<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
            ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 Number 1-13071

                           HANOVER COMPRESSOR COMPANY
             (Exact name of registrant as specified in its charter)

           Delaware                                          76-0625124
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or 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)

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

As of August 9, 2002 there were 79,284,478 shares of the Company's common stock,
par value $0.001 per share, outstanding.

<PAGE>

                           HANOVER COMPRESSOR COMPANY
                      CONDENSED CONSOLIDATED BALANCE SHEET
        (in thousands of dollars, except for par value and share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                  June 30,     December 31,
                                                                                                   2002            2001
                                                                                               -------------  -------------
                                ASSETS                                                                         (Restated)
<S>                                                                                            <C>            <C>
Current assets:
     Cash and cash equivalents                                                                 $      40,649  $      23,191
     Accounts receivable trade, net                                                                  222,286        272,014
     Inventory                                                                                       214,172        216,405
     Costs and estimated earnings in excess of billings on uncompleted contracts                      44,338         59,099
     Other current assets                                                                             45,833         44,709
                                                                                               -------------  -------------
           Total current assets                                                                      567,278        615,418
                                                                                               -------------  -------------

Property, plant and equipment, net                                                                 1,214,904      1,152,385
Goodwill, net                                                                                        196,419        244,427
Intangible and other assets                                                                           85,963         79,090
Investment in non-consolidated affiliates                                                            178,383        178,328
                                                                                               -------------  -------------
                    Total assets                                                               $   2,242,947  $   2,269,648
                                                                                               =============  =============

                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current maturities of long-term debt                                                      $       5,185  $       5,553
     Accounts payable, trade                                                                          66,051        119,077
     Accrued liabilities                                                                             163,759        155,108
     Advance billings                                                                                 55,018         53,140
     Billings on uncompleted contracts in excess of costs and estimated earnings                       9,663          7,152
                                                                                               -------------  -------------
       Total current liabilities                                                                     299,676        340,030
Long-term debt                                                                                       581,316        504,260
Other liabilities                                                                                    121,295        130,276
Deferred income taxes                                                                                160,773        166,916
                                                                                               -------------  -------------
                  Total liabilities                                                                1,163,060      1,141,482
                                                                                               -------------  -------------

Commitments and contingencies (note 8)
Mandatorily redeemable convertible preferred securities                                               86,250         86,250
Common stockholders' equity:
     Common stock, $.001 par value; 200,000,000 shares authorized;
       79,430,300 and 79,228,179 shares issued and outstanding, respectively                              80             79
     Additional paid-in capital                                                                      833,588        828,939
     Notes receivable - employee stockholders                                                         (2,781)        (2,538)
     Deferred employee compensation - restricted stock grants                                         (2,624)            --
     Accumulated other comprehensive (loss)                                                           (6,411)        (6,557)
     Retained earnings                                                                               172,502        222,710
     Treasury stock - 75,739 common shares at cost                                                      (717)          (717)
                                                                                               -------------  -------------
       Total common stockholders' equity                                                             993,637      1,041,916
                                                                                               -------------  -------------
                     Total liabilities and common stockholder's equity                         $   2,242,947  $   2,269,648
                                                                                               =============  =============
</TABLE>


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


                                       2

<PAGE>

                           HANOVER COMPRESSOR COMPANY
                CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
               (in thousands of dollars, except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                  Three Months Ended               Six Months Ended
                                                                       June 30,                        June 30,
                                                                  2002           2001             2002           2001
                                                             -------------- --------------   -------------- --------------
<S>                                                          <C>            <C>              <C>            <C>
Revenues:
   Rentals                                                     $ 129,284        $  89,873      $ 258,155      $ 169,735
   Parts, service and used equipment                              67,859           50,025        135,446        100,359
   Compressor fabrication                                         32,444           57,839         58,502        112,490
   Production and processing equipment fabrication                31,617           43,785         64,749         85,397
   Equity in income of non-consolidated affiliates                 5,214            1,313         10,146          2,063
   Other                                                             791            2,594          1,117          5,329
                                                               ---------        ---------      ---------      ---------
                                                                 267,209          245,429        528,115        475,373
Expenses:
   Rentals                                                        40,827           30,561         83,501         57,273
   Parts, service and used equipment                              64,500           34,203        120,694         64,043
   Compressor fabrication                                         28,241           48,733         50,640         94,989
   Production and processing equipment fabrication                27,536           34,210         56,073         67,978
   Selling, general and administrative                            40,066           23,645         74,737         44,381
   Depreciation and amortization                                  27,387           19,581         51,763         36,984
   Leasing expense                                                23,946           15,639         46,874         30,927
   Interest expense                                                9,174            3,069         17,436          6,055
   Distributions on mandatorily redeemable convertible
     preferred securities                                          1,594            1,594          3,187          3,187
   Foreign currency translation                                      197                8         12,878            163
   Change in fair value of derivative financial instruments          977               15         (1,033)         3,007
   Goodwill impairment                                            47,500               --         47,500             --
   Other                                                          14,626               --         14,837             --
                                                               ---------        ---------      ---------      ---------
                                                                 326,571          211,258        579,087        408,987
                                                               ---------        ---------      ---------      ---------
Income (loss) before income taxes                                (59,362)          34,171        (50,972)        66,386
Provision (benefit) for income taxes                              (4,121)          12,977           (765)        25,219
                                                               ---------        ---------      ---------      ---------

Net income (loss) before cumulative effect of accounting
  change                                                         (55,241)          21,194        (50,207)        41,167
    Cumulative effect of accounting change for
     derivative instruments, net of income tax                        --               --             --           (164)
                                                               ---------        ---------      ---------      ---------
Net income (loss)                                                (55,241)          21,194        (50,207)        41,003

Other comprehensive income (loss), net of tax:
    Change in fair value of derivative financial instruments      (4,457)             761         (2,498)           761
    Foreign currency translation                                   2,648               10          2,644             16
                                                               ---------        ---------      ---------      ---------
Comprehensive income (loss)                                    $ (57,050)       $  21,965      $ (50,061)     $  41,780
                                                               =========        =========      =========      =========

Diluted net income (loss) per share:
   Net income (loss) before cumulative effect
     of accounting change                                      $ (55,241)       $  21,194      $ (50,207)     $  41,167
   Distributions on mandatorily redeemable
     convertible preferred securities, net of income tax              --            1,036             --          2,072
   Cumulative effect of accounting change, net of income tax          --               --             --           (164)
                                                               ---------        ---------      ---------      ---------
Net income (loss) for purposes of computing diluted net
  income (loss) per share                                      $ (55,241)       $  22,230      $ (50,207)     $  43,075
                                                               =========        =========      =========      =========
Earnings (loss) per common share:
   Basic                                                       $   (0.70)       $    0.30      $   (0.63)     $    0.60
   Diluted                                                     $   (0.70)       $    0.28      $   (0.63)     $    0.56

Weighted average common and common equivalent shares
  outstanding:
   Basic                                                          79,382           70,243         79,288         68,555
   Diluted                                                        79,382           79,205         79,288         77,557
</TABLE>

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


                                       3

<PAGE>

                           HANOVER COMPRESSOR COMPANY
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                   Six Months ended June 30,
                                                                                                   -------------------------
                                                                                                       2002         2001
                                                                                                    ---------    ----------
<S>                                                                                                 <C>          <C>
Cash flows from operating activities:
     Net income (loss)                                                                            $   (50,207)  $    41,003
     Adjustments:
         Depreciation and amortization                                                                 51,763        36,984
         Amortization of debt issuance costs and debt discount                                            725         1,024
         Bad debt expense                                                                               4,941         1,038
         Gain on sale of property, plant and equipment                                                 (1,420)       (4,023)
         Equity in income of non-consolidated affiliates                                              (10,146)       (2,063)
        (Gain) loss on derivative instruments                                                          (1,033)        3,260
         Write down of non-consolidated affiliates                                                     12,625            --
         Goodwill impairment                                                                           47,500            --
         Pay-in-kind interest on Schlumberger note                                                     11,971            --
         Deferred income taxes                                                                         (2,711)       15,689
         Changes in assets and liabilities, excluding impact of  business combinations:
                Accounts receivable and notes                                                          41,760        (1,935)
                Inventory                                                                               2,253       (52,430)
                Costs and estimated earnings in excess of billings on
                  uncompleted contracts                                                                17,271       (27,468)
                Accounts payable and other liabilities                                                (53,555)        2,366
                Advance billings                                                                        1,202        12,431
                Other                                                                                  (2,503)       (3,569)
                                                                                                  -----------   -----------
Net cash provided by operating activities                                                              70,436        22,307
                                                                                                  -----------   -----------

Cash flows from investing activities:
     Capital expenditures                                                                            (144,508)     (187,041)
     Payments for deferred lease transaction costs                                                       (412)         (131)
     Proceeds from sale of property, plant and equipment                                               37,780        10,373
     Cash used for business combinations, net                                                          (9,278)      (76,686)
     Cash returned from non-consolidated affiliates                                                     5,698         3,288
     Cash used to acquire investments in non-consolidated affiliates                                   (7,706)       (5,771)
                                                                                                  -----------   -----------
Net cash used in investing activities                                                                (118,426)     (255,968)
                                                                                                  -----------   -----------

Cash flows from financing activities:
     Net borrowing (repayment) on revolving credit facility                                            66,000       (37,500)
     Repayment of long-term debt and short-term notes                                                  (1,190)      (11,832)
     Payment of debt issue costs                                                                         (275)           --
     Issuance of convertible senior notes, net                                                             --       185,590
     Issuance of common stock, net                                                                         --        83,850
     Proceeds from warrant conversions and stock option exercises                                         820         1,310
     Proceeds from employee stock purchases                                                               264
     Repayment of employee shareholder notes                                                               25            32
                                                                                                  -----------   -----------
Net cash provided by financing activities                                                              65,644       221,450
                                                                                                  -----------   -----------
Effect of exchange rate changes on cash and equivalents                                                  (196)           11
                                                                                                  -----------   -----------
Net increase (decrease) in cash and cash equivalents                                                   17,458       (12,200)
Cash and cash equivalents at beginning of period                                                       23,191        45,484
                                                                                                  -----------   -----------
Cash and cash equivalents at end of period                                                        $    40,649   $    33,284
                                                                                                  ===========   ===========

Acquisitions of businesses:
     Property, plant and equipment acquired                                                       $     7,400   $    87,324
     Other assets acquired, net of cash acquired                                                  $     1,785   $    10,247
     Goodwill                                                                                     $        --   $    32,369
     Liabilities                                                                                  $        93   $    (1,047)
     Debt issued                                                                                  $        --   $    (3,716)
     Deferred taxes                                                                               $        --   $    (6,802)
     Common stock issued                                                                          $        --   $   (41,689)

</TABLE>

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


                                       4

<PAGE>

                           HANOVER COMPRESSOR COMPANY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hanover
Compressor Company (the "Company", "we", "us" or "our") included herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is the opinion of
our management that the information furnished includes all adjustments,
consisting only of normal recurring adjustments, which are necessary to present
fairly the financial position, results of operations, and cash flows of the
Company for the periods indicated. The financial statement information included
herein should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's (i) Annual Report on Form 10-K/A for
the year ended December 31, 2001 and (ii) Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002. These interim results are not necessarily
indicative of results for a full year.

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
preferred securities, unless their effect would be anti-dilutive.

<TABLE>
<CAPTION>

                                                                    Three Months Ended             Six Months Ended
                       (in thousands)                                    June 30,                      June 30,
                                                                    2002          2001             2002          2001
                                                                  --------      --------        ---------     ---------
<S>                                                               <C>           <C>             <C>            <C>
Weighted average common shares outstanding -- used in basic
     earnings per common share                                      79,382        70,243           79,288        68,555
Net dilutive potential common shares issuable
     on exercise of options                                             **         4,133               **         4,173
Net dilutive potential common shares issuable
     on exercise of warrants                                            **             4               **             4
Net dilutive potential common shares issuable
     on conversion of mandatorily redeemable preferred
     securities                                                         **         4,825               **         4,825
Net dilutive potential common shares issuable
     on conversion of convertible senior notes                          **            **               **            **
                                                                  --------      --------        ---------     ---------
Weighted average common shares and dilutive potential
    common shares - used in dilutive earnings per common
    share                                                           79,382        79,205           79,288        77,557
                                                                  ========      ========        =========     =========
</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 earnings per common shares as their effect would be
anti-dilutive.

<TABLE>
<CAPTION>
                                                                    Three Months Ended             Six Months Ended
                       (in thousands)                                    June 30,                      June 30,
                                                                    2002          2001             2002          2001
                                                                  --------      --------        ---------     ---------
<S>                                                               <C>           <C>             <C>            <C>
Net dilutive potential common shares issuable
     on exercise of options                                          2,857            --            2,917            --
Net dilutive potential common shares issuable
     on exercise of warrants                                             4            --                4            --
Net dilutive potential common shares issuable
     on conversion of mandatorily redeemable preferred
     securities                                                      4,825            --            4,825            --
Net dilutive potential common shares issuable
     on conversion of convertible senior notes                       1,504         1,504            1,504         1,504

</TABLE>



                                       5

<PAGE>

RECLASSIFICATIONS

Certain amounts in the prior year's financial statements have been reclassified
to conform to the 2002 financial statement classification. These
reclassifications have no impact on net income (loss). See Note 13 for a
discussion of restatements.

2. BUSINESS COMBINATIONS

In August 2001, we acquired 100% of the issued and outstanding shares of the
Production Operators Corporation natural gas compression business, ownership
interests in certain joint venture projects in South America, and related assets
("POI") from Schlumberger for $761 million in cash, Hanover common stock and
indebtedness, subject to certain post-closing adjustments that to date have
resulted in an increase in the purchase price to approximately $778 million.
Under the terms of the definitive agreement, Schlumberger received approximately
$287 million in cash, $150 million in a long-term subordinated note and
approximately 8,708,000 Hanover common shares, or approximately 11% of the
outstanding shares of Hanover common stock, which are required to be held by
Schlumberger for at least three years following the closing date.

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

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

<TABLE>
<CAPTION>
                                                                              Three Months Ended     Six Months Ended
                                                                                June 30, 2001         June 30, 2001
                                                                              -------------------    -----------------
<S>                                                                           <C>                    <C>
     Revenue                                                                        $286,377              $558,599
     Net income before cumulative effect of accounting change                         23,000                42,080
     Earnings per common share--basic                                                   0.29                  0.54
     Earnings per common share--diluted                                                 0.27                  0.50

</TABLE>


3. INVENTORIES

     Inventory consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                June 30, 2002       December 31, 2001
                                                                                -------------       -----------------
<S>                                                                             <C>                 <C>
     Parts and supplies                                                             $146,292              $147,627
     Work in progress                                                                 46,337                46,091
     Finished goods                                                                   21,543                22,687
                                                                                    --------              --------
                                                                                    $214,172              $216,405
                                                                                    ========              ========

</TABLE>

During the three months ended June 30, 2002, we recorded approximately $12.1
million in inventory write downs and additional reserves for parts and power
generation inventory which was either obsolete, excess or carried at a price
above market value.



                                       6

<PAGE>

4. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>

                                                                                June 30, 2002       December 31, 2001
                                                                                -------------       -----------------
                                                                                                        (restated)
<S>                                                                             <C>                 <C>
     Compression equipment, facilities and other rental assets                   $1,254,114            $1,172,154
     Land and buildings                                                              74,952                55,570
     Transportation and shop equipment                                               68,684                61,848
     Other                                                                           26,543                23,848
                                                                                 ----------            ----------
                                                                                  1,424,293             1,313,420
     Accumulated depreciation                                                      (209,389)             (161,035)
                                                                                 ----------            ----------
                                                                                 $1,214,904            $1,152,385
                                                                                 ==========            ==========

</TABLE>

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 the six months ended June 30, 2002 was a decrease in depreciation expense of
approximately $7.0 million and an increase in net income of approximately $4.2
million ($0.05 per share).

5. LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                                June 30, 2002   December 31, 2001
                                                                                                -------------   -----------------
<S>                                                                                             <C>             <C>
     Bank credit facility                                                                          $223,000         $157,000
     4.75% convertible senior notes due 2008                                                        192,000          192,000
     Schlumberger note, interest at 10.5%                                                           161,971          150,000
     Real estate mortgage, interest at 7.5%, collateralized by certain land and buildings,
       payable through 2002                                                                           3,417            3,583
     Other, interest at various rates, collateralized by equipment and other assets, net of
       unamortized discount                                                                           6,113            7,230
                                                                                                   --------         --------
                                                                                                    586,501          509,813
     Less--current maturities                                                                        (5,185)          (5,553)
                                                                                                  ---------         --------
                                                                                                  $ 581,316         $504,260
                                                                                                  =========         ========
</TABLE>

Our amended and restated bank credit facility provides for a $350,000,000
revolving credit facility that matures on November 30, 2004. Advances bear
interest at the bank's prime or a negotiated rate (3.6% and 3.9% at June 30,
2002 and December 31, 2001, respectively). A commitment fee of 0.35% per annum
on the average available commitment is payable quarterly. The credit facility
contains certain financial covenants and limitations on, among other things,
indebtedness, liens, leases and sales of assets. The credit facility also limits
the payment of cash dividends on the Company's common stock to 25% of net income
for the respective period.

As a result of the restatement of its consolidated financial statements for the
period ended December 31, 2000 and nine months ended September 30, 2001 and
other compliance provisions, the Company was not in compliance with certain
covenants in its bank credit facility and lease agreements. The Company obtained
waivers and amendments during the first quarter of 2002 and is currently in
compliance with all applicable covenants.

In connection with the POI Acquisition on August 31, 2001, the Company issued a
$150,000,000 subordinated acquisition note to Schlumberger, which matures
December 15, 2005. Interest on the subordinated acquisition note accrues and is
payable-in-kind (accrued interest is converted to note principal if not paid) at
the rate of 8.5% annually through February 28, 2002, 10.5% for the following six
months and rates periodically increasing in increments of 1% to 2% per annum
thereafter to a maximum interest rate after March 2005 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


                                       7

<PAGE>

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

6. ACCOUNTING FOR DERIVATIVES

We adopted Statement of Financial Accounting Standard ("SFAS") 133 on January 1,
2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the balance
sheet at fair value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, the Company entered into two interest rate swaps which are outstanding at
June 30, 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,
but were extended for an additional two years at the option of the counterparty.
The difference paid or received on the swap transactions is recognized in
leasing expense. These swap transactions expire in July 2003. The Company
recognizes the unrealized gain or loss related to the change in the fair value
of these interest rate swaps in the statement of income because management
decided not to designate the interest rate swaps as hedges at the time they were
extended by the counterparty. At June 30, 2002, $6,524,000 was recorded in
accrued liabilities and $292,000 in other long-term liabilities 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 (loss).

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

   Lease       Maturity Date    Strike Rate        Notional Amount

March 2000        3/11/05         5.2550%           $100,000,000
August 2000       3/11/05         5.2725%           $100,000,000
October 2000      10/26/05        5.3975%           $100,000,000

These three swaps, which the Company has designated as cash flow hedging
instruments, meet the specific hedge criteria and any changes in their fair
values have been recognized in other comprehensive income. At June 30, 2002,
$11,254,000 was included in accrued current liabilities and $1,931,000 in other
long-term liabilities with respect to these three swaps.

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

7.  COMMON STOCKHOLDERS EQUITY

In May 2002, the Company issued 142,585 shares of restricted common stock to
certain employees as part of an incentive compensation plan. The restricted
stock grants vest equally over four years. Deferred compensation is charged to
equity when the restricted stock is granted. The deferred compensation is
expensed over the balance of the vesting period and is adjusted if conditions of
the restricted stock grant are not met.

8. COMMITMENTS AND CONTINGENCIES

Commencing in February 2002, approximately 15 putative securities class action
lawsuits were filed against us and certain of our officers and directors in the
United States District Court of the Southern District of Texas. These class
actions have been consolidated into one case, Pirelli Armstrong Tire Corporation
Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly
Situated, Civil Action No. H-02-CV-0410, naming as defendants Hanover Compressor
Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A.
O'Connor. The plaintiffs in the securities actions purport to represent
purchasers of our common stock during various periods ranging from May 15, 2000
through January 28, 2002. The complaints assert various claims under Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and seek unspecified
amounts of compensatory damages, interest and costs, including legal fees.
Motions are pending for appointment of lead plaintiff(s). A consolidated
complaint is due 30 days after the Court appoints lead plaintiff(s).

Commencing in February 2002, four derivative lawsuits were filed in the United
States District Court for the Southern District of Texas, two derivative
lawsuits were filed in state district court for Harris County, Texas (one of
which was nonsuited) and one derivative lawsuit was filed in the Delaware State
Court in New Castle County, Delaware. A motion to consolidate the derivative
actions that were filed in the United States District Court for the Southern
District of Texas is currently pending. These six pending derivative lawsuits
are:

<TABLE>
<CAPTION>

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

Roger Koch,          Michael A. O'Connor, William S.          H-02-1332     United States District       4/10/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
Behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
Henry Carranza,      Michael A. O'Connor, William S.          H-02-1430     United States District       4/18/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
William Steves,      Michael A. O'Connor, William S.          H-02-1527     United States District       4/27/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
John B. Hensley,     Michael J. McGhan, William S.            H-02-2994     270th Judicial District,      6/20/02
Jr., derivatively    Goldberg, Ted Collins, Jr., Alvin                      Harris County, Texas;
on behalf of         Shoemaker, Robert R. Furgason,                         removed to the United
Hanover Compressor   Melvyn N. Klein, Charles D. Erwin,                     States District Court
Company              PricewaterhouseCoopers LLP,                            for the Southern
                     Defendants and Hanover Compressor                      District of Texas on
                     Company, Nominal Defendant                             August 9, 2002
-------------------- -------------------------------------- --------------- -------------------------- -------------
Coffelt Family,      Michael A. O'Conner, Michael J.           19410-NC     Delaware State Court in      02/15/02
LLC, derivatively    McGhan, William S. Goldberg, Ted                       New Castle County
on behalf of         Collins, Jr., Melvyn N. Klein, Alvin
Hanover Compressor   V. Shoemaker, and Robert R.
Company              Furgason, Defendants and
                     Hanover Compressor Company, Nominal
                     Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
</TABLE>

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

The putative class action securities lawsuit and the derivative lawsuits are at
early stage. Consequently, it is not possible at this time to predict whether we
will incur any liability or to estimate the damages, or the range of damages, if
any, that we might incur in connection with such actions, or whether an adverse
outcome could have a material adverse effect on our business, consolidated
financial condition, results of operations or cash flows.

The Fort Worth District Office of the Securities and Exchange Commission has
requested we provide information relating to the matters involved in our
restatement of our financial results for the year ended December 31, 2000 and
the nine months ended September 30, 2001. We are cooperating fully with the
Securities and Exchange Commission's request. It is too soon to determine
whether the outcome of this inquiry will have a material adverse effect on
our business, financial condition, results of operations or cash flows.

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

                                       8

<PAGE>

9. RELATED PARTY TRANSACTIONS

In January 2002, the Company advanced cash of $400,000 to Michael J. McGhan, who
served as the Company's President and Chief Executive Officer until August 1,
2002, and $100,000 to Robert O. Pierce, Senior Vice President--Manufacturing and
Fabrication, in return for notes. The notes bear interest at 4.5%, mature on
September 30, 2002 and are unsecured. These amounts were outstanding at June 30,
2002. In addition, during 2001 we advanced cash of $2,200,000 to Mr. McGhan,
which, together with accrued interest, was outstanding as of June 30, 2002. In
addition, in exchange for unsecured notes, the Company has loaned approximately
$2.9 million to employees who were subject to margin calls, which were
outstanding as of July 31, 2002.

On July 29, 2002, the Company purchased 147,322 shares of our 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 New York Stock
Exchange on July 29, 2002. Our board of directors determined to purchase the
shares from Mr. McGhan because he was subject to a margin call during a blackout
period under our 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 effective date of the agreement is August 1, 2002, and the agreement
sets forth a mutual agreement to sever the current relationships between Mr.
McGhan and the Company, including the employment relationships of Mr. McGhan
with the Company 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 $2.6 million owed by Mr. McGhan
to the Company; (ii) certain waivers and releases by Mr. McGhan; and (iii)
certain other matters. In the agreement, Mr. McGhan has made certain
representations as to the status of the outstanding loans payable by Mr. McGhan
to the Company, the documentation for the loans and the enforceability of the
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
provides that Mr. McGhan may exercise his vested stock options pursuant to the
post-termination exercise periods set forth in the applicable plan, which range
from 30 to 90 days. In addition, Mr. McGhan agreed, among other things, not to
compete with the Company and not to solicit Company 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-solicit agreement, the Company agreed to pay Mr. McGhan
$33,333.00 per month for a period of eighteen months after the effective date of
the agreement.

On August 2, 2002, the Company entered into a Separation Agreement with Mr.
Charles D. Erwin, who served as the Company's Chief Operating Officer until
August 2, 2002. The effective date of the agreement is August 2, 2002, and the
agreement sets forth a mutual agreement to sever the current relationships
between Mr. Erwin and the Company, including the employment relationships of Mr.
Erwin with the Company 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 $583,692 owed by Mr. Erwin to the
Company; (ii) certain waivers and releases by Mr. Erwin; (iii) the payment of a
reasonable and customary finders fee for certain proposals brought to the
Company's attention by Mr. Erwin during the twenty-four month period after the
effective date of the agreement; and (iv) certain other matters. In the
agreement, Mr. Erwin has made certain representations as to the status of the
outstanding loan payable by Mr. Erwin to the Company, the documentation for the
loan and the enforceability of the his obligations under the loan documents. The
loan was not modified and must be repaid in accordance with its original terms.
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, which range from 30 to 90 days. 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 the Company and not to solicit Company
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-solicit agreement, the Company agreed to pay Mr. Erwin
$20,611.11 per month for a period of eighteen months after the effective date of
the agreement.


10. NEW ACCOUNTING PRONOUNCEMENTS

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

In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
Under SFAS 142, amortization of goodwill over an estimated useful life will be
discontinued. Instead, goodwill amounts will be subject to a fair-value-based
annual impairment assessment. The standard also requires acquired intangible
assets to be recognized separately and amortized as appropriate. SFAS 142 became
effective for Hanover on January 1, 2002. For the three and six months ended
June 30, 2001, our goodwill amortization was approximately $2,926,000 and
$5,405,000, respectively. 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
determined that our reporting units are the same as our business segments and
performed our


                                       9

<PAGE>

initial impairment assessment. We determined 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 analysis performed as of June
30, 2002, we recorded an estimated $47,500,000 impairment of goodwill
attributable to our production and processing equipment fabrication business
unit. 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. We may adjust the estimated impairment in our third quarter
results upon completion of the second step of the goodwill impairment test. The
second step of the goodwill impairment test requires us allocate the fair value
of the reporting unit to the production and processing equipment businesses'
assets.

The table below presents the carrying amount of goodwill at June 30, 2002:

<TABLE>
<CAPTION>
                    (in thousands)                           Balance
                                                          June 30, 2002
                                                          -------------

<S>                                                       <C>
Domestic rentals                                              $ 90,306
International rentals                                           33,149
Parts, service and used equipment                               53,788
Compressor fabrication                                          19,176
Production and processing equipment fabrication                     --
                                                              --------
Total                                                         $196,419
                                                              ========
</TABLE>


The table below presents Hanover's results as if goodwill had not been
amortized:

<TABLE>
<CAPTION>
                     (in thousands, except per share amounts)                 Three Months Ended     Six Months Ended
                                                                                June 30, 2001         June 30, 2001
                                                                              ------------------     ----------------
<S>                                                                           <C>                    <C>
     Net income as reported                                                         $21,194               $41,003
     Goodwill amortization, net of tax benefit                                        2,224                 4,108
                                                                                    -------               -------
     Adjusted net income                                                            $23,418               $45,111
                                                                                    =======               =======

     Earnings per common share--basic                                                 $0.33                 $0.66
     Earnings per common share--diluted                                               $0.31                 $0.61
</TABLE>


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                      2001              2000               1999
                                                                      ----              ----               ----
                                                                   (restated)        (restated)
<S>                                                                <C>               <C>                  <C>
     Net income as reported                                          $72,856           $49,658             $40,441
     Goodwill amortization, net of tax benefit                         8,846             4,280               1,908
                                                                     -------           -------             -------
     Adjusted net income                                             $81,702           $53,938             $42,349
                                                                     =======           =======             =======

     Earnings per common share--basic                                  $1.13             $0.87               $0.74
     Earnings per common share--diluted                                $1.05             $0.81               $0.69

</TABLE>

In June 2001, the FASB issued SFAS 143,"Accounting for Obligations Associated
with the Retirement of Long-Lived Assets." SFAS 143 establishes the accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. This statement becomes effective for
Hanover on January 1, 2003. We are currently assessing the new standard and has
not yet determined the 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." The new rules supersede SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The


                                       10

<PAGE>

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 became effective for Hanover as of January 1, 2002. 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 FSAB Statement No. 13, and Technical Corrections." The
Statement updates, clarifies and simplifies existing accounting pronouncements.
Provisions of SFAS 145 related to the rescission of Statement 4 are effective
for Hanover 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 July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities, such as
restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. We are currently assessing the
new standard and have not yet determined the impact on our consolidated results
of operations, cash flows or financial position.

11. REPORTABLE SEGMENTS

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 and Accessory Fabrication and Production and Processing Equipment
Fabrication. The rentals segments provide natural gas compression and power
generation rental and maintenance services to meet specific customer
requirements. The compressor fabrication segment involves the design,
fabrication and sale of natural gas compression units to meet unique customer
specifications. The production and processing equipment fabrication segment
designs, fabricates and sells equipment utilized in the production of crude oil
and natural gas. Parts, service and used equipment segment provides used
equipment, both new and used parts directly to customers, as well as complete
maintenance services for customer owned packages.

The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily redeemable convertible preferred securities and income taxes.
Amounts defined as "Other" includes equity income of non-consolidated
affiliates, results of insignificant operations and corporate related items
primarily related to cash management activities. Revenues include sales to
external customers and inter-segment sales. Inter-segment sales are accounted
for at cost except for compressor fabrication sales which are accounted for on
an arms length basis. Intersegment sales and 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.

The following table presents sales and other financial information by reportable
segment for the three months ended June 30, 2002 and 2001 (in thousands).

<TABLE>
<CAPTION>

                                                         PARTS,      COMPRESSOR   PRODUCTION
                            DOMESTIC   INTERNATIONAL  SERVICE AND   AND ACCESSORY EQUIPMENT
                            RENTALS       RENTALS    USED EQUIPMENT  FABRICATION  FABRICATION    OTHER    ELIMINATIONS  CONSOLIDATED
                          ----------------------------------------------------------------------------------------------------------
<S>                       <C>          <C>           <C>             <C>          <C>            <C>        <C>         <C>
June 30, 2002:
Revenues from External
Customers                   $ 82,324     $ 46,960      $ 67,859     $ 32,444      $ 31,617     $  6,005      $     --     $  267,209
Intersegment Sales                --          375        23,947       13,670         3,408        2,308       (43,708)            --
                            --------------------------------------------------------------------------------------------------------
Total revenues                82,324       47,335        91,806       46,114        35,025        8,313       (43,708)       267,209

Gross Profit                  54,685       33,772         3,359        4,203         4,081        6,005            --        106,105
Identifiable Assets         $888,832     $724,980      $118,035     $147,804      $144,299     $218,997                   $2,242,947

June 30, 2001:
Revenues from External
Customers                   $ 60,060     $ 29,813      $ 50,025     $ 57,839      $ 43,785     $  3,907      $     --     $  245,429
Intersegment Sales                --          300        16,785       17,194         1,447        1,112       (36,838)            --
                            --------------------------------------------------------------------------------------------------------
Total revenues                60,060       30,113        66,810       75,033        45,232        5,019       (36,838)       245,429

Gross Profit                  39,959       19,353        15,822        9,106         9,575        3,907            --         97,722
Identifiable Assets         $509,151     $508,408      $125,191     $270,318      $142,555     $ 63,612      $     --     $1,619,235

</TABLE>

 The following table presents sales and other financial information by industry
                 segment for the six months ended June 30, 2002


                                       11

<PAGE>

and 2001 (in thousands).


<TABLE>
<CAPTION>
                                                         PARTS,      COMPRESSOR   PRODUCTION
                            DOMESTIC   INTERNATIONAL  SERVICE AND   AND ACCESSORY  EQUIPMENT
                            RENTALS       RENTALS    USED EQUIPMENT  FABRICATION  FABRICATION    OTHER    ELIMINATIONS  CONSOLIDATED
                          ----------------------------------------------------------------------------------------------------------
<S>                       <C>          <C>           <C>             <C>          <C>          <C>        <C>         <C>
June 30, 2002:
Revenues from external
customers                   $168,458      $89,697      $135,446      $58,502      $ 64,749     $ 11,263      $     --       $528,115
Intersegment sales                --          716        31,961       44,954         6,364        3,886       (87,881)             -
                          ----------------------------------------------------------------------------------------------------------
Total revenues               168,458       90,413       167,407      103,456        71,113       15,149       (87,881)       528,115

Gross Profit                 110,946       63,708        14,752        7,862         8,676       11,263            --        217,207

June 30, 2001:
Revenues from external
customers                   $113,789      $55,946      $100,359     $112,490      $ 85,397     $  7,392      $     --       $475,373
Intersegment sales                --        2,134        23,968       36,722         2,232        2,246       (67,302)             -
                          ----------------------------------------------------------------------------------------------------------
Total revenues               113,789       58,080       124,327      149,212        87,629        9,638       (67,302)       475,373

Gross Profit                  76,341       36,121        36,316       17,501        17,419        7,392            --        191,090

</TABLE>

12. OTHER EXPENSE

     The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, goodwill, intangibles and investments in
non-consolidated affiliates whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable or a decline in
value may be other than temporary. 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.

Other expenses recorded during the three months ended June 30, 2002 were
$14,626,000. Other expense includes a $12.1 million write-down of investments in
three 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 the Company has abandoned and a $2.0
million write down of a note receivable from Aurion Technologies, Inc.

13. SUBSEQUENT EVENTS

Acquisitions

In July 2002, the Company acquired a 92.5% interest in Wellhead Power Gates LLC
for approximately $14.4 million. Wellhead Power Gates is a developer and owner
of a peaking plant in Fresno County, California which is under contract with
California Department of Water Resources.

In July 2002, the Company acquired a 49% interest in Wellhead Power Panoche LLC
for approximately $6.8 million. Wellhead Power Panoche is a developer and owner
of a peaking plant in Fresno County, California which is under contract with
California Department of Water Resources.

Management Changes

On July 30, the Company announced the resignation of William S. Goldberg as vice
chairman and a member of the board of directors, effective August 31, 2002. On
August 2, 2002, the Company announced the resignations of Chief Executive
Officer Michael J. McGhan and Chief Operating Officer Charles D. Erwin, and
Chairman Victor E. Grijalva was appointed by the board of directors to serve as
Chief Executive Officer pending completion of a search for a replacement. Senior
corporate officers will report directly to Mr. Grijalva until a new chief
executive is in place. Mr. Grijalva, 64, who retired December 31, 2001 as vice
chairman of Schlumberger Ltd., was elected to Hanover's expanded board of
directors in February and elected chairman in March.

Restatement

An independent committee of the board of directors, aided by outside legal
counsel, recently completed an extensive investigation of certain transactions
recorded during 2000 and 2001, including those transactions restated by the
Company last February. The investigation ultimately focused on a group of
additional transactions similar to those included in the restatement announced
in February and involving revenues of $15.3 million and net income of $5.0
million. As a result of this investigation, the Company determined and its
independent auditors agreed that several transactions will be restated,
including one that was the subject of restatement announced in February 2002.
For 2001, the Company reduced revenue by $7,083,000 of total revenue of
$1,078,209,000 and reduced pretax expenses by $7,437,000. The results, after
taxes, added


                                       12

<PAGE>

$219,000 to the total $72,637,000 of net income for the year ended December 31,
2001, with fully diluted per share earnings remaining $0.95. The restatement
also reduced 2000 revenue by $2,203,000 of the total $566,081,000 and $1,506,000
of the total $51,164,000 of net income for the year ended December 31, 2000, and
reduced fully diluted per share earnings of $0.77 by $0.02. The restatement had
no impact on the Company's results of operations for the three and six month
periods ended June 30, 2001.

On February 26, 2002, the Company announced a restatement based upon an
investigation that was concluded by counsel under the direction of the Audit
Committee. While the Company did not believe any additional matters would
require restatement when it made its February announcement, and although the
amounts involved in the present restatement are small in the context of the
Company's overall revenues and net income, additional information came to light
as part of the investigation conducted by a committee of the board since
February that made the current restatement necessary under the circumstances.
The Company has provided, and will continue to provide, information concerning
its internal investigations to the Securities and Exchange Commission.

The restated transactions include the correction of $7,500,000 of revenue and
$820,000 of net income from the sale of a power generation unit. The sale was
one of three such turbine sales the Company restated last February after
determining that the revenue should have been recognized on these transactions
at the time that collection of the sales price was reasonably assured. The
transaction in question was restated last February to reflect the fact that the
Company did not receive full payment on the $7,500,000 turbine sale until the
fourth quarter of 2001 and, therefore, recorded the related $820,000 net income
in that quarter. The Company subsequently determined, based on new information
related to this transaction, that the turbine sale in question should have been
accounted for as an exchange of equipment rather than an asset sale and,
consequently, revenue and net income for both the full year and fourth quarter
2001 need to be reduced accordingly.


                                       13

<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

     .    the loss of market share through competition;

     .    the introduction of competing technologies by other companies;

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

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

     .    our inability to successfully integrate acquired businesses;

     .    currency fluctuations;

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

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

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

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

GENERAL

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

REVENUES

Our total revenues increased by $21.8 million, or 9%, to $267.2 million during
the three months ended June 30, 2002 from $245.4 million during the three months
ended June 30, 2001. The increase resulted primarily from growth of our natural
gas compressor rental fleet and business acquisitions completed during 2001.


                                       14

<PAGE>

Revenues from rentals increased by $39.4 million, or 44%, to $129.3 million
during the three months ended June 30, 2002 from $89.9 million during the three
months ended June 30, 2001. Domestic revenues from rentals increased by $22.3
million, or 37%, to $82.3 million during the three months ended June 30, 2002
from $60.0 million during the three months ended June 30, 2001. International
rental revenues increased by $17.1 million, or 57%, to $46.9 million during the
three months ended June 30, 2002 from $29.8 million during the three months
ended June 30, 2001. The increase in both domestic and international rental
revenue resulted primarily from business acquisitions completed during 2001 and
from expansion of our rental fleet. 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. At June 30, 2002, our
compressor rental fleet consisted of approximately 3,611,000 horsepower, a 43%
increase over the approximately 2,533,000 horsepower in the rental fleet at June
30, 2001. Domestic horsepower in the rental fleet increased by 35% to
approximately 2,777,000 horsepower at June 30, 2002 from approximately 2,060,000
horsepower at June 30, 2001. In addition, international horsepower increased by
76% to approximately 834,000 horsepower at June 30, 2002 from approximately
473,000 horsepower at June 30, 2001.

Revenue from parts, service and used equipment increased by $17.9 million, or
36%, to $67.9 million during the three months ended June 30, 2002 from $50.0
million during the three months ended June 30, 2001. This increase was primarily
due to a $12.6 million compressor sale transaction in the second quarter of
2002.

Revenues from compressor fabrication decreased by $25.4 million, or 44%, to
$32.4 million during the three months ended June 30, 2002 from $57.8 million
during the three months ended June 30, 2001. During the three months ended June
30, 2002, an aggregate of approximately 34,000 horsepower of compression
equipment was fabricated and sold compared to approximately 108,000 horsepower
fabricated and sold during the three months ended June 30, 2001. In addition,
approximately 21,000 horsepower was fabricated and placed in the rental fleet
during the three months ended June 30, 2002 compared to 28,000 in the three
months ended June 30, 2001. Revenues from production and processing equipment
fabrication decreased by $12.2 million, or 28%, to $31.6 million during the
three months ended June 30, 2002 from $43.8 million during the three months
ended June 30, 2001. The decrease in sales of production and processing
equipment and compressor fabrication was due primarily to the lower capital
spending by customers, recent political and economic events in South America and
domestic economic market conditions. The average Henry Hub natural gas price
decreased to $3.38 per Mcf for the second quarter of 2002 from $4.65 per Mcf for
the second quarter of 2001.

Equity in income of non-consolidated affiliates increased by $3.9 million, or
297%, to $5.2 million during the three months ended June 30, 2002, from $1.3
million during the three months ended June 30, 2001. This increase is primarily
due to our acquisition of POI in August of 2001, which included interests in
three joint venture projects in South America. These joint ventures contributed
$5.5 million in equity earnings for the second quarter of 2002.

EXPENSES

Operating expenses of the rental segments increased by $10.2 million, or 34%, to
$40.8 million during the three months ended June 30, 2002 from $30.6 million
during the three months ended June 30, 2001. The increase resulted primarily
from the corresponding 44% increase in revenues from rentals over the
corresponding period in 2001. The gross profit percentage from rentals improved
to 68% during the three months ended June 30, 2002 from 66% during the three
months ended June 30, 2001. Gross profit margins increased due to the increase
in margins in international rental revenues without a corresponding increase in
expenses. Operating expenses of parts, service and used equipment increased by
$30.3 million, or 89%, to $64.5 million, which is partially related to the 36%
increase in parts, service and used equipment revenue and a decrease in margin.
The gross profit margin from parts, service and used equipment was 5% during the
three months ended June 30, 2002 and 32% during the three months ended June 30,
2001. During the three months ended June 30, 2002, we recorded approximately
$12.1 million in inventory write downs and reserves for parts and power
generation inventory which was either obsolete, excess or carried at a price
above market value. Excluding these write downs and the compression equipment
transaction, the gross profit margin from parts, service and used equipment
would have been 25% during the three months ended June 30, 2002. The remainder
of the decrease was due to an increase in overhead, primarily related to
acquisitions, and lower sales margins which have been impacted by weaker market
conditions.

Operating expenses of compressor fabrication decreased by $20.5 million, or 42%,
to $28.2 million during the three months ended June 30, 2002 from $48.7 million
during the three months ended June 30, 2001 commensurate with the corresponding
decrease in compressor fabrication revenue. The gross profit margin on
compression fabrication was 13% during the three months ended June 30, 2002 and
16% during the three months ended June 30, 2001. The operating expenses
attributable to production equipment fabrication decreased by $6.7 million, or
19%, to $27.5 million during the three months ended June 30, 2002 from $34.2
million during the three months ended June 30, 2001. The gross profit margin
attributable to production and processing equipment fabrication was 13% during
the three months ended June 30, 2002 and 22% during the three months ended June
30, 2001. The decrease in gross profit margin for compressor fabrication and
production and processing equipment fabrication was attributable to lower sales
levels without a corresponding decrease in overhead and lower sales margins due
to the impact of weaker market conditions.


                                       15

<PAGE>

Selling, general and administrative expenses increased $16.4 million, or 69%, to
$40.0 million during the three months ended June 30, 2002 from $23.6 million
during the three months ended June 30, 2001. The increase is primarily
attributable to increased personnel and other administrative and selling
expenses associated with increased activity in our business segments resulting
from the acquisitions completed during 2001. In addition, in the three months
ended June 30, 2002, we recorded approximately $3.3 million in additional legal
and accounting costs, a portion of which was associated with our review of
certain transactions and the Securities and Exchange Commission inquiry.

We believe that earnings before interest, leasing expense, distributions on
mandatorily redeemable convertible preferred securities, income taxes,
depreciation and amortization (EBITDAR) is a standard measure of financial
performance used for valuing companies in the compression industry. EBITDAR is a
useful common yardstick as it measures the capacity of companies to generate
cash without reference to how they are capitalized, how they account for
significant non-cash charges for depreciation and amortization associated with
assets used in the business (the bulk of which are long-lived assets in the
compression industry), or what their tax attributes may be. Additionally, since
EBITDAR is a basic source of funds not only for growth but to service
indebtedness, lenders in both the private and public debt markets use EBITDAR as
a primary determinant of borrowing capacity. EBITDAR for the three months ended
June 30, 2002 decreased 32% to $50.2 million from $74.1 million for the three
months ended June 30, 2001 primarily due to the $14.1 million write down of
non-core assets (included in other expense) and the $12.1 million write down of
inventory (included in parts, service and used equipment operating expenses).
EBITDAR should not be considered in isolation from, or as a substitute for, net
income (loss), cash flows from operating activities or other consolidated income
(loss) or cash flow data prepared in accordance with generally accepted
accounting principles.

Depreciation and amortization increased by $7.8 million to $27.4 million during
the three months ended June 30, 2002 compared to $19.6 million during the three
months ended June 30, 2001. The 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 the three months ended June 30, 2002 was a
decrease in depreciation expense of approximately $3.7 million and an increase
in net income of approximately $2.2 million ($0.03 per share).

In addition, because we sold compressors in sale leaseback transactions,
depreciation expense was reduced by approximately $13 million in the three
months ended June 30, 2002 compared to approximately $11 million in the three
months ended June 30, 2001. 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 the three months ended June 30, 2001,
approximately $2.9 million in goodwill amortization was recorded.

We incurred leasing expense of $23.9 million during the three months ended June
30, 2002, compared to $15.6 million during the three months ended June 30, 2001.
This increase was attributable to the equipment leases we entered into in August
2001. In connection with these leases, we are 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 has not
been completed, we are required to pay additional leasing expense in the amount
of approximately $105,000 per week until the exchange offer is completed. The
additional leasing expense began accruing on January 28, 2002. In the three
months ended June 30, 2002, we recorded additional leasing expense of
approximately $1.3 million related to the registration and exchange offering
obligations.

Interest expense increased by $6.1 million to $9.2 million during the three
months ended June 30, 2002 from $3.1 million for the three months ended June 30,
2001 due to higher levels of outstanding debt partly offset by lower interest
rates on our bank credit facility.

The fair value of our derivative instruments (interest rate swaps) decreased
during the three months ended June 30, 2002 by $1.0 million while the fair value
was basically unchanged during the three months ended June 30, 2001. This
resulted from the recognition of an unrealized change in fair value of the
interest rate swaps which were not designated as cash flow hedges under SFAS
133.

Other expenses recorded during the three months ended June 30, 2002 were
$14,626,000. Other expenses include a $12.1 million write-down of investments in
three 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 the Company has abandoned and a $2.0
million write down of a note receivable from Aurion Technologies, Inc.


                                       16

<PAGE>

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 analysis performed as of June 30, 2002, we recorded an
estimated $47,500,000 impairment of goodwill attributable to our production and
processing equipment fabrication business unit. The fair value of our 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. We may
adjust the estimated impairment, in our third quarter results, upon completion
of the second step of the goodwill impairment test. The second step of the
goodwill impairment test requires us allocate the fair value of the reporting
unit to the production and processing equipment businesses' assets.

INCOME TAXES

The provision for income taxes decreased by $17.1 million, or 132%, to a $4.1
million tax benefit during the three months ended June 30, 2002 from a $13.0
million tax provision during the three months ended June 30, 2001. The decrease
resulted primarily from the corresponding decrease in income (loss) before
income taxes. The effective income tax rates during the three months ended June
30, 2002 and 2001 were 7% and 38%, respectively. The provision for income taxes
reflects a 7.0% effective tax rate benefit for the three months ended June 30,
2002 compared to an effective tax rate provision of 38% for the comparable
period of 2001. The effective tax rate for the three months ended June 30,2002
reflects the non-deductible portion of the goodwill and other write-downs
recorded during the quarter. Excluding non-recurring items, the Company's
consolidated effective tax rate provision was 51.7% for the three months ended
June 30, 2002. The higher effective tax rate in 2002 is the result of a
reduction in the Company's earnings for 2002 and the effect of permanent items
which are deductible for book, but not tax purposes.


NET INCOME (LOSS)

Net income (loss) decreased by $76.4 million, or 361%, to a net loss of $55.2
million during the three months ended June 30, 2002 from net income of $21.2
million during the three months ended June 30, 2001 for the reasons discussed
above.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

REVENUES

Our total revenues increased by $52.7 million, or 11%, to $528.1 million during
the six months ended June 30, 2002 from $475.4 million during the six months
ended June 30, 2001. The increase resulted primarily from growth of our natural
gas compressor rental fleet and business acquisitions completed during 2001.

Revenues from rentals increased by $88.4 million, or 52%, to $258.1 million
during the six months ended June 30, 2002 from $169.7 million during the six
months ended June 30, 2001. Domestic revenues from rentals increased by $54.7
million, or 48%, to $168.5 million during the six months ended June 30, 2002
from $113.8 million during the six months ended June 30, 2001. International
rental revenues increased by $33.8 million, or 60%, to $89.7 million during the
six months ended June 30, 2002 from $55.9 million during the six months ended
June 30, 2001. The increase in both domestic and international rental revenue
resulted primarily from business acquisitions completed during 2001 and from
expansion of our rental fleet. 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. At June 30, 2002, the
compressor rental fleet consisted of approximately 3,611,000 horsepower, a 43%
increase over the 2,533,000 horsepower in the rental fleet at June 30, 2001.
Domestic horsepower in the rental fleet increased by 35% to 2,777,000 horsepower
at June 30, 2002 from approximately 2,060,000 horsepower at June 30, 2001. In
addition, international horsepower increased by 77% to 834,000 horsepower at
June 30, 2002 from approximately 473,000 horsepower at June 30, 2001.

Revenue from parts, service and used equipment increased by $35.1 million, or
35%, to $135.5 million during the six months ended June 30, 2002 from $100.4
million during the six months ended June 30, 2001. This increase was due to a
$26.5 million gas plant sale transaction. Revenues from compressor fabrication
decreased by $54.0 million, or 48%, to $58.5 million during the six months ended
June 30, 2002 from $112.5 million during the six months ended June 30, 2001.
During the six months ended June 30, 2002, an aggregate of approximately 75,000
horsepower of compression equipment was fabricated and sold compared to
approximately 197,000 horsepower fabricated and sold during the six months ended
June 30, 2001. In addition, approximately 75,000 horsepower was fabricated and
placed in the rental fleet during the six months ended June 30, 2002 compared to
55,000 in the six months ended June 30, 2001. Revenues from production and
processing equipment fabrication decreased by $20.6 million, or 24%, to $64.8
million during the six months ended June 30, 2002 from $85.4 million during the
six months ended June 30, 2001. The decrease in sales of production and
processing equipment and compressor fabrication was due primarily to the lower
capital spending by customers, recent political and economic events in South
America and domestic economic market conditions. The average Henry Hub natural
gas price decreased to $2.86 per Mcf for the first six months of 2002 from $5.85
per Mcf for the first six months of 2001.

Equity in income of non-consolidated affiliates increased by $8.1 million, or
392%, to $10.2 million during the six months ended


                                       17

<PAGE>

June 30, 2002, from $2.1 million during the six months ended June 30, 2001. This
increase is primarily due to our acquisition of POI in August of 2001, which
included interests in three joint venture projects in South America. These joint
ventures contributed $10.8 million in equity earnings for the first six months
of 2002.

EXPENSES

Operating expenses of the rental segments increased by $26.2 million, or 46%, to
$83.5 million during the six months ended June 30, 2002 from $57.3 million
during the six months ended June 30, 2001. The increase resulted primarily from
the corresponding 52% increase in revenues from rentals over the corresponding
period in 2001. The gross profit margin from rentals was 68% during the six
months ended June 30, 2002 and 66% for the six months ended June 30, 2001. Gross
profit margins increased due to the increase in margins in international rentals
due to increases in international rental revenues without a corresponding
increase in expenses. Operating expenses of parts, service and used equipment
increased by $56.7 million, or 88%, to $120.7 million, which related to the 35%
increase in parts, service and used equipment revenue and a decrease in margin.
The gross profit margin from parts, service and used equipment was 11% during
the six months ended June 30, 2002 and 36% during the six months ended June 30,
2001. During the six months ended June 30, 2002, we recorded approximately $12.1
million in inventory write downs and reserves for parts and power generation
inventory which was either obsolete, excess or carried at a price above market
value. In addition, 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. The remainder of the
decrease was due to an increase in overhead, primarily related to acquisitions,
and lower sales margins which have been impacted by weaker market conditions.
Excluding the write downs, the gas plant sale transaction, and the compression
equipment transaction, the gross profit margin from parts, service and used
equipment would have been 24% during the six months ended June 30, 2002.

Operating expenses of compressor fabrication decreased by $44.4 million, or 47%,
to $50.6 million during the six months ended June 30, 2002 from $95.0 million
during the six months ended June 30, 2001 commensurate with the corresponding
decrease in compressor fabrication revenue. The gross profit margin on
compression fabrication was 13% during the six months ended June 30, 2002 and
16% during the six months ended June 30, 2001. The operating expenses
attributable to production equipment fabrication decreased by $11.9 million, or
17%, to $56.1 million during the six months ended June 30, 2002 from $68.0
million during the six months ended June 30, 2001. The gross profit margin
attributable to production and processing equipment fabrication was 13% during
the six months ended June 30, 2002 and 20% during the six months ended June 30,
2001. The decrease in gross profit margin for compression 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 $30.3 million, or 68%, to
$74.7 million during the six months ended June 30, 2002 from $44.4 million
during the six months ended June 30, 2001. The increase is attributable to
increased personnel and other administrative and selling expenses associated
with increased activity in our business segments resulting from the acquisitions
completed during 2001. In addition, during the six months ended June 30, 2002,
we recorded approximately $6.7 million in additional legal and accounting costs,
a portion of which was associated with our review of certain transactions and
the Securities and Exchange Commission inquiry.

We believe that earnings before interest, leasing expense, distributions on
mandatorily redeemable convertible preferred securities, income taxes,
depreciation and amortization (EBITDAR) is a standard measure of financial
performance used for valuing companies in the compression industry. EBITDAR is a
useful common yardstick as it measures the capacity of companies to generate
cash without reference to how they are capitalized, how they account for
significant non-cash charges for depreciation and amortization associated with
assets used in the business (the bulk of which are long-lived assets in the
compression industry), or what their tax attributes may be. Additionally, since
EBITDAR is a basic source of funds not only for growth but to service
indebtedness, lenders in both the private and public debt markets use EBITDAR as
a primary determinant of borrowing capacity. EBITDAR for the six months ended
June 30, 2002 decreased 19% to $115.8 million from $143.5 million for the six
months ended June 30, 2001 primarily due to a $14.1 million write down of
non-core assets (included in other expense) and a $12.1 million write down of
inventory (included in parts, service and used equipment operating expenses) to
foreign currency translation charges (discussed below). EBITDAR should not be
considered in isolation from, or as a substitute for, net income (loss), cash
flows from operating activities or other consolidated income (loss) or cash flow
data prepared in accordance with generally accepted accounting principles.

Depreciation and amortization increased by $14.8 million to $51.8 million during
the six months ended June 30, 2002 compared to $37.0 million during the six
months ended June 30, 2001. The 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 the six months ended June 30, 2002 was a decrease
in depreciation expense

                                       18

<PAGE>

of approximately $7.0 million and an increase in net income of approximately
$4.2 million ($0.05 per share).

In addition, because we sold compressors in sale leaseback transactions,
depreciation expense was reduced by approximately $25 million in the six months
ended June 30, 2002 compared to approximately $22 million in the six months
ended June 30, 2001. 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 the six months ended June 30, 2001, approximately
$5.4 million in goodwill amortization was recorded.

We incurred leasing expense of $46.9 million during the six months ended June
30, 2002, compared to $30.9 million during the six months ended June 30, 2001.
This increase was attributable to the equipment leases we entered into in August
2001. In connection with these leases, we are 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 has not
been completed, we are required to pay additional leasing expense in the amount
of approximately $105,000 per week until the exchange offer is completed. The
additional leasing expense began accruing on January 28, 2002. In the six months
ended June 30, 2002, we recorded additional leasing expense of approximately
$2.2 million related to the registration and exchange offering obligations.

Interest expense increased by $11.4 million to $17.4 million during the six
months ended June 30, 2002 from $6.0 million for the six months ended June 30,
2001 due to higher levels of outstanding debt partly offset by lower interest
rates on our bank credit facility.

Foreign currency translation expense for the six months ended June 30, 2002 was
$12.9 million, compared to $.2 million for the six months ended June 30, 2001.
Foreign currency translation expense increased 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 fund transfers
internally and outside the country. In addition, the Argentine government
enacted regulations to temporarily prohibit enforcement of contracts with
exchange rate-based purchase price adjustments. Instead, payment under such
contracts 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 business days of the devaluation. As a result, we are involved in
negotiations with our customers in Argentina, as mandated by the Argentine
government. During the six months ended June 30, 2002, we recorded an exchange
loss of approximately $11.6 million and $1.1 million for assets exposed to
currency translation in Argentina and Venezuela, respectively, and recorded a
translation loss of approximately $.2 million for all other countries. We have
renegotiated the majority of our agreements in Argentina and expect to
renegotiate the remaining agreements before the end of the third quarter. As a
result of these negotiations, we expect to receive between $8 and $9 million in
partial reimbursements for prior period amounts during the remainder of 2002.
While we have not finalized negotiations with all of our customers, we believe
that the eventual settlements will partially mitigate the unfavorable financial
impact recorded in the first quarter of 2002.

The fair value of our derivative instruments (interest rate swaps) increased
during the six months ended June 30, 2002 by $1.0 million compared to a loss in
value of $3.0 million for the six months ended June 30, 2001. This resulted from
the recognition of an unrealized change in fair value of the interest rate swaps
which were not designated as cash flow hedges under SFAS 133.

Other expenses recorded during the six months ended June 30, 2002 were
$14,626,000. Other expenses include a $12.1 million write-down of investments in
three 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 the Company has abandoned and a $2.0
million write down of a note receivable from Aurion Technologies, Inc.

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 analysis performed as of June 30, 2002, we recorded an
estimated $47,500,000 impairment of goodwill attributable to our production and
processing equipment fabrication business unit. The fair value of our 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. We may
adjust the estimated impairment, in our third quarter results, upon completion
of the second step of the goodwill impairment test. The second step of the
goodwill impairment test requires us allocate the fair value of the reporting
unit to the production and processing equipment businesses' assets.

INCOME TAXES

The provision for income taxes decreased by $26.0 million, or 103%, to a $0.8
million tax benefit during the six months ended June 30, 2002 from a $25.2
million tax expense during the six months ended June 30, 2001. The decrease
resulted primarily from the


                                       19

<PAGE>

corresponding decrease in income before income taxes. The provision for income
taxes reflects a 1.5% effective tax rate benefit for the six months ended June
30, 2002 compared to an effective tax rate provision of 38% for the comparable
period of 2001. The effective tax rate for the six months ended June 30, 2002
reflects the non-deductible portion of the goodwill and other write-downs
recorded during the six months ended June 30, 2002. Excluding non-recurring
items, the Company's consolidated effective tax rate provision was 51.7% for the
six months ended June 30, 2002. The higher effective tax rate in 2002 is the
result of a reduction in the Company's earnings for 2002 and the effect of
permanent items which are deductible for book, but not tax purposes.

NET INCOME (LOSS)

Net income (loss) decreased by $91.2 million, or 222%, to a loss of $50.2
million during the six months ended June 30, 2002 from income of $41.0 million
during the six months ended June 30, 2001 for the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance amounted to $40.6 million at June 30, 2002 compared to $23.2
million at December 31, 2001. Our principal source of cash was cash provided by
operating activities of $70.4 million and borrowings of $66 million under our
bank credit facility. Principal uses of cash during the six months ended June
30, 2002 were capital expenditures of $144.5 million.

Working capital was $273.9 million at June 30, 2002 and decreased from $275.4
million at December 31, 2001. We invested $144.5 million in property, plant and
equipment during six months ended June 30, 2002. During 2002, we added
approximately 134,000 horsepower (net) to the rental fleet. At June 30, 2002,
the compressor rental fleet consisted of approximately 2,777,000 horsepower
domestically and approximately 834,000 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 economic terms exceed our return on capital targets. During
2002, we plan to spend approximately $250 million on rental equipment fleet
additions, including $60 million on equipment overhauls and other maintenance
capital although this amount may increase somewhat to take advantage of
attractive opportunities. Historically, we have funded capital expenditures with
a combination of internally generated cash flow, borrowings under our bank
credit facility, sale lease-back transactions and 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 near term. Since
capital expenditures for 2002 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 June 30, 2002, we had
approximately $223 million in borrowings and approximately $40 million in
letters of credit outstanding on our $350 million revolving bank credit facility
(3.6% weighted average effective rate at June 30, 2002). The letters of credit
expire in 2002 and 2003. In addition, we had approximately $17.9 million in
letters of credit outstanding under other letters of credit facilities which
expire from 2002 to 2003.

We are currently in compliance with all covenants or other requirements set
forth in our bank credit facility and indentures. However, as a result of the
restatement of our consolidated financial statements for the period ended
December 31, 2000 and nine months ended September 30, 2001 and other compliance
provisions, we were not in compliance with certain covenants in our bank credit
facility and lease agreements. We obtained waivers and amendments and are
currently in compliance with all applicable covenants. Further, we do not have
any rating downgrade provisions that would accelerate the maturity dates of our
debt. However, a downgrade in our credit rating could adversely affect our
ability to renew existing, or obtain access to new credit facilities in the
future and could increase the cost of such facilities. Should this occur, we
might seek alternative sources of funding. As of June 30, 2002, our debt to
capitalization ratio, including the residual value guarantees under our
operating leases, was 1.48 to 1 and our book debt to capitalization ratio,
excluding operating leases, was .59 to 1.

Our bank credit facility permits us to incur indebtedness up to the $350 million
credit limit under our bank credit agreement 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 and
compressor equipment lease facilities permits us to enter into future sale and
leaseback transactions and equipment lease transactions with respect to
equipment having an aggregate value not in excess of $300 million. 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, Hanover's ratio of EBITDAR to total fixed charges,
as defined and adjusted by these agreements, is greater than 2.25 to 1.0. These
agreements define indebtedness to include the present value of the total rental
obligations under sale and leaseback transactions and under facilities similar
to our compression equipment lease facilities.


                                       20

<PAGE>

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 these contingent obligations is largely
dependent upon future operations of various subsidiaries, investees and other
third parties, or the occurrence of certain future events. We would record a
reserve if events occurred that required that one be established.

In January 2001, we entered into a facilitation agreement with Belleli Energy
SRL ("Belleli"), a fabrication company based in Italy. In connection with the
agreement, we agreed to provide Belleli with project financing, including
necessary guarantees, bonding capacity and other collateral on an individual
project basis. Under the agreement, Belleli must present each project to us
which we may approve at our sole discretion. At June 30, 2002, no amounts were
outstanding under the facilitation agreement. Under a separate agreement with
Belleli, we have issued letters of credit on Belleli's behalf totaling
approximately $17.9 million at June 30, 2002. In July 2001, the Company acquired
a 20% interest in Belleli.

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

We adopted Statement of Financial Accounting Standard ("SFAS") 133 on January 1,
2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the balance
sheet at fair value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, the Company entered into two interest rate swaps which are outstanding at
June 30, 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,
but were extended for an additional two years at the option of the counterparty.
The difference paid or received on the swap transactions is recognized in
leasing expense. These swap transactions expire in July 2003. The Company
recognizes the unrealized gain or loss related to the change in the fair value
of these interest rate swaps in the statement of income because management
decided not to designate the interest rate swaps as hedges at the time they were
extended by the counterparty. At June 30, 2002, $6,524,000 was recorded in
accrued liabilities and $292,000 in other long-term liabilities 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.

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

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

These three swaps, which the Company has designated as cash flow hedging
instruments, meet the specific hedge criteria and any changes in their fair
values have been recognized in other comprehensive income. At June 30, 2002,
$11,254,000 was included in accrued current liabilities and $1,931,000 in other
long-term liabilities with respect to these three swaps.

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

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


                                       21

<PAGE>

equivalent pending a final agreement. The Argentine government also requires the
parties to such contracts to renegotiate the price terms within 180 days of the
devaluation. As a result, we are involved in negotiations with our customers in
Argentina as to the currency in which contract amounts are to be paid, as
mandated by the Argentine government. We have renegotiated the majority of our
agreements in Argentina and expect to renegotiate the remaining agreements
before the end of the third quarter. As a result of these negotiations, we
expect to receive between $8 and $9 million in partial reimbursements for prior
period amounts during the remainder of 2002. For the year ended December 31,
2001, our Argentine operations represented approximately 7% of our revenue and
8% of our EBITDAR, before allocation of corporate sales, general and
administrative expenses. The economic situation in Argentina is subject to
change, and we cannot predict whether the peso will continue to lose value
against the dollar or the terms under which we and our customers will be able to
renegotiate our agreements. To the extent that the situation in Argentina
continues to deteriorate, exchange controls continue in place and the value of
the peso against the dollar is reduced further, Hanover's results of operations
in Argentina may be adversely affected which could result in reductions in
Hanover's net income.

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

NEW ACCOUNTING PRONOUNCEMENTS

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

In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets".
Under SFAS 142, amortization of goodwill over an estimated useful life will be
discontinued. Instead, goodwill amounts will be subject to a fair-value-based
annual impairment assessment. The standard also requires acquired intangible
assets to be recognized separately and amortized as appropriate. SFAS 142 became
effective for Hanover on January 1, 2002. For the three and six months ended
June 30, 2001, our goodwill amortization was approximately $2,926,000 and
$5,405,000. 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 determined that
our reporting units are the same as our business segments and performed our
initial impairment assessment. We determined 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 analysis performed as of June
30, 2002, we recorded an estimated $47,500,000 impairment of goodwill
attributable to our production and processing equipment fabrication business
unit. 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. We may adjust the estimated impairment in our third quarter
results upon completion of the second step of the goodwill impairment test. The
second step of the goodwill impairment test requires us allocate the fair value
of the reporting unit to the production and processing equipment businesses'
assets.

The table below presents the carrying amount of goodwill at June 30, 2002:

<TABLE>
<CAPTION>
                    (in thousands)                        Balance
                                                       June 30, 2002
                                                       -------------

<S>                                                    <C>
Domestic rentals                                          $ 90,306
International rentals                                       33,149
Parts, service and used equipment                           53,788
Compressor fabrication                                      19,176
Production and processing equipment fabrication                 --
                                                          --------
Total                                                     $196,419
                                                          ========
</TABLE>



                                       22

<PAGE>

The table below presents Hanover's results as if goodwill had not been
amortized:

<TABLE>
<CAPTION>

                     (in thousands, except per share amounts)                 Three Months Ended     Six Months Ended
                                                                                June 30, 2001         June 30, 2001
                                                                              -------------------    ----------------
<S>                                                                           <C>                    <C>
     Net income as reported                                                         $21,194               $41,003
     Goodwill amortization, net of tax benefit                                        2,224                 4,108
                                                                                    -------               -------
     Adjusted net income                                                            $23,418               $45,111
                                                                                    =======               =======

     Earnings per common share--basic                                                 $0.33                 $0.66
     Earnings per common share--diluted                                               $0.31                 $0.61
</TABLE>


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                      2001              2000               1999
                                                                      ----              ----               ----
                                                                   (restated)        (restated)
<S>                                                                  <C>               <C>                 <C>
     Net income as reported                                          $72,856           $49,658             $40,441
     Goodwill amortization, net of tax benefit                         8,846             4,280               1,908
                                                                     -------           -------             -------
     Adjusted net income                                             $81,702           $53,938             $42,349
                                                                     =======           =======             =======

     Earnings per common share--basic                                  $1.13             $0.87               $0.74
     Earnings per common share--diluted                                $1.05             $0.81               $0.69

</TABLE>



In June 2001, the FASB issued SFAS 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets." SFAS 143 establishes the accounting
standards for the recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. This statement becomes effective for
Hanover on January 1, 2003. The Company is currently assessing the new standard
and has not yet determined the 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." The new rules supersede SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The new rules retain many of the fundamental recognition and measurement
provisions of SFAS 121, but significantly change the criteria for classifying an
asset as held-for-sale. SFAS 144 became effective for Hanover as of January 1,
2002. 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 FSAB Statement No. 13, and Technical Corrections." The
Statement updates, clarifies and simplifies existing accounting pronouncements.
Provisions of SFAS 145 related to the rescission of Statement 4 are effective
for Hanover 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 July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities, such as
restructuring, involuntarily terminating employees, and consolidating
facilities, initiated after December 31, 2002. We are currently assessing the
new standard and have not yet determined the impact on our consolidated results
of operations, cash flows or financial position.


                                       23

<PAGE>

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to interest rate and foreign currency risk. We periodically enter
into interest rate swaps to manage our exposure to fluctuations in interest
rates. At June 30, 2002, the fair market value of these interest rate swaps was
a liability of approximately $20.0 million, of which $17.8 million was recorded
in accrued liabilities and $2.2 million in other long-term liabilities. We are
party to five interest rate swaps to convert variable lease payments under
certain lease arrangements to fixed payments as follows (in thousands):

<TABLE>
<CAPTION>
                                                        Fair Value of the
                     Company Pays         Notional           Swap at
  Maturity Date        Fixed Rate          Amount         June 30, 2002
  -------------        ----------          ------         -------------
<S>                 <C>                  <C>          <C>

      7/21/2003         5.5100%           $75,000           ($2,531)
      7/21/2003         5.5600%          $125,000           ($4,285)
      3/11/2005         5.2550%          $100,000           ($4,308)
      3/11/2005         5.2725%          $100,000           ($4,177)
     10/26/2005         5.3975%          $100,000           ($4,701)
</TABLE>

We are exposed to interest rate risk on borrowings under our floating rate
revolving credit facility. At June 30, 2002, $223 million was outstanding
bearing interest at a weighted average effective rate of 3.6% per annum.
Assuming a hypothetical 10% increase in weighted average interest rate from
those in effect at June 30, 2002, the increase in annual interest expense for
advances under this facility would be approximately $0.8 million. At June 30,
2002, we are exposed to variable rental rates on the equipment leases we entered
into in June 1999 and October 2000. Assuming a hypothetical 10% increase in
interest rates from those in effect at quarter end, the increase in annual
leasing expense on these equipment leases would be approximately $1.8 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.

In January 2002, Argentina devalued its peso against the U.S. dollar and imposed
significant restrictions on funds transfers internally and outside the country.
In addition, the Argentine government enacted regulations to temporarily
prohibit enforcement of contracts with exchange rate-based purchase price
adjustments. Instead, payment under such contracts can either be made at an
exchange rate negotiated by the parties or, if no such agreement is reached, a
preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending
a final agreement. The Argentine government also requires the parties to such
contracts to renegotiate the price terms within 180 days of the devaluation. As
a result, we are involved in negotiations with our customers as mandated by the
Argentine government. We have renegotiated the majority of our agreements in
Argentina and expect to renegotiate the remaining agreements before the end of
the third quarter. As a result of these negotiations, we expect to receive
between $8 and $9 million in partial reimbursements for prior period amounts
during the remainder of 2002. For the year ended December 31, 2001, our
Argentine operations represented approximately 7% of our revenue and 8% of our
EBITDAR, before allocation of corporate sales, general and administrative
expense. The economic situation in Argentina is subject to change, and we cannot
predict whether the peso will continue to lose value against the dollar or the
terms under which we and our customers will be able to renegotiate our
contracts. To the extent that the situation in Argentina continues to
deteriorate, exchange controls continue in place and the value of the peso
against the dollar is reduced further, our results of operations in Argentina
may be 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. For the year ended December 31, 2001, our
Venezuelan operations represented approximately 7% of our revenue and 11% of our
EBITDAR, before allocation of corporate sales, general and administrative
expense.


                                       24

<PAGE>

PART II. OTHER INFORMATION

Item 1:  Legal Proceedings

Commencing in February 2002, approximately 15 putative securities class action
lawsuits were filed against us and certain of our officers and directors in the
United States District Court of the Southern District of Texas. These class
actions have been consolidated into one case, Pirelli Armstrong Tire Corporation
Retiree Medical Benefits Trust, On Behalf of Itself and All Others Similarly
Situated, Civil Action No. H-02-CV-0410, naming as defendants Hanover Compressor
Company, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A.
O'Connor. The plaintiffs in the securities actions purport to represent
purchasers of our common stock during various periods ranging from May 15, 2000
through January 28, 2002. The complaints assert various claims under Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and seek unspecified
amounts of compensatory damages, interest and costs, including legal fees.
Motions are pending for appointment of lead plaintiff(s). A consolidated
complaint is due 30 days after the Court appoints lead plaintiff(s).

Commencing in February 2002, four derivative lawsuits were filed in the United
States District Court for the Southern District of Texas, two derivative
lawsuits were filed in state district court for Harris County, Texas (one of
which was nonsuited) and one derivative lawsuit was filed in the Delaware State
Court in New Castle County, Delaware. A motion to consolidate the derivative
actions that were filed in the United States District Court for the Southern
District of Texas is currently pending. These six pending derivative lawsuits
are:

<TABLE>
<CAPTION>

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

Roger Koch,          Michael A. O'Connor, William S.          H-02-1332     United States District       4/10/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
Behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
Henry Carranza,      Michael A. O'Connor, William S.          H-02-1430     United States District       4/18/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
William Steves,      Michael A. O'Connor, William S.          H-02-1527     United States District       4/24/02
derivatively on      Goldberg, Melvyn N. Klein, Michael                     Court for the Southern
behalf of Hanover    J. McGhan, Ted Collins, Jr., Robert                    District of Texas
Compressor Company   R. Furguson, Rene J. Huck, Alvin V.
                     Shoemaker, Victor E. Grijalva,
                     Gordon T. Hall, I. Jon Brumley,
                     Defendants and Hanover Compressor
                     Company, Nominal Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
John B. Hensley,     Michael J. McGhan, William S.            H-02-2994     270th Judicial District,      6/20/02
Jr., derivatively    Goldberg, Ted Collins, Jr., Alvin                      Harris County, Texas;
on behalf of         Shoemaker, Robert R. Furgason,                         removed to the United
Hanover Compressor   Melvyn N. Klein, Charles D. Erwin,                     States District Court
Company              PricewaterhouseCoopers LLP,                            for the Southern
                     Defendants and Hanover Compressor                      District of Texas on
                     Company, Nominal Defendant                             August 9, 2002
-------------------- -------------------------------------- --------------- -------------------------- -------------
Coffelt Family,      Michael A. O'Conner, Michael J.           19410-NC     Delaware State Court in      02/15/02
LLC, derivatively    McGhan, William S. Goldberg, Ted                       New Castle County
on behalf of         Collins, Jr., Melvyn N. Klein, Alvin
Hanover Compressor   V. Shoemaker, and Robert R.
Company              Furgason, Defendants and
                     Hanover Compressor Company, Nominal
                     Defendant
-------------------- -------------------------------------- --------------- -------------------------- -------------
</TABLE>

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

The putative class action securities lawsuit and the derivative lawsuits are at
early stage. Consequently, it is not possible at this time to predict whether we
will incur any liability or to estimate the damages, or the range of damage, if
any, that we might incur in connection with such actions, or whether an adverse
outcome could have a material adverse effect on our business, consolidated
financial condition, results of operations or cash flows.

The Fort Worth District Office of the Securities and Exchange Commission has
requested we provide information relating to the matters involved in our
restatement of our financial results for the year ended December 31, 2000 and
the nine months ended September 30, 2001. We are cooperating fully with the
Securities and Exchange Commission's request. It is too soon to determine
whether the outcome of this inquiry will have a material adverse effect on
our business, financial condition, results of operations or cash flows.

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

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

At its Annual Meeting of Stockholders held on May 14, 2002, the Company
presented the following matters to the stockholders for action and the votes
cast are indicated below:

                 Matter                      For               Withheld
                 ------                      ---               --------
1.       Re-election of Directors.

         Victor E. Grijalva              62,394,973            298,543
         Michael A. O'Connor             62,353,369            340,147
         Michael J. McGhan*              62,355,052            338,464
         William S. Goldberg*            62,348,123            345,396
         Ted Collins, Jr.                62,351,448            342,068
         Melvin N. Klein                 62,352,023            341,493
         Alvin V. Shoemaker              62,340,173            353,343
         Robert A. Furgason              62,350,560            342,956
         Rene Huck                       62,313,783            379,733
         I. Jon Brumley                  62,379,382            314,134
         Gordon T. Hall                  62,379,623            313,893
--------------
*    On July 30, 2002 the Company announced the resignation of William S.
     Goldberg as vice chairman and a member of the board of directors, effective
     August 31, 2002. On August 2, 2002, the Company announced the resignation
     Michael J.McGhan as Chief Executive Officer and member of the board of
     directors.

2.       Reappointment of PricewaterhouseCoopers LLP as Independent Accountants

                        For               Against             Abstain
                    61,851,840            826,812             14,863

Item 6:  Exhibits and reports on Form 8-K

   (a)  Exhibits

     10.76  Letter Agreement, by and among Michael J. McGhan, Hanover Compressor
            Company and Herndon Plant Oakley, Ltd. dated July 30, 2002.

     10.77  Separation Agreement, by and among Michael J. McGhan, Hanover
            Compressor Company and Hanover Compression Limited Partnership dated
            August 1, 2002.

     10.78  Separation Agreement, by and among Charles D. Erwin, Hanover
            Compressor Company and Hanover Compression Limited Partnership dated
            August 2, 2002.

     99.1   Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


     99.2   Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                                       25

<PAGE>

   (b)  Reports submitted on Form 8-K:


1.         A report on Form 8-K was filed on April 18, 2002, which reported
           under the caption "Item 5 - Other Events" the appointment of Mark S.
           Berg as Senior Vice President and General Counsel effective May 6,
           2002. The date of such report (the date of the earliest event
           reported) was April 18, 2002.

2.         A report on Form 8-K was filed on May 10, 2002, which reported under
           the caption "Item 5 - Other Events" that the Company would release
           first quarter 2002 earnings before the market opens on Monday, May
           13. The date of such report (the date of the earliest event reported)
           was May 9, 2002.

3.         A report on Form 8-K was filed on May 14, 2002, which reported under
           the caption "Item 5 - Other Events" the Company's financial results
           for the first quarter ended March 31, 2002. This report also included
           a consolidated income statement for the quarter ended March 31, 2002.
           The date of such report (the date of the earliest event reported) was
           May 13, 2002.

4.         A report on Form 8-K was filed on June 19, 2002, which reported under
           the caption "Item 5 - Other Events" that John Jackson, senior vice
           president and chief financial officer, will speak at the Bank of
           America Energy Conference on June 19, 2002. The date of such report
           (the date of the earliest event reported) was June 18, 2002.


                                       26

<PAGE>

                                   SIGNATURES

Pursuant to the requirements 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

Date: August 14, 2002

By: /s/ Victor E. Grijalva
-----------------------------
        Victor E. Grijalva
        Chief Executive Officer and Director


Date: August 14, 2002
By: /s/ John E. Jackson
-----------------------
        John E. Jackson
       Senior Vice President and Chief Financial Officer

                                       27

<PAGE>

                                 Exhibit Index

Exhibit
Number      Description
-------     -----------


10.76       Letter Agreement, by and among Michael J. McGhan, Hanover Compressor
            Company and Herndon Plant Oakley, Ltd. dated July 30, 2002.

10.77       Separation Agreement, by and among Michael J. McGhan, Hanover
            Compressor Company and Hanover Compression Limited Partnership dated
            August 1, 2002.

10.78       Separation Agreement, by and among Charles D. Erwin, Hanover
            Compressor Company and Hanover Compression Limited Partnership dated
            August 2, 2002.

99.1        Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2        Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted
            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002