<PAGE>

                                  UNITED STATES
                       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 MARCH 31, 2003

                                       OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ___________.


                           Commission File No. 1-13071

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


           Delaware                                         76-0625124
    (State or Other Jurisdiction of                      (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 |_|

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

Number of shares of the Common Stock of the registrant outstanding as of May 8,
2003: 80,598,588 shares.

<PAGE>

                          Part I. Financial Information

ITEM 1.  FINANCIAL STATEMENTS

                           HANOVER COMPRESSOR COMPANY
                      CONDENSED CONSOLIDATED BALANCE SHEET
        (in thousands of dollars, except for par value and share amounts)
                                   (unaudited)
<TABLE>
<CAPTION>
<S>                                                                                                        <C>          <C>
                                                                                                         March 31,    December 31,

                                                                                                           2003           2002
                                                                                                           ----           ----
                                              ASSETS

Current assets:
      Cash and cash equivalents ...................................................................   $    20,748     $    19,011
      Accounts receivable, net ....................................................................       249,182         211,722
      Inventory, net ..............................................................................       175,951         166,004
      Costs and estimated earnings in excess of billings on uncompleted contracts .................        60,027          57,346
      Prepaid taxes ...............................................................................         9,559           7,664
      Assets held for sale ........................................................................        67,756          69,408
      Other current assets ........................................................................        47,087          49,933
                                                                                                      -----------     -----------
            Total current assets ..................................................................       630,310         581,088
Property, plant and equipment, net ................................................................     1,169,514       1,167,675
Goodwill, net .....................................................................................       178,712         180,519
Intangible and other assets .......................................................................        76,480          74,058
Investments in non-consolidated affiliates ........................................................       155,502         150,689
                                                                                                      -----------     -----------
            Total assets ..........................................................................   $ 2,210,518     $ 2,154,029
                                                                                                      ===========     ===========

                           LIABILITIES AND COMMON STOCKHOLDERS' EQUITY

Current liabilities:
      Current maturities of long-term debt ........................................................   $    41,919     $    33,741
      Accounts payable, trade .....................................................................        76,421          72,637
      Accrued liabilities .........................................................................       205,158         189,639
      Advance billings ............................................................................        34,192          36,156
      Liabilities held for sale ...................................................................        21,757          22,259
      Billings on uncompleted contracts in excess of costs and estimated earnings .................        14,069          14,571
                                                                                                      -----------     -----------
            Total current liabilities .............................................................       393,516         369,003
Long-term debt ....................................................................................       558,217         521,203
Other liabilities .................................................................................       194,199         137,332
Deferred income taxes .............................................................................        99,751         112,472
                                                                                                      -----------     -----------
            Total liabilities .....................................................................     1,245,683       1,140,010
                                                                                                      -----------     -----------
Commitments and contingencies (Note 7)
Minority interest .................................................................................           115             143
Mandatorily redeemable convertible preferred securities ...........................................        86,250          86,250
Common stockholders' equity:
      Common stock, $.001 par value; 200,000,000 shares authorized; 80,592,005 and 80,815,209
         shares issued, respectively ..............................................................            81              81
      Additional paid-in capital ..................................................................       841,794         841,657
      Deferred employee compensation - restricted stock grants ....................................        (2,115)         (2,285)
      Accumulated other comprehensive loss ........................................................        (9,960)        (13,696)
      Retained earnings ...........................................................................        50,995         104,194
      Treasury stock--253,115 common shares, at cost ..............................................        (2,325)         (2,325)
                                                                                                      -----------     -----------
            Total common stockholders' equity .....................................................       878,470         927,626
                                                                                                      -----------     -----------
            Total liabilities and common stockholders' equity .....................................   $ 2,210,518     $ 2,154,029
                                                                                                      ===========     ===========
</TABLE>


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

                                       2

<PAGE>

                           HANOVER COMPRESSOR COMPANY
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
               (in thousands of dollars, except per share amounts)
                                   (unaudited)
<TABLE>
<CAPTION>
<S>                                                                                           <C>           <C>
                                                                                        Three Months Ended March 31,
                                                                                        ----------------------------
                                                                                              2003         2002
                                                                                              ----         ----
Revenues:
      Domestic rentals ...................................................................   $78,649      $86,134
      International rentals ..............................................................    51,440       42,737
      Parts, service and used equipment ..................................................    37,770       62,291
      Compressor and accessory fabrication ...............................................    21,380       26,058
      Production and processing equipment fabrication ....................................    80,140       33,132
      Equity in income of non-consolidated affiliates ....................................     2,880        4,932
      Other ..............................................................................     1,428          242
                                                                                             -------      -------
                                                                                             273,687      255,526
                                                                                             -------      -------
Expenses:
      Domestic rentals ...................................................................    30,846       29,873
      International rentals ..............................................................    15,020       12,801
      Parts, service and used equipment ..................................................    24,463       53,160
      Compressor and accessory fabrication ...............................................    18,638       22,399
      Production and processing equipment fabrication ....................................    69,562       28,537
      Selling, general and administrative ................................................    39,272       32,720
      Foreign currency translation .......................................................       373       12,681
      Change in fair value of derivative financial instruments ...........................    (1,960)      (2,010)
      Provision for estimated cost of litigation settlement ..............................    68,703          --
      Other ..............................................................................     1,367          211
      Depreciation and amortization ......................................................    34,578       24,295
      Leasing expense ....................................................................    24,653       22,928
      Interest expense ...................................................................    10,554        8,262
      Distributions on mandatorily redeemable convertible preferred securities ...........     1,593        1,593
                                                                                           ---------    ---------
                                                                                             337,662      247,450
                                                                                           ---------    ---------
Income (loss) from continuing operations before income taxes .............................   (63,975)       8,076
Provision for (benefit from) income taxes ................................................   (11,745)       3,246
                                                                                           ---------    ---------
Income (loss) from continuing operations .................................................   (52,230)       4,830
Income from discontinued operations, net of tax ..........................................       475          204
Loss from write down of discontinued operations, net of tax ..............................    (1,444)         --
                                                                                           ---------    ---------
Net income (loss) ........................................................................ $ (53,199)     $ 5,034
                                                                                           ==========   =========
Diluted net income (loss) per share:
      Net income (loss) .................................................................. $ (53,199)     $ 5,034
      (Income) loss from discontinued operations, net of tax .............................       969         (204)
                                                                                           ---------   ----------
Net income (loss) for purposes of computing diluted net income per share from continuing
 operations .............................................................................. $ (52,230)     $ 4,830
                                                                                           =========   ==========
Basic earnings (loss) per common share:
      Income (loss) from continuing operations ........................................... $   (0.65)  $     0.06
      Loss from discontinued operations ..................................................     (0.01)        --
                                                                                           ---------   ----------
Net income (loss) ........................................................................ $   (0.66)  $     0.06
                                                                                           =========   ==========
Diluted earnings (loss) per common share:
      Income (loss) from continuing operations ........................................... $   (0.65)  $     0.06
      Income (loss) from discontinued operations .........................................     (0.01)         --
                                                                                           ---------   ----------
Net income (loss) ........................................................................ $   (0.66)  $     0.06
                                                                                           =========   ==========
Weighted average common and equivalent shares outstanding:
      Basic ..............................................................................    80,435       79,195
                                                                                           ==========  ==========
      Diluted ............................................................................    80,435       82,190
                                                                                           ==========  ==========
</TABLE>
              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                       3

<PAGE>

                           HANOVER COMPRESSOR COMPANY
         CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
                            (in thousands of dollars)
                                   (unaudited)


<TABLE>
<CAPTION>
               <S>                                                                             <C>          <C>
                                                                                          Three Months Ended March 31,
                                                                                          ----------------------------
                                                                                              2003          2002
                                                                                              ----          ----
Net income (loss) .....................................................................      $(53,199)     $ 5,034
Other comprehensive income, net of tax:
      Change in fair value of derivative financial instruments ........................           426        1,959
      Foreign currency translation adjustment .........................................         3,310            4
                                                                                            ---------    ---------
Comprehensive income (loss) ...........................................................     $ (49,463)   $   6,997
                                                                                            =========    =========
</TABLE>

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

                                       4

<PAGE>

                           HANOVER COMPRESSOR COMPANY
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<CAPTION>
<S>                                                                                      <C>            <C>
                                                                                               Three Months
                                                                                              Ended March 31,
                                                                                              ---------------
                                                                                             2003          2002
                                                                                             ----          ----
Cash flows from operating activities:
      Net income (loss) ................................................................. $  (53,199)    $   5,034
      Adjustments:
            Depreciation and amortization ...............................................     34,578        24,295
            Amortization of debt issuance costs and debt discount .......................         30           350
            Loss (income) from discontinued operations, net of tax ......................        969          (204)
            Bad debt expense ............................................................      1,002           467
            Gain on sale of property, plant and equipment ...............................       (886)       (2,065)
            Equity in income of non-consolidated affiliates, net of dividends received ..     (2,880)       (2,194)
            Gain on derivative instruments ..............................................     (1,960)       (2,010)
            Provision for inventory impairment and reserves .............................      1,251            --
            Provision for estimated cost of litigation settlement .......................     68,703            --
            Pay-in-kind interest on Schlumberger note ...................................      5,171         3,571
            Deferred income taxes .......................................................    (13,402)         (122)
            Changes in assets and liabilities:
                  Accounts receivable and notes .........................................     (9,321)       22,316
                  Inventory .............................................................     (8,254)      (27,909)
                  Costs and estimated earnings versus billings on uncompleted contracts .     (2,685)       14,475
                  Accounts payable and other liabilities ................................    (20,803)      (80,040)
                  Advance billings ......................................................     (2,336)          818
                  Other .................................................................         98          (758)
                                                                                             -------      --------
                        Net cash used in continuing operations ..........................     (3,924)      (43,976)
                        Net cash provided by discontinued operations ....................      1,182         1,566
                                                                                             -------      --------
                        Net cash used in operating activities ...........................     (2,742)      (42,410)
                                                                                             -------      --------
Cash flows from investing activities:
      Capital expenditures ..............................................................    (36,383)      (66,401)
      Payments for deferred lease transaction costs .....................................     (1,097)         (326)
      Proceeds from sale of property, plant and equipment ...............................      4,442        27,445
      Cash used to acquire investments in and advances to unconsolidated affiliates .....     (1,531)       (6,474)
                                                                                             -------      --------
                        Net cash used in continuing operations ..........................    (34,569)      (45,756)
                        Net cash used in discontinued operations ........................       (281)       (1,492)
                                                                                             -------      --------
                        Net cash used in investing activities ...........................    (34,850)      (47,248)
                                                                                             -------      --------
Cash flows from financing activities:
      Net borrowings on revolving credit facility .......................................     33,000        71,000
      Payments for debt issue costs .....................................................       (687)         (125)
      Proceeds from warrant conversions and stock options exercised .....................        108            --
      Proceeds from employee stock purchase .............................................        --            593
      Net borrowings (repayments) of other debt .........................................      7,196          (633)
      Proceeds from employee stockholder notes ..........................................         --           372
                                                                                             -------      --------
                        Net cash provided by continuing operations ......................     39,617        71,207
                        Net cash used in discontinued operations ........................       (378)           (2)
                                                                                             -------      --------
                        Net cash provided by financing activities .......................     39,239        71,205
                                                                                             -------      --------
Effect of exchange rate changes on cash and equivalents .................................         90        (1,583)
                                                                                             -------      --------
Net increase (decrease) in cash and cash equivalents ....................................      1,737       (20,036)
Cash and cash equivalents at beginning of period ........................................     19,011        23,191
                                                                                             -------      --------
Cash and cash equivalents at end of period .............................................. $   20,748     $   3,155
                                                                                             =======      ========
</TABLE>

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

                                       5

<PAGE>

                           HANOVER COMPRESSOR COMPANY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Hanover Compressor Company ("Hanover", "we", "us", "our" or the "Company")
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. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America is not required in these interim
financial statements and 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 Hanover
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 our Annual Report on Form 10-K for the year ended
December 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 and
warrants to purchase common stock, convertible senior notes and mandatorily
redeemable preferred securities, unless their effect would be anti-dilutive.

The table below indicates the potential common shares issuable which were
included in computing the dilutive potential common shares used in dilutive
earnings (loss) per common share (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                 <C>         <C>
                                                                                   Three Months Ended
                                                                                       March 31,
                                                                                  --------------------
                                                                                      2003       2002
                                                                                      ----       ----
 Weighted average common shares outstanding--used in basic earnings (loss) per
    common share .................................................................     80,435   79,195
 Net dilutive potential common shares issuable:
       On exercise of options and vesting of restricted stock ....................         **    2,991
       On exercise of warrants ...................................................         **        4
       On conversion of mandatorily redeemable convertible preferred securities ..         **       **
       On conversion of convertible senior notes .................................         **       **
                                                                                       ------   ------
 Weighted average common shares and dilutive potential common shares--used in
  dilutive earnings (loss) per common share ......................................     80,435   82,190
                                                                                       ======   ======
</TABLE>
** Excluded from diluted earnings (loss) per common share as the effect would
have been anti-dilutive.

The table below indicates the potential common shares issuable which were
excluded from diluted potential common shares as their effect would be
anti-dilutive (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                 <C>        <C>
                                                                                    Three Months Ended
                                                                                         March 31,
                                                                                    ------------------
                                                                                         2003    2002
                                                                                         ----    ----
Net dilutive potential common shares issuable:
      On exercise of options and vesting of restricted stock ......................      1,347    --
      On exercise of options-exercise price greater than average market value
       during period ..............................................................      4,319    177
      On exercise of warrants .....................................................          4    --
      On conversion of mandatorily redeemable convertible preferred securities ....      4,825  4,825
      On conversion of convertible senior notes ...................................      4,370  4,370
</TABLE>
                                       6

<PAGE>

Stock-Based Compensation

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


<TABLE>
<CAPTION>
<S>                                                                       <C>            <C>
                                                                       Three months ended March 31,
                                                                       ---------------------------
                                                                              2003         2002
                                                                              ----         ----
Net income (loss) as reported ...........................................   $(53,199)    $ 5,034
      Add back: Restricted stock grant expense, net of tax ..............        170         --
      Deduct: Stock-based employee compensation expense determined
       under the fair value method, net of tax ..........................       (398)       (354)
                                                                            --------     -------
      Pro forma net income (loss) .......................................   $(53,427)    $ 4,680
                                                                            ========     =======
Earnings (loss) per share:
      Basic as reported .................................................   $  (0.66)    $  0.06
      Basic pro forma ...................................................   $  (0.66)    $  0.06
      Diluted as reported ...............................................   $  (0.66)    $  0.06
      Diluted pro forma .................................................   $  (0.66)    $  0.06
</TABLE>

Reclassifications

Certain amounts in the prior year's financial statements have been reclassified
to conform to the 2003 financial statement classification. These
reclassifications have no impact on net income. See Note 11 for a discussion of
discontinued operations.

2. BUSINESS ACQUISITIONS AND COMBINATIONS

2002 Acquisitions

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

We are in the process of completing our valuation of Belleli's intangible
assets. In connection with our increase in ownership in November 2002, each
party has certain buy/sell rights with respect to the interests in Belleli and
the right to market the entire company to a third party. During 2002, we also
purchased certain operating assets of Belleli for approximately $22.4 million
from a bankruptcy estate and leased these assets to Belleli for approximately
$1.2 million per year, for seven years, for use in its operations.

In July 2002, we acquired a 92.5% interest in Wellhead Power Gates, LLC
("Gates") for approximately $14.4 million and had loaned approximately $6
million to Gates prior to our acquisition. Gates is a developer and owner of a
forty-six megawatt cycle peaking power facility in Fresno County, California.
This investment is accounted for as a consolidated subsidiary and has been
classified as an asset held for sale and its operating results are reported in
income (loss) from discontinued operations.

                                       7

<PAGE>

In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC
("Panoche") for approximately $6.8 million and had loaned approximately $5
million to Panoche prior to the acquisition of our interest. Panoche is a
developer and owner of a forty-nine megawatt cycle peaking power facility in
Fresno County, California, which is under contract with California Department of
Water Resources. This investment has been classified as an asset held for sale
and the equity income (loss) from this non-consolidated subsidiary is reported
in income (loss) from discontinued operations.

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

3. INVENTORIES

Inventory consisted of the following amounts (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                       <C>                        <C>
                                                                                    March 31, 2003           December 31, 2002
                                                                                    --------------           -----------------
Parts and supplies .............................................................         $117,724                  $114,833
Work in progress ...............................................................           46,606                    37,790
Finished goods .................................................................           11,621                    13,381
                                                                                         --------                  --------
                                                                                         $175,951                  $166,004
                                                                                         ========                  ========
</TABLE>

As of March 31, 2003 and December 31, 2002 we had inventory reserves of
approximately $16.6 million and $14.2 million, respectively.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                       <C>                        <C>

                                                                                    March 31, 2003           December 31, 2002
                                                                                    --------------           -----------------
Compression equipment, facilities and other rental assets ......................       $1,287,790                $1,261,241
Land and buildings .............................................................           87,140                    86,732
Transportation and shop equipment ..............................................           76,218                    75,443
Other ..........................................................................           34,122                    31,888
                                                                                       ----------                ----------
                                                                                        1,485,270                 1,455,304
Accumulated depreciation .......................................................         (315,756)                 (287,629)
                                                                                       ----------                ----------
                                                                                       $1,169,514                $1,167,675
                                                                                       ==========                ==========
</TABLE>

5. DEBT

Debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S>                                                                                      <C>                         <C>


                                                                                    March 31, 2003           December 31, 2002
                                                                                    --------------           -----------------

Bank credit facility ...........................................................          $189,500                 $156,500
4.75% convertible senior notes due 2008 ........................................           192,000                  192,000
Schlumberger note, interest at 13.5% ...........................................           171,124                  167,096
Real estate mortgage, interest at 3.3%, collateralized by certain land and
   buildings, payable through September 2004 ...................................             3,167                    3,250
Belleli--factored receivables ..................................................            22,644                   15,970
Belleli--revolving credit facility .............................................            13,955                   11,964
Other, interest at various rates, collateralized by equipment and other assets,
   net of unamortized discount .................................................             7,746                    8,164
                                                                                          --------                 --------
                                                                                           600,136                  554,944
Less--current maturities .......................................................           (41,919)                 (33,741)
                                                                                          --------                 --------
Long-term debt .................................................................          $558,217                 $521,203
                                                                                          ========                 ========
</TABLE>

                                       8

<PAGE>

Our bank credit facility as amended and restated to date provides for a $350
million revolving credit facility that matures on November 30, 2004. Advances
bear interest at (a) the greater of the administrative agent's prime rate, the
federal funds effective rate, or the base CD rate, or (b) a eurodollar rate,
plus, in each case, a specified margin (3.8% and 3.2% weighted average interest
rate at March 31, 2003 and December 31, 2002, respectively). A commitment fee
based upon a percentage of the average available commitment is payable quarterly
to the lenders participating in the facility. The fee ranges from 0.25% to 0.50%
per annum and fluctuates with our consolidated leverage ratio. In addition to
the drawn balance on the bank credit facility, as of March 31, 2003, we had
$62.1 million in letters of credit outstanding under our bank credit facility.
The credit facility contains certain financial covenants and limitations on,
among other things, indebtedness, liens, leases and sales of assets. Giving
effect to the covenant limitations in our bank credit agreement, as amended to
date, the availability under the bank credit facility at March 31, 2003 was
approximately $98.4 million. The credit facility also limits the payment of cash
dividends on our common stock to 25% of net income for the period from December
2001 through November 30, 2004. In addition, as of March 31, 2003 we had $4.1
million in letters of credit outstanding under other letters of credit
facilities.

In February 2003, we executed an amendment to our bank credit facility and the
compression equipment leases that we entered into in 1999 and 2000. The
amendment, which was effective December 31, 2002, modifies certain financial
covenants to allow us greater flexibility in accessing the capacity under the
bank credit facility to support our short-term liquidity needs. In addition, at
the higher end of our permitted consolidated leverage ratio, the amendment would
increase the commitment fee under the bank credit facility by 0.125% and
increase the interest rate margins used to calculate the applicable interest
rates under all of the agreements by up to 0.75%. Any increase in our interest
cost as a result of the amendment will depend on our consolidated leverage ratio
at the end of each quarter, the amount of indebtedness outstanding and the
interest rate quoted for the benchmark selected by us. As part of the amendment,
we granted the lenders under these agreements a security interest in the
inventory, equipment and certain other property of Hanover and its domestic
subsidiaries, and pledged 66% of the equity interest in certain of Hanover's
foreign subsidiaries. In consideration for obtaining the amendment, we paid
approximately $1.8 million to the lenders under these agreements. We also agreed
to a restriction on our capital expenditures during 2003, which under the
agreement cannot exceed $200 million.

In connection with the POI Acquisition on August 31, 2001, we issued a $150
million subordinated acquisition note to Schlumberger, which matures December
31, 2005. Interest on the note accrues and is payable-in-kind at the rate of
8.5% annually for the first six months after issuance and periodically increases
in increments of 1% to 2% per annum to a maximum interest rate 42 months after
issuance of 15.5%. In the event of an event of default under the note, interest
will accrue at a rate of 2% above the then applicable rate. The note is
subordinated to all of our indebtedness other than indebtedness issued in
connection with acquisitions. In the event that we complete an offering of
equity securities, we are required to apply the proceeds of the offering to
repay amounts outstanding under the note as long as no default exists or would
exist under our other indebtedness as a result of such payment. On May 14, 2003,
we entered into an agreement to restructure the note (See Note 12).

In November 2002, we increased our ownership in Belleli to 51%. (See Note 2).
Belleli has financed its growth through the factoring of its receivables. Such
factoring is typically short term in nature and at March 31, 2003 bore interest
at a weighted average rate of 3.95%. In addition, Belleli's revolving credit
facilities bore interest at a weighted average rate of 4.0% and 3.0% at March
31, 2003 and December 31, 2002, respectively. These revolving credit facilities
expire in September and December of 2003 and are secured by letters of credit
issued and outstanding under Hanover's bank credit facility of $7.7 million as
of March 31, 2003.

6. ACCOUNTING FOR DERIVATIVES

We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended by SFAS 137 and SFAS 138, effective January
1, 2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the balance
sheet at fair value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, we entered into two interest rate swaps which were outstanding at March
31, 2003 with notional amounts of $75 million and $125 million and strike rates
of 5.51% and 5.56%,

                                       9

<PAGE>

respectively. These swaps were to expire in July 2001, however, they were
extended for an additional two years at the option of the counterparty and now
expire in July 2003. The difference paid or received on the swap transactions is
recorded as an accrued lease liability and is recognized in leasing expense.
During the quarters ended March 31, 2003 and 2002, we recognized an unrealized
gain of approximately $2.0 million in each quarter related to the change in the
fair value of these interest rate swaps in our statement of operations because
management decided not to designate the interest rate swaps as hedges at the
time they were extended by the counterparty. At March 31, 2003, we recorded
approximately $2.7 million in accrued current liabilities with respect to the
fair value adjustment related to these interest rate swaps. The fair value of
these interest rate swaps will fluctuate with changes in interest rates over
their remaining terms and the fluctuations will be recorded in our statement of
operations.

During the second quarter of 2001, we entered into three additional interest
rate swaps to convert variable lease payments under certain lease arrangements
to fixed payments as follows:
<TABLE>
<CAPTION>
      <S>                             <C>                               <C>                              <C>
     Lease                        Maturity Date                     Strike Rate                    Notional Amount
     -----                        -------------                     -----------                    ---------------
   March 2000                     March 11, 2005                       5.2550%                       $100,000,000
   August 2000                    March 11, 2005                       5.2725%                       $100,000,000
  October 2000                   October 26, 2005                      5.3975%                       $100,000,000
</TABLE>

These three swaps, which we have designated as cash flow hedging instruments,
meet the specific hedge criteria and any changes in their fair values have been
recognized in other comprehensive income. During the quarters ended March 31,
2003 and 2002, we recorded income of approximately $0.7 million and $3.0
million, respectively, related to these three swaps, ($0.4 million and $2.0
million, net of tax) in other comprehensive income. As of March 31, 2003, a
total of approximately $12.1 million was recorded in current liabilities and
approximately $10.2 million in long-term liabilities with respect to the fair
value adjustment related to these three swaps.

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

                                       10

<PAGE>

7. COMMITMENTS AND CONTINGENCIES

Hanover has issued the following guarantees which are not recorded on our
Condensed Consolidated Balance Sheet:
<TABLE>
<CAPTION>
          <S>                                                         <C>                   <C>
                                                                                      Maximum Potential
                                                                                        Undiscounted
                                                                                       Payments as of
                                                                      Term             March 31, 2003
                                                                      ----             --------------
                                                                                       (in thousands)

Indebtedness of non-consolidated affiliates:
     Simco/Harwat Consortium/1/ ..................................     2003               $ 12,461
     El Furrial/1/ ...............................................     2013                 42,523

Other:
Leased compression equipment residual value ......................   2004-2011             881,299
Performance guarantees through letters of credit/2/ ..............   2003-2007              34,929
Standby letters of credit ........................................   2003-2004              31,298
Bid bonds and performance bonds/2/ ...............................   2003-2007              69,999
                                                                                        ----------
                                                                                        $1,072,509
                                                                                        ==========
</TABLE>

/1/  We have guaranteed the amount included above, which is a percentage of the
     debt of this non-consolidated affiliate equal to our ownership percentage
     in such affiliate.

/2/  We have issued guarantees to third parties to ensure performance of our
     obligations some of which may be fulfilled by third parties.

As part of the POI acquisition, as of December 31, 2002 we were required to pay
up to $58 million to Schlumberger from the proceeds of the financing of PIGAP
II, a South American joint venture, a 30% interest of which was acquired by
Hanover in the acquisition of POI. Because the joint venture failed to execute
the financing on or before December 31, 2002, we had the right to put our
interest in the joint venture back to Schlumberger in exchange for a return of
the purchase price allocated to the joint venture, plus the net amount of any
capital contributions by Hanover to the joint venture. In January 2003, we gave
notice that we intended to exercise our right to put our interest in the joint
venture back to Schlumberger. If notice had not been given, the put right would
have expired as of February 1, 2003. The consummation of the transfer of
Hanover's interest in the joint venture back to Schlumberger is subject to
certain consents. At December 31, 2002, Hanover expected the $58 million
obligation together with accrued interest to be paid in 2003. This obligation is
recorded in accrued liabilities in the accompanying balance sheet. The purchase
price is also subject to a contingent payment by Hanover to Schlumberger based
on the realization of certain tax benefits by Hanover over the next 15 years. On
May 14, 2003, we entered into an agreement to modify the repayment terms of the
$58 million obligation. (See Note 12).

Litigation and Securities and Exchange Commission Investigation
---------------------------------------------------------------

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

On January 24, 2003, Plumbers & Steamfitters, Local 137 Pension Fund and John
Petti filed a putative securities class action against PricewaterhouseCoopers
LLP, which is Hanover's auditor. The alleged class was all persons

                                       11

<PAGE>

who purchased the equity or debt securities of Hanover from March 8, 2000
through and including October 23, 2002. On February 13, 2003, the court
consolidated this action with Civil Action No. H-02-0410 described above.

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

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

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

Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas.

On and after March 26, 2003, three plaintiffs filed separate putative class
actions collectively against Hanover, Michael McGhan, Michael O'Connor, William
Goldberg and Chad Deaton (and other purportedly unknown defendants) in the
United States District Court for the Southern District of Texas. The alleged
class is comprised of persons who participated in or were beneficiaries of The
Hanover Companies Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal Revenue Code of 1986,
as amended. The purported class action seeks relief under the Employee
Retirement Income Security Act (ERISA) based upon Hanover's and the individual
defendants' alleged mishandling of Hanover's 401(k) Plan. The three ERISA
putative class actions are entitled: Kirkley v. Hanover, Case No. H-03-1155;
Angleopoulos v. Hanover, Case No. H-03-1064; and Freeman v. Hanover, Case No.
H-03-1095.

On May 12, 2003, Hanover reached agreement, subject to court approval, to settle
the securities class actions, the ERISA class actions and the shareholder
derivative actions described above. The terms of the proposed settlement provide
for Hanover to: (i) make a cash payment of approximately $30 million (of which
$26.7 million is to be funded by payments from Hanover's directors and officers
insurance carriers), (ii) issue 2.5 million shares of common stock, and (iii)
issue a contingent note with a principal amount of $6.7 million. The note is
payable, together with accrued interest, on March 31, 2007 but can be
extinguished (with no monies owing under it) if Hanover's common stock trades at
or above the average price of $12.25 for 15 consecutive days at any time between
March 31, 2004 and March 31, 2007. As part of the settlement, Hanover has also
agreed to implement corporate governance enhancements, including allowing large
shareholders to participate in the process to appoint two independent directors
to Hanover's Board. The Company's auditor, PricewaterhouseCoopers, is not a
party to the settlement and will continue to be a defendant in the consolidated
securities class action.

GKH Investments, L.P., and GKH Private Limited (collectively "GKH") which
together own approximately ten percent of Hanover's outstanding common stock and
which sold shares in the Company's March 2001 secondary offering of common stock
are parties to the proposed settlement and have agreed to settle claims against
them that arise out of that offering as well as other potential securities,
ERISA, and derivative claims. The terms of the proposed settlement provide for
GKH to transfer 2.5 million shares of common stock from their holdings or from
other sources.

In connection with this settlement, Hanover recorded a pre-tax charge of
approximately $68.7 million ($54.0 million after-tax) in its first quarter 2003
financial statements. This charge includes approximately $42.1 million ($27.4
million after-tax), net of insurance recoveries, for Hanover's contribution of
cash and estimated costs, 2.5 million common shares, and the contingent note.

The charge also includes approximately $26.6 million, without tax benefit, for
2.5 million common shares to be funded by GKH. The offsetting effect of the
$26.6 million expense is expected to be ultimately recorded in equity when the
funding of Hanover common shares by GKH is completed. Because this settlement
may be considered to be a related party transaction as defined in SAB 5-T, the
fair value of the GKH shares was recorded as an expense in Hanover's statement
of operations. Hanover is considering seeking guidance from the Securities and
Exchange Commission to determine whether the common shares provided by GKH
should be recorded as an expense.



                                       12

<PAGE>

Based on the terms of the settlement agreement, we determined that a liability
related to these lawsuits was probable and that the value was reasonably
estimable. Accordingly, we evaluated the individual components of the settlement
in consideration of existing market conditions and established an estimate for
the cost of the litigation settlement. The details of this estimate are as
follows (in thousands):
<TABLE>
<CAPTION>
<S>                                                                        <C>             <C>                   <C>

                                                                           Hanover            GKH
                                                                         Settlement       Settlement            Total
                                                                         ----------       ----------            -----
Cash ................................................................    $ 30,050            $    --         $ 30,050
Estimated fair value of note to be issued ...........................       5,194                 --            5,194
Common stock to be issued by Hanover ................................      26,600                 --           26,600
Hanover common stock to be  funded by GKH ...........................          --             26,600           26,600
Legal fees and administrative costs .................................       6,929                 --            6,929
                                                                         --------            -------         --------
Total ...............................................................      68,773             26,600           95,373
Less insurance recoveries ...........................................     (26,670)                --          (26,670)
                                                                         --------           --------         --------
               Net estimated litigation settlement ..................    $ 42,103           $ 26,600         $ 68,703
                                                                         ========           ========         ========
</TABLE>

The $5.2 million estimated fair value of the note to be issued was based on the
present value of the future cash flows discounted at borrowing rates currently
available for debt with similar terms and maturities. Utilizing a
market-borrowing rate of 11%, the principal value and stipulated interest rate
required by the note of 5% per annum, an estimated discount of $1.5 million was
computed on the note to be issued. Upon the issuance of the note, the discount
will be amortized to interest expense over the term of the note. Because the
note could be extinguished without a payment (if Hanover's common stock trades
at or above the average price of $12.25 for 15 consecutive days at any time
between March 31, 2004 and March 31, 2007), we will be required to record an
asset in future periods for the value of the embedded derivative, as required by
SFAS 133, when the note is issued. This asset will be marked to market in future
periods with any increase or decrease included in our statement of operations.

We recorded a receivable of $26.7 million related to the expected amount of
insurance recoveries and a $58.4 million long-term liability in the accompanying
balance sheet pending approval by the courts and satisfaction of certain other
conditions and $37.0 million in accounts payable and accrued expenses related to
amounts which are expected to be paid in the next twelve months. Upon issuance
of the note and common stock, we will record such amounts in liabilities and
stockholders' equity, respectively, and will include the shares in our
outstanding shares used for earnings per share calculations. The shares to be
funded by GKH are currently outstanding shares.

The final value of the settlement may differ significantly from the estimates
currently recorded depending on a variety of factors including the market value
of the our common stock when issued and potential changes in the market
conditions affecting the valuation of the note to be issued. Additionally, the
settlement is contingent on confirmatory discovery, final documentation, court
approval and certain other conditions. Accordingly, we will revalue the estimate
of the settlement on a quarterly basis and at the time the securities are
issued.

On May 13, 2003, Hanover moved to consolidate all of the ERISA actions and the
consolidated shareholder derivative action into the consolidated securities
class action. In addition, Hanover, and the other defendants in the actions,
together with the plaintiffs that entered into the settlement filed a motion in
the consolidated securities action pursuant to which the parties have agreed to
seek preliminary approval of the court for the settlement by September 29, 2003.
The settlement is subject to court approval and could be the subject of an
objection by

                                       13

<PAGE>

shareholders as well as from plaintiff's counsel to Harbor Finance in the
shareholder derivative matter and plaintiffs' counsel in the Angleopoulos
(H-03-1064) and the Freeman (H-03-1095) ERISA matters who were not signatories
to the agreement reached among the remaining parties.

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

As of March 31, 2003, we had incurred approximately $9.7 million in legal
related expenses in connection with the internal investigations, the putative
class action securities lawsuits, the derivative lawsuit and the Securities and
Exchange Commission investigation. Of this amount, we incurred approximately
$1.2 million on behalf of officers and directors in connection with the
above-named proceedings. We intend to pay the litigation costs of our officers
and directors, subject to the limitations imposed by Delaware and other
applicable law and Hanover's certificate of incorporation and bylaws. We expect
to incur approximately $6.9 million in additional legal fees and administrative
expenses in connection with the settlement of the securities-related litigation.

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

8. RELATED PARTY TRANSACTIONS

In connection with the restatements announced by Hanover in 2002, certain
present and former officers and directors have been named as defendants in
putative stockholder class actions, stockholder derivative actions and have been
involved with the investigation being conducted by the Staff of the Securities
and Exchange Commission. Pursuant to the indemnification provisions of Hanover's
articles of incorporation and bylaws, we paid legal fees on behalf of certain
employees, officers and directors involved in these proceedings. In this
connection, expenses incurred on behalf of indemnified officers and directors
during 2002 and the first quarter of 2003 totaled $1.1 million and $0.1 million,
respectively, in the aggregate. Of this amount, during 2002, $0.4 million was
incurred on behalf of former director and officer William S. Goldberg; and $0.3
million was incurred on behalf of former director and officer Michael J. McGhan;
$0.1 million was incurred on behalf of former officer Charles D. Erwin; and $0.1
million was incurred on behalf of former officer Joe S. Bradford; $0.2 million
was incurred on behalf of directors Ted Collins, Jr., Robert R. Furgason, Rene
Huck, Melvyn N. Klein, Michael A. O'Connor, and Alvin V. Shoemaker, who were
elected prior to 2002; and $0.1 million was incurred on behalf of directors I.
Jon Brumley, Victor E. Grijalva, and Gordon T. Hall who were elected during
2002.

9. NEW ACCOUNTING PRONOUNCEMENTS

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

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

                                       14

<PAGE>

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

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

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

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

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

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). This Statement
amends and clarifies financial accounting and reporting for

                                       15

<PAGE>

derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of this Statement
will be applied prospectively. We are currently evaluating the impact of
adoption of SFAS 149 on our financial position and results of operations.

In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
The Statement changes the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
interim period beginning after June 15, 2003. We are currently evaluating the
impact of adoption of SFAS 150 on our financial position and results of
operations.

10. REPORTABLE SEGMENTS

We manage our business segments primarily on the type of product or service
provided. We have five principal industry segments: Domestic Rentals,
International Rentals, Parts, Service and Used Equipment, Compressor
Fabrication, and Production and Processing Equipment Fabrication. The Rentals
segments primarily provide natural gas compression and production and processing
equipment rental and maintenance services to meet specific customer requirements
on Hanover owned assets. The Parts, Service and Used Equipment segment provides
a full range of services to support the surface production needs of customers
from installation and normal maintenance and services, to full operation of a
customer's owned assets and surface equipment. In addition, sales of used
equipment are included in our Parts, Service and Used Equipment segment. The
Compressor Fabrication Segment involves the design, fabrication and sale of
natural gas compression units and accessories to meet unique customer
specifications. The Production and Processing Equipment Fabrication Segment
designs, fabricates and sells equipment utilized in the production and treating
of crude oil and natural gas and engineering, procurement and construction of
desalination plants.

We evaluate the performance of our segments based on segment gross profit.
Segment gross profit for each segment includes direct operating expenses. Costs
excluded from segment gross profit include selling, general and administrative,
depreciation and amortization, leasing, interest, foreign currency translation,
distributions on mandatorily redeemable convertible preferred securities, change
in value of derivative instruments, goodwill impairment, other expenses and
income taxes. Amounts defined as "Other" include equity in income of
nonconsolidated affiliates, results of other insignificant operations and
corporate related items primarily related to cash management activities.
Revenues include sales to external customers and intersegment sales.
Intersegment sales are accounted for at cost, except for compressor fabrication
sales which are accounted for on an arms length basis. Intersegment sales and
any resulting profits are eliminated in consolidation. Identifiable assets are
tangible and intangible assets that are identified with the operations of a
particular segment or geographic region, or which are allocated when used
jointly.

                                       16

<PAGE>

The following tables present sales and other financial information by industry
segment for the three months ended March 31, 2003 and 2002.

   Industry Segments
<TABLE>
<CAPTION>
  <S>                                   <C>       <C>            <C>        <C>          <C>        <C>        <C>          <C>

                                                                 Parts,
                                                                service                Production
                                      Domestic  International  and used   Compressor   equipment
                                       rentals   rentals       equipment  fabrication  fabrication  Other  Elimination  Consolidated
                                       -------   -------       ---------  -----------  -----------  -----  -----------  ------------
                                                                          (in thousands of dollars)
2003:
   Revenues from external customers .. $ 78,649   $ 51,440      $37,770    $ 21,380     $ 80,140    $ 4,308    $   --      $ 273,687
   Intersegment sales ................      --       3,314       27,108       1,930        2,017        --     (34,369)          --
                                       --------   --------      -------    --------     --------    -------    -------     ---------
        Total revenues ...............   78,649     54,754       64,878      23,310       82,157      4,308    (34,369)      273,687

   Gross profit ......................   47,803     36,420       13,307       2,742       10,578      4,308        --        115,158

   Identifiable assets ..............   795,204    802,395       86,773      90,367      259,529    176,250        --      2,210,518

2002:
   Revenues from external customers .  $ 86,134   $ 42,737     $ 62,291    $ 26,058     $ 33,132    $ 5,174    $   --      $ 255,526
   Intersegment sales ...............       --         341        8,014      31,284        2,956      1,578    (44,173)          --
                                       --------   --------     --------    --------     --------    -------    -------     ---------
         Total revenues .............    86,134     43,078       70,305      57,342       36,088      6,752    (44,173)      255,526

   Gross profit .....................    56,261     29,936        9,131       3,659        4,595      5,174        --        108,756

   Identifiable assets ..............   793,841    751,976      159,337     122,193      200,404    215,762        --      2,243,513
</TABLE>


                                       17

<PAGE>

11. DISCONTINUED OPERATIONS

During 2002, Hanover's Board of Directors approved management's plan to dispose
of our non-oilfield power generation projects, which were part of our domestic
rental business, and certain used equipment businesses, which were part of our
parts and service business. These disposals meet the criteria established for
recognition as discontinued operations under SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144"). SFAS 144
specifically requires that such amounts must represent a component of a business
comprised of operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
These businesses have been reflected as discontinued operations in our Condensed
Consolidated Statement of Operations for the quarters ended March 31, 2003 and
2002. These assets are expected to be sold during 2003 and the assets and
liabilities are reflected as Assets held for sale on our Condensed Consolidated
Balance Sheet.

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

                                                            Three Months Ended
                                                            ------------------
                                                                 March 31,
                                                                 ---------
                                                             2003        2002
                                                             ----        ----
Revenues and other:
    Domestic rentals .....................................  $1,671       $  --
    Parts, service and used equipment ....................   3,629        5,296
    Equity in income of non-consolidated affiliates ......     414          --
    Other ................................................     (87)          84
                                                            ------       ------
                                                             5,627        5,380
                                                            ------       ------

Expenses:
    Domestic rentals .....................................     299          --
    Parts, service and used equipment ....................   2,504        3,034
    Selling, general and administrative ..................   1,684        1,951
    Depreciation and amortization ........................     --            81
    Interest expense .....................................     304          --
    Other ................................................      46          --
                                                            ------       ------
                                                             4,837        5,066
                                                            ------       ------
Income from discontinued operations before income taxes ..     790          314
Provision for income taxes ...............................     315          110
                                                            ------       ------
Income from discontinued operations ......................  $  475       $  204
                                                             =====       ======

Summary balance sheet data for discontinued operations as of March 31, 2003 (in
thousands):
                                                        Non-Oilfield
                                             Used           Power
                                           Equipment     Generation     Total
                                           ---------     ----------     -----
Current assets ...........................  $19,924       $14,337       $34,261
Property plant and equipment .............      858        26,299        27,157
Non-current assets .......................      --          6,338         6,338
                                            -------       -------       -------
     Assets held for sale ................   20,782        46,974        67,756
                                            -------       -------       -------
Current liabilities ......................      --          3,133         3,133
Non-current liabilities ..................      --         18,624        18,624
                                            -------       -------       -------
     Liabilities held for sale ...........      --         21,757        21,757
                                            -------       -------       -------
          Net assets held for sale .......  $20,782       $25,217       $45,999
                                            =======       =======       =======

Loss from the write down of discontinued operations was $1.4 million during the
three months ended March 31, 2003 and related to an additional write down of our
discontinued operations to their estimated market value.

                                       18

<PAGE>

12. SUBSEQUENT EVENTS

Panoche and Gates Transaction

On May 8, 2003, Hanover announced that it had agreed to sell its 49% membership
interest in Panoche and its 92.5% membership interest in Gates to Hal Dittmer
and Fresno Power Investors Limited Partnership (the "Purchasers"), who currently
own the remaining interests in Panoche and Gates. Panoche and Gates own gas
fired peaking power plants of 49 megawatts and 46 megawatts, respectively. Total
consideration for the transaction is approximately $28 million consisting of
approximately $3.1 million for Hanover's membership interests in Panoche and
Gates, $6.9 million for loans from Hanover to Panoche and Gates, and the release
of Hanover's obligations under a capital lease from GE Capital to Gates that is
included on Hanover's accompanying Condensed Consolidated Balance Sheet as a
liability held for sale and has a current outstanding balance of approximately
$18 million. Upon closing, Hanover will receive approximately $7.2 million in
cash and $2.8 million in notes that mature in May 2004. The notes will be
secured by the assets and stock of Santa Maria Cogen, Inc., the operator of a 9
megawatt power plant in Santa Maria, California. In addition, Hanover will be
released from a $12 million letter of credit from Hanover to GE Capital that was
provided as additional credit support for the Gates capital lease. The Panoche
and Gates transactions are expected to close separately on different dates but
Hanover expects that both transactions will close by mid 2003. Each of the
Panoche and Gates transactions are subject to customary closing conditions.

PIGAP II Put and Subordinated Note Restructuring

On May 14, 2003, Hanover entered into an agreement with Schlumberger to
terminate the PIGAP II Put in return for Schlumberger agreeing to the
restructuring of the $150 million subordinated note (the "Note") that
Schlumberger received from Hanover in August 2001 as part of the purchase price
for the acquisition of POI. Hanover had previously given notice of its intent to
exercise the PIGAP II Put in January 2003. The finalization of this agreement is
subject to consent by Hanover's lender group.

A comparison of the primary financial terms of the original $150 million
subordinated note and the restructured Note are shown in the table below.
<TABLE>
<CAPTION>
        <S>                                            <C>                                           <C>
      Primary Financial Term                        Restructured Note                        Original Note
      ----------------------                        -----------------                        -------------
Principal Outstanding at March 31, 2003:      $171 million                               $171 million

Maturity:                                     March 31, 2007                             December 31, 2005

Interest Rate:                                Zero coupon accreting at 11.0% fixed       13.5% currently, 14.5%
                                                                                         beginning March 1, 2004,
                                                                                         15.5% beginning March 1, 2005

Schlumberger  First  Call  Rights on          None                                       Schlumberger had first call
Hanover Equity Issuance:                                                                 on any Hanover equity
                                                                                         offering proceeds

Call Provision:                               Hanover cannot call the Note prior to      Callable at any time
                                              March 31, 2006
</TABLE>

As of March 31, 2003, the $150 million subordinated note had an outstanding
principal balance of approximately $171 million, including accrued interest.
Under the new terms, the maturity of the Note has been extended to March 31,
2007, from the original maturity of December 31, 2005. The Note will be a zero
coupon note with interest accruing at 11.0% for its remaining life. The Note
will accrue an additional 2.0% interest upon the occurrence and during the
continuance of an event of default under the Note. The Note will also accrue an
additional 3.0% interest if Hanover's "consolidated leverage ratio" exceeds 5.18
to 1.0 as of the end of two consecutive fiscal quarters.

                                       19

<PAGE>

Notwithstanding the foregoing, the Note will accrue additional interest of a
total of 3.0% if both of the previously mentioned circumstances occur. The Note
also contains a covenant that limits our ability to incur additional
indebtedness if Hanover's "consolidated leverage ratio" exceeds 5.6 to 1.0,
subject to certain exceptions. Schlumberger will no longer have a first call on
any proceeds from the issuance of any shares of capital stock or other equity
interests by Hanover and the Note is not callable until March 31, 2006. Hanover
has agreed to file a shelf registration statement covering the sale of the Note
by Schlumberger.

Hanover and Schlumberger have also agreed to the modification of the repayment
terms of a $58 million obligation associated with the PIGAP II joint venture
("PIGAP Note") that Hanover currently accounts for as a contingent liability on
its balance sheet. The PIGAP Note will be structured as a non-recourse note
payable by Hanover Cayman Limited, our indirect wholly owned consolidated
subsidiary, with a 6% interest rate compounding semi-annually. It will be
payable only from distributions received from the PIGAP II joint venture. Should
no distributions from the PIGAP II joint venture be available at the time of an
interest payment, interest will accrue and be added to the principal balance of
the PIGAP Note. Payments will first be applied to accrued interest, and then to
principal. Hanover Cayman will not receive any distributions from the joint
venture until the PIGAP Note has been paid off.

For financial accounting purposes, the above described changes to the Note and
PIGAP Note will not be considered an extinguishment of debt.

                                       20

<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
and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements can generally be identified as such because of the context of the
statement or because the statement may include words such as "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe our future plans, objectives or goals or future
revenues or other financial metrics are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause our actual results to differ materially from those anticipated as of
the date of this report. These risks and uncertainties include:

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

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

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

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

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

     o    the loss of market share through competition;

     o    the introduction of competing technologies by other companies;

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

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

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

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

     o    our inability to comply with loan and lease covenants;

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

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

     o    our inability to successfully integrate acquired businesses;

     o    currency fluctuation;

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

     o    our inability to conclude the agreed upon settlement of the
          securities-related litigation and restructuring of our subordinated
          note payable to Schlumberger;

     o    fluctuations of our net income attributable to changes in the fair
          value of our common stock which will be used to fund the settlement of
          the securities-related litigation;

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

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

                                       21

<PAGE>

Other factors besides those described in this Form 10-Q could also affect our
actual results. You should not unduly rely on the forward-looking statements
contained in this Form 10-Q, which speak only as of the date of this Form 10-Q.
We undertake no obligation to publicly revise any forward-looking statement to
reflect circumstances or events after the date of this Form 10-Q or to reflect
the occurrence of unanticipated events. You should, however, review the factors
and risks we describe in our Annual Report for the year ended December 31, 2002,
on Form 10-K and the reports we file from time to time with the SEC after the
date of this Form 10-Q. All forward-looking statements attributable to our
Company are expressly qualified in their entirety by this cautionary statement.


GENERAL

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

We have grown through internal growth and through acquisitions. For 2003, we
plan to reduce our capital spending and focus on completing the integration of
recent acquisitions. In addition, we plan to reduce our headcount by
approximately 500 employees worldwide and consolidate our fabrication operations
into 9 fabrication centers down from the 13 fabrication centers we had as of
December 31, 2002. The estimated annualized savings from these actions are
expected to be approximately $20 million. During the fourth quarter of 2002, we
accrued approximately $2.8 million in employee separation costs related to the
reduction in workforce. During the three months ended March 31, 2003, we have
paid approximately $0.8 million in separation benefits. Since December 31, 2002,
our workforce has decreased by approximately 280 employees. We continue to work
on the consolidation of fabrication centers.


RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

REVENUES

Our total revenues increased by $18.2 million, or 7%, to $273.7 million during
the three months ended March 31, 2003 from $255.5 million during the three
months ended March 31, 2002. The increase resulted primarily from the
consolidation of the results of Belleli Energy S.r.l. which are included as part
of our production and processing equipment business. In July 2002, we increased
our ownership of Belleli Energy S.r.l. to 40.3% from 20.3% by converting a $4.0
million loan, together with accrued interest thereon, to Belleli into additional
equity ownership. In November 2002, we increased our ownership to 51% by
exchanging a $9.4 million loan, together with accrued interest thereon, to the
other principal owner of Belleli for additional equity ownership and began
consolidating the results of Belleli's operations.

Revenues from rentals increased $1.2 million, or 1%, to $130.1 million during
the three months ended March 31, 2003 from $128.9 million during the three
months ended March 31, 2002. Domestic revenues from rentals decreased by $7.5
million, or 9%, to $78.6 million during the three months ended March 31, 2003
from $86.1 million during the three months ended March 31, 2002. International
rental revenues increased by $8.7 million, or 20%, to $51.4 million during the
three months ended March 31, 2003 from $42.7 million during the three months
ended March 31, 2002. The decrease in domestic revenues was primarily
attributable to weaker market conditions which resulted in a lower utilization
of our rental fleet. International rental revenue increased primarily from: (i)
the expansion of our business operations, (ii) the recognition of approximately
$1.7 million in billings to Venezuelan customers in the first quarter of 2003
which were not recognized in 2002 due to concerns about the ultimate receipt of
these revenues

                                       22

<PAGE>

as a result of the strike by workers of the national oil company in Venezuela
and (iii) a $1.9 million fee received for the modification of a contract in
Venezuela. At March 31, 2003, we had approximately $34.1 million in accounts
receivable related to our Venezuelan operations.

At March 31, 2003, the compressor rental fleet consisted of approximately
3,545,000 horsepower, a 0.3% decrease from the 3,554,000 horsepower in the
rental fleet at March 31, 2002. Domestic horsepower in the rental fleet
decreased by 3% to 2,653,000 horsepower at March 31, 2003 from approximately
2,735,000 horsepower at March 31, 2002. In addition, international horsepower
increased by 9% to 892,000 horsepower at March 31, 2003 from approximately
819,000 horsepower at March 31, 2002. Our compression horsepower utilization
rate was approximately 79% at March 31, 2003 compared to 85% at March 31, 2002.

Revenue from parts, service and used equipment decreased by $24.5 million, or
39%, to $37.8 million during the three months ended March 31, 2003 from $62.3
million during the three months ended March 31, 2002. This decrease was
primarily due to a $26.5 million gas plant sale transaction included in the
first quarter of 2002.

Revenues from compressor and accessory fabrication decreased by $4.7 million, or
18%, to $21.4 million during the three months ended March 31, 2003 from $26.1
million during the three months ended March 31, 2002. During the three months
ended March 31, 2003, an aggregate of approximately 29,000 horsepower of
compression equipment was fabricated and sold compared to approximately 41,000
horsepower fabricated and sold during the three months ended March 31, 2002. In
addition, approximately 1,200 horsepower was fabricated and placed in the rental
fleet during the three months ended March 31, 2003 compared to 52,600 in the
three months ended March 31, 2002. The decrease in sales of compressor
fabrication in the three months ended March 31, 2003 was due primarily to the
lower capital spending by customers as a consequence of recent political events
in South America and domestic economic market conditions. The North and South
American rig count increased by 25% from a year ago, to 1,616 at March 31, 2003
from 1,295 at March 31, 2002. However, the twelve month rolling average North
and South American rig count decreased by 17% as of March 31, 2003 to 1,357 from
1,636 at March 31, 2002. In addition, the twelve month rolling average Henry Hub
wellhead natural gas price increased to $4.28 per Mcf in the first quarter of
2003 from $3.08 per Mcf in the first quarter of 2002.

Revenues from production and processing equipment fabrication increased by $47.0
million, or 142%, to $80.1 million during the three months ended March 31, 2003
from $33.1 million during the three months ended March 31, 2002. The increase in
production and processing equipment revenues is primarily due to the inclusion
of $35.7 million in revenues from the consolidation of Belleli.

Equity in income of non-consolidated affiliates decreased by $2.0 million, or
42%, to $2.9 million during the three months ended March 31, 2003, from $4.9
million during the three months ended March 31, 2002. This decrease is primarily
due to a fire that occurred at a facility owned by one of our minority owned
Venezuelan non-consolidated affiliates.

EXPENSES

Operating expenses for domestic rentals increased by $0.9 million, or 3%, to
$30.8 million during the three months ended March 31, 2003 from $29.9 million
during the three months ended March 31, 2002. The gross profit percentage from
rentals was 61% during the three months ended March 31, 2003 and 65% during the
three months ended March 31, 2002. The decrease in gross profit percentage was
due to a lower overall utilization of our domestic rental fleet without a
corresponding decrease in overhead and expenses. Operating expenses for
international rentals increased by $2.2 million, or 17%, to $15.0 million during
the three months ended March 31, 2003 from $12.8 million during the three months
ended March 31, 2002. The increase was primarily attributable to the increase in
international rental revenues. The gross profit percentage from international
rentals was 71% during the three months ended March 31, 2003 and 70% during the
three months ended March 31, 2002.

Operating expenses for our parts, service and used equipment business decreased
by $28.7 million, or 54%, to $24.5 million, which related to the corresponding
39% decrease in parts, service and used equipment revenue and an increase in
margin. The gross profit margin from parts, service and used equipment was 35%
during the three months ended March 31, 2003 and 15% during the three months
ended March 31, 2002. Included in parts & service revenue for the first quarter
of 2003 was $3.9 million in used gas plant and compression equipment sales, with
a

                                       23

<PAGE>

58% gross margin compared to $28.7 million in sales and a 6% gross margin for
the first quarter 2002.

Operating expenses for our compressor and accessory fabrication business
decreased by $3.8 million, or 17%, to $18.6 million during the three months
ended March 31, 2003 from $22.4 million during the three months ended March 31,
2002 commensurate with the corresponding decrease in compressor fabrication
revenue. The gross profit margin on compression fabrication was 13% during the
three months ended March 31, 2003 and 14% during the three months ended March
31, 2002.

The operating expenses attributable to production and processing equipment
fabrication business increased by $41.1 million, or 144%, to $69.6 million
during the three months ended March 31, 2003 from $28.5 million during the three
months ended March 31, 2002. The increase in production and processing equipment
fabrication expenses was primarily due to the consolidation of the results of
Belleli in the three months ended March 31, 2003. The gross profit margin
attributable to production and processing equipment fabrication was 13% during
the three months ended March 31, 2003 and 14% during the three months ended
March 31, 2002. The decrease in gross profit margin for production and
processing equipment fabrication was attributable to the inclusion of Belleli.
Excluding Belleli, production and processing equipment gross margin for the
three months ended March 31, 2003 was 16%.

Selling, general and administrative expenses increased $6.6 million, or 20%, to
$39.3 million during the three months ended March 31, 2003 from $32.7 million
during the three months ended March 31, 2002. The increase is primarily due to
the inclusion of Belleli's selling and general and administrative costs of
approximately $2.5 million and an increase in bad debt expense, payroll and
consulting costs related to our focus on improving our organizational structure
to facilitate the consolidation of our operations.

Foreign currency translation expense for the three months ended March 31, 2003
was $0.4 million, compared to $12.7 million for the three months ended March 31,
2002. In January 2002, Argentina devalued its peso against the U.S. dollar and
imposed significant restrictions on fund transfers internally and outside the
country. In addition, the Argentine government enacted regulations to
temporarily prohibit enforcement of contracts with exchange rate-based purchase
price adjustments. Instead, payment under such contracts could either be made at
an exchange rate negotiated by the parties or, if no such agreement is reached,
a preliminary payment may be made based on a 1 dollar to 1 peso equivalent
pending a final agreement. The Argentine government also required the parties to
such contracts to renegotiate the price terms within 180 business days of the
devaluation. During the three months ended March 31, 2002, we recorded an
exchange loss of approximately $11.7 million and $1.4 million for assets exposed
to currency translation in Argentina and Venezuela, respectively, and recorded a
translation gain of approximately $0.4 million for all other countries. We have
renegotiated all of our agreements in Argentina. As a result of these
negotiations, we received approximately $11.2 million in reimbursements in 2002
and $0.7 million in the first quarter of 2003.

Depreciation and amortization increased by $10.3 million to $34.6 million during
the three months ended March 31, 2003 compared to $24.3 million during the three
months ended March 31, 2002. The increase in depreciation was primarily due to
additions to the rental fleet, including maintenance capital, which were placed
in service in 2002 and the first quarter of 2003, and the inclusion of $0.9
million related to Belleli. In addition, because we sold compressors in
sale-leaseback transactions, depreciation expense was reduced by approximately
$8.5 million in the three months ended March 31, 2003 compared to approximately
$9.6 million in the three months ended March 31, 2002.

We incurred leasing expense of $24.7 million during the three months ended March
31, 2003, compared to $22.9 million during the three months ended March 31,
2002. The increase in leasing expense was primarily due to an increase in our
borrowing rates due to the amendment of three of our compression equipment
leases. The amendment, which was effective December 31, 2002, modifies certain
financial covenants to allow us greater flexibility in accessing the capacity
under our bank credit facility to support our short-term liquidity needs. In
addition, at the higher end of our permitted consolidated leverage ratio, the
amendment increases the interest rate margins used to calculate the applicable
interest rates under all of the agreements by up to 0.75%. Our lease cost as a
result of the amendment is dependent on our consolidated leverage ratio at the
end of each quarter, the amount of indebtedness outstanding and the interest
rate quoted for the benchmark selected by us.

Pursuant to the compression equipment leases and related agreements entered into
in August 2001, we were

                                       24

<PAGE>

obligated to prepare registration statements and complete an exchange offering
to enable the holders of the notes issued by the lessors to exchange their notes
for notes which are registered under the Securities Act of 1933. Because of the
restatement of our financial statements, the exchange offering was not completed
pursuant to the time line required by the agreements and we were required to pay
additional lease expense of $105,600 per week until the exchange offering was
completed. The additional lease expense began accruing on January 28, 2002. The
exchange offer was completed and the requirement to pay the additional lease
expense ended on March 13, 2003. In the three months ended March 31, 2003, we
recorded additional leasing expense related to the registration and exchange
offering obligations of approximately $1.1 million compared to approximately
$0.9 million during the three months ended March 31, 2002.

Interest expense increased by $2.3 million to $10.6 million during the three
months ended March 31, 2003 from $8.3 million for the three months ended March
31, 2002 primarily due to an increase of $1.6 million due to the increase in the
interest rate paid on the debt payable to Schlumberger and the inclusion of
Belleli's interest expense of approximately $0.5 million.

PROVISION FOR ESTIMATED COST OF LITIGATION SETTLEMENT

On May 12, 2003, Hanover reached agreement, subject to court approval, to settle
the securities class actions, the ERISA class actions and the shareholder
derivative actions described above. The terms of the proposed settlement provide
for Hanover to: (i) make a cash payment of approximately $30 million (of which
$26.7 million is to be funded by payments from Hanover's directors and officers
insurance carriers), (ii) issue 2.5 million shares of common stock, and (iii)
issue a contingent note with a principal amount of $6.7 million. The note is
payable, together with accrued interest, on March 31, 2007 but can be
extinguished (with no monies owing under it) if Hanover's common stock trades at
or above the average price of $12.25 for 15 consecutive days at any time between
March 31, 2004 and March 31, 2007. As part of the settlement, Hanover has also
agreed to implement corporate governance enhancements, including allowing large
shareholders to participate in the process to appoint two independent directors
to Hanover's Board. The Company's auditor, PricewaterhouseCoopers, is not a
party to the settlement and will continue to be a defendant in the consolidated
securities class action.

GKH Investments, L.P., and GKH Private Limited (collectively "GKH") which
together own approximately ten percent of Hanover's outstanding common stock and
which sold shares in the Company's March 2001 secondary offering of common stock
are parties to the proposed settlement and have agreed to settle claims against
them that arise out of that offering as well as other potential securities,
ERISA, and derivative claims. The terms of the proposed settlement provide for
GKH to transfer 2.5 million shares of common stock from their holdings or from
other sources.

In connection with this settlement, Hanover recorded a pre-tax charge of
approximately $68.7 million ($54.0 million after-tax) in its first quarter 2003
financial statements. This charge includes approximately $42.1 million ($27.4
million after-tax), net of insurance recoveries, for Hanover's contribution of
cash and estimated costs, 2.5 million common shares, and the contingent note.

The charge also includes approximately $26.6 million, without tax benefit, for
2.5 million common shares to be funded by GKH. The offsetting effect of the
$26.6 million expense is expected to be ultimately recorded in equity when the
funding of Hanover common shares by GKH is completed. Because this settlement
may be considered to be a related party transaction as defined in SAB 5-T, the
fair value of the GKH shares was recorded as an expense in Hanover's statement
of operations. Hanover is considering seeking guidance from the Securities and
Exchange Commission to determine whether the common shares provided by GKH
should be recorded as an expense.

                                             Hanover        GKH
                                           Settlement    Settlement       Total
                                           ----------    ----------       -----
Cash ...................................... $ 30,050    $    --         $ 30,050
Estimated fair value of note to be issued .    5,194         --            5,194

                                       25

<PAGE>

Common stock to be issued by Hanover .....   26,600           --         26,600
Hanover common stock to be funded by GKH .      --         26,600        26,600
Legal fees and administrative costs ......    6,929                       6,929
                                           --------      --------      --------
Total ....................................   68,773        26,600        95,373
Less insurance recoveries ................  (26,670)          --        (26,670)
                                           --------      --------      --------
     Net estimated litigation settlement . $ 42,103      $ 26,600      $ 68,703
                                           ========      ========      ========

The $5.2 million estimated fair value of the note to be issued was based on the
present value of the future cash flows discounted at borrowing rates currently
available for debt with similar terms and maturities. Utilizing a
market-borrowing rate of 11%, the principal value and stipulated interest rate
required by the note of 5% per annum, an estimated discount of $1.5 million was
computed on the note to be issued. Upon the issuance of the note, the discount
will be amortized to interest expense over the term of the note. Because the
note could be extinguished without a payment (if Hanover's common stock trades
at or above the average price of $12.25 for 15 consecutive days at any time
between March 31, 2004 and March 31, 2007), we will be required to record an
asset in future periods for the value of the embedded derivative, as required by
SFAS 133, when the note is issued. This asset will be marked to market in future
periods with any increase or decrease included in our statement of operations.

We recorded a receivable of $26.7 million related to the expected amount of
insurance recoveries and a $58.4 million long-term liability in the accompanying
balance sheet pending approval by the courts and satisfaction of certain other
conditions and $37.0 million in accounts payable and accrued expenses related to
amounts which are expected to be paid in the next twelve months. Upon issuance
of the note and common stock, we will record such amounts in liabilities and
stockholders' equity, respectively, and will include the shares in our
outstanding shares used for earnings per share calculations. The shares to be
funded by GKH are currently outstanding shares.

The final value of the settlement may differ significantly from the estimates
currently recorded depending on a variety of factors including the market value
of the our common stock when issued and potential changes in the market
conditions affecting the valuation of the note to be issued. Additionally, the
settlement is contingent on confirmatory discovery, final documentation, court
approval and certain other conditions. Accordingly, we will revalue the estimate
of the settlement on a quarterly basis and at the time the securities are
issued.

INCOME TAXES

The provision for income taxes decreased $14.9 million, or 462%, to a benefit of
$11.7 million during the three months ended March 31, 2003 from a provision of
$3.2 million during the three months ended March 31, 2002. The decrease resulted
primarily from the corresponding decrease in income before income taxes. The
effective income tax rates during the three months ended March 31, 2003 and
March 31, 2002 were 18% and 40% respectively. The decrease in the effective tax
rate primarily resulted from the $26.6 million portion of the provision for
estimated cost of litigation settlement that relates to GKH's contribution to
the settlement and is not deductible for tax purposes by Hanover.

DISCONTINUED OPERATIONS

During the fourth quarter of 2002, we reviewed our business lines and the board
of directors approved management's recommendation to exit and sell our
non-oilfield power generation and certain used equipment business lines. Income
(loss) from discontinued operations increased $.3 million, to net income of $0.5
million during the three months ended March 31, 2003 from income of $0.2 million
during the three months ended March 31, 2002. Loss from the write down of
discontinued operations was $1.4 million during the three months ended March 31,
2003 and related to an additional write down of our discontinued operations to
their estimated market value.

NET INCOME

Net income decreased by $58.2 million, or 1,157%, to a loss of $53.2 million
during the three months ended March 31, 2003 from income of $5.0 million during
the three months ended March 31, 2002 for the reasons discussed

                                       26

<PAGE>

above.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance amounted to $20.7 million at March 31, 2003 compared to $19.0
million at December 31, 2002. Our principal source of cash was borrowings of $33
million under our bank credit facility. Principal uses of cash during the three
months ended March 31, 2003 were capital expenditures of $36.4 million and
payment of accounts payable and other liabilities.

Working capital increased to $236.8 million at March 31, 2003 from $212.1
million at December 31, 2002. The increase in working capital was primarily due
to the payment of accrued liabilities and an increase in accounts receivables.

We invested $36.4 million in property, plant and equipment during three months
ended March 31, 2003, primarily for international rental projects and
maintenance capital. During 2003, we had approximately 3,545,000 horsepower in
the rental fleet with 2,653,000 horsepower domestically and 892,000 horsepower
in the international rental fleet.

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES, GENERAL PURPOSE AND ANTICIPATED
SOURCE OF FUNDS

We may carry out new customer projects through rental fleet additions and other
related capital expenditures. We generally invest funds necessary to make these
rental fleet additions when our idle equipment cannot economically fulfill a
project's requirements and the new equipment expenditure is matched with
long-term contracts whose expected economic terms exceed our return on capital
targets. During 2003, we plan to spend approximately $175 to $200 million on
rental equipment fleet additions, including $60 million on equipment overhauls
and other maintenance capital. A recent amendment to our bank credit facility
restricts our capital spending to $200 million in 2003. We expect that our 2003
capital spending will be within operating cash flows. As a result of our
agreement to settle the securities-related litigation, we will be required to
pay approximately $6.9 million in estimated expenses over the next twelve months
in addition to approximately $3.4 million for the cash portion of the settlement
which is not covered by insurance. Historically, we have funded our capital
requirements with a combination of internally generated cash flow, borrowing
under the revolving credit facility, sale and leaseback transactions, raising
additional equity and issuing long-term debt.

As of March 31, 2003, after giving effect to the amendment made in February
2003, which was effective as of December 31, 2002, we were in compliance with
all covenants and other requirements set forth in our bank credit facility,
compression equipment leases and indentures. Giving effect to the covenant
limitations in our bank credit agreement, as amended to date, the liquidity
available under our revolver at March 31, 2003 was approximately $98.4 million.

We believe that cash flow from operations and borrowing under our existing $350
million bank credit facility will provide us with adequate capital resources to
fund our estimated level of capital expenditures for the short term. Since
capital expenditures are largely discretionary, we believe we would be able to
significantly reduce them, in a reasonably short time frame, if expected cash
flows from operations are not realized. As of March 31, 2003, we had
approximately $189.5 million in borrowings and approximately $62.1 million in
letters of credit outstanding on our $350 million revolving bank credit facility
(3.8% weighted average effective rate at March 31, 2003). The letters of credit
expire between 2003 and 2007. In addition, we had approximately $4.1 million in
letters of credit outstanding under other letters of credit facilities which
expire during 2003. Our bank credit facility permits us to incur indebtedness,
subject to covenant limitations, up to a $350 million credit limit, plus, in
addition to certain other indebtedness, an additional $300 million in
subordinated unsecured indebtedness and $125 million of other unsecured
indebtedness. In addition, our bank credit facility permits us to enter into
future sale and leaseback transactions with respect to equipment having a value
not in excess of $300 million.

In addition to purchase money and similar obligations, the indentures and the
participation agreements, which are part of our compression equipment leases,
permit us to incur indebtedness up to the $350 million credit limit under our
bank credit facility, plus (1) an additional $75 million in unsecured
indebtedness and (2) any additional indebtedness so long as, after incurring
such indebtedness, our ratio of the sum of consolidated net income before

                                       27

<PAGE>

interest expense, income taxes, depreciation expense, amortization of
intangibles, certain other non-cash charges and rental expense to total fixed
charges (all as defined and adjusted by the agreements), or Hanover's "coverage
ratio," is greater than 2.25 to 1.0. The indentures and participation agreements
define indebtedness to include the present value of our rental obligations under
sale and leaseback transactions and under facilities similar to our compression
equipment leases. As of March 31, 2003, Hanover's coverage ratio was less than
2.25 to 1.0 and therefore as of such date we could not incur indebtedness other
than under our credit facility, up to an additional $75 million in unsecured
indebtedness and certain other permitted indebtedness including refinancing
indebtedness.

In May 2003, Hanover entered into an agreement with Schlumberger to terminate
the PIGAP II put in return for Schlumberger agreeing to modify the $150 million
subordinated note and payment terms of a $58 million obligation. See Note 12 in
Notes to Condensed Consolidated Financial Statements included in this Form 10-Q.

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

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

As part of our business, we are a party to various financial guarantees,
performance guarantees and other contractual commitments to extend guarantees of
credit and other assistance to various subsidiaries, investees and other third
parties. To varying degrees, these guarantees involve elements of performance
and credit risk, which are not included on our Consolidated Balance Sheet. The
possibility of us having to honor our contingencies is largely dependent upon
future operations of various subsidiaries, investees and other third parties, or
the occurrence of certain future events. We would record a reserve for these
guarantees if events occurred that required that one be established. Subsequent
to December 31, 2002, there have been no significant changes to our obligations
to make future payments under existing contracts.

Hanover utilizes derivative financial instruments to minimize the risks and/or
costs associated with financial and global operating activities by managing its
exposure to interest rate fluctuation on a portion of its variable rate debt and
leasing obligations. 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 SFAS 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"), as amended by SFAS 137 and SFAS 138, effective January
1, 2001. SFAS 133 requires that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recognized in the balance
sheet at fair value, and that changes in such fair values be recognized in
earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged item pending recognition in earnings. Prior to
2001, we entered into two interest rate swaps which were outstanding at March
31, 2003 with notional amounts of $75 million and $125 million and strike rates
of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001,
however, they were extended for an additional two years at

                                       28

<PAGE>

the option of the counterparty and now expire in July 2003. The difference paid
or received on the swap transactions is recorded as an accrued lease liability
and is recognized in leasing expense. During the quarters ended March 31, 2003
and 2002, we recognized an unrealized gain of approximately $2.0 million in each
quarter related to the change in the fair value of these interest rate swaps in
our statement of operations because management decided not to designate the
interest rate swaps as hedges at the time they were extended by the
counterparty. At March 31, 2003, we recorded approximately $2.7 million in
accrued current liabilities with respect to the fair value adjustment related to
these interest rate swaps. The fair value of these interest rate swaps will
fluctuate with changes in interest rates over their remaining terms and the
fluctuations will be recorded in our statement of operations.

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

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

These three swaps, which we have designated as cash flow hedging instruments,
meet the specific hedge criteria and any changes in their fair values have been
recognized in other comprehensive income. During the quarters ended March 31,
2003 and 2002, we recorded income of approximately $0.7 million and $3.0
million, respectively, related to these three swaps, ($0.4 million and $2.0
million, net of tax) in other comprehensive income. As of March 31, 2003, a
total of approximately $12.1 million was recorded in current liabilities and
approximately $10.2 million in long-term liabilities with respect to the fair
value adjustment related to these three swaps.

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

In January 2002, Argentina devalued its peso against the U.S. dollar and imposed
significant restrictions on funds transfers internally and outside the country.
In addition, the Argentine government enacted regulations to temporarily
prohibit enforcement of contracts with exchange rate-based purchase price
adjustments. Instead, payment under such contracts can either be made at an
exchange rate negotiated by the parties or, if no such agreement is reached, a
preliminary payment may be made based on a 1 dollar to 1 peso equivalent pending
a final agreement. The Argentine government also requires that the parties to
such contracts renegotiate the price terms within 180 days of the devaluation.
We have renegotiated all of our agreements in Argentina. As a result of these
negotiations, we received approximately $11.2 million in reimbursements in 2002
and $0.7 million in the first quarter of 2003. During the year ended December
31, 2002, we recorded an exchange loss of approximately $9.9 million for assets
exposed to currency translation in Argentina. For the three months ended March
31, 2003, our Argentine operations represented approximately 4% of our revenue
and 8% of our gross margin. The economic situation in Argentina is subject to
change. To the extent that the situation in Argentina deteriorates, exchange
controls continue in place and the value of the peso against the dollar is
reduced further, our results of operations in Argentina could be materially and
adversely affected which could result in reductions in our net income.

In addition, we have exposure to currency risks in Venezuela. To mitigate that
risk, the majority of our existing contracts provide that we receive payment in
U.S. dollars rather than Venezuelan bolivars, thus reducing our exposure to
fluctuations in the bolivar's value. During the three months ended March 31,
2002, we recorded an exchange loss of approximately $11.7 million and $1.4
million for assets exposed to currency translation in Argentina and Venezuela,
respectively, and recorded a translation gain of approximately $0.4 million for
all other countries. For the quarter ended March 31, 2003, our Venezuelan
operations represented approximately 9% of our revenue and 17% of our gross
margin.

In December 2002, certain groups in Venezuela initiated a strike by workers of
the national oil company in Venezuela. This has caused economic conditions in
Venezuela to deteriorate, including a substantial dip in the production of oil
in Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency which can be exchanged for
foreign currency by businesses operating inside Venezuela. If the national
strike continues, exchange controls remain in place, or economic conditions in
Venezuela

                                       29

<PAGE>

continue to deteriorate, Hanover's results of operations in Venezuela could be
materially and adversely affected, which could result in reductions in Hanover's
net income. As a result, during the fourth quarter of 2002, our international
rental revenues were decreased by approximately $2.7 million a result of the
disruption in our operations in Venezuela. In the three months ended March 31,
2003, we received approximately $1.7 million of the 2002 revenues which were
impacted by the strike. At March 31, 2003, we had approximately $34.1 million in
accounts receivable related to our Venezuelan operations.


NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

                                       30

<PAGE>

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

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. All provisions of this Statement will be applied
prospectively. We are currently evaluating the impact of adoption of SFAS 149 on
our financial position and results of operations.

In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
The Statement changes the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
interim period beginning after June 15, 2003. We are currently evaluating the
impact of adoption of SFAS 150 on our financial position and results of
operations.

                                       31

<PAGE>

ITEM 3.    QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate and foreign currency risk. Hanover and its
subsidiaries periodically enter into interest rate swaps to manage its exposure
to fluctuations in interest rates. At March 31, 2003, the fair market value of
these interest rate swaps, excluding the portion attributable to and included in
accrued leasing, was a liability of approximately $25.0 million, of which $14.8
million was recorded in accrued liabilities and $10.2 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 (dollars
in thousands):

                                                             Fair Value of the
                                                                  Swap at
Maturity Date   Company Pays Fixed Rate   Notional Amount      March 31, 2003
-------------   -----------------------   ---------------      --------------
  7/21/2003             5.5100%               $ 75,000               $(985)
  7/21/2003             5.5600%               $125,000             $(1,661)
  3/11/2005             5.2550%               $100,000             $(6,884)
  3/11/2005             5.2725%               $100,000             $(6,928)
 10/26/2005             5.3975%               $100,000             $(8,515)

At March 31, 2003, we are exposed to variable rental rates, which fluctuate with
market interest rate, on a portion of the equipment leases we entered into in
September 1999 and October 2000. Assuming a hypothetical 10% increase in the
variable rates from those in effect at quarter end, the increase in annual
leasing expense on these equipment leases would be approximately $1.5 million.

We are also exposed to interest rate risk on borrowings under our floating rate
revolving credit facility. At March 31, 2003, $189.5 million was outstanding
bearing interest at a weighted average effective rate of 3.8% per annum.
Assuming a hypothetical 10% increase in the weighted average interest rate from
those in effect at March 31, 2003, the increase in annual interest expense for
advances under this facility would be approximately $0.7 million.

On May 12, 2003, we reached agreement to settle the securities class actions,
the ERISA class actions and the shareholder derivative actions. The final value
of the settlement may differ significantly from the estimates currently recorded
depending on a variety of factors including the market value of our stock when
issued and potential changes in the market conditions affecting the valuation of
the note to be issued. Additionally, the settlement is contingent on
confirmatory discovery, final documentation, court approval and certain other
conditions. Accordingly, we will revalue the estimate of the settlement on a
quarterly basis and at the time the securities are issued. We are exposed to
market risk on the value of our common stock to be issued by us and to be paid
by GKH. For every $1 change in market value of a share of our common stock, we
will record a $5.0 million change in our estimate of the fair value of the stock
portion of the settlement. In addition, until issued, the value of the note may
change based on the fair market value of note. For every 1% change in the market
borrowing rate, we will record a $0.2 million change in our estimate of the fair
value of the note to be issued in the settlement.

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 could either be made at an exchange rate negotiated by the parties or,
if no such agreement is reached, a preliminary payment may be made based on a 1
dollar to 1 peso equivalent pending a final agreement. The Argentine government
also requires that the parties to such contracts renegotiate the price terms
within 180 days of the devaluation. We have renegotiated all of our agreements
in Argentina. As a result of these negotiations, we received approximately $11.2
million in reimbursements in 2002 and $0.7 million in the first quarter of 2003.
During the year ended December 31, 2002, we recorded an exchange loss of
approximately $9.9 million for assets exposed to currency translation in
Argentina. For the three months ended March 31, 2003, our Argentine operations
represented approximately 4% of our revenue and 8% of our gross margin. For the
year ended December 31, 2002, our Argentine operations represented approximately
5% of our revenue and 7% of our gross margin. The economic situation in
Argentina is subject to change. To the extent that the situation in Argentina
deteriorates, exchange

                                       32

<PAGE>

controls continue in place and the value of the peso against the dollar is
reduced further, our results of operations in Argentina could be materially and
adversely affected which could result in reductions in our net income.

In addition, we have exposure to currency risks in Venezuela. To mitigate that
risk, the majority of our existing contracts provide that we receive payment in
U.S. dollars rather than Venezuelan bolivars, thus reducing our exposure to
fluctuations in the bolivar's value. During the year ended December 31, 2002, we
recorded an exchange loss of approximately $5.8 million for assets exposed to
currency translation in Venezuela. For the three months ended March 31, 2003,
our Venezuelan operations represented approximately 9% of our revenue and 17% of
our gross margin. For the year ended December 31, 2002, our Venezuelan
operations represented approximately 10% of our revenue and 17% of our gross
margin.

In December 2002, certain groups in Venezuela initiated a strike by workers of
the national oil company in Venezuela. This has caused economic conditions in
Venezuela to deteriorate, including a substantial dip in the production of oil
in Venezuela. In addition, exchange controls have been put in place which put
limitations on the amount of Venezuelan currency which can be exchanged for
foreign currency by businesses operating inside Venezuela. If the national
strike continues, exchange controls remain in place, or economic conditions in
Venezuela continue to deteriorate, Hanover's results of operations in Venezuela
could be materially and adversely affected, which could result in reductions in
Hanover's net income. As a result, during the fourth quarter of 2002, our
international rental revenues were decreased by approximately $2.7 million as a
result of the disruption in our operations in Venezuela. In the three months
ended March 31, 2003, we received approximately $1.7 million of the 2002
revenues which were impacted by the strike. At March 31, 2003, we had
approximately $34.1 million in accounts receivable related to our Venezuelan
operations.

ITEM 4.    CONTROLS AND PROCEDURES

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

(b) Changes in Internal Controls. Under the direction of our President and Chief
Executive Officer, Senior Vice President and Chief Financial Officer, and Senior
Vice President and General Counsel, we continued the process of reviewing our
internal controls and procedures for financial reporting and have changed or are
in the process of changing some of those controls and procedures, including
changes relating to: information systems, human resources; internal audit;
reconciliation of intercompany accounts; approval of capital expenditures;
preparation, approval and closing of significant agreements and transactions;
review and quantification of compressor substitutions under compression
equipment lease agreements; integration of acquired businesses and assets
(including integration of certain financial and accounting systems related
thereto); standardization of internal controls and policies across the
organization; and the development, implementation and enhancements of corporate
governance policies and procedures and performance management systems. As part
of our review of our internal controls and procedures for financial reporting,
we have made personnel changes and hired additional qualified staff in the
legal, accounting/finance and human resource areas and are utilizing third
parties to assist with some of our integration and internal audit functions.
This review is ongoing, and the review to date constitutes the evaluation
referenced in paragraphs 5 and 6 of the Certifications of our President and
Chief Executive Officer and our Senior Vice President and Chief Financial
Officer which appear immediately following the signature page of this report.

                                       33

<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 current and former officers
and directors in the United States District Court for the Southern District of
Texas. These class actions were consolidated into one case, Pirelli Armstrong
Tire Corporation Retiree Medical Benefits Trust, On Behalf of Itself and All
Others Similarly Situated, Civil Action No. H-02-0410, naming as defendants
Hanover, Mr. Michael J. McGhan, Mr. William S. Goldberg and Mr. Michael A.
O'Connor. The complaints asserted various claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and sought unspecified amounts of
compensatory damages, interest and costs, including legal fees. The court
entered an order appointing Pirelli Armstrong Tire Corporation Retiree Medical
Benefits Trust and others as lead plaintiffs on January 7, 2003 and appointed
Milberg, Weiss, Bershad, Hynes & Lerach LLP as lead counsel.

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

Commencing in February 2002, four derivative lawsuits were filed in the United
States District Court for the Southern District of Texas, two derivative
lawsuits were filed in state district court for Harris County, Texas (one of
which was nonsuited and the second of which was removed to Federal District
Court for the Southern District of Texas) and one derivative lawsuit was filed
in the Court of Chancery for the State of Delaware in and for New Castle County.
These derivative lawsuits, which were filed by certain of our shareholders
purportedly on behalf of Hanover, alleged, among other things, that our
directors breached their fiduciary duties to shareholders and sought unspecified
amounts of damages, interest and costs, including legal fees. The derivative
actions in the United States District Court for the Southern District of Texas
were consolidated on August 19 and August 26, 2002. With that consolidation, the
currently pending derivative lawsuits are:
<TABLE>
<CAPTION>
             <S>                              <C>                          <C>                         <C>                   <C>
                                                                                                                             Date
         Plaintiff                         Defendants                  Civil Action No.              Court                Instituted
         ---------                         ----------                  ----------------              -----                ----------
Harbor Finance Partners,      Michael J. McGhan, William S.            H-02-0761             United States District        03/01/02
Derivatively on behalf of     Goldberg, Ted Collins, Jr., Robert                             Court for the Southern
Hanover Compressor Company    R. Furgason, Melvyn N. Klein,                                  District of Texas
                              Michael A. O'Connor, and Alvin V.
                              Shoemaker, Defendants and Hanover
                              Compressor Company, Nominal Defendant

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

Motions are currently pending for appointment of lead counsel in the
consolidated derivative actions in the Southern District of Texas.

On and after March 26, 2003, three plaintiffs filed separate putative class
actions collectively against Hanover, Michael McGhan, Michael O'Connor, William
Goldberg and Chad Deaton (and other purportedly unknown defendants) in the
United States District Court for the Southern District of Texas. The alleged
class is comprised of persons who participated in or were beneficiaries of The
Hanover Companies Retirement and Savings Plan, which was established by Hanover
pursuant to Section 401(k) of the United States Internal Revenue Code of 1986,
as amended. The purported class action seeks relief under the Employee
Retirement Income Security Act (ERISA) based upon Hanover's and the individual
defendants' alleged mishandling of Hanover's 401(k) Plan. The three ERISA
putative class actions are entitled: Kirkley v. Hanover, Case No. H-03-1155;
Angleopoulos v. Hanover, Case No. H-03-1064; and Freeman v. Hanover, Case No.
H-03-1095.

                                       34

<PAGE>

On May 12, 2003, Hanover reached agreement, subject to court approval, to settle
the securities class actions, the ERISA class actions and the shareholder
derivative actions described above. The terms of the proposed settlement provide
for Hanover to: (i) make a cash payment of approximately $30 million (of which
$26.7 million is to be funded by payments from Hanover's directors and officers
insurance carriers), (ii) issue 2.5 million shares of common stock, and (iii)
issue a contingent note with a principal amount of $6.7 million. The note is
payable, together with accrued interest, on March 31, 2007 but can be
extinguished (with no monies owing under it) if Hanover's common stock trades at
or above the average price of $12.25 for 15 consecutive days at any time between
March 31, 2004 and March 31, 2007. As part of the settlement, Hanover has also
agreed to implement corporate governance enhancements, including allowing large
shareholders to participate in the process to appoint two independent directors
to Hanover's Board. The Company's auditor, PricewaterhouseCoopers, is not a
party to the settlement and will continue to be a defendant in the consolidated
securities class action.

GKH Investments, L.P., and GKH Private Limited (collectively "GKH") which
together own approximately ten percent of Hanover's outstanding common stock and
which sold shares in the Company's March 2001 secondary offering of common stock
are parties to the proposed settlement and have agreed to settle claims against
them that arise out of that offering as well as other potential securities,
ERISA, and derivative claims. The terms of the proposed settlement provide for
GKH to transfer 2.5 million shares of common stock from their holdings or from
other sources.

In connection with this settlement, Hanover recorded a pre-tax charge of
approximately $68.7 million ($54.0 million after-tax) in its first quarter 2003
financial statements. This charge includes approximately $42.1 million ($27.4
million after-tax), net of insurance recoveries, for Hanover's contribution of
cash and estimated costs, 2.5 million common shares, and the contingent note.

The charge also includes approximately $26.6 million, without tax benefit, for
2.5 million common shares to be funded by GKH. The offsetting effect of the
$26.6 million expense is expected to be ultimately recorded in equity when the
funding of Hanover common shares by GKH is completed. Because this settlement
may be considered to be a related party transaction as defined in SAB 5-T, the
fair value of the GKH shares was recorded as an expense in Hanover's statement
of operations. Hanover is considering seeking guidance from the Securities and
Exchange Commission to determine whether the common shares provided by GKH
should be recorded as an expense.

Based on the terms of the settlement agreement, we determined that a liability
related to these lawsuits was probable and that the value was reasonably
estimable. Accordingly, we evaluated the individual components of the settlement
in consideration of existing market conditions and established an estimate for
the cost of the litigation settlement. The details of this estimate are as
follows (in thousands):

                                            Hanover       GKH
                                           Settlement  Settlement        Total
                                           ----------  ----------        -----
Cash ...................................... $ 30,050    $    --        $ 30,050
Estimated fair value of note to be issued .    5,194         --           5,194
Common stock to be issued by Hanover ......   26,600         --          26,600
Hanover common stock to be  funded by GKH .      --       26,600         26,600
Legal fees and administrative costs .......    6,929         --           6,929
                                            --------    --------       --------
Total .....................................   68,773      26,600         95,373
Less insurance recoveries .................  (26,670)        --         (26,670)
                                            --------    --------       --------
      Net estimated litigation settlement . $ 42,103    $ 26,600       $ 68,703
                                            ========    ========       ========


The $5.2 million estimated fair value of the note to be issued was based on the
present value of the future cash flows discounted at borrowing rates currently
available for debt with similar terms and maturities. Utilizing a
market-borrowing rate of 11%, the principal value and stipulated interest rate
required by the note of 5% per annum, an estimated discount of $1.5 million was
computed on the note to be issued. Upon the issuance of the note, the discount
will be amortized to interest expense over the term of the note. Because the
note could be extinguished without a payment (if Hanover's common stock trades
at or above the average price of $12.25 for 15 consecutive days at any time
between March 31, 2004 and March 31, 2007), we will be required to record an
asset in future periods for the value of the embedded derivative, as required by
SFAS 133, when the note is issued. This asset will be marked to market in future
periods with any increase or decrease included in our statement of operations.

We recorded a receivable of $26.7 million related to the expected amount of
insurance recoveries and a $58.4 million long-term liability in the accompanying
balance sheet pending approval by the courts and satisfaction of

                                       35

<PAGE>

certain other conditions and $37.0 million in accounts payable and accrued
expenses related to amounts which are expected to be paid in the next twelve
months. Upon issuance of the note and common stock, we will record such amounts
in liabilities and stockholders' equity, respectively, and will include the
shares in our outstanding shares used for earnings per share calculations. The
shares to be funded by GKH are currently outstanding shares.

The final value of the settlement may differ significantly from the estimates
currently recorded depending on a variety of factors including the market value
of the our common stock when issued and potential changes in the market
conditions affecting the valuation of the note to be issued. Additionally, the
settlement is contingent on confirmatory discovery, final documentation, court
approval and certain other conditions. Accordingly, we will revalue the estimate
of the settlement on a quarterly basis and at the time the securities are
issued.

On May 13, 2003, Hanover moved to consolidate all of the ERISA actions and the
consolidated shareholder derivative action into the consolidated securities
class action. In addition, Hanover, and the other defendants in the actions,
together with the plaintiffs that entered into the settlement filed a motion in
the consolidated securities action pursuant to which the parties have agreed to
seek preliminary approval of the court for the settlement by September 29, 2003.
The settlement is subject to court approval and could be the subject of an
objection by shareholders as well as from plaintiff's counsel to Harbor Finance
in the shareholder derivative matter and plaintiffs' counsel in the Angleopoulos
(H-03-1064) and the Freeman (H-03-1095) ERISA matters who were not signatories
to the agreement reached among the remaining parties.

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

As of March 31, 2003, we had incurred approximately $9.7 million in legal
related expenses in connection with the internal investigations, the putative
class action securities lawsuits, the derivative lawsuit and the Securities and
Exchange Commission investigation. Of this amount, we incurred approximately
$1.2 million on behalf of officers and directors in connection with the
above-named proceedings. We intend to pay the litigation costs of our officers
and directors, subject to the limitations imposed by Delaware and other
applicable law and Hanover's certificate of incorporation and bylaws. We expect
to incur approximately $6.9 million in additional legal fees and administrative
expenses in connection with the settlement of the securities-related litigation.

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

ITEM 6: EXHIBITS AND REPORT ON FORM 8-K

     (a)  Exhibits

          10.1 Employment letter with Peter Schreck dated August 22, 2000.

          10.2 Employment letter with Stephen York dated March 6, 2002.

          99.1 Certification of the Chief Executive Officer pursuant to 18
               U.S.C. Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002 (furnished herewith)

          99.2 Certification of the Chief Financial Officer pursuant to 18
               U.S.C. Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002 (furnished herewith)

     (b)  Reports submitted on Form 8-K:

                                       36

<PAGE>

          1.   A report on Form 8-K was filed on March 17, 2003, which reported
               under caption "Item 5 - Other Events" the expiration of exchange
               offers for Senior Secured Notes of Hanover Equipment Trust 2001A
               and Hanover Equipment Trust 2001B. The offers Expired at 5:00
               p.m., Eastern Time, on March 13, 2003. The date of such report
               (the date of the earliest event reported) was March 14, 2003.

          2.   A report on Form 8-K was filed on March 5, 2003, which reported
               under caption "Item 5 - Other Events" Hanover's financial results
               for the fourth quarter ended and year ended December 31, 2002.
               This report also included a Consolidated Statement of Income
               (Loss) for the quarter and year ended December 31, 2002. In
               addition under caption "Item 9 - Regulation FD Disclosure"
               Hanover disclosed anticipated results for 2003. The date of such
               report (the date of the earliest event reported) was March 4,
               2003.

          3.   A report on Form 8-K was filed on February 12, 2003, which
               reported under caption "Item 5 - Other Events" the commencement
               of exchange offers for Senior Secured Notes of Hanover Equipment
               Trust 2001A and Hanover Equipment Trust 2001B. The date of such
               report (the date of the earliest event reported) was February 12,
               2003.

          4.   A report on Form 8-K was filed on February 7, 2003, which
               reported under caption "Item 5 - Other Events" the announcement
               of an amendment to Hanover Compressor Company's $350 million
               corporate revolving credit facility. The report also included the
               Amendment dated January 31, 2003 and the Guarantee and Collateral
               Agreement dated January 31, 2003. The date of such report (the
               date of the earliest event reported) was February 6, 2003.

          5.   A report on Form 8-K was filed on February 6, 2003, which
               reported under caption "Item 5 - Other Events" additional
               information related to Hanover's exercise of its right to put its
               ownership interest in the PIGAP II joint venture in Venezuela
               back to Schlumberger. The report also included Schedule 1.2(c) to
               the Purchase Agreement with Schlumberger. The date of such report
               (the date of the earliest event reported) was February 6, 2003.

          6.   A report on Form 8-K was filed on February 3, 2003, which
               reported under caption "Item 5 - Other Events" the exercise of
               Hanover's right to put the PIGAP II joint venture in Venezuela
               back to Schlumberger. The date of such report (the date of the
               earliest event reported) was February 3, 2003.

                                       37

<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: May 20, 2003

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

Date: May 20, 2003

By: /s/ John E. Jackson
------------------------------------------------------
     John E. Jackson
     Senior Vice President and Chief Financial Officer

                                       38

<PAGE>

                                 Certifications


     I, Chad C. Deaton, certify that:

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

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

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

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

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

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

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


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

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

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

     6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: May 20, 2003

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

                                       39

<PAGE>

     I, John E. Jackson, certify that:

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

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

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

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

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

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

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

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

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

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

     6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 20, 2003


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

                                       40

<PAGE>

                                  EXHIBIT INDEX

     10.1 Employment letter with Peter Schreck dated August 22, 2000.

     10.2 Employment letter with Stephen York dated March 6, 2002.

     99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002 (furnished herewith)

     99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002 (furnished herewith)

                                       41