate mortgage, interest at 3.7%, collateralized by certain land and
  buildings, payable through September 2004........................................    3,250     3,583
Belleli--factored receivables......................................................   15,970        --
Belleli--revolving credit facility.................................................   11,964        --
Other, interest at various rates, collateralized by equipment and other assets, net
  of unamortized discount..........................................................    8,164     7,230
                                                                                    --------  --------
                                                                                     554,944   509,813
Less--current maturities...........................................................  (33,741)   (5,553)
                                                                                    --------  --------
Long-term debt..................................................................... $521,203  $504,260
                                                                                    ========  ========
</TABLE>

   The Company's bank credit facility as amended and restated to date provides
for a $350,000,000 revolving credit facility that matures on November 30, 2004.
Advances bear interest at (a) the greater of the administrative agent's prime
rate, the federal funds effective rate, or the base CD rate, or (b) a
eurodollar rate, plus, in each case, a specified margin (3.2% and 3.9% weighted
average interest rate at December 31, 2002 and 2001, respectively). A
commitment fee based upon a percentage of the average available commitment is
payable quarterly to the lenders participating in the facility. The fee ranges
from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage
ratio. In addition to the drawn balance on the bank credit facility, as of
December 31, 2002, we had $52,895,000 in letters of credit outstanding under
the Company's bank credit facility. The credit facility contains certain
financial covenants and limitations on, among other things, indebtedness,
liens, leases and sales of assets. Giving effect to the covenant limitations in
the Company's bank credit agreement, as amended to date, the availability under
the bank credit facility at December 31, 2002 was approximately $120,000,000.
The credit facility also limits the payment of cash dividends on the Company's
common stock to 25% of net income for the period from December 2001 through
November 30, 2004. In addition, the Company had $3,775,000 in letters of credit
outstanding under other letters of credit facilities.

   In February 2003, the Company executed an amendment to its bank credit
facility and the compression equipment leases that we entered into in 1999 and
2000. The amendment, which was effective December 31, 2002, modifies certain
financial covenants to allow the Company greater flexibility in accessing the
capacity under the bank credit facility to support our short-term liquidity
needs. In addition, at the higher end of our permitted consolidated leverage
ratio, the amendment would increase the commitment fee under the bank credit
facility by 0.125% and increase the interest rate margins used to calculate the
applicable interest rates under all of the agreements by up to 0.75%. Any
increase in the Company's interest cost as a result of the amendment will
depend on our consolidated leverage ratio at the end of each quarter, the

                                     F-25

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

amount of indebtedness outstanding and the interest rate quoted for the
benchmark selected by us. As part of the amendment, we granted the lenders
under these agreements a security interest in the inventory, equipment and
certain other property of Hanover and its domestic subsidiaries, and pledged
66% of the equity interest in certain of Hanover's foreign subsidiaries. In
consideration for obtaining the amendment, we agreed to pay approximately $1.8
million to the lenders under these agreements. We also agreed to a restriction
on our capital expenditures during 2003, which under the agreement cannot
exceed $200,000,000.

   In March 2001, the Company issued $192,000,000 principal amount of 4.75%
convertible senior notes due 2008 (see Note 15).

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

   In November 2002, the Company increased its ownership in Bellel to 51%. (See
Note 2). Belleli has financed its growth through the factoring of its
receivables. Such factoring is typically short term in nature and at December
31, 2002 bore interest at a weighted average rate of 3.3%. In addition, Belleli
has revolving credit facilities of $11,964,000 at December 31, 2002 at a
weighted average rate of 3.0% which expire in 2003 and are secured by letters
of credit issued by Hanover of $6,717,000.

   Maturities of long-term debt at December 31, 2002 are (in thousands):
2003--$33,741; 2004--$160,194; 2005--$167,734; 2006--$549; 2007--$186; and
$192,540 thereafter.

12.  Leasing Transactions

   The Company has entered into five transactions involving the sale of
equipment by Hanover and its subsidiaries to special purpose entities, which in
turn lease the equipment back to us. At the time, these transactions had a
number of advantages over other sources of capital then available to the
Company. The sale and leaseback transactions (1) enabled Hanover to affordably
extend the duration of its financing arrangements, (2) reduced Hanover's cost
of capital and (3) provided access to a source of capital other than
traditional bank financing.

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

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

                                     F-26

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

to an unsecured borrowing rate. The Company will continue to evaluate
sale-leaseback transactions as well as consider other forms of financing for
cost effectiveness as future capital needs arise.

   The Company believes that the sale and leaseback transactions represent a
source of capital in addition to the commercial bank financing traditionally
utilized by the Company. This diversification of the Company's capital sources
has broadened its access to capital to allow it to expand operations.

   In August 2001 and in connection with the POI Acquisition, we completed two
sale and leaseback transactions involving certain compression equipment.
Concurrent with these transactions, we exercised our purchase option under our
July 1998 operating lease for $200,000,000. Under one transaction, we received
$309,300,000 proceeds from the sale of compression equipment. Under the second
transaction, we received $257,750,000 from the sale of additional compression
equipment. Both transactions are recorded as a sale and leaseback of the
equipment and are recorded as operating leases. Under the first transaction,
the equipment was sold and leased back by us for a seven year period and will
continue to be deployed by us in the normal course of our business. The
agreement calls for semi-annual rental payments of approximately $12,750,000 in
addition to quarterly rental payments of approximately $215,000. Under the
second transaction, the equipment was sold and leased back by us for a ten year
period and will continue to be deployed by us in the normal course of our
business. The agreement calls for semi-annual rental payments of approximately
$10,938,000 in addition to quarterly rental payments of approximately $188,000.
We have options to repurchase the equipment under certain conditions as defined
by the lease agreements. Through December 31, 2002, we incurred transaction
costs of approximately $18,607,000 related to these transactions. These costs
are included in intangible and other assets and are being amortized over the
respective lease terms.

   In October 2000, we completed a $172,589,000 sale and leaseback of
compression equipment. In March 2000, we entered into a separate $200,000,000
sale and leaseback of compression equipment. Under the March agreement, we
received proceeds of $100,000,000 from the sale of compression equipment at the
first closing in March 2000 and in August 2000, we completed the second half of
the equipment lease and received an additional $100,000,000 for the sale of
additional compression equipment. In June 1999 and in July 1998, we completed
two other separate $200,000,000 sale and leaseback transactions of compression
equipment. Under the lease agreements, the equipment was sold and leased back
by us for a five year term and will be utilized by us in the normal course of
our business. We have options to repurchase the equipment under the 2000 and
1999 leases as defined under certain conditions by the lease agreements. The
lease agreements call for variable quarterly payments that fluctuate with the
London Interbank Offering Rate and have covenant restrictions similar to our
bank credit facility. We incurred an aggregate of approximately $7,470,000 in
transactions costs for the leases entered into in 2000 and 1999 which are
included in intangible and other assets on the balance sheet and are being
amortized over the respective lease terms of the respective transactions.

                                     F-27

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

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

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

   As a result of the lease transactions, we incurred approximately
$94,751,000, $70,435,000, and $45,484,000 in lease expense for the years ended
December 31, 2002, 2001 and 2000, respectively. The following future minimum
lease payments are due under the leasing arrangements exclusive of any final
rent payments or purchase option payments (in thousands): 2003--$83,703;
2004--$76,418; 2005--$62,332; 2006--$48,987; 2007--$48,987; and $100,537
thereafter.

   In connection with the compression equipment leases entered into in August
2001, the Company was obligated to prepare registration statements and complete
an exchange offering to enable the holders of the notes issued by the lessors
to exchange their notes with notes which are registered under the Securities
Act of 1933. Because of the restatement of our financial statements, the
exchange offering was not completed pursuant to the time line required by the
agreements, the Company was required to pay additional lease expense in the
amount equal to $105,600 per week until the exchange offering was completed.
The additional lease expense began accruing on January 28, 2002 and increased
the Company's lease expense by $5,067,000 during 2002. The registration
statements became effective in February 2003. The exchange offer was completed
and the requirement to pay the additional lease expense ended on March 13, 2003.

   In February 2003, we executed an amendment to our bank credit facility and
the compression equipment leases entered into in 1999 and 2000. (See Note 11.)

                                     F-28

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


13.  Income Taxes

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

<TABLE>
<CAPTION>
                                Years ended December 31,
                              ----------------------------
                                 2002      2001     2000
                              ---------  -------- --------
                                         Restated Restated
                     <S>      <C>        <C>      <C>
                     Domestic $(115,733) $ 62,128 $54,684
                     Foreign.    23,314    49,872  20,264
                              ---------  -------- -------
                              $ (92,419) $112,000 $74,948
                              =========  ======== =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                  --------------------------
                                                    2002      2001     2000
                                                  --------  -------- --------
                                                            Restated Restated
  <S>                                             <C>       <C>      <C>
  Current tax provision (benefit):
     Federal..................................... $ (9,551) $ 1,136  $ 2,048
     State.......................................     (227)     560      449
     Foreign.....................................   11,243   10,474   (2,561)
                                                  --------  -------  -------
         Total current...........................    1,465   12,170      (64)
                                                  --------  -------  -------
  Deferred tax provision (benefit):
     Federal.....................................  (10,738)  25,085   16,284
     State.......................................
     Foreign.....................................   (8,303)   5,133   11,598
                                                  --------  -------  -------
         Total deferred..........................  (19,041)  30,218   27,882
                                                  --------  -------  -------
  Total provision for (benefit from) income taxes $(17,576) $42,388  $27,818
                                                  ========  =======  =======
</TABLE>

   The provision for (benefit from) income taxes for 2002, 2001 and 2000
resulted in effective tax rates of 19.0%, 37.8% and 37.1%, respectively. The
reasons for the differences between these effective tax rates and the U.S.
statutory rate of 35% are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                                                 --------------------------
                                                                   2002      2001     2000
                                                                 --------  -------- --------
                                                                           Restated Restated
<S>                                                              <C>       <C>      <C>
Federal income tax at statutory rate............................ $(32,347) $39,200  $26,231
State income taxes, net of federal benefit......................     (148)     364      291
Foreign effective rate/U.S. rate differential (including foreign
  valuation allowances).........................................   (8,020)  (2,775)     (64)
U.S. impact of foreign operations, net of federal benefit.......    7,894    3,458    1,305
Nondeductible goodwill..........................................   10,117    1,118      875
U.S. valuation allowance........................................    2,609       --       --
Other, net......................................................    2,319    1,023     (820)
                                                                 --------  -------  -------
                                                                 $(17,576) $42,388  $27,818
                                                                 ========  =======  =======
</TABLE>

                                     F-29

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

<TABLE>
<CAPTION>
                                                         December 31,
                                                     --------------------
                                                        2002       2001
                                                     ---------  ---------
                                                                 Restated
     <S>                                             <C>        <C>
     Deferred tax assets:
        Net operating losses........................ $ 157,928  $  64,787
        Investment in joint ventures................    11,208         --
        Inventory...................................     7,097      3,039
        Alternative minimum tax credit carryforward.     5,351     15,152
        Derivative instruments......................     9,656      6,452
        Accrued liabilities.........................    13,478      3,980
        Intangibles.................................    15,297        316
        Other.......................................     9,003      9,387
                                                     ---------  ---------
     Gross deferred tax assets......................   229,018    103,113
        Valuation allowance.........................   (23,371)        --
                                                     ---------  ---------
                                                       205,647    103,113
                                                     ---------  ---------
     Deferred tax liabilities:
        Property, plant and equipment...............  (313,483)  (263,108)
        Other.......................................    (4,636)    (5,497)
                                                     ---------  ---------
     Gross deferred tax liabilities.................  (318,119)  (268,605)
                                                     ---------  ---------
                                                     $(112,472) $(165,492)
                                                     =========  =========
</TABLE>

   The Company has U.S. net operating loss carryforwards at December 31, 2002
of approximately $381,000,000 expiring in 2006 to 2022. At December 2002, the
Company has an alternative minimum tax credit carryforward of approximately
$5,351,000 that does not expire. At December 31, 2002, the Company has
approximately $70,200,000 of net operating loss carryforwards in certain
non-U.S. jurisdictions. Of these, approximately $1,400,000 have no expiration
date, and the remaining $68,800,000 will expire in future years through 2011. A
valuation allowance has been provided, primarily for net operating loss
carryforwards that are not expected to be utilized. The valuation allowance
increased by $20,762,000 due to current year losses in non-U.S. tax
jurisdictions with short net operating loss carryforward periods, including
Argentina and Venezuela.

   In 2001, the Company recorded approximately $35,212,000 of additional
deferred income tax liability resulting from the 2001 acquisition transactions.
(See Note 2.)

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

14.  Mandatorily Redeemable Convertible Preferred Securities

   In December 1999, the Company issued $86,250,000 of unsecured Mandatorily
Redeemable Convertible Preferred Securities (the "Convertible Preferred
Securities") through Hanover Compressor Capital Trust, a Delaware business
trust and wholly-owned finance subsidiary of the Company. The Convertible
Preferred Securities have a liquidation amount of $50 per unit. The Convertible
Preferred Securities mature in 30 years but

                                     F-30

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

the Company may redeem them partially or in total any time on or after December
20, 2002. The Convertible Preferred Securities also provide for annual cash
distributions at the rate of 7.25%, payable quarterly in arrears; however,
payments may be deferred up to 20 quarters subject to certain restrictions. The
Company recorded approximately $6,253,000, during 2002, 2001 and 2000, for
distributions related to Convertible Preferred Securities. Each Convertible
Preferred Security is convertible into 2.7972 shares of Hanover common stock,
subject to certain conditions. The Company has fully and unconditionally
guaranteed the Convertible Preferred Securities. The Company incurred
approximately $3,587,000 in transaction costs that are included in other
assets, and recorded $121,000, $120,000 and $116,000 of amortization for
December 31, 2002, 2001 and 2000, respectively. The transaction costs are being
amortized over the term of the Convertible Preferred Securities. The fair value
of the Convertible Preferred Securities is approximately $62,963,000 at
December 31, 2002.

15.  Common Stockholders' Equity

  Convertible Senior Notes Offering

   In March 2001, the Company issued $192,000,000 principal amount of 4.75%
convertible senior notes due 2008. The notes mature on March 15, 2008 and are
subject to call beginning on March 15, 2004. The notes are convertible into
shares of the Company's common stock at a conversion price of approximately
$43.94 per share. In addition, the Company may decrease the conversion price by
any amount for any period of time, subject to approval by the Board of
Directors and within the terms of the indenture. The Company received
approximately $185,537,000 of proceeds from the sale, net of underwriting and
offering costs. The fair value of the convertible senior notes is approximately
$153,696,000 at December 31, 2002.

  Stock Offerings

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

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

  Stock Split

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

  Notes Receivable-Employee Stockholders

   Under various stock purchase plans, the Company's employees were 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 were
recorded as a reduction of common stockholders' equity. Due to the decline in
the price of the Company's stock which secured a portion of the notes, during
2002, the Company recorded a reserve for these notes receivable.

                                     F-31

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


  Other

   As of December 31, 2002, warrants to purchase approximately 4,000 shares of
common stock at $.005 per share were outstanding. The warrants expire in August
2005.

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

16.  Stock Options

   The Company has employee stock option plans that provide for the granting of
options to purchase common shares. The options are generally issued with an
exercise price equal to the fair market value on the date of grant and are
exercisable over a ten-year period. Options granted typically vest over a three
to four year period. No compensation expense related to stock options was
recorded in 2002, 2001 and 2000. On December 31, 2002, there were 264,400
shares available for future grants under the Company's stockholder approved
stock option plans.

   In April 2002, the Company granted 151,048 restricted shares of our common
stock to certain employees as part of an incentive compensation plan. The
restricted stock grants vest equally over four years. As of December 31, 2002,
142,630 restricted shares were outstanding under the plan. We will recognize
compensation expense equal to the fair value of the stock at the date of grant
over the vesting period related to these grants. During 2002, we recognized
$423,000 in compensation expense related to these grants.

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

   The following is a summary of stock option activity for the years ended
December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                                                          Weighted average
                                                Shares    price per share
                                              ----------  ----------------
      <S>                                     <C>         <C>
      Options outstanding, December 31, 1999.  8,797,004       $ 6.24
         Options granted.....................         --           --
         APSI acquisition....................    127,813        12.88
         Options canceled....................    (11,562)        9.78
         Options exercised...................   (994,572)        3.68
                                              ----------
      Options outstanding, December 31, 2000.  7,918,683         6.63
         Options granted.....................     43,575        25.00
         Options canceled....................    (47,622)       12.48
         Options exercised...................   (250,161)        9.12
                                              ----------
      Options outstanding, December 31, 2001.  7,664,475         6.62
         Options granted.....................  1,497,706        13.35
         Options canceled....................   (261,323)       10.29
         Options exercised................... (1,422,850)        4.69
                                              ----------
      Options outstanding, December 31, 2002.  7,478,008         8.21
                                              ==========
</TABLE>

                                     F-32

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2002:

<TABLE>
<CAPTION>
                                 Options outstanding      Options exercisable
                             ---------------------------- ------------------
                                       Weighted
                                        average  Weighted            Weighted
                                       remaining average             average
                                        life in  exercise            exercise
    Range of exercise prices  Shares     years    price    Shares     price
    ------------------------ --------- --------- -------- ---------  --------
    <S>                      <C>       <C>       <C>      <C>        <C>
          $0.00-2.50........ 2,086,918    2.4     $ 2.25  2,086,918   $ 2.25
          $2.51-5.00........   506,387     .8       2.94    506,387     2.94
          $5.01-7.50........   142,724    3.2       5.84    142,724     5.84
          $7.51-10.00....... 3,192,051    5.0       9.77  2,741,051     9.75
          $10.01-12.50......   296,213    6.5      12.17    250,713    12.50
          $12.51-15.00......   970,005    8.6      14.51    118,723    14.50
          $15.01-17.50......   175,000    9.3      17.29         --       --
          $17.51-20.00......    14,000    9.3      18.43         --       --
          $20.01-22.50......    30,145    2.2      20.09         --       --
          $22.51-25.00......    64,565    8.6      25.00      6,911    25.00
                             ---------                    ---------
                             7,478,008                    5,853,427
                             =========                    =========
</TABLE>

   The weighted-average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date was
$13.35 and $25.00 per option during 2002 and 2001, respectively.

   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The Company did
not grant any stock options in 2000. The fair value of options at date of grant
was estimated using the Black-Scholes model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                      2002     2001   2000
                                    -------  -------  ----
                     <S>            <C>      <C>      <C>
                     Expected life. 6 years  6 years  N/A
                     Interest rate.     4.4%     4.0% N/A
                     Volatility....    39.3%    35.4% N/A
                     Dividend yield       0%       0% N/A
</TABLE>

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

17.  Benefit Plans

   The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company recorded matching contributions of $1,472,000,
$1,062,000, and $594,000 during the years ended December 31, 2002, 2001 and
2000, respectively.

                                     F-33

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


18.  Related Party and Certain Other Transactions

Transactions with GKH Entities

   The Company and GKH Partners, L.P. ("GKH") are parties to a stockholders
agreement that provides, among other things, for GKH Investments, L.P.'s rights
of visitation and inspection and the Company's obligation to provide Rule 144A
information to prospective transferees of the Common Stock.

   GKH and other stockholders (collectively, the "Holders") who, as of December
31, 2002, together beneficially own approximately 11% of the outstanding Common
Stock, are, together with the Company, parties to a Third Amended Registration
Rights Agreement dated December 5, 1995 (the "GKH Rights Agreement"). The GKH
Rights Agreement generally provides that if the Company proposes to register
shares of its capital stock or any other securities under the Securities Act of
1933, then upon the request of those Holders owning in the aggregate at least
2.5% of the Common Stock (the "Registrable Securities") then held by all of the
Holders, the Company will use its reasonable best efforts to cause the
Registrable Securities so requested by the Holders to be included in the
applicable registration statement, subject to underwriters' cutbacks. The
Company is required to pay all registration expenses in connection with
registrations of Registrable Securities effected pursuant to the GKH Rights
Agreement.

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

   GKH has advised the Company that it is in the process of dissolving and
"winding up" its affairs. On November 12, 2002, GKH informed the Company that
GKH has advised its limited partners that it is extending the wind-up process
of the partnership for an additional twelve months from January 25, 2003 until
January 25, 2004. On December 3, 2002, GKH, as nominee for GKH Private Limited,
and GKH Investments, L.P. made a partial distribution of 10,000,000 shares out
of a total of 18,274,795 shares held by GKH to its limited and general
partners. As part of the wind-up process, GKH may liquidate or distribute
substantially all of its assets, including the remaining shares of the Common
Stock owned by GKH, to its partners.

   In August 2001, Hanover paid a $4,650,000 fee to GKH as payment for services
rendered in connection with Hanover's acquisition of POI and related assets.
Pursuant to an agreement with GKH which provides for compensation to GKH for
services, Hanover paid a management fee of $45,000 per month from November 2001
until terminated February 2002.

   Hanover leases certain compression equipment to an affiliate of Cockrell Oil
and Gas, LP, which was owned 50% by GKH until January 2001. The lease is on a
month-to-month basis. For the years ended 2001 and 2000, approximately $76,000
and $228,540 respectively, was billed under the lease.

Transactions with Schlumberger Entities

   In August 2001, the Company purchased Production Operators Corporation and
related assets (the "POI Acquisition") from the Schlumberger Companies (as
defined below). Schlumberger Limited (Schlumberger Limited and the Schlumberger
Companies, collectively are referred to as "Schlumberger") owns, directly or

                                     F-34

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

indirectly, all of the equity of the Schlumberger Companies. Pursuant to the
Lock-Up, Standstill and Registration Rights Agreement, dated as of August 31,
2001 (the "Schlumberger Rights Agreement"), between Schlumberger Technology
Company, Camco International Inc., Schlumberger Surenco, S.A., Schlumberger
Oilfield Holdings Limited, Operational Services, Inc. (collectively, the
"Schlumberger Companies") and Hanover, Hanover granted to each of the
Schlumberger Companies certain registration rights in connection with shares of
the Common Stock received by the Schlumberger Companies as consideration in the
POI acquisition (the "Hanover Stock"). The registration rights granted to the
Schlumberger Companies include (i) the right, subject to certain restrictions,
to register the Hanover Stock in any registration of securities initiated by
Hanover within the period of time beginning on the third anniversary of the
date of the Schlumberger Rights Agreement and ending on the tenth anniversary
of the date of the Schlumberger Rights Agreement (such period of time, the
"Registration Period"), and (ii) the right, subject to certain restrictions, to
demand up to five registrations of the Hanover Stock within the Registration
Period. Hanover is required to pay all registration expenses in connection with
registrations of Hanover Stock pursuant to the Schlumberger Rights Agreement.
For a period of three years from the date of the Schlumberger Rights Agreement,
the Schlumberger Companies are prohibited from, directly or indirectly, selling
or contracting to sell any of the Hanover Stock. The Schlumberger Rights
Agreement also provides that none of the Schlumberger Companies shall, without
Hanover's written consent, (i) acquire or propose to acquire, directly or
indirectly, greater than twenty-five percent (25%) of the shares of Hanover
common stock, (ii) make any public announcement with respect to, or submit a
proposal for, any extraordinary transaction involving Hanover, (iii) form or
join in any group with respect to the matters set forth in (i) above, or (iv)
enter into discussions or arrangements with any third party with respect to the
matters set forth in (i) above.

   Schlumberger has the right under the POI purchase agreement, so long as
Schlumberger owns at least 5% of the Common Stock and subject to certain
restrictions, to nominate one representative to sit on our Board of Directors.
In August 2001, Schlumberger designated Mr. Rene Huck, a Vice President of
Schlumberger Ltd., as a nominee to serve on our Board of Directors.
Schlumberger has advised the Company that it will not designate a nominee for
2003 and thus Mr. Huck will not stand for re-election. For the years ended
December 31, 2002, 2001 and 2000, Hanover generated revenues of approximately
$6,034,000, $1,379,000 and $918,000 in business dealings with Schlumberger. In
addition, Hanover made purchases of equipment and services of approximately
$7,599,000 from Schlumberger during 2002.

   As part of the purchase agreement entered into with respect to the POI
Acquisition, the Company was required to make a payment of up to $58,000,000
plus interest from the proceeds of and due upon the completion of a financing
of PIGAP II, a South American joint venture acquired by Hanover from
Schlumberger. (See Note 8.) Because the joint venture failed to execute the
financing on or before December 31, 2002, the Company had the right to put its
interest in the joint venture back to Schlumberger in exchange for a return of
the purchase price allocated to the joint venture, plus the net amount of any
capital contributions by the Company to the joint venture. In January 2003, the
Company exercised its right to put its interest in the joint venture back to
Schlumberger. If not exercised, the put right would have expired as of February
1, 2003. The consummation of the transfer of the Company's interest in the
joint venture back to Schlumberger is subject to receipt of necessary consents.
Hanover is currently in discussions with Schlumberger to explore the
possibility of entering into a new agreement under which Hanover would retain
the 30% ownership interest in the joint venture. In light of the ongoing
discussions between Hanover and Schlumberger relating to the put, the parties
agreed to postpone the closing date of the transfer to no later than May 31,
2003.

   In connection with the POI Acquisition, the Company issued a $150,000,000
subordinated acquisition note to Schlumberger, which matures December 15, 2005.
Interest on the subordinated acquisition note accrues and is payable-in-kind at
the rate of 8.5% annually for the first six months after issuance and
periodically increases in

                                     F-35

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

increments of 1% to 2% per annum to a maximum interest rate 42 months after
issuance of 15.5%. In the event of an event of default under the subordinated
acquisition note, interest will accrue at a rate of 2% above the then
applicable rate. The subordinated acquisition note is subordinated to all of
the Company's indebtedness other than certain indebtedness to fund future
acquisitions. In the event that the Company completes an offering of equity
securities, the Company is required to apply the proceeds of the offering to
repay amounts outstanding under the subordinated acquisition note as long as no
default exists or would exist under the Company's other indebtedness as a
result of such payment.

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

Other Related Party Transactions

   In January 2002, Hanover advanced cash of $100,000 to Robert O. Pierce,
Senior Vice President - Manufacturing and Procurement, in return for a
promissory note. The note bore interest at 4.0%, matured on September 30, 2002,
and was unsecured. On September 18, 2002, the Board of Directors approved the
purchase of 30,054 shares of Hanover common stock from Mr. Pierce at $9.60 per
share for a total of $288,500. The price per share was determined by reference
to the closing price quoted on the New York Stock Exchange on September 18,
2002. The Board of Directors determined to purchase the shares from Mr. Pierce
because it was necessary for him to sell shares to repay his loan with the
Company as well as another outstanding loan. The loans matured during a
blackout period under our insider trading policy and therefore Mr. Pierce could
not sell shares of Hanover stock in the open market to repay the loans. Mr.
Pierce's loan from the Company was repaid in full in September 2002.

   During 2001, the Company sold equipment totaling approximately $12,004,000
to an affiliate of Enron Capital and Trade Resources Corp. During 2001, the
Company learned that Enron had sold its investment in the Company's stock and
thus is no longer a related party to the Company.

   In exchange for notes, Hanover has loaned approximately $8,922,000 to
employees, some of who were subject to margin calls, which together with
accrued interest were outstanding as of December 31, 2002. In December 2002,
Hanover's Board of Directors eliminated the practice of extending loans to
employees and executive officers and there are no loans outstanding with any
current executive officer of the Company. Due to the decline in Hanover's stock
price and other collectibility concerns, the Company has recorded a charge in
other expense to reserve $6,021,000 for non-executive officer loans.

   Ted Collins, Jr., a Director of the Company owns 100% of Azalea Partners,
which in turn owns 13% of Energy Transfer Group, LLC ("ETG"). The Company owns
a 10% interest in ETG and ETG owns a 1% interest in Energy Transfer Hanover
Ventures, LP, ("Energy Ventures") a subsidiary of the Company. The Company
advanced working capital to ETG in 2002, for certain costs incurred by ETG for
the performance of services relating to Energy Ventures' power generation
business. During the fiscal year ended December 31, 2002, the largest aggregate
amount advanced under this arrangement was $400,000. The advances do not bear
interest. At December 31, 2002, the Company had $400,000 in advances
outstanding to ETG. In 2002, ETG billed the Company $1,899,000 for services
rendered to reimburse ETG for expenses incurred on behalf of Energy Ventures
during the year. In 2002, the Company recorded sales of approximately $470,000
related to equipment leases and parts sales to ETG.

                                     F-36

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   In connection with the restatements announced by the Company in 2002,
certain officers and directors have been named as defendants in putative
stockholder class actions, stockholder derivative actions and have been
involved with the investigation being conducted by the Staff of the Securities
and Exchange Commission. Pursuant to the indemnification provisions of the
Company's articles of incorporation and bylaws, the Company has advanced legal
fees to certain employees, officers and directors involved in these
proceedings. In this connection, expenses incurred on behalf of indemnified
officers and directors during 2002 total $999,000. Of this amount $392,000 was
incurred on behalf of a former officer and director, William S. Goldberg;
$375,000 was incurred on behalf of former officers Michael J. McGhan, Charles
D. Erwin and Joe C. Bradford; $149,000 was incurred on behalf of directors Ted
Collins, Jr., Robert R. Furgason, Rene Huck, Melvyn N. Klein, Michael A.
O'Connor, and Alvin V. Shoemaker, who were serving during 2001; and $83,000 was
incurred on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon
T. Hall.

Transactions with Former Executive Officers

   Michael J. McGhan. Mr. McGhan served as Chief Executive Officer and
President of the Company since October 1991 and served as a director of the
Company since March 1992. Mr. McGhan also served as an officer and director of
certain Hanover subsidiaries during his tenure. Mr. McGhan resigned from all
positions held with the Company on August 1, 2002. In 2001, the Company
advanced cash of $2,200,000 to Mr. McGhan, in return for promissory notes. The
notes bear interest at 4.88%, mature on April 11, 2006, and are collateralized
by personal real estate and Hanover common stock with full recourse. 411,914
shares of Hanover Common Stock owned by Mr. McGhan are held secured as
collateral for this $2,200,000 loan. In January 2002, the Company advanced
additional cash of $400,000 to Mr. McGhan in return for a promissory note. The
note bore interest at 4.0% and was repaid in full in September 2002. Set forth
below is information concerning the indebtedness of Mr. McGhan to Hanover as of
December 31, 2002, 2001, and 2000.

<TABLE>
<CAPTION>
                                         Largest     Weighted
                         Aggregate    Note Principal  Average
                       Note Principal     Amount      Rate of
                           Amount      Outstanding   Interest
                        Outstanding    during each   at Period
                  Year at Period End      Period        End
                  ---- -------------- -------------- ---------
                  <S>  <C>            <C>            <C>
                  2002   $2,200,000     $2,600,000     4.88%
                  2001   $2,200,000     $2,200,000     4.88%
                  2000   $       --     $       --       --
</TABLE>

   On July 29, 2002, the Company purchased 147,322 shares of the Common Stock
from Mr. McGhan for $8.96 per share for a total of $1,320,000. The price per
share was determined by reference to the closing price quoted on the New York
Stock Exchange on July 29, 2002. The Board of Directors determined to purchase
the shares from Mr. McGhan because he was subject to a margin call during a
blackout period under the Hanover insider trading policy, and therefore, could
not sell such shares to the public to cover the margin call without being in
violation of the policy.

   On August 1, 2002, the Company entered into a Separation Agreement with Mr.
McGhan. The agreement sets forth a mutual agreement to sever the relationships
between Mr. McGhan and Hanover, including the employment relationships of Mr.
McGhan with Hanover and its affiliates. In the agreement, the parties also
documented their understandings with respect to: (i) the posting of additional
collateral by Mr. McGhan to secure repayment of loans owed by Mr. McGhan to
Hanover; and (ii) certain waivers and releases by Mr. McGhan. In the agreement,
Mr. McGhan made certain representations as to the status of the outstanding
loans payable by Mr. McGhan to Hanover, the documentation for the loans and the
enforceability of his obligations under the loan documents. The loans were not
modified and must be repaid in accordance with their original terms. In
addition, the agreement provided that Mr. McGhan may exercise his vested stock
options pursuant to the post-termination

                                     F-37

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

exercise periods set forth in the applicable plan. Since the date of the
agreement, Mr. McGhan has exercised all such vested stock options and the net
shares from such exercise have been posted as collateral for his outstanding
indebtedness to the Company. In addition, Mr. McGhan agreed, among other
things, not to compete with Hanover and not to solicit Hanover employees or
customers under terms described in the agreement for a period of twenty-four
months after the effective date of the agreement. In consideration for this
non-compete/non-solicitation agreement, Hanover agreed to pay Mr. McGhan
$33,333 per month for a period of eighteen months after the effective date of
the agreement.

   Charles D. Erwin. Mr. Erwin served as Chief Operating Officer of the Company
since April 2001 and served as Senior Vice President--Sales and Marketing since
May 2000. Mr. Erwin resigned from these positions on August 2, 2002. In 2000,
the Company advanced $824,087 to Mr. Erwin in return for a promissory note. In
2002 and 2001, according to the terms of the original note, the Company
recorded compensation expense and forgave $207,382 and $145,118 of such
indebtedness (which included $42,565 and $62,709 of accrued interest),
respectively. The balance of the loan was repaid in full by Mr. Erwin in
December 2002. Set forth below is information concerning the indebtedness of
Mr. Erwin to Hanover as of December 31, 2001, 2001 and 2000:

<TABLE>
<CAPTION>
                           Aggregate    Largest
                             Note        Note     Weighted
                           Principal   Principal   Average
                            Amount      Amount     Rate of
                          Outstanding Outstanding Interest
                           at Period  during each at Period
                     Year     End       Period       End
                     ---- ----------- ----------- ---------
                     <S>  <C>         <C>         <C>
                     2002  $     --    $631,800      4.3%
                     2001  $631,800    $769,148      4.8%
                     2000  $769,148    $824,087      9.5%
</TABLE>

   On August 2, 2002, the Company entered into a Separation Agreement with Mr.
Erwin. The agreement sets forth a mutual agreement to sever the relationships
between Mr. Erwin and Hanover, including the employment relationships of Mr.
Erwin with Hanover and its affiliates. In the agreement, the parties also
documented their understandings with respect to: (i) the posting of additional
collateral by Mr. Erwin to secure repayment of an outstanding loan owed by Mr.
Erwin to Hanover; (ii) certain waivers and releases by Mr. Erwin; and (iii) the
payment of a reasonable and customary finders fee for certain proposals brought
to Hanover's attention by Mr. Erwin during the twenty-four month period after
the effective date of the agreement. In the agreement, Mr. Erwin has made
certain representations as to the status of an outstanding loan payable by Mr.
Erwin to Hanover, the documentation for the loan and the enforceability of the
his obligations under the loan documents. The loan was not modified and as
noted above this note was repaid in full in December 2002. In addition, the
agreement provides that Mr. Erwin may exercise his vested stock options
pursuant to the post-termination exercise periods set forth in the applicable
plan. Since the date of the agreement, Mr. Erwin has exercised all such vested
stock options. Mr. Erwin's non-vested stock options were forfeited as of August
2, 2002. In addition, Mr. Erwin agreed, among other things, not to compete with
Hanover and not to solicit Hanover employees or customers under terms described
in the agreement for a period of twenty-four months after the effective date of
the agreement. In consideration for this non-compete/non-solicitation
agreement, Hanover agreed to pay Mr. Erwin $20,611 per month for a period of
eighteen months after the effective date of the agreement.

   Joe C. Bradford. In August 2002, our Board of Directors did not reappoint
Mr. Bradford to the position of Senior Vice President--Worldwide Operations
Development, which he held since May 2000. On September 27, 2002, Mr. Bradford
resigned his employment with Hanover. In 2000, the Company advanced $764,961 to
Mr. Bradford in return for a promissory note that matures in June 2004. In 2002
and 2001, according to the

                                     F-38

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

terms of the note, the Company recorded compensation expense and forgave
$192,504 and $134,706 of such indebtedness (which included $39,512 and $58,210
of accrued interest), respectively. Set forth below is information concerning
the indebtedness of Mr. Bradford to Hanover as of December 31, 2002, 2001 and
2000:

<TABLE>
<CAPTION>
                           Aggregate    Largest
                             Note        Note     Weighted
                           Principal   Principal   Average
                            Amount      Amount     Rate of
                          Outstanding Outstanding Interest
                           at Period  during each at Period
                     Year     End       Period       End
                     ---- ----------- ----------- ---------
                     <S>  <C>         <C>         <C>
                     2002  $535,473    $579,845      4.3%
                     2001  $579,845    $706,022      4.8%
                     2000  $706,022    $764,961      9.5%
</TABLE>

19.  Commitments and Contingencies

   Rent expense, excluding lease payments for the leasing transactions
described in Note 12, for 2002, 2001 and 2000 was approximately $4,142,000,
$4,008,000, and $2,159,000 respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 12 under noncancelable operating
leases with terms in excess of one year at December 31, 2002 are (in
thousands): 2003--$4,947; 2004--$4,000; 2005--$2,617; 2006--$590; 2007--$94 and
$131 thereafter.

   Hanover has issued the following guarantees which are not recorded on the
Company's Consolidated Balance Sheet:

<TABLE>
<CAPTION>
                                                               Maximum Potential
                                                                 Undiscounted
                                                                Payments as of
                                                       Term    December 31, 2002
                         -                           --------- -----------------
                                                                (in thousands)
<S>                                                  <C>       <C>
Indebtedness of non-consolidated affiliates:
   Simco/Harwat Consortium (1)......................   2003       $   13,188
   El Furrial (1)...................................   2013           43,512

Other:
Leased compression equipment residual value......... 2004-2011       881,299
Performance guarantees through letters of credit (2) 2003-2007        14,635
Standby letters of credit........................... 2003-2004        42,035
Bid bonds and performance bonds (2)................. 2003-2007        72,341
                                                                  ----------
                                                                  $1,067,010
                                                                  ==========
</TABLE>
--------
(1) The Company has guaranteed the debt within this non-consolidated affiliate
    up to the Company's ownership percentage in such affiliate. (See Note 8).
(2) The Company has issued guarantees to third parties to ensure performance of
    its obligations some of which may be fulfilled by third parties.

   As part of the POI acquisition, as of December 31, 2002 we were required to
pay up to $58.0 million to Schlumberger from the proceeds of the financing of
PIGAP II, a South American joint venture, a minority interest of which was
acquired by Hanover in the acquisition of POI. Because the joint venture failed
to execute

                                     F-39

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

the financing on or before December 31, 2002, we had the right to put our
interest in the joint venture back to Schlumberger in exchange for a return of
the purchase price allocated to the joint venture, plus the net amount of any
capital contributions by Hanover to the joint venture. In January 2003, we
exercised our right to put our interest in the joint venture back to
Schlumberger. If not exercised, the put right would have expired as of February
1, 2003. The consummation of the transfer of Hanover's interest in the joint
venture back to Schlumberger is subject to certain consents. Hanover is
currently in discussions with Schlumberger to explore the possibility of
entering into a new agreement under which Hanover would retain the 30%
ownership interest in the joint venture. In light of the ongoing discussions
between Hanover and Schlumberger relating to the put, the parties have agreed
to postpone the closing date to no later than May 31, 2003. At December 31,
2002, the Company expected the $58,000,000 obligation together with accrued
interest to be paid in 2003, this obligation is recorded in accrued liabilities
in the accompanying balance sheet. The purchase price is also subject to a
contingent payment by Hanover to Schlumberger based on the realization of
certain tax benefits by Hanover over the next 15 years.

   Commencing in February 2002, approximately 15 putative securities class
action lawsuits were filed against us and certain of our officers and directors
in the United States District Court for the Southern District of Texas. These
class actions have been consolidated into one case, Pirelli Armstrong Tire
Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All Others
Similarly Situated, Civil Action No. H-02-0410, naming as defendants Hanover
Compressor Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr.
Michael A. O'Connor. The plaintiffs in these securities actions purport to
represent purchasers of our common stock during various periods ranging from
May 15, 2000 through January 28, 2002. The complaints assert various claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seek
unspecified amounts of compensatory damages, interest and costs, including
legal fees. The court entered an order appointing Pirelli Armstrong Tire
Corporation Retiree Medical Benefits Trust and others as lead plaintiffs on
January 7, 2003 and appointed Milberg, Weiss, Bershad, Hynes & Lerach LLP as
lead counsel. A consolidated amended complaint is currently due to be filed on
or before April 7, 2003.

                                     F-40

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

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

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

   Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas. Currently,
the Company will be required to file an answer or otherwise move with respect
to the derivative action filed in Delaware by May 3, 2003. The Board of
Directors has formed a Special Litigation Committee to address the issues
raised by the derivative suits. Subject to the work of that Committee and its
instructions, we intend to defend these cases vigorously.

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

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

   In January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and
John Petti filed a putative securities class action against
PricewaterhouseCoopers LLP, which is Hanover's auditor. The alleged class is
all persons who purchased the equity or debt securities of Hanover Compressor
Company or its affiliates from March 8, 2000 through and including October 23,
2002. On February 13, 2003, the court consolidated this action with Civil
Action No. H-02-0410.

                                     F-41

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   On March 26, 2003, Ann Angleopoulos filed a putative class action against
Hanover, Michael McGhan, Michael O'Conner, Chad Deaton and other purportedly
unknown defendants. The alleged class is comprised of persons who between
November 8, 2000 and the present participated in or were beneficiaries of The
Hanover Companies Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal Revenue Code of 1986,
as amended. The purported class action seeks relief under the Employee
Retirement Income Security Act based upon Hanover's and the individual
defendants' alleged mishandling of the Company's 401(k) Plan. The Company has
not yet been served with the complaint in this action.

   As of December 31, 2002, the Company has paid approximately $7,734,000 in
legal related expenses in connection with the internal investigations, the
putative class action securities lawsuits, the derivative lawsuits and the
Securities and Exchange Commission investigation. Of this amount, the Company
has paid approximately $999,000 on behalf of officers and directors in
connection with the above-named proceedings. The Company intends to pay the
litigation costs of its officers and directors, subject to the limitations
imposed by Delaware law and the Company's certificate of incorporation and
bylaws. The Company expects to be reimbursed for all or a portion of these
litigation expenses from the Company's directors' and officers' insurance
policies.

   In the ordinary course of business the Company is involved in various other
pending or threatened legal actions, including environmental matters. While
management is unable to predict the ultimate outcome of these actions, it
believes that any ultimate liability arising from these actions will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows. (See Note 26.)

20.  Accounting for Derivatives

   We adopted SFAS 133, as amended by SFAS 137 and SFAS 138, effective January
1, 2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the
balance sheet at fair value, and that changes in such fair values be recognized
in earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, we entered into two interest rate swaps which were outstanding at
December 31, 2002 with notional amounts of $75,000,000 and $125,000,000 and
strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in
July 2001; however, they were extended for an additional two years at the
option of the counterparty and now expire in July 2003. The difference paid or
received on the swap transactions is recorded as an accrued lease liability and
is recognized in leasing expense. On January 1, 2001, in accordance with the
transition provisions of SFAS 133, we recorded a loss resulting from the
cumulative effect of an accounting change in the statement of operations of
approximately $164,000, net of tax benefit of $89,000. During the year ended
December 31, 2002 and 2001, we recognized an unrealized gain of approximately
$3,245,000 and an additional unrealized loss of approximately $7,596,000,
respectively, related to the change in the fair value of these interest rate
swaps in the statement of operations because these swaps did not meet the
specific hedge criteria as a result of the counterparty's option to extend the
interest rate swaps. Further, management decided not to designate the interest
rate swaps as hedges at the time they were extended by the counterparty. At
December 31, 2002, we recorded approximately $4,606,000 in accrued liabilities
with respect to the fair value adjustment related to these interest rate swaps.
The fair value of these interest rate swaps will fluctuate with changes in
interest rates over their remaining terms and the fluctuations will be recorded
in the statement of income.

                                     F-42

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

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

   These three swaps, which we have designated as cash flow hedging
instruments, meet the specific hedge criteria and any changes in their fair
values have been recognized in other comprehensive income. During the year
ended December 31, 2002 and 2001, we recorded a loss of approximately
$13,640,000 and $9,343,000 million, respectively, net of tax of $4,774,000 and
$3,270,000 with respect to these three swaps, in other comprehensive income. As
of December 31, 2002, a total of approximately $11,476,000 was recorded in
accrued current liabilities and approximately $11,507,000 in other long-term
liabilities with respect to the fair value adjustment related to these three
swaps.

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

21.  New Accounting Pronouncements

   In June 2001, the FASB issued SFAS 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets ("SFAS 143"). SFAS 143
establishes the accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. This
statement is effective for Hanover on January 1, 2003. The Company is currently
assessing the new standard and does not believe it will have a material impact
on its consolidated results of operations, cash flows or financial position.

   In August 2001, the FASB issued SFAS 144. The new rules supersede SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121"). The new rules retain many of the fundamental
recognition and measurement provisions of SFAS 121, but significantly change
the criteria for classifying an asset as held-for-sale. SFAS 144 is effective
for fiscal years beginning after December 15, 2001. The Company has adopted the
new standard, which had no material effect on its consolidated results of
operations, cash flows or financial position.

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

   In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"), which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3. We
will adopt the provision of SFAS 146 for restructuring activities initiated
after December 31, 2002. SFAS 146 requires that the

                                     F-43

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF No. 94-3, a liability for an exit
cost was recognized at the date of the commitment to an exit plan. SFAS 146
also establishes that the liability should initially be measured and recorded
at fair value. Accordingly, SFAS 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.

   In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 will be
effective for interim periods beginning after June 15, 2003. The Company is
currently evaluating the impact of adoption of EITF 00-21 on its financial
position and results of operations.

   In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The Company has adopted the disclosure provisions which are included within
these financials and is currently evaluating the impact of adoption of the
recognition and measurement provisions of FIN 45 on its financial position and
results of operations.

   In December 2002, the FASB issued Statement of SFAS 148, Accounting for
Stock-Based Compensation--Transition and Disclosure ("SFAS 148"). SFAS 148
amends SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The Company has adopted the disclosure provisions
which are included within these financials and is currently evaluating the
impact of adoption of SFAS 148 on its financial position and results of
operations.

   In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51". The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights ("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity in which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 will require us to include in our
consolidated financial statements the special purpose entities that lease
compression equipment to us beginning in July 2003. If these special purpose
entities had been consolidated in Hanover's financial statements as of December
31, 2002, Hanover would add approximately $1,031,000,000 in compressor
equipment and approximately $1,140,000,000 in debt to its balance sheet and
reverse $109,000,000 of deferred gains that were recorded on its balance sheet
as a result of the sale and leaseback transactions. In addition, Hanover would
record depreciation expense on the compression equipment for prior periods (net
of tax) as part of the cumulative effect

                                     F-44

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

of the adoption of FIN 46 and would record depreciation expense in future
periods. The Company is currently evaluating the impact of recording
depreciation for prior periods. After the adoption of FIN 46, the Company
estimates that it will record approximately $20,000,000 per year in additional
depreciation expense on its leased compression equipment.

22.  April 2002 Restatement

   In conjunction with a review of our joint ventures and other transactions
conducted by counsel under the direction of the Audit Committee in early 2002,
the Company determined to restate its financial statements for the year ended
December 31, 2000. See Note 23 for information regarding the further
restatement of the 2000 consolidated financial statements.

                                     F-45

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

<TABLE>
<CAPTION>
                                                          Cawthorne
                                                      Channel Project in Acquisitions of
                                                       Nigeria/Hampton     Compressors   Compressor  Sale of
                                                         Roads Joint     In Non-Monetary    Sale     Turbine
                                         As Filed (1)      Venture          Exchange     Transaction Engine   Restated (1)
                                         ------------ ------------------ --------------- ----------- -------  ------------
                                                              (in thousands except per share amounts)
<S>                                      <C>          <C>                <C>             <C>         <C>      <C>
Revenues:
   Rentals..............................   $254,515        $     --          $    --      $     --   $    --    $254,515
   Parts, service and used equipment....    133,340              --               --       (12,004)   (7,500)    113,836
   Compressor fabrication...............     96,838          (6,568)              --            --        --      90,270
   Production and processing equipment
    fabrication.........................     88,572          (9,451)              --            --        --      79,121
   Gain on sale of other assets.........      5,743              --           (2,225)           --        --       3,518
   Gain on change in interest in non-
    consolidated affiliate..............        864              --               --            --        --         864
   Other................................      4,768              --               --            --        --       4,768
                                           --------        --------          -------      --------   -------    --------
      Total revenues....................    584,640         (16,019)          (2,225)      (12,004)   (7,500)    546,892
                                           --------        --------          -------      --------   -------    --------
Expenses:
   Rentals..............................     87,992              --               --            --        --      87,992
   Parts, service and used equipment....     94,106              --               --        (7,954)   (6,194)     79,958
   Compressor fabrication...............     81,996          (5,242)              --            --        --      76,754
   Production and processing equipment
    fabrication.........................     69,281          (6,597)              --            --        --      62,684
   Selling, general and administrative..     51,742              26               --            --        --      51,768
   Depreciation and amortization........     52,188              --               --            --        --      52,188
   Lease expense........................     45,484              --               --            --        --      45,484
   Interest expense.....................      8,467             212               --            --        --       8,679
   Distributions on mandatorily
    redeemable convertible preferred
    Securities..........................      6,369              --               --            --        --       6,369
                                           --------        --------          -------      --------   -------    --------
      Total expenses....................    497,625         (11,601)                        (7,954)   (6,194)    471,876
                                           --------        --------          -------      --------   -------    --------
   Income (loss) from continuing
    operations before income taxes......     87,015          (4,418)          (2,225)       (4,050)   (1,306)     75,016
   Provision for (benefit from) income
    taxes...............................     32,309          (1,644)            (827)       (1,507)     (486)     27,845
                                           --------        --------          -------      --------   -------    --------
Income (loss) from continuing
 operations.............................     54,706          (2,774)          (1,398)       (2,543)     (820)     47,171
   Income (loss) from discontinued
    operations..........................      3,993              --               --            --        --       3,993
                                           --------        --------          -------      --------   -------    --------
Net income (loss).......................   $ 58,699        $ (2,774)         $(1,398)     $ (2,543)  $  (820)   $ 51,164
                                           ========        ========          =======      ========   =======    ========
Basic earnings per common share:
   Income from continuing
    operations..........................   $   0.89                                                             $   0.77
   Income from discontinued
    operations..........................       0.06                                                                 0.06
                                           --------                                                             --------
      Net income........................   $   0.95                                                             $   0.83
                                           ========                                                             ========
Diluted earnings per common share:
   Income from continuing
    operations..........................   $   0.82                                                             $   0.71
   Income from discontinued
    operations..........................       0.06                                                                 0.06
                                           --------                                                             --------
      Net income........................   $   0.88                                                             $   0.77
                                           ========                                                             ========
</TABLE>
--------
(1) As reclassified for 2002 presentation, see Note 3 for a discussion of
    discontinued operations.

                                     F-46

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


Cawthorne Channel Project in Nigeria/Hampton Roads Joint Venture

   Cawthorne Channel is a project to build, own and operate barge-mounted gas
compression and gas processing facilities to be stationed in a Nigerian coastal
waterway as part of the performance of a contract between Global Energy and
Refining Ltd. ("Global") and Shell Petroleum Development Company of Nigeria
Limited, the Nigerian operating unit of The Royal/Dutch Shell Group ("Shell").
The Company entered into a contract with Global in June 1999 to fabricate and
lease facilities to Global to assist Global in fulfilling its obligations under
its contract with Shell. Subsequently, the Company acquired 1,000,000 shares of
preferred stock in Global in settlement of a $1.1 million debt owed by Global
to the Company.

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

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

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

Acquisition of Compressors In Non-Monetary Exchange

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

                                     F-47

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


Compressor Sale Transaction

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

Sale of Turbine Engine

   In the fourth quarter of 2000, the Company entered the non-oil field power
generation market to take advantage of rising electricity demand and purchased
used turbines to carry out this effort. In connection with this effort, the
Company agreed to sell a turbine to a third party on extended credit and
recognized revenues of $7,500,000 and $1,306,000 of pre-tax income in the
fourth quarter of 2000. In early 2001, the third party assigned their interest
in the turbine to another unrelated third party. The Company was ultimately
paid for the turbine in December 2001. Based on the information provided to the
Company at the time of the April 2002 restatement, the Company determined that
revenue should have been recognized for this transaction in the fourth quarter
of 2001 when payment was received and collectability was assured. As a result
of the discovery of new information, the Company determined to restate the sale
of the turbine engine recorded in the fourth quarter of 2001. See Sale and
Purchase of Turbine Engine in Note 23.

Reclassification

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

23.  November 2002 Restatement

   In October 2002, a special committee of the Board of Directors together with
the Audit Committee of the Board and company management, aided by outside legal
counsel, completed an extensive investigation of transactions recorded during
2001, 2000 and 1999, including those transactions restated by the Company in
April 2002 (see Note 22). As a result of this investigation, the Company
determined, to restate its financial results further for the years ended 2001
and 2000 and 1999.

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

                                     F-48

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

<TABLE>
<CAPTION>
                                                                                                       Sale Of
                                                     Indonesia                                       Compression
                                            As Filed Technical              Sale of Used    Pre-         And
                                             April   Assistance Scrap Sale  Compression  Acquisition Production   Delay
                                            2002(1)   Revenue   Transaction  Equipment     Revenue    Equipment  Penalty
                                            -------- ---------- ----------- ------------ ----------- ----------- --------
                                                                    (in thousands, except per share amounts)
<S>                                         <C>      <C>        <C>         <C>          <C>         <C>         <C>
Revenues:
  Rentals.................................. $254,515  $   (678)  $     --     $     --    $     --    $     --   $     --
  Parts, service and used equipment........  113,836        --         --           --          --        (310)        --
  Compressor fabrication...................   90,270        --         --           --          --          --         --
  Production and processing equipment
   fabrication.............................   79,121        --         --           --          --          --         --
  Equity in income of non-consolidated
   affiliates..............................    3,518        --         --           --          --          --         --
  Gain on change in interest in non-
   consolidated affiliate..................      864        --         --           --          --          --         --
  Other....................................    4,768        --         --           --          --          --        920
                                            --------  --------   --------     --------    --------    --------   --------
   Total revenues..........................  546,892      (678)        --           --          --        (310)       920
                                            --------  --------   --------     --------    --------    --------   --------
Expenses:
  Rentals..................................   87,992        --         --           --          --          --         --
  Parts, service and used equipment........   79,958        --         --           --          --          --         --
  Compressor fabrication...................   76,754        --         --           --          --          --         --
  Production and processing equipment
   fabrication.............................   62,684        --         --           --          --          --         --
  Selling, general and administrative......   51,768        --         --           --          --          --         --
  Depreciation and amortization............   52,188        --         --           --          --          --         --
  Lease expense............................   45,484        --         --           --          --          --         --
  Interest expense.........................    8,679        --         --           --          --          --         --
  Distributions on mandatorily redeemable
   convertible preferred Securities........    6,369        --         --           --          --          --         --
                                            --------  --------   --------     --------    --------    --------   --------
   Total expenses..........................  471,876
                                            --------  --------   --------     --------    --------    --------   --------
  Income (loss) from continuing operations
   before income taxes.....................   75,016      (678)        --           --          --        (310)       920
  Provision for (benefit from) income
   taxes...................................   27,845      (258)        --           --          --        (118)       349
                                            --------  --------   --------     --------    --------    --------   --------
  Income (loss) from continuing
   operations..............................   47,171      (420)        --           --          --        (192)       571
                                            --------  --------   --------     --------    --------    --------   --------
  Income (loss) from discontinued
   operations, net of tax..................    3,993        --       (434)        (372)       (678)         --         --
                                            --------  --------   --------     --------    --------    --------   --------
  Net income (loss)........................ $ 51,164  $   (420)  $   (434)    $   (372)   $   (678)   $   (192)  $    571
                                            ========  ========   ========     ========    ========    ========   ========
Basic earnings per common share:
  Income from continuing operations........ $   0.77
  Income from discontinued operations......     0.06
                                            --------
   Net income.............................. $   0.83
                                            ========
Diluted earnings per common share:
  Income from continuing operations........ $   0.71
  Income from discontinued operations......     0.06
                                            --------
  Net income............................... $   0.77
                                            ========
</TABLE>
<TABLE>
<CAPTION>




                                            Restated(1)
                                            -----------

<S>                                         <C>
Revenues:
  Rentals..................................  $253,837
  Parts, service and used equipment........   113,526
  Compressor fabrication...................    90,270
  Production and processing equipment
   fabrication.............................    79,121
  Equity in income of non-consolidated
   affiliates..............................     3,518
  Gain on change in interest in non-
   consolidated affiliate..................       864
  Other....................................     5,688
                                             --------
   Total revenues..........................   546,824
                                             --------
Expenses:
  Rentals..................................    87,992
  Parts, service and used equipment........    79,958
  Compressor fabrication...................    76,754
  Production and processing equipment
   fabrication.............................    62,684
  Selling, general and administrative......    51,768
  Depreciation and amortization............    52,188
  Lease expense............................    45,484
  Interest expense.........................     8,679
  Distributions on mandatorily redeemable
   convertible preferred Securities........     6,369
                                             --------
   Total expenses..........................   471,876
                                             --------
  Income (loss) from continuing operations
   before income taxes.....................    74,948
  Provision for (benefit from) income
   taxes...................................    27,818
                                             --------
  Income (loss) from continuing
   operations..............................    47,130
                                             --------
  Income (loss) from discontinued
   operations, net of tax..................     2,509
                                             --------
  Net income (loss)........................  $ 49,639
                                             ========
Basic earnings per common share:
  Income from continuing operations........  $   0.76
  Income from discontinued operations......      0.04
                                             --------
   Net income..............................  $   0.80
                                             ========
Diluted earnings per common share:
  Income from continuing operations........  $   0.71
  Income from discontinued operations......      0.04
                                             --------
  Net income...............................  $   0.75
                                             ========
</TABLE>
--------
(1) As reclassified for 2002 presentation, see Note 3 for a discussion of
    discontinued operations.

                                     F-49

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


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

<TABLE>
<CAPTION>
                                                                      Indonesia  Overstatement                 Sale Of
                                                            Turbine   Technical   of Mark to               Compression And
                                               As Filed     Sale and  Assistance    Market     Scrap Sale    Production
                                            April 2002 (1)  Purchase   Revenue      Expense    Transaction    Equipment
                                            -------------- ---------  ---------- ------------- ----------- ---------------
                                                                     (in thousands, except per share amounts)
<S>                                         <C>            <C>        <C>        <C>           <C>         <C>
Revenues:
  Rentals..................................   $  400,776   $      --  $      --    $      --   $       --    $       --
  Parts, service and used equipment........      222,648      (7,500)      (276)          --           --            --
  Compressor fabrication...................      223,519          --         --           --           --            --
  Production and processing equipment
   fabrication.............................      184,040          --         --           --           --            --
  Equity in income of non-consolidated
   affiliates..............................        9,350          --         --           --           --            --
  Other....................................        8,403          --         --           --           --            --
                                              ----------   ---------  ---------    ---------   ----------    ----------
   Total...................................    1,048,736      (7,500)      (276)                                     --
                                              ----------   ---------  ---------    ---------   ----------    ----------
Expenses:
  Rentals..................................      140,998          --         --           --           --            --
  Parts, service and used equipment........      158,607      (6,194)      (428)          --           --           716
  Compressor fabrication...................      188,122          --         --           --           --            --
  Production and processing equipment
   fabrication.............................      147,824          --         --           --           --            --
  Selling, general and administrative......       92,172          --         --           --           --            --
  Depreciation and amortization............       88,823          --         --           --           --            --
  Lease expense............................       70,435          --         --           --           --            --
  Interest expense.........................       17,531          --         --           --           --            --
  Foreign currency translation.............        6,658          --         --           --           --            --
  Distributions on mandatorily redeemable
   convertible preferred securities........        6,373          --         --           --           --            --
  Other....................................       18,566          --         --       (1,243)          --            --
                                              ----------   ---------  ---------    ---------   ----------    ----------
   Total expenses..........................      936,109      (6,194)      (428)      (1,243)                       716
                                              ----------   ---------  ---------    ---------   ----------    ----------
  Income (loss) from continuing operations
   before income taxes.....................      112,627      (1,306)       152        1,243           --          (716)
  Provision for (benefit from) income
   taxes...................................       42,627        (496)        58          472           --          (273)
                                              ----------   ---------  ---------    ---------   ----------    ----------
Income (loss) from continuing
 operations................................       70,000        (810)        94          771                       (443)
  Income from discontinued operations net
   of taxes................................        2,801          --         --           --          164            --
                                              ----------   ---------  ---------    ---------   ----------    ----------
Net income (loss) before cumulative effect
 of accounting change......................       72,801        (810)        94          771          164          (443)
  Cumulative effect of accounting change
   for derivative instruments, net of
   income tax..............................         (164)         --         --           --           --            --
                                              ----------   ---------  ---------    ---------   ----------    ----------
Net income (loss)..........................   $   72,637   $    (810) $      94    $     771   $      164    $     (443)
                                              ==========   =========  =========    =========   ==========    ==========
Basic earnings per common share:...........
  Income from continuing operations........   $     0.96
  Income from discontinued operations......         0.04
                                              ----------
   Net income..............................   $     1.00
                                              ==========
Diluted earnings per common share:.........
  Income from continuing operations........   $     0.92
  Income from discontinued operations......         0.03
                                              ----------
   Net income..............................   $     0.95
                                              ==========
</TABLE>
<TABLE>
<CAPTION>



                                            Restated (1)
                                            ------------

<S>                                         <C>
Revenues:
  Rentals..................................  $  400,776
  Parts, service and used equipment........     214,872
  Compressor fabrication...................     223,519
  Production and processing equipment
   fabrication.............................     184,040
  Equity in income of non-consolidated
   affiliates..............................       9,350
  Other....................................       8,403
                                             ----------
   Total...................................   1,040,960
                                             ----------
Expenses:
  Rentals..................................     140,998
  Parts, service and used equipment........     152,701
  Compressor fabrication...................     188,122
  Production and processing equipment
   fabrication.............................     147,824
  Selling, general and administrative......      92,172
  Depreciation and amortization............      88,823
  Lease expense............................      70,435
  Interest expense.........................      17,531
  Foreign currency translation.............       6,658
  Distributions on mandatorily redeemable
   convertible preferred securities........       6,373
  Other....................................      17,323
                                             ----------
   Total expenses..........................     928,960
                                             ----------
  Income (loss) from continuing operations
   before income taxes.....................     112,000
  Provision for (benefit from) income
   taxes...................................      42,388
                                             ----------
Income (loss) from continuing
 operations................................      69,612
  Income from discontinued operations net
   of taxes................................       2,965
                                             ----------
Net income (loss) before cumulative effect
 of accounting change......................      72,577
  Cumulative effect of accounting change
   for derivative instruments, net of
   income tax..............................        (164)
                                             ----------
Net income (loss)..........................  $   72,413
                                             ==========
Basic earnings per common share:...........
  Income from continuing operations........  $     0.96
  Income from discontinued operations......        0.04
                                             ----------
   Net income..............................  $     1.00
                                             ==========
Diluted earnings per common share:.........
  Income from continuing operations........  $     0.91
  Income from discontinued operations......        0.03
                                             ----------
   Net income..............................  $     0.94
                                             ==========
</TABLE>

(1) As reclassified for 2002 presentation, see note 3 for a discussion of
discontinued operations.

                                     F-50

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000



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

Sale of Compression and Production Equipment

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

Delay Penalty

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

Turbine Engine Sale and Purchase

   As described in Note 22 under the heading "Sale of Turbine Engine" above, in
the fourth quarter of 2000, the Company entered into an agreement to sell a
turbine to a third party. In the April 2002 restatement, based on information
provided to the Company at that time, the Company restated the transaction to
recognize the $7,500,000 in revenue in the fourth quarter of 2001, when full
payment was received. Through the Company's subsequent investigation, it
discovered that in the fourth quarter of 2001, the Company purchased an
interest in a

                                     F-51

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

turbine engine package from a third party for $8,000,000. The third party was
the same entity that had ultimately purchased the Company's turbine engine.
Based upon an evaluation of this new information, the Company has determined to
account for these transactions as a non-monetary exchange, rather than a sale
and purchase transaction. Accordingly, the revenue and related expense which
was recorded in the fourth quarter of 2001 was reversed.

Indonesian Technical Assistance Revenue

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

Overstatement of Mark to Market Expense

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

Scrap Sale Transaction

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

Sale of Used Compression Equipment

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

Pre-Closing Revenue

   In the second quarter of 2000, the Company completed negotiations for the
acquisition of used equipment companies. The Company entered into acquisition
agreements with effective dates of June 1, 2000 which were not completed until
July 2000. The Company recorded $2,085,000 in revenue and $965,000 in pre-tax
income in the second quarter of 2000 and $442,000 in revenue and $128,000 in
pre-tax income in the third quarter of 2000,

                                     F-52

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

reflecting the results of the acquired entities for the period between the
effective date of the acquisitions and the closing of the acquisitions. Upon
further evaluation of this matter, the Company determined that these
pre-closing results should not have been recorded.

Power Plant Sale

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

Management Fee Transaction

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

Compressor Sale Transaction

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

24.  Subsequent Events

   In January 2003, we exercised our right to put our interest in the PIGAP II
joint venture (See Note 8) back to Schlumberger. If not exercised, the put
right would have expired as of February 1, 2003. The consummation of the
transfer of Hanover's interest in PIGAP II back to Schlumberger is subject to
certain consents. Hanover is currently in discussions with Schlumberger to
explore the possibility of entering into a new agreement under which Hanover
would retain the 30% ownership interest PIGAP II. In light of the ongoing
discussions between Hanover and Schlumberger relating to the put, the parties
have agreed to postpone the closing date to no later than May 31, 2003.

   In February 2003, the Company executed an amendment to its bank credit
facility and certain compression equipment leases that we entered into in 1999
and 2000. (See Note 11.) The amendment, which was effective as of December 31,
2002, modified certain financial covenants to allow the Company greater
flexibility in accessing the capacity under the bank credit facility to support
its short-term liquidity needs. In addition, at the higher end of the Company's
permitted consolidated leverage ratio, the amendment would increase the
commitment fee

                                     F-53

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000

under the bank credit facility by 0.125% and increase the interest rate margins
used to calculate the applicable interest rates under all of the agreements by
up to 0.75%. Any increase in the Company's interest costs as a result of the
amendment will depend on the Company's consolidated leverage ratio at the end
of each quarter, the amount of indebtedness outstanding and the interest rate
quoted for the benchmark selected by the Company. As part of the amendment, the
Company granted the lenders under these agreements a security interest in the
inventory, equipment and certain other property of Hanover and the Company's
domestic subsidiaries, and pledged 66% of the equity interest in certain of
Hanover's foreign subsidiaries. In consideration for obtaining the amendment,
the Company agreed to pay approximately $1.8 million in fees to the lenders
under these agreements.

25.  Industry Segments and Geographic Information

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

   The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, foreign
currency translation distributions on mandatorily redeemable convertible
preferred securities, change in value of derivative instruments, goodwill
impairment, other expenses and income taxes. Amounts defined as "Other" include
equity in income of nonconsolidated affiliates, results of other insignificant
operations and corporate related items primarily related to cash management
activities. Revenues include sales to external customers and intersegment
sales. Intersegment sales are accounted for at cost, except for compressor
fabrication sales which are accounted for on an arms length basis. Intersegment
sales and any resulting profits are eliminated in consolidation. Identifiable
assets are tangible and intangible assets that are identified with the
operations of a particular segment or geographic region, or which are allocated
when used jointly. Capital expenditures include fixed asset purchases.

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

                                     F-54

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


   The following tables present sales and other financial information by
industry segment and geographic region for the years ended December 31, 2002,
2001 and 2000.

  Industry Segments

<TABLE>
<CAPTION>
                                                              Parts,
                                                              service              Production
                                      Domestic International and used  Compressor   equipment
                                      rentals     rentals    equipment fabrication fabrication  Other   Eliminations Consolidated
                                      -------- ------------- --------- ----------- ----------- -------- ------------ ------------
                                                                       (in thousands of dollars)
<S>                                   <C>      <C>           <C>       <C>         <C>         <C>      <C>          <C>
2002:
   Revenues from external customers.. $328,600   $189,700    $223,845   $114,009    $149,656   $ 23,000  $      --    $1,028,810
   Intersegment sales................       --      6,718      54,249     60,790      12,848      5,057   (139,662)           --
                                      --------   --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.................  328,600    196,418     278,094    174,799     162,504     28,057   (139,662)    1,028,810
   Gross profit......................  207,860    132,121      44,001     14,563      22,214     23,000         --       443,759
   Identifiable assets...............  763,161    792,554      92,609     90,639     245,366    169,700         --     2,154,029
   Capital expenditures..............  120,581    101,349       1,093        441      26,706         --         --       250,170
   Depreciation and amortization.....   90,160     54,249       1,233      1,282       4,257         --         --       151,181
2001: (Restated)
   Revenues from external customers.. $269,679   $131,097    $214,872   $223,519    $184,040   $ 17,753  $      --    $1,040,960
   Intersegment sales................       --      2,858      72,930    112,748       7,110      4,600   (200,246)           --
                                      --------   --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.................  269,679    133,955     287,802    336,267     191,150     22,353   (200,246)    1,040,960
   Gross profit......................  174,476     85,302      62,171     35,397      36,216     17,753         --       411,315
   Identifiable assets...............  867,544    683,829     145,010    153,198     194,081    222,114         --     2,265,776
   Capital expenditures..............  450,172    137,805       6,763        399      24,626     20,118         --       639,883
   Depreciation and amortization.....   45,743     33,685       1,259      4,774       3,362         --         --        88,823
2000: (Restated)
   Revenues from external customers.. $172,517   $ 81,320    $113,526   $ 90,270    $ 79,121   $ 10,070  $      --    $  546,824
   Intersegment sales................       --      1,200      31,086     89,963       3,653      7,413   (133,315)           --
                                      --------   --------    --------   --------    --------   --------  ---------    ----------
      Total revenues.................  172,517     82,520     144,612    180,233      82,774     17,483   (133,315)      546,824
   Gross profit......................  112,181     53,664      33,568     13,516      16,437     10,070         --       239,436
   Identifiable assets...............  428,332    431,362      13,226    202,390     125,377     45,485         --     1,246,172
   Capital expenditures..............  214,460     58,801          --        874         723         --         --       274,858
   Depreciation and amortization.....   29,568     15,117          --      4,381       3,122         --         --        52,188
</TABLE>

  Geographic Data
<TABLE>
<CAPTION>
                                        United
                                        States   International(1) Consolidated
                                      ---------- ---------------- ------------
                                             (in thousands of dollars)
 <S>                                  <C>        <C>              <C>
 2002:
    Revenues from external customers. $  692,823    $  335,987     $1,028,810
    Identifiable assets.............. $1,068,003    $1,086,026     $2,154,029
 2001: (Restated)
    Revenues from external customers. $  730,702    $  310,258     $1,040,960
    Identifiable assets.............. $1,319,084    $  946,692     $2,265,776
 2000: (Restated)
    Revenues from external customers. $  424,837    $  121,987     $  546,824
    Identifiable assets.............. $  760,105    $  486,067     $1,246,172
</TABLE>
--------
(1) International operations include approximately $104,043,000 and $77,171,000
    of revenues and $430,989,000 and $467,801,000 of identifiable assets for
    2002 and 2001, respectively, related to operations and investments in
    Venezuela. Approximately $141,008,000 and $152,443,000 of the identifiable
    assets in 2002 and 2001, respectively, relates to the joint ventures
    acquired in connection with the POI acquisition completed in August 2001.
    (See Note 8).

                                     F-55

<PAGE>

                          HANOVER COMPRESSOR COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2002, 2001 and 2000


26.  Other Expense

   Other expense during 2002 included $15,950,000 in charges for investments in
four non-consolidated affiliates which have experienced a decline in value
which we believe to be other than temporary, a $500,000 write off of a purchase
option for an acquisition which was abandoned, a $8,454,000 write down of notes
receivable and $2,703,000 in other non-operating costs. Included in the
$8,454,000 write down of notes receivable is a $6,021,000 reserve established
for loans to employees who are not executive officers.

   Other expenses during 2001 were $9,727,000 which included a $2,750,000
bridge loan commitment fee associated with Hanover's acquisition of POI, a
$5,013,000 write down of an investment in Aurion, a $965,000 litigation
settlement and $999,000 in other non-operating expenses.

27.  Restructuring, Impairment and Other Charges

   During 2002, the Company recorded restructuring, impairment and other
charges. Below is a summary of these pre-tax charges and the line on the
Company's Consolidated Statement of Operations which was impacted by the
charges (in thousands):

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

   For a further description of these charges see Notes 3, 4, 6, 7, 8, 9 and 26.

                                     F-56

<PAGE>

                          HANOVER COMPRESSOR COMPANY

                  SELECTED QUARTERLY UNAUDITED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                       1st       2nd       3rd         4th
                                                     quarter  quarter(1) quarter  quarter (2)(3)
                                                     -------- ---------- -------- --------------
                                                      (in thousands, except per share amounts)
<S>                                                  <C>      <C>        <C>      <C>
2002:
   Revenue(4)....................................... $255,526  $262,220  $249,367    $261,697
   Gross profit(4)..................................  108,756   110,108   117,993     106,902
   Net income.......................................    5,034   (55,241)    9,059     (74,920)
   Earnings per common and common equivalent share:
       Basic........................................ $   0.06  $  (0.70) $   0.11    $  (0.93)
       Diluted...................................... $   0.06  $  (0.70) $   0.11    $  (0.93)

2001: (Restated)
   Revenue(4)....................................... $222,786  $235,203  $274,720    $308,251
   Gross profit(4)..................................   89,132    92,549   109,251     120,383
   Net income.......................................   19,809    20,752    19,848      12,004
   Earnings per common and common equivalent share:
       Basic........................................ $   0.30  $   0.30  $   0.27    $   0.15
       Diluted...................................... $   0.27  $   0.28  $   0.26    $   0.14
</TABLE>
--------
(1) During the second quarter of 2002, the Company recorded a $47,500,000
    goodwill impairment, $6,000,000 write down of assets held for sale, a
    $6,100,000 inventory reserve, a $500,000 write off of a purchase option for
    an acquisition which was abandoned and $14,100,000 write down related to
    investments in certain non-consolidated affiliates.
(2) The Company incurred other expenses during the fourth quarter of 2001 which
    included a $5,013,000 write down of an investment in Aurion, a $965,000
    litigation settlement, and $999,000 in other non-operating expenses. In
    addition, the Company incurred a $5,511,000 translation loss related to its
    foreign operations, primarily in Argentina and Venezuela.
(3) The Company incurred other expenses during the fourth quarter of 2002 which
    included a $8,454,000 write down of notes receivable and a $1,850,000 write
    off related to Aurion. In addition, during the fourth quarter of 2002, the
    Company recorded i) $52,282,000 pre-tax charge for the estimated loss in
    fair-value from the carrying value expected to be realized at the time of
    disposal of its discontinued operations; ii) $34,485,000 in additional
    impairment to reduce the carrying value of certain idle compression
    equipment that are being retired and the acceleration of depreciation
    related to certain plants and facilities expected to be sold or abandoned;
    iii) $4,603,000 goodwill impairment related to the Company's pump division
    which is expected to be sold in 2003; and iv) $2,720,000 in employee
    separation costs.
(4) Amounts reflect reclassifications for discontinued operations. (See Note 3).

                                     F-57

<PAGE>

                                  SCHEDULE II

                          HANOVER COMPRESSOR COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                         Additions
                                                                Balance   Charged
                                                                  at     to Costs               Balance
                                                               Beginning    and                at End of
                         Description                           of Period Expenses  Deductions   Period
                         -----------                           --------- --------- ----------  ---------
                                                                            (in thousands)
<S>                                                            <C>       <C>       <C>         <C>
Allowance for doubtful accounts deducted from accounts
  receivable in the balance sheet
   2002.......................................................  $6,300    $ 7,091    $8,229(1)  $ 5,162
   2001.......................................................   2,659      4,860     1,219(1)    6,300
   2000.......................................................   1,730      3,198     2,269(1)    2,659
Allowance for obsolete and slow moving inventory deducted from
  inventories in the balance sheet(3)
   2002.......................................................  $2,101    $13,853    $1,743(2)  $14,211
   2001.......................................................     560      2,336       795(2)    2,101
Allowance for deferred tax assets not expected to be realized
   2002.......................................................  $   --    $23,371    $   --     $23,371
Allowance for employee loans
   2002.......................................................  $   --    $ 6,021    $   --     $ 6,021
</TABLE>
--------
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory written off at cost, net of value received.
(3) Amounts for 2000 were not material.

                                      S-1